Item 1. Business
Cabot Industrial Properties, L.P.
Cabot Industrial Properties, L.P. ("Cabot L.P.") was organized on October 10, 1997 as a Delaware limited partnership to continue and expand the national industrial real estate business of Cabot Partners Limited Partnership ("Cabot Partners"). The sole general partner of Cabot L.P. is Cabot Industrial Trust ("Cabot Trust"), a Maryland real estate investment trust. Cabot L.P. and Cabot Trust are organized in what is commonly referred to as an umbrella partnership, or "UPREIT" structure, meaning that all of Cabot Trust's properties are held and its business is conducted primarily through Cabot L.P. At June 30, 2002, Cabot Trust held a 100% partnership interest in Cabot L.P. (exclusive of preferred units). Cabot L.P.'s outstanding equity consists of common units of limited partnership interests ("Common Units") and cumulative redeemable perpetual preferred units ("Preferred Units").
On October 28, 2001, Cabot L.P. and Cabot Trust entered into an Agreement and Plan of Merger (the "Merger Agreement") with Calwest Industrial Properties, LLC ("Calwest"), which is a joint venture between the California Public Employees' Retirement System ("CalPERS") and RREEF America L.L.C. and its affiliates ("RREEF"), and Rooster Acquisition Corp., a wholly-owned subsidiary of Calwest ("Rooster"), pursuant to which, among other things, Calwest agreed to acquire Cabot Trust by making a tender offer for all of Cabot Trust's outstanding common shares of beneficial interest and then merging Rooster with and into Cabot Trust.
On December 4, 2001 Rooster closed the tender offer and on December 5, 2001 purchased 97% of the outstanding common shares of beneficial interest. On December 7, 2001, Calwest acquired all of Cabot Trust's remaining outstanding common shares of beneficial interest pursuant to the merger of Rooster with and into Cabot Trust, with Cabot Trust surviving as a wholly-owned subsidiary of Calwest. In January 2002, 146 individuals became the owners of less than 0.1% of common shares of beneficial interest of Cabot Trust.
The UPREIT structure was unaffected by the merger transactions ("the Merger"). However, Cabot Trust became an externally-managed private REIT which, through Cabot L.P., leases, manages, holds for investment, acquires, or develops industrial real estate properties in principal markets throughout the United States. In conjunction with the Merger, Cabot L.P. engaged RREEF, an investment manager, and an affiliate of one of the members in Calwest, to provide asset and property management, acquisition, disposition and development services. RREEF manages over $18 billion in pension fund real estate investments for over 225 corporate, public and international clients. Its activities include private and public market equity investments ranging from core investments to higher return/higher risk holdings, including development. RREEF also provides investment services to Calwest.
On August 1, 2002, Cabot L.P., pursuant to an Agreement of Sale dated June 28, 2002, sold to CalEast Industrial Investors, LLC ("CalEast") all of its interest in Cabot Acquisition, LLC, a wholly-owned subsidiary of Cabot L.P. ("Cabot Acquisition") for $375,450,000, of which amount $300,450,000 was paid in cash and $75,000,000 was paid by the assumption of mortgage loans issued by Teachers Insurance and Annuity Association of America ("TIAA") to Cabot L.P. The assets sold included 46 buildings (the "Property", which is included within Assets Held for Sale),constituting approximately 16% of the assets of Cabot L.P., all of the improvements, leases, license and permits, and personal property which affects the Property, and all of Cabot Acquisition's service contracts and agreements (collectively, the "Assets"). The purchase price represented the fair market value of the Assets as of June 30, 2002, as determined by appraisers appointed by Calwest, less $75 million, constituting the outstanding principal balance of the assumed mortgage loans issued by TIAA to Cabot L.P., which mortgage loans were assumed by CalEast at the closing.
Ninety-eight percent (98%) of the membership interest in Calwest is owned by CalPERS. Further, ninety-eight percent (98%) of the membership interest of CalEast is owned by CalPERS.
At June 30, 2002, Cabot L.P. owned a geographically diversified portfolio of 382 industrial properties having an aggregate of approximately 43.5 million rentable square feet, approximately 91% of which space was leased to 774 tenants (excluding Assets Held for Sale, 332 industrial properties having an aggregate of approximately 34.6 million rentable square feet, approximately 93% of which space was leased to 690 tenants). The properties are located in 20 (17 excluding Assets Held for Sale) states in each of the five principal regions (West, Midwest, Northeast, Southeast and Southwest) of the United States. As of June 30, 2002, no single tenant accounted for more than 2.0% of Cabot L.P.'s total annualized net rent (0.9% excluding Assets Held for Sale).
Cabot L.P. offers a broad spectrum of industrial property types to meet the diverse needs of its tenants. Its properties have historically been grouped into three general types: bulk distribution properties, multitenant distribution properties and workspace properties (light industrial, research and development (R&D) and similar facilities).
Cabot L.P.'s goal is to provide increasing levels of cash flows to its common limited partnership unitholder through its diversified investments in industrial real estate by serving a variety of industrial space users. As of June 30, 2002, Cabot L.P. has a significant market presence across the United States, with properties in a total of 20 markets, including 13 markets in which Cabot L.P. owns properties with more than one million rentable square feet (excluding Assets Held for Sale, 18 markets, including 11 markets in which Cabot L.P. owns properties with more than one million rentable square feet). Its tenant base ranges from large national distributors using industrial space in multiple locations, to smaller companies using single workspace properties. Cabot L.P. believes that its geographic diversification and substantial presence in multiple markets is a strategic advantage that allows it to serve industrial space users with multiple site and industrial property type requirements, to compete more effectively in its individual markets and to respond quickly to acquisition opportunities as they arise.
In addition to acquiring existing industrial properties on a selective basis, Cabot L.P. is engaged in the development and construction of new properties. The construction and leasing functions of its development activities are conducted through relationships with local builders selected by Cabot L.P. As of June 30, 2002, in addition to 10 properties that became fully leased in 2002, Cabot L.P. had 3 development projects that have reached shell completion or are under construction with total projected development costs of approximately $18.6 million. The 3 projects are located in 3 of Cabot L.P.'s existing submarkets and involve construction of two of Cabot L.P.'s principal property types. Six percent of the square footage of these development projects has been leased as of June 30, 2002.
In April 2002, Cabot L.P. changed its fiscal year end from December 31 to June 30 in order to conform to Calwest's fiscal year end. References to "fiscal year 2002", "fiscal year 2001" and "fiscal year 2000" herein are for the six months ended June 30, 2002 and years ended December 31, 2001 and 2000, respectively.
Cabot L.P. is treated as a partnership under the Internal Revenue Code of 1986 (the "Code"), as amended. As a partnership, Cabot L.P. is not generally subject to federal or state income taxes as the partners report their respective shares of net taxable income on their individual returns.
Cabot L.P.'s principal executive offices are located at 875 North Michigan Avenue, 41st Floor, Chicago, Illinois 60611, and its telephone number is (312) 266-9300.
Formation Transactions; Tender and Merger Transactions; Organizational Structure
In February 1998, Cabot Trust completed an initial public offering of 8,625,000 common shares of beneficial interest ("Common Shares") and a private placement of 1,000,000 Common Shares, in each case at an offering price of $20.00 per Common Share (collectively, the "Offerings"). Concurrently with the completion of the Offerings, Cabot Trust also completed a series of business combinations (the "Formation Transactions") involving Cabot Partners and a number of property-owning entities, including both entities organized by Cabot Partners and its institutional advisory clients, and institutional investors that had no prior relationship with Cabot Partners (collectively, the "Contributing Investors"). The Formation Transactions resulted, among other things, in the transfer of ownership of 122 industrial properties to Cabot L.P.
Cabot Trust's interest in Cabot L.P. entitles it to share in cash distributions from, and in the profits and losses of, Cabot L.P. in proportion to Cabot Trust's percentage ownership (apart from tax allocations of profits and losses to take into account pre-contribution property appreciation). At June 30, 2002, Cabot Trust owned 100% of the common equity of Cabot L.P.
As the general partner of Cabot L.P., Cabot Trust has the exclusive power under the agreement of limited partnership to manage and conduct the business of Cabot L.P. Cabot Trust currently holds one Common Unit in Cabot L.P. for each Common Share that it has issued. The net proceeds of the issuance of Common Shares of Cabot Trust are required by the Second Amended and Restated Agreement of Limited Partnership of Cabot L.P. (the "Partnership Agreement") to be contributed to Cabot L.P. in exchange for a corresponding number of Common Units of partnership interest.
On October 28, 2001, Cabot L.P. and Cabot Trust entered into the Merger Agreement with Calwest and Rooster pursuant to which, among other things, Calwest agreed to acquire Cabot Trust by making a tender offer for all of Cabot Trust's outstanding Common Shares and then merging Rooster with and into Cabot Trust.
On November 5, 2001, pursuant to the Merger Agreement, Rooster and Calwest commenced a tender offer to purchase all of Cabot Trust's outstanding Common Shares at a price of $24.00 per share in cash. On December 4, 2001, all outstanding Common Units of limited partnership interest in Cabot L.P., other than those held by Cabot Trust, were exchanged for Common Shares of Cabot Trust and such shares were tendered to Rooster and Calwest pursuant to the tender offer. As a result, Cabot Trust became the sole holder of Common Units of limited partnership interest in Cabot L.P. The tender offer expired at 12:00 midnight New York City time on December 4, 2001, and on December 5, 2001, Rooster and Calwest announced that they had accepted all 42,388,440 Common Shares of Cabot Trust that were tendered pursuant to the tender offer. Such shares constituted 97% of Cabot Trust's outstanding Common Shares.
On December 7, 2001, Calwest acquired all of Cabot Trust's remaining outstanding Common Shares pursuant to the merger of Rooster with and into Cabot Trust, with Cabot Trust surviving as a wholly-owned subsidiary of Calwest through December 31, 2001. In January 2002, 146 individuals became owners of less than 0.1% of Common Shares of Cabot Trust.
On August 1, 2002, Cabot L.P., pursuant to an Agreement of Sale dated June 28, 2002, sold to CalEast all of its interest in Cabot Acquisition, a wholly-owned subsidiary of Cabot L.P. for $375,450,000, of which amount $300,450,000 was paid in cash and $75,000,000 was paid by the assumption of mortgage loans issued by TIAA to Cabot L.P. The assets sold included 46 buildings (the "Property", which is included within Assets Held for Sale), constituting approximately 16% of the assets of Cabot L.P., all of the improvements, leases, license and permits, and personal property which affects the Property, and all of Cabot Acquisition's service contracts and agreements (collectively, the "Assets"). The purchase price represented the fair market value of the Assets as of June 30, 2002, as determined by appraisers appointed by Calwest, less $75 million, constituting the outstanding principal balance of the assumed mortgage loans issued by TIAA to Cabot L.P., which mortgage loans were assumed by CalEast at the closing.
Business Strategies
Cabot L.P.'s fundamental business objective is to maximize the total return to its common limited partnership unitholder through growth in its cash flow from operating activities and cash available for distribution per Common Unit and in the value of its portfolio of industrial properties. Cabot L.P. 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 - Cabot L.P. believes that controlling a significant market presence in its principal markets across the country is an important factor in achieving its targeted returns on investment. It will continue to concentrate its holdings in principal industrial markets across the country and respond to demand for space by national tenants. New acquisitions will be concentrated in such top-tier markets and existing holdings in secondary markets will be evaluated for disposition.
Cabot L.P. believes that its substantial presence in its principal markets provides significant strategic advantages. Among these advantages is that, through RREEF's national tenant marketing program, Cabot L.P. is well positioned to market its industrial space to national companies and third-party logistics companies who have space requirements in multiple markets. The national tenant marketing program emphasizes the advantages of dealing with a single source for a company's industrial space needs and complements the quality and attractive locations of Cabot L.P.'s properties. Further advantages of the national tenant marketing program 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. Cabot L.P. serves 45 tenants in multiple properties (42 tenants excluding Assets Held for Sale). These tenants accounted for approximately 17% of Cabot L.P.'s annualized net rents as of June 30, 2002.
Cabot L.P. believes that having a substantial inventory of properties and significant leasing activities within each local market increases its visibility to prospective tenants and enables it to establish strong relationships with leasing brokers and other local market participants. These brokers and market participants serve as sources of information and potential tenant referrals. In addition, large inventories increase Cabot L.P.'s opportunities to relocate tenants to one or more of its other properties as their needs change.
Serving a Variety of Tenants by Offering a Broad Spectrum of Industrial Property Types
Cabot L.P. believes that its strategy of offering a variety of industrial property types provides complementary benefits in meeting Cabot L.P.'s operating objectives. Offering a broad spectrum of industrial property types and Cabot L.P.'s size and professional management through its investment manager, enable Cabot L.P. to provide better service, on a more cost-efficient basis, to national customers who need various types of workspace properties, in addition to distribution space, for their local operations. At the same time, offering a variety of industrial property types suitable for smaller companies enables Cabot L.P. to capture a larger share of the growth in its chosen industrial property markets. Cabot L.P.'s strategy of offering diverse industrial property types also enables Cabot L.P. to pursue opportunities as they arise within its existing tenant base by responding to shifts in demand at different stages of the economic cycle.
Operating Strategies
Cabot L.P. intends to achieve its cash flow objectives through a combination of internal growth, limited new development, strategic property acquisitions and sales of certain assets.
Internal Growth
Cabot L.P.'s primary internal growth strategy is to increase the cash flow generated by its properties by renewing or replacing expiring leases with new leases at higher rental rates and by incorporating periodic rent increases in its leases. In addition, Cabot L.P. works actively to (i) maintain its historically high occupancy levels by retaining existing tenants, thereby minimizing "down time" and re-leasing costs, (ii) improve the occupancy levels of its properties, (iii) capitalize on economies of scale arising from the size of its portfolio of properties and (iv) control costs. Cabot L.P. also seeks internal growth by converting its properties to more intensive, higher-margin uses, if and to the extent that suitable opportunities to do so arise. Leases covering approximately 18.8% and 18.6% of the total rentable space of Cabot L.P.'s properties will expire in fiscal year 2003 and 2004 (excluding Assets Held for Sale, 19.8% and 19.0%), respectively.
Development
Cabot L.P. believes there are attractive opportunities in select markets for new development with potentially greater returns than those available from the ownership or purchase of existing stabilized properties. Cabot L.P. pursues development opportunities on a very selective basis in those markets in which it owns land and believes that the supply and demand balance will provide targeted returns, and will purchase land to construct buildings for new or existing tenants on a build-to-suit basis. Cabot L.P. also regularly engages 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 from time to time. Cabot L.P. executes its development activities by engaging local or regional builders to perform construction and leasing functions.
Acquisitions
Cabot L.P. seeks to acquire additional modern, high-quality properties in attractive submarkets within the industrial markets that it currently serves that provide a strategic advantage. Based upon the current capital market conditions and its investment strategy, in the near term, Cabot L.P. expects to reduce the pace of its acquisition program, compared to prior years, and acquire properties on a very selective basis.
Investment Criteria
Cabot L.P. follows a disciplined, value-oriented strategy in its property acquisitions. Cabot L.P. seeks to acquire modern, cost-efficient buildings located in top-tier national distribution centers and centers of economic growth. Cabot L.P.'s investment considerations include (i) yield on acquisition cost, (ii) economic fundamentals in the market, (iii) replacement costs, (iv) rent levels and trends, (v) construction quality and property condition, (vi) historical occupancy rates, (vii) access to transportation, (viii) proximity to housing, (ix) operating costs, and (x) location in modern industrial parks.
Emphasis on Market Research
Cabot L.P.'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) rent levels and trends and (v) the physical characteristics of buildings within the market. Cabot L.P.'s research includes extensive in-market activity by its investment manager, including physical site inspections and continuing contacts with leasing brokers and other local market participants in the local markets.
Dispositions
Subsequent to the Merger, Cabot L.P. initiated the process of re-evaluating its portfolio and asset management strategies. Cabot L.P. is focused on producing consistent and growing cash flow. As a result of its assessment, Cabot L.P. may (i) consider selling certain assets or groups of assets to effect a change in strategy, (ii) divest of assets with a risk profile considered too high when compared to the historical and prospective returns, (iii) eliminate assets that require a change in use or a large investment of capital to continue generating returns, or (iv) eliminate assets that are in markets that have unfavorable conditions that are expected to continue for an extended period of time.
As a result of this re-evaluation process, on August 1, 2002, Cabot L.P., pursuant to an Agreement of Sale dated June 28, 2002, sold to CalEast all of its interest in Cabot Acquisition, a wholly-owned subsidiary of Cabot L.P. for $375,450,000, of which amount $300,450,000 was paid in cash and $75,000,000 was paid by the assumption of mortgage loans issued by TIAA to Cabot L.P. The assets sold included 46 buildings (the "Property" which is included within Assets Held for Sale),constituting approximately 16% of the assets of Cabot L.P., all of the improvements, leases, license and permits, and personal property which affects the Property, and all of Cabot Acquisition's service contracts and agreements (collectively, the "Assets"). The purchase price represented the fair market value of the Assets as of June 30, 2002, as determined by appraisers appointed by Calwest, less $75 million, constituting the outstanding principal balance of the assumed mortgage loans issued by TIAA to Cabot L.P., which mortgage loans were assumed by CalEast at the closing.
Joint Venture Programs
During 2000, Cabot L.P. entered into separate joint venture arrangements with JP Morgan Partners (formerly Chase Capital Partners), GE Capital Real Estate and Teachers Insurance and Annuity Association - College Retirement Fund (TIAA-CREF), (collectively, "the Joint Ventures"). Cabot L.P. (or one of its wholly owned subsidiaries) is the managing member of the Joint Ventures. RREEF, as investment manager of Cabot L.P. has assumed the day to day responsibilities of managing the Joint Ventures. As of June 30, 2002, the Joint Ventures owned $144.7 million of property consisting of 2.9 million square feet and Cabot L.P.'s (including one of its wholly owned subsidiaries) investment in the Joint Ventures totaled $18.0 million.
Subsequent to the Merger, Cabot L.P. is re-evaluating the merits of the Joint Ventures and their compatibility with its long-term goals. Discussions are underway with each partner to decide if each venture will continue or be terminated. Cabot L.P. is not required to and will not make any further investments through the Joint Ventures until those decisions are made. If the decision to unwind the Joint Ventures is made, Cabot L.P. would expect to either buy the Joint Venture interests from its partners, sell its joint venture interests to its partners or market the assets of one or more of the Joint Ventures for sale to third parties.
As the managing member of each Joint Venture, Cabot L.P. (or one of its wholly-owned subsidiaries) is responsible for (i) handling the administration of the Joint Venture, (ii) managing the day-to-day operations of the property held by the Joint Venture, and (iii) overseeing construction and development in the case of a Joint Venture with a property under development. Since the closing of the Merger, these responsibilities have been performed by RREEF, who, as a result, is paid the fees for services due to Cabot L.P. under the Joint Venture Agreements. In addition, Cabot L.P. either has the power to recommend the sale or refinancing of the property or, in certain Joint Ventures in which such decisions are vested in the other partner, Cabot L.P. has the ability to cause the sale or marketing of the property in accordance with preestablished procedures in accordance with the Joint Venture operating agreement. Most major decisions, such as material financings, would require the approval of both partners of the Joint Venture and any disputes over such major decisions would generally be resolved through the exercise of a buy-sell provision in the Joint Venture operating agreement.
Policies
The following is a description of policies that have been adopted by Cabot Trust's Board of Trustees for the conduct of the business of Cabot Trust and Cabot L.P. These policies may be amended or revised from time to time without Cabot Trust shareholder approval, except that shareholder approval is required for Cabot Trust to change its policy of holding its assets and conducting its business only through Cabot L.P. and its subsidiaries and other affiliates, including Cabot Advisors, Inc. ("Cabot Advisors") and joint ventures in which Cabot L.P. or a subsidiary may be a partner. In addition, changes in policies with respect to conflicts of interest must be made in a manner consistent with legal requirements.
Investment Policies
Cabot Trust conducts all of its investment activities through Cabot L.P., its subsidiaries and other affiliates (including Cabot Advisors) and joint ventures with institutional partners and may conduct future activities through additional joint ventures in which Cabot L.P. or a subsidiary may be a partner. Cabot L.P.'s investment policy is to purchase or build income-producing industrial properties primarily for long-term capital appreciation and rental growth, and to expand and improve its properties or to sell them, in whole or in part, when the circumstances warrant.
Cabot L.P.'s property investments may be subject to existing mortgage and other indebtedness or to indebtedness that may be incurred in connection with acquiring or refinancing such investments. Debt service with respect to such indebtedness will have a priority over any distributions with respect to the Common Units and Preferred Units. Investments are also subject to Cabot L.P.'s policy not to be treated as an investment company under the Investment Company Act of 1940.
Cabot L.P. currently invests in existing improved properties and development projects. It does not limit its investment or development activities to any geographic area or product type or to a specified percentage of assets. While Cabot L.P. intends to maintain diversity in its investments in terms of property location, size and market, Cabot L.P. does not have any limit on the amount or percentage of its assets that may be invested in any one property or any one geographic area. Cabot Trust intends to conduct the investment and development activities of Cabot L.P. in a manner that is consistent with the maintenance of Cabot Trust's status as a REIT for federal income tax purposes.
Cabot L.P.'s current portfolio consists of, and its business objectives emphasize, investments in industrial real estate. Cabot L.P. may also make or invest in loans secured by mortgages or deeds of trust that are consistent with Cabot Trust's continued qualification as a REIT for federal income tax purposes, although it has no current plans to do so. These may include participating or convertible mortgage loans if Cabot L.P. concludes that it may benefit from the cash flow or any appreciation in value of the property secured by such mortgages. Investments in real estate mortgage loans entail the risk that one or more borrowers may default under such loans and that the collateral securing such loans may not be sufficient to enable Cabot L.P. to recoup its full investment.
Subject to the limitations on ownership of certain types of assets and the gross income tests imposed by the Code, Cabot L.P. also may invest in the securities of other REITs, other entities engaged in real estate activities or other issuers, including investments made for the purpose of exercising control over such entities. Cabot L.P. may enter into additional joint ventures or partnerships for the purpose of obtaining an equity interest in a particular property in accordance with its investment policies. Such investments may permit Cabot L.P. to own interests in larger assets without unduly restricting diversification and, therefore, add flexibility in structuring its portfolio. Cabot Trust and Cabot L.P. do not intend to enter into joint ventures or partnerships to make investments that would not meet their own investment policies.
Financing Policies
As a general policy, Cabot L.P. intends to limit its total consolidated indebtedness incurred so that at the time any debt is incurred, Cabot L.P.'s debt-to-total undepreciated assets ratio does not exceed 40%. Cabot Trust's Declaration of Trust and Bylaws and Cabot L.P.'s Partnership Agreement do not, however, limit the amount or percentage of indebtedness that they may incur. Moreover, due to changes in the value of Cabot L.P.'s portfolio of properties over time, and since any determination of its debt-to-total undepreciated assets ratio is made only at the time debt is incurred, the debt-to-total undepreciated assets ratio could exceed or be less than the 40% level. In addition, Cabot L.P. may modify its debt policy from time to time in light of changes in economic conditions, relative costs of debt and equity capital, the market values of its properties, general conditions in the market for debt and equity securities, disposition, growth and acquisition opportunities and other factors. If its debt policy were changed, Cabot L.P. could become more highly leveraged, resulting in an increased risk of default on its obligations and a related increase in debt service requirements that could adversely affect its financial condition and results of operations. Cabot L.P. has not established any limit on the number or amount of mortgages that it may place on any single property or on its portfolio as a whole.
To the extent that Cabot Trust's Board of Trustees decides to obtain additional capital, Cabot L.P. may raise such capital through offerings of Cabot Trust's Common or Preferred Shares, or of Cabot L.P.'s partnership Units, including Common and Preferred Units, debt financings or retention of cash available for distribution (subject to provisions in the Code concerning the taxability of undistributed REIT income), or a combination of these methods. As long as Cabot L.P. is in existence, the net proceeds of the sale of Common Shares or Preferred Shares by Cabot Trust will be transferred to Cabot L.P. in exchange for that number of Common Units or Preferred Units that equals the number of Common Shares or Preferred Shares sold by Cabot Trust.
Cabot Trust presently anticipates that any borrowings would be made through Cabot L.P., although Cabot Trust may incur indebtedness directly and loan the proceeds to Cabot L.P. Borrowings may be unsecured or may be secured by any or all of the assets of Cabot L.P. (to the extent not prohibited by existing debt arrangements), or any existing or new property-owning partnership and may have full or limited recourse to all or any portion of the assets of Cabot L.P., or any existing or new property-owning partnership. Indebtedness incurred may be in the form of bank borrowings, purchase money obligations to sellers of properties, publicly or privately placed debt instruments or financings from institutional investors or other lenders. The proceeds from borrowings may be used for working capital, to refinance existing indebtedness or to finance acquisitions, expansions or the development of new properties and for the payment of distributions.
Policies with Respect to Other Activities
Cabot L.P. may, but does not presently intend to, make investments that are different from those described herein. Cabot Trust has authority to offer its Common Shares, other shares of beneficial interest or other securities for cash or in exchange for property and to repurchase or otherwise reacquire its shares or any other securities and may engage in such activities in the future. Cabot L.P. and Cabot Trust have no outstanding loans to other entities or persons, including officers and Trustees of Cabot Trust, except loans from time to time to Cabot Advisors, and loans from time to time to entities in which Cabot L.P. is a 20% joint venture partner. Cabot L.P. has not engaged in trading, underwriting or agency distribution, or sales of securities of other issuers and does not currently intend to do so. Cabot Trust has also not invested in the securities of companies other than Cabot L.P. for the purpose of exercising control over such companies and does not currently intend to do so. Cabot L.P. and Cabot Trust make and intend to continue to make investments in such a way that neither will be treated as an investment company under the Investment Company Act of 1940. Its policies with respect to such activities may be reviewed and modified or amended from time to time by the Board of Trustees of Cabot Trust without the approval of Cabot Trust's shareholders or Cabot L.P.'s limited partners.
Cabot L.P. intends to make investments in a manner consistent with the requirements of the Code for Cabot Trust to qualify as a REIT unless, because of changing circumstances or changes in the Code or applicable Treasury regulations, the Board of Trustees of Cabot Trust determines that it is no longer in the best interests of Cabot Trust to qualify as a REIT.
Working Capital Reserves
Cabot L.P. intends to maintain working capital reserves in amounts that the Board of Trustees of Cabot Trust determines to be adequate to meet normal contingencies in connection with the operation of Cabot L.P.'s business and investments.
Declaration of Trust and Bylaw Provisions
The Declaration of Trust includes a provision generally permitting Cabot Trust to enter into any agreement or transaction with any person, including any Trustee, officer, employee or agent of Cabot Trust.
Cabot Trust's Bylaws provide that Section 2-419 of the Maryland General Corporation Law, relating to transactions by interested directors, will be available for and apply to contracts and other transactions between Cabot Trust and any of its Trustees, or between Cabot Trust and any other trust, corporation or other entity of or in which any of Cabot Trust's Trustees is a trustee or director or has a material financial interest. Under Section 2-419, a contract or other transaction between a corporation and any of its directors and any other corporation, firm or other entity in which any of its directors is a director or has a material financial interest is not void or voidable solely because of (a) the common directorship or interest, (b) the presence of the director at the meeting of the board or a committee of the board that authorizes, approves or ratifies the contract or transaction, (c) the counting of the vote of the director for the authorization, approval or ratification of the contract or transaction if either (i) after disclosure of the interest, the transaction is authorized, approved or ratified by the affirmative vote of a majority of the disinterested directors, or by the affirmative vote of a majority of the votes cast by shareholders entitled to vote other than the votes of shares owned of record or beneficially by the interested director or such corporation, firm or other entity or (ii) the transaction is fair and reasonable to the corporation.
Cabot L.P. Partnership Agreement
The Cabot L.P. Partnership Agreement gives Cabot Trust, in its capacity as general partner, full and exclusive discretion in managing and controlling the business of Cabot L.P. and in making all decisions affecting the business and assets of Cabot L.P., with limited exceptions. In the Partnership Agreement, the limited partners have acknowledged and agreed that Cabot Trust is acting on behalf of both Cabot L.P. and Cabot Trust's shareholders generally and that, in its capacity as general partner of Cabot L.P., Cabot Trust is under no obligation to consider separate interests of the Cabot L.P. security holders in deciding whether to cause Cabot L.P. to take or to decline to take, any actions which Cabot Trust, in its capacity as general partner, has undertaken in good faith on behalf of Cabot L.P. In addition, Cabot Trust in its capacity as general partner is not responsible for any misconduct or negligence on the part of its agents, provided that such agents were appointed in good faith. The Cabot L.P. Partnership Agreement also provides that neither Cabot Trust nor any of its affiliates (including its officers and Trustees) may sell, transfer or convey any property to, or purchase any property from, Cabot L.P., except on terms that are fair and reasonable and no less favorable than would be obtained from an unaffiliated party.
Security Holder Reports
Cabot L.P. does not currently provide separate annual or other reports to security holders of Cabot L.P. and does not expect to do so, except to the extent it specifically undertakes to do so in connection with the issuances of debt or other securities.
Competition
Numerous industrial properties compete with Cabot L.P.'s 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 has a material effect on Cabot L.P.'s ability to lease space at the properties or at newly acquired or developed properties and on the dollar amount of rents charged. Some of these competing properties may be newer or better located than Cabot L.P.'s properties.
In addition, the industrial real estate acquisition market has become highly competitive. There are a significant number of buyers and developers of industrial property, including other industrial REITs, many of which have significant financial resources. Accordingly, it is possible that Cabot L.P. may not be able to acquire or develop desired properties due to such competition or other factors that may have an adverse effect on Cabot L.P.'s expected growth in cash flows in future periods.
Insurance
Cabot L.P. is a named insured on CalPERS' blanket insurance program. Accordingly, Cabot L.P. carries commercial general liability insurance, standard "all-risk" property insurance, terrorism, flood, earthquake and rental loss insurance with respect to its properties with policy terms and conditions customarily carried for similar properties. However, the insurance is subject to normal limitations on the amounts of coverage and certain types of losses (such as from wars, terrorism 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 the amount of the insurance coverage occur, Cabot L.P. could lose the capital invested in a property, as well as the anticipated future revenue from that property, and Cabot L.P. would continue to be obligated on any mortgage indebtedness or other obligations related to the property.
In light of the California earthquake risk, California building codes have since the early 1970's established minimum construction standards for all new buildings and also contain guidelines for seismic upgrading of existing buildings that are intended to reduce the possibility and severity of loss from earthquakes. The construction standards and upgrading, however, do not eliminate the possibility of earthquake loss. Cabot L.P.'s current policy is to obtain earthquake insurance if available at acceptable cost. As of June 30, 2002, all of Cabot L.P.'s 85 properties located in California are covered by earthquake insurance in amounts believed by management to be reasonable. Cabot L.P. currently maintains blanket earthquake insurance coverage for all properties located outside California in amounts Cabot L.P. believes to be reasonable.
Cabot L.P. is currently reviewing its insurance policies and as such its insurance policies and terms and conditions contained therein may change, including its policies and terms and conditions with respect to earthquakes and/or terrorism. Although Cabot L.P. intends to maintain insurance policies with policy terms and conditions customarily maintained by similarly situated entities, Cabot L.P. can give no assurance that its future insurance policies will contain the same coverage, terms and conditions as it currently maintains. Consequently, all or a portion of Cabot L.P.'s properties may not be covered by disaster-type insurance.
Cabot L.P. carries blanket environmental insurance coverage on all but one property. That property is undergoing remediation and has pollution and remediation legal liability coverage. Four other properties have stand-alone environmental policies in addition to coverage afforded under the blanket program.
Environmental Matters
Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the costs of removal or remediation of hazardous or toxic substances on, under or in such property. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances.
In addition, the presence of hazardous or toxic substances, or the failure to remediate such property properly, may adversely affect the owner's ability to borrow using such real property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances may also be liable for the costs of removal or remediation of hazardous substances at the disposal or treatment facility, whether or not such facility is or ever was owned or operated by such person.
Certain environmental laws and common law principles could be used to impose liability for release of, and exposure to, hazardous substances and third parties may seek recovery from owners or operators of real properties for personal injury or property damage associated with exposure to released hazardous substances. As the owner of real properties, Cabot L.P. may be potentially liable for any such costs.
Phase I environmental site assessment reports ("Phase I ESAs") were obtained by the original Contributing Investors in connection with their initial acquisitions of the properties, or were obtained by Cabot Trust in connection with the transactions resulting in Cabot Trust's formation. In accordance with Cabot Trust's acquisition policies, Cabot Trust has also obtained Phase I ESAs for all of the properties acquired since the completion of the Formation Transactions. Furthermore, Cabot Trust also intends to complete Phase I ESAs or environmental audits for each property annually. The purpose of Phase I ESAs is to identify potential sources of contamination for which Cabot L.P. may be responsible and to assess the status of environmental regulatory compliance. The earliest of the Phase I ESAs for Cabot L.P.'s properties were obtained in 1988. Commonly accepted standards and practices for Phase I ESAs have evolved to encompass higher standards and more extensive procedures over the period from 1988 to the present. Cabot Trust expects that by December 31, 2002 the Phase I ESA for any property will be no greater than three years old.
It is possible, even if prepared in accordance with professional standards, that Phase I ESAs relating to the subject properties do not reveal all environmental liabilities. Moreover, future laws, ordinances or regulations may impose material environmental liability or the properties' current environmental condition may be affected by tenants, by the condition of land or operations in the vicinity of the properties (such as the presence of underground storage tanks) or by third parties unrelated to Cabot L.P.
Cabot L.P. carries blanket environmental insurance coverage on all but one property. That property is undergoing remediation and has pollution and remediation legal liability coverage. Four other properties have stand-alone environmental policies in addition to coverage afforded under the blanket program.
Cabot Advisors
Prior to December 7, 2001, Cabot Advisors provided investment advisory and asset management services to the former clients of Cabot Partners who elected not to contribute some or all of their industrial properties to Cabot Trust. In addition, Cabot Advisors provided property management services to Cabot L.P. and to the properties of some clients that are not associated with Cabot Trust. On December 7, 2001, in conjunction with the Merger, Cabot Advisors ceased providing these services. Cabot L.P. expects the activities of Cabot Advisors in the future to be limited.
To permit Cabot Trust to share in the income of Cabot Advisors while maintaining its status as a REIT under the law in effect prior to January 1, 2001, Cabot L.P. owned all of Cabot Advisors' nonvoting preferred stock (representing 95% of its economic interest in Cabot Advisors) and Ferdinand Colloredo-Mansfeld, Cabot Trust's former Chief Executive Officer, owned all of Cabot Advisors' voting common stock (representing 5% of its economic interest therein). On December 7, 2001, Cabot Advisors repurchased Ferdinand Colloredo-Mansfeld's stock in Cabot Advisors and Cabot Advisors issued new common shares to Cabot L.P. for $115,000. As a result Cabot L.P. currently owns 100% of Cabot Advisors.
The REIT Modernization Act ("RMA"), which was effective on January 1, 2001, modifies certain provisions of the Code with respect to the taxation of REITs. Primarily, the RMA allows for the creation of Taxable REIT Subsidiaries ("TRS"), which will allow Cabot Trust (directly or indirectly through Cabot L.P.) to own up to 100% of a TRS (previously limited to 10% of the voting stock). As a result of this legislation, for federal income tax purposes, Cabot Trust and Cabot Advisors have jointly elected to treat Cabot Advisors as a TRS.
In addition, under the RMA, not more than 20% of the value of a REIT's total assets may be represented by securities of one or more TRS. A TRS will be subject to full corporate level taxation on its earnings, but will be permitted to engage in certain types of activities that cannot currently be performed by REITs or their controlled subsidiaries without jeopardizing REIT status. A TRS is subject to certain limitations on the deductibility of certain payments made to the associated REIT which could materially increase the taxable income of the TRS and are subject to prohibited transaction taxes on certain other payments made to the associated REIT. Moreover, rents paid by a taxable REIT subsidiary to the associated REIT may be excluded from qualification as rents from real property under certain circumstances.
Leases
Cabot L.P.'s properties typically are leased on a triple net basis, meaning that the tenants pay their proportionate share of real estate taxes and operating costs. However, some of the properties are leased at higher gross rents with Cabot L.P. being responsible for paying a stated amount of real estate taxes and operating 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 75% (based on annualized net rent) of Cabot L.P.'s leases contain provisions for automatic increases of a specified amount or percentage at a certain point or points during the term of the lease (78% excluding Assets Held for Sale).
Employees
At June 30, 2002, Cabot L.P. and Cabot Advisors had no employees.
Item 2.
Item 2. Properties
For descriptive purposes, Cabot L.P.'s properties may generally be grouped into three property types: bulk distribution properties, multitenant distribution properties and workspace properties.
Bulk distribution properties are oriented primarily to large national and regional distribution tenants. These properties generally have at least 100,000 square feet of rentable space, building depths of at least 240 feet, clear heights of 24 feet or more, truck courts in excess of 100 feet in depth to accommodate larger modern trucks, a ratio of loading docks to rentable space of one or more per 10,000 square feet and a location with good access to interstate highways.
Multitenant distribution properties are oriented primarily to smaller regional and local distribution tenants, and are generally designed to be subdivided to suit tenants whose space requirements generally range from 10,000 square feet to 100,000 square feet. These properties generally have clear heights of 20 feet or more, building depths of less than 240 feet (unless configured with loading docks on two sides) and a location with good access to regional and interstate highways. Both types of distribution property are used predominantly 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 on the next page summarizes information regarding Cabot L.P.'s properties and markets as of June 30, 2002. All of the properties listed are owned, directly or through title holding entities, by Cabot L.P. As of June 30, 2002, certain of the properties detailed below, with a net book value of $441.5 million, were security for loans aggregating $236.1 million (excluding discounts and premiums) at June 30, 2002.
Properties by Region and Market As of June 30, 2002
(1) "Annualized Net Rent" means annualized monthly net rent from leases in effect as of June 30, 2002. "Net Rent" means contractual rent, excluding any reimbursements for real estate taxes or operating expenses. (2) Included within Assets Held for Sale at June 30, 2002. (3) Property sold subsequent to June 30, 2002.
Item 3.
Item 3. Legal Proceedings
Cabot L.P. is not a party to any material litigation nor, to Cabot L.P.'s knowledge, is any litigation threatened against Cabot L.P., 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 Cabot L.P.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
There is no established public trading market for Cabot L.P.'s units. As of September 30, 2002, Cabot L.P. had outstanding 52,979,886 common equity limited partnership units (Common Units) and Cumulative Redeemable Perpetual Preferred Units (Preferred Units) as follows: 1,300,000 Series B Preferred Units, 2,600,000 Series C Preferred Units, 200,000 Series D Preferred Units, 200,000 Series E Preferred Units, 1,800,000 Series F Preferred Units, 600,000 Series G Preferred Units, and 1,400,000 Series H Preferred Units. As of September 30, 2002, there was one holder of Common Units of Cabot L.P. As of the same date, there were seven holders of the Preferred Units.
The table sets forth the distributions paid per Common Unit with respect to the calendar periods indicated (fiscal year for 2003):
The operating cash flow realized by Cabot L.P. and the amount available for distributions to Common Unitholders is affected by a number of factors, including the property revenues of Cabot L.P., the operating expenses of Cabot L.P., the debt service on borrowings, property capital expenditures and the distributions to holders of Preferred Units of Cabot L.P. Future distributions by Cabot L.P. will be at the discretion of the Board of Trustees of Cabot Trust and will depend on the actual cash flow of Cabot L.P., its financial condition and capital requirements, the annual income distribution requirements under the REIT provisions of the Code and such other factors as Cabot Trust's Board of Trustees deems relevant.
Recent Sales of Unregistered Securities
Cabot L.P. issued Cabot Trust 7,300 Common Units on January 28, 2002 for an aggregate consideration of $148,920. The issuance was made to Cabot Trust, an "accredited investor" within the meaning of Rule 501 of Regulation D of the Securities Act of 1933, and the Common Units were issued in reliance upon the exemption from registration set forth in Regulation D.
Cabot L.P. issued Cabot Trust 9,354,591 Common Units on February 26, 2002 for an aggregate consideration of $192,891,666.42. The issuance was made to Cabot Trust, an "accredited investor" within the meaning of Rule 501 of Regulation D of the Securities Act of 1933, and the Common Units were issued in reliance upon the exemption from registration set forth in Regulation D.
Item 6.
Item 6. Selected Financial Data
Cabot L.P. commenced operations on February 4, 1998; the completion date of the Formation Transactions and the Offerings described elsewhere herein. On December 7, 2001, the Merger was completed as described elsewhere herein. Set forth below are selected historical financial and other data for the real estate advisory business of Cabot Partners and for Cabot L.P. The selected financial data presented below for the six months ended June 30, 2002 and for the years ended December 31, 2001 (on a combined basis), 2000 and 1999 and as of June 30, 2002, December 31, 2001 and 2000 have been derived from the financial statements of Cabot L.P. that have been audited by Deloitte & Touche LLP, independent public accountants, as indicated in their report included within this report on Form 10-K. This information should be read in conjunction with the financial statements and notes thereto included elsewhere herein.
The selected financial data presented below for Cabot L.P. as of December 31, 1999 and as of and for the year ended December 31, 1998, and Cabot Partners as of and for the year ended December 31, 1997 is derived from Cabot L.P. and Cabot Partners financial statements and the notes thereto, not included in this report on Form 10-K.
(1) In April 2002, Cabot L.P. changed its fiscal year-end from December 31 to June 30. Accordingly, Cabot L.P.'s transition period from January 1, 2002 to June 30, 2002 is presented. The unaudited data for the six months ended June 30, 2001 is presented for comparative purposes only.
(2) Reflects the combined pre-and post-Merger periods.
(3) Represents activity for the period from the commencement of operations on February 4, 1998 through December 31, 1998.
(4) Amounts have been restated in accordance with Statement of Financial Accounting Standards No. 144. The restated financial statements are unaudited.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operations ---------------------
INTRODUCTION
On December 4, 2001, pursuant to a previously announced Merger Agreement, all outstanding common limited partnership units in Cabot L.P., other than those held by Cabot Trust, were exchanged for shares of beneficial interest of Cabot Trust and such shares were tendered to Rooster and Calwest pursuant to a tender offer. As a result, Cabot Trust became the sole holder of common units of limited partnership interest in Cabot L.P. After the expiration of the tender offer on December 4, 2001, Rooster and Calwest announced that they had accepted all 42,388,440 common shares of beneficial interest of Cabot Trust that were tendered pursuant to the tender offer. Such shares constituted 97% of Cabot Trust's outstanding common shares of beneficial interest. On December 7, 2001, Calwest acquired all Cabot Trust's remaining outstanding common shares of beneficial interest pursuant to the Merger of Rooster with and into Cabot Trust, with Cabot Trust surviving as a wholly-owned subsidiary of Calwest through December 31, 2001.
The Merger was accounted for as a purchase of Cabot L.P. by Calwest and therefore the balance sheet of Cabot L.P. on December 7, 2001 was adjusted to reflect the purchase price and recorded at Cabot L.P. in accordance with the SEC's Staff Accounting Bulletin "Push Down Basis of Accounting in Certain Limited Circumstances." The purchase price was approximately $2.1 billion, which included the outstanding Preferred Units and the assumption of debt of Cabot L.P. This purchase price was allocated to the assets and liabilities of Cabot L.P. based on their relative fair values and resulted in no allocation to goodwill.
The schedule below sets forth Cabot L.P.'s 2001 consolidated results of operations. The period from January 1, 2001 to December 6, 2001 represents Cabot L.P.'s operations prior to the date of the Merger on an historical basis. The period from December 7, 2001 to December 31, 2001 reflects the operations of Cabot L.P. after the Merger and therefore reflects the operating impact of purchase accounting adjustments made to the assets and liabilities as previously described. In general, the recognition of straight-line rental revenue and depreciation, amortization and interest expense has been impacted by the new cost basis of the corresponding assets and liabilities on the balance sheet.
In April 2002, Cabot L.P. changed its fiscal year end from December 31 to June 30. Accordingly, the results of operations for 2002 compares the six months ended June 30, 2002 with the unaudited six months ended June 30, 2001. The six month period ended June 30, 2002 reflects the operations of Cabots L.P. after the Merger and therefore reflects the operating impact of purchase accounting adjustments made to the assets and liabilities as previously described. The six month period ended June 30, 2001 represents Cabot L.P's operations prior to the date of the Merger on an historical basis. In general, the recognition of straight-line rental revenue and depreciation, amortization and interest expense has been impacted by the new cost basis of the corresponding assets and liabilities on the balance sheet. Material fluctuations in operations resulting from the effect of purchase accounting have been highlighted.
On August 1, 2002, Cabot L.P., pursuant to an Agreement of Sale dated June 28, 2002, sold to CalEast all of its interest in Cabot Acquisition, a wholly-owned subsidiary of Cabot L.P. for $375,450,000, of which amount $300,450,000 was paid in cash and $75,000,000 was paid by the assumption of mortgage loans issued by TIAA to Cabot L.P. The assets sold included 46 buildings (the "Property" which is included within Assets Held for Sale), constituting approximately 16% of the assets of Cabot L.P., all of the improvements, leases, license and permits, and personal property which affects the Property, and all of Cabot Acquisition's service contracts and agreements (collectively, the "Assets"). The purchase price represented the fair market value of the Assets as of June 30, 2002, as determined by appraisers appointed by Calwest, less $75 million, constituting the outstanding principal balance of the assumed mortgage loans issued by TIAA to Cabot L.P., which mortgage loans were assumed by Caleast at the closing.
Cabot L.P. owns and operates a diversified portfolio of bulk distribution, multitenant distribution and "workspace" (light industrial, R&D and similar facilities) properties throughout the United States. As of June 30, 2002 Cabot L.P. owned 382 industrial properties. Cabot L.P.'s continuing portfolio consisted of 332 properties and its Assets Held for Sale consisted of 50 properties at June 30, 2002. The operations related to the Assets Held for Sale are presented as discontinued operations for all periods presented in accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. In the near term, Cabot L.P. expects to significantly reduce the pace of its acquisition of property. Furthermore, Cabot L.P. expects to re-evaluate the markets within which it operates as part of its portfolio strategy, which may result in the disposition of assets.
Management believes the following critical accounting policies represent the more significant estimates and assumptions used in the preparation of the consolidated financial statements. The allowance for uncollectible rental income, which is established through a charge to the provision for uncollectible rental income, is based on management's evaluation of the level of the allowance required in relation to the estimated exposure in Rents and Other Receivables. Management believes the allowance for uncollectible accounts is a significant estimate and therefore regularly evaluates it for adequacy by taking into consideration factors such as tenant payment history and likelihood of a tenant's ability to continue as a going concern. The use of different estimates or assumptions could produce different provisions for possible uncollectible rental income. Investments in Real Estate are carried at cost, less accumulated depreciation. Management applies assumptions in determining the estimated lives of its Investments in Real Estate. Additionally in conjunction with the Merger, management has allocated Calwest's $2.1 billion purchase price to Cabot L.P.'s tangible assets and liabilities based on their respective fair values.
The combined 2001 pre- and post-merger periods have been compared to the year ended December 31, 2000 for purposes of management's discussion and analysis of the results of operations. Any references, below, to the year ended 2001 shall refer to the combined periods. Material fluctuations in operations resulting from the effect of purchase accounting have been highlighted.
RESULTS OF OPERATIONS
Six Months Ended June 30, 2002 Compared with Six Months Ended June 30, 2001
Net income allocable to partnership units for the six months ended June 30, 2002 totaled $25.6 million compared to $33.8 million for the six months ended June 30, 2001. The results for the six months ended June 30, 2001 include a gain on sale of real estate of $2.4 million. There were no sales of property during the six months ended June 30, 2002. After the consideration of the impact of the gain on sale of property in 2001, the decrease in net income allocable to partnership units in 2002 of approximately $5.8 million is primarily due a $3.1 million decrease in income earned from Discontinued Operations, increased depreciation and amortization expense, decreased operating margin from Continuing Operations and decreased fees from joint ventures and advisory clients, offset partially by decreased general and administrative expenses.
Rental revenues were $94.6 million, including tenant reimbursements of $14.6 million, for the six months ended June 30, 2002, compared to $90.9 million, including tenant reimbursements of $14.2 million, for the six months ended June 30, 2001. Rental revenue of $88.5 million and $87.2 million was generated for the six months ended June 30, 2002 and 2001, respectively, by the properties owned as of January 1, 2001 and still owned at June 30, 2002, excluding properties included in Discontinued Operations, and rental revenue of $6.1 million and $2.6 million for the six months ended June 30, 2002 and 2001, respectively, was generated by the properties acquired or developed after January 1, 2001. The remainder of rental revenue relates to sold properties.
Cabot L.P.'s operating margin (the ratio of rental revenues minus property operating and property tax expenses to rental revenues) decreased to approximately 75% for the six months ended June 30, 2002 compared with 79% for the six months ended June 30, 2001. The decrease is due to a change in the composition of leases (primarily as a result of the acquisition of multitenant and workspace properties) to include more leases where Cabot L.P. pays property and operating expenses and is reimbursed by the tenants compared to leases where the tenant pays these expenses directly. In addition, average occupancy for the entire property portfolio (including properties included within Discontinued Operations) decreased to 91.5% as of June 30, 2002 from 96.1% as of June 30, 2001. The operating margin is not significantly impacted by the purchase price adjustments.
Depreciation and amortization expense related to real estate investments was $18.5 million and $16.6 million for the six months ended June 30, 2002 and 2001, respectively. The increase relates primarily to the increased depreciation as a result of the increased cost basis of real estate assets recorded in conjunction with the Merger, offset by decreased amortization related to leasing costs, primarily as a result of the reduced basis recorded in connection with the Merger.
General and administrative expense decreased by $2.7 million from $5.2 million for the six months ended June 30, 2001 to $2.5 million for the six months ended June 30, 2002. The decrease is primarily due to decreased compensation and rental expenses. In conjunction with the Merger, all employees were terminated and all general and administrative duties subsequent to the Merger are performed by RREEF, Cabot L.P.'s investment manager.
Interest expense increased by approximately $0.7 million to $20.6 million for the six months ended June 30, 2002. The increase is primarily due to approximately $2.5 mi11ion of interest expense related to deferred financing costs for the Bridge Financing and a reduction in the amount of interest expense that was capitalized to development projects of approximately $1.3 million due to the completion and transfer of several development projects to operations and decreased investment in new development projects offset by a reduction of interest expense related to the amortization of the premium resulting from the debt revaluation made in conjunction with the Merger.
Interest and Other Income, which consisted primarily of interest earned on Cabot L.P.'s invested cash balances during the six months ended June 30, 2002, decreased $0.8 million to $0.4 million. The decrease is primarily due to lower interest rates available on invested cash balances, approximately $0.3 million of interest income earned in 2001 related to bridge loan financing provided to the Joint Ventures in 2001 and development fee revenues earned in 2001.
Earnings and Fees from Joint Ventures and Advisory Clients consists of earnings from the Joint Ventures accounted for under the equity method of approximately $0.6 million for the six months ended June 30, 2002 and development fees of approximately $0.2 million earned from Joint Venture arrangements. During the six months ended June 30, 2001, Cabot L.P. recorded earnings from Joint Ventures of approximately $0.4 million and earned acquisition, development and asset management fees of $0.9 million from its Joint Venture arrangements as well as from third party clients for which Cabot L.P. performed services. The decrease in Earnings and Fees from Joint Ventures and Advisory Clients is primarily attributable to acquisition fees that were earned from advisory clients in 2001. In conjunction with the Merger, RREEF was engaged to provide these services and therefore there are no acquisition and asset management fees earned by Cabot L.P. for the six months ended June 30, 2002. This decrease is partially offset by an increase in earnings from Joint Ventures attributable to the completion and placement of a development property placed into operations during 2002.
Distributions to Preferred Unitholders totaled $10.6 million for the six months ended June 30, 2002, which was unchanged from the $10.6 million that was distributed for the six months ended June 30, 2001.
Income from Discontinued Operations decreased approximately $3.1 million to $6.1 million for the six months ended June 30, 2002. Income from Discontinued Operations reflects the actual operating results for rental revenues, property operating, property tax and depreciation and amortization expenses for each of the properties included within Discontinued Operations and in 2002 also reflects an impairment expense related to assets sold to CalEast of $1.9 million. In addition, Income from Discontinued Operations also reflects approximately $3.0 million and $3.2 million of interest expense for each of the six months ended June 30, 2002 and 2001, respectively, related to the mortgage loans assumed by CalEast in connection with sale of certain property to CalEast. The decrease in Income from Discontinued Operations of approximately $3.1 million resulted from a decrease in income related to increased vacancy and the loss on the sale of property to CalEast.
Year Ended December 31, 2001 Compared with Year Ended December 31, 2000
Net income allocable to partnership units for the year ended December 31, 2001 totaled $15.9 million compared to $59.3 million for the year ended December 31, 2000. The decrease is primarily due to the recognition of $51.3 million of severance and merger expenses offset primarily by a full year's earnings from additional investments in real estate.
Rental revenues were $188.2 million, including tenant reimbursements of $29.0 million, for the year ended December 31, 2001, compared to $172.5 million, including tenant reimbursements of $25.0 million, for the year ended December 31, 2000. Rental revenue of $152.2 million and $146.9 million was generated in 2001 and 2000, respectively, by the properties owned as of January 1, 2000 and still owned at December 31, 2001, excluding properties included in Discontinued Operations, and rental revenue of $32.1 million and $17.7 million in 2001 and 2000, respectively, was generated by the properties acquired or developed after January 1, 2000. The remainder of rental revenue relates to properties sold and properties under development.
The operating margin (the ratio of rental revenues minus property operating and property tax expense to rental revenues) remained unchanged at 80% for each of the years ended December 31, 2001 and 2000.
Depreciation and amortization expense related to real estate investments was $34.7 million and $34.1 million for the years ended December 31, 2001 and 2000, respectively. The increase relates primarily to amortization of increased deferred leasing costs and additional depreciation related to the new cost basis of real estate assets established in conjunction with the Merger.
General and administrative expense increased by $1.3 million from $10.1 million for the year ended December 31, 2000 to $11.4 million for the year ended December 31, 2001. The increase is primarily due to increased compensation and rental expenses. As a percentage of total rental revenues (including rental revenues earned by properties included in Discontinued Operations), general and administrative expense remained relatively stable at 5.0% in 2001 versus 4.8% in 2000. In conjunction with the Merger, all employees were terminated and all general and administrative duties subsequent to the Merger are performed by RREEF, Cabot L.P.'s investment manager.
In 2001, Cabot L.P. incurred expenses of $51.3 million related to the Merger. Severance expense payable to certain senior executives pursuant to employment agreements was $21.7 million, and severance expense payable to other employees pursuant to the Cabot Trust Severance Plan was $6.0 million. Expense recognized from distribution equivalent units (DEUs) payable to employees due to the change of control was $14.6 million, and other compensation expenses totaled $1.4 million. Other merger expenses incurred by Cabot L.P. prior to the Merger, primarily payable to financial advisors, were $7.6 million.
Interest expense of $39.5 million and $40.9 million was incurred related to Continuing Operations for the years ended December 31, 2001 and 2000, respectively. The decrease primarily results from a $4.8 million decrease in interest expense on the Cabot L.P. LIBOR-based facility partially offset by a $3.3 million increase of interest incurred on $55 million of medium term notes obtained in September of 2000. The decrease in interest expense on the Cabot L.P. LIBOR-based facility reflects a decrease in the average outstanding balance as well as a decrease in the average interest rate. The increase in interest expense related to the medium term notes reflects a full year of interest expense in 2001. Interest incurred on unsecured debt of $200 million remained relatively unchanged.
During 2001, Cabot L.P. sold nine properties and a parcel of land for $47.3 million, which resulted in Net Gain on Sales of Real Estate of $4.0 million. During 2000, Cabot L.P. sold two properties for $22.3 million, which resulted in Net Gain on Sales of Real Estate of $2.6 million.
Interest and Other Income decreased $1.1 million to $1.0 million for the year ended December 31, 2001 compared to $2.1 million for the year ended December 31, 2000. The decrease is primarily due to decreased earnings from Cabot Advisors related to the loss of a significant client and since its responsibilities terminated at the date of the Merger, it earned no revenue during the post-Merger period.
Earnings and Fees from Joint Ventures and Advisory Clients increased $1.6 million to $2.4 million for the year ended December 31, 2001 from $0.8 million for the year ended December 31, 2000. The increase is primarily due to a full year of ownership in 2001. In addition, acquisition fees of $0.4 million from an advisory client were earned in 2001.
Distributions to Preferred Unitholders totaled $21.2 million in 2001, an increase of $1.6 million compared to $19.6 million in 2000. The increase reflects a full year of distributions for $50 million of Preferred Units that were issued in 2000.
Income from Discontinued Operations decreased approximately $3.0 million to $16.8 million for the year ended December 31, 2001. Income from Discontinued Operations reflects the actual operating results for rental revenues, property operating, property tax and depreciation and amortization expenses for each of the properties included within Discontinued Operations. In addition, income from Discontinued Operations also reflects approximately $6.4 million and $2.6 million of interest expense for each of the years ended December 31, 2001 and 2000, respectively, related to the mortgage loans assumed by CalEast in connection with the sale of certain property to CalEast. The increase in interest expense of $3.8 million reflects a full year of interest expense in 2001 on the secured mortgage loans assumed by CalEast, which were obtained by Cabot L.P. in 2000. The increase in interest expense is offset by an increase in operating margin on the properties included with Discontinued Operations.
Year Ended December 31, 2000 Compared with Year Ended December 31, 1999
Net income allocable to partnership units for the year ended December 31, 2000 totaled $59.3 million, compared to $57.7 million for the year ended December 31, 1999. The increase in net income is due to increased income from real estate operations and joint ventures, and the negative impact of the Settlement of Treasury Lock in 1999, both offset by increased distributions to Preferred Unitholders.
Rental revenues were $172.5 million, including tenant reimbursements of $25.0 million, for the year ended December 31, 2000, compared to $121.4 million, including tenant reimbursements of $16.0 million, for the year ended December 31, 1999. Total rental revenue of $101.3 million and $97.4 million was generated in 2000 and 1999, respectively, by the properties owned as of January 1, 1999 and still owned at December 31, 2000, excluding properties included in Discontinued Operations, and rental revenue of $68.6 million and $21.8 million in 2000 and 1999, respectively, was generated by the properties acquired or developed after January 1, 1999, excluding properties included in Discontinued Operations. The remainder of rental revenue relates to properties sold.
Cabot L.P.'s operating margin (the ratio of rental revenues minus property operating and property tax expenses to rental revenues) decreased to approximately 80% for the year ended December 31, 2000 compared with 82% for the year ended December 31, 1999. The decrease is primarily due to a change in the composition of leases, primarily as a result of the acquisition of multitenant and workspace properties, to more leases where Cabot L.P. pays property and operating expenses and is reimbursed by the tenants compared to leases where the tenant pays these expenses directly. In addition, average occupancy for the entire property portfolio decreased to 97.2% in 2000 from 97.5% in 1999.
Depreciation and amortization related to real estate investments was $34.1 million and $24.1 million for the years ended December 31, 2000 and 1999, respectively. The increase reflects the acquisition of real estate assets in 2000, as well as a full year of expense related to 1999 acquisitions, excluding properties included in Discontinued Operations.
General and administrative expense increased by $1.2 million, to $10.1 million for the year ended December 31, 2000. The increase reflects additional annual incentive compensation for 2000 payable under Cabot L.P.'s compensation program and an increase in the number of personnel to manage the acquisition, development, asset management and financing activity related to the increase in the number of Cabot L.P.'s properties during the two-year period. As a percentage of total rental revenues (including rental revenues earned by properties included in Discontinued Operations), general and administrative expense decreased to 4.8% in 2000 from 5.7% in 1999.
Interest expense related to Continuing Operations increased by $15.6 million to $40.9 million for the year ended December 31, 2000. The increase is primarily due to additional borrowings under Cabot L.P.'s Facility compared to the prior year and the impact of a full year interest expense on $200 million of unsecured financing obtained during 1999. In addition, Cabot L.P.'s weighted average borrowing rate increased in 2000 due to an increase in the LIBOR rate for the Facility and the refinancing of approximately $55 million of the Facility with medium term notes in September of 2000 with a higher fixed interest rate.
During 2000, Cabot L.P. sold two properties for $22.3 million, which resulted in Net Gain on Sales of Real Estate of $2.6 million. During 1999, Cabot L.P. sold two properties for $17.1 million, which resulted in a Net Gain on Sales of Real Estate of $2.8 million.
Interest and Other Income increased by $1.1 million, to $2.1 million in 2000. The increase is primarily due to $0.6 million of interest income earned in 2000 related to bridge loan financing provided to the Joint Ventures in 2000. Additional other income of $0.5 million is primarily due to increased earnings from Cabot Advisors.
During 2000, Cabot L.P. entered into three separate joint venture arrangements from which it derived fee income and shares in the operating results (accounted for under the equity method). The income in 2000, included in earnings and fees from joint ventures and advisory clients, consisted primarily of acquisition and development fees of $0.7 million and asset and property management fees and earnings from joint ventures of $0.1 million.
Income from Discontinued Operations decreased approximately $2.0 million to $19.8 million for the year ended December 31, 2000. Income from Discontinued Operations reflects the actual operating results for rental revenues, property operating, property tax and depreciation and amortization expenses for each of the properties included within Discontinued Operations. In addition, income from Discontinued Operations also reflects approximately $2.6 million of interest expense for the year ended December 31, 2000, related to the mortgage loans assumed by CalEast in connection with the sale of certain property to CalEast. Cabot L.P. obtained the mortgage loans assumed by CalEast in 2000. Accordingly, no interest expense is included within income from Discontinued Operations for the year ended December 31, 1999 related to these mortgage loans.
CAPITAL RESOURCES AND LIQUIDITY
Cabot L.P. intends to rely on cash provided by operations, unsecured and secured borrowings from institutional sources, and public debt as its primary sources of funding for acquisition, development, expansion and renovation of properties. Cabot L.P. may also consider preferred and common equity financing when such financing is available on attractive terms.
In December 2001, Cabot L.P. issued a note payable in the amount of $500 million. This financing (the "Bridge Financing") bore an interest rate of LIBOR plus 125 basis points (3.30% at December 31, 2001), and was due June 6, 2002. The Bridge Financing was repaid in full and terminated in February 2002.
On February 5, 2002, Cabot L.P. entered into a Revolving Credit Agreement (the "Revolving Credit Agreement") with JP Morgan Chase Bank as lead agent for a syndicate of banks. The $300 million in proceeds from the Revolving Credit Agreement were used to partially repay the Bridge Financing. The Revolving Credit Agreement is guaranteed by Cabot Trust and Calwest and provides for a loan amount of $300 million or such lesser amount as will enable Cabot L.P. to comply with all financial covenants. The loan is due in February 2005, and may be extended one year after payment of an extension fee of 20 basis points.
In January 2002, Cabot Trust contributed 62,156 Common Units to Cabot L.P. resulting in a decrease in Cabot L.P.'s outstanding Common Units to 43,617,995. Also in January 2002, Cabot L.P. issued an additional 7,300 Common Units to Cabot Trust which resulted in proceeds of approximately $150,000. In February 2002, Cabot L.P. also issued 9,354,591 Common Units which resulted in proceeds of $192.9 million. These proceeds, combined with the proceeds from the Revolving Credit Agreement and proceeds from a sale of real estate were used to repay the outstanding balance on the Bridge Financing.
As of June 30, 2002, Cabot L.P. had $236.1 million of fixed rate debt secured by properties (excluding discounts and premiums), $290 million of unsecured borrowings under its Revolving Credit Agreement, $255 million of unsecured debt (excluding premiums) and a 36% debt-to-total undepreciated assets ratio. Cabot L.P. expects to maintain this ratio at 40% or less, but is not required to do so. On August 1, 2002, Cabot L.P. sold its interest in Cabot Acquisition LLC, a wholly owned subsidiary of Cabot L.P., which owned 46 properties, to CalEast for $375.5 million, of which $300.5 was paid in cash and $75 million was paid by assumption of Mortgage Loans. Proceeds from the sale amounting to $299.4 million were distributed to the common unitholder on August 15, 2002.
The Revolving Credit Agreement bears interest at rates that are dependent on the type of borrowing and the credit rating of Calwest, as detailed below:
Borrowing type Base rate Spread - -------------- --------- ------
Euro-Dollar Applicable LIBOR 0.65% - 1.40% Base Rate U.S. Prime or Fed Funds + 0.50% 0.0% - 0.70% Money Market Auction based n/a
For Money Market loans, Cabot L.P. is able to request that the syndicate of banks bid on loan commitments, which may result in Cabot L.P. obtaining borrowings at interest rates lower than those available under either the Euro-Dollar or Base Rate borrowing types. As of September 30, 2002, the Revolving Credit Agreement has $286 million outstanding, bearing interest at a weighted average rate of 2.69%.
Additionally, the Revolving Credit Agreement has an expansion option, which allows Cabot L.P. to expand the total commitment to $400 million. This option must be exercised in the first 24 months of the term. The Revolving Credit Agreement is subject to various covenants, which are customary in nature, including a limit on distributions to 100% of cash flow, which excludes proceeds from sales or refinancings and a one-time right to distribute up to $75 million.
Cash and cash equivalents totaled $8.8 million at June 30, 2002, representing a decrease of $91.7 million, compared to December 31, 2001. This was the result of $53.0 million of cash generated from operating activities ($44.3 million generated by continuing operations and $8.7 million by discontinued operations), reduced by $25.8 million of cash used in investing activities and $118.9 million of cash used in financing activities.
INFLATION
Substantially all of the leases of Cabot L.P.'s 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 or indexed increases (based on the consumer price index or other measures) in base rent. Management believes that inflationary increases in operating expenses will be offset, in part, by these expense reimbursements and contractual rent increases.
RISK FACTORS
We can change our financing, investment, distribution and other business policies.
Cabot Trust's Board of Trustees establishes our financing, investment, distribution and other business policies based on management's recommendations and the Board's evaluation of business and general economic conditions and other relevant factors. The Board has full discretion to change these policies without the consent of Cabot L.P.'s Unitholders. Among other policies, it is our current policy to limit our debt-to-total undepreciated assets ratio to 40%, but our organizational documents do not limit the amount of indebtedness that we may incur without unitholder approval and this policy could therefore be changed by the Board at any time.
Our business consists primarily of operating real estate and is therefore subject to real estate investment and operating risks.
Tenant defaults and bankruptcies may reduce our income and cash flow. We derived more than 98% of our continuing income from rental operations during the period January 1, 2002 through June 30, 2002. If a significant number of tenants fail to meet their lease obligations, our revenues and cash flow will decrease and we may be unable to make required debt service payments.
Defaulting tenants may seek bankruptcy protection, which could result in payment delays or in the rejection and termination of the tenants' leases. This would reduce our income, cash flow and amounts available to repay debt obligations. In addition, a tenant may suffer business losses which may weaken its financial condition and result in the failure to make rental payments when due.
We may be adversely affected by increases in real estate operating costs. If our properties do not generate revenues sufficient to meet our operating expenses, including debt service, tenant improvement costs, leasing commissions and other capital expenditures, we may have to borrow additional amounts to cover our fixed costs, and our cash flow may be adversely affected.
Commercial properties are subject to increases in operating expenses such as cleaning, electricity, heating, ventilation and air conditioning and maintenance, insurance and administrative costs, and other general costs associated with security, landscaping, repairs and maintenance. If operating expenses increase, competition in the local rental market may limit the extent to which rents may be increased to meet increased expenses without decreasing occupancy rates. While our current tenants are generally obligated to pay a portion of increases in operating costs, there is no assurance that our existing tenants will agree to pay all or any portion of those costs upon renewal of their leases or that new tenants will agree to pay those costs.
We may encounter significant delays in reletting vacant space with resulting losses of income. When leases of space in our properties expire, the leases may not be renewed, the related space may not be relet promptly or the terms of renewal or reletting, including the cost of required renovations, may be less favorable than the terms of the expiring leases. Leases covering approximately 18.8% of our total leased rentable space will expire in fiscal year 2003 and leases covering approximately 18.6% of our total rentable space will expire in fiscal year 2004 (excluding Assets Held for Sale, 19.8% and 19.0%), based on annualized net rent.
In formulating our annual business plans, we make estimates of renovation and reletting costs that take into consideration our views of both current and expected future business conditions in our markets. Our estimates may prove to be inaccurate. If we are unable promptly to relet or renew the leases for all or a substantial portion of our space, if the rental rates upon the renewal or reletting are significantly lower than expected rates or if our cost estimates prove inadequate, then our cash flow may be adversely affected.
We may not be able to meet our targeted levels of leasing activity due to the highly competitive nature of the industrial property markets.
Numerous industrial properties compete with our properties in attracting tenants to lease space and additional properties can be expected to be built in the markets in which our properties are located. The number and quality of competitive industrial properties in a particular area will have a material effect on our ability to lease space at our existing properties or at newly acquired properties and on the rents charged.
There are potential conflicts of interest in our operations.
In conjunction with the Merger, Cabot L.P. and Cabot Trust engaged RREEF to be their investment advisor and provide asset and property management, acquisition, disposition and development services for Cabot L.P. and Cabot Trust with respect to their owned assets. RREEF is also the investment advisor and manager of Cabot Trust's majority shareholder, Calwest, and in such capacity has overall management and control of the business and affairs of Calwest, subject to the investment objectives and policies, program guidelines, budgets and annual investment plans of Calwest's majority owner, CalPERS. Further, RREEF in its capacity as manager of Calwest can elect or remove members of the Board of Trustees of Cabot Trust. Currently, the members of the Board of Trustees and the officers of Cabot Trust are all employees of RREEF, and in such capacities, such employees of RREEF control the business and affairs of Cabot Trust. RREEF generally has the authority within certain parameters to determine whether and on what terms to acquire properties on behalf of and sell the properties owned by Cabot L.P. and may from time to time seek counsel from CalPERS. As a manager of Calwest, an investment manager of Cabot L.P. and having control responsibility for Cabot Trust, RREEF could determine that the acquisition or sale of properties of Cabot L.P. on arm's length terms is advantageous to CalPERS, Calwest or Cabot Trust and cause Cabot L.P. to execute the same even though such acquisition or sale may be one that Cabot L.P. would not otherwise undertake.
We may incur significant environmental remediation costs or liabilities.
As an owner and operator of real properties, we are subject to various federal, state and local environmental laws, ordinances and regulations that impose liability on current and previous owners and operators of real property for the costs of removal or remediation of hazardous or toxic substances on, under or in the property. Some of these laws impose liability whether or not the owner or operator knew of, or was responsible for, the presence of the hazardous or toxic substances. Persons who arrange for the disposal or treatment of hazardous or toxic substances may also be liable for the costs of removal or remediation of hazardous substances at the disposal or treatment facility, whether or not the facility is or ever was owned or operated by the person. In addition, the presence of hazardous or toxic substances, or the failure to remediate the property properly, may adversely affect the owner's ability to borrow using the real property as collateral.
Environmental laws and common law principles could be used to impose liability for release into the air of and exposure to hazardous substances, including asbestos-containing materials, and third parties may seek recovery from owners or operators of real properties for personal injury or property damage associated with exposure to the released hazardous substances. As an owner of real properties, we could be liable for these types of costs.
Phase I environmental site assessment reports were obtained by our original Contributing Investors in connection with their initial acquisitions of the properties, or were obtained by us in connection with the transactions resulting in our formation. In accordance with our acquisition policies, we have also obtained Phase I's for all of the properties that we have acquired since the date of our formation. Furthermore, we also intend to complete Phase I ESAs or environmental audits for each property annually. The purpose of Phase I's is to identify potential sources of contamination for which we may be responsible and to assess the status of environmental regulatory compliance. The earliest of the Phase I's for our properties were obtained in 1988. Commonly accepted standards and practices for Phase I's have evolved to encompass higher standards and more extensive procedures over the period from 1988 to the present. We expect that by December 31, 2002 the Phase I ESA for any property will be no greater than three years old.
It is possible, however, that the Phase I's relating to the properties do not reveal all environmental liabilities. Moreover, future laws, ordinances or regulations may impose material environmental liability or our properties' current environmental condition may be affected by tenants, by the condition of land or operations in the vicinity of the properties or by third parties unrelated to us.
Cabot L.P. carries blanket environmental insurance coverage on all but one property. That property is undergoing remediation and has pollution and remediation legal liability coverage. Four other properties have stand-alone environmental policies in addition to coverage afforded under the blanket program.
We may be adversely affected by changes in laws.
Our properties are subject to various federal, state and local regulatory requirements, including state and local fire and life-safety requirements. Failure to comply with these requirements could result in the imposition of fines by governmental authorities or awards of damages to private litigants. We believe that our properties are in material compliance with all current regulatory requirements. However, new requirements may be imposed that would require us to make significant unanticipated expenditures and that could have an adverse effect on our cash flow.
We could be adversely affected if hazard losses on our properties exceed the amount of our insurance coverage or are not covered by insurance.
We are a named insured on CalPERS' blanket insurance program. Accordingly, we carry commercial general liability insurance, standard "all-risk" property insurance, terrorism, flood, earthquake and rental loss insurance with respect to our properties with policy terms and conditions customarily carried for similar properties. We believe that our current insurance coverage (other than insurance coverage with respect to earthquakes for properties located in Northern California) is adequate. However, our insurance is subject to normal limitations on the amounts of coverage and some types of losses, (such as losses from wars, terrorism 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 the amount of our insurance coverage occur, we could lose the capital invested in a property, as well as the anticipated future revenue from that property, and we would continue to be obligated on any mortgage indebtedness or other obligations related to the property.
In light of the California earthquake risk, California building codes have since the early 1970s established construction standards for all new buildings and also contain guidelines for seismic upgrading of existing buildings that are intended to reduce the possibility and severity of loss from earthquakes. The construction standards and upgrading, however, do not eliminate the possibility of earthquake loss. It is our current policy to obtain earthquake insurance if available at acceptable cost. As of June 30, 2002, all of our 85 properties located in California are covered by earthquake insurance in amounts we believe to be reasonable. We currently maintain blanket earthquake insurance coverage for all properties located outside California in amounts we believe to be reasonable.
We are currently reviewing our insurance policies and as such our insurance policies and terms and conditions contained therein may change, including our policies and terms and conditions with respect to earthquakes and/or terrorism. Although we intend to maintain insurance policies with policy terms and conditions customarily maintained by similarly situated entities, we can give no assurance that our future insurance policies will contain the same coverage, terms and conditions as we currently maintain. Consequently, all or a portion of our properties may not be covered by disaster-type insurance.
Equity real estate investments are relatively illiquid.
The relative illiquidity of our real estate investments may limit our ability to adjust our property portfolio to respond to market changes. In addition, the Code significantly limits a REIT's ability to sell properties held for fewer than four years, which may affect our ability to sell properties without adversely affecting returns to common unitholders. These factors will tend to limit our ability to vary our portfolio promptly in response to changes in market or general economic or other conditions.
If Cabot Trust requires cash to satisfy distribution requirements or tax liabilities, it may cause Cabot L.P. to incur additional borrowings.
Cabot Trust has no sources of cash other than Cabot L.P. Thus, if Cabot Trust has cash requirements in excess of distributions from Cabot L.P., it may cause Cabot L.P. to incur indebtedness. Cabot Trust may need to borrow funds or cause Cabot L.P. to borrow funds to enable Cabot Trust to meet REIT minimum distribution requirements, avoid imposition of excise tax, or to satisfy tax liabilities. To qualify as a REIT, Cabot Trust is generally required to distribute at least 90% of its annual net taxable income, excluding any net capital gain, to its shareholders. In addition, REIT's are subject to a 4% nondeductible excise tax to the extent their annual distributions fail to meet certain distribution requirements imposed by the Tax Code. Furthermore, certain transactions of a REIT can be subject to a tax rate of 100%.
If Cabot Trust fails to qualify as a REIT, it will incur substantial additional tax liabilities. Cabot Trust believes that it has qualified as a REIT for federal income tax purposes, but it has not and does not intend to request a ruling from the Internal Revenue Service that Cabot Trust does in fact qualify as a REIT. If Cabot Trust were to fail to qualify as a REIT for any taxable year, Cabot Trust would not be permitted to deduct the amount it distributes to its shareholders from its taxable income and would have to pay federal income tax, including any alternative minimum tax, at regular corporate tax rates. Unless entitled to relief under Tax Code provisions, Cabot Trust also would be disqualified from treatment as a REIT for the four taxable years following the year during which Cabot Trust's REIT qualification was lost. Cabot Trust's Board of Trustees is authorized to revoke its REIT election at any time in response to future economic, market, legal, tax or other considerations.
We may suffer losses from our acquisition, development and construction activities.
We intend to acquire existing industrial properties to the extent that they can be acquired on advantageous terms and meet our investment criteria. These acquisitions will entail the risk that investments will fail to perform as expected, the risk of unexpected liabilities and the risk that necessary property improvement costs may be greater than we estimated in deciding to acquire a property.
We also intend to grow through the selective development and construction of industrial properties, including build-to-suit properties and speculative development, as suitable opportunities arise. The risks associated with real estate development and construction activities include the following:
. we may find it necessary to abandon development project activities after expending significant resources to determine their feasibility;
. the construction cost of a project may exceed original estimates, possibly making the project less profitable than originally estimated;
. occupancy rates and rents at a newly completed property may not be sufficient to make the property profitable;
. financing may not be available on favorable terms for development of a property;
. limited cash flow during construction period;
. the construction and lease up of a property may not be completed on schedule, resulting in increased debt service and construction costs; and
. we may fail to obtain, or may experience delays in obtaining, necessary zoning, land-use, building occupancy and other required governmental permits and authorizations.
We are subject to real estate financing risks.
Potential adverse effects of the costs of and possible difficulties in obtaining debt financing may adversely affect our cash flows. As a result, among other things, of Cabot Trust's annual income distribution requirements applicable to REITs under the Code, we rely to a significant extent on borrowings to fund acquisitions, capital expenditures and other items and expect to continue to do so. We are therefore subject to real estate and general financing risks, including changes from period to period in the availability of financing, the risk that our cash flow may not cover required debt service payments and the risk that we will not be able to refinance existing indebtedness or that the refinancing terms will be unfavorable. If we do not make mortgage payments, the property or properties subject to the mortgage indebtedness could be foreclosed upon by or transferred to the lender.
Rising interest rates will generally increase our borrowing costs.
We have a bank credit facility (the Revolving Credit Agreement obtained in February 2002) that permits us to borrow up to $300 million for property acquisitions and other purposes that provides for interest at variable rates, and we may incur additional variable rate indebtedness in the future. Variable-rate debt creates higher debt service requirements if market interest rates increase, which would adversely affect our cash flow. While we may enter into arrangements that are intended to reduce our exposure to rising interest rates, changes in interest rates will still affect our business and results of operations.
Our use of interest rate hedging agreements may increase our interest and financing costs, may result in losses and may present other risks.
To reduce our exposure to changes in market interest rates, we have from time to time entered into various types of interest rate protection, or "hedging", agreements with investment grade financial institutions. These agreements include interest rate swap, interest rate collar and interest rate cap agreements, which are intended to limit our exposure to increases in interest rates on our variable rate borrowings. They also include "Treasury lock agreements" that are entered into for the purpose of hedging the interest rates of fixed interest rate indebtedness that we expect to incur in future periods. Interest rate hedging agreements involve the risks described in the following paragraphs:
Hedging agreements may increase our interest and financing costs. Since interest rate hedging agreements are intended to have the effect of fixing the interest rates that we pay within a specified range or at a specified level, they may have the effect in declining interest rate environments of increasing our interest costs over what those costs would otherwise have been. We may also pay fees and incur other transaction costs in connection with entering into these agreements.
Hedging agreements present credit risks. The counterparties in our hedging agreements may become financially unable to perform their obligations under the agreements. In that case, we would not receive the protection against changes in interest rates that we had intended and we may also not be able to recover fees or others costs incurred by us in entering the hedging agreement.
Hedging agreements may present "basis risks." The interest rate index or other basis of the hedging agreement may not change with the same frequency or in the same magnitude as the interest rates that we are seeking to hedge. This possibility, which is commonly referred to as "basis risk", may result in unexpected costs and losses.
Deferral of gains and losses under hedge accounting principles may become inappropriate for specific hedging arrangements. In general, we intend that the amounts we are required to pay to or that we receive from the counterparties under our hedging agreements will be reflected in our financial statements using "hedge accounting" principles. Under hedge accounting principles the amounts of such losses and gains are added to or credited against our interest expense over the life of the related borrowing rather than being reported as current gain or loss. Hedge accounting may cease to be appropriate for a particular hedging agreement if the agreement ceases to be sufficiently correlated with the indebtedness being hedged. This may occur as a result of basis risk or it may occur because the borrowing to which the hedge agreement relates is not completed in the form or within the time frame contemplated when the hedging agreement was executed or if the related borrowing is terminated prior to maturity.
Effective January 1, 2001, Cabot L.P. implemented SFAS No. 133, which changed the underlying accounting for derivative instruments that qualify as hedges. Under the provisions of SFAS No. 133, the amounts we are required to pay to or that we receive from the counterparties under our hedging agreements will be accounted for as cash flow hedging instruments and reflected in our financial statements, at fair value, as either assets or liabilities depending on the rights or obligations under the agreements. The effective portion of the changes in fair value of a derivative instrument designated and qualifying as a cash flow hedging instrument shall be reported as a component of other comprehensive income (outside earnings) and reclassified into earnings in the same period or periods during which the hedged forecasted transaction affects earnings. The remaining change in fair value of the derivative instrument, if any, shall be recognized currently in earnings. Reporting of changes in fair value as a component of other comprehensive income may cease to be appropriate for a particular hedging agreement if the agreement ceases to be highly effective in offsetting the corresponding change in the cash outflows or inflows of the hedged transaction. Loss of effectiveness could result in the net change in fair value in accumulated other comprehensive income to be immediately reclassified into earnings. This may again occur as a result of basis risk or it may occur because the borrowing to which the hedge agreement relates is not completed in the form or within the time frame contemplated when the hedging agreement was executed or if the related borrowing is terminated prior to maturity.
Treasury lock agreements may result in substantial losses if market interest rates change significantly. Treasury lock agreements involve the sale by us to an institutional counterparty, on a future delivery basis, of Treasury securities having maturities comparable to that of our proposed future debt issuance. The amount, if any, that we may be required to pay to our counterparty, or that the counterparty may be required to pay to us, under the Treasury lock agreement depends on the direction and magnitude of any change in the relevant Treasury market yields between the contract initiation date and the contract settlement date. Accordingly, if we enter into Treasury lock agreements in the future we will be subject to potential increases in interest expense or immediate loss recognition that will fluctuate with movements in Treasury market yields and that may be substantial.
Interest rate hedging agreements may not be enforceable in some cases. The enforceability of interest rate hedging agreements may depend on compliance by the parties with applicable statutory and other legal requirements. They may not be enforceable if they were not authorized or appropriate for a counterparty or if the related documentation has not been prepared and executed properly.
Substantial income from hedging activities could adversely affect the ability to comply with Cabot Trust's REIT qualification requirements of the Code.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
In addition to using equity capital and retained earnings, Cabot L.P. finances its acquisition and development programs and its ongoing operating cash needs through the use of debt financing. Cabot L.P. uses short-term debt and long-term secured and unsecured debt with original maturities of five years or more. Our short-term debt will be primarily in the form of the Revolving Credit Agreement obtained in February 2002. Cabot L.P. attempts to manage its debt maturities to reduce its exposure to the refinancing risk that would arise from having significant maturities of principal at a time when debt capital may not be available or may be available only at unfavorable interest rates.
Cabot L.P. is exposed to market risk in the form of the effects of changes in market interest rates on its existing and proposed debt financing. Its Revolving Credit Agreement bears a variable rate of interest (a weighted average rate of 2.69% at September 30, 2002), while the interest rates on proposed fixed-rate unsecured and secured debt instruments will usually be based on Treasury securities yields plus a market-based spread. Cabot L.P. has entered into various forms of interest rate protection agreements with investment-grade financial institutions from time to time for the purpose of managing a portion of its interest rate risk. For variable rate borrowings, these agreements include interest rate swap, interest rate collar and interest rate cap agreements that are intended to limit Cabot L.P.'s effective cost on variable rate borrowings, either within an agreed range or below an agreed maximum level. For proposed long-term instruments, Cabot L.P. has also entered into "Treasury Lock transactions" that are intended to set the Treasury securities component of the interest cost in advance through agreements for the sale of Treasury securities having notional amounts and maturities comparable to Cabot L.P.'s intended debt issuance. Cabot L.P. does not enter into interest rate protection agreements or any other form of derivative financial instruments for speculative trading purposes.
As of June 30, 2002, Cabot L.P. was not a party to any interest rate protection agreements, and therefore taking into account $290 million of variable rate borrowings that Cabot L.P. had outstanding under its Revolving Credit Facility at June 30, 2002, an instantaneous increase of 100 basis points in LIBOR at that date would, if LIBOR remained at the increased levels thereafter, result in an estimated $2.9 million reduction in Cabot L.P.'s net income in fiscal year 2003. This estimate is provided for the purpose of illustrating the possible effects on Cabot L.P.'s results of operations of changing interest rates and assumes that the Revolving Credit Facility is still outstanding. It does not take into account any other effects that changes in interest rates might have on Cabot L.P.'s operations, such as higher interest rates on new fixed rate borrowings, nor does it consider any additional interest rate protection agreements that Cabot L.P. might enter into in reaction to, or in anticipation of, changes in interest rates. While an increase in LIBOR of 100 basis points over a relatively short time period is possible, it is unlikely that interest rates would increase instantaneously or stay at the same rate for a sustained period as assumed for purposes of the illustration.
As of June 30, 2002, Cabot L.P. also had $236.1 million of fixed rate debt (excluding premiums and discounts) at stated rates ranging from 7.25% to 9.67% secured by certain properties (of which $75 million was assumed by CalEast on August 1, 2002), $200.0 million (excluding premiums) of fixed rate unsecured debt at a stated rate of 7.125% and $55.0 million (excluding premiums) of unsecured Medium Term Notes at a weighted average stated rate of 8.4%. The current and future use of fixed rate debt is advantageous to Cabot L.P., as compared with variable rate debt, in times of rising interest rates. However, in an environment of falling interest rates, fixed rate debt would place Cabot L.P. at a disadvantage as compared with competitors having larger components of variable rate debt.
Item 8.
Item 8. Financial Statements and Supplementary Data
CABOT INDUSTRIAL PROPERTIES, L.P.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
To the Partners of Cabot Industrial Properties, L.P.:
We have audited the accompanying consolidated balance sheets of Cabot Industrial Properties, L.P. and subsidiaries (Cabot L.P.), as of June 30, 2002, and December 31, 2001 and 2000, and the related consolidated statements of operations, partners' equity and cash flows for the periods from January 1, 2002 to June 30, 2002, December 7, 2001 to December 31, 2001 and January 1, 2001 to December 6, 2001 and for the years ended December 31, 2000 and 1999. Our audits also included the supplemental schedule listed in the Index at Item 8. These financial statements and supplemental schedule are the responsibility of Cabot L.P.'s management. Our responsibility is to express an opinion on these consolidated financial statements and supplemental schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, such consolidated financial statements present fairly, in all material respects, the financial position of Cabot Industrial Properties, L.P. and subsidiaries as of June 30, 2002, and December 31, 2001 and 2000 and the results of their operations and their cash flows for the periods from January 1, 2002 to June 30, 2002, December 7, 2001 to December 31, 2001 and January 1, 2001 to December 6, 2001 and for the years ended December 31, 2000 and 1999 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such supplemental schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
As explained in Note 2 to the consolidated financial statements, Cabot L.P. implemented SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, effective January 1, 2002, and restated prior year amounts to reflect discontinued operations. As described in Note 2, Cabot L.P. accounted for the Merger Transactions in accordance with SEC Staff Accounting Bulletin (SAB) No. 54, Push Down Basis of Accounting Required in Certain Limited Circumstances. The assets and liabilities of Cabot L.P. were restated on December 7, 2001 to reflect the purchase price. Effective January 1, 2001, Cabot L.P. changed its method of accounting for its derivative instruments and hedging activities.
DELOITTE & TOUCHE LLP San Francisco, California October 11, 2002
CABOT INDUSTRIAL PROPERTIES, L.P.
CONSOLIDATED BALANCE SHEETS (In Thousands) - --------------------------------------------------------------------------------
See notes to consolidated financial statements.
CABOT INDUSTRIAL PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands) - --------------------------------------------------------------------------------
See notes to consolidated financial statements.
CABOT INDUSTRIAL PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY (In Thousands, Except Partnership Unit Amounts) - --------------------------------------------------------------------------------
See notes to consolidated financial statements.
CABOT INDUSTRIAL PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands, except Partnership Units) - --------------------------------------------------------------------------------
(Continued)
CABOT INDUSTRIAL PROPERTIES, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands, except Partnership Units) - --------------------------------------------------------------------------------
DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
In January 2002, Cabot Trust contributed 62,156 Partnership Units to Cabot L.P.
In February 2002, CalWest repaid $192,892 of the Bridge Financing, including $298 of accrued interest, on behalf of Cabot L.P. in exchange for an additional 9,354,591 Partnership Units issued to Cabot Trust.
In February 2002, Cabot L.P. entered into and borrowed $300,000 under the Revolving Credit Facility. The proceeds directly paid down a portion of the Bridge Financing.
In conjunction with the Merger Transactions, Cabot L.P. assumed indebtedness of $1,010,927 and other net assets of $28,264.
In conjunction with a sale of real estate in 1999, Cabot L.P. received a promissory note in the amount of $627 as a component of total consideration due from seller. This note was repaid in full during 1999.
In conjunction with the acquisitions of certain real estate, Cabot L.P. assumed indebtedness of $28,182 and issued Partnership Units valued at $3,413 in 1999 and assumed indebtedness of $11,156 in 2000.
In 2001, Cabot L.P. sold eight properties for $41,200 and Cabot L.P. sold two properties for $22,300 in 2000. These proceeds received in 2001 and 2000 were reinvested in real estate.
In 2001 and 2000, Cabot L.P. contributed real estate valued at $5,093 and $2,332, respectively, to a joint venture. In addition, Cabot Trust issued warrants valued at $550 in conjunction with the formation of a joint venture in 2000.
At December 6, 2001, employee stock option and DEU Transactions of $22,444 were payable to employees.
At June 30, 2002, December 31, 2001, December 6, 2001, June 30, 2001, December 31, 2000 and 1999, accrued capital expenditures (including amounts included in accounts payable) totaled $4,363, $2,410, $2,823, $7,749, $3,525 and $6,520, accrued development costs totaled $4,389, $10,838, $6,712, $796, $5,216 and $3,610 and accrued preferred equity offering costs totaled $0, $0, $795, $47, $828 and $1,578.
See notes to consolidated financial statements.
CABOT INDUSTRIAL PROPERTIES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002 - --------------------------------------------------------------------------------
1. GENERAL
Organization - Cabot Industrial Properties, L.P. (Cabot L.P.), a Delaware limited partnership, was formed on October 10, 1997. The general partner of Cabot L.P. is Cabot Industrial Trust (Cabot Trust), a Maryland real estate investment trust which was also formed on October 10, 1997. As the general partner of Cabot L.P., Cabot Trust has the exclusive power under the agreement of limited partnership to manage and conduct the business of Cabot L.P. Cabot Trust is an externally-managed real estate company which qualifies as a real estate investment trust (a REIT) for federal income tax purposes.
As of June 30, 2002, Cabot L.P. owned a geographically diversified portfolio of 382 industrial properties having an aggregate of approximately 43 million square feet, approximately 91% of which space was leased to 774 tenants (see Note 2 for a discussion of Assets Held For Sale).
The Merger Transactions - On December 7, 2001, pursuant to an Agreement and Plan of Merger, dated as of October 28, 2001, among Cabot Trust, Calwest Industrial Properties, LLC, a California limited liability company (Calwest) and Rooster Acquisition Corp., a Maryland corporation and wholly-owned subsidiary of Calwest (Rooster), Cabot Trust and Rooster effected a merger (the Merger Transactions) whereby Rooster merged with and into Cabot Trust, with Cabot Trust being the surviving entity. As part of the Merger Agreement, (i) the trustees and executive officers of Cabot Trust and their affiliates entered into shareholder agreements with Calwest, Rooster, Cabot Trust and Cabot L.P., under which they agreed to tender their shares, and in some instances, to sell their common units of limited partner interest in Cabot L.P. to Calwest; and (ii) certain holders of limited partnership units entered into unitholder agreements with Calwest, Rooster, Cabot Trust and Cabot L.P., under which they agreed to convert their common units of limited partner interest (Partnership Units) into Cabot Trust common shares of beneficial interest (Common Shares) and tender such Common Shares. In addition, pursuant to an Option Agreement, dated as of October 28, 2001, between Cabot Trust and Calwest, Calwest under specified circumstances had the right, with certain defined limitations, to acquire newly issued Common Shares at a price of $24.00 per share. Upon consummation of the Merger Transactions, (i) Cabot Trust became a wholly-owned subsidiary of Calwest and (ii) the then outstanding Common Shares were converted into the right to receive a cash payment of $24.00 per Common Share. As a result of the Merger and related transactions, all Partnership Units in Cabot L.P. are owned by Cabot Trust.
Immediately subsequent to the Merger Transactions, Calwest, Cabot Trust and Cabot L.P. (collectively, the Borrowers) entered into a bridge financing arrangement (the Bridge Financing) with several lenders. Under the terms of the Bridge Financing, Cabot L.P. received $500 million in cash due on June 6, 2002, bearing interest of LIBOR plus 125 basis points (see Note 4). The obligations of the Bridge Financing were fully recoursed to the Borrowers and were secured by a perfected first priority security interest in the equity interests of Calwest, including Calwest's equity interest in Cabot Trust and Cabot L.P., and were guaranteed by Calwest. The proceeds from the Bridge Financing were used to repay the $260.6 million outstanding balance as of December 6, 2001 of Cabot L.P.'s LIBOR-based facility (see Note 4). The Bridge Financing was repaid in February 2002 (see Note 4).
In conjunction with the Merger Transactions, Cabot L.P. acquired all the outstanding common stock of Cabot Advisors, Inc. (Cabot Advisors) and as a result, Cabot L.P.'s financial statements as of June 30, 2002 and for the periods from January 1, 2002 to June 30, 2002 and December 7, 2001 to December 31, 2001 include Cabot Advisors' financial position and results of operations on a consolidated basis.
1. GENERAL (CONTINUED)
Other Transactions - In January 2002, Cabot Trust contributed 62,156 Partnership Units to Cabot L.P., thereby decreasing Cabot L.P.'s outstanding Partnership Units to 43,617,995, and then issued an additional 7,300 Partnership Units which resulted in proceeds of approximately $150,000. In February 2002, Cabot L.P. also issued 9,354,591 Partnership Units which resulted in proceeds of $192.9 million. These proceeds, combined with the proceeds from the Revolving Credit Agreement and proceeds from a sale of real estate were used to repay the outstanding balance on the Bridge Financing (see Note 4).
Cumulative Redeemable Perpetual Preferred Equity - During 2000 and 1999, Cabot L.P. completed private sales of the following Cumulative Redeemable Perpetual Preferred Units (the Preferred Units):
The Preferred Units, which may be called by Cabot L.P. at liquidation value on or after the fifth anniversary of issuance in each case, have no stated maturity or mandatory redemption provisions and are not convertible into any other securities of Cabot L.P.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The accompanying consolidated financial statements include the accounts of Cabot L.P. and its subsidiaries over which it exercises control. All significant intercompany accounts and transactions have been eliminated in consolidation.
Change in Fiscal Year End - In April 2002, Cabot L.P. changed its fiscal year end from December 31 to June 30 in order to conform to Calwest's fiscal year end. Accordingly, Cabot L.P.'s transition period, which ended on June 30, 2002, is the six month period from January 1, 2002 to June 30, 2002. The unaudited consolidated statements of operations and cash flows for the six months ended June 30, 2001 are presented for comparative purposes only.
Effect of Merger Transactions on Presentation - The Merger Transactions have been accounted for under the purchase method of accounting. As allowed under SEC Staff Accounting Bulletin (SAB) No. 54, Push Down Basis of Accounting Required in Certain Limited Circumstances, Cabot L.P. has elected to record the effect of the purchase accounting (push down accounting) in its financial position as of December 7, 2001. Push down accounting requires an entity to establish a new basis for its assets and liabilities based on the amount paid for its ownership. The acquiring entity's (Calwest's) basis is reflected in the acquired entities' (Cabot L.P.'s and Cabot Trust's) financial statements. In order to apply push down accounting, Calwest's purchase price of $2.1 billion was allocated to the assets and liabilities of Cabot L.P. based on their relative fair values. For Cabot L.P., the new basis primarily impacts investments in real estate and related depreciation, debt and associated deferred financing costs and interest expense, as well as recognition of rental revenue.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Effect of Merger Transactions on Presentation (Continued) - Historically, although Cabot L.P. owned 100% of the nonvoting preferred stock of Cabot Advisors, control did not rest with Cabot L.P. as 100% of the common stock was owned by an officer of Cabot Trust, therefore Cabot L.P.'s investment in Cabot Advisors had been accounted for under the equity method of accounting. In conjunction with the Merger Transactions, Cabot L.P. acquired the controlling interest. As a result, the results of operations and the financial position of Cabot Advisors is reflected on a consolidated basis prospectively, beginning December 7, 2001.
Cabot L.P.'s consolidated results of operations for the periods January 1, 2001 to December 6, 2001 and January 1, 2001 to June 30, 2001 reflect the historical operating results prior to the Merger Transactions. Cabot L.P.'s consolidated results of operations for the six months ended June 30, 2002 and for the period December 7, 2001 to December 31, 2001 reflect the operations of Cabot L.P. subsequent to the Merger Transactions and the impact of purchase accounting adjustments. The consolidated financial statements for the years ended 2000 and 1999 represent the historical results of operations of Cabot L.P.
Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the 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. On an ongoing basis, management evaluates its estimates, including those related to bad debts, depreciable lives and purchase price allocations. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis in making judgments about the carrying values of assets that are not readily apparent from other sources. Actual results could differ from the amount derived from management's estimates and assumptions under different assumptions or conditions.
Management believes the following critical accounting policies represent the more significant estimates and assumptions used in the preparation of the consolidated financial statements. The allowance for uncollectible rental income which is established through a charge to the provision for uncollectible accounts is based on management's evaluation of the level of the allowance required in relation to the estimated exposure in Rents and Other Receivables. Management believes the allowance for uncollectible accounts is a significant estimate and therefore regularly evaluates it for adequacy by taking into consideration factors such as tenant payment history and likelihood of a tenant's ability to continue as a going concern. The use of different estimates or assumptions could produce different provisions for possible uncollectible rental income. Investments in Real Estate are carried at cost, less accumulated depreciation. Management applies assumptions in determining the estimated lives of its Investments in Real Estate. Additionally, in conjunction with the Merger Transactions, management has allocated Calwest's $2.1 billion purchase price to Cabot L.P.'s tangible assets and liabilities based on their respective estimated fair values.
Investment in Real Estate - Investments in real estate are carried at cost, less accumulated depreciation. A new cost basis was established on December 7, 2001 as a result of the Merger Transactions, by adjusting the value of investments in real estate to reflect the preliminary allocation of the purchase price and eliminating prior accumulated depreciation. A final cost allocation was established June 30, 2002 (see Note 3). It is Cabot L.P.'s policy to review the carrying value of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Measurement of any impairment loss is based on the fair value of the asset. Generally, fair value is determined using valuation techniques such as the present value of expected future cash flows. No impairment adjustments have been made as a result of this review process during any of the periods presented, except that an impairment loss in the amount of $1.9 million is included in discontinued operations in the six month period ended June 30, 2002.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investment in Real Estate (Continued) - Investments in real estate are depreciated primarily over 40 years using the straight-line method. Expenditures for ordinary maintenance and repairs are charged to operations as incurred. Significant building renovations and improvements that extend the useful life of or improve the assets are capitalized. Interest is capitalized as a cost of real estate investments in accordance with Statement of Financial Accounting Standards (SFAS) No. 34, Capitalization of Interest Cost. Interest totaling $687,000, $1,946,000, $231,000, $4,464,000, $3,443,000 and $3,167,000 was capitalized during the periods January 1, 2002 to June 30, 2002, January 1, 2001 to June 30, 2001, December 7 to December 31, 2001, January 1 to December 6, 2001 and the years ended December 31, 2000 and 1999, respectively.
Cash Equivalents - Cabot L.P. considers all short-term investments purchased with an original maturity of three months or less to be cash equivalents.
Capitalization of Costs - Cabot L.P. has capitalized as deferred costs certain expenditures related to the financing and leasing of its properties. Capitalized loan costs are amortized over the term of the related loans and lease acquisition costs are amortized over the term of the related leases, or the estimated useful life of the improvement, if shorter. All unamortized deferred financing costs existing at the time of the Merger Transactions were allocated no value in the purchase price allocation, as all associated debt was adjusted to its then fair value based on current market rates. Deferred Lease Acquisition Costs and Deferred Financing Costs included in the accompanying consolidated balance sheets are presented net of accumulated amortization totaling $2,916,000 and $296,000, respectively, as of June 30, 2002, $328,000 and $376,000, respectively, as of December 31, 2001 and $16,048,000 and $1,118,000, respectively, as of December 31, 2000.
Investments in Joint Ventures and Cabot Advisors - Cabot L.P.'s joint venture arrangements (the Joint Ventures) are accounted for using the equity method. As described above, Cabot L.P.'s investment in Cabot Advisors was accounted for using the equity method through December 6, 2001. Under the equity method of accounting, Cabot L.P.'s pro rata share of the Joint Ventures' and Cabot Advisors' income (loss) is recorded as an increase (decrease) in the carrying value of its investment and any distributions received are recorded as decreases in the carrying value.
Assets Held for Sale - As of June 30, 2002 and December 31, 2001 and 2000, Assets Held for Sale included 46 properties sold to CalEast Industrial Investors, LLC (CalEast), an affiliate of Calwest, on August 1, 2002, and four other properties held for sale. (See Note 9 for further discussion.) The operations related to these Assets Held for Sale are presented as discontinued operations for all periods presented in accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
In addition, as of December 31, 2000, Assets Held for Sale included seven industrial properties in California and Ohio. One property held for sale was subject to indebtedness that totaled $5,401,000 at December 31, 2000. During 2001, these properties, containing approximately one million square feet, were sold by Cabot L.P. for an aggregate sales price of approximately $39 million. These sales resulted in a Net Gain on Sales of Real Estate of approximately $2.5 million. Proceeds from these sales of property were used to acquire additional real estate assets.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Rental Income - All leases are classified as operating leases. Certain leases provide for tenant occupancy during periods for which no rent is due and rent payments that increase during the term of the lease. Cabot L.P. records rental income for the full or remaining term of each lease evenly over the term. The resulting Deferred Rent Receivable represents the cumulative amount of rental revenue recognized in excess of that currently due from tenants, net of reserves. Cabot L.P. expects to collect the Deferred Rent Receivable over the remaining life of the leases. In connection with the purchase price allocation associated with the Merger Transactions, the Deferred Rent Receivable was allocated no value. Additionally, the remaining lives of the leases for all leases in place at the date of the Merger Transactions is the basis for determining the Deferred Rent Receivable under the new basis of accounting. Rental revenue is not recognized for income tax purposes until currently due under the lease.
Cabot L.P. recorded a provision for uncollectible rental income of $2,034,000, $377,000, $81,000, $1,062,000, $1,336,000 and $352,000 for the periods January 1, 2002 to June 30, 2002, January 1, 2001 to June 30, 2001, December 7 to December 31, 2001, January 1 to December 6, 2001, and for the years 2000 and 1999, respectively, and wrote off $0, $271,000, $0, $398,000, $928,000 and $90,000 against its allowance for uncollectible accounts during the periods January 1, 2002 to June 30, 2002, January 1, 2001 to June 30, 2001, December 7 to December 31, 2001, January 1 to December 6, 2001, and the years 2000 and 1999, respectively.
Interest Rate Protection Agreements - Cabot L.P. uses various types of interest rate protection agreements from time to time to manage its exposures to interest rate risk. During 2001, 2000 and 1999, Cabot L.P. used interest rate swap agreements, interest rate collar agreements and interest rate cap agreements to manage a portion of the interest rate risk arising from its LIBOR-based facility (see Note 4) and may, in the future, use other types of agreements. The interest rate swap agreements effectively limited the LIBOR interest cost on a portion of the outstanding balance of the facility to a specified interest rate by requiring Cabot L.P.'s counterparty to pay to Cabot L.P. amounts to the extent LIBOR exceeded the specified interest rate or by requiring Cabot L.P. to pay to the counterparty amounts to the extent LIBOR was less than the specified interest rate. The collar agreements effectively limited the LIBOR interest cost on a portion of the outstanding balance on the facility to a specified interest rate range by requiring Cabot L.P.'s counterparty to pay amounts to Cabot L.P. to the extent LIBOR exceeded the ceiling of the specified range and requiring Cabot L.P. to make payments to the counterparty to the extent LIBOR was less than the floor of the range. The interest rate cap agreements limited the LIBOR interest cost on a portion of the outstanding balance on the facility to a maximum interest rate by requiring Cabot L.P.'s counterparty to pay amounts to Cabot L.P. to the extent LIBOR exceeded the ceiling as specified. Cabot L.P. accounts for such agreements under the accrual method. Amounts to be received from or paid to the counterparties of the agreements are accrued during the period to which the amounts relate and are reflected as increases or decreases in interest expense. The related amounts payable to or receivable from the counterparties are included in accounts payable or other assets in the accompanying balance sheets.
During 1998, Cabot L.P. entered into an interest rate hedge transaction (referred to as a Treasury Lock) involving the future sale of $100 million of Treasury securities based on a rate of approximately 5.54% for such securities in anticipation of a future debt issuance of at least $100 million with a maturity of 10 years. At the March 31, 1999 contractual settlement date for this transaction, Cabot L.P. paid $2.5 million to its counterparty in the transaction, reflecting the decrease in Treasury security yields since the July 1998 commencement of the transaction. Because an offering of the size and maturity contemplated when the interest rate hedge transaction was executed was not completed by the time of, or shortly after, the March 31, 1999 settlement date of the transaction, Cabot L.P. recorded a loss of $2.5 million in the year ended December 31, 1999.
Cabot L.P. did not use any hedging instruments during the six months ended June 30, 2002.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent Accounting Pronouncements - On January 1, 2001, Cabot L.P. adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 138, Accounting for Certain Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133. SFAS 133, as amended, requires companies to carry all derivative instruments, including certain embedded derivatives, in the statement of financial condition at fair value. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, if so, on the reason for holding it. Cabot L.P. uses only qualifying hedges that are designated specifically to reduce exposure to interest rate risk by hedging the expected future cash payments on certain liabilities. This is typically accomplished using an interest rate cap, collar or swap agreement. For financial reporting purposes these transactions qualify as cash flow hedges and the gain or loss on the effective portion of the interest rate hedge is recorded as a component of equity, which becomes reclassified into earnings along with payments on the hedged liability. The effectiveness of the hedging relationship will be assessed each reporting period, and any ineffectiveness measured, if applicable, will be included in earnings.
Upon adoption of SFAS No. 133 in January 2001, Cabot L.P. recorded a net transition loss of $287,000 in accumulated other comprehensive income (equity). Adoption of the standard also resulted in the recognition of $287,000 of derivative instrument liabilities. In general, the amount of volatility will vary with the level of derivative activities during any period.
On January 1, 2002, Cabot L.P. adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations - Reporting the Effect of a Disposal of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. The provisions of SFAS No. 144 generally are to be applied prospectively. Properties and the related operations sold prior to January 1, 2002 have not been restated to reflect the adoption of SFAS No. 144. As a result of adoption of SFAS No. 144, Cabot L.P. classified certain assets and liabilities as Assets Held for Sale, and reflected the related operations as discontinued operations for all periods presented (see Note 9 for further discussion). The revenues related to Assets Held for Sale and included within discontinued operations were $19,158,000, $21,486,000, $2,492,000, $38,316,000, $39,584,000 and $36,082,000 for the periods January 1, 2002 to June 30, 2002, January 1, 2001 to June 30, 2001, December 7, 2001 to December 31, 2001, January 1, 2001 to December 6, 2001, and the years 2000 and 1999, respectively.
Reclassifications - Certain amounts from prior periods have been reclassified to conform to the 2002 financial statement presentation.
3. ACQUISITIONS OF REAL ESTATE INVESTMENTS
In accordance with generally accepted accounting principles, Cabot L.P. accounted for the Merger Transactions using the purchase method of accounting. As such, the net assets acquired in connection with the Merger Transactions were recorded at the fair value of the consideration surrendered and liabilities assumed. The purchase price was then allocated to all identifiable assets and assumed liabilities based upon their individual estimated fair market values.
3. ACQUISITIONS OF REAL ESTATE INVESTMENTS (CONTINUED)
The following is a summary of the final allocation of acquisition costs recorded in connection with the Merger Transactions:
In general, the new cost basis of the assets and liabilities as a result of the purchase price allocation impacted the recognition of straight-line rental revenue, depreciation and interest expense.
The final allocation shown above does not differ significantly from the preliminary allocation recorded on December 7, 2001.
4. DEBT FACILITIES
Cabot L.P.'s debt balances were adjusted as of December 7, 2001 to fair value to reflect the present value of amounts to be paid using market interest rates for obligations with similar terms. These adjustments, resulting in an aggregate, net premium of $17.2 million, are amortized as a reduction of interest expense over the remaining term of the loans to reflect an estimated market interest rate as of the date of the Merger Transactions.
The Bridge Financing - As described in Note 1, Cabot L.P. issued a note payable in the amount of $500 million. This financing (the Bridge Financing) bore an interest rate of LIBOR plus 125 basis points and was due June 6, 2002. The Bridge Financing was repaid in full in February 2002.
The Revolving Credit Facility - On February 5, 2002, Cabot L.P. entered into a Revolving Credit Agreement (the Revolving Credit Agreement) with JP Morgan Chase Bank as lead agent for a syndicate of banks. The $300 million proceeds of the Revolving Credit Agreement were used to partially repay the Bridge Financing. The Revolving Credit Agreement is guaranteed by Cabot Trust and Calwest and provides for a loan amount of $300 million or such lesser amount as will enable Cabot L.P. to comply with all financial covenants. The loan is due in February 2005, and may be extended one year after payment of an extension fee of 20 basis points.
The Revolving Credit Agreement bears interest at rates that are dependent on the type of borrowing and the credit rating of Calwest, as detailed below:
Borrowing type Base rate Spread
Euro-Dollar Applicable LIBOR 0.65%-1.40% Base Rate U.S. Prime or Fed Funds + 0.50% 0.00%-0.70% Money Market Auction based n/a
For Money Market loans, Cabot L.P. is able to request that the syndicate of banks bid on loan commitments, which may result in Cabot L.P. obtaining borrowings at interest rates lower than those available under either the Euro-Dollar or Base Rate borrowing types. As of June 30, 2002, the Revolving Credit Agreement has $290 million outstanding, bearing interest at 2.64%.
Additionally, the Revolving Credit Agreement has an expansion option, which allows Cabot L.P. to expand the total commitment to $400 million. This option must be exercised in the first 24 months of the term. The Revolving Credit Agreement is subject to various covenants which are customary in nature, including a limit on distributions to 100% of operating cash flow, exclusive of proceeds from sales or refinancings, which can be freely distributed and a one-time distribution of up to $75 million.
The Facility - On October 24, 2000, Cabot L.P. obtained a new $325 million unsecured line of credit facility (the Facility) replacing its previous $325 million credit facility that was to mature in March 2001. The new credit facility, which was scheduled to mature in October 2003, was repaid and terminated in conjunction with the Merger Transactions. As a result of the termination of this facility, deferred financing costs in the amount of $2.8 million were allocated no value in conjunction with purchase price allocation. The interest rate on the Facility for 2001, 2000 and 1999 was LIBOR plus 100 basis points (which included a 0.20% facility fee in 2001 and 2000). At December 31, 2000 and 1999, the interest rate on outstanding borrowings was 7.69% and 7.50%, respectively. The weighted average coupon interest rate for the period from January 1 to December 6, 2001, and for the years ended 2000 and 1999 was 5.44%, 7.54% and 6.37% respectively, including the effect of the interest rate protection agreements described below. The Facility was used to acquire and develop properties and for working capital purposes.
4. DEBT FACILITIES
The Facility (Continued) - Cabot L.P. had entered into two interest rate swaps relating to the Facility for notional amounts of $25 million each, which were intended to result in limiting the variable nature of the LIBOR component of Cabot L.P.'s interest rate on an equivalent amount of borrowings to 5.891% and 5.905% through October 2003. Immediately subsequent to the Merger Transactions, Cabot L.P. terminated these swaps at a cost of $2.6 million. The liability related to these swaps was assumed at the date of the Merger Transactions, therefore this cost is included in total purchase price consideration (see Note 3). Cabot L.P. had entered into an interest rate cap arrangement relating to the Facility for a notional amount of $100 million for the period from October 1, 1999 through April 1, 2000. This arrangement resulted in limiting the variable nature of the LIBOR component of Cabot L.P.'s interest rate on an equivalent amount of borrowings to no more than 6.50% per annum. Cabot L.P. also entered into other similar arrangements during 2000 and 1999, which resulted in additional interest expense of $16,000 and $86,000 respectively.
Unsecured Debt - Medium Term Notes - On September 7, 2000, Cabot L.P. established a Medium Term Note program eligible to issue up to $200 million of notes payable. On September 12, 2000, Cabot L.P. issued $40 million of notes payable, with a coupon interest rate of 8.5%, due September 15, 2010. On September 18, 2000, Cabot L.P. issued an additional $15 million of notes payable, with a coupon interest rate of 8.2%, due September 15, 2005. On December 7, 2001, the market interest rates for these notes were determined by management to be 7.44% and 6.41%, respectively, as such the debt was revalued to reflect a premium (an increase in the debt balance) in the amount of $2.4 million and $852,000, respectively. A reduction of interest expense related to the amortization of this premium of $250,000 and $33,000 was recorded in the periods from January 1, 2002 to June 30, 2002 and December 7 to December 31, 2001, respectively.
Unsecured Debt - Senior Notes - On May 4, 1999, Cabot L.P. issued $200 million of senior unsecured redeemable notes, due May 1, 2004. The notes have a 7.125% coupon interest rate, and on December 7, 2001, the market interest rate for this debt was determined by management to be 5.61%, as such the debt was revalued to reflect a premium of $6.5 million. A reduction of interest expense related to the amortization of this premium of $1.4 million and $183,000 was recorded in the periods from January 1, 2002 to June 30, 2002 and December 7 to December 31, 2001, respectively.
Mortgage Loans - Cabot L.P. entered into loan agreements during 2000 and 1999, assumed certain loans in conjunction with several real estate acquisitions, and assumed certain loans in connection with its formation, all secured by certain existing real estate assets (collectively, the Mortgage Loans). The Mortgage Loans, totaling $236.1 million, $238.4 million and $246.4 million at June 30, 2002, December 31, 2001 and 2000 (excluding discounts and premiums), respectively, bear coupon interest rates ranging from 7.25% to 9.67% and are secured by properties with a net book value of $441.5 million, $444.9 million and $396.3 million, respectively. Certain of the debt assumed in conjunction with the acquisition of properties bears a coupon interest rate that differed from the fair market value interest rate at the date of acquisition of the related property. In accordance with generally accepted accounting principles, such debt was recorded at fair market value and interest expense was adjusted based on the fair market interest rate at the date of acquisition for each of the periods through December 6, 2001. All Mortgage Loans outstanding at December 7, 2001 were revalued as a result of the Merger Transactions using market interest rates, determined by management, ranging from 4.13% to 8.35%, as such the debt was revalued to reflect a net premium of $7.4 million. A reduction of interest expense related to the amortization of this premium of $772,000 and $131,000 was recorded in the periods from January 1, 2002 to June 30, 2002 and December 7 to December 31, 2001, respectively.
4. DEBT FACILITIES
Mortgage Loans - Aggregate contractual principal payments on the Mortgage Loans payable at June 30, 2002 (excluding the net premium recorded in conjunction with the Merger Transactions and excluding $75 million of Mortgage Loans payable that were assumed by CalEast on August 1, 2002 (see Note 9)) for the five fiscal years ending June 30 and thereafter are as follows:
(In Thousands)
2003 $ 11,112 2004 13,389 2005 9,598 2006 12,817 2007 16,325 Thereafter 97,831 -------- Total $161,072
5. FUTURE MINIMUM RENTS
Future minimum rental receipts due to Cabot L.P. on noncancelable operating leases for the 332 industrial properties owned as of June 30, 2002 (excluding Assets Held for Sale) for the five fiscal years ending June 30 and thereafter were as follows:
(In Thousands)
2003 $ 132,629 2004 110,494 2005 86,132 2006 65,503 2007 48,797 Thereafter 107,878 -------- Total $551,433
Cabot L.P. is subject to the usual business risks associated with the collection of the above-scheduled rents. The above amounts do not include additional rental receipts that will become due as a result of the expense reimbursement and escalation provisions in the leases. In addition, Cabot L.P.'s minimum future rental receipts related to Assets Held for Sale and nonindustrial properties total $137.3 million and $5.7 million, respectively, as of June 30, 2002.
6. INCOME TAXES
No provision for federal and state income taxes has been recorded relating to Cabot L.P. as the partners report their respective share of net taxable income on their individual tax returns.
7. EMPLOYEE BENEFIT PLANS AND AGREEMENTS
Cabot Trust adopted the Cabot Industrial Trust Long-Term Incentive Plan (the LTIP) and the Cabot Industrial Trust 1999 Long-Term Incentive Plan (the 1999 LTIP) (collectively, the Plans), for the purpose of attracting and retaining highly qualified executive officers, Trustees and employees. The 1999 LTIP was maintained as a broad-based plan within the meaning of the New York Stock Exchange rules. Both plans were terminated as a result of the Merger Transactions and all benefits payable to participants were recorded on December 6, 2001 as compensation.
7. EMPLOYEE BENEFIT PLANS AND AGREEMENTS (CONTINUED)
The Plans were administered by the Executive Compensation Committee of the Board of Trustees of Cabot Trust (the Administrator). Officers and other employees of Cabot Trust, Cabot L.P. and designated subsidiaries and members of the Board of Trustees of Cabot Trust who were not employees of Cabot Trust were eligible to participate.
Options were awarded to Trustees in the form of options on Common Shares and to employees of Cabot L.P. or Cabot Advisors in the form of options on Partnership Units.
The Plans provided for the grant of (i) Common Share options and Partnership Unit options intended to qualify as incentive options under Section 422 of the Code (the LTIP only), (ii) Common Share options and Partnership Unit options not intended to qualify as incentive options under Section 422 of the Code and (iii) dividend equivalent rights and distribution equivalent rights (collectively, DEUs) which entitled a Participant to be credited with additional Common Share or Partnership Unit rights.
In connection with the grant of options under the Plans, other than options to nonemployee Trustees, the Administrator determined the terms of the option, including the option exercise price, any vesting requirements and whether a DEU would be awarded. The Administrator had authority to award options at an exercise price that was less than fair market value but had not. Except for options granted to non-employee Trustees, the options granted under the Plans had 10-year terms and became 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 Cabot Trust (as defined in the Plans).
DEUs entitled an option holder to an award of additional Common Shares or Partnership Units at year end with a positive intrinsic value calculated using a formula that was based on the difference between the annual distribution rate on the Common Shares and Partnership Units versus the average dividend rate on common stocks included in the S&P 500 Index. DEUs vested on a vesting schedule as determined by the Administrator and once vested entitled the holder to a Common Share or Partnership Unit at the earlier of the year of exercise of the underlying option, the year of termination of employment, or the year of expiration of the underlying option or, in some cases, only upon a change in control. The options granted with DEUs resulted in compensation expense in 2001, 2000 and 1999 of approximately $15.4 million (including $14.6 million related to the change in control), $772,000 and $475,000, respectively.
To the extent an option had not become exercisable at the time of the holder's termination of employment, it was forfeited unless the Administrator had previously exercised its reasonable discretion to make such option exercisable and all vested options which were not exercised by the expiration date described in the Plans were forfeited. Any Common Shares or Partnership Units subject to options which were forfeited (or which expired without exercise) were again available for grant under the Plans.
The closing of the Merger Transactions resulted in a change of control under the Plans and all options and DEU awards became fully vested. All options and DEUs were settled by a payment to the holders of $24 per Common Share or Partnership Unit, less the exercise price of the related option or DEU, totaling $21.1 million and $17.3 million, respectively.
7. EMPLOYEE BENEFIT PLANS AND AGREEMENTS (CONTINUED)
A summary of Cabot Trust's stock option activity is as follows for the period ended December 6, 2001 and for each of the years ended December 31, 2000 and 1999.
For the DEUs outstanding as of December 31, 2000 and 1999, 156,889 and 152,797, respectively, vested over the shorter of a four-year period or upon a change of control and 348,740 and 130,908, respectively, vested only upon a change of control.
Pro Forma Stock-based Compensation Expense - As permitted by SFAS No. 123, Accounting for Stock-based Compensation, Cabot L.P. has elected to apply APB Opinion No. 25, Accounting for Stock Issued to Employees, to account for its stock-based compensation plans. Prior to the Merger Transactions, except for the DEUs as described above, no compensation cost has been recognized for Cabot Trust's Plans as the option prices at the date of grant were equal to market prices. Had compensation cost for awards in 2001 (through the date of the Merger Transactions), 2000 and 1999 under Cabot Trust's Plans been determined based on the fair value at the grant dates consistent with the method set forth under SFAS No. 123, the effect on Cabot L.P.'s net income allocable to partnership units would have been as follows for the period from January 1 to December 6, 2001 and for the years ended December 31, 2000 and 1999.
7. EMPLOYEE BENEFIT PLANS AND AGREEMENTS (CONTINUED)
All options and DEUs were settled in conjunction with the Merger Transactions and therefore have no effect subsequent to December 6, 2001.
The weighted average fair value per share/unit of options granted was $2.36, $2.51 and $2.23 in 2001, 2000 and 1999, respectively. The fair value of each option grant was estimated on the grant date using the Black-Scholes option pricing model with the following weighted-average assumptions:
2001 2000 1999
Expected Volatility 18.45% 18.49% 19.21% Risk-free interest rate 4.80-5.51% 6.00-6.69% 4.82-6.60% Expected life options 7 Years 7 Years 7 Years Expected dividend yields 5.4% 6.20% 6.90%
The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option pricing models require the input of highly subjective assumptions including expected stock price volatility. Because Cabot Trust's employee stock options had characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of fair value of its employee stock options.
401(k) Savings Plan - The Cabot Savings Plan 401(k) covered eligible full-time employees of Cabot L.P., Cabot Trust and their affiliates. Contributions to the plan were made by both the employee and the employer. Employer contributions were based on the level of employee contributions. For this plan, Cabot L.P. contributed and charged to expense $80,000, $64,000 and $58,000 in 2001, 2000 and 1999, respectively.
In conjunction with the Merger Transactions in 2001, Cabot Trust terminated this plan which resulted in the vesting of all employer contributions. Plans assets will be distributed to all plan participants upon receipt of a final determination letter from the Internal Revenue Service.
Employment and Severance Agreements - Cabot L.P. had employment agreements with former senior executives. Each of the employment agreements provided for severance payments in the event of a change in control of Cabot Trust equal to three times the sum of the current base salary and the latest annual bonus paid and also provided for tax reimbursements in certain circumstances.
On December 17, 1998, Cabot Trust's Board of Trustees approved a severance plan covering all full-time employees of Cabot L.P. and its affiliates not covered by employment agreements which provided for six to 24 months of compensation to be paid, under certain circumstances, in the event the employee was terminated due to a change in control.
In conjunction with the Merger Transactions, the former senior executives were entitled to payments totaling $21.7 million under the employment agreements, and all other employees who were terminated were entitled to payments under the severance plan totaling $6.0 million. These amounts are reflected as severance and merger expenses in the accompanying consolidated statement of operations for the period from January 1 to December 6, 2001.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures about Fair Value of Financial Instruments, requires Cabot L.P. to disclose fair value information for all financial instruments, for which it is practicable to estimate fair value, whether or not recognized in the balance sheets. Cabot L.P.'s financial instruments, other than debt and interest rate protection agreements, are generally short-term in nature and contain minimal credit risk. These instruments consist of cash and cash equivalents, rents and other receivables and accounts payable. The carrying amount of these assets and liabilities in the consolidated balance sheets approximate fair value.
The carrying amount and fair value of Cabot L.P.'s long-term obligations and off-balance-sheet financial instruments as of June 30, 2002, December 31, 2001 and 2000 are as follows:
Cabot L.P.'s Mortgage Loans and Unsecured Debt are at fixed rates and were revalued at December 7, 2001 (see Note 4). The fair market values of Mortgage Loans and Unsecured Debt were estimated using a valuation technique that discounts expected future cash flows to net present value, at current market rates. The market rates at December 7, 2001 approximate the rates at June 30, 2002 and December 31, 2001; therefore the carrying values are equal to the market values at June 30, 2002 and December 31, 2001. The fair market value of Cabot L.P.'s Unsecured Debt at December 31, 2000 was estimated based on publicly quoted market prices, which represented the amount Cabot L.P. would have to pay to repurchase such borrowings. Cabot L.P.'s Revolving Credit Facility, Facility and Bridge Financing were at variable rates, which resulted in carrying values that approximate their fair values at June 30, 2002 and December 31, 2001 and 2000. The fair value of Cabot L.P.'s interest rate protection agreements was the estimated amount that Cabot L.P. would receive or pay if it had terminated the contracts as of December 31, 2000, taking into account the change in interest rates and the creditworthiness of the counterparties. There are no balances under the Facility or interest protection agreements outstanding at December 31, 2001 nor June 30, 2002 and no balance under the Bridge Financing at December 31, 2000 nor June 30, 2002.
9. RELATED PARTY TRANSACTIONS
Following the Merger Transactions, Cabot L.P. and RREEF America L.L.C. (RREEF), an affiliate of one of the members in Calwest, entered into an investment advisory agreement that engaged RREEF as the investment adviser of Cabot L.P. for the period beginning on December 7, 2001 and ending on December 31, 2002. Cabot L.P. may extend the term of the agreement for additional one-year periods. Under the agreement, RREEF is to provide asset and property management, development, acquisition and disposition services to Cabot L.P. and Cabot L.P. is to pay RREEF the following fees:
9. RELATED PARTY TRANSACTIONS (CONTINUED)
(i) an annual asset management fee equal to (A) the fair market value of the properties in the Cabot L.P. portfolio during the measurement period, divided by (B) the sum of the fair market values of the properties in the Calwest portfolio and the Cabot L.P. portfolio during the same measurement period (the Total Portfolio Value), multiplied by (C) the dollar amount determined using the following fee schedule:
(a) 50 basis points to the extent the Total Portfolio Value is less than $1 billion, plus
(b) 35 basis points to the extent the Total Portfolio Value is more than $1 billion and less than $2 billion, plus
(c) 30 basis points to the extent the Total Portfolio Value is more than $2 billion and less than $3 billion, plus
(d) 25 basis points to the extent the Total Portfolio Value exceeds $3 billion;
(ii) an acquisition fee of .50% of the purchase price (including any debt incurred or assumed) of property acquired;
(iii) a monthly property management fee for all the properties managed by RREEF equal to 2.52% of total monthly collections;
(iv) a lease commission upon the execution of a lease agreement or certain lease amendments equal to a percentage (depending on type of lease and whether or not there is a listing and/or cooperating broker) of annual base rent contracted for over the original term of the lease document minus certain amounts related to amortized cost of tenant improvements and concessions given to the tenant;
(v) a construction supervision fee for each capital expenditure greater than $100,000 equal to 3% of such capital expenditures up to a maximum fee of $150,000 per capital expenditure;
(vi) a development fee equal to 2% of property development costs excluding land costs, acquisition and development fees and actual or imputed interest costs;
(vii) a disposition fee of .25% of the sales price of a property and
(viii) an incentive fee based on the cumulative performance of the portfolio of properties owned by Cabot L.P. and Calwest.
Under such agreement, Cabot L.P. incurred acquisition fees of $16,000 and $6.4 million, asset management fees of $3.5 million and $517,000, property management fees of $2.5 million and $309,000, development fees of $247,000 and $211,000, leasing fees of $137,000 and $0 and disposition fees of $0 and $19,000 under this agreement during the periods from January 1, 2002 to June 30, 2002 and December 7, 2001 to December 31, 2001, respectively.
Cabot L.P. earned fees from its Joint Ventures as described in Note 10. Since the closing of the Merger Transactions, these responsibilities have been performed by RREEF, who as a result, is paid the fees for services due to Cabot L.P. under the Joint Venture Agreements. Therefore for the six months ended June 30, 2002, RREEF earned $435,000 from Cabot L.P. related to fees it had earned under the Joint Venture Agreements.
On December 7, 2001, RREEF entered into an agreement with Cabot L.P. and Cabot Advisors under which (i) Cabot L.P. and Cabot Advisors agreed to permit RREEF to occupy certain premises that were leased by Cabot L.P. and Cabot Advisors, and RREEF agreed to reimburse Cabot L.P. and Cabot Advisors for rent payable under such leases, (ii) Cabot L.P. and Cabot Advisors transferred to RREEF all of its right, title and interest in all furniture, fixtures and equipment located in such premises, (iii) Cabot L.P. agreed to reimburse RREEF for any severance amounts paid by RREEF to the former employees of Cabot L.P. and Cabot Advisors who were hired by RREEF in connection with the Merger Transactions, (iv) Cabot L. P. agreed to reimburse RREEF for payments made by RREEF for a Cabot L.P. property in connection with a development agreement and (v) Cabot L.P. agreed to pay RREEF the management and other fees otherwise payable to Cabot L.P. for performing the management services required to be performed by Cabot L.P. under the Joint Venture agreements.
9. RELATED PARTY TRANSACTIONS (CONTINUED)
The current trustees and executive officers of Cabot Trust are all employees of RREEF, are compensated by RREEF and receive no remuneration or other compensation from Cabot L.P.
On August 1, 2002, Cabot L.P. sold its interest in Cabot Acquisition LLC, a wholly owned subsidiary of Cabot L.P., which owned 46 properties, to CalEast for $375.5 million, of which $300.5 million was paid in cash and $75 million was paid by the assumption of Mortgage Loans. As a result of this transaction, Cabot L.P. recorded a provision for impairment of assets (after consideration of a reduction in the premium related to the $75 million debt of $3.6 million) in the amount of $1.9 million, which is included in discontinued operations in the six month period ended June 30, 2002. Ninety-eight percent (98%) of the membership interest of CalEast is owned by CalPERS.
10. EQUITY INVESTMENTS
Cabot L.P. had an equity investment in Cabot Advisors (see Note 2) and also has a 20% equity interest in the Joint Ventures with JP Morgan Chase Capital Partners, GE Capital Real Estate and Teachers Insurance and Annuity Association - College Retirement Fund (TIAA-CREF), each of which were formed in 2000. As of December 7, 2001, Cabot L.P.'s investments in the Joint Ventures and Cabot Advisors were adjusted to reflect the fair value of the investments in connection with the purchase price allocation. Furthermore, in conjunction with the Merger Transactions, Cabot L.P. acquired a controlling interest in Cabot Advisors; therefore, commencing December 7, 2001, the accounts of Cabot Advisors are consolidated for financial reporting purposes.
Through December 6, 2001, Cabot Advisors was responsible for various activities including management of Cabot L.P.'s properties and properties on behalf of third parties, as well as providing other real estate related services for third parties. Total management fees earned by Cabot Advisors related to Cabot L.P.'s properties are included in Property Operating Expenses in the accompanying consolidated statements of operations and amounted to $4,395,000, $4,444,000, $2,684,000 in 2001, 2000 and 1999, respectively. As of the date of the Merger Transactions, Cabot Advisors ceased providing management and real estate services and Cabot L.P. engaged RREEF to provide these services for its portfolio (see Note 9).
The Joint Ventures are engaged in the acquisition and development of industrial properties. Cabot L.P. is the managing member and earns acquisition, development, asset management and property management fees for services it provides to the Joint Ventures. During the six month period ended June 30, 2002 and the years ended December 31, 2001 and 2000, Cabot L.P. earned acquisition and development fees of $373,000, $734,000 and $687,000 and asset management and property management fees of $286,000, $338,000 and $56,000, respectively.
10. EQUITY INVESTMENTS (CONTINUED)
Summarized unaudited financial information for Cabot Advisors and the Joint Ventures as of June 30, 2002 and for the six months ended June 30, 2002 and as of December 31, 2001, 2000 and 1999 and for the years then ended is as follows:
Cabot Advisors' operations are consolidated commencing December 7, 2001, therefore, there are no results reflected above for the six months ended June 30, 2002 and the results for the year ended December 31, 2001 reflected above represent activity only through December 6, 2001, or approximately 11 months. No assets are reflected above for 2002 nor 2001 related to Cabot Advisors. Cabot L.P.'s share of Cabot Advisors' net income (loss) through December 6, 2001 is included in Interest and Other Income in the accompanying consolidated statements of operations. Cabot L.P.'s share of the Joint Ventures' income for the period from December 7 through December 31, 2001 was $79,000. The Joint Ventures recognized total revenue of approximately $1.1 million during the same period.
The Joint Ventures commenced operations at various dates in 2000. Accordingly, their results for the year ended December 31, 2000 do not represent a full year. Cabot L.P.'s share of the Joint Ventures' net income is included in Earnings and Fees from Joint Ventures and Advisory Clients in the accompanying consolidated statements of operations.
11. COMMITMENTS AND CONTINGENCIES
Concentration of Credit Risk - Cabot L.P. maintains its cash and cash equivalents at financial institutions. The combined account balances at each institution periodically exceed Federal Deposit Insurance Corporation (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 Cabot L.P. believes the risk is not significant.
Environmental - Cabot L.P., as an owner of real estate, is subject to various environmental laws of federal and local governments. All of Cabot L.P.'s properties were subject to Phase I Environmental Assessments, which consist of, among other things, a visual inspection of the property and its neighborhood and a review of pertinent public records. Compliance by Cabot L.P. with existing laws has not had a material adverse effect on Cabot L.P.'s consolidated financial condition or results of operations and management does not believe it will have such a material adverse effect in the future.
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Litigation - Management of Cabot L.P. 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 and none of which is expected to have a material adverse effect on the consolidated operating results or financial position of Cabot L.P.
Minimum Future Lease Obligations - In conjunction with the Merger Transactions, Cabot L.P.'s lease obligations for all offices, that will remain open, were assumed by RREEF. The remaining lease obligations of $60,000, related to offices to be closed, were accrued as of the date of the Merger Transactions (see Note 3). Cabot L.P. incurred rental expense of $655,000, $421,000 and $389,000 for the years ended December 31, 2001, 2000 and 1999, respectively. In addition, Cabot Advisors incurred rental expense of $776,000, $476,000 and $374,000 for the years ended December 31, 2001, 2000 and 1999, respectively.
Severance Agreement - In connection with the Merger Transactions, RREEF agreed to employ those employees of Cabot L.P. and Cabot Trust who were not terminated in connection with the Merger Transactions and to pay such individuals the severance amounts that such employees would otherwise have been entitled to under the Cabot Trust Severance Plan. In consideration for the foregoing, Cabot L.P. agreed to reimburse RREEF for any amounts paid by RREEF to such employees.
12. SUPPLEMENTARY QUARTERLY DATA
CABOT INDUSTRIAL PROPERTIES, L.P.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION JUNE 30, 2002 - --------------------------------------------------------------------------------
(Continued)
CABOT INDUSTRIAL PROPERTIES, L.P.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION JUNE 30, 2002 - --------------------------------------------------------------------------------
(Continued)
CABOT INDUSTRIAL PROPERTIES, L.P.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION JUNE 30, 2002 - --------------------------------------------------------------------------------
(Continued)
CABOT INDUSTRIAL PROPERTIES, L.P.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION JUNE 30, 2002 - --------------------------------------------------------------------------------
(Continued)
CABOT INDUSTRIAL PROPERTIES, L.P.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION JUNE 30, 2002 - --------------------------------------------------------------------------------
(Continued)
CABOT INDUSTRIAL PROPERTIES, L.P.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION JUNE 30, 2002 - -------------------------------------------------------------------------------
(Continued)
CABOT INDUSTRIAL PROPERTIES, L.P.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION JUNE 30, 2002 - --------------------------------------------------------------------------------
CABOT INDUSTRIAL PROPERTIES, L.P.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION JUNE 30, 2002 - --------------------------------------------------------------------------------
(Continued)
CABOT INDUSTRIAL PROPERTIES, L.P.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION JUNE 30, 2002 - --------------------------------------------------------------------------------
CABOT INDUSTRIAL PROPERTIES, L.P.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION JUNE 30, 2002 - --------------------------------------------------------------------------------
(1) The aggregate cost for federal income tax purposes as of June 30, 2002, was approximately $1,300,000. (2) Nonindustrial property.
CABOT INDUSTRIAL PROPERTIES, L.P. Schedule III - Real Estate and Accumulated Depreciation (continued) June 30, 2002 (dollar amounts in thousands)
Reconciliation of Real Estate
The changes in total investment in real estate assets for the six months ended June 30, 2002 and for the years ended December 31, 2001, 2000 and 1999 are as follows:
Reconciliation of Accumulated Depreciation
The changes in accumulated depreciation for the six months ended June 30, 2002 and for the years ended December 31, 2001, 2000 and 1999 are as follows:
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and --------------------------------------------------------------- Financial Disclosure --------------------
On April 29, 2002, Cabot L.P. dismissed its independent public accountants, Arthur Andersen LLP ("Andersen") and, on April 29, 2002, Cabot retained Deloitte & Touche LLP ("Deloitte") as its new independent public accountants. The change in accountants was recommended and approved by Cabot Trust, the general partner of Cabot L.P. Cabot L.P. does not have an audit committee.
During Cabot L.P.'s two most recent fiscal years, and through April 29, 2002, there were no disagreements between Cabot L.P. and Andersen on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to Andersen's satisfaction, would have caused Andersen to make reference to the subject matter of the disagreement in connection with its reports on Cabot L.P.'s financial statements for such periods.
None of the reportable events described under Item 304(a)(1)(v) of Regulation S-K occurred during Cabot L.P.'s two most recent fiscal years ended or during any subsequent interim period through April 29, 2002.
The audit reports issued by Andersen on the consolidated financial statements of Cabot L.P. as of and for the fiscal years ended December 31, 2001 and December 31, 2000 did not contain any adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles. Cabot L.P. provided Andersen with a copy of the foregoing disclosures, and a letter from Andersen confirming its agreement with these disclosures was attached as an exhibit to Cabot L.P.'s report on Form 8-K dated May 3, 2002.
During Cabot L.P.'s two most recent fiscal years ended December 31, 2001 and through April 29, 2002, Cabot L.P. did not consult with Deloitte with respect to the application of accounting principles to a specified transaction or regarding any of the other matters or events set forth in Item 304(a)(2)(i) and (ii) of Regulation S-K.
PART III
Item 10.
Item 10. Directors and Executive Officers of Registrant ----------------------------------------------
Cabot L.P. does not have any directors or executive officers. Under the Second Amended and Restated Limited Partnership Agreement of Cabot L.P. dated February 4, 1998, as amended to date, Cabot Trust has full power and authority in the management and control of Cabot L.P. The executive officers and trustees of Cabot Trust and their respective positions, business experience and ages at September 30, 2002, are set forth below. The executive officers serve at the discretion of the board of trustees of Cabot Trust. RREEF is the investment advisor and manager of Cabot Trust's majority shareholder, Calwest. In such capacity, RREEF can elect or remove members of the board of trustees and officers of Cabot Trust. Currently, the members of the board of trustees and executive officers of Cabot Trust are all employees of RREEF, and in such capacities, such employees of RREEF control the business and affairs of Cabot Trust.
Name Age Position ------------------------------------ -------------------- Warren H. Otto 48 Chairman, Chief Executive Officer, Vice President and Trustee Charles B. Leitner III 43 President and Trustee Christopher L. Hughes 36 Chief Financial Officer Robert J. Cook 48 Vice President and Trustee
Timothy K. Gonzalez 46 Trustee Gary T. Kachadurian 52 Trustee Stephen M. Steppe 55 Trustee Daniel S. Weaver 41 Trustee
Business Experience
Warren Otto. . . . . . . . Mr. Otto has been Chairman, Vice President and Trustee of Cabot Trust since December 2001 and Chief Executive Officer since June 2002. Additionally, Mr. Otto has worked at RREEF since 1994 and currently serves as the Portfolio Manager of Calwest. Mr. Otto graduated cum laude from Harvard College in 1976 majoring in economics.
Charles B. Leitner III . . Mr. Leitner has been the President and Trustee of Cabot Trust since December 2001. Additionally, Mr. Leitner has been employed with RREEF since 1988, directs RREEF's National Acquisitions Group and is a member of the RREEF Investment Committee, serving as its industrial specialist. Mr. Leitner is also a member of RREEF's Policy Committee. Mr. Leitner graduated from the University of
Pennsylvania with a B.A. degree in Urban Studies/Regional Science.
Christopher L. Hughes. . . .Mr. Hughes has been the Chief Financial Officer of Cabot Trust since December 2001. Additionally, Mr. Hughes has served as the Vice President of Capital Markets at RREEF since July 2000. His responsibilities at RREEF include directing the debt capital market activities, which include asset and portfolio-level financing and hedging transactions. Mr. Hughes also is the Chief Financial Officer for Cabot Trust's majority owner, Calwest. From June 1999 to June 2000, Mr. Hughes held the position of Senior Vice President-Director of Capital Markets at Transwestern Commercial Services. From April 1998 to June 1999, Mr. Hughes held the position of Executive Director at CIBC World Markets. From January 1997 to April 1998, Mr. Hughes held the position of Senior Vice President for Heller Real Estate Financial Services. Mr. Hughes received a B.A. degree from Marquette University in 1988.
Robert J. Cook. . . . . . . Mr. Cook has been a Trustee of Cabot Trust since December 2001. Additionally, Mr. Cook has worked at RREEF since February of 1990 and has been principal in charge of RREEF Portfolio Management since 1999. He previously held the positions of vice president and principal at RREEF. Mr. Cook also serves on RREEF's Policy Committee and Investment Committee as its retail specialist. Mr. Cook has M.S. degrees in Real Estate Appraisal and Investment Analysis and Landscape Architecture and a Ph.D. in Urban and Regional Planning from the University of Wisconsin.
Timothy K. Gonzalez . . . . Mr. Gonzalez has been a Trustee of Cabot Trust since December 2001. Additionally, Mr. Gonzalez has worked at RREEF since 1990 and directs the portfolio management activities of the San Francisco office and has managed over $3 billion in assets. He became a principal of RREEF in 1997. Mr. Gonzalez is a member of RREEF's Policy and Investment Committees. Mr. Gonzalez also serves as portfolio manager for RREEF America II, RREEF's flagship core fund. Mr. Gonzalez received his B.S. degree from the University of California, and holds a Masters degree from Harvard University.
Gary T. Kachadurian. . . . .Mr. Kachadurian has been a Trustee of Cabot Trust since December 2001. Additionally, Mr. Kachadurian has worked at RREEF since 1990 and serves as the Principal-in-Charge of RREEF's National Acquisition Group. At RREEF, Mr. Kachadurian has responsibility for the value-added line of business. Mr. Kachadurian also serves as the Apartment Specialist on RREEF's Investment Committee. Further, Mr. Kachadurian is a member of RREEF's Policy Committee. Mr. Kachadurian is a founding Board Member of the Chicago Apartment Association and the immediate past chairman of the National Multi-housing Council. He also serves on the Multi-family Council of the Urban Land Institute, is a member of the International Council of Shopping Centers, and is a Board Member of the Real Estate Committee of the YMCA. Mr. Kachadurian received his B.S. in Accounting from the University of Illinois.
Stephen M. Steppe. . . . . Mr. Steppe has been a Trustee of Cabot Trust since December 2001. Mr. Steppe joined RREEF as a principal in 1986 and oversees the client relations department. He is also a member of RREEF's Policy and Investment Committees and is on its Management Board. He also serves on the Editorial Board of the Institutional Real Estate Letter. Mr. Steppe is a graduate of the University of Arizona.
Daniel S. Weaver . . . . . Mr. Weaver received a Bachelor's Degree in Architecture and MBA from Miami University. He has 16 years of experience in commercial real estate investments and capital markets. Mr. Weaver was the chief financial officer and a managing director for Rodamco North America, N.V., a European publicly traded property company with $6 billion in US investments, from 1999 until the company was successfully sold in May 2002. Mr. Weaver was named a principal with RREEF (a prior subsidiary of Rodamco) in 2000 and before his involvement with Rodamco North America, was responsible for providing capital markets services and structuring development investments for RREEF's pension fund clients. Before joining RREEF in 1996, Mr. Weaver was a vice president with Homart Development Co., with primary responsibility for executing major capital transactions. He began his real estate career with Sun Bank as a commercial real estate officer. Mr. Weaver is currently a member of the International Council of Shopping Centers and the Association of Foreign Investors in Real Estate.
Item 11.
Item 11. Executive Compensation ----------------------
Summary of Cash and Other Compensation
Cabot L.P. does not have any directors or executive officers. Prior to the Merger, Cabot Trust's executive officers were compensated by Cabot L.P. in the manner set forth below. Upon completion of the Merger, Calwest designated a new Board of Trustees for Cabot Trust. The Board of Trustees elects the Chief Executive Officer and other executive officers for Cabot Trust. None of the newly elected trustees and executive officers are employees of Cabot Trust or Cabot L.P. nor have they received compensation from Cabot Trust or Cabot L.P. for services provided in their respective capacities.
The following table sets forth information concerning the compensation earned by Cabot Trust's former Chief Executive Officer and each of its six other most highly compensated former executive officers (collectively, the "Named Executive Officers") during the period January 1, 2001 through December 6, 2001 and during the calendar years ended December 31, 2000 and 1999.
(1) Options granted may have included rights to receive distribution equivalent units ("DEUs") annually based on the extent to which the annual dividend rate on Cabot Trust's Common Shares exceeded the average dividend rate on the common shares of the companies comprising the Standard & Poor's 500 Stock Index. DEUs, when granted, were to vest on a vesting schedule determined at the date of grant, which may be only upon a change in control. DEUs granted were to be settled in Common Shares upon exercise or termination of the related vested options, with the number of such shares being determined at the grant dates of the DEUs.
(2) Consists of amounts paid to the Named Executive Officers upon settlement of all their options and DEUs upon completion of the Merger, amounts paid under employment agreements for severance and related tax liabilities incurred by each Named Executive Officer. Also includes accrued and unused vacation pay due upon completion of the Merger and contributions to officer's accounts under the Cabot Savings Plan 401(k) for the period January 1, 2001 through December 6, 2001 and for each of the years ended December 31, 2000 and 1999 in the amount of $1,800 per period.
All options and DEUs granted through December 6, 2001 were settled in cash upon completion of the Merger. The Common Share equivalent
of option and DEU amounts settled for each of the Named Executive Officers, respectively are as follows: Ferdinand Colloredo-Mansfeld -- 750,000 and 116,408; Robert E. Patterson -- 615,000 and 94,268; Franz Colloredo-Mansfeld -- 545,000 and 83,538; and Andrew D. Ebbott, Howard B. Hodgson, Jr., Eugene F. Reilly and Neil E. Waisnor -- 435,000 and 66,830 each, respectively.
Amounts paid to each of the Named Executive Officers under employment agreements for tax liabilities incurred are as follows: Ferdinand Colloredo-Mansfeld -- $2,280,064; Robert E. Patterson -- $1,779,368; Franz Colloredo-Mansfeld -- $1,493,973; Andrew D. Ebbott -- $1,285,900; Howard B. Hodgson, Jr. -- $1,296,545; Eugene F. Reilly -- $1,304,263 and Neil E. Waisnor -- $1,296,542, respectively.
(3) Reflects compensation for the period January 1, 2001 to December 6, 2001.
Option Grants in Last Fiscal Year
Grants of options to purchase an aggregate of 1,019,000 Units, made under Cabot Trust's Long-Term Incentive Plan, were made to employees of Cabot L.P. for services performed relating to the year ended December 31, 2000. Included within the 1,019,000 options granted, 705,000 were granted to the Named Executive Officers and are included within the Summary Compensation Table under "Long-Term Compensation Awards" for the year 2000 as set forth in Cabot Trust's definitive proxy statement filed with respect to its 2001 Annual Meeting of Shareholders. No options or DEUs have been granted subsequent to the date of Merger.
Aggregated Option Exercises in Last Calendar Year and Calendar Year-End Option Values
There were no exercises of options or DEUs by the Named Executive Officers during the period January 1, 2001 through December 6, 2001. All outstanding options and DEUs granted to employees of Cabot Trust were settled upon completion of the Merger on December 7, 2001. There have been no grants of options or DEUs subsequent to the date of Merger. Accordingly, there were no outstanding options or DEUs, vested or nonvested, as of June 30, 2002.
Employment Agreements
Each of the Named Executive Officers had entered into employment agreements with Cabot Trust and Cabot L.P. Each of the agreements with Messrs. Ferdinand Colloredo-Mansfeld, Robert E. Patterson and Franz Colloredo-Mansfeld were for an initial term of three years, and each year the term automatically extended an additional year unless terminated in advance. The agreements with each of the other Named Executive Officers were for initial terms of two years, with those terms automatically extending each year for an additional year unless terminated in advance. The agreements each provided for annual base compensation and an annual cash bonus to be determined by the Board of Trustees or the Executive Compensation Committee. Upon the change in control of Cabot Trust, which occurred as a result of the Merger, each agreement provided the employee the option of terminating the employment agreement, resulting in severance payments equal to three times the sum of the current base salary and the last annual bonus payment and also provided for tax reimbursements in certain circumstances. Each of the Named Executive Officers were terminated upon completion of the Merger. Amounts received under these agreements are included within the Summary Compensation Table under "All Other Compensation".
Compensation Committee Interlocks and Insider Participation
Prior to the Merger, W. Nicholas Thorndike (Chairman), George M. Lovejoy, Jr., Christopher C. Milliken, Maurice Segall, and Ronald L. Skates (the "Former Independent Trustees") each served on Cabot Trust's Executive Compensation Committee. Following the Merger, the Board of Trustees of Cabot Trust has not appointed a Compensation Committee. Cabot Trust does not compensate its executive officers.
Compensation of Trustees
Prior to the Merger, the Former Independent Trustees received an annual retainer of $18,000 and per meeting compensation of $1,000 for board meetings and $500 for committee meetings. The Former Chairmen of the Audit and Compliance Committee, the Executive Compensation Committee and the Nominating Committee each received an additional $1,000 annually for their services in those capacities, and each Former Trustee was reimbursed for out-of-town travel expenses incurred in attending Board and Committee meetings. Each Former Independent Trustee also received, under Cabot Trust's Long-Term Incentive Plans, a grant of options to purchase 10,000 Common Shares on the date the Trustee became a Trustee, and an additional grant of options to purchase 4,000 Common Shares each year on the date of Cabot Trust's annual meeting of shareholders provided they had been reelected or were continuing to serve as Trustees following the meeting. Option grants included rights to receive DEUs calculated and credited annually based on the extent to which the annual dividend rate on Cabot Trust's Common Shares exceeded the average dividend rate on the common shares of the companies comprising the Standard & Poor's 500 Index. DEU grants vested over one year or upon a change of control for the Former Independent Trustees. The exercise price per share for options granted to the Former Independent Trustees was the market price of a Common Share of Cabot Trust on the date of grant. Options granted to the Former Independent Trustees became exercisable on the first anniversary of the date of grant or upon a change in control. All options and DEUs granted to the Former Independent Trustees were settled upon the completion of the Merger. The amounts received upon settlement of all options and DEUs held by the Former Independent Trustees were as follows: W. Nicholas Thorndike, Ronald L. Skates, Christopher C. Milliken, Maurice Segall $178,920 each; and George M. Lovejoy, Jr. $142,116.
Current Trustees of Cabot Trust do not receive any compensation for services provided as Trustees.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and ------------------------------------------------------------------ Related Stockholder Matters ---------------------------
As of September 30, 2002 all limited partnership units of Cabot L.P. were owned by Cabot Trust, which in turn, is greater than 99% owned by Calwest, which is in turn, 98% owned by CalPERS. Cabot Trust's address is 875 North Michigan Avenue, 41st Floor, Chicago, Illinois 60611.
Cabot L.P.'s Preferred Units were owned as follows as of September 30, 2002:
Series B 100% by Belmar Realty Corporation c/o Eaton Vance Management The Eaton Vance Building 255 State Street Boston, MA 02109
Series C 100% by TMCT II, LLC c/o Tribune Company 435 North Michigan Avenue Chicago, Illinois 60611-4001
Series D 100% by JPM Mosaic II REIT, Inc. c/o JP Morgan Private Investments, Inc. 345 Park Avenue New York, NY 10154-1002
Series E 100% by Montebello Realty Corporation 800 Scudder's Mill Road Special Investments Area 2-G Plainsboro, NJ 08536
Series F 100% by SSB Tax Advantaged Exchange Fund II REIT, Inc. c/o Salomon, Smith Barney, Inc. 388 Greenwich St., 17th Floor New York, NY 10013
Series G 100% by JPM Emerging Technology REIT, Inc. c/o JP Morgan Private Investments, Inc. 345 Park Avenue New York, NY 10154-1002
Series H 100% by GSEP 2000 Realty Corp. c/o Goldman Sachs & Co. 85 Broad Street New York, NY 10004
Item 13.
Item 13. Certain Relationships and Related Transactions ----------------------------------------------
During 2001 (through December 6, 2001) Cabot Advisors provided asset management and property management services related to properties owned by Cabot Trust's former Chief Executive Officer, Ferdinand Colloredo-Mansfeld, for which it earned fees charged at rates consistent with rates charged by Cabot Advisors to unrelated third parties, that totaled $163,000 and $33,000, respectively.
For the period beginning January 1, 2001, Cabot L.P. had advanced unsecured loans to Cabot Advisors to fund operations, including a development project, in a maximum amount of $6,815,505 through December 6, 2001. Such loans bore interest at the rate of prime plus 2%. Cabot L.P. also sold property to Cabot Advisors for $2,005,000.
Through December 6, 2001, Cabot L.P. owned all of the outstanding preferred stock of Cabot Advisors, which as a class was entitled to 95% of all distributions, and Ferdinand Colloredo-Mansfeld owned all of the outstanding common stock of Cabot Advisors, which as a class was entitled to 5% of all distributions. In conjunction with the Merger, Cabot Advisors repurchased all of its voting common shares from Ferdinand Colloredo-Mansfeld, the former Chairman and Chief Executive Officer of Cabot Trust. In return for the shares, Mr. Colloredo-Mansfeld was assigned three of Cabot Advisors' advisory contracts and furniture, fixtures and equipment with a net book value of $100,000. Cabot Advisors issued voting common shares to Cabot L.P. for $115,000 in cash, constituting all of Cabot Advisor's outstanding shares.
In addition, during calendar year 2001, Cabot L.P. incurred property management fee expenses related to its properties of $4,395,000 payable to Cabot Advisors.
Following the Merger Transactions, Cabot L.P. and RREEF entered into an investment advisory agreement that engaged RREEF as the investment adviser of Cabot L.P. for the period beginning on December 7, 2001 and ending on December 31, 2002. Cabot L.P. may extend the term of the agreement for additional one-year periods. Under the agreement, RREEF is to provide asset and property management, development, leasing, acquisition and disposition services to Cabot L.P. and Cabot L.P. is to pay RREEF the following fees:
(i) an annual asset management fee equal to (A) the fair market value of the properties in the Cabot L.P. portfolio during the measurement period, divided by (B) the sum of the fair market values of the properties in the Calwest portfolio and the Cabot L.P. portfolio during the same measurement period (the Total Portfolio Value), multiplied by (C) the dollar amount determined using the following fee schedule:
(a) 50 basis points to the extent the Total Portfolio Value is less than $1 billion, plus
(b) 35 basis points to the extent the Total Portfolio Value is more than $1 billion and less than $2 billion, plus
(c) 30 basis points to the extent the Total Portfolio Value is more than $2 billion and less than $3 billion, plus
(d) 25 basis points to the extent the Total Portfolio Value exceeds $3 billion;
(ii) an acquisition fee of .50% of the purchase price (including any debt incurred or assumed) of property acquired;
(iii) a monthly property management fee for all the properties managed by RREEF equal to 2.52% of total monthly collections;
(iv) a lease commission upon the execution of a lease agreement or certain lease amendments equal to a percentage (depending on type of lease and whether or not there is a listing and/or cooperating broker) of annual base rent contracted for over the original term of the lease document minus certain amounts related to amortized cost of tenant improvements and concessions given to the tenant;
(v) a construction supervision fee for each capital expenditure greater than $100,000 equal to 3% of such capital expenditures up to a maximum fee of $150,000 per capital expenditure;
(vi) a development fee equal to 2% of property development costs excluding land costs, acquisition and development fees and actual or imputed interest costs;
(vii) a disposition fee of .25% of the sales price of a property and
(viii) an incentive fee based on the cumulative performance of the portfolio of properties owned by Cabot L.P. and Calwest.
During the periods from January 1, 2002 to June 30, 2002 and from December 7, 2001 to December 31, 2001, respectively, Cabot L.P. incurred acquisition fees of $16,000 and $6.4 million, asset management fees of $3.5 million and $517,000, property management fees of $2.5 million and $309,000, development fees of $247,000 and $211,000, leasing fees of $137,000 and $0 and disposition fees of $0 and $19,000, respectively, under this agreement.
On December 7, 2001, RREEF entered into an agreement with Cabot L.P. and Cabot Advisors under which (i) Cabot L.P. and Cabot Advisors agreed to permit RREEF to occupy certain premises that were leased by Cabot L.P. and Cabot Advisors, and RREEF agreed to reimburse Cabot L.P. and Cabot Advisors for rent payable under such leases, (ii) Cabot L.P. and Cabot Advisors transferred to RREEF all of its right, title and interest in all furniture, fixtures and equipment located in such premises, (iii) Cabot L.P. agreed to reimburse RREEF for any severance amounts paid by RREEF to the former employees of Cabot L.P. and Cabot Advisors who were hired by RREEF in connection with the Merger Transactions, (iv) Cabot L. P. agreed to reimburse RREEF for payments made by RREEF for a Cabot L.P. property in connection with a development agreement and (v) Cabot L.P. agreed to pay RREEF the management and other fees otherwise payable to Cabot L.P. for performing the management services required to be performed by Cabot L.P. under the Joint Venture agreements.
The current trustees and executive officers of Cabot Trust are all employees of RREEF, are compensated by RREEF and receive no remuneration or other compensation from Cabot L.P.
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 PROPERTIES, L.P.
By Cabot Industrial Trust, its general partner
By /s/ WARREN H. OTTO ---------------------------------- Title: Chief Executive Officer ------------------------------
Date: October 14, 2002
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.
Title Date ----- ---- /s/ WARREN H. OTTO Chairman, Chief Executive October 14, 2002 - ----------------------------- Officer Vice President and Warren H. Otto Trustee (Principal Executive Officer)
/s/ CHARLES B. LEITNER, III President and Trustee October 14, 2002 - ----------------------------- Charles B. Leitner, III
/s/ CHRISTOPHER L. HUGHES Chief Financial Officer October 14, 2002 - ----------------------------- (Principal Financial Officer Christopher L. Hughes and Principal Accounting Officer)
/s/ ROBERT J. COOK Vice President and Trustee October 14, 2002 - ----------------------------- Robert J. Cook
/s/ TIMOTHY K. GONZALEZ Trustee October 14, 2002 - ----------------------------- Timothy K. Gonzalez
/s/ GARY T. KACHADURIAN Trustee October 14, 2002 - ----------------------------- Gary T. Kachadurian
/s/ STEPHEN M. STEPPE Trustee October 14, 2002 - ----------------------------- Stephen M. Steppe
/s/ DANIEL S. WEAVER Trustee October 14, 2002 - ----------------------------- Daniel S. Weaver
PART IV
Item 14.
Item 14. Exhibits and Reports on Form 8-K --------------------------------
(a) The following documents are filed as part of this report:
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES Included in Item 8 hereof.
INDEX TO EXHIBITS
Exhibit Number Document Description - ------ --------------------
2.1 Agreement and Plan of Merger, dated as of October 28, 2001, by and among Calwest Industrial Properties, LLC, Rooster Acquisition Corp., Cabot Trust and Cabot L.P. Incorporated by reference to Exhibit 99 (D)(3) to Calwest's Schedule TO filed on November 5, 2001. Cabot L.P. agrees to furnish supplementally a copy of any omitted schedule to the Securities and Exchange Commission upon request.
2.2 Agreement of Sale and Purchase, dated as of June 28, 2002, between Cabot Industrial Trust and CalEast Industrial Investors, LLC. Incorporated by reference to the Exhibit 2.1 to Cabot L.P.'s Form 8-K, filed July 3, 2002.
3.1 Second Amended and Restated Agreement of Limited Partnership of Cabot L.P., dated February 4, 1998, as amended by (i) the First Amendment thereto dated April 29, 1999, (ii) the Second Amendment thereto dated September 3, 1999, (iii) the Third Amendment thereto dated September 27, 1999, (iv) the Fourth Amendment thereto dated December 9, 1999, (v) the Fifth Amendment thereto dated December 22, 1999, (vi) the Sixth Amendment thereto dated March 23, 2000, (vii) the Seventh Amendment thereto dated May 25, 2000, (viii) the Eighth Amendment thereto dated February 26, 2002 and (ix) the Ninth Amendment thereto dated May 13, 2002.
4.1 Amended and Restated Cabot Trust Declaration of Trust, dated January 26, 1998. Incorporated by reference to Exhibit 3.1 to Cabot Trust's Form S-11 Registration Statement (File No. 333-38383; the "Form S-11").
4.2 Articles of Amendment to Amended and Restated Cabot Declaration of Trust, dated February 1, 2002. Incorporated by reference to Exhibit 4.2 to Cabot L.P.'s Annual Report on Form 10-K for the year ended December 31, 2001.
4.3 Second Amended and Restated Bylaws of Cabot Trust, dated March 22, 2002. Incorporated by reference to Exhibit 4.3 to Cabot L.P.'s Annual Report on Form 10-K for the year ended December 31, 2001.
4.4 Form of Indenture by and among Cabot L.P., Cabot Trust and Bank of New York as trustee. Incorporated by reference to Exhibit 4.11 to Cabot Trust's and Cabot L.P.'s Form S-3 Registration Statement (File No. 333-71585).
4.5 Form of Mortgage, Assignment of Leases and Rents, Security
Agreement and Fixture Filing Statement of Cabot L.P., as borrower, for the benefit of Teachers Insurance and Annuity Association of America, as lender, used in connection with mortgage loans. Incorporated by reference to Exhibit 4.3 to Cabot Trust's Annual Report on Form 10-K for the year ended December 31, 1998.
4.6 Form of Promissory Note of Cabot L.P., as borrower, in favor of Teachers Insurance and Annuity Association of America, as lender, used in connection with mortgage loans. Incorporated by reference to Exhibit 4.4 to Cabot Trust's Annual Report on Form 10-K for the year ended December 31, 1998.
4.7 Articles Supplementary, 1,300,000 Shares of 8.625% Series B Cumulative Redeemable Preferred Shares, dated April 29, 1999. Incorporated by reference to Exhibit 4.6 to Cabot Trust's Annual Report on Form 10-K for the year ended December 31, 1999.
4.8 Articles Supplementary, 2,600,000 Shares of 8.625% Series C Cumulative Redeemable Preferred Shares, dated September 3, 1999. Incorporated by reference to Exhibit 4.8 to Cabot Trust's Annual Report on Form 10-K for the year ended December 31, 1999.
4.9 Articles Supplementary, 200,000 Shares of 8.375% Series D Cumulative Redeemable Preferred Shares, dated September 27, 1999. Incorporated by reference to Exhibit 4.10 to Cabot Trust's Annual Report on Form 10-K for the year ended December 31, 1999.
4.10 Articles Supplementary, 200,000 Shares of 8.375% Series E Cumulative Redeemable Preferred Shares, dated December 9, 1999. Incorporated by reference to Exhibit 4.12 to Cabot Trust's Annual Report on Form 10-K for the year ended December 31, 1999.
4.11 Articles Supplementary, 1,800,000 Shares of 8.5% Series F Cumulative Redeemable Preferred Shares, dated December 22, 1999. Incorporated by reference to Exhibit 4.14 to Cabot Trust's Annual Report on Form 10-K for the year ended December 31, 1999.
4.12 Articles Supplementary, 600,000 Shares of 8.875% Series G Cumulative Redeemable Preferred Shares, dated March 23, 2000. Incorporated by reference to Exhibit 4.16 to Cabot Trust's S-3 Registration Statement (File No. 333-51298) filed on December 5, 2000.
4.13 Articles Supplementary, 1,400,000 Shares of 8.95% Series H Cumulative Redeemable Preferred Shares, dated May 25, 2000. Incorporated by reference to Exhibit 4.18 to Cabot Trust's S-3 Registration Statement (File No. 333-51298) filed on December 5, 2000.
4.14 Supplemental Indenture No. 1 dated as May 4, 1999 by and among Cabot L.P. and The Bank of New York. Incorporated by reference to Exhibit 4.19 to Cabot L.P.'s Annual Report on Form 10-K for the year ended December 31, 2000.
4.15 Supplemental Indenture No. 2 dated as September 7, 2000 by and among Cabot L.P. and The Bank of New York. Incorporated by reference to Exhibit 99.2 to the Form 8-K dated September 7, 2000
filed by Cabot L.P.
10.1 Cabot Trust Long-Term Incentive Plan (as Amended and Restated Effective as of January 26, 1998). Incorporated by reference to Cabot Trust's Annual Report on Form 10-K for the year ended December 31, 1999.
10.2 Amended Employment Agreement between Cabot L.P. and Ferdinand Colloredo-Mansfeld. Incorporated by reference to Exhibit 10.6 to Cabot Trust's Annual Report on Form 10-K for the year ended December 31, 1998.
10.3 Amended Employment Agreement between Cabot L.P. and Robert E. Patterson. Incorporated by reference to Exhibit 10.7 to Cabot Trust's Annual Report on Form 10-K for the year ended December 31, 1998.
10.4 Amended Employment Agreement between Cabot L.P. and Franz Colloredo-Mansfeld. Incorporated by reference to Exhibit 10.8 to Cabot Trust's Annual Report on Form 10-K for the year ended December 31, 1998.
10.5 Amended Employment Agreement between Cabot L.P. and Andrew D. Ebbott. Incorporated by reference to Exhibit 10.9 to Cabot Trust's Annual Report on Form 10-K for the year ended December 31, 1998.
10.6 Amended Employment Agreement between Cabot L.P. and Howard B. Hodgson, Jr. Incorporated by reference to Exhibit 10.10 to Cabot Trust's Annual Report on Form 10-K for the year ended December 31, 1998.
10.7 Amended Employment Agreement between Cabot L.P. and Neil E. Waisnor. Incorporated by reference to Exhibit 10.11 to Cabot Trust's Annual Report on Form 10-K for the year ended December 31, 1998.
10.8 Amended Employment Agreement between Cabot L.P. and Eugene F. Reilly. Incorporated by reference to Exhibit 10.12 to Cabot Trust's Annual Report on Form 10-K for the year ended December 31, 1998.
10.9 Amendment to Letter of Employment between Cabot L.P. and Ferdinand Colloredo-Mansfeld dated October 28, 2001. Incorporated by reference to Exhibit 10.9 to Cabot L.P.'s Annual Report on Form 10-K for the year ended December 31, 2001.
10.10 Amendment to Letter of Employment between Cabot L.P. and Robert E. Patterson dated October 28, 2001. Incorporated by reference to Exhibit 10.10 to Cabot L.P.'s Annual Report on Form 10-K for the year ended December 31, 2001.
10.11 Amendment to Letter of Employment between Cabot L.P. and Franz Colloredo-Mansfeld dated October 28, 2001. Incorporated by reference to Exhibit 10.11 to Cabot L.P.'s Annual Report on Form 10-K for the year ended December 31, 2001.
10.12 Amendment to Letter of Employment between Cabot L.P. and Andrew D. Ebbott dated October 28, 2001. Incorporated by reference to Exhibit 10.12 to Cabot L.P.'s Annual Report on Form 10-K for the year ended December 31, 2001.
10.13 Amendment to Letter of Employment between Cabot L.P. and Howard B. Hodgson, Jr. dated October 28, 2001. Incorporated by reference to Exhibit 10.13 to Cabot L.P.'s Annual Report on Form 10-K for the year ended December 31, 2001.
10.14 Amendment to Letter of Employment between Cabot L.P. and Neil E. Waisnor dated October 28, 2001. Incorporated by reference to Exhibit 10.14 to Cabot L.P.'s Annual Report on Form 10-K for the year ended December 31, 2001.
10.15 Amendment to Letter of Employment between Cabot L.P. and Eugene F. Reilly dated October 28, 2001. Incorporated by reference to Exhibit 10.15 to Cabot L.P.'s Annual Report on Form 10-K for the year ended December 31, 2001.
10.16 Amendment to Letter of Employment between Cabot L.P. and Ferdinand Colloredo-Mansfeld dated December 5, 2001. Incorporated by reference to Exhibit 10.16 to Cabot L.P.'s Annual Report on Form 10-K for the year ended December 31, 2001.
10.17 Amendment to Letter of Employment between Cabot L.P. and Robert E. Patterson dated December 5, 2001. Incorporated by reference to Exhibit 10.17 to Cabot L.P.'s Annual Report on Form 10-K for the year ended December 31, 2001.
10.18 Amendment to Letter of Employment between Cabot L.P. and Franz Colloredo-Mansfeld dated December 5, 2001. Incorporated by reference to Exhibit 10.18 to Cabot L.P.'s Annual Report on Form 10-K for the year ended December 31, 2001.
10.19 Amendment to Letter of Employment between Cabot L.P. and Andrew D. Ebbott dated December 5, 2001. Incorporated by reference to Exhibit 10.19 to Cabot L.P.'s Annual Report on Form 10-K for the year ended December 31, 2001.
10.20 Amendment to Letter of Employment between Cabot L.P. and Howard B. Hodgson, Jr. dated December 5, 2001. Incorporated by reference to Exhibit 10.20 to Cabot L.P.'s Annual Report on Form 10-K for the year ended December 31, 2001.
10.21 Amendment to Letter of Employment between Cabot L.P. and Neil E. Waisnor dated December 5, 2001. Incorporated by reference to Exhibit 10.21 to Cabot L.P.'s Annual Report on Form 10-K for the year ended December 31, 2001.
10.22 Amendment to Letter of Employment between Cabot L.P. and Eugene F. Reilly dated December 5, 2001. Incorporated by reference to Exhibit 10.22 to Cabot L.P.'s Annual Report on Form 10-K for the year ended December 31, 2001.
10.23 Cabot Trust 1999 Long-Term Incentive Plan. Incorporated by reference to Exhibit 10.15 to Cabot Trust's Annual Report on 10-K for the year ended December 31, 1999.
10.24 Cabot Trust Severance Pay Plan. Incorporated by reference to Exhibit 10.17 to Cabot L.P.'s Annual Report on Form 10-K for the year ended December 31, 2000.
10.25 Loan Agreement dated as of December 5, 2001 by and among Calwest Industrial Properties LLC, Rooster Acquisition Corp., the lenders set forth therein, Goldman Sachs Mortgage Company, LaSalle Bank National Association, Deutsche Bank AG and Bank of America, N.A. Incorporated by reference to Exhibit 99 (b)(1) to Calwest's Schedule TO filed on November 5, 2001.
10.26 Revolving Credit Agreement dated as of February 5, 2002 among Cabot L.P., JPMorgan Chase Bank, Bank of America, N.A., Bank One, NA, Fleet National Bank, Commerzbank Aktiengesellschaft and the other parties listed therein. Incorporated by reference to Exhibit 10.26 to Cabot L.P.'s Annual Report on Form 10-K for the year ended December 31, 2001.
10.27 Investment Advisory Agreement dated as of December 7, 2001 between Cabot L.P., Cabot Trust, RREEF and other parties listed therein. Incorporated by reference to Exhibit 10.27 to Cabot L.P.'s Annual Report on Form 10-K for the year ended December 31, 2001.
10.28 Operations Agreement dated as of December 7, 2001 between Cabot L.P., Cabot Trust, RREEF and RREEF Management Company. Incorporated by reference to Exhibit 10.28 to Cabot L.P.'s Annual Report on Form 10-K for the year ended December 31, 2001.
12.1 Ratio of Earnings to Fixed Charges.
21.1 Subsidiaries of Cabot L.P.
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
REPORTS ON FORM 8-K
On May 3, 2002, Cabot L.P. filed a Form 8-K dated April 29, 2002, to report information under Item 4 of Form 8-K, Changes in Registrant's Certifying Accountant.
On July 3, 2002, Cabot L.P. filed a Form 8-K dated June 28, 2002, to report information under Item 5 of Form 8-K, Other Events.
On August 15, 2002, Cabot L.P. filed a Form 8-K dated August 1, 2002, as amended on September 27, 2002, to report information under Items 2 and 7 of Form 8-K.
On October 3, 2002, Cabot L.P. filed a Form 8-K dated September 11, 2002, to report information under Item 5 of Form 8-K.