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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 2
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the fiscal year ended December 31, 1997
OR
[_] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from __________ to _____________
COMMISSION FILE NUMBER: 1-13829
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CABOT INDUSTRIAL TRUST
(Exact name of registrant as specified in its charter)
MARYLAND 04-3397866
- -------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
TWO CENTER PLAZA, SUITE 200, BOSTON, MASSACHUSETTS 02108
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (617) 723-0900
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
------------------- ------------------------------
REGISTERED
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Common Shares of Beneficial New York Stock Exchange
Interest, $.01 par value
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
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The aggregate market value of the common shares of beneficial interest held
by non-affiliates of the registrant was approximately $407,948,500 based on the
closing price ($22.00) for such shares on the New York Stock Exchange on March
24, 1998.
As of March 24, 1998, there were 18,586,764 shares of the registrant's common
shares of beneficial interest outstanding.
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TABLE OF CONTENTS
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Description Page
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PART I
Item 1. Business....................................................................... 1
Item 2. Properties..................................................................... 10
Item 3. Legal Proceedings.............................................................. 15
Item 4. Submission of Matters to a Vote of Security Holders............................ 15
Item 4A. Executive Officers of the Registrant........................................... 15
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.......... 16
Item 6. Selected Financial Data........................................................ 18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................... 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..................... 22
Item 8. Financial Statements and Supplementary Data ................................... 23
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure....................................................... 39
PART III
Item 10. Directors and Executive Officers of the Registrant............................ 40
Item 11. Executive Compensation........................................................ 41
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................................... 46
Item 13. Certain Relationships and Related Transactions................................ 49
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............. 52
EXHIBIT INDEX................................................................................. 52
SIGNATURES.................................................................................... 53
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PART I
Item 1. BUSINESS
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THE COMPANY
Cabot Industrial Trust (the "Company") was organized on October 10, 1997 as a
Maryland real estate investment trust to continue and expand the national
industrial real estate business of Cabot Partners Limited Partnership ("Cabot
Partners"). The Company is the sole general partner of Cabot Industrial
Properties, L.P. (the "Operating Partnership") in which it holds a 42.8%
interest. The Company's properties and property interests are generally owned
and operated through the Operating Partnership. The Company is an internally
managed, fully integrated real estate company which, through the Operating
Partnership, acquires or develops, leases, manages, and holds for investment
industrial real estate properties in the West, Midwest, Northeast, Southeast and
Southwest areas of the United States.
In February 1998, the Company completed an initial public offering of 8,625,000
common shares of beneficial interest ("Common Shares") of the Company and a
private placement of 1,000,000 common shares of beneficial interest to a group
of investors, in each case, at an offering price of $20.00 per common share (the
"Offering Price") (collectively the "Offerings"). The Offerings resulted in net
proceeds to the Company of approximately $173.9 million. Concurrently with the
completion of the Offerings, the Company completed business combinations (the
"Formation Transactions") involving Cabot Partners and certain property-owning
entities, each of which was organized by Cabot Partners and one or more
institutional investors or by institutional investors with no prior relationship
with Cabot Partners (collectively the "Contributing Investors"). The Formation
Transactions resulted, among other things, in the transfer of ownership to the
Operating Partnership of 122 properties. As described under "Recent
Developments," subsequent to the completion of the Offerings, the Operating
Partnership executed a credit facility agreement with a syndicate of banks with
Morgan Guaranty Trust Company of New York as its lead agent in the amount of
$325 million and has acquired 23 additional properties with a total approximate
cost of $154.9 million.
As of March 24, 1998, the Company wholly owns 145 industrial properties located
in 21 states throughout the United States (the "Properties") containing
approximately 22 million rentable square feet. As of March 24, 1998, the Company
has contracted to purchase four additional industrial properties containing
approximately 704,000 square feet.
The Company's goal is to be the preeminent national real estate company focused
on serving a variety of industrial space users. As of March 24, 1998, the
Company owns and operates a diversified portfolio of properties and has a
significant market presence across the United States, with properties in a
total of 21 markets (17 of which the Company has identified as principal
targeted markets) and including Properties with more than one million rentable
square feet in eight of such markets. Its tenant base ranges from large
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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 17 principal targeted markets are identified below under the
heading "Properties". 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 following table provides information concerning the general
characteristics and the Company's holdings of each of these property types as of
March 24, 1998.
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RENTABLE SQUARE FEET ANNUALIZED NET RENT
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PROPERTY PROPERTY NUMBER % OF AMOUNT % OF PER LEASED
TYPE CHARACTERISTICS TOTAL TOTAL SQUARE FOOT
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<S> <C> <C> <C> <C> <C> <C>
Bulk Buildings configured 12,067,686 54% $37,685,190 47% $3.24
Distribution for large tenants
(generally at least
100,000 square feet;
building depths of
240 feet or more)
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Multitenant Buildings configured 6,861,171 31 24,444,578 31 3.73
Distribution for multitenant use
(generally tenant
sizes of
10,000-100,000
square feet;
building depths of
less than 240 feet)
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Workspace Light assembly and 3,486,592 15 17,841,950 22 5.29
flex/R&D (generally
tenant sizes of
3,000-70,000 square
feet)
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Total/ 22,415,449 100% $79,971,718 100% $3.71
weighted
average
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</TABLE>
The Company intends to be taxed as a real estate investment trust ("REIT") under
the Internal Revenue Code of 1986, as amended (the "Code") beginning with its
fiscal year ended December 31, 1998. As a REIT, the Company generally will not
be subject to Federal income tax to the extent it distributes its taxable income
to its shareholders.
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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.
The Company has regional offices in Los Angeles, Dallas and Orlando.
RECENT DEVELOPMENTS
Subsequent to the completion of the Offerings, the Company has acquired 23
properties in Atlanta, Dallas, Harrisburg, Los Angeles, Orlando, Phoenix and San
Diego for $154.9 million in 11 separate transactions. The 23 properties, 13 of
which are distribution properties and 10 of which are workspace properties,
consist of 3.9 million rentable square feet. As of March 24 1998, the Company
has contracted to acquire four additional distribution and workspace properties
in the Atlanta, Minneapolis, Chicago and Los Angeles markets, consisting of
704,019 rentable square feet. The Company expects to complete these acquisitions
in April 1998.
On March 16, 1998 the Operating Partnership entered into a $325 million
unsecured revolving line of credit (the "Acquisition Facility") with Morgan
Guaranty Trust Company of New York. The line of credit matures on March 16,
2001. The applicable interest rate ranges from LIBOR plus 75 basis points to
LIBOR plus 125 basis points depending on the Operating Partnership's loan-to-
value ratio. The line of credit is intended to be used to acquire and develop
properties and for working capital needs. The syndication of the Acquisition
Facility to nine other banks was completed on March 27, 1998.
BUSINESS STRATEGIES
The Company's fundamental business objectives are 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
markets 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.
The Company's substantial market presence in its principal markets will provide
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 companies
serving such companies. The Company is pursuing a national tenant marketing
program that, in addition to the quality
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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
March 24, 1998.
Having a substantial inventory of properties and significant leasing activities
within each local market increases the Company's visibility to prospective
tenants and enables the Company to establish strong relationships with leasing
brokers and other local market participants. These brokers and other local
market participants 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. The
Company's strategy of offering diverse property types also enables the Company
to pursue opportunities as they arise across industry segments by responding to
shifts in demand at different stages of the economic cycle.
GROWTH STRATEGIES
The Company intends to achieve its growth objectives through a combination of
property acquisitions, 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-
efficient buildings located in key national and regional distribution centers.
The Company's investment considerations include (i) capitalization rates, (ii)
economic fundamentals in the market, (iii) replacement costs, (iv) rent levels
and trends, (v) construction quality and property
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condition, (vi) historical occupancy 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
demographic trends; (ii) the supply of and demand for industrial space in
targeted submarkets; (iii) existing and potential tenant space requirements;
(iv) rental 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 proprietary database which is updated periodically, covering
each market and submarket in which it has invested or that it has targeted. The
database 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. 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% of the Properties based on Annualized Net Rents at
March 24, 1998) 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 Company
believes that workspace properties (light assembly and flex/R&D facilities) are
also attractive in selected markets where they are in limited supply and strong
demand exists. The Company has begun to increase its acquisitions of workspace
properties, which represented approximately 22% of its Properties at March 24,
1998 (based on Annualized Net Rents).
Relationships with Institutional Real Estate Investors. Cabot Partners'
operations were focused on serving public and private 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. The Company believes that its ability to borrow
using its $325 million credit facility will enhance its credibility with
potential property sellers. The Company's UPREIT structure, which will enable
it to acquire industrial properties on a non-cash basis by exchanging Units in
the Operating Partnership for properties in a tax-
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deferred manner, provides an attractive alternative to a taxable cash sale for
tax paying property owners.
Development
The Company's senior management has extensive real estate development
experience, including experience derived from the industrial park development
activities of Cabot, Cabot and Forbes, a nationwide real estate development,
investment, construction and management firm that pioneered the development of
large scale, planned industrial parks. 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.
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 Company 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 properties 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 was 84.0%.
LEASES
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 landlord 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 half (based on leased square footage) of the leases contain a
provision 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.
Substantially all of the leases of the
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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).
Management believes that inflationary increases in operating expenses will be
offset, in part, by the expense reimbursements and contractual rent increases
described above.
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 Property 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
indications of intended exercise of any of such rights, other than with respect
to one building containing approximately 40,000 rentable square feet. The
Company believes the exercise of all or part of such rights would not have a
material adverse effect on its operations.
COMPETITION
Numerous industrial properties compete with the Properties in attracting tenants
to lease space and additional properties can be expected to be built in the
markets in which the Properties are located. The number and quality of
competitive industrial properties in a particular 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 industrial property, including other
publicly traded industrial REITs, many of which have significant financial
resources. This has resulted in increased competition in acquiring attractive
industrial properties. 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 Funds from Operations ("FFO"). The Company may be
competing with others that have greater resources than the Company and whose
officers and directors have more experience than the Company's officers and
Trustees.
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INSURANCE
The Company generally carries 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 addition, certain types of
losses (such as from civil disturbances or from earthquakes for Properties
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 insurance on the
Properties located in California. In light of the California earthquake risk,
California building codes have since the early 1970's established construction
standards for all new buildings and also contain guidelines for seismic
upgrading of buildings intended to reduce the possibility and severity of loss
from earthquakes. It is the Company's policy to obtain assessments from
qualified third-party professionals of the seismic standards of its Properties
located in California and to conduct such seismic upgrading thereof as it
determines, on the basis of such third-party 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 36 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 the date hereof. The Company currently
maintains blanket earthquake insurance coverage for all Properties located
outside California in amounts it deems reasonable.
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 asbestos containing materials.
Phase I ESAs have been obtained in connection with the Properties contributed to
the Company in the Formation Transactions and for each Property acquired since
that time. The purpose of Phase I ESAs is to identify potential sources of
contamination for which the Company may be responsible and to assess the status
of environmental regulatory compliance. 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 of 1988 to the present.
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Where recommended in the Phase I ESA, invasive procedures, such as soil sampling
and testing or the installation and monitoring of groundwater wells, were
subsequently performed.
The Phase I ESAs, including subsequent procedures where applicable, have not
revealed any environmental liability that the Company believes would have a
material adverse affect on the Company's business, assets or results of
operations, nor is the Company aware of any 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
material environmental liabilities of which the Company is unaware. Neither the
Company nor, to the knowledge of the Company, any of the previous owners of the
Properties has been notified by any governmental authority of any material
noncompliance, liability or claim relating to hazardous or toxic substances or
other environmental substances in connection with any of its present or former
properties.
THE OPERATING PARTNERSHIP
The business of the Company is operated through the Operating Partnership and
Cabot Advisors, Inc., a Delaware corporation (the "Management Company"). The
Company is the sole general partner of the Operating Partnership, a Delaware
limited partnership, through which it owns the Properties. At March 24, 1998,
the partnership interests in the Operating Partnership were as follows: the
Company owns a 42.8% general partnership interest, certain institutional
investors and others who participated in the Formation Transactions own in the
aggregate 53.3% in limited partnership interests and executive officers of the
Company own in the aggregate 3.9% in limited partnership interests. The
Company's interest in the Operating Partnership entitles it to share in cash
distributions from, and in the profits and losses of, the Operating Partnership
in proportion to the Company's percentage ownership (apart from tax allocations
of profits and losses to take into account pre-contribution property
appreciation). Limited partnership interests in the Operating Partnership are
convertible into shares of the Company on a one-for-one basis subject to certain
limitations.
The Company holds one unit in the Operating Partnership for each common share
that it has issued. The net proceeds of the issuance of common shares of the
Company were contributed to the Operating Partnership in exchange for a
corresponding number of units of partnership interest.
As the general partner of the Operating Partnership, the Company has the
exclusive power under the agreement of limited partnership of the Operating
Partnership to manage and conduct the business of the Operating Partnership.
The Board of Trustees of the Company manages the affairs of the Company by
directing the affairs of the Operating Partnership. The Operating Partnership
will terminate on December 31, 2097 unless terminated earlier in connection
with, among other things, a merger or a sale of all or substantially all of the
assets of the Operating Partnership or upon a vote of the partners. The
Operating Partnership is responsible for, and is required to pay when due, all
administrative and operating expenses of the Properties.
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THE MANAGEMENT COMPANY
The Management Company will provide investment advisory and asset management
services to the clients of Cabot Partners which elected not to contribute some
or all of their industrial properties to the Company. In addition, the
Management Company will provide property management services to the Operating
Partnership and to properties of some of its own clients. 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.
In order to permit the Company to share in the income of the Management Company
while maintaining its status as a REIT, the Operating Partnership will own all
of the Management Company's non-voting preferred stock (representing
approximately 95% of its economic interest) and Ferdinand Colloredo-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 Operating
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.
EMPLOYEES
As of March 24, 1998, the Operating Partnership and the Management Company
employ a total of approximately 40 persons, none of which are represented by
any collective bargaining organization. The Company believes its employee
relations are good.
ITEM 2. PROPERTIES
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As of March 24,1998, the Company owns a geographically diversified portfolio of
145 Properties having an aggregate of approximately 22 million rentable square
feet, approximately 96% of which space was leased to 270 tenants. The
Properties are located in 21 states in each of the five principal regions of the
United States and are within overnight trucking access (a 500-mile radius) to
90% of the population of the United States. As of March 24, 1998, no single
tenant accounted for more than 5.1% of the Company's annualized base rent.
The Company categorizes its Properties into three types: bulk distribution
properties, multi-tenant 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
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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. Multi-tenant 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 table set forth below summarizes the following information related to the
Properties as of March 24, 1998: (i) the name and location of the Properties,
identified by each of the Company's 17 principal targeted markets; (ii) the year
each property was completed; (iii) the number of properties at each location;
(iv) the rentable square feet at each location; (v) the percent of the rentable
square feet of each property that is currently leased; (vi) the annualized net
rent for the tenants leasing each property and (vii) the annualized net rent per
leased square foot.
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PROPERTIES BY REGION AND MARKET
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AS OF MARCH 24, 1998
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<TABLE>
<CAPTION>
Rentable Square Feet Annualized Net Rent(1)
--------------------- --------------------------------------
Year Built/ Number of Per Leased
Property Type and Location Renovated Properties Number % Leased Amount % of Total Square Foot
- ----------------------------- ----------- ---------- ---------- --------- ------------ ----------- -----------
<S> <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 1.9% $2.91
South Rockefeller Avenue,
Ontario, CA 1986 1 164,140 100% 551,510 0.7% 3.36
East Jurupa Street,
Ontario, CA 1986 1 141,132 100% 341,769 0.4% 2.42
DeForest Circle,
Mira Loma, CA 1992 1 250,584 100% 857,943 1.1% 3.42
Vintage Avenue, Ontario, CA
Santa Anita Avenue, 1988 1 284,559 100% 973,200 1.2% 3.42
Rancho Cucamonga, CA 1988 1 212,300 100% 764,280 1.0% 3.60
-- --------- --- ----------- ---- -----
Market Subtotal 7 1,573,227 100% $ 5,000,935 6.3% $3.18
San Diego Market
Dornoch Court, San Diego, CA 1988 1 220,000 100% $ 957,709 1.2% $4.35
-- --------- --- ----------- ---- -----
Phoenix Market
North 47th Avenue, Phoenix, AZ 1986 1 163,200 100% 434,283 0.5% $2.66
South 63rd Avenue, Phoenix, AZ 1990 1 168,165 100% 450,494 0.6% 2.68
South 55th Avenue, Phoenix, AZ 1986 1 100,000 100% 300,000 0.4% 3.00
North 104th Avenue,
Tolleson, AZ 1995 1 279,131 56% 457,315 0.6% 2.90
Van Buren Avenue, Tolleson, AZ 1997 1 278,142 100% 834,426 1.0% 3.00
South 84th Avenue, Tolleson, AZ 1989 1 236,007 100% 762,468 1.0% 3.23
-- --------- --- ----------- ---- -----
Market Subtotal 6 1,224,645 90% 3,238,986 4.1% 2.94
-- --------- --- ----------- ---- -----
West Region Subtotal 14 3,017,872 96% $ 9,197,630 11.6% $3.18
Southwest Region
Dallas Market
Luna Road, Carrollton, TX 1997 1 205,400 100% 679,992 0.9% $3.31
DFW Trade Center, Building 1,
Grapevine,TX 1996 1 540,000 70% 1,129,000 1.4% 2.97
DFW Trade Center, Building
2, Grapevine, TX 1997 1 440,000 82% 993,000 1.2% 2.76
Airline Drive, Building 2,
Coppell, TX 1990 1 140,800 100% 492,804 0.6% 3.50
-- --------- --- ----------- ---- -----
Southwest Region/Market Subtotal 4 1,326,200 82% $ 3,294,796 4.1% $3.03
Midwest Region
Chicago Market
West 73rd Street, Building
1, Bedford Park, IL 1982 1 233,282 100% 671,482 0.8% $2.88
West 73rd Street, Building
2, Bedford Park, IL 1986 1 380,269 100% 1,034,331 1.3% 2.72
West 73rd Street, Building
3, Bedford Park, IL 1979 1 232,000 100% 720,953 0.9% 3.11
Remington Street,
Bolingbrook, IL 1996 1 212,333 100% 796,925 1.0% 3.75
Harvester Drive, Chicago, IL 1974 1 212,922 100% 798,458 1.0% 3.75
Arthur Avenue, Elk Grove, IL 1978 1 230,768 100% 653,076 0.8% 2.83
Ambassador Road,
Naperville, IL 1997 1 203,500 65% 503,366 0.6% 3.80
Mark Street, Wood Dale, IL 1985 1 234,000 100% 809,992 1.0% 3.46
-- --------- --- ----------- ---- -----
Market Subtotal 8 1,939,074 96% 5,988,583 7.4% $3.21
Cincinnati/Northern
Kentucky Market
Holton Drive, Independence, KY 1996 1 352,000 100% 991,952 1.2% $2.82
International Way, Hebron, KY 1990 1 192,000 100% 556,800 0.7% 2.90
International Road,
Building 1, Cincinnati, OH 1990 1 192,000 100% 528,000 0.7% 2.75
International Road,
Building 2, Cincinnati, OH 1990 1 204,800 100% 721,520 0.9% 3.52
-- --------- --- ----------- ---- -----
Market Subtotal 4 940,800 100% 2,798,272 3.5% $2.97
Columbus Market
Westbelt Drive, Building 2,
Columbus OH 1980 1 229,200 100% 616,343 0.8% $2.69
Equity Drive, Building 1,
Columbus, OH 1980 1 227,480 100% 648,318 0.8% 2.85
-- --------- --- ----------- ---- -----
Market Subtotal 2 456,680 100% 1,264,661 1.6% $2.77
Other Market
North State Rd. #9, Howe, IN 1988 1 346,515 100% 762,333 1.0% 2.20
Lakefront Drive, Earth
City, MO 1995 1 189,017 100% 656,400 0.8% 3.47
-- --------- --- ----------- ---- -----
Market Subtotal 2 535,532 100% $ 1,418,733 1.8% 2.65
-- --------- --- ----------- ---- -----
Midwest Region Subtotal 16 3,872,086 98% $11,470,249 14.3% 3.02
Southeast Region
Memphis Market
Pilot Drive, Memphis, TN 1987 1 336,080 100% 795,326 1.0% 2.37
Orlando Market
Landstreet Road, Building
1, Orlando FL 1997 1 355,732 100% 1,639,782 2.0% 4.61
Charlotte Market
Reames Road, Charlotte, NC 1994 1 105,600 100% 318,227 0.4% 3.01
Atlanta Market
Highway 316, Dacula, GA 1989 1 326,019 100% 1,041,889 1.3% 3.20
Westgate Parkway, Atlanta,
GA 1988 1 231,835 100% 556,404 0.7% 2.40
-- --------- --- ----------- ---- -----
Market Subtotal 2 557,854 100% $ 1,598,293 2.0% 2.87
-- --------- --- ----------- ---- -----
Southeast Region Subtotal 5 1,355,266 100% 4,351,628 5.4% 3.21
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Rentable Square Feet Annualized Net Rent(1)
--------------------- --------------------------------------
Year Built/ Number of Per Leased
Property Type and Location Renovated Properties Number % Leased Amount % of Total Square Foot
- ----------------------------- ----------- ---------- ---------- --------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Northeast Region
Baltimore/Washington Market
Tar Bay Drive, Jessup, MD 1990 1 210,000 100% 800,527 1.0% $3.81
Oceano Avenue, Jessup, MD 1987 1 243,500 100% 998,350 1.2% 4.10
-- --------- --- ----------- ---- -----
Market Subtotal 2 453,500 100% 1,798,877 2.2% $3.97
New York/New Jersey Market
Pepes Farm Road, Milford, CT 1980 1 200,000 100% 829,998 1.0% 4.15
South Middlesex Avenue,
Building 1, Cranbury, NJ 1989 1 204,369 100% 735,728 0.9% 3.60
Birch Creek Road, 1991/
Bridgeport, NJ 1997 1 203,229 100% 792,463 1.0% 3.90
Pierce Street, Franklin
Township, NJ 1984 1 182,764 100% 776,748 1.0% 4.25
Herrod Boulevard, South
Brunswick, NJ 1989 1 418,000 100% 1,698,384 2.2% 4.06
-- --------- --- ----------- ---- -----
Market Subtotal 5 1,208,362 100% 4,833,321 6.1% 4.00
-- --------- --- ----------- ---- -----
Harrisburg Market
Brackbill Boulevard,
Building 1,
Mechanicsburg, PA 1984 1 259,200 100% $ 835,588 1.0% 3.22
Brackbill Boulevard,
Building 2,
Mechanicsburg, PA 1985 1 235,200 100% $ 758,133 0.9% 3.22
Cumberland Parkway,
Mechanicsburg, PA 1992 1 340,000 100% 1,144,968 1.4% 3.37
-- --------- --- ----------- ---- -----
Market Subtotal 3 834,400 100% $ 2,738,689 3.4% 3.28
-- --------- --- ----------- ---- -----
Northeast Region Subtotal 10 2,496,262 100% $ 9,370,887 11.7% 3.75
-- ---------- --- ----------- ---- -----
Bulk Distribution Properties Total 49 12,067,686 96% $37,685,190 47.1% $3.24
Multi-tenant Distribution
Properties:
West Region
Los Angeles Market 1954/
East Dyer Road, Santa Ana, CA 1965 1 372,096 100% $ 1,319,594 1.7% $3.55
-- ---------- --- ----------- ---- -----
San Francisco Market
Reed Avenue, Building 1, West
Sacramento, CA 1988 1 103,110 100% $ 378,813 0.5% 3.67
Reed Avenue, Building 2, West
Sacramento, CA 1988 1 105,600 100% 423,336 0.5% 4.01
-- ---------- --- ----------- ---- -----
Market Subtotal 2 208,710 100% $ 802,149 1.0% 3.84
Phoenix Market
44th Avenue, Phoenix, AZ 1997 1 144,602 0% $ 0 0.0% 0
Seattle Market
Kent West Corporate Park,
II, Kent, WA 1989 1 250,820 100% $ 899,100 1.1% 3.58
-- ---------- --- ----------- ---- -----
West Region Subtotal 5 976,228 85% $ 3,020,843 3.8% 3.63
Southwest Region
Dallas Market
113th Street, Arlington, TX 1979 1 79,735 100% $ 291,032 0.4% $3.65
Airline Drive, Building 1,
Coppell, TX 1991 1 75,000 100% 262,500 0.3% 3.50
North Lake Drive,
Coppell, TX 1982 1 230,400 100% 632,581 0.8% 2.75
-- ---------- --- ----------- ---- -----
Southwest Region/Market Subtotal 3 385,135 100% $ 1,186,113 1.5% 3.08
Midwest Region
Chicago Market
Medinah Road, Roselle, IL 1986 2 480,258 100% $ 2,618,591 3.2% $5.45
High Grove Lane,
Naperville, IL 1994 1 95,000 100% 392,549 0.5% 4.13
1970/
Western Avenue, Lisle, IL 1985 1 67,996 100% 383,143 0.5% 5.63
-- ---------- --- ----------- ---- -----
Market Subtotal 4 643,254 100% $ 3,394,283 4.2% $5.28
Cincinnati/Northern Kentucky
Market
Lake Forest Drive, Building
1, Blue Ash, OH 1978 1 239,891 98% $ 633,837 0.8% $2.69
Lake Forest Drive, Building
2, Blue Ash, OH 1979 1 176,956 100% 459,775 0.6% 2.60
-- ---------- --- ----------- ---- -----
Market Subtotal 2 416,847 99% $ 1,093,612 1.4% $2.65
Columbus Market
International Street,
Columbus, OH 1988 1 152,800 100% $ 420,200 0.5% $2.75
Port Road, Building 1,
Columbus, OH 1995 1 205,109 100% 672,903 0.8% 3.28
Port Road, Building 2,
Columbus, OH 1995 1 156,000 100% 425,899 0.5% 2.73
Westbelt Drive, Building 1,
Columbus, OH 1979 1 202,000 100% 1,010,000 1.3% 5.00
Dividend Drive, Columbus, OH 1980 1 144,850 100% 434,550 0.5% 3.00
Twin Creek Drive, Columbus,
OH 1989 1 176,000 53% 260,208 0.4% 2.78
-- ---------- --- ----------- ---- -----
Market Subtotal 6 1,036,759 92% $ 3,223,760 4.0% $3.38
Other Market
Sysco Court, Grand Rapids, MI 1985 1 62,700 100% $ 366,689 0.5% $5.85
-- ---------- --- ----------- ---- -----
Midwest Region Subtotal 13 2,159,560 96% $ 8,078,344 10.1% $3.90
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Rentable Square Feet Annualized Net Rent(1)
--------------------- --------------------------------------
Year Built/ Number of Per Leased
Property Type and Location Renovated Properties Number % Leased Amount % of Total Square Foot
- ----------------------------- ----------- ---------- ---------- --------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Southeast Region
Orlando Market
Orlando Central Park,
Orlando, FL 1983 6 1,172,875 94% $ 3,784,002 4.7% $3.44
Kingspointe Parkway,
Orlando, FL 1991 1 101,870 100% 404,979 0.5% 3.98
-- ---------- --- ----------- ---- -----
Southeast Region/Market Subtotal 7 1,274,745 94% $ 4,188,981 5.2% $3.49
Northeast Region
Boston Market 1961/
First Avenue, Needham, MA 1992 1 119,573 100% $ 686,246 0.9% $5.74
New York/New Jersey Market
South Middlesex Avenue,
Building 2, Cranbury, NJ 1982 1 203,404 100% $ 661,062 0.8% $3.25
Colony Road, Building 1,
Jersey City, NJ 1976 1 262,453 100% 918,438 1.2% 3.50
Colony Road, Building 2,
Jersey City, NJ 1974 1 124,933 100% 499,732 0.6% 4.00
Pulaski Boulevard, 1974/
Bayonne, NJ 1982 1 224,664 100% 703,139 0.9% 3.13
Port Jersey Boulevard,
Building 1, Jersey City, NJ 1974 1 425,121 100% 1,711,838 2.2% 4.03
Port Jersey Boulevard,
Building 2, Jersey City, NJ 1974 1 204,564 100% 754,841 0.9% 3.69
Industrial Drive, Building
1, Jersey City, NJ 1976 1 263,717 100% 988,939 1.2% 3.75
Industrial Drive, Building
2, Jersey City, NJ 1976 1 154,000 100% 615,996 0.8% 4.00
Industrial Drive, Building
3, Jersey City, NJ 1972 1 45,274 100% 181,096 0.2% 4.00
-- ---------- --- ----------- ---- -----
Market Subtotal 9 1,908,130 100% $ 7,035,081 8.8% $3.69
Harrisburg Market
Ritter Road, Mechanicsburg,
PA 1986 1 37,800 100% $ 248,970 0.3% $6.59
-- ---------- --- ----------- ---- -----
Northeast Region Subtotal 11 2,065,503 100% $ 7,970,297 10.0% $3.86
-- ---------- --- ----------- ---- -----
Multi-tenant Distribution
Properties Total 39 6,861,171 96% $24,444,578 30.6% $3.73
Workspace Properties:
West Region
Los Angeles Market
East Howell Avenue,
Building 1, Anaheim, CA 1968 1 81,475 100% 327,882 0.4% $4.02
East Howell Avenue,
Building 2, Anaheim, CA 1991 1 25,962 100% 109,040 0.1% 4.20
Artesia Avenue, Building 1,
Fullerton, CA 1991 1 55,498 100% 211,749 0.3% 3.82
Artesia Avenue, Building 2,
Fullerton, CA 1991 1 60,502 100% 232,164 0.3% 3.84
Commonwealth Avenue,
Fullerton, CA 1965 1 62,762 99% 222,270 0.3% 3.59
-- ---------- --- ----------- ---- -----
Market Subtotal 5 286,199 100% $ 1,103,105 1.4% $3.87
San Diego Market
Avenida Encinas, Building
1, Carlsbad, CA 1972 1 80,000 100% 637,720 0.8% $7.97
Avenida Encinas, Building
2, Carlsbad, CA 1993 1 126,008 100% 716,846 0.9% 5.69
-- ---------- --- ----------- ---- -----
Market Subtotal 2 206,008 100% $ 1,354,566 1.7% $6.58
San Francisco Market
Brisbane Industrial Park,
Brisbane, CA 1965 14 542,378 98% $ 2,507,549 3.1% $4.70
Huntwood Avenue, Hayward, CA 1982 1 62,031 100% 446,628 0.6% 7.20
-- ---------- --- ----------- ---- -----
Market Subtotal 15 604,409 99% $ 2,954,177 3.7% $4.96
Phoenix Market
East Encanto Drive, Tempe, AZ 1990 1 81,817 100% $ 306,637 0.4% $3.75
Seattle Market
Kent West Corporate Park I,
Kent, WA 1989 4 151,940 100% $ 966,456 1.2% $6.36
-- ---------- --- ----------- ---- -----
West Region Subtotal 27 1,330,373 99% $ 6,684,941 8.4% $5.06
Southwest Region
Dallas Market
DFW Trade Center, Building
3, Grapevine, TX 1997 1 202,361 100% $ 1,723,671 2.2% $8.52
Diplomat Drive, Carrollton, TX 1997 1 53,375 100% $ 325,044 0.4% $6.09
-- ---------- --- ----------- ---- -----
Southwest Region/Market Subtotal 2 255,736 100% $ 2,048,715 2.6% $8.01
Midwest Region
Cincinnati/Northern Kentucky
Market
Empire Drive, Florence, KY 1991 1 101,250 100% $ 318,999 0.4% $3.15
Spiral Drive, Building 1,
Florence, KY 1988 1 26,556 100% 245,846 0.3% 9.26
Spiral Drive, Building 2,
Florence, KY 1989 1 34,999 93% 257,442 0.3% 7.93
Creek Road, Blue Ash, OH 1983 1 66,095 88% 410,096 0.5% 7.04
-- ---------- --- ----------- ---- -----
Market Subtotal 4 228,900 95% $ 1,232,383 1.5% $5.64
Columbus Market
Equity Drive, Building 2,
Columbus, OH 1980 1 116,160 61% $ 415,371 0.5% $5.83
-- ---------- --- ----------- ---- -----
Midwest Region Subtotal 5 345,060 84% $ 1,647,754 2.0% $5.69
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Rentable Square Feet Annualized Net Rent(1)
--------------------- --------------------------------------
Year Built/ Number of Per Leased
Property Type and Location Renovated Properties Number % Leased Amount % of Total Square Foot
- ----------------------------- ----------- ---------- ---------- --------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Southeast Region
Charlotte Market 1957/
Old Charlotte Highway, 1972 2 253,930 100% $ 986,000 1.2% $3.88
Monroe, NC
--- ---------- --- ----------- ----- -----
Atlanta Market
Cobb International Place,
Building 1, Atlanta, GA 1996 1 60,000 100% $ 256,500 0.3% $4.28
Cobb International Place,
Building 2, Atlanta, GA 1996 1 68,000 80% 207,659 0.3% 3.82
South Royal Drive, Building
1, Tucker, GA 1987 1 53,402 91% 226,177 0.3% 4.65
South Royal Drive, Building
2, Tucker, GA 1987 1 43,720 100% 176,300 0.2% 4.03
South Royal Drive, Building
3, Tucker, GA 1989 1 37,041 100% 148,588 0.2% 4.01
--- ---------- --- ----------- ----- -----
Market Subtotal 5 262,163 93% $ 1,015,224 1.3% $4.16
Orlando Market
Boggy Creek Road, Building
1, Orlando, FL 1992 1 52,508 99% $ 245,336 0.3% $4.71
Boggy Creek Road, Building
2, Orlando, FL 1996 1 55,456 100% 297,949 0.4% 5.37
Landstreet Road, Building
2, Orlando, FL 1997 1 55,456 79% 238,052 0.3% 5.42
Landstreet Road, Building
3, Orlando, FL 1996 1 50,018 100% 247,587 0.3% 4.95
--- ---------- --- ----------- ----- -----
Market Subtotal 4 213,438 94% $ 1,028,924 1.3% $5.11
Other Market
Industrial Drive South,
Gluckstadt, MS 1988 1 160,000 100% $ 671,386 0.8% $4.20
--- ---------- --- ----------- ----- -----
Southeast Region Subtotal 12 889,531 97% $ 3,701,534 4.6% $4.31
Northeast Region
Baltimore/Washington Market
The Crysen Center, Jessup, MD 1985 2 151,863 100% $ 698,610 0.9% $4.60
Oakville Industrial Park,
Alexandria, VA 1948 6 276,807 93% 1,627,761 2.0% 6.34
--- ---------- --- ----------- ----- -----
Market Subtotal 8 428,670 95% $ 2,326,371 2.9% $5.69
Boston Market
Technology Drive, Auburn, MA 1973 1 54,400 100% $ 190,368 0.2% $3.50
John Hancock Road, Taunton, MA 1986 1 34,224 100% 206,147 0.3% 6.02
--- ---------- --- ----------- ----- -----
Market Subtotal 2 88,624 100% $ 396,515 0.5% $4.47
New York/New Jersey Market
Memorial Drive, Franklin
Township, NJ 1988 1 148,598 100% $ 1,036,120 1.3% $6.97
--- ---------- --- ----------- ----- -----
Northeast Region Subtotal 11 665,892 97% $ 3,759,006 4.7% $5.82
--- ---------- --- ----------- ----- -----
Workspace Properties Total 57 3,486,592 97% $17,841,950 22.3% $5.29
--- ---------- --- ----------- ----- -----
Grand Total 145 22,415,449 96% $79,971,718 100.0% $3.71
=== ========== === =========== ===== =====
</TABLE>
- -------------------------------------------------
(1) "Annualized Net Rent" means annualized monthly Net Rent from leases in
effect as of March 24, 1998. "Net Rent" means contractual rent, excluding any
reimbursements for real estate taxes or operation expenses.
ITEM 3. LEGAL PROCEEDINGS
-----------------
The Company is not a party to any material litigation nor, to the Company's
knowledge, is any litigation threatened against the Company 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
Not applicable.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------
The executive officers of the Registrant and their respective positions,
business experience and ages as of April 29, 1998 are shown in the table below.
Name
Age Position
- --------------------------------------------------------------------------------
Ferdinand Colloredo-Mansfeld(1) 58 Chairman of the Board and Chief
Executive Officer, Trustee
Robert E. Patterson 53 President, Trustee
Franz Colloredo-Mansfeld(1) 35 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 43 Senior Vice President - Finance,
Treasurer and Secretary
Eugene F. Reilly 36 Senior Vice President - Director of
Leasing, Marketing and Development
(1) Messrs. Ferdinand and Franz Colloredo-Mansfeld are father and son.
The following paragraphs summarize the business experience of the officers of
the Company.
FERDINAND COLLOREDO-MANSFELD has served as Chairman of the Board of Trustees and
Chief Executive Officer of the Company since its formation in October 1997. Mr.
Colloredo-Mansfeld also serves as the Chairman and Chief Executive Officer of
the Management Company. Mr. Colloredo-Mansfeld served as Chairman, Chief
Executive Officer and Chief Investment Officer of Cabot Partners from 1990 to
1997, having previously served in the same positions with Cabot Cabot & Forbes
Realty 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 Executive 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 & Co. and is
a Director of Data General 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 served as President and a Trustee of the Company since
its formation in October 1997. Mr. Patterson served as Executive Vice President,
Director of Acquisitions and a member of the Investment Committee of Cabot Cabot
& Forbes Realty Advisors and Cabot Partners from 1987 to 1997. 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 real estate development,
management and investment firm as Senior Vice President. He joined Cabot Cabot &
Forbes Realty 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.
R. 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 Investment
Trusts, the Society of Industrial and Office Realtors, the Urban Land Institute
and the National Association of Real Estate Investment Managers.
FRANZ COLLOREDO-MANSFELD has been Chief Financial Officer of the Company since
October 1997 and served as a Senior Vice President of Cabot Partners from 1996
to October 1997. 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
College and Harvard Business School. He is a director or trustee of numerous
charitable organizations.
ANDREW D. EBBOTT has served as Senior Vice President - Director of Acquisitions
of the Company since October 1997. Mr. Ebbott joined Cabot Cabot & Forbes
Realty 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, investment 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 Senior Vice President - Director of Real Estate
Operations of the Company since October 1997, and served as a Senior Vice
President - Director of Asset Management and Member of the Investment Committee
of Cabot Partners from 1992 to October 1997. 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 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 Cambridge Savings Bank. He is a member of the
Building Owners and Managers Association, the National Association of Industrial
and Office Parks and the National Council of Real Estate Investment Fiduciaries.
NEIL E. WAISNOR has served as Senior Vice President - Finance, Treasurer and
Secretary of the Company since October 1997. Mr. 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 President 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 Massachusetts at Amherst and is a member of the
American Institute of Certified Public Accountants, the Massachusetts Society of
Certified Public Accountants, the National Association of Real Estate Investment
Managers and has served on the Accounting Committee of the National Council of
Real Estate Investment Fiduciaries.
EUGENE F. REILLY has been Senior Vice President - Director of Leasing, Marketing
and Development of the Company since October 1997. Mr. Reilly served as
Director of Leasing and Marketing of Cabot Partners from 1992 to October 1997,
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 President 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 Development
Research Council and The Council of Logistics Managers.
15
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
--------------------------------------------------------------
MATTERS
-------
The Company's common shares began trading on the New York Stock Exchange
("NYSE") on January 30, 1998, under the symbol "CTR." The following table sets
forth the high and low sales prices per share as reported on the New York Stock
Exchange Composite Tape.
<TABLE>
<CAPTION>
PERIOD HIGH LOW
<S> <C> <C>
January 30, 1998 through March 24, 1998....... $23.50 $20.875
</TABLE>
On March 24, 1998, the Company had 18,586,764 common shares outstanding held of
record by 22 shareholders and beneficially by more than 2,000 shareholders.
No dividends have yet been declared or paid by the Company as of March 24, 1998.
The Company intends to make regular quarterly cash distributions to its
shareholders based upon an initial quarterly distribution rate 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 actual
operating cash flow 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 Operating Partnership and
Company, the interest expense incurred on borrowings and unanticipated capital
expenditures. No assurance can be given that the Company's estimates, on which
its initial intended distribution policy is based, will prove accurate. 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 condition,
capital requirements, the annual distribution requirements under the REIT
provisions of the Code and such other factors as the Board of Trustees deems
relevant.
The Company's transfer agent and registrar is Boston EquiServe, P.O. Box
644, Boston, Massachusetts 02102-0644.
PRIVATE PLACEMENT OF 1,000,000 COMMON SHARES OF BENEFICIAL INTEREST OF THE
COMPANY
On February 4, 1998, the Company completed a private placement of 1,000,000
Common Shares to a group of investors represented by Morgan Stanley Asset
Management, Inc. ("Morgan Stanley"). Morgan Stanley acted as advisor to the
following investors in connection with the private placement: Stichting
Bedrijspensioenfonds Voor De Metaalnijhverheid, Stichting Pensioenfonds ABP, MS
Real Estate Special Situations Inc., The Morgan Stanley Real Estate Special
Situations Funds I, L.P., The Morgan Stanley Real Estate Special Situations Fund
II, L.P. and Morgan Stanley Real Estate Special Situations Real Estate
Investors, L.P.
16
<PAGE>
The aggregate and sales offering price of such shares was $20,000,000.
The Company relied on Regulation D to effectuate the private placement. All of
the investors who purchased common stock in the private placement were qualified
institutional buyers within the meaning of Rule 144A, except for one
institutional "accredited investor" within the meaning of Rule 501 of Regulation
D.
None of the common shares sold by the private placement are subject to
conversion.
USE OF PROCEEDS FROM SALES OF COMMON SHARES
On January 29, 1998, the Company's registration statement on Form S-11 (File
Number 333-38383) with regard to the public offering of 8,625,000 Common Shares
in the Company for an aggregate price of $172,500,000 was declared effective by
the Securities and Exchange Commission. The offering commenced on the effective
date and terminated on February 4, 1998 with a sale of all the registered shares
for an aggregate offering price of $172,500,000. The managing underwriter for
the public offering was J.P. Morgan Securities, Inc.
The following table indicates the expenses incurred in connection with the
issuance and distribution of Common Shares in the Offerings:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Description of Fees and Expenses Amount of Fee
- --------------------------------- -------------
<S> <C>
Underwriting Discounts and Commissions $11,212,500
Finders' Fees 0
Underwriters Expenses 170,000
Other Expenses 7,192,500
-----------
TOTAL FEES AND EXPENSES $18,575,000
===========
- -----------------------------------------------------------------
</TABLE>
None of such expenses represented direct or indirect payments to
(i)Trustees or officers of the Company or their associates, (ii) persons owning
10 percent or more of any class of the Company's equity securities or (iii)
affiliates of the Company. The net proceeds to the Company from the Offerings
after deducting the expenses described above were approximately $173.9 million.
The net proceeds of the offering were applied as follows through March 24, 1998:
approximately $146.5 million for the acquisition of other properties;
approximately $13.1 million for the repayment of indebtedness; and approximately
$14.3 million for working capital. None of such uses of net proceeds
represented direct or indirect payments to (i)Trustees or officers of the
Company or their associates, (ii) persons owning 10 percent or more of any class
of the Company's equity securities or (iii) affiliates of the Company.
17
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The Company was organized on October 10, 1997, but did not commence
operations in its current form until February 4, 1998, the completion date of
the Formation Transactions and the Offerings described elsewhere herein. Set
forth below are selected historical financial and other data for the real estate
advisory business of Cabot Partners. The selected financial data presented below
as of December 31, 1997 and 1996 and for the three years ended December 31, 1997
have been derived from the Cabot Partners financial statements that have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their reports thereon. This information should be read in conjunction with such
financial statements and the notes thereto included elsewhere in this report on
Form 10-K. The selected financial data presented below as of December 31, 1995
and as of and for the years ended December 31, 1994 and 1993 for Cabot Partners
are derived from Cabot Partners Financial Statements and the notes thereto not
included in this report on Form 10-K which have been audited by Arthur Andersen
LLP.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
In thousands 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
OPERATING DATA
Revenues $ 9,080 $ 7,908 $ 6,516 $ 4,159 $ 4,088
General and administrative expenses 7,045 5,888 5,069 4,267 4,074
Depreciation and amortization expense 977 419 453 474 480
Net income (loss) 1,058 1,594 1,057 (536) (428)
In thousands 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
BALANCE SHEET DATA
Total assets $ 5,339 $ 6,075 $ 5,628 $ 4,300 $ 4,923
Total liabilities 760 485 563 292 379
Total partners' capital 4,579 5,590 5,065 4,008 4,544
In thousands 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
OTHER DATA
Cash flows provided by (used in):
Operating activities $ 1,062 $ 1,283 $ 1,351 $ (12) $ (173)
Investing activities (193) 113 (6) 40 25
Financing activities (2,069) (1,069) -- -- --
Assets under management (unaudited)(1) 861,000 979,000 778,000 515,000 472,000
</TABLE>
(1) Based on the estimated fair market value of such assets as of the dates
indicated.
18
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
-------------
The statements contained in this discussion and elsewhere in this report that
are not historical facts are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These forward-looking statements are based on current
expectations, estimates and projections about the industry and markets in which
the Company operates, management's beliefs and assumptions made by management.
Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates" and variations of such words and similar expressions are intended to
identify such forward-looking statements. Such forward-looking statements are
not guarantees of future performance and involve risks and uncertainties.
Therefore, actual outcomes and results may differ materially from what is
expressed or suggested by such forward-looking statements. The Company
undertakes no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise. The
Company's operating results depend primarily on income from industrial
properties, which may be affected by various factors, including changes in
national and local economic conditions, competitive market conditions, receipt
of governmental approvals and costs of material and labor, all of which may
cause actual results to differ materially from what is expressed herein. Capital
and credit market conditions which affect the Company's cost of capital also
influence operating results.
CABOT PARTNERS
Cabot Partners is the real estate advisory and management entity that was the
sponsor and organizer of the Company. Its revenues primarily consisted of
asset management and acquisition fees earned under Advisory Contracts with large
institutional investors.
THE COMPANY
The Company is the result of combining the properties of the Contributing
Investors and the advisory business of Cabot Partners contributed in the
Formation Transactions, the Offerings and the use of the net proceeds therefrom
to fund the Company Acquisitions and to repay indebtedness.
As a result of the successful completion of the Offerings in February 1998, the
Company issued 8,625,000 Common Shares to the public and 1,000,000 additional
Common Shares to a group of investors in a private placement of shares. All of
the Common Shares were sold at a price of $20.00 per share. The proceeds from
the Offerings, net of offering costs
19
<PAGE>
and expenses, totaled $173.9 million. The net proceeds were used as follows:
<TABLE>
<S> <C>
Repayment of debt......... $ 13,100,000
Acquisitions.............. 146,500,000
Working capital reserves.. 14,300,000
------------
TOTAL..................... $173,900,000
============
</TABLE>
As of March 24, 1998, the Company owns a 42.8% general partnership interest in
the Operating Partnership, which holds the operating assets of the Company. The
limited partners hold Operating Partnership units which are convertible into
shares of the Company on a one-for-one basis, subject to certain limitations.
The Company intends to qualify as a REIT for Federal income tax purposes.
CABOT PARTNERS
YEARS ENDED DECEMBER 31, 1997 AND 1996
Revenues. Revenues, primarily consisting of asset management fees and
- --------
acquisition fees, increased by $1.2 million for the year ended December 31,
1997, or 14.8%, to $9.1 million as compared to $7.9 million for the year ended
December 31, 1996. The increase was due to a $191 million increase in average
assets under management for the year ended December 31, 1997 as compared to the
year ended December 31, 1996, which resulted in an $850,000 increase in asset
management fees. In addition, acquisition fees increased by $262,000 in 1997 as
compared to 1996 due to an increase in fee earning acquisitions of $37 million.
General and administrative expenses. General and administrative expenses
- -----------------------------------
increased by $1.2 million for the year ended December 31, 1997, or 19.7%, to
$7.0 million as compared to $5.9 million for the year ended December 31, 1996.
Compensation expense increases accounted for $798,000, or 69.0%, of the
increase. The remainder of the increase was primarily due to higher professional
services fees.
Depreciation and amortization expense. Depreciation and amortization expense
- -------------------------------------
increased by $558,000 for the year ended December 31, 1997 to $977,000 due to
increased amortization of two advisory contracts terminated during 1997.
YEARS ENDED DECEMBER 31, 1996 AND 1995
Revenues. Revenues, primarily consisting of asset management fees and
- --------
acquisition 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.
20
<PAGE>
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%, respectively, over the prior year due primarily to compensation expense
increases. General and administrative expense as a percent of revenues for 1996
and 1995 was 74.5% and 77.8%, respectively.
CAPITAL RESOURCES AND LIQUIDITY
THE COMPANY
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
recently executed a $325 million Acquisition Facility with Morgan Guaranty
Trust Company of New York as lead agent to the syndicate of banks. The
Acquisition Facility will be used to fund property acquisitions, development
activities, building expansions and tenant leasing costs and for other general
corporate purposes. The Acquisition Facility contains certain restrictions and
requirements such as ratio limitations relating to total debt-to-assets, debt
service coverage, minimum unencumbered assets to unsecured debt ratios, and
other limitations. The Company believes cash flow from operations not
distributed to shareholders 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.
The Company's initial low Debt-to-Total Market Capitalization Ratio reduces
exposure to fixed charges and increases its ability to access large amounts of
debt capital. As of March 24, 1998, after giving effect to the Formation
Transactions, the Offerings, and the post-Offering acquisitions, the Operating
Partnership had fixed rate debt secured by properties with an outstanding
principal amount of approximately $13.4 million and a Debt-to-Total Market
Capitalization Ratio of less than 2%.
As of December 31, 1997, the Company has incurred costs related to the
Formation Transactions and the Offerings totalling $3.5 million. Approximately
$1.2 million of these costs are payable to Cabot Partners, L.P. as direct
reimbursement for costs paid to third parties relating to the transactions.
CABOT PARTNERS
Cabot Partners relied 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
increased significantly over the last three years due to the increase in
acquisition activity and assets under management discussed above. In addition,
several advisory contracts provided for quarterly, rather than monthly, fee
payments in arrears, further increasing amounts receivable. Finally,
approximately $1.2 million of the increase results from amounts due from the
Company as reimbursement of costs incurred in connection with the Formation
Transactions and the Offering. The increase in accounts receivable was not an
indication of a collectibility problem.
21
<PAGE>
INFLATION
THE COMPANY
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).
Management believes that inflationary increases in operating expenses will be
off-set, in part, by these expense reimbursements and contractual rent
increases.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
Not applicable.
22
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CABOT INDUSTRIAL TRUST Page
----
<S> <C>
Report of Independent Public Accountants.................................................... 24
Balance Sheet as of December 31, 1997....................................................... 25
Notes to Balance Sheet...................................................................... 26
CABOT PARTNERS LIMITED PARTNERSHIP
Report of Independent Public Accountants..................................................... 29
Balance Sheets as of December 31, 1997 and 1996.............................................. 30
Statements of Operations for the years ended December 31, 1997, 1996 and 1995................ 31
Statements of Partners' Capital for the years ended December 31, 1997, 1996 and 1995 ........ 32
Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995................ 33
Notes to Financial Statements................................................................ 34
</TABLE>
23
<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 December 31, 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 standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. 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 management, 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
December 31, 1997, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
March 27, 1998
24
<PAGE>
Cabot Industrial Trust
Balance Sheet
December 31, 1997
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Cash $ 1,000
Deferred offering and acquisition costs 3,480,000
----------
Total assets $3,481,000
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $2,255,000
Due to related party 1,225,000
----------
Total liabilities 3,480,000
----------
Commitments (Note 4)
SHAREHOLDERS' EQUITY
Common Shares, $0.01 par value; 150,000,000 shares authorized, 50 1
shares issued and outstanding
Additional Paid in Capital 999
----------
1,000
----------
Total liabilities and shareholders' equity $3,481,000
==========
</TABLE>
The accompanying notes are an integral part of this financial statement.
25
<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 is 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 business
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 Company
expects to qualify as a real estate investment trust (a REIT) for federal income
tax purposes.
The Company and the Operating Partnership have had no operations from inception
through December 31, 1997.
2. The Formation Transactions, The Offerings and the Acquisition Facility
The Formation Transactions
On February 4, 1998, under a Contribution Agreement executed by the Company, the
Operating Partnership, Cabot Partners, L.P. and various other contributors, 122
real estate properties, real estate advisory contracts and other assets were i)
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 ii) contributed to the Company in exchange for common
shares. The properties contributed to the Company were contributed to the
Operating Partnership in exchange for the number of general partnership Units in
the Operating Partnership equal to the number of common shares exchanged for the
property.
The Operating Partership contributed the real estate investment advisory
contracts to Cabot Advisors, Inc. (the Management Company) and received 100% of
the non-voting preferred stock of the Management Company, which entitles it to
95% of the Management Company's net operating cash flow. All of the common
stock of the Management Company is owned by an officer of the Company.
The Offerings
On February 4, 1998, the Company completed the offering of 8,625,000 common
shares of beneficial interest (Common Shares) at an offering price of $20.00 per
share. In addition, the Company issued 1,000,000 Common Shares to a single
investor in a private offering at $20.00 per share (collectively, the
Offerings). The Company contributed 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.
As of December 31, 1997, the Company has incurred costs related to the Formation
Transactions and the Offerings totalling $3.5 millions. Approximately $1.2
million of these costs are payable to Cabot Partners, L.P. as direct
reimbursement for costs paid to third parties relating to the transactions.
The Acquisition Facility
On March 16, 1998, the Operating Partnership entered into a $325 million
unsecured revolving line of credit (the Acquisition Facility). The Acquisition
Facility matures on March 16, 2001. The interest rate ranges from LIBOR plus 75
basis points to LIBOR plus 125 basis points depending on the Operating
Partnership's loan-to-value ratio. The Acquisition Facility is intended to be
used to acquire and develop properties and for working capital purposes.
26
<PAGE>
Cabot Industrial Trust
Notes to Balance Sheet
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 subject
to state and local income taxes and to federal income tax and excise tax on its
undistributed income.
4. Commitments
Subsequent to December 31, 1997, the Operating Partnership acquired the
following industrial properties with proceeds from the Offerings:
<TABLE>
<CAPTION>
ACQUISITION
SQUARE COST
PROPERTY LOCATION BUILDING TYPE FEET (000's)
- ----------------- ------------- ---- ----
<S> <C> <C> <C>
Grapevine, TX Bulk Distribution/Workspace 1,182,361 $ 52,207
Mira Loma, CA, Dacula, GA,
Mechanicsburg, PA Bulk Distribution 916,603 34,621
Mechanicsburg, PA Bulk Distribution 494,400 17,102
San Diego, CA Bulk Distribution 220,000 10,905
Orlando, FL Workspace Properties 213,430 11,027
Tucker, GA Workspace Properties 134,163 5,560
Atlanta, GA Workspace Properties 128,000 5,370
Florence, KY Workspace Properties 61,555 4,050
Tempe, AZ Workspace Properties 81,817 3,295
Phoenix, AZ Multi-tenant Distribution 144,602 4,035
Tolleson, AZ Bulk Distribution 278,142 6,730
--------- --------
Total square feet/acquisition cost 3,855,073 154,902
=========
Less: Debt assumed 8,392
--------
Proceeds used to fund acquisitions $146,510
========
</TABLE>
As of March 24, 1998, the Company has entered into separate agreements to
acquire four additional properties with an estimated total acquisition cost of
$39.8 million. The acquisitions are expected to close within 30 days.
27
<PAGE>
Cabot Industrial Trust
Notes to Balance Sheet
5. Long Term Incentive Plan
The Company has adopted the Cabot Industrial Trust Long Term Incentive Plan (the
Plan) for the purpose of attracting and retaining highly qualified executive
officers, Trustees and employees. The Plan will be administered by the
Compensation Committee of the Board of Trustees, except 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 Plan
(in either case, the Administrator). Officers and other employees of the
Company, the Operating Partnership and designated subsidiaries and members of
the Board of Trustees who are not employees of the Company will also be eligible
to participate.
Options will be awarded to Trustees or employees of the Company in the form of
Common Shares and to employees of the Operating Partnership or the Management
Company in the form of Units. The Plan currently authorizes the issuance of up
to 4,347,500 Common Shares and Units. The number of Common Shares and Units
available may increase each January 1 to an amount equal to 10% of the aggregate
number of outstanding Common Shares and Units on such date. The 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 Plan, other than options to
Non-employee Trustees, the Administrator will determine the terms of the option,
including the option exercise price, any vesting requirements and whether a
dividend equivalent right or a distribution equivalent right shall be awarded.
The Administrator has authority to award options at less than fair market value
(as defined in the Plan) but at this time has no intention of doing so.
Effective as of the closing of the Offering, options for a total of 2,188,500
Common Shares and Units have been granted to employees, officers and Non-
employee Trustees with an exercise price of $20 per share. The initial options
granted under the Plan have ten-year terms and become exercisable in four equal
annual installments commencing on the first anniversary of the date of grant,
subject to acceleration of vesting upon a change in control of the Company (as
defined in the Plan).
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 reasonable discretion to make such option exercisable,
and all vested options which are not exercised by the expiration date described
in the 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 Plan.
28
<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
Partnership as of December 31, 1997 and 1996, and the related statements of
operations, partners' capital, and cash flows for each of the three years in the
period ended December 31, 1997. These financial statements are the
responsibility 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
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
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 presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cabot Partners Limited
Partnership as of December 31, 1997 and 1996, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 27, 1998
29
<PAGE>
Cabot Partners Limited Partnership
Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
---------- --------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 509 $1,709
Accounts receivable 2,689 1,637
Accounts receivable from related party 1,225 -
Investments 39 836
Cost of investment advisory contracts acquired, net of accumulated
amortization of $824 and $2,425, respectively 780 1,729
Other assets 97 164
------ ------
Total Assets $5,339 $6,075
====== ======
LIABILITIES AND PARTNERS' CAPITAL
Accrued compensation $ 373 $ 385
Accounts payable and accrued liabilities 387 100
------ ------
Total Liabilities 760 485
------ ------
Commitments (Note 4)
Partners' capital 4,579 5,590
------ ------
Total Liabilities and Partners' Capital $5,339 $6,075
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
30
<PAGE>
Cabot Partners Limited Partnership
Statements of Operations
(Dollars in thousands)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-------------------------------
1997 1996 1995
--------- ---------- --------
<S> <C> <C> <C>
REVENUES
Advisory fees $9,010 $7,871 $6,482
Other income 70 37 34
------ ------ ------
Total Revenues 9,080 7,908 6,516
------ ------ ------
EXPENSES
Compensation 4,685 3,887 3,416
Other general and administrative 2,360 2,001 1,653
Depreciation and amortization 977 419 453
------ ------ ------
Total Expenses 8,022 6,307 5,522
------ ------ ------
Income before income (loss) from
unconsolidated subsidiary 1,058 1,601 994
Equity in income (loss) from unconsolidated
subsidiary 0 (7) 63
------ ------ ------
Net income $1,058 $1,594 $1,057
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
31
<PAGE>
Cabot Partners Limited Partnership
Statements of Partners' Capital
For the Years Ended December 31, 1997, 1996 and 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
Limited Partners Total
General ------------------------ Partners'
Partner Class A Class B Capital
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
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 year ended December 31, 1997 -- 1,058 -- 1,058
Distributions (10) (1,669) (390) (2,069)
---- ------- ----- -------
Partners' Capital, December 31, 1997 $ -- $ 4,579 $ -- $ 4,579
==== ======= ===== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
32
<PAGE>
Cabot Partners Limited Partnership
Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
For the Year Ended
December 31,
---------------------------------
1997 1996 1995
---------- ----------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,058 $ 1,594 $1,057
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 977 419 453
Unrealized equity in (income) loss of investment 0 7 (63)
(Increase) in accounts receivable (1,052) (695) (315)
Increase (Decrease) in accrued liabilities 37 (70) 265
(Decrease) Increase in accounts payable (5) (9) 6
Decrease (Increase) in other assets 47 37 (52)
------- ------- ------
Net cash provided by operating activities 1,062 1,283 1,351
------- ------- ------
INVESTING ACTIVITIES
Increase in accounts receivable from related parties (984) -- --
Dividends received 797 183 77
Purchase of furniture, fixtures and equipment (6) (50) (63)
Additional cost-basis investments -- (20) (20)
------- ------- ------
Net cash provided by (used in) investing activities (193) 113 (6)
------- ------- ------
FINANCING ACTIVITIES
Distributions to partners (2,069) (1,069) --
------- ------- ------
Net (decrease) increase in cash and cash equivalents (1,200) 327 1,345
Cash and cash equivalents, beginning of period 1,709 1,382 37
------- ------- ------
Cash and cash equivalents, end of period $ 509 $ 1,709 $1,382
======= ======= ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
33
<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. Eight
investors represented 70% of fee revenues for 1997, nine investors represented
77% of fee revenues for 1996 and eleven investors represented 81% of fee
revenues for 1995.
The Partnership has two classes of limited partners. The Class A limited
partners 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, 1997, the cumulative unpaid and
unrecognized return was $2,795.
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
taxable income on their individual tax returns. The tax basis of assets and
liabilities 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.
34
<PAGE>
Cabot Partners Limited Partnership
Notes to Financial Statements
(Dollars in thousands)
2. Summary of Significant Accounting Policies (Continued)
Cash Equivalents
At December 31, 1997, 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 approximate
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.
35
<PAGE>
Cabot Partners Limited Partnership
Notes to Financial Statements
(Dollars in thousands)
3. Investments (continued)
The condensed unaudited historical cost balance sheets of Private Partners at
December 31, 1997 and December 31, 1996 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 576 $ 186
Real estate assets, net 3,140 58,776
Other assets 179 18,203
------ -------
Total Assets $3,895 $77,165
====== =======
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued liabilities $ 29 $ 453
PARTNERS' CAPITAL
The Partnership 39 767
Other Partners 3,827 75,945
------ -------
Total Partners' Capital 3,866 76,712
------ -------
Total Liabilities and Partners' Capital $3,895 $77,165
====== =======
</TABLE>
The difference between the Partnership's share of the 1996 historical partners'
capital 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, 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------
1997 1996 1995
------------- -------------- -------------
<S> <C> <C> <C>
Sale of real estate assets $ 60,268 $ 20,817 $ --
Rental revenues 6,448 11,726 12,778
Cost of real estate sold (51,728) (20,411) --
Note receivable reduction (2,078) (7,688) --
Operating expenses (1,213) (5,163) (6,483)
Write down of real estate to net
realizable value (4,860) -- --
-------- -------- -------
Net income (loss) $ 6,837 $ (719) $ 6,295
======== ======== =======
Dividends paid $ 79,683 $ 18,292 $ 7,700
======== ======== =======
The Partnership's share of:
Net income (loss) $ 68 $ (7) $ 63
======== ======== =======
Dividends paid $ 797 $ 183 $ 77
======== ======== =======
</TABLE>
Private Partners' remaining real estate is vacant land which is held for sale.
As of December 31, 1997, its carrying cost has been reduced to its estimated net
realizable value.
36
<PAGE>
Cabot Partners Limited Partnership
Notes to Financial Statements
(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>
<S> <C>
1998 $298
1999 313
2000 325
2001 310
</TABLE>
The Partnership incurred rental expense of $332, $304 and $242 for the years
ended December 31, 1997, 1996 and 1995, respectively. The Partnership's only
significant lease is for its office space. The lease provides for the payment of
base rent and operating expenses and real estate taxes over stated base amounts.
5. Related Party Transactions
Under two separate agreements, the Partnership provides acquisition, asset
management and property management services to a partnership and a company
separately controlled by two Class A limited partners. The agreements are
cancelable by either party with 30 days notice. After a recent amendment, one
agreement 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 year ended December 31, 1997, and other related
party fees of $287, $164 and $153 for the years ended December 31, 1997, 1996
and 1995, respectively.
As of December 31, 1997, the Partnership had incurred costs related to the
Formation Transactions decribed below of $1,225, of which $241 is unpaid and
included in accounts payable and accrued expenses. These costs are to be
reimbursed by Cabot Industrial Trust subsequent to the Formation Transactions.
6. Subsequent Events
Formation Transactions
Under the provisions of an agreement executed by the Partnership and several
other investors, Cabot Partners contributed its Advisory Contracts and certain
of its other net assets to Cabot Industrial Properties, L.P. (the Operating
Partnership), a subsidiary partnership of Cabot Industrial Trust (the Company)
and received 1,819,587 Units from the Operating Partnership. The Units are
convertible into common shares of the Company on a one-to-one basis subject to
certain limitations. As of February 4, 1998, the common shares had a fair market
value of $20 per share. The remainder of the Partnership's net assets will be
distributed to its partners. The impact of these proposed transactions is not
reflected in the accompanying financial statements.
The cumulative unpaid and unrecognized return discussed in Note 1 was settled
through the distribution of Units received in conjunction with these
transactions.
37
<PAGE>
Cabot Partners Limited Partnership
Notes to Financial Statements
(Dollars in thousands)
6. Subsequent Events (Continued)
Sales 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
transferred to other advisors or sold as a part of the investor's investment
strategy.
During 1997, all the properties of three portfolios have been sold. These
portfolios accounted for advisory and property management fees of $2,985, $3,249
and $3,295 for the years ended December 31, 1997, 1996 and 1995, respectively.
38
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
----------------------------------------------
The information called for by Item 10 with respect to executive officers of the
Registrant appears in Item 4A under Part I of this Report and is incorporated
herein by reference.
<TABLE>
<CAPTION>
Positions with Company, Business Experience
Name Age and Other Positions
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Noah T. Herndon 66 Mr. Herndon has been a Trustee of the Company
since February 1998. Mr. Herndon is a
Partner of Brown Brothers Harriman & Co.,
where he has worked since 1958. Mr. Herndon
is a Director of Scully Signal Company,
Standard Mutual Insurance Company, Watts
Industries, Inc., and Zoll Medical
Corporation. He is Trustee and Treasurer of
Dumaines Trust, and Trustee of The Carroll
School.
Maurice Segall 68 Mr. Segall has been a Trustee of the Company
since February 1998. Mr. 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 Corporation, 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.
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
Positions with Company, Business Experience
Name Age and Other Positions
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Ronald L. Skates 56 Mr. Skates has been a Trustee of the Company
since February 1998. Mr. Skates has been
President, Chief Executive Officer and
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.
W. Nicholas Thorndike 65 Mr. Thorndike has served as a Trustee of the
Company since February 1998. Mr. 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 Corporation, 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.
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
Positions with Company, Business Experience
Name Age and Other Positions
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Ferdinand Colloredo-Mansfeld 58 Ferdinand Colloredo-Mansfeld has served as
Chairman of the Board of Trustees and Chief
Executive Officer of the Company since its
formation in October 1997. See the
description of Mr. Colloredo-Mansfeld's
background set forth under Item 4A of this
report.
Robert E. Patterson 53 Mr. Patterson has served as President and a
Trustee of the Company since October 1997.
See the description of Mr. Patterson's
background set forth under Item 4A of this
report.
Christopher C. Milliken 52 Mr. Milliken has been a Trustee of the
Company since February 1998. He 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.
</TABLE>
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires Trustees,
executive officers and beneficial owners of more than ten percent of the Common
Shares to file initial reports of ownership and reports of changes in ownership
with the Securities and Exchange Commission and to provide the Company with
copies of such reports. The Company was not subject to Section 16(a) during
1997.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
Summary Compensation Table
- --------------------------
The Company was organized in October 1997 and did not pay any compensation to
its executive officers during 1997. The following table sets forth information
concerning the base compensation to be paid, and the initial amounts of options
to purchase Units granted, to Ferdinand Colloredo-Mansfeld, Robert E. Patterson,
Franz Colloredo-Mansfeld, Andrew D. Ebbott, Howard B. Hodgson, Jr., Eugene F.
Reilly and Neil E. Waisnor (collectively, the
41
<PAGE>
"Named Executive Officers") during the fiscal year ending December 31, 1998.
<TABLE>
<CAPTION>
Long-Term
Annual Compensation
Compensation Awards
- -------------------------------------------------------------------------------------------
Securities
Fiscal Underlying
Name and Principal Position Year Salary Options(#)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Ferdinand Colloredo-Mansfeld
Chairman of the Board and
Chief Executive Officer 1998 $265,000 350,000
Robert E. Patterson
President 1998 $245,000 275,000
Franz Colloredo-Mansfeld
Chief Financial Officer 1998 $175,000 250,000
Andrew D. Ebbott
Senior Vice President
Director of Acquisitions 1998 $175,000 200,000
Howard B. Hodgson, Jr.
Senior Vice President 1998 $175,000 200,000
Director of Real Estate Operations
Eugene F. Reilly
Senior Vice President
Director of Leasing, Marketing
and Development 1998 $175,000 200,000
Neil E. Waisnor
Senior Vice President 1998 $175,000 200,000
Finance, Treasurer and Secretary
</TABLE>
42
<PAGE>
Option Grants
- -------------
The following table sets forth certain information concerning grants of options
to purchase Units to the Named Executive Officers made in February 1998.
<TABLE>
<CAPTION>
Individual Grants(1) Potential Realizable
------------------------------------------------------------------ Value at Annual Rates
of Stock Price
Appreciation for Option
Term(2)
----------------------------------------------------------------------------------------------------
Number of
Securities Percent of Total Exercise or
Underlying Options Granted Base Price
Options to Employees(3) per Share Expiration
Name Granted Date 5% 10%
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Ferdinand Colloredo-Mansfeld 350,000 17.1% $20.00 2/4/08 $4,402,262 $11,156,197
Robert E. Patterson 275,000 13.4% $20.00 2/4/08 3,458,920 8,765,584
Franz Colloredo-Mansfeld 250,000 12.2% $20.00 2/4/08 3,144,473 7,968,712
Andrew D. Ebbott 200,000 9.8% $20.00 2/4/08 2,515,579 6,374,971
Howard B. Hodgson, Jr. 200,000 9.8% $20.00 2/4/08 2,515,579 6,374,971
Eugene F. Reilly 200,000 9.8% $20.00 2/4/08 2,515,579 6,374,971
Neil E. Waisnor 200,000 9.8% $20.00 2/4/08 2,515,579 6,374,971
</TABLE>
(1) Options granted under the Company's Long Term Incentive Plan upon the
closing of the Company's initial public offering in February 1998. Options
vest in four equal annual installments beginning on the first anniversary
of the date of grant.
(2) Hypothetical gains based on assumed rates of annual compounded share price
appreciation of 5% and 10% from the date of grant over the full option
term. The 5% and 10% assumed rates of appreciation are mandated by the
rules of the Securities and Exchange Commission and do not represent the
Company's estimate or projection of future increases in the price of its
Common Shares or the Units.
(3) Based on an aggregate of options to purchase 2,045,600 Units granted to
employees upon the closing of the Company's initial public offering.
Employment Contracts and Termination of Employment and Change-in-Control
- ------------------------------------------------------------------------
Arrangements
- ------------
Employment Agreements
Messrs. Ferdinand Colloredo-Mansfeld, Robert E. Patterson and Franz Colloredo-
Mansfeld and each of the other Named Executive Officers have entered into
employment agreements with the Company and the Operating Partnership. Each of
the agreements with Messrs. Ferdinand Colloredo-Mansfeld, Robert E. Patterson
and Franz Colloredo-Mansfeld is 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 are
for initial terms of two years, which will be automatically extended for
successive one-year periods unless otherwise terminated. The agreements each
provide for base annual compensation in the amounts set forth in the Summary
Compensation Table above and a cash bonus to be determined by the Board of
Trustees or the Executive Compensation Committee thereof. The base annual
compensation may be increased in subsequent years by action of the Board of
Trustees or the Executive Compensation Committee. Each of the employment
agreements provides for severance payments equal to three times current base
salary plus the amount of any bonus paid for the preceding year and including
certain tax reimbursements, in the event of termination by the Company without
cause or by the employee after a change in control of the Company. Each
executive is required under the terms of his employment agreement to devote
substantially all of his business time to the affairs of the Company. The
agreements also prohibit each executive from engaging, directly or indirectly,
during the term of his employment in activities that compete with those of the
Company or the Operating Partnership.
43
<PAGE>
Long Term Incentive Plan
The Board of Trustees has adopted 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 is administered by the Executive Compensation Committee of
the Board of Trustees, except that the Board of Directors of Cabot Advisors,
Inc. (the "Management Company") or a committee thereof selects 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") are
eligible to participate in the Long Term Incentive Plan. Certain awards are
made to the Non-employee Trustees automatically and the applicable Administrator
selects other individuals for participation in the Long Term Incentive Plan
("Participants"). No options or other incentive award may be granted under the
Long Term Incentive Plan after the tenth anniversary of the date of its
adoption.
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 Operating
Partnership or the Management Company relate to Units. The Long Term Incentive
Plan authorizes the issuance of up to 4,347,500 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 Internal Revenue Code of 1986, as
amended (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 determines the terms of
the option, including the option exercise price and any vesting requirements and
whether a dividend equivalent right or a distribution equivalent 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 automatically receives an
option to purchase 10,000 Common Shares. Thereafter, at the closing of the
annual meeting of the Trust's shareholders, each continuing Non-employee Trustee
shall receive an option to purchase an additional 4,000 Common Shares. Upon the
closing of the Company's initial public offering in February 1998, options for a
total of 2,095,600 Common Shares and units were granted to employees, officers
and Non-employee Trustees, including the officers named in Summary Compensation
Table above, with an exercise price equal to the offering price of $20.00. The
initial options granted to officers and employees under the Long Term Incentive
Plan have ten-year terms and become exercisable in four equal
44
<PAGE>
annual installments commencing on the first anniversary of the date of grant,
subject to acceleration of vesting upon a change in control of the company (as
defined in the Long Term Incentive Plan).
A Common Share option granted under the Long Term Incentive Plan may be
exercised 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
for any number of whole units up to the full number of Units for which the
option could be exercised. A holder of any option has 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 reasonable
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 an option
granted under the Long Term Incentive Plan may be made in cash or by exchanging
Common Shares, in the case of Common Share options, or Units, in the case of
Unit options, that have, in either case, been upheld by the Participant for at
least six months, or in any combination thereof, as determined by the
Administrator.
Savings Plan
The Company has assumed, and the Operating Partnership and certain subsidiaries,
including the Management Company (each a "Participating Employer"), have
adopted, 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 defer up to 15% of
compensation, subject to the annual statutory limitation prescribed by Section
402(g) of the Code, on a pre-tax basis. The Company and the Participating
Employers make matching contributions equal to 100% of the amount deferred, up
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 determined on an annual basis by the Executive
Compensation Committee. Matching and discretionary contributions are made in
cash or Common Shares.
45
<PAGE>
Compensation of Trustees
Independent Trustees receive an annual retainer of $18,000 and per meeting
compensation of $1,000. The Chairman of the Audit Committee and the Executive
Compensation Committee each receive an additional $1,000 annually for their
services in such capacities, and each Trustee is reimbursed for out-of-town
travel expenses incurred in connection with attendance at Board and committee
meetings. Each Independent Trustee also receives, under the Company's Long Term
Incentive Plan, an initial grant of options to purchase 10,000 Common Shares on
the date they become a Trustee, and an additional annual grant of options to
purchase 4,000 Common Shares each year on the date of the Company's annual
meeting of shareholders provided they have been reelected or are continuing to
serve as Trustees following such meeting. The exercise price per share for
options granted to Independent Trustees is the market price of a Common Share,
as defined in the Long Term Incentive Plan, on the date of grant. Options
granted to Independent Trustees become exercisable on the first anniversary of
the date of grant.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
Principal and Management Shareholders
The following table sets forth, as of April 17, 1998, the beneficial ownership
of Common Shares of (i) each person known by the Company to own more than 5% of
the Common Shares, (ii) each Trustee and nominee, (iii) each person named in the
Summary Compensation Table above, and (iv) all Trustees and executive officers
of the Company as a group. The table also sets forth the number of limited
partnership units (the "Units") of the Operating Partnership owned by each
beneficial owner of Units that, upon exchange of Units for Common Shares, would
own more than 5% of the Common Shares, and by the persons and group specified in
clauses (ii) through (iv) above. Pursuant to the Amended and Restated Agreement
of Limited Partnership of the Operating Partnership (the "Operating Partnership
Agreement"), the Units are exchangeable for Common Shares on a one-for-one basis
or the cash equivalent thereof (as determined by the Company) beginning February
4, 1999, or such earlier date as the Company may authorize. Unless otherwise
indicated, the persons and entities named below have sole voting and investment
power with respect to all Common Shares and Units shown as beneficially owned by
them.
46
<PAGE>
<TABLE>
<CAPTION>
Percent of
All Common Percent of
Shares and All Common
Beneficial Owner(1) Common Shares Units Units(2) Shares (3)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ferdinand Colloredo-Mansfeld 1,050 1,331,657 3.1% 6.7%
Robert E. Patterson 14,000 128,590 * *
Franz Colloredo-Mansfeld 4,000 25,991 * *
Andrew D. Ebbott 1,000 36,499 * *
Howard B. Hodgson Jr. 1,000 36,499 * *
Eugene F. Reilly -- 30,416 * *
Neil E. Waisnor -- 36,499 * *
Noah T. Herndon 5,000 -- * *
Christopher C. Milliken 100 -- * *
Maurice Segall 2,500 -- * *
W. Nicholas Thorndike 5,000 -- * *
Ronald L. Skates 10,000 -- * *
IBM Retirement Plan Trust(4) -- 10,246,244 23.5% 35.5%
Pennsylvania Public School
Employees' Retirement System(5) -- 5,502,973 12.6% 22.8%
New York State Teachers' Retirement
System(6) 2,186,947 3,764,579 13.7% 26.6%
State of Wisconsin Investment
Board(7) 2,959,534 -- 6.8% 15.9%
Leland Stanford Jr. Endowment Fund(8) -- 2,367,923 5.4% 11.3%
The Prudential Insurance Company of
America(9) 2,504,699 -- 5.8% 13.5%
Argo Partnership II, L.P.(10) 1,586,484 -- 3.6% 8.5%
Morgan Stanley Asset Management
Inc.(11) 1,000,000 -- 2.3% 5.4%
All Trustees and executive officers
as a group (12 persons) 43,650 1,626,151 3.8% 8.3%
</TABLE>
47
<PAGE>
* Less than 1%
(1) Unless otherwise indicated, the address of each named person or the title
holding entity is c/o Cabot Industrial Trust, Two Center Plaza, Suite 200,
Boston, Massachusetts 02108.
(2) Assumes all Units exchanged for Common Shares on a one-for-one basis
(without regard to the prohibition on exchange of 22,699,884 and 2,228,719
Units until February 4, 1999 and 2000 respectively).
(3) Assumes that all Units beneficially owned by the identified person or group
(and no other person) are exchanged for Common Shares on a one-for-one
basis (without regard to the prohibition on exchange of 22,699,884 and
2,228,719 units until February 4, 1999 and 2000, respectively).
(4) Information based on a Schedule 13G dated April 22, 1998 filed with the
Securities and Exchange Commission. The address of IBM Retirement Plan
Trust is 3001 Summer Street, Stamford, Connecticut 06905.
(5) Units held of record by Keystone-Illinois Property Holding Corp., Keystone-
New Jersey Property Holding Corp. and Keystone-Ohio Property Holding Corp.
which are each owned by Pennsylvania Public School Employees' Retirement
System. The business address of the Unitholders is 875 North Michigan
Avenue, Suite 4114, Chicago, Illinois 60611.
(6) Common Shares and Units held of record by the three title holding entities
and six title holding entities, respectively, which are each wholly owned
by New York State Teachers' Retirement System. The business address of
these entities is c/o Bankers Trust Company, 14 Wall Street, New York, New
York 10005.
(7) Information based on a Schedule 13G dated March 10, 1998 filed with the
Securities and Exchange Commission. The address of State of Wisconsin
Investment Board is P.O. Box 7842, Madison, Wisconsin 53707.
(8) Units held of record by CP REPROP Corp. which is wholly owned by the Leland
Stanford Jr. Endowment Fund. The business address of the entities is c/o
Stanford Management Company, 2770 Sand Hill Road, Menlo Park, California
94025.
(9) Includes 950 shares with respect to which The Prudential Insurance Company
of America ("Prudential") has shared voting and investment power.
Information based on a Schedule 13G dated March 9, 1998 filed with the
Securities and Exchange Commission. Prudential's address is 751 Broad
Street, Newark, New Jersey 07102-3777.
(10) Common Shares held of record by West Coast Industrial, L.I.C. which are
beneficially owned by its managing member, Argo Partnership II, L.P. The
business address of this Unitholder is c/o The O'Connor Group, 399 Park,
Avenue, New York, New York 10022.
(11) Common Shares held of record by Morgan Stanley Asset Management Inc.
("MSAM") as advisor to Stichting Bedrijspensioenfonds Voor De
Metaalnijhwerheld, Stichting Pensiocnfonds ABP, MS Real Estate Special
Situations Inc., The Morgan Stanley Real Estate Special Situations Funds I,
L.P., The Morgan Stanley Real Estate Special Situations Fund II, L.P. and
Morgan Stanley Real Estate Special Situations Real Estate Investors, L.P.
MSAM 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 these entities. MSAM maintains its principal
office at 1221 Avenue of the Americas, New York, New York 10020 and Morgan
Stanley, Dean Witter, Discover & Co. maintains its principal office at 1585
Broadway, New York, New York 10036. MSAM and Morgan Stanley, Dean Witter,
Discover & Co. disclaim beneficial ownership of such Common Shares.
48
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Formation Transactions
In connection with the formation of the Company and the Operating Partnership in
October 1997, certain Trustees and executive officers, members of their family
and certain other persons (collectively, the "Cabot Group Participants")
received a total of 1,705,506 Units in exchange for their interests in C-M
Holdings L.P. and its affiliated partnerships ("C-M Property Partnerships")
and/or Cabot Partners, respectively. These Units (representing approximately
3.9% of the common equity of the Company on a fully diluted basis had a total
value of approximately $34.1 million, based on the initial public offering price
of the Company's Common Shares of $20.00 per share (the "Offering Price"). The
Cabot Group Participants' partnership interests for the C-M Property
Partnerships and Cabot Partners had an aggregate net book value of $5.1 million
as of September 30, 1997. The aggregate cost to the Cabot Group Participants for
these partnership interests was $8.8 million, resulting in an unrealized gain of
approximately $25.3 million. The C-M Property Partnerships are owned by
Ferdinand Colloredo-Mansfeld, the Company's Chairman and 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 interest therein,
respectively. Of the total number of Units received by the Cabot Group
Participants in connection with the formation of the Company and the Operating
Partnership, (i) Ferdinand Colloredo-Mansfeld received 1,331,657 Units having a
value, based on the Offering Price, of approximately $26.6 million in exchange
for his partnership interests in the C-M Property Partnerships and Cabot
Partners, which had an aggregate cost of approximately $4.7 million and $3.9
million, respectively, (ii) Robert E. Patterson, President of the Company,
received 128,590 Units having a value, on such basis, of approximately $2.6
million in exchange for his partnership interests in Cabot Partners, which had
an aggregate cost of $59,000, and (iii) the other executive officers of the
Company received 165,904 Units having a value, on such basis, of approximately
$3.3 million in exchange for partnership interests in the C-M Property
Partnerships and Cabot Partners, which had an aggregate cost of $62,000. In
addition, the Company reimbursed or will reimburse Cabot Partners for
approximately $1.2 million of out-of-pocket expenses incurred by Cabot Partners
in connection with the formation of the Company pursuant to the terms of the
Contribution Agreement, dated October 10, 1997, entered into in connection with
the formation of the Company.
In addition, the Contributing Investors (as defined below) received a total of
22,598,735 Units and 8,961,714 Common Shares in exchange for their interests in
the certain properties that were contributed to the Company and/or the Operating
Partnership in connection with their formation. These Units and Common Shares
(representing approximately 72.6% of the common equity of the Company on a fully
diluted basis) had a total value of approximately $631.2 million based on the
Offering Price, compared to the aggregate cost of such properties of
approximately $655.9 million. The Contributing Investors include CP Investment
Properties, Inc. (the title holding entity of IBM Retirement Plan Trust), nine
title holding entities of New York Teachers' Retirement System, State of
Wisconsin Investment Board, CP REPROP Corp. (the title holding entity of the
Leland Stanford Jr. Endowment Fund), West Coast Industrial, L.L.C. (the title
holding entity of Argo Partnership II, L.P.), Keystone-New Jersey Property
49
<PAGE>
Holding corp., Keystone-Ohio Property Holding Corp. and Keystone-Illinois
Property Holding Corp. (the title holding entities of Pennsylvania Public School
Employes' Retirement System), Herrod Associates and the Prudential Insurance
Company of America.
The Units received by the Cabot Group Participants and the Contributing
Investors in connection with the formation of the Company and the Operating
Partnership 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
February 4, 1999 in the case of the Contributing Investors or February 4, 2000
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.
In connection with the formation of the Management Company in December 1997,
Cabot Partners contributed to the Management Company certain advisory contracts
and other assets relating to properties that were not contributed to the Company
or the Operating partnership. The Operating Partnership owns all 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 is senior in liquidation or dissolution to the extent of the
liquidation preference of the preferred stock to the Management Company common
equity. Ferdinand Colloredo-Mansfeld acquired all of the voting common shares
of the Management Company for a cash purchase price of $100,000 and is entitled
to receive quarterly cash dividends equal to 5% of the Management Company's net
operating cash flow.
Private Placement
Concurrently with the Company's initial public offering, the Company sold $20
million of Common Shares at the Offering Price in a private offering to the
following investors, for whom Morgan Stanley Asset Management Inc. acted as
advisor: Stichting Bedrijspensioenfonds Voor De Metaalnijhverheid, Stichting
Pensioenfonds ABP, MS Real Estate Special Situations Inc., The Morgan Stanley
Real Estate Special Situations Funds I, L.P., The Morgan Stanley Real Estate
Special Situations Fund II, L.P. and Morgan Stanley Real Estate Special
Situations Real Estate Investors, L.P. Under the agreements relating to the
sale of such shares, the Company has agreed to file a registration statement
with the Securities and Exchange Commission 180 days after the closing of the
Company's initial public offering for the purpose of registering resales,
subject to certain exceptions, of such Common Shares and to reimburse such
parties for up to $25,000 in related legal expenses.
50
<PAGE>
Repayment of Debt
Approximately $18.3 million of indebtedness secured by the properties
contributed by the C-M Property Partnerships was assumed by the Operating
Partnership, and approximately $13.1 million of such indebtedness was repaid
from the proceeds of the Company's initial public offering.
Indemnification
The Company has entered into indemnification agreements with each of its
executive officers and Trustees that require that the Company indemnify such
persons to the fullest extent permitted by Maryland 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
indemnification is not permitted in the circumstances. Although the
indemnification agreements provide substantially the same scope of
indemnification as that to which the Company's officers and Trustees are
entitled under the Company's Bylaws and applicable Maryland law, such agreements
may provide greater assurance 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.
51
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
(a) The following documents are filed as part of this report:
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DOCUMENT DESCRIPTION PAGE NO.
- ------ -------------------- --------
<C> <S>
3.1 Amended and Restated Cabot Industrial Trust Declaration of Trust,
dated January 26, 1998. Incorporated by reference to Exhibit 3.1 to the
Registrant's Form S-11 Registration Statement (File No. 333-38383);
the "Form S-11").
3.2 Bylaws of the Company. Incorporated by reference to Exhibit 3.2 to
the Registrant's Form S-11.
3.3 Form of Registration Rights and Lock-Up Agreement, dated as of
February 4, 1998, between the Company, the Contributing Investors and
various other persons identified therein (included as Exhibit B to
Exhibit 4.1). Incorporated by reference to Exhibit 3.3 to the
Registrant's Form S-11.
3.4 Second Amended and Restated Agreement of Limited Partnership
Agreement of Cabot Industrial Properties, L.P., dated February 4,
1998. Incorporated by reference to Exhibit 3.5 to the Registrant's
Form S-11.
4.1 Contribution Agreement relating to the Capitalization of Cabot
Industrial Trust, dated as of October 10, 1997, among the Company,
the Operating Partnership, Cabot Partners and Various Contributors
and Title Holding Entities Identified Therein. Incorporated by
reference to Exhibit 4.1 to the Registrant's Form S-11.
10.1 Form of Indemnification Agreement between the Company and the Trustees.
Incorporated by reference to Exhibit 10.1 to the Registrant's Form S-11.
10.2 Share Purchase Agreement, dated as of December 17, 1997, between the
Company and Morgan Stanley Asset Management Inc., on behalf of
certain of its institutional investors. Incorporated by reference to
Exhibit 10.2 to the Registrant's Form S-11.
10.3 Form of Registration Rights and Lock-Up Agreement, between the
Company and Morgan Stanley Asset Management Inc., on behalf of
certain of its institutional investors. Incorporated by reference to
Exhibit 10.3 to the Registrant's Form S-11.
10.4 Cabot Industrial Trust Long Term Incentive Plan. Incorporated by
reference to Exhibit 10.4 to the Registrant's Form S-11.
10.5 Form of Employment Agreement between Cabot Industrial Properties,
L.P. and Ferdinand Colloredo-Mansfeld. Incorporated by reference to
Exhibit 10.5 to the Registrant's Form S-11.
10.6 Form of Employment Agreement between Cabot Industrial Properties,
L.P. and Robert E. Patterson. Incorporated by reference to Exhibit
10.6 to the Registrant's Form S-11.
10.7 Form of Employment Agreement between Cabot Industrial Properties,
L.P. and Franz Colloredo-Mansfeld. Incorporated by reference to
Exhibit 10.7 to the Registrant's Form S-11.
10.8 Form of Employment Agreement between Cabot Industrial Properties,
L.P. and Andrew D. Ebbott, Howard B. Hodgson, Jr., Neil E. Waisnor or
Eugene F. Reilly. Incorporated by reference to Exhibit 10.8 to the
Registrant's Form S-11.
10.9* Revolving Credit Agreement between the Operating Partnership and
Morgan Guaranty Trust Company of New York, dated March 27, 1998.
24 Power of Attorney (included on the signature page to the Company's
Form 10-K as filed March 31, 1998).
27* Financial Data Schedule.
99.1 Pro Forma Condensed Combined Balance Sheet (unaudited)
99.2 Existing Investment Property Group Combined Financial Statements
99.3 New Investors Property Group Financial Statements-
Orlando Central Park and 500 Memorial Drive
Knickerbocker Properties, Inc. II
Pennsylvania Public School Employes' Retirement System Industrial
Properties Portfolio
Prudential Properties Group
West Coast Industrial, LLC
The 4 B's
</TABLE>
- ------------
* Previously filed.
52
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CABOT INDUSTRIAL TRUST
By /s/ Robert E. Patterson
_______________________
Title: President
_______________________
Date: August 21, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Title Date
----- ----
<S> <C> <C>
/s/ *
________________________________ Chairman of the Board and August 21, 1998
Ferdinand Colloredo-Mansfeld Chief Executive Officer
Trustee
/s/ ROBERT E. PATTERSON
________________________________ President and Trustee August 21, 1998
Robert E. Patterson
/s/ *
________________________________ Chief Financial Officer August 21, 1998
Franz Colloredo-Mansfeld
/s/ Neil E. Waisnor
________________________________ Senior Vice President--Finance, August 21, 1998
Neil E. Waisnor Treasurer and Secretary
Chief Accounting Officer
/s/ *
________________________________
Noah T. Herndon Trustee August 21, 1998
/s/ *
________________________________
Christopher C. Milliken Trustee August 21, 1998
/s/ *
________________________________
Maurice Segall Trustee August 21, 1998
/s/ *
________________________________
W. Nicholas Thorndike Trustee August 21, 1998
/s/ *
________________________________
Ronald L. Skates Trustee August 21, 1998
</TABLE>
* By Neil E. Waisnor pursuant to a Power of Attorney filed March 31, 1998.
53
<PAGE>
EXHIBIT 99.1
CABOT INDUSTRIAL TRUST
PRO FORMA CONDENSED COMBINED BALANCE SHEET
(UNAUDITED)
The pro forma condensed combined balance sheet as of December 31, 1997 has been
prepared to reflect (i) the contribution to the Company of (A) the properties
that were managed by Cabot Partners as of December 31, 1997 that were
contributed to the Company in the Formation Transactions (referred to herein as
the "Existing Investment Property Group") and (B) the properties that were not
managed by Cabot Partners as of December 31, 1997 that were contributed to the
Company in the Formation Transactions, (referred to herein as the "New
Investors Property Group"), (ii) the other Formation Transactions (iii) the
properties acquired by the Company during the six months ended June 30, 1998,
(iv) the use of a portion of the net proceeds of the Offerings to repay
indebtedness and (v) certain other adjustments, as if each of such
contributions, transactions and adjustments had occurred on December 31, 1997.
In the opinion of management, the pro forma condensed combined financial
statements include all adjustments necessary to reflect the effects of the
foregoing transactions and adjustments. The pro forma balance sheet is unaudited
and is 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
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 of the Company as of any future date or for any future
period.
<PAGE>
CABOT INDUSTRIAL TRUST
PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF DECEMBER 31, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
EXISTING NEW PRE-OFFERINGS
--------- --- -------------
CABOT INVESTORS INVESTORS OTHER CABOT INDUSTRIAL
----- --------- --------- ----- ----------------
INDUSTRIAL CABOT PROPERTY PROPERTY FORMATION TRUST COMPANY
---------- ----- -------- --------- --------- ----- -------
TRUST PARTNERS GROUP GROUP(A) TRANSACTIONS PRO-FORMA ACQUISITIONS(H)
----- -------- ------ -------- ------------ --------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Properties, net $ -- $ -- $377,613 $244,405 $ 35,725(B) $657,743 $ 261,063
Cash and cash
equivalents 1 509 2,742 1,617 (4,868)(E) 1 (154,755)
Rents and other
receivables -- 2,144 1,766 400 (4,310)(E) -- --
Advisory fees
receivables -- 545 -- -- (545)(F) -- --
Restricted cash -- -- 27 -- -- 27 --
Deferred rent
receivable -- -- 4,444 3,892 (8,336)(C) -- --
Lease acquisition
costs, net -- -- 6,459 3,552 -- 10,011 --
Other assets 3,480 916 217 731 (1,787)(D)(E) 3,557 __
------ ------- -------- -------- --------- -------- ---------
Total Assets $3,481 $ 4,114 $393,268 $254,597 $ 15,879 $671,339 $ 106,308
====== ======= ======== ======== ========= ======== =========
LIABILITIES AND
SHAREHOLDERS'
EQUITY
Mortgage debt $ -- $ -- $ 18,433 $ -- -- $ 18,433 $ 104,041
Due to related 1,225 (1,225) 27,476 -- (26,251)(G)(E) 1,225 --
parties
Accounts payable
and accrued
liabilities 2,255 760 4,168 1,141 2,644(B)(E) 10,968 --
Advisory fees
payable -- -- 545 2,099 (2,644)(E)(F) -- --
Other liabilities -- -- 1,046 1,305 (2,324)(E) 27 --
------ ------- -------- -------- --------- -------- ---------
Total
Liabilities
3,480 (465) 51,668 4,545 (28,575) 30,653 104,041
------ ------- -------- -------- --------- -------- ---------
Limited Partners
interest in
Operating
Partnership -- -- -- -- 471,095(B) 471,095 2,267
Owners' equity -- 4,579 341,600 250,052 (596,231) -- --
Common stock -- -- -- -- 90(B) 90 --
Paid in capital 1 -- -- -- 169,500(B) 169,501 --
------ ------- -------- -------- --------- -------- ---------
Total
Shareholders'
Equity
1 4,579 341,600 250,052 (426,641) 169,591 --
------ ------- -------- -------- --------- -------- ---------
Total
Liabilities
and
Shareholders'
Equity $3,481 $ 4,114 $393,268 $254,597 $ 15,879 $671,339 $ 106,308
====== ======= ======== ======== ========= ======== =========
<CAPTION>
CABOT
-----
THE OFFERINGS INDUSTRIAL
------------- ----------
PRO FORMA TRUST
------------------ -----
ADJUSTMENTS (I)(J) PRO-FORMA
------------------ ---------
<S> <C> <C>
ASSETS
Properties, net $ -- $918,806
Cash and cash
equivalents 154,755 1
Rents and other
receivables -- --
Advisory fees
receivables -- --
Restricted cash -- 27
Deferred rent
receivable -- --
Lease acquisition
costs, net -- 10,011
Other assets (3,480) 77
-------- --------
Total Assets
$151,275 $928,922
======== ========
LIABILITIES AND
SHAREHOLDERS'
EQUITY
Mortgage debt
Due to related
parties $(13,193) $109,281
Accounts payable
and accrued
liabilities (1,225) --
Advisory fees
payable (10,968) ---
Other liabilities -- --
-- 27
-------- --------
Total
Liabilities (25,386) 109,308
-------- -------
Limited Partners
interest in
Operating
Partnership (3,723) 469,639(K)
Owners' equity -- --
Common stock 96 186
Paid in capital 180,288 349,789
-------- -------
Total
Shareholders'
Equity 180,384 349,975
-------- -------
Total
Liabilities
and
Shareholders'
Equity $151,275 $928,922
======== ========
</TABLE>
<PAGE>
CABOT INDUSTRIAL TRUST
NOTES TO PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF DECEMBER 31, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
New Investors Property Group
(A) The New Investors Property Group is the combination of the financial
information for the following contributing investors:
Orlando Central Park and 500 Memorial Drive
Knickerbocker Properties, Inc. II
Pennsylvania Public School Employes' Retirement System Industrial
Properties Portfolio
Prudential Properties Group
West Coast Industrial, LLC
The 4 B's
Other Formation Transactions
(B) 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 (excluding Units issued to the sponsor, Cabot Partners,
which are recorded at Cabot Partners' carryover basis), as follows:
<TABLE>
<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 $ 640,608
Plus: Mortgage debt assumed 18,433
Plus: Other Acquisition costs and liabilities assumed 8,713
Less: Historical net book value of properties and other acquired assets (632,029)
---------
Cost of assets acquired in excess of historical book value $ 35,725
=========
</TABLE>
(C) To eliminate $8,336 deferred rent receivable which arose from the
historical straight-lining of rents.
(D) To write off $780 of intangible assets of Cabot Partners related to
advisory contracts of Cabot Partners terminated at the time of the
Formation Transactions and to eliminate $119 of unamortized deferred loan
costs related to mortgage debt repaid with net proceeds of the Offerings.
(E) 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.
(F) To eliminate fees receivable (payable) between Cabot Partners and the
Existing Investors Property Group arising from advisory contracts of Cabot
Partners which were terminated as a part of the Formation Transactions.
<PAGE>
CABOT INDUSTRIAL TRUST
NOTES TO PRO FORMA CONDENSED COMBINED BALANCE SHEET ---(CONTINUED)
AS OF DECEMBER 31, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(G) To reflect the conversion to equity of $27,476 due by certain of the
contributing investors to certain affiliated entities.
Acquisitions during the six months ended June 30, 1998
(H) To reflect the acquisition of the following properties, and the related
issuance of debt and Units, and assumption of liabilities, during the six
months ended June 30, 1998:
<TABLE>
<CAPTION>
NUMBER OF SQUARE ESTIMATED
PROPERTY LOCATION BUILDINGS BUILDING TYPE FEET COST
- ----------------- ---------- --------------------------- ----------- ---------
<S> <C> <C> <C> <C>
Grapevine, TX 2/1 Bulk Distribution/Workspace 1,182,361 $51,734
Mira Loma, CA,
Dacula, GA,
Mechanicsburg,PA 3 Bulk Distribution 916,603 34,520
Mechanicsburg, PA 2 Bulk Distribution 494,400 17,118
San Diego, CA 1 Bulk Distribution 220,000 10,898
Orlando, FL 4 Workspace 213,430 11,053
Tucker, GA 3 Workspace 134,163 5,575
Atlanta, GA 2 Workspace 128,000 5,363
Florence, KY 2 Workspace 61,555 4,054
Tempe, AZ 1 Workspace 81,817 3,319
Phoenix, AZ 1 Multitenant Distribution 144,592 4,016
Tolleson, AZ 1 Bulk Distribution 278,142 6,815
Mounds View, MN 1/3 Multitenant Distribution/Workspace 320,328 20,242
Mt. Prospect, IL 1 Workspace 57,150 4,872
Kennesaw, GA 2 Workspace 121,384 5,802
Sun Valley, CA 1 Bulk Distribution 181,670 9,770
Otay Mesa, CA 2 Workspace 123,136 7,752
Ontario, CA 2 Multitenant Distribution 161,180 6,310
Mt. Prospect, IL 1 Workspace 43,250 3,617
Cincinnati, OH 2 Bulk Distribution 403,406 12,320
Plano, TX 2 Multitenant Distribution 206,939 8,393
Huntington Beach, CA 1 Workspace 125,000 7,960
Piscataway, NJ 1 Workspace 101,553 4,081
Phoenix, AZ 1 Multitenant Distribution 89,423 6,744
Simi Valley, CA 6 Workspace 112,271 8,735
--- -------- --------
49 Total Acquisitions 5,901,753 $261,063
=== ========= ========
</TABLE>
<PAGE>
CABOT INDUSTRIAL TRUST
NOTES TO PRO FORMA CONDENSED COMBINED BALANCE SHEET ---(CONTINUED)
AS OF DECEMBER 31, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
The Offerings
(I) To reflect the net proceeds derived from (i) the offering of 8,625,000
Common Shares at a price of $20.00 per share ($172,500), (ii) the
concurrent private placement of 1,000,000 Common Shares at a price of
$20.00 per share ($20,000), reduced by (iii) $24,552 of estimated fees and
expenses associated with the Formation Transactions and the Offerings.
(J) To reflect the repayment of three mortgage loans totaling $13,193, each
with a fixed interest rate of 8.375%, due February 1, 1998 with a portion
of the net proceeds of the Offerings. The total debt to be paid with the
proceeds of the Offerings is based on the principal outstanding at
December 31, 1997. The actual amounts repaid differed to the extent of
amortization of the principal occurring prior to the actual date of
repayment.
(K) The following table sets forth the calculation of the minority interest
(Limited Partners Interest in Operating Partnership) in the Company:
Total equity in the Operating Partnership $819,614
Minority interest ownership percentage 57.30%
Limited partners interest in the Operating partnership $469,639
<PAGE>
EXHIBIT 99.2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Owners of the
Existing Investors Property Group:
We have audited the accompanying combined balance sheets of the Existing
Investors Property Group, as defined in Note 1, as of December 31, 1997 and
1996, and the related combined statements of income, owners' equity and cash
flows for each of the three years in the period ended December 31, 1997. These
combined financial statements are the responsibility of the management of the
Existing Property Investors. Our responsibility is to express an opinion on
these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of mate-
rial misstatement. An audit includes examining, on a test basis, evidence sup-
porting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement pre-
sentation. We believe that our audits provide a reasonable basis for our opin-
ion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of the Existing
Investors Property Group at December 31, 1997 and 1996, and the combined
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1997, 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
July 13, 1998
<PAGE>
EXISTING INVESTORS PROPERTY GROUP
COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
--------------------------
YEARS ENDED DECEMBER 31,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Rental properties $ 417,138 $ 336,836
Accumulated depreciation (39,525) (32,528)
<CAPTION>
------------ ------------
<S> <C> <C>
377,613 304,308
Cash and Cash Equivalents 2,742 2,423
Rents and other receivables, net of allowance for
doubtful accounts of $0 and $339, respectively 6,210 4,810
Restricted cash 27 71
Lease acquisition costs, net of accumulated
amortization of $7,467 and $5,721, respectively 6,459 6,808
Other assets 217 312
<CAPTION>
------------ ------------
<S> <C> <C>
Total Assets $ 393,268 $ 318,732
<CAPTION>
============ ============
<S> <C> <C>
LIABILITIES AND OWNERS' EQUITY
Mortgage debt $ 18,433 $ 19,292
Due to Related Parties 27,476 3,668
Accounts payable and accrued expenses 4,713 3,608
Other liabilities 1,046 878
<CAPTION>
------------ ------------
<S> <C> <C>
Total Liabilities 51,668 27,446
<CAPTION>
------------ ------------
<S> <C> <C>
Contingencies (Note 8)
Owners' Equity 341,600 291,286
<CAPTION>
------------ ------------
<S> <C> <C>
Total Liabilities and Owners' Equity $ 393,268 $ 318,732
<CAPTION>
============ ============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
<PAGE>
EXISTING INVESTORS PROPERTY GROUP
COMBINED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
---------------------------
YEARS ENDED DECEMBER 31,
---------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
REVENUES
Rental $ 33,417 $ 29,736 $ 24,691
Tenant reimbursements 6,388 4,917 3,759
Other rental 611 334 199
Interest 138 193 145
<CAPTION>
-------- -------- --------
<S> <C> <C> <C>
Total Revenues 40,554 35,180 28,794
<CAPTION>
-------- -------- --------
<S> <C> <C> <C>
EXPENSES
Real estate taxes 5,932 5,037 3,979
Management fees 2,352 1,889 1,522
Property operating costs 520 755 648
Maintenance and repairs 550 504 393
Grounds care 274 298 218
Professional services 302 214 194
Insurance 298 210 151
Bad debt, net of recoveries (247) 383 156
Other 223 70 75
Interest 2,134 1,931 2,097
Depreciation and amortization 8,953 7,966 7,118
<CAPTION>
-------- -------- --------
<S> <C> <C> <C>
Total Expenses 21,291 19,257 16,551
<CAPTION>
-------- -------- --------
<S> <C> <C> <C>
Net income $ 19,263 $ 15,923 $ 12,243
<CAPTION>
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
<PAGE>
EXISTING INVESTORS PROPERTY GROUP
COMBINED STATEMENTS OF OWNERS' EQUITY
FOR THE YEARS ENDED
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
--------
<S> <C>
Owners' Equity, December 31, 1994 $213,203
Contributions 50,326
Distributions (14,143)
Net income for the year ended December 31, 1995 12,243
<CAPTION>
--------
<S> <C>
Owners' Equity, December 31, 1995 261,629
Contributions 35,228
Distributions (21,494)
Net income for the year ended December 31, 1996 15,923
<CAPTION>
--------
<S> <C>
Owners' Equity, December 31, 1996 291,286
Contributions 55,973
Distributions (24,922)
Net income for the year ended December 31, 1997 19,263
<CAPTION>
--------
<S> <C>
Owners' Equity, December 31, 1997 $341,600
<CAPTION>
========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
<PAGE>
EXISTING INVESTORS PROPERTY GROUP
COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
----------------------------
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 19,263 $ 15,923 $ 12,243
Adjustments to reconcile net income to net cash
provided by operating activities--
Depreciation and amortization adjustments 8,953 7,966 7,118
Rent normalization adjustments (346) (519) (993)
Changes in assets--(increase) decrease
Rents and other receivables (1,054) 1,750 196
Restricted cash 44 282 265
Other assets 20 25 184
Changes in liabilities--increase (decrease)
Accounts payable and accrued liabilities 1,105 2 705
Other liabilities 168 266 (317)
<CAPTION>
-------- -------- --------
<S> <C> <C> <C>
Net cash provided by operations 28,153 25,695 19,401
<CAPTION>
-------- -------- --------
<S> <C> <C> <C>
INVESTING ACTIVITIES
Property acquisitions (77,264) (33,485) (49,677)
Payments for capital expenditures and lease
acquisition costs (4,570) (5,581) (4,038)
Deferred financing costs -- (8) (153)
<CAPTION>
-------- -------- --------
<S> <C> <C> <C>
Net cash (used in) investing activities (81,834) (39,074) (53,868)
<CAPTION>
-------- -------- --------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Capital contributions 55,973 35,228 50,326
Distributions (24,922) (21,494) (14,143)
Mortgage loan proceeds -- -- 10,865
Repayments of mortgage loans (859) (791) (11,390)
Advances from related parties, net 23,808 261 22
<CAPTION>
-------- -------- --------
<S> <C> <C> <C>
Net cash provided by financing activities 54,000 13,204 35,680
<CAPTION>
-------- -------- --------
<S> <C> <C> <C>
Net (decrease) increase in Cash and Cash
Equivalents 319 (175) 1,213
Cash and Cash Equivalents, Beginning of Year 2,423 2,598 1,385
<CAPTION>
-------- -------- --------
<S> <C> <C> <C>
Cash and Cash Equivalents, End of Year $ 2,742 $ 2,423 $ 2,598
<CAPTION>
======== ======== ========
<S> <C> <C> <C>
Supplemental Information, Interest paid during
the year $ 1,718 $ 1,730 $ 1,909
<CAPTION>
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
<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 79 industrial
buildings (as of December 31, 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 were man-
aged, leased and renovated by Cabot Partners Limited Partnership (Cabot Part-
ners), the investment manager, under separate investment management agreements
with each owner through February 3, 1998 (see Note 2). The accompanying finan-
cial 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 prop-
erties included in the financial statements for the year ended December 31,
1997. A summary of EIP Group as of December 31, 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 by the New York
State Teachers' Retirement System 14 2,767,182
Six general partnerships owned by C-M Holdings Limited
Partnership 7 895,169
State of Wisconsin Investment Board 2 376,440
<CAPTION>
--------- -----------
<S> <C> <C>
Total 79 11,215,259
<CAPTION>
========= ===========
</TABLE>
2. FORMATION TRANSACTIONS
Under the provisions of the Contribution Agreement executed by each property
owner, on February 4, 1998, EIP Group contributed all of its properties to
Cabot Industrial Trust (the Company) or a subsidiary partnership, Cabot Indus-
trial Properties, L.P. (the Operating Partnership) and received common shares
from the Company or units from the Operating Partnership. 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 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 was under the common management of Cabot
Partners through investment advisory agreements. All significant intercompany
transactions and balances have been eliminated in combination.
Rental Properties
Rental properties, which consist of industrial warehouses, are stated at cost.
Expenditures for ordinary maintenance and repairs are expensed to operations as
incurred. Significant renovations and improvements that improve or extend the
useful life of the assets are capitalized. Except for amounts attributed to
land, rental property and improvements are depreciated over their estimated
useful lives using the straight-line method. The estimated useful lives by
asset category are as follows:
<TABLE>
<CAPTION>
-------------
ESTIMATED
ASSET CATEGORY USEFUL LIFE
-------------- -------------
<S> <C>
Buildings and improvements 10 - 40 years
Tenant improvements Life of lease
</TABLE>
<PAGE>
EXISTING INVESTORS PROPERTY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
Properties consisted of the following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
-----------------
DECEMBER 31,
-----------------
1997 1996
-------- --------
<S> <C> <C>
Land $ 84,462 $ 74,939
Buildings and improvements 332,676 261,897
<CAPTION>
-------- --------
<S> <C> <C>
Total $417,138 $336,836
<CAPTION>
======== ========
</TABLE>
EIP Group adopted the provisions of Statement of Financial Accounting Standards
(SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets To Be Disposed Of, on January 1, 1996. This statement
requires that long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Adoption of this
statement did not have an impact on EIP Group's financial position, results of
operations or liquidity.
Lease Acquisition Costs
Capitalized lease acquisition costs are recorded at cost. These costs are amor-
tized over the respective lives of the leases. Unamortized costs are charged to
expense in the event of any early termination of the lease.
Loan Costs
Capitalized loan costs are recorded at cost and are included in other assets.
These costs are amortized over the term of the respective financings on a
straight-line basis. Loan costs, net of accumulated amortization of $328 and
$253 as of December 31, 1997 and December 31, 1996, respectively, were approxi-
mately $119 and $194, 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 December 31,
1997 and December 31, 1996, 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 $4,444 and $4,098, respectively (De-
ferred Rent). The amounts included in rental income for the years ended
December 31, 1997, 1996 and 1995, which are not currently due, were approxi-
mately $346, $519 and $993, 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.
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 December 31, 1997 and 1996.
The current value of debt was computed by discounting 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 (excluding Deferred Rent),
accounts payable and accrued expenses are reasonable estimates of their fair
value.
Income Taxes
The properties were 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-
<PAGE>
EXISTING INVESTORS PROPERTY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
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.
Reclassifications
Certain reclassifications have been made to the prior year financial statements
to make them consistent with current year presentation.
4. MORTGAGE DEBT
As of, December 31, 1997 and 1996, EIP Group had outstanding fixed rate mort-
gage indebtedness as follows:
<TABLE>
<CAPTION>
---------------
DECEMBER 31,
---------------
1997 1996
------- -------
<S> <C> <C>
Three mortgage loans at fixed interest rate of 8.375%, due
February 1, 1998 $13,193 $13,813
Three mortgage loans at fixed interest rates ranging from
7.95% to 8.05%,
due January 1, 2003 5,240 5,479
<CAPTION>
------- -------
<S> <C> <C>
Total mortgage loans payable $18,433 $19,292
<CAPTION>
======= =======
</TABLE>
Payments on mortgage debt are due in monthly installments of principal and
interest. The weighted average interest rate was approximately 8.3% as of
December 31, 1997 and 1996. 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 December 31, 1997 are
summarized as follows:
<TABLE>
<CAPTION>
-------
<S> <C>
1998 $13,452
1999 281
2000 304
2001 329
2002 4,067
</TABLE>
All EIP Group outstanding mortgage indebtedness was repaid or assumed by the
Company or the Operating Partnership in conjunction with the Formation Transac-
tions (see Note 2).
5. FUTURE MINIMUM RENTS
Future minimum rental receipts due on noncancellable operating leases for the
industrial properties as of December 31, 1997 were as follows:
<TABLE>
<CAPTION>
--------
<S> <C>
1998 $ 37,634
1999 31,807
2000 24,812
2001 19,147
2002 13,904
Thereafter 37,134
<CAPTION>
--------
<S> <C>
$164,438
<CAPTION>
========
</TABLE>
The above amounts do not include additional rental receipts that will become
due as a result of the expense pass-through and escalation provisions in the
leases. EIP Group is subject to the usual business risks associated with the
collection of the above scheduled rents.
<PAGE>
EXISTING INVESTORS PROPERTY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
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 YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
FEE INCURRED
Asset management $ 1,529 $ 1,244 $ 981
Acquisition 720 360 504
Property management 596 482 437
</TABLE>
At December 31, 1997 and 1996, total fees payable to Cabot Partners were $546
and $343, respectively.
Acquisition fees are capitalized to Rental Properties in the accompanying com-
bined balance sheets and property and asset management fees are expensed as
incurred and included in Management Fees in the accompanying combined state-
ments 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%
(10.0% as of December 31, 1997) and are payable out of cash flows after third-
party debt service of the property. Five properties held by tax exempt entities
had debt payable to their sole shareholder. Such debt accrues interest at the
prime rate (8.5% as of December 31, 1997). Interest expense related to the
advances was $570, $299 and $314 for the years ended December 31, 1997, 1996
and 1995, respectively.
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. EIP Group made certain representations and
warranties to the Company in the Contribution Agreement entered into among the
parties in connection with the Formation Transactions (see Note 2), with
respect to environmental and certain other matters. Compliance by EIP Group
with existing laws has not had a material adverse effect on EIP Group's finan-
cial condition and results of operations, and management does not believe it
will have such an impact 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.
<PAGE>
SCHEDULE III
EXISTING INVESTORS PROPERTY GROUP
REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COSTS
CAPITALIZED GROSS AMOUNT
SUBSEQUENT CARRIED AS OF
INITIAL COST TO ACQUISITION DECEMBER 31, 1997
--------------------- ------------------ ------------------------------
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 -- 33 651 5,981 6,632
South 84th
Avenue Tolleson, AZ -- 553 5,116 -- 187 553 5,303 5,856
South 55th
Avenue Phoenix, AZ -- 261 2,161 -- -- 261 2,161 2,422
North 47th
Avenue Phoenix, AZ -- 423 3,492 -- 41 423 3,533 3,956
Brisbane
Industrial
Park(1) Brisbane, CA -- 10,519 17,011 -- 717 10,519 17,728 28,247
South Vintage
Avenue(2) Ontario, CA -- 2,896 15,836 -- 96 2,896 15,932 18,828
East Jurupa
Street Ontario, CA -- 409 2,217 -- 284 409 2,501 2,910
Santa Anita
Avenue Rancho Cucamonga, CA -- 1,200 6,491 -- 81 1,200 6,572 7,772
East Dyer Road Santa Ana, CA -- 8,160 10,432 -- 2,162 8,160 12,594 20,754
Huntwood Avenue Hayward, CA -- 880 3,463 -- -- 880 3,463 4,343
South
Rockefeller
Avenue Ontario, CA -- 870 5,056 -- -- 870 5,056 5,926
Pepes Farm Road Milford, CT -- 1,637 8,787 -- 622 1,637 9,409 11,046
Kingspointe
Parkway Orlando, FL -- 600 2,581 -- 87 600 2,668 3,268
West 73rd
Street, Building
1 Bedford Park, IL -- 1,333 4,819 -- 56 1,333 4,875 6,208
West 73rd
Street, Building
2 Bedford Park, IL -- 2,148 8,258 -- 69 2,148 8,327 10,475
West 73rd
Street, Building
3 Bedford Park, IL -- 986 5,395 -- 82 986 5,477 6,463
Harvester Drive Chicago, IL -- 763 5,604 -- 156 763 5,760 6,523
Arthur Avenue Elk Grove, IL -- 2,160 4,777 -- 912 2,160 5,689 7,849
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 -- 6 800 3,340 4,140
Ambassador Road Naperville, IL -- 1,060 6,942 -- -- 1,060 6,942 8,002
Remington Street Bolingbrook, IL -- 980 7,685 -- -- 980 7,685 8,665
North State Road
#9(6) Howe, IN $4,412 239 6,112 -- 28 239 6,140 6,379
Holton Drive Independence, KY -- 2,100 8,294 -- 3 2,100 8,297 10,397
Empire Drive Florence, KY -- 212 2,456 -- 57 212 2,513 2,725
<CAPTION>
----------------------------------------------
DEPRECI-
DATE ABLE
ACCUMULATED CONSTRUCTED/ DATE LIVES
PROPERTY NAME(8) DEPRECIATION RENOVATED ACQUIRED IN YEARS(9)
- ---------------- ------------ ------------ -------- -----------
<S> <C> <C> <C> <C>
South 63rd
Avenue $ 361 1990 05/27/94 10-40
North 104th
Avenue 165 1995 11/26/96 10-40
South 84th
Avenue 365 1989 04/03/95 10-40
South 55th
Avenue 40 1986 03/27/97 10-40
North 47th
Avenue 65 1986 03/27/97 10-40
Brisbane
Industrial
Park(1) 3,209 1965 08/10/90 10-40
South Vintage
Avenue(2) 3,528 1986 11/20/89 10-40
East Jurupa
Street 70 1986 11/19/96 10-40
Santa Anita
Avenue 258 1988 06/27/96 10-40
East Dyer Road 2,491 1954/1965 04/24/89 10-40
Huntwood Avenue 29 1982 09/12/97 10-40
South
Rockefeller
Avenue 52 1986 07/23/97 10-40
Pepes Farm Road 2,047 1980 11/07/88 10-40
Kingspointe
Parkway 67 1991 12/30/96 10-40
West 73rd
Street, Building
1 880 1982 09/13/90 10-40
West 73rd
Street, Building
2 1,506 1986 09/13/90 10-40
West 73rd
Street, Building
3 992 1979 09/13/90 10-40
Harvester Drive 1,437 1974 07/05/88 10-40
Arthur Avenue 1,322 1978 06/27/88 10-40
Western Avenue 474 1970/1985 06/27/88 10-40
Mark Street 1,712 1985 12/14/90 10-40
High Grove Lane 250 1994 01/11/95 10-40
Ambassador Road 34 1997 10/09/97 10-40
Remington Street 36 1996 10/07/97 10-40
North State Road
#9(6) 1,237 1988 12/01/89 10-40
Holton Drive 207 1996 07/6/96 10-40
Empire Drive 300 1991 04/06/93 10-40
</TABLE>
<PAGE>
SCHEDULE III--(CONTINUED)
EXISTING INVESTORS PROPERTY GROUP
REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COSTS
CAPITALIZED GROSS AMOUNT
SUBSEQUENT CARRIED AS OF
INITIAL COST TO ACQUISITION DECEMBER 31, 1997
-------------------- ------------------ -----------------------------
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>
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 $1,560 257 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 -- 232 1,662 4,702 6,364
Oceano Avenue Jessup, MD -- 1,629 7,940 -- 49 1,629 7,989 9,618
Sysco Court(6) Grand Rapids, MI 2,187 354 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 3,574 320 4,325 -- -- 320 4,325 4,645
Old Charlotte
Highway(4)(6) Monroe, NC 5,207 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 1,824 354 6,682 7,036
South Middlesex
Avenue, Building
1 Cranbury, NJ -- 1,300 6,817 -- 42 1,300 6,859 8,159
South Middlesex
Avenue, Building
2 Cranbury, NJ -- 1,400 5,470 -- 40 1,400 5,510 6,910
Pierce Street Franklin Township, NJ -- 1,400 5,635 -- 64 1,400 5,699 7,099
Herrod Boulevard South Brunswick, NJ -- 2,600 15,721 -- -- 2,600 15,721 18,321
International
Street Columbus, OH -- 517 3,537 -- -- 517 3,537 4,054
Twin Creek Drive Columbus, OH -- 705 4,071 -- 30 705 4,101 4,806
Lake Forest
Drive, Building
1 Blue Ash, OH -- 460 5,920 -- -- 460 5,920 6,380
Lake Forest
Drive, Building
2 Blue Ash, OH -- 420 4,357 -- -- 420 4,357 4,777
Creek Road Blue Ash, OH -- 439 3,950 -- -- 439 3,950 4,389
Ritter Road(6) Mechanicsburg, PA 1,493 332 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 -- 17 506 1,872 2,378
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
<CAPTION>
----------------------------------------------
DEPRECI-
DATE ABLE
ACCUMULATED CONSTRUCTED/ DATE LIVES
PROPERTY NAME(8) DEPRECIATION RENOVATED ACQUIRED IN YEARS(9)
- ---------------- ------------ ------------ -------- -----------
<S> <C> <C> <C> <C>
Technology Drive $ 505 1973 01/30/89 10-40
First Avenue 737 1961/1992 01/16/90 10-40
John Hancock
Road(6) 363 1986 12/01/89 10-40
Tar Bay Drive 897 1990 12/20/90 10-40
The Crysen
Center(3) 845 1985 08/09/90 10-40
Oceano Avenue 1,491 1987 06/28/90 10-40
Sysco Court(6) 492 1985 12/01/89 10-40
Lakefront Drive 310 1995 06/15/95 10-40
Industrial Drive
South(6) 868 1988 12/01/89 10-40
Old Charlotte
Highway(4)(6) 1,232 1957/1972 12/01/89 10-40
Reames Road 147 1994 02/22/96 10-40
Birch Creek Road 668 1991/1997 10/22/92 10-40
South Middlesex
Avenue, Building
1 512 1989 01/17/95 10-40
South Middlesex
Avenue, Building
2 411 1982 06/02/95 10-40
Pierce Street 282 1984 08/18/95 10-40
Herrod Boulevard 76 1989 10/22/97 10-40
International
Street 185 1988 11/21/95 10-40
Twin Creek Drive 314 1989 12/01/94 10-40
Lake Forest
Drive, Building
1 11 1978 12/18/97 10-40
Lake Forest
Drive, Building
2 9 1979 12/18/97 10-40
Creek Road 8 1983 12/18/97 10-40
Ritter Road(6) 293 1986 12/01/89 10-40
Pilot Drive 370 1987 09/05/95 10-40
113th Street 261 1979 07/20/92 10-40
Airline Drive,
Building 1 218 1991 04/23/93 10-40
Airline Drive,
Building 2 411 1990 04/23/93 10-40
</TABLE>
<PAGE>
SCHEDULE III--(CONTINUED)
EXISTING INVESTORS PROPERTY GROUP
REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COSTS
CAPITALIZED GROSS AMOUNT
SUBSEQUENT CARRIED AS OF
INITIAL COST TO ACQUISITION DECEMBER 31, 1997
--------------------- ------------------ ------------------------------
BUILDINGS AND BUILDINGS AND BUILDINGS AND ACCUMULATED
PROPERTY NAME(8) LOCATION ENCUMBRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS LAND IMPROVEMENTS TOTAL(7) DEPRECIATION
- ---------------- -------- ------------ ------- ------------- ---- ------------- ------- ------------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
North Lake Drive Coppell, TX -- $ 1,165 $ 3,636 $ 68 -- $ 1,233 $ 3,636 $ 4,869 $ 428
Diplomat Drive Carrollton, TX -- 110 2,447 -- -- 110 2,447 2,557 20
Luna Road Carrollton, TX -- 1,020 6,506 -- -- 1,020 6,506 7,526 31
Oakville
Industrial
Park(5) Alexandria, VA -- 10,552 19,806 -- $ 2,578 10,552 22,384 32,936 3,996
------- ------- -------- ---- ------- ------- -------- -------- -------
Totals $18,433 $84,064 $320,627 $398 $12,049 $84,462 $332,676 $417,138 $39,525
======= ======= ======== ==== ======= ======= ======== ======== =======
<CAPTION>
---------------------------------
DEPRECI-
DATE ABLE
CONSTRUCTED/ DATE LIVES
PROPERTY NAME(8) RENOVATED ACQUIRED IN YEARS(9)
- ---------------- ------------ -------- -----------
<S> <C> <C> <C>
North Lake Drive 1982 05/12/93 10-40
Diplomat Drive 1997 09/19/97 10-40
Luna Road 1997 10/17/97 10-40
Oakville
Industrial
Park(5) 1948 02/28/90 10-40
Totals
</TABLE>
- ----
(1) Brisbane Industrial Park consists of fourteen 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, 1997
was approximately $417 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.
<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, 1997, 1996, 1995 are as follows:
<TABLE>
<CAPTION>
--------------------------
DECEMBER 31,
--------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Balance, beginning of the year $336,836 $301,059 $250,387
Acquisitions 77,264 33,485 49,677
Improvements 3,038 2,292 995
<CAPTION>
-------- -------- --------
<S> <C> <C> <C>
Balance, end of year $417,138 $336,836 $301,059
<CAPTION>
======== ======== ========
</TABLE>
The changes in accumulated depreciation for the years ended December 31, 1997,
1996 and 1995 are as follows:
<TABLE>
<CAPTION>
-----------------------
DECEMBER 31,
-----------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Balance, beginning of the year $32,528 $26,430 $20,936
Depreciation 6,997 6,098 5,494
<CAPTION>
------- ------- -------
<S> <C> <C> <C>
Balance, end of year $39,525 $32,528 $26,430
<CAPTION>
======= ======= =======
</TABLE>
<PAGE>
EXHIBIT 99.3
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, 1997 and 1996, and the related historical cost
basis combined statements of income, changes in net assets and cash flows for
each of the three years in the period ended December 31, 1997. 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, 1997
and 1996, and the historical cost basis combined results of their operations
and their combined cash flows for each of the three years in the period ended
December 31, 1997, 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.
PricewaterhouseCoopers LLP
New York, New York
July 1, 1998
<PAGE>
ORLANDO CENTRAL PARK AND 500 MEMORIAL DRIVE
COMBINED STATEMENTS OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
--------------------------
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Real estate investments:
Land $ 8,847,965 $ 8,847,965
Building and improvements 40,729,028 40,720,252
Accumulated depreciation (7,348,285) (6,316,118)
<CAPTION>
------------ ------------
<S> <C> <C>
42,228,708 43,252,099
Cash and cash equivalents 61,257 591,653
Accounts receivable and accrued investment income 41,610 109,938
Deferred leasing costs, net of accumulated
amortization of $2,930,662 and $2,135,209 at
December 31, 1997 and December 31, 1996,
respectively 2,861,922 3,392,025
Deferred rent concessions 1,067,652 838,408
Other assets 49,207 62,815
<CAPTION>
------------ ------------
<S> <C> <C>
Total Assets $46,310,356 $48,246,938
<CAPTION>
============ ============
<S> <C> <C>
LIABILITIES AND NET ASSETS
Accounts payable and accrued expenses $ 288,309 $ 597,561
Security deposits 216,875 211,363
Unearned rental income 210,363 247,756
<CAPTION>
------------ ------------
<S> <C> <C>
Total Liabilities 715,547 1,056,680
<CAPTION>
------------ ------------
<S> <C> <C>
Net Assets 45,594,809 47,190,258
<CAPTION>
------------ ------------
<S> <C> <C>
Total Liabilities and Net Assets $46,310,356 $48,246,938
<CAPTION>
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
ORLANDO CENTRAL PARK AND 500 MEMORIAL DRIVE
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
--------------------------------
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
REVENUE
Rental income $5,943,235 $5,521,188 $5,757,490
Other income 21,395 99,749 233,998
<CAPTION>
---------- ---------- ----------
<S> <C> <C> <C>
Total Revenue 5,964,630 5,620,937 5,991,488
<CAPTION>
---------- ---------- ----------
<S> <C> <C> <C>
EXPENSES
Property taxes 646,169 653,797 640,810
Operating expenses 991,441 1,045,704 928,209
Depreciation and amortization 1,827,620 1,745,376 1,693,022
<CAPTION>
---------- ---------- ----------
<S> <C> <C> <C>
Total Expenses 3,465,230 3,444,877 3,262,041
<CAPTION>
---------- ---------- ----------
<S> <C> <C> <C>
Net income $2,499,400 $2,176,060 $2,729,447
<CAPTION>
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
ORLANDO CENTRAL PARK AND 500 MEMORIAL DRIVE
COMBINED STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
-----------
<S> <C>
Net assets, January 1, 1995 $49,237,627
Asset advisory fees paid by owner 281,062
Distributions (3,946,000)
Net income for the year ended December 31, 1995 2,729,447
<CAPTION>
-----------
<S> <C>
Net assets, January 1, 1996 48,302,136
Asset advisory fees paid by owner 275,062
Distributions (3,563,000)
Net income for the year ended December 31, 1996 2,176,060
<CAPTION>
-----------
<S> <C>
Net assets, January 1, 1997 47,190,258
Asset advisory fees paid by owner 308,809
Contributions 397,342
Distributions (4,801,000)
Net income for the year ended December 31, 1997 2,499,400
<CAPTION>
-----------
<S> <C>
Net assets, December 31, 1997 $45,594,809
<CAPTION>
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
ORLANDO CENTRAL PARK AND 500 MEMORIAL DRIVE
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
-------------------------------------
YEARS ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,499,400 $ 2,176,060 $ 2,729,447
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 1,827,620 1,745,376 1,693,022
Asset advisory fees paid by owner 308,809 275,062 281,062
Changes in operating assets and
liabilities
Accounts receivable 68,328 (17,833) 85,920
Other assets 13,608 (40,886) 344
Deferred rent concessions (229,244) 146,767 (197,855)
Accounts payable and accrued expenses (309,252) 420,666 (73,095)
Security deposits 5,512 (61,742) 5,919
Unearned rental income (37,393) 127,600 (3,394)
<CAPTION>
----------- ----------- -----------
<S> <C> <C> <C>
Net cash provided by operations 4,147,388 4,771,070 4,521,370
<CAPTION>
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for capital expenditures and
leasing commissions (274,126) (845,679) (908,717)
<CAPTION>
----------- ----------- -----------
<S> <C> <C> <C>
Net cash used in investing activities (274,126) (845,679) (908,717)
<CAPTION>
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Contributions 397,342 -- --
Distributions (4,801,000) (3,563,000) (3,946,000)
<CAPTION>
----------- ----------- -----------
<S> <C> <C> <C>
Net cash used in financing activities (4,403,658) (3,563,000) (3,946,000)
<CAPTION>
----------- ----------- -----------
<S> <C> <C> <C>
Net increase (decrease) in cash (530,396) 362,391 (333,347)
Cash and cash equivalents, beginning of
year 591,653 229,262 562,609
<CAPTION>
----------- ----------- -----------
<S> <C> <C> <C>
Cash and cash equivalents, end of year $ 61,257 $ 591,653 $ 229,262
<CAPTION>
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<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 ("Clarion"), manages the Properties under an investment advisory agree-
ment. These financial statements include the combined assets, liabilities and
operations of the Properties which comprise Orlando Central Park (six indus-
trial bulk warehouse buildings and associated land located in an industrial
park in Orlando, Florida) and 500 Memorial Drive (an industrial building and
associated land located in an industrial park in Franklin Township, New Jer-
sey). On February 4, 1998 SWIB sold the Properties to Cabot Industrial Trust
for $45,016,645.
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 were acquired in a business com-
bination by Cabot Industrial Trust, a newly formed real estate investment
trust, in connection 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 using the his-
torical cost basis in accordance with the requirement of Regulation S-X of the
Securities and Exchange Commission.
Real Estate and Deferred Costs
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 Clarion 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 management fees for the years
ended December 31, 1997, 1996 and 1995 were $308,809, $275,062 and $281,062,
respectively.
Income Taxes
SWIB and the entities through which the Properties are owned are not subject to
income taxes, therefore no income taxes have been provided in the accompanying
financial statements.
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 with or investing
cash equivalents through major financial institutions.
<PAGE>
ORLANDO CENTRAL PARK AND 500 MEMORIAL DRIVE
NOTES TO COMBINED 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 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, 1997 are as follows:
<TABLE>
<CAPTION>
-----------
<S> <C>
1998 $ 4,609,000
1999 3,921,000
2000 2,277,000
2001 1,765,000
2002 1,268,000
Thereafter 2,559,000
<CAPTION>
-----------
<S> <C>
$16,399,000
<CAPTION>
===========
</TABLE>
Minimum rentals above do not include recoveries of operating expenses and real
estate taxes. Recoveries of operating expenses and real estate taxes, included
in base rental income, amounted to approximately $946,000, $1,068,000 and
$1,015,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
4. PROPERTY MANAGEMENT FEES
Orlando Central Park
SWIB has retained Trammell Crow Realty Associates, Inc. ("Trammell Crow") to
provide management services to Orlando Central Park on a year-to-year basis
ending March 4, 1998. For its services, Trammell Crow receives a base manage-
ment fee equal to 3% of base rents collected, as defined. SWIB has the right to
terminate the agreement, with written notice, under certain conditions, as
defined in the management agreement. For the years ended December 31, 1997,
1996 and 1995, fees incurred under this agreement were $112,000, $105,000 and
$112,000, respectively.
Trammell Crow earns leasing commissions when it provides services in negoti-
ating and obtaining, on behalf of SWIB, leases with tenants for Orlando Central
Park in accordance with provisions of the management agreement.
Trammell Crow also earns fees for providing construction management services at
the request of SWIB. The Construction Management fee is equal to (i) 8% of the
construction costs of each capital repair in excess of $10,000, as defined in
the agreement, and (ii) 8% of the construction costs of alterations, additions
and improvement work made by SWIB on behalf of tenants, as defined in the
agreement.
500 Memorial Drive
Prior to December 31, 1996, SWIB retained Jones Lang Wooton USA ("JLW USA"), a
former affiliate of Clarion, 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 agree-
ment. For the years ended December 31, 1996 and 1995, fees incurred under these
agreements were approximately $39,000 and $37,000, respectively.
Effective January 1, 1997, SWIB entered into an agreement with Clarion Realty
Services, LLC, ("Realty Services"), an affiliate of Clarion, 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. During 1997, fees incurred
under this agreement were approximately $37,000.
Realty Services earns fees from leasing commissions when it provides services
in negotiating 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 and 1996.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholder of
Knickerbocker Properties, Inc.
II:
We have audited the accompanying historical cost balance sheet of Knickerbocker
Properties, Inc. II, a wholly owned subsidiary of the New York State Teachers'
Retirement System, as of December 31, 1997, and the related historical cost
statements of operations, shareholder's equity, and cash flows for the year
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements 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 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 audit provides a reasonable basis for our opin-
ion.
As described in Note 2, the Company was acquired in a business combination with
a newly formed public real estate investment trust in February 1998. Accord-
ingly, the accompanying financial statements were prepared under the historical
cost basis of accounting for the purpose of complying with the rules and regu-
lations of the Securities and Exchange Commission.
In our opinion, the historical cost financial statements referred to above
present fairly, in all material respects, the financial position of Knicker-
bocker Properties, Inc. II as of December 31, 1997, and the results of its
operations and its cash flows for the year then ended on the historical cost
basis of accounting described in Note 2.
Arthur Andersen LLP
New York, New York
July 20, 1998
<PAGE>
KNICKERBOCKER PROPERTIES, INC. II
BALANCE SHEET
<TABLE>
<CAPTION>
------------
DECEMBER 31,
------------
1997
-----------
<S> <C>
ASSETS
Real estate investments
Land $ 3,691,118
Building and improvements 16,969,431
Tenant improvements 119,484
<CAPTION>
-----------
<S> <C>
Rental Property 20,780,033
Accumulated depreciation and amortization (3,280,374)
<CAPTION>
-----------
<S> <C>
Net Rental Property 17,499,659
<CAPTION>
-----------
<S> <C>
Cash and cash equivalents 93,198
Deferred rent receivable 110,501
Other assets 43,547
<CAPTION>
-----------
<S> <C>
Total Assets $17,746,905
<CAPTION>
===========
<S> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable and accrued expenses $ 34,736
Security deposits 148,812
Unearned rental income 62,073
<CAPTION>
-----------
<S> <C>
Total Liabilities 245,621
<CAPTION>
-----------
<S> <C>
Stockholder's Equity
Common Stock $1 par value; 500 shares authorized,
issued and outstanding 500
Additional Paid in Capital 17,500,784
Retained Earnings --
<CAPTION>
-----------
<S> <C>
Total Stockholder's Equity 17,501,284
<CAPTION>
-----------
<S> <C>
Total Liabilities and Stockholder's Equity $17,746,905
<CAPTION>
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
KNICKERBOCKER PROPERTIES, INC. II
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
----------
FOR THE
YEAR ENDED
DECEMBER 31,
----------
1997
----------
<S> <C>
REVENUE
Rental income $1,769,280
Escalation and reimbursement income 491,384
Other income 5,790
----------
Total Revenue 2,266,454
----------
EXPENSES
Property taxes 299,337
Operating expenses 208,671
Depreciation and amortization 494,777
----------
Total Expenses 1,002,785
----------
Net income $1,263,669
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
KNICKERBOCKER PROPERTIES, INC. II
STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
--------------------------------------------
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at January 1, 1997 $ 500 $17,670,855 $ -- $17,671,355
Net income 1,263,669 1,263,669
Capital contributions 283,435 -- 283,435
Dividends (453,506) (1,263,669) (1,717,175)
------ ----------- ----------- -----------
Balance at December 31, 1997 $ 500 $17,500,784 $ -- $17,501,284
====== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
KNICKERBOCKER PROPERTIES, INC. II
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
-----------
FOR THE
YEAR ENDED
DECEMBER 31,
-----------
1997
-----------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $1,263,669
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 494,777
Changes in assets--(Increase) Decrease:
Other assets 5,569
Deferred rent receivable 38,458
Changes in liabilities--Increase
(Decrease):
Accounts payable and accrued expenses 1,611
Unearned rental income 3,143
Security deposits 1,816
----------
Net cash provided by operating
activities 1,809,043
----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital and tenant improvements (362,291)
----------
Net cash used in investing activities (362,291)
----------
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contributions 283,435
Dividends (1,717,175)
----------
Net cash used in financing activities (1,433,740)
----------
Net increase (decrease) in cash 13,012
Cash and cash equivalents at beginning
of year 80,186
----------
Cash and cash equivalents at end of year $ 93,198
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
KNICKERBOCKER PROPERTIES, INC. II
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
The Company
Knickerbocker Properties, Inc. II (the "Company") was incorporated under the
laws of the State of Delaware on May 16, 1990. The Company is wholly owned by
the New York State Teachers' Retirement System ("NYSTRS"), a pension benefit
organization for New York State teachers. The Company owns Kent West Corporate
Park (the "Rental Property"), a multi-building industrial park located in
Kent, Washington. Cash flow in excess of operating requirements is distributed
to NYSTRS.
The Company entered into an agreement in October 1997 with a newly formed
public real estate investment trust to be acquired in a business combination.
The transaction was consummated in February 1998.
ERE Yarmouth, Inc. was the investment advisor for NYSTRS with respect to the
Rental Property. On July 13, 1998, Lend Lease Corporation Limited changed the
name of its wholly owned subsidiary, ERE Yarmouth, Inc. to Lend Lease Real
Estate Investments, Inc. ("Lend Lease").
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Company was acquired in a business combination with a newly formed real
estate investment trust in February 1998. Accordingly, the financial state-
ments were prepared under the historical cost basis of accounting for the pur-
pose of complying with the rules and regulations of the Securities and
Exchange Commission.
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 period. The
most significant estimates relate to the recoverability of the operating prop-
erty and the deferred rent receivable. Actual results could differ from these
estimates.
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. Financial instruments which potentially subject the Company to concen-
trations of credit risk consist principally of cash balances held with finan-
cial institutions which at times exceed federally insurable limits.
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 useful life of the improvement. Tenant improvements and 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
The Company recognizes base rental income on straight-line basis over the
terms of the related leases. The effect of this straight-lining is recorded as
deferred rent receivable on the accompanying balance sheets. Additional rents
which are provided for in individual tenant leases primarily relate to the
reimbursement of certain operating expenses of the Rental Property. The Com-
pany recognizes such reimbursements of expenses by tenants as revenue when
earned, and the amounts can be reasonably estimated.
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.
Investment Advisors Fees
Fees earned by Lend Lease in 1997 in its role as investment advisor, were
paid directly by NYSTRS and, therefore, are not included in the Statement of
Operations.
<PAGE>
KNICKERBOCKER PROPERTIES, INC. II
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
3. RENTAL PROPERTY
Rental Property consists of five office buildings aggregating approximately
400,000 square feet. As of December 31, 1997, the Rental Property was 100%
occupied.
The Company's Rental Property is being leased to tenants under operating leases
that expire at various dates through 2001. For the year ended December 31,
1997, three tenants in the warehouse/distribution, medical laboratory and dis-
tribution industry accounted for approximately 42%, 24% and 18%, respectively,
of base rental income.
Future minimum rents to be received from tenants under noncancelable leases in
effect at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
----------
<S> <C>
1998 $1,430,741
1999 808,518
2000 99,321
2001 7,194
<CAPTION>
----------
<S> <C>
$2,345,774
<CAPTION>
==========
</TABLE>
The Company is also entitled to additional rents, which are not included above,
and which are primarily based upon escalations of real estate taxes and oper-
ating expenses over base period amounts.
4. RELATED PARTY TRANSACTIONS
Certain officers of the Company are also officers or employees of Lend Lease.
5. LOCAL IMPROVEMENT DISTRICT COSTS
The Rental Property has been assessed local improvement district costs of
$194,758, of which $95,426 is outstanding at December 31, 1997, by the local
county authorities. These costs are payable through 2009. The Company's policy
is to bill tenants for their pro rata share of these assessments. To the extent
the Rental Property is not fully leased, the Company would have to incur a pro
rata portion of these costs. Since the Company 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>
1998 $ 15,778
1999 15,128
2000 14,468
2001 13,817
2002 13,167
Thereafter 71,742
<CAPTION>
--------
<S> <C>
$144,100
<CAPTION>
========
</TABLE>
The total amount of interest included in the above minimum payments is $48,674,
to be paid through May 2009.
<PAGE>
KNICKERBOCKER PROPERTIES, INC. II
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
For the year ended December 31, 1997, the Company paid $15,268 of such costs,
which are included in property taxes on the accompanying statement of opera-
tions.
6. 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
year ended December 31, 1997 amounted to $63,686.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Retirement Board Pennsylvania Public
School Employes' Retirement System:
We have audited the accompanying combined balance sheets of Pennsylvania Public
School Employes' Retirement System Industrial Properties Portfolio Managed by
RREEF America L.L.C. (the Portfolio, as defined in Note 1) as of December 31,
1997 and 1996, and the related combined statements of operations, combined own-
er's equity, and combined cash flows for the years then ended 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 Accumu-
lated Depreciation as of December 31, 1997. These combined financial statements
and combined financial statement schedule are the responsibility of the Portfo-
lio's management. Our responsibility is to express an opinion on these combined
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of mate-
rial misstatement. An audit includes examining, on a test basis, evidence sup-
porting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement pre-
sentation. We believe that our audits provide a reasonable basis for our opin-
ion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the Port-
folio as of December 31, 1997 and 1996, and the combined results of its opera-
tions and its combined cash flows for the years then ended and for 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 com-
bined financial statement schedule, when considered in relation to the basic
combined financial statements taken as a whole, presents fairly, in all mate-
rial respects, the information set forth therein.
KPMG Peat Marwick LLP
Chicago, Illinois
July 2, 1998
<PAGE>
PENNSYLVANIA PUBLIC SCHOOL
EMPLOYES' RETIREMENT SYSTEM
INDUSTRIAL PROPERTIES PORTFOLIO
MANAGED BY RREEF AMERICA L.L.C.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
--------------------------
DECEMBER 31,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Real estate:
Land $ 21,148,662 $ 21,148,662
Building and improvements 84,932,488 83,748,432
Accumulated depreciation (7,228,786) (4,142,761)
<CAPTION>
------------ ------------
<S> <C> <C>
98,852,364 100,754,333
Cash and cash equivalents 1,253,007 1,431,677
Rents and other tenant receivables, net 252,299 462,457
Accrued rents receivable (note 4) 2,360,015 1,901,037
Deferred expenses (note 3) 482,860 331,426
Other assets 149,804 184,028
<CAPTION>
------------ ------------
<S> <C> <C>
Total Assets $103,350,349 $105,064,958
<CAPTION>
============ ============
<S> <C> <C>
LIABILITIES AND OWNER'S EQUITY
Accounts payable and accrued expenses $ 2,358,078 $ 1,255,294
Tenant security deposits 364,047 327,400
Other liabilities 40,739 42,344
<CAPTION>
------------ ------------
<S> <C> <C>
Total Liabilities 2,762,864 1,625,038
<CAPTION>
------------ ------------
<S> <C> <C>
Owner's Equity 100,587,485 103,439,920
<CAPTION>
------------ ------------
<S> <C> <C>
Total Liabilities and Owner's Equity $103,350,349 $105,064,958
<CAPTION>
============ ============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
<PAGE>
PENNSYLVANIA PUBLIC SCHOOL
EMPLOYES' RETIREMENT SYSTEM
INDUSTRIAL PROPERTIES PORTFOLIO
MANAGED BY RREEF AMERICA, L.L.C.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
--------------------------------------
PERIOD FROM
YEARS ENDED DECEMBER 31, JULY 6, TO
------------------------- DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
REVENUE
Rental income (note 4) $ 12,427,862 $ 12,348,207 $5,859,691
Tenant reimbursements 1,122,405 1,389,320 333,724
Interest 82,480 139,190 95,901
Other 124,888 633,066 2,667
<CAPTION>
------------ ------------ ------------
<S> <C> <C> <C>
Total Income 13,757,635 14,509,783 6,291,983
EXPENSES
Property taxes 963,073 1,234,230 271,316
Operating expenses (note 5) 951,396 853,074 271,920
Advisor fees (note 5) 2,327,357 731,836 339,440
Depreciation and amortization 3,183,564 2,858,119 1,304,717
<CAPTION>
------------ ------------ ------------
<S> <C> <C> <C>
Total Expenses 7,425,390 5,677,259 2,187,393
<CAPTION>
------------ ------------ ------------
<S> <C> <C> <C>
Net income $ 6,332,245 $ 8,832,524 $4,104,590
<CAPTION>
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
<PAGE>
PENNSYLVANIA PUBLIC SCHOOL
EMPLOYES' RETIREMENT SYSTEM
INDUSTRIAL PROPERTIES PORTFOLIO
MANAGED BY RREEF AMERICA L.L.C.
COMBINED STATEMENT OF OWNER'S EQUITY
YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996,
AND THE PERIOD FROM JULY 6, TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
------------
<S> <C>
Beginning Balance $ --
Contributions 98,561,147
Distributions (4,050,000)
Net income 4,104,590
<CAPTION>
------------
<S> <C>
Balance at December 31, 1995 98,615,737
Contributions 7,147,878
Distributions (11,156,219)
Net income 8,832,524
<CAPTION>
------------
<S> <C>
Balance at December 31, 1996 103,439,920
Contributions 745,320
Distributions (9,930,000)
Net income 6,332,245
<CAPTION>
------------
<S> <C>
Balance at December 31, 1997 $100,587,485
<CAPTION>
============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
<PAGE>
PENNSYLVANIA PUBLIC SCHOOL
EMPLOYES' RETIREMENT SYSTEM
INDUSTRIAL PROPERTIES PORTFOLIO
MANAGED BY RREEF AMERICA, L.L.C.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
---------------------------------------
PERIOD FROM
YEARS ENDED DECEMBER 31, JULY 6 TO
------------------------- DECEMBER 31,
1997 1996 1995
----------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 6,332,245 $ 8,832,524 $ 4,104,590
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 3,183,564 2,858,119 1,304,717
Accrued rents receivable (458,978) (1,201,791) (699,246)
Changes in:
Rents and other tenant receivables,
net 210,158 (162,845) (299,613)
Other assets 34,224 (90,876) (93,152)
Accounts payable and accrued
expenses 1,102,784 754,998 500,296
Tenant security deposits 36,647 23,796 303,604
Other liabilities (1,605) (125,335) 167,679
<CAPTION>
----------- ------------ ------------
<S> <C> <C> <C>
Net cash provided by operating
activities 10,439,039 10,888,590 5,288,875
<CAPTION>
----------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of real estate investment
property (note 1) -- (6,268,069) (96,049,051)
Additions and improvements to real
estate (1,184,056) (1,518,383) (1,061,591)
Payment of deferred expenses (248,973) (350,140) (1,360)
<CAPTION>
----------- ------------ ------------
<S> <C> <C> <C>
Net cash used in investing activities (1,433,029) (8,136,592) (97,112,002)
<CAPTION>
----------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Contributions 745,320 7,147,878 98,561,147
Distributions (9,930,000) (11,156,219) (4,050,000)
<CAPTION>
----------- ------------ ------------
<S> <C> <C> <C>
Net cash (used in) provided by
financing activities (9,184,680) (4,008,341) 94,511,147
<CAPTION>
----------- ------------ ------------
<S> <C> <C> <C>
Net increase (decrease) in cash and
cash equivalents (178,670) (1,256,343) 2,688,020
Cash and cash equivalents, at
beginning of period 1,431,677 2,688,020 --
<CAPTION>
----------- ------------ ------------
<S> <C> <C> <C>
Cash and cash equivalents, at end of
period $ 1,253,007 $ 1,431,677 $ 2,688,020
<CAPTION>
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
<PAGE>
PENNSYLVANIA PUBLIC SCHOOL
EMPLOYES' RETIREMENT SYSTEM
INDUSTRIAL PROPERTIES PORTFOLIO
MANAGED BY RREEF AMERICA L.L.C.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
1. ORGANIZATION
The accompanying combined financial statements include the accounts of the
industrial real estate investment properties and related title holding compa-
nies, collectively referred to as the Portfolio, which are managed by RREEF
America L.L.C. (Advisor) for Pennsylvania Public School Employes' Retirement
System (PSERS). At December 31, 1997, the Portfolio included 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. EXCHANGE OF PORTFOLIO OWNERSHIP INTEREST
On February 4, 1998, PSERS exchanged its ownership in the Portfolio for common
shares in the newly formed Cabot Industrial Trust.
3. SIGNIFICANT ACCOUNTING POLICIES
Depreciation of buildings and improvements was 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, were amortized using the straight-line method over the
term of the lease to which they related.
Maintenance and repair expenses were charged to operations as incurred. Expen-
ditures which extend the economic life or represent additional capital invest-
ments benefiting future periods, including tenant improvements and leasing com-
missions, were capitalized.
Deferred expenses were comprised of leasing commissions and other costs
directly attributable to obtaining tenants were amortized over the terms of the
leases to which they related.
For purposes of the combined statements of cash flows, the Portfolio considered
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 required 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
<PAGE>
PENNSYLVANIA PUBLIC SCHOOL
EMPLOYES' RETIREMENT SYSTEM
INDUSTRIAL PROPERTIES PORTFOLIO
MANAGED BY RREEF AMERICA L.L.C.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997 AND 1996
between willing parties, other than in a forced or liquidation sale. The Port-
folio believed the carrying amount of its financial instruments approximated
SFAS 107 value due to the relatively 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 that long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or change in circumstances indicate
that the carrying 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 State-
ment did not have an impact on the Portfolio's combined financial position,
combined results of operations, or liquidity.
Pennsylvania Public School Employes' Retirement System and the Portfolio's
title holding companies were exempt from taxes, and accordingly, no income tax
provision was required.
4. LEASES
The Portfolio determined that all leases relating to the Portfolio's investment
properties were to be classified as operating leases; therefore, rental income
was reported when earned. Leases ranged 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 Con-
sumer Price Index and the direct payment of all operating costs, real estate
taxes and insurance related to the property.
The approximate future minimum rentals on noncancelable long-term operating
leases in effect at December 31, 1997 (exclusive of expense reimbursements)
were as follows:
<TABLE>
<CAPTION>
-----------
CALENDAR YEAR AMOUNT
------------- -----------
<S> <C>
1998 $12,151,511
1999 11,661,702
2000 9,843,562
2001 7,441,810
2002 3,889,381
Thereafter 10,577,301
<CAPTION>
-----------
<S> <C>
Total $55,565,267
<CAPTION>
===========
</TABLE>
A number of tenant leases contained 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 represent future
amounts receivable related to scheduled future rent increases. The net
increases in accrued rents receivable during the years ended December 31, 1997
and 1996 and the period from July 6, 1995 to December 31, 1995, of $458,978,
$1,201,791 and $699,246, respectively, represented increases to base rent reve-
nue.
5. ADVISOR'S AND AFFILIATES FEES
The annual advisor's fee for the Portfolio was calculated in accordance with
the agreement as a percentage of PSERS' original cash investment for those
properties. All fees were paid quarterly in arrears.
<PAGE>
PENNSYLVANIA PUBLIC SCHOOL
EMPLOYES' RETIREMENT SYSTEM
INDUSTRIAL PROPERTIES PORTFOLIO
MANAGED BY RREEF AMERICA L.L.C.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997 AND 1996
An affiliate of the Advisor acted as the property manager, as well as performed
leasing and construction supervisory services. A property management fee was
paid based upon methods and rates that the Advisor believed was consistent with
industry practice. Management fees for the years ended December 31, 1997 and
1996 and the period from July 6, 1995 to December 31, 1995 amounted to
$238,465, $287,879, and $119,055, respectively. Leasing commissions for the
years ended December 31, 1997, 1996 and the period from July 6, 1995 to
December 31, 1995 amounted to $459,820, $216,380, and $1,360, respectively.
Construction supervisory services for the years ended December 31, 1997, 1996
and the period from July 6, 1995 to December 31, 1995 amounted to $98,587,
$53,981, and $0, respectively.
The Advisor was also entitled to receive an incentive fee based primarily on
cumulative unrealized appreciation related to the Portfolio. During 1997, the
amount of the incentive fee became determinable and $1,581,369 was accrued and
included in accounts payable and accrued expenses. Such amount was unpaid at
December 31, 1997.
<PAGE>
SCHEDULE III
PENNSYLVANIA PUBLIC SCHOOL EMPLOYES' RETIREMENT
INDUSTRIAL PROPERTIES PORTFOLIO
MANAGED BY RREEF AMERICA L.L.C.
COMBINED REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 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
(Roselle,
Illinois) $ 3,120,000 $17,668,584 $ 195,457 $ 3,120,000 $17,864,041 $ 20,984,041 $1,488,130 7/6/95
Port Jersey
Industrial Park
(Jersey City,
New Jersey) 15,230,059 37,593,965 1,546,509 15,230,059 39,140,474 54,370,533 3,249,150 7/6/95
Westbelt
Business Park
(Columbus,
Ohio) 2,798,603 25,905,909 2,022,064 2,798,603 27,927,973 30,726,576 2,491,506 7/6/95
<CAPTION>
----------- ------------- ----------------- ----------- ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$21,148,662 $81,168,458 $3,764,030 $21,148,662 $84,932,488 $106,081,150 $7,228,786
<CAPTION>
=========== ============= ================= =========== ============ ============ ===============
<CAPTION>
LIFE ON
WHICH
DEPRECIATION
IN STATEMENT
OF OPERATIONS
DESCRIPTION IS COMPUTED
- ----------- -------------
<S> <C>
Industrial
Property:
Medinah
Industrial Park
(Roselle,
Illinois) 30 years
Port Jersey
Industrial Park
(Jersey City,
New Jersey) 2-30 years
Westbelt
Business Park
(Columbus,
Ohio) 2-30 years
<CAPTION>
<S> <C>
<CAPTION>
</TABLE>
- ----
Notes
(A) The initial cost to the Portfolio represents the original purchase price of
the properties.
(B) Reconciliation of real estate owned:
(C) Reconciliation of accumulated depreciation:
<TABLE>
<CAPTION>
-------------------------------------
1997 1996 1995
------------ ------------ -----------
<S> <C> <C> <C>
Balance at beginning of period $104,897,094 $ 97,110,642 $97,110,642
Additions during period 1,184,056 7,786,452 --
<CAPTION>
------------ ------------ -----------
<S> <C> <C> <C>
Balance at end of period $106,081,150 $104,897,094 $97,110,642
<CAPTION>
============ ============ ===========
-------------------------------------
<S> <C> <C> <C>
Balance at beginning of period $4,142,761 $1,304,717 $ --
Depreciation expense 3,086,025 2,838,044 1,304,717
<CAPTION>
------------ ------------ -----------
<S> <C> <C> <C>
Balance at end of period $7,228,786 $4,142,761 $1,304,717
<CAPTION>
============ ============ ===========
</TABLE>
<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 December 31, 1997 and 1996, and the
related combined statements of operations, owners' equity and cash flows for
the each of the three years in the period ended December 31, 1997. These com-
bined financial statements are the responsibility of the management of the Pru-
dential Properties 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 December 31, 1997 and 1996, and the combined results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, 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
July 13, 1998
<PAGE>
PRUDENTIAL PROPERTIES GROUP
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
------------------------
DECEMBER 31,
------------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Real Estate:
Land $ 8,302,419 $ 8,302,419
Buildings and improvements 35,656,389 35,656,389
Accumulated depreciation (4,889,338) (3,997,931)
<CAPTION>
----------- -----------
<S> <C> <C>
39,069,470 39,960,877
Cash and Cash Equivalents 210,152 61,377
Accounts Receivable and Accrued Investment
Income 105,472 53,272
Deferred Leasing Costs 690,126 181,461
Deferred Rent Concessions 354,180 345,406
Other Assets 6,280 6,284
<CAPTION>
----------- -----------
<S> <C> <C>
Total assets $40,435,680 $40,608,677
<CAPTION>
=========== ===========
<S> <C> <C>
LIABILITIES
Accounts Payable and Accrued Expenses $ 558,803 $ 557,563
Other Liabilities 262,040 75,000
<CAPTION>
----------- -----------
<S> <C> <C>
Total liabilities 820,843 632,563
<CAPTION>
----------- -----------
<S> <C> <C>
Owners' Equity 39,614,837 39,976,114
<CAPTION>
----------- -----------
<S> <C> <C>
Total Liabilities and Owners' Equity $40,435,680 $40,608,677
<CAPTION>
=========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
<PAGE>
PRUDENTIAL PROPERTIES GROUP
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
--------------------------------
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
REVENUE
Rental income $4,771,907 $4,433,557 $3,776,468
Other income 59,311 1,975 --
<CAPTION>
---------- ---------- ----------
<S> <C> <C> <C>
Total revenue 4,831,218 4,435,532 3,776,468
EXPENSES
Property taxes 343,993 371,771 290,962
Operating expenses 638,128 823,830 482,778
Depreciation and amortization 975,664 928,406 686,548
<CAPTION>
---------- ---------- ----------
<S> <C> <C> <C>
Total expenses 1,957,785 2,124,007 1,460,288
<CAPTION>
---------- ---------- ----------
<S> <C> <C> <C>
Net income $2,873,433 $2,311,525 $2,316,180
<CAPTION>
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
<PAGE>
PRUDENTIAL PROPERTIES GROUP
COMBINED STATEMENTS OF OWNERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
-----------
<S> <C>
Owners' Equity, December 31, 1994 $29,998,086
Net transfers to owners (3,061,947)
Net income for the year ended December 31, 1995 2,316,180
<CAPTION>
-----------
<S> <C>
Owners' Equity, December 31, 1995 29,252,319
Net transfers from owners 8,412,270
Net income for the year ended December 31, 1996 2,311,525
<CAPTION>
-----------
<S> <C>
Owners' Equity, December 31, 1996 39,976,114
Net transfers to owners (3,234,710)
Net income for the year ended December 31, 1997 2,873,433
<CAPTION>
-----------
<S> <C>
Owners' Equity, December 31, 1997 $39,614,837
<CAPTION>
===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
<PAGE>
PRUDENTIAL PROPERTIES GROUP
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
-----------------------------------
YEARS ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
---------- ----------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $2,873,433 $ 2,311,525 $2,316,180
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 975,664 928,406 686,548
Changes in assets--(increase) decrease
Accounts receivable (52,200) 35,811 (122,243)
Other assets 3 22 (1,621)
Deferred rent concessions (8,774) (155,098) (83,760)
Changes in liabilities--increase
(decrease):
Accounts payable and accrued expenses 1,240 175,689 193,561
Other liabilities 187,040 -- --
<CAPTION>
---------- ----------- ----------
<S> <C> <C> <C>
Net cash provided by operating activities 3,976,406 3,296,355 2,988,665
<CAPTION>
---------- ----------- ----------
<S> <C> <C> <C>
INVESTING ACTIVITIES
Property acquisitions -- (11,574,600) --
Payments for capital and tenant
improvements (592,921) (167,809) --
<CAPTION>
---------- ----------- ----------
<S> <C> <C> <C>
Net cash used in investing activities (592,921) (11,742,409) --
<CAPTION>
---------- ----------- ----------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Net transfers (to) from owners (3,234,710) 8,412,270 (3,061,947)
<CAPTION>
---------- ----------- ----------
<S> <C> <C> <C>
Net increase (decrease) in cash 148,775 (33,784) (73,282)
Cash and cash equivalents, beginning of
year 61,377 95,161 168,443
<CAPTION>
---------- ----------- ----------
<S> <C> <C> <C>
Cash and cash equivalents, end of year $ 210,152 $ 61,377 $ 95,161
<CAPTION>
========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
<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 were 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 Insur-
ance Company of America on behalf of a single-client separate account. Pruden-
tial Group properties were 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 statement include all of the direct and indirect costs of the busi-
ness of Prudential Group. A summary of the holdings of Prudential Group is as
follows (each location has one building):
<TABLE>
<CAPTION>
---------------------
NUMBER OF
BULK DISTRIBUTION 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
<CAPTION>
-----------
<S> <C> <C>
1,466,343
<CAPTION>
===========
</TABLE>
2. FORMATION TRANSACTION
Under the provisions of the Contribution Agreement executed by each property
owner, Prudential Group contributed all of its properties to Cabot Industrial
Trust (the Company) on February 4, 1998 and received common shares from the
Company. The impact of this transaction 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.
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
ASSET CATEGORY USEFUL LIFE
- -------------- -------------
<S> <C>
Buildings and improvements 40 years
Tenant improvements Life of lease
</TABLE>
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.
<PAGE>
PRUDENTIAL PROPERTIES GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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 December
31, 1997 and 1996, the receivables from tenants, net of reserves, which Pruden-
tial Group expects to collect over the remaining life of these leases rather
than currently, were approximately $354,000 and $345,000, respectively (De-
ferred Rent). The amounts included in rental income for the years ended
December 31, 1997, 1996 and 1995, which are not currently due, were approxi-
mately $9,000, $155,000 and $84,000, respectively. Deferred Rent is not recog-
nized 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 noncancelable operating leases for the
industrial properties as of December 31, 1997 were as follows:
<TABLE>
<CAPTION>
-----------
<S> <C>
1998 $ 4,329,812
1999 3,472,172
2000 2,942,526
2001 2,003,584
2002 1,552,436
Thereafter 2,474,062
<CAPTION>
-----------
<S> <C>
$16,774,592
<CAPTION>
===========
</TABLE>
The above amounts do not include additional rental receipts that will become
due as a result of the expense pass-through and escalation provisions in the
leases. Prudential Group is subject to the usual business risks associated with
the collection of the above scheduled rents.
<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 YEARS ENDED DECEMBER 31,
--------------------------------
FEE INCURRED 1997 1996 1995
------------ ---------- ---------- ----------
<S> <C> <C> <C>
Asset management $251,018 $ 274,410 $ 168,796
Acquisition -- 93,000 --
Property management 73,172 62,835 60,302
Incentive -- 76,514 3,400
</TABLE>
At December 31, 1997, December 31, 1996 and December 31, 1995, total fees pay-
able to PAMG were $251,018, $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. Prudential Group made certain
representations and warranties to the Company in the Contribution Agreement
entered into among the parties in connection with the Formation Transactions
(see Note 2), with respect to environmental and certain other matters. Compli-
ance by the Prudential Group with existing laws has not had a material adverse
effect on either financial condition or results of operations, and management
does not believe it will have such an impact in the future. However, Prudential
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.
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
<PAGE>
SCHEDULE III
PRUDENTIAL PROPERTIES GROUP
REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
COSTS CAPITALIZED
INITIAL COST TO GROUP SUBSEQUENT TO ACQUISITION
------------------------- ------------------------------
BUILDINGS BUILDINGS
AND AND
DESCRIPTION(1) LOCATION LAND IMPROVEMENTS LAND IMPROVEMENTS
- -------------- ----------- ---------- -------------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
Vintage Avenue Ontario CA $ 3,761 $ 6,918 -- --
Fulton Co.
Westgate Parkway GA 1,619 4,196 -- --
International
Way Hebron KY 663 4,483 -- --
International Blvd., Cincinnati
Building 1 OH 564 4,858 -- --
International Blvd., Cincinnatti
Building 2 OH 464 4,858 -- --
Port Road,
Building 1 Columbus OH 651 5,974 -- --
Port Road,
Building 2 Columbus OH 580 4,370 -- --
<CAPTION>
---------- -------------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
$ 8,302 $ 35,657 -- --
<CAPTION>
========== ============== ============ ================
<CAPTION>
GROSS AMOUNT
CARRIED AT DECEMBER 31,1997
-----------------------------------------
BUILDINGS
AND ACCUMULATED DATE DATE DEPRECIABLE
DESCRIPTION(1) LAND IMPROVEMENTS TOTAL(2) DEPRECIATION CONSTRUCTED ACQUIRED LIVES
- -------------- ------ ------------ -------- ------------ ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Vintage Avenue $3,761 $ 6,918 $10,679 $1,557 1988 1998 40
Westgate Parkway 1,619 4,196 5,815 944 1988 1998 40
International
Way 663 4,483 5,146 598 1990 1992 40
International Blvd.,
Building 1 564 4,858 5,422 647 1990 1992 40
International Blvd.,
Building 2 464 4,858 5,322 647 1990 1992 40
Port Road,
Building 1 651 5,974 6,625 286 1995 1996 40
Port Road,
Building 2 580 4,370 4,950 210 1995 1996 40
<CAPTION>
------ ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
$8,302 $35,657 $43,959 $4,889
<CAPTION>
====== ============ ======== ============
</TABLE>
- ----
(1) All properties consist of single buildings which are considered to be
Industrial
(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, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
---------------
DECEMBER 31,
---------------
1997 1996
------- -------
<S> <C> <C>
Balance, beginning of the year $43,959 $32,384
Acquisitions -- 11,575
<CAPTION>
------- -------
<S> <C> <C>
Balance, end of year $43,959 $43,959
<CAPTION>
======= =======
The changes in accumulated depreciation for the years ended December 31, 1997
and 1996 are as follows:
---------------
DECEMBER 31,
---------------
1997 1996
------- -------
<S> <C> <C>
Balance, beginning of the year $ 3,998 $ 3,128
Depreciation 891 870
<CAPTION>
------- -------
<S> <C> <C>
Balance, end of year $ 4,889 $ 3,998
<CAPTION>
======= =======
</TABLE>
<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, 1997. 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,
1997, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
June 30, 1998
<PAGE>
WEST COAST INDUSTRIAL, LLC
COMBINED STATEMENT OF REVENUE AND CERTAIN EXPENSES
<TABLE>
<CAPTION>
------------
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
REVENUES
Base Rent $3,269,657
Tenant Reimbursements 301,019
Other Income 16,770
<CAPTION>
------------
<S> <C>
Total Revenues 3,587,446
<CAPTION>
------------
<S> <C>
EXPENSES
Property, Operating and Maintenance 144,184
Real Estate Taxes 366,042
Management Fees 63,285
Insurance 237,148
<CAPTION>
------------
<S> <C>
Total Expenses 810,659
<CAPTION>
------------
<S> <C>
Revenue in Excess of Certain Expenses $2,776,787
<CAPTION>
============
</TABLE>
The accompanying notes are an integral part of this combined financial
statement.
<PAGE>
WEST COAST INDUSTRIAL, LLC
NOTES TO COMBINED STATEMENT OF REVENUE AND CERTAIN EXPENSES
1. BUSINESS
The accompanying Combined Statement 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 and were contributed to Cabot Industrial Trust on February 4,
1998 as part of the Formation Transactions.
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.
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. 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.
<PAGE>
WEST COAST INDUSTRIAL, LLC
NOTES TO COMBINED STATEMENT OF REVENUE AND CERTAIN EXPENSES--(CONTINUED)
4. FUTURE MINIMUM RENTS
Future minimum rental receipts due on noncancelable operating leases for the
Portfolio as of December 31, 1997 were as follows:
<TABLE>
<CAPTION>
-----------
<S> <C>
1998 $ 3,057,505
1999 2,740,537
2000 2,607,223
2001 2,598,079
2002 1,742,238
Thereafter 9,578,300
<CAPTION>
-----------
<S> <C>
$22,323,882
<CAPTION>
===========
</TABLE>
The above amounts do not include additional rental receipts that will become
due as a result of the expense pass-through and escalation provisions in the
leases. The Portfolio is subject to the usual business risks associated with
the collection of the above scheduled rents.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Owners of The 4B's:
We have audited the accompanying Statement of Revenue and Certain Expenses of
The 4B's (the Property) for the period from inception (September 1, 1997)
through December 31, 1997. 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 period from inception (September 1,
1997) through December 31, 1997, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
August 3, 1998
<PAGE>
THE 4 B'S
STATEMENT OF REVENUE AND CERTAIN EXPENSES
<TABLE>
<CAPTION>
------------
PERIOD FROM
INCEPTION
THROUGH
DECEMBER 31,
1997
------------
<S> <C>
REVENUES
Base Rent $337,120
Tenant Reimbursements 71,694
<CAPTION>
------------
<S> <C>
Total Revenues 408,814
<CAPTION>
------------
<S> <C>
EXPENSES
Property, Operating and Maintenance 27,129
Real Estate Taxes 41,509
Professional Fees 47,009
Insurance 7,344
<CAPTION>
------------
<S> <C>
Total Expenses 122,991
<CAPTION>
------------
<S> <C>
Revenue in Excess of Certain Expenses $285,823
<CAPTION>
============
</TABLE>
The accompanying notes are an integral part of this financial statement.
<PAGE>
THE 4 B'S
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES
1. BUSINESS
The accompanying Statement of Revenue and Certain Expenses relates to the oper-
ations of The 4 B's (the Property). The Property consists of one building
totaling approximately 355,732 rentable square feet, located at 2000 Landstreet
Road in Orlando, Florida.
The Property commenced operations on September 1, 1997 and was contributed to
Cabot Industrial Trust on February 4, 1998 as part of the Formation Transac-
tions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying Statement of Revenue and Certain Expenses was prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the registration statement on Form S-11 of
Cabot Industrial Trust. The statement is not representative of the actual oper-
ations of the Property for the period presented nor indicative of future opera-
tions 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 Property, have been
excluded.
Revenue and Expense Recognition
Revenue is recognized on a straight-line basis over the terms of the related
leases. Expenses are recognized in the period in which they are incurred.
Use of Estimates
The preparation of the Statement of Revenue and Certain Expenses in conformity
with generally accepted accounting principles requires management to make esti-
mates and assumptions that affect the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates.
3. RENTAL REVENUES
All leases are classified as operating leases. 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. Approximately $153,000 of
the base rental revenue earned during the period was from a related party.
4. FUTURE MINIMUM RENTS
Future minimum rental receipts due on noncancelable operating leases for the
Property as of December 31, 1997 were as follows:
<TABLE>
<CAPTION>
----------
<S> <C>
1998 $ 551,976
1999 551,976
2000 551,976
2001 551,976
2002 99,816
<CAPTION>
----------
<S> <C>
$2,307,720
<CAPTION>
==========
</TABLE>
The above amounts do not include additional rental receipts that will become
due as a result of the expense pass-through and escalation provisions in the
leases. The Property is subject to the usual business risks associated with the
collection of the above scheduled rents. Subsequent to December 31, 1997, the
Property entered into another leasing agreement which provides for an aggregate
of $6,306,840 of future minimum rental receipts over the term of the lease.
