<PAGE> 1
ITEM 1. FINANCIAL STATEMENTS
CORNERSTONE PROPERTIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------ --------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Developments in progress:
Land $ 46,132 $ 46,132
Development costs 26,198 17,000
Rental Property, at cost:
Land 657,890 646,852
Buildings, leasehold interests and improvements 3,111,138 3,084,466
Deferred lease costs 157,747 157,015
------------ --------------
3,999,105 3,951,465
Less: Accumulated depreciation and amortization 310,851 290,998
------------ --------------
Total Development and Rental Property 3,688,254 3,660,467
Assets held for sale 131,052 62,185
Cash and cash equivalents 27,199 19,679
Restricted cash 71,844 222,043
Investment in joint ventures 31,827 31,725
Other deferred costs, net of accumulated amortization of $8,813 and $7,092 40,944 42,655
Deferred tenant receivables 84,203 77,243
Tenant and other receivables, net 18,608 14,725
Other assets 60,167 39,506
------------ --------------
TOTAL ASSETS $ 4,154,098 $ 4,170,228
============ ==============
LIABILITIES
Long-term debt, inclusive of $15,423 and $16,149 of unamortized
premium $ 1,383,111 $ 1,448,331
Credit facility 355,100 329,000
Accrued interest 11,384 10,961
Accrued real estate taxes 25,405 16,457
Accounts payable and accrued expenses 39,006 45,006
Distributions payable 29,714 -
Unearned revenue and other liabilities 41,295 40,881
------------ --------------
TOTAL LIABILITIES 1,885,015 1,890,636
------------ --------------
MINORITY INTEREST
Minority interest in operating partnership 283,221 284,566
Minority interest in joint ventures 22,977 22,532
------------ --------------
TOTAL MINORITY INTEREST 306,198 307,098
------------ --------------
Commitments and contingencies
Redeemable preferred stock; 344,828 shares authorized;
0 shares issued and outstanding - -
STOCKHOLDERS' EQUITY
7% Cumulative convertible preferred stock, $16.50 stated value;
65,000,000 shares authorized; 3,030,303 shares issued and outstanding 50,000 50,000
Common stock, no par value; 250,000,000 shares authorized;
129,748,494 shares issued and 129,390,261 shares outstanding - -
Paid-in capital 1,807,923 1,808,943
Retained earnings 82,796 111,150
Accumulated other comprehensive income 29,362 9,424
Deferred compensation (2,185) (2,012)
------------ --------------
1,967,896 1,977,505
Treasury stock, 358,233 shares, at cost (5,011) (5,011)
------------ --------------
TOTAL STOCKHOLDERS' EQUITY 1,962,885 1,972,494
------------ --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,154,098 $ 4,170,228
============ ==============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
<PAGE> 2
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
CORNERSTONE PROPERTIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(Dollar amounts in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2000 1999
------------- -------------
<S> <C> <C>
REVENUES
Office and parking rentals $ 147,826 $ 149,476
Earnings in joint ventures 110 305
Interest and other income 3,020 1,984
--------- ---------
TOTAL REVENUES 150,956 151,765
--------- ---------
EXPENSES
Building operating expenses 27,339 31,077
Real estate taxes 18,137 19,524
Interest expense 31,039 34,358
Depreciation and amortization 24,390 25,085
General and administrative 7,023 6,136
--------- ---------
TOTAL EXPENSES 107,928 116,180
--------- ---------
43,028 35,585
--------- ---------
Other income (expenses)
Carrying value in excess of market value of assets
held for sale (803) --
Gain on sale of real estate assets 2,260 --
--------- ---------
TOTAL OTHER INCOME (EXPENSES) 1,457 --
--------- ---------
MINORITY INTEREST
Minority interest in operating partnership (5,436) (4,473)
Minority interest in joint ventures (1,474) (1,450)
--------- ---------
TOTAL MINORITY INTEREST (6,910) (5,923)
--------- ---------
--------- ---------
Income before cumulative effect of a change in
accounting principle 37,575 29,662
--------- ---------
Cumulative effect of a change in accounting principle -- (630)
--------- ---------
NET INCOME $ 37,575 $ 29,032
========= =========
INCOME APPLICABLE TO PREFERRED STOCK $ (875) $ (875)
--------- ---------
INCOME APPLICABLE TO COMMON STOCK $ 36,700 $ 28,157
========= =========
INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE PER COMMON SHARE $ 0.28 $ 0.22
========= =========
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE PER COMMON SHARE $ -- $ --
========= =========
BASIC INCOME PER COMMON SHARE $ 0.28 $ 0.22
========= =========
DILUTED INCOME PER COMMON SHARE $ 0.28 $ 0.22
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
CORNERSTONE PROPERTIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS MONTHS ENDED MARCH 31, 2000 AND 1999
(Dollar amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2000 1999
------------- -------------
<S> <C> <C>
NET INCOME $ 37,575 $ 29,032
======== ========
OTHER COMPREHENSIVE INCOME:
Unrealized gain on investments 20,487 --
Unrealized gain on interest rate swaps
during the period (549) 2,085
-------- --------
OTHER COMPREHENSIVE INCOME 19,938 2,085
-------- --------
COMPREHENSIVE INCOME $ 57,513 $ 31,117
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE> 4
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
CORNERSTONE PROPERTIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(Dollar amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2000 1999
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 37,575 $ 29,032
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 26,035 24,533
Deferred compensation amortization 281 478
Net change in real estate joint ventures (102) (305)
Cumulative effect of a change in accounting principle -- 630
Unbilled rental revenue (7,059) (6,980)
Increase in accrued interest 424 1,162
Minority interest share of income 6,910 5,923
Gain on sale of real estate assets (2,260) --
Carrying value in excess of market value of assets
held for sale 803 --
Increase in tenant and other receivables and
other assets (4,934) (9,940)
Increase in accounts payable, accrued expenses
and other liabilities 2,154 17,748
-------- --------
Total adjustments 22,252 33,249
-------- --------
Net cash provided by operating activities 59,827 62,281
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to investment property (38,006) (22,022)
Repayment of notes receivable -- 134
Proceeds from sale of real estate assets 26,176 --
-------- --------
Net cash used in investing activities (11,830) (21,888)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under credit facility 87,500 29,000
Repayments under credit facility (61,400) (15,000)
Repayments under mortgage loans (64,493) (27,137)
Decrease (increase) in restricted cash 45,425 (4,892)
Debt refinancing deposits -- (450)
Stock and debt issuance costs (11) (170)
Contribution from joint venture partner 367 --
Unitholder redemptions (513) --
Distributions to minority partners (7,316) (5,034)
Distributions to common stockholders (40,036) (34,491)
-------- --------
Net cash used in financing activities (40,477) (58,174)
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 7,520 (17,781)
CASH AND CASH EQUIVALENTS, beginning of period 19,679 61,869
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 27,199 $ 44,088
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE> 5
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
CORNERSTONE PROPERTIES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
1. NATURE OF COMPANY'S BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF THE COMPANY'S BUSINESS
Cornerstone Properties Inc. (together with its subsidiaries, "Cornerstone"
or the "Company") is a self-administered equity real estate investment trust
("REIT") which owns, through subsidiaries, interests in 82 Class A office
buildings comprising approximately 17 million rentable square feet, a shopping
center, a hotel and developable land (collectively, the "Properties," and each
interest, a "Property"). The Properties are primarily located in nine major
metropolitan areas throughout the United States: Atlanta, Boston, suburban
Chicago, Minneapolis, New York City, San Francisco Bay Area, Seattle, Southern
California and Washington, D.C. and surrounding suburbs. The Company's strategy
is to own and develop Class A office properties in prime Central Business
District locations and major suburban office markets in U.S. metropolitan areas.
Class A office properties are generally considered to be those that have the
most favorable locations and physical attributes, command premium rents and
experience the highest tenant retention rates within their markets. The Company
also provides property management, leasing, development and tenant improvement
services to third parties on a fee basis through WCP Services, Inc., a taxable
corporate subsidiary in which the Company owns 95% of the equity, but only 1% of
the voting common stock. In January 1998, Cornerstone converted its corporate
structure into an umbrella limited partnership REIT ("UPREIT"). Under the UPREIT
structure, Cornerstone owns all of its properties and conducts all of its
business through Cornerstone Properties Limited Partnership, a Delaware limited
partnership (the "Operating Partnership"), of which the Company is the sole
general partner. As of March 31, 2000, Cornerstone owned approximately 87.1% of
the common units of partnership interest ("UPREIT Units") in the Operating
Partnership.
On February 11, 2000, the Company announced that it had entered into an
agreement and plan of merger with Equity Office Properties Trust ("EOP") (the
"EOP Merger"). The merger agreement provides for a merger of Cornerstone with
and into EOP and a merger of the Operating Partnership with and into EOP
Operating Limited Partnership. In the mergers, holders of common stock of
Cornerstone and holders of Units in the Operating Partnership shall be entitled
to elect to receive, for each share or unit, as the case may be, either 0.7009
of a share of beneficial interest of EOP (or, in the case of the Cornerstone
Units, 0.7009 of a Class A Unit of EOP Operating Limited Partnership), or $18.00
per share (or per Unit, as the case may be) in cash, subject to pro ration as
provided in the merger agreement. Each share of 7% Cumulative Convertible
Preferred Stock, liquidation preference $16.50 per share, of Cornerstone shall
be converted into the right to receive $18.00, plus accrued and unpaid
dividends, in cash. For U.S. federal income tax purposes, the merger is expected
to be tax-free to Cornerstone stockholders who are U.S. persons and who receive
EOP shares in the merger, except that any such stockholder who receives cash in
addition to EOP shares generally will recognize gain (but not loss) in an amount
equal to the amount of cash received in the merger, or, if less, the excess of
the fair market value of the EOP shares and cash received in the merger over the
stockholder's basis in the Cornerstone common stock exchanged in the merger. The
merger is also expected in most cases to be tax-free to Cornerstone stockholders
who are non-U.S. persons, although certain non-U.S. stockholders may be subject
to U.S. tax under the provisions of the Foreign Investment in Real Property Tax
Act. The mergers are subject to customary closing conditions, including the
approval of the merger by the shareholders of EOP and the stockholders of
Cornerstone and the approval of the partnership merger, to the extent necessary,
by the partners of EOP Operating Limited Partnership and the Operating
Partnership.
<PAGE> 6
GENERAL
The unaudited condensed consolidated financial statements included herein
have been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in consolidated financial statements prepared in accordance
with generally accepted accounting principles ("GAAP") have been omitted
pursuant to such rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not misleading. In
the opinion of management of the Company, all adjustments, consisting only of
normal recurring accruals, necessary to summarize fairly the unaudited results
of operations for the three month periods presented have been included. Results
for the three months ended March 31, 2000 are not necessarily indicative of
results which may be expected for any other interim periods or for the year as a
whole. These condensed consolidated financial statements should be read in
conjunction with the audited financial statements and notes thereto included in
the Company's latest annual report on Form 10-K.
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of Cornerstone,
its wholly-owned qualified REIT subsidiary, the Operating Partnership and
controlled partnerships. The Company has consolidated the following partnerships
because it has a majority interest in the economic benefits and is or has the
right to become the managing general partner at its sole discretion: the
Operating Partnership; NWC Limited Partnership ("NWC"); Third and University
Limited Partnership ("Third Partnership"); Two Twenty Two Berkeley Venture ("222
Berkeley"); Five Hundred Boylston West Venture ("500 Boylston"); One Ninety One
Peachtree Associates ("191 Peachtree"); 191 Finance Associates, L.P. ("191
Finance"); Avenue Associates Limited Partnership ("Market Square"); and 120
Montgomery Associates, LLC ("120 Montgomery"). The Company's investments in the
One Post Property and WCP Services, Inc. are accounted for as equity investments
(see Note 4). All significant intercompany balances and transactions have been
eliminated in consolidation.
ASSETS HELD FOR SALE
Included in Assets Held for Sale at March 31, 2000 are ten properties, which
are expected to be sold by the Company within the next year. The Properties are
valued at approximately $131.0 million, the lower of the carrying amount or the
fair value less estimated costs to sell. The Company has recorded a $0.8 million
write down on two of these assets which represents the difference between the
carrying value of these assets and the expected selling price less costs to
sell. The Company discontinues the recognition of depreciation on the assets
when the property is considered held for sale.
OTHER ASSETS
The Company records costs incurred for potential investments as Other
Assets. Upon consummation of an investment, the Company capitalizes all such
costs as an adjustment to the purchase price and depreciates these costs over
the useful life of the asset. All such costs are expensed at the time it is
determined that a potential investment will not be consummated. In addition, the
Company adopted EITF 97-11 and in accordance therewith, the Company expenses all
internal acquisition costs.
Included in Other Assets is the Company's $1.5 million equity investment in
Allied Riser Communications Corp. ("ARCC") and its $3.5 million equity
investment in Cypress Communications, Inc. ("CYCO"). ARCC and CYCO are providers
of voice, video and data telecommunications services. As part of the terms of
the agreements with both ARCC and CYCO, the Company received warrants for shares
of common stock by providing ARCC and CYCO access to certain of the Company's
buildings. As such, the value of the warrants received from ARCC and CYCO of
$5.1 million and $2.1 million, respectively, is included in Other Assets. Per
the applicable requirements of Statement of Financial Accounting Standards No.
115 "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS
115"), the Company recorded an unrealized gain on its total investment in ARCC
and CYCO of $20.5 million for the three months ended March 31, 2000. A
corresponding adjustment was posted to a separate component of stockholder's
equity through Other Comprehensive Income.
<PAGE> 7
MINORITY INTEREST
Minority interest in Operating Partnership relates to the interest in the
Operating Partnership that the Company does not own, which as of March 31, 2000
amounted to approximately 12.9%. The Company allocates income to the minority
interest in the Operating Partnership based on the weighted-average percentage
ownership in the Operating Partnership through the year. Persons who contributed
assets to the Operating Partnership received UPREIT Units, shares of
Cornerstone's common stock (the "Common Stock"), cash or a combination thereof.
At the request of a unitholder, the Company will be obligated to redeem each
UPREIT Unit held by such unitholder for one share of Common Stock or, at the
option of the Company, cash equal to the fair market value of one share of
Common Stock at the time of redemption. Such redemptions will cause the
Company's percentage ownership in the Operating Partnership to increase. As of
March 31, 2000, the number of issued and outstanding UPREIT Units held by
unitholders other than the Company was 19,103,202 and as of such date, 1,235,425
UPREIT Units have been redeemed for shares of Common Stock on a one-for-one
basis and 110,848 UPREIT Units have been redeemed for cash.
Minority interest in joint ventures represents the minority partner's or
venturer's capital account balances in NWC, Third Partnership, 222 Berkeley, 500
Boylston, 191 Peachtree, 191 Finance, Market Square and 120 Montgomery. Debit
balances in certain of these capital accounts originated through special cash
distributions in excess of the partner's share of income in accordance with
certain provisions of the respective partnership and joint venture agreements.
Realizability of the debit balances is continually monitored by calculating pro
forma sales proceeds under the respective agreements.
TREASURY STOCK
As of March 31, 2000, the Company reacquired 358,233 shares of Common Stock,
which was accounted for using the cost method. Of these shares, 347,400 shares
were acquired under the Repurchase Program (see Note 8).
INTEREST RATE SWAP AGREEMENTS
The Company uses interest rate swaps to effectively fix the interest rates
on certain floating-rate debt. Specific types of loans and amounts that are
hedged are determined based on prevailing market conditions and the current
shape of the yield curve. The specific terms and notional amount of the swaps
are determined based on management's assessment of future interest rates, as
well as short-term strategic initiatives.
During 1999, the Company entered into and subsequently amended swap
agreements that effectively fixed the rate on $250.0 million of the amount
outstanding on the Company's Revolving Credit Facility at 5.41% through the
maturity of the swaps in December 2000. The swaps have been designated as "cash
flow hedges" within the meaning defined in SFAS 133 (as defined hereinafter). At
March 31, 2000 and December 31, 1999, the Company recorded an unrealized loss of
$549,000 and an unrealized gain of $5,513,000, respectively in Other Assets with
a corresponding adjustment posted to a separate component of stockholder's
equity through Other Comprehensive Income as defined in Statement of Financial
Accounting Standards No. 130. Based on the expiration of these instruments, the
unrealized gain is expected to be reclassified to earnings during the next
twelve months. These swaps are considered hedges for federal income tax
purposes.
ESTIMATES AND RISKS
The preparation of financial statements in conformity with generally
accepted accounting principles ("GAAP") requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The most significant risks, estimates and assumptions are
related to the recoverability and depreciable lives of investment property, the
recoverability of deferred tenant receivables and the qualification of the
Company as a REIT. Actual results could differ from those estimates.
<PAGE> 8
2. PROPERTIES
The following table summarizes Cornerstone's interest in real estate
investments at March 31, 2000:
<TABLE>
<CAPTION>
TOTAL
MARKET NAME RENTABLE CORNERSTONE YEAR
Property SQUARE FEET INTEREST (A) CONSTRUCTED LEASED NOTES
------------------------------------- ----------------------------- ------------- ------------ ------
<S> <C> <C> <C> <C> <C>
BOSTON, MASSACHUSETTS
Sixty State Street 823,014 100.0% 1979 100% B
500 Boylston Street 714,513 91.5% 1988 100% C
222 Berkeley Street 530,844 91.5% 1991 100% C
125 Summer Street 463,691 100.0% 1989 79%
One Memorial Drive 352,764 100.0% 1985 100% D
------- ----
MARKET TOTAL 2,884,826 97%
SAN MATEO COUNTY, CALIFORNIA
Bayhill (4 buildings) 514,255 100.0% 1982-1987 98% E
Peninsula Office Park (7 buildings) 492,044 100.0% 1971-1998 100% E
Seaport Centre 463,418 100.0% 1988 100% E
Bay Park Plaza (2 buildings) 257,058 100.0% 1985-1998 100% E
One Bay Plaza 176,533 100.0% 1979 100% E
------- ----
MARKET TOTAL 1,903,308 99%
ATLANTA, GEORGIA
191 Peachtree Street 1,215,288 80.0% 1991 98% C,F
200 Galleria 432,698 100.0% 1985 99% C
------- ---
MARKET TOTAL 1,647,986 98%
EAST BAY, CALIFORNIA
Corporate Centre (2 buildings) 329,348 100.0% 1985-1987 95% E
ADP Plaza (2 buildings) 300,308 100.0% 1987-1989 99% E
PeopleSoft Plaza 277,562 100.0% 1984 100% E
Norris Tech Center (3 buildings) 260,513 100.0% 1984-1990 100% E
Golden Bear Center 160,587 100.0% 1986 99% E
Park Plaza 87,040 100.0% 1986 92% E
------ ---
MARKET TOTAL 1,415,358 98%
SEATTLE, WASHINGTON
Washington Mutual Tower (3 buildings) 1,154,560 50.0% 1988 99% G
110 Atrium Place 215,172 100.0% 1981 100% E
Island Corporate Center 100,009 100.0% 1987 96% E
------- ---
MARKET TOTAL 1,469,741 99%
SANTA CLARA COUNTY, CALIFORNIA
Pruneyard Office (3 buildings) 354,629 100.0% 1971-1999 100% E,H
10 Almaden 294,809 100.0% 1989 100% E
Pruneyard Shopping Center 252,210 100.0% 1970s 91% E
Embarcadero Place (4 buildings) 192,081 100.0% 1984 100% E
Pruneyard Inn 94,500 100.0% 1989 N/A E,I
------ ---
MARKET TOTAL 1,188,229 98%
SAN FRANCISCO, CALIFORNIA
120 Montgomery Street 420,310 66.7% 1955 98% E
One Post 391,450 50.0% 1969 100% E
201 California Street 240,230 100.0% 1980 91% J
188 Embarcadero 85,183 100.0% 1985 99% E
------ ---
MARKET TOTAL 1,137,173 97%
MINNEAPOLIS, MINNESOTA
Norwest Center 1,117,439 50.0% 1988 100% K
--------- ----
MARKET TOTAL 1,117,439 100%
</TABLE>
<TABLE>
<CAPTION>
TOTAL
MARKET NAME RENTABLE CORNERSTONE YEAR
Property SQUARE FEET INTEREST (A) CONSTRUCTED LEASED NOTES
------------------------------------- ----------------------------- ------------- ------------ ------
<S> <C> <C> <C> <C> <C>
WASHINGTON, D.C./ALEXANDRIA,
VIRGINIA
Market Square (2 buildings) 688,709 70.0% 1990 99% C,L
99 Canal Center 137,945 100.0% 1986 98% C
TransPotomac Plaza 5 96,392 100.0% 1983 94% C
11 Canal Center 70,365 100.0% 1986 96% C
------ ---
MARKET TOTAL 993,411 98%
SUBURBAN CHICAGO, ILLINOIS
Corporate 500 Centre (4 679,039 100.0% 1986/1990 98% M
buildings)
One Lincoln Centre 297,040 100.0% 1986 88%
------- ---
MARKET TOTAL 976,079 95%
SANTA MONICA/WEST LOS ANGELES,
CALIFORNIA
West Wilshire (2 buildings) 235,787 100.0% 1960-1976 92% E
Wilshire Palisades 186,714 100.0% 1981 100% J
Janss Court 125,709 100.0% 1989 100% E,N
Searise Office Tower 122,292 100.0% 1975 100% E
Commerce Park 94,367 100.0% 1977 100% E,O
429 Santa Monica 83,243 100.0% 1982 88% E
------ ---
MARKET TOTAL 848,112 96%
ORANGE COUNTY, CALIFORNIA
Bixby Ranch 277,289 100.0% 1987 93% E
18301 Von Karman 219,508 100.0% 1991 89% E
2677 North Main 213,318 100.0% 1987 96% E
------- ---
MARKET TOTAL 710,115 93%
SAN DIEGO, CALIFORNIA
Centerside II 286,949 100.0% 1987 93% E
Crossroads 133,553 100.0% 1983 100% E
------- ----
MARKET TOTAL 420,502 95%
NEW YORK CITY, NEW YORK
527 Madison Avenue 215,332 100.0% 1986 100%
Tower 56 163,633 100.0% 1983 98% P
------- ---
MARKET TOTAL 378,965 99%
LOS ANGELES, CALIFORNIA
700 North Brand 202,531 100.0% 1981 96% E
Warner Park Center 57,366 100.0% 1986 100% E
------ ----
MARKET TOTAL 259,897 97%
CONEJO VALLEY (VENTURA), CALIFORNIA
Westlake Spectrum (2 buildings) 118,990 100.0% 1990 100% E
Agoura Hills 115,208 100.0% 1987 100% E
------- ----
MARKET TOTAL 234,198 100%
OTHER REGIONS
U.S. West (Murray, Utah) 136,608 100.0% 1985 81% E
400 Capitol Mall (Sacramento, 502,365 100.0% 1992 100% Q
California)
Exposition Centre (Sacramento, 72,971 100.0% 1984 97% E
------ ---
California)
MARKET TOTAL 711,944 96%
------- ---
---------------
TOTAL PORTFOLIO 18,297,283 97%
---
Minority Interest Adjustment (738,364)
--------
(R)
CORNERSTONE PORTFOLIO 17,558,919 97%
===
Adjustment For Pruneyard Inn (94,500)
--------
CORNERSTONE OFFICE PORTFOLIO 17,464,419
</TABLE>
<PAGE> 9
--------------------
(A) Unless noted below, cash flow and residual proceeds will be distributed to
Cornerstone according to its percentage interest.
(B) On December 31, 1997, the Company purchased the second mortgage on Sixty
State Street. The mortgage is a cash flow mortgage through which all the
economic benefits/risks (subject to the first mortgage) inure to the
Company. The Company controls all major decisions regarding management and
leasing. The total purchase price for the second
mortgage was $131.5 million and is consolidated in buildings due to the
above factors. The $78.4 million first mortgage on the Property was
originally recorded by the Company as an $89.6 million liability due to its
above-market interest rate.
The second mortgage, which the Company holds, is collateralized only by the
improvements on Sixty State Street. Title to the improvements is owned by
Sixty State Street Trust, the ground lessee under a ground lease that
expires on December 28, 2067. The lease payments on the ground lease are
$398,896 per annum throughout the term.
(C) On October 27, 1997, the Company acquired interests in nine Class A office
properties comprising approximately 4.5 million rentable square feet in
Alexandria, Virginia (3 properties), Atlanta (2 properties), Boston (2
properties), Charlotte and Washington, D.C., as well as an undeveloped
parcel of land in Chicago (collectively, "the DIHC Portfolio"). The Company
acquired the DIHC Portfolio for a purchase price of approximately $1.06
billion, consisting of approximately 34.2 million shares of Common Stock
valued and recorded at $16.00 per share, approximately $260.0 million in
cash and $250.0 million in promissory notes. The cash portion of the
acquisition was financed with proceeds from the Company's initial public
offering in April 1997 and $54.0 million from its Revolving Credit Facility.
The Company has since sold the asset in Charlotte as well as the undeveloped
parcel of land in Chicago.
(D) On April 28, 1998, the Company purchased One Memorial Drive in Cambridge,
Massachusetts. The total purchase price for the Property was approximately
$112.5 million, approximately $23.5 million of which was paid in cash,
approximately $29.0 million of which was paid in UPREIT Units valued at
$17.50 per unit and approximately $60.0 million of which was paid in Common
Stock valued at $17.50 per share.
(E) Property was acquired as a result of the Wilson Acquisition in December
1998. After receiving stockholder approval on December 14, 1998, the Company
acquired substantially all of the properties and real estate operations of
William Wilson & Associates and related entities ("WW&A") (the "Wilson
Acquisition"). As part of the Wilson Acquisition, the Company acquired
interests in 69 Class A office Properties, comprising approximately 9.2
million rentable square feet primarily in the San Francisco Bay Area and in
Southern California, a shopping center consisting of approximately 252,000
rentable square feet in Santa Clara, California, a hotel consisting of
94,500 square feet in Santa Clara, California and 12.8 acres of developable
land in the San Francisco Bay Area. The Company has since sold thirteen
assets comprising approximately 1.4 million square feet.
The Company acquired WW&A for a purchase price of approximately $1.8
billion, consisting of approximately 14.9 million shares of Common Stock
valued at $17.25 per share (recorded at $16.25 per share for GAAP purposes),
approximately 16.2 million UPREIT Units valued at $17.25 per unit (recorded
at $16.25 per unit for GAAP purposes), approximately $465.0 million in cash
and the assumption of approximately $760.0 million of property and
construction related debt (recorded at $773.7 million for GAAP purposes).
The cash portion of the transaction was financed primarily from the
Company's Revolving Credit Facility and the sale of $200.0 million of Common
Stock to PGGM, an approximate 33.6% stockholder prior to the Wilson
Acquisition, priced at $17.25 per share.
(F) While the Company's stated interest in the partnership that owns 191
Peachtree Street is 80.0%, its economic interest is significantly larger
since it has acquired the first mortgage note on the Property in the amount
of $145.0 million, which earns interest at 9.375% and will receive a
priority distribution on its acquired capital base. In 1999, the partner in
the transaction, CH Associates, Ltd., received an annual Incentive
Distribution (as defined) of $250,000, with the Company receiving the
remainder of the cash flow of the Property. CH Associates, Ltd. received
this distrbution through February 28, 2000.
The partnership that owns 191 Peachtree Street leases a portion of the land
upon which the project is located pursuant to a ground lease agreement. The
agreement requires annual payments of $45,000 through January 31, 2002 and
$75,000 through January 31, 2008. Thereafter, the annual rent increases
$2,500 per year until the expiration date of January 31, 2087. The
partnership records ground rental expense relating to this agreement on a
straight-line basis. The ground lease is renewable for an additional 99
years.
(G) While the Company's stated interest in the partnership that owns Washington
Mutual Tower is 50.0%, its economic interest in the Property is
significantly larger due to priority distributions it receives on its
invested capital base. For the three months ended March 31, 2000, the
Company received 100% of the cash distributions from the partnership that
owns Washington Mutual Tower.
(H) Pruneyard Place construction was completed and occupied on April 1, 1999.
The building was entirely pre-leased.
(I) The Pruneyard Inn is a three-story hotel. An expansion was completed in May
1999, increasing the number of rooms from 118 to 172.
<PAGE> 10
(J) On June 3, 1998, the Company purchased 201 California Street and Wilshire
Palisades. The total purchase price for the Properties was approximately
$121.5 million, approximately $29.5 million of which was paid in cash,
approximately $29.1 million of which was paid in UPREIT Units valued at
$17.50 per unit and approximately $62.9 million of assumed debt (recorded at
$64.6 million for GAAP purposes).
(K) While the Company's stated interest in the partnership that owns Norwest
Center is 50.0%, its economic interest in the Property is significantly
larger due to priority distributions it receives on its invested capital
base. For the three months ended March 31, 2000, the Company's share of
earnings and cash distributions from the partnership that owns Norwest
Center was 73.5%.
(L) During 1998, through a series of transactions, the Company acquired
partnership interests with a stated interest of approximately 70.0% in the
partnerships that own Market Square. The Company's economic interest is
significantly larger since it has acquired the first mortgage note on the
Property in the amount of $181.0 million which earns interest at 9.75% and
will receive a priority distribution on its acquired capital base. In
addition, the Company acquired a "buffer loan", with accrued principal and
interest of $49.0 million at purchase, which accrues interest at a rate of
Prime plus 1.25% and is payable from cash flow, refinancing or sales
proceeds in excess of the first mortgage. During the three months ended
March 31, 2000, the Company received 100% of the cash flow from the
Property. On November 14, 1998, the Company purchased an additional interest
in the partnerships that own Market Square which enabled it to gain
sufficient control in order to consolidate the investment.
(M) On January 28, 1998, the Company purchased Corporate 500 Centre in
Deerfield, Illinois. This Property consists of four Class A office buildings
with approximately 679,000 rentable square feet. The consideration paid for
this Property was approximately $135.0 million in cash and approximately
$15.0 million in UPREIT Units valued at $18.50 per unit, for a total
purchase price of approximately $150.0 million. The Company financed a
portion of the purchase price with an $80.0 million mortgage loan from
Bankers Trust Company; this mortgage was subsequently refinanced in October
1998.
(N) Janss Court is a seven-story Class A mixed-use building containing
approximately 126,000 square feet. In addition to approximately 93,000
square feet of retail and office space, Janss Court offers 32 apartments for
a total of 33,000 rentable square feet of residential space.
(O) The Property is subject to a ground lease agreement. The agreement requires
annual payments of $115,000 through March 31, 2002 and $121,000 from April
1, 2002 through March 31, 2007. The lease payment increases every ten years
thereafter according to a formula based on the Consumer Price Index. The
ground lease expires on March 31, 2041.
(P) On January 5, 1998, the Company purchased for approximately $5.5 million,
the remaining participation rights in the cash flow and residual value of
Tower 56 from the former participants for 307,692 shares of Common Stock. As
a result, all of the cash flow and the residual value of Tower 56 inures to
the Company.
(Q) On January 21, 2000, the Company purchased 400 Capitol Mall in Sacramento,
California. This Property contains approximately 502,000 rentable square
feet. The total purchase price for the Property was approximately $130.0
million, consisting of approximately $128.0 million in cash and
approximately $2.0 million of which was paid in UPREIT Units valued at
$17.25 per unit. Of the cash paid, $104.8 million was Section 1031 exchange
funds from the sale of One Norwest Center in Denver, Colorado during 1999.
(R) Rentable square feet includes an adjustment for the interest of a joint
venture or minority partner. Calculations are based on the partners'
<PAGE> 11
percentage interest in the cash flows of the Property.
During the first three months of 2000, the Company sold two properties for
gross proceeds of $27,225,000 resulting in a net gain of $2,026,306.
During 1999, the Company sold 13 properties for gross proceeds of
$495,705,000 resulting in a net gain of $131,033,847.
3. RESTRICTED CASH
Restricted cash includes security deposits for some of the Company's office
properties and escrow and reserve funds for real estate taxes, property
insurance, capital improvements, tenant improvements and leasing costs. These
funds were established pursuant to certain mortgage and construction financing
arrangements.
The proceeds from the sales of certain properties during 1999 totaling
approximately $61.4 million, are included in restricted cash pursuant to the
terms of Section 1031 of the Internal Revenue Code of 1986, as amended,
"Exchange of property held for productive use or investment."
4. INVESTMENT IN JOINT VENTURES
Investment in joint ventures represents the Company's two investments that
are accounted for using the equity method of accounting. The first investment is
the Company's 50.0% interest in a co-tenancy with Crocker Plaza Company for One
Post, a 38-story, Class A office tower in San Francisco, California. The Company
and Crocker co-manage and lease the Property. The second equity investment is
the Company's interest in WCP Services, Inc. The Company owns 1% of the voting
common stock and 100% of the non-voting common stock of WCP Services, Inc. The
remaining shares of voting common stock of WCP Services, Inc. are owned by
certain executive officers of the Company. The Company's ownership of voting and
nonvoting common stock together represents a 95% economic interest in the
earnings of WCP Services, Inc. WCP Services, Inc. provides property management,
development and tenant construction supervision services to third parties. WCP
Services, Inc. also provides tenant construction supervision services to tenants
in Properties owned by Cornerstone.
5. LONG-TERM DEBT
The following table sets forth certain information regarding the
consolidated debt obligations of the Company as of March 31, 2000, including
mortgage obligations relating to the Properties. All of this debt, with the
exception of the Convertible Promissory Note due 2001, is nonrecourse to the
Company. However, notwithstanding the nonrecourse indebtedness, the lender may
have the right to recover deficiencies from the Company in certain
circumstances, including fraud, misappropriation of funds and environmental
liabilities (Dollar amounts in thousands).
<TABLE>
<CAPTION>
PROPERTY AMORTIZATION INTEREST RATE (A) MATURITY FIXED RATE
DATE 3/31/00 12/31/99
-------- ------- ------------ ----------------- -------- ----------
<S> <C> <C> <C> <C> <C>
TransPotomac Plaza (B)...... Interest Only 7.28% Oct-2000 65,000 65,000
West Wilshire Office and
Medical................... 25 year 6.90% Jan-2002 16,829 16,926
Searise Office Tower........ 25 year 6.90% Jan-2002 11,540 11,607
Exposition Centre........... 25 year 6.90% May-2002 5,049 5,081
Wilshire Palisades.......... 22 year 6.70% Jul-2002 28,826 29,047
110 Atrium Place 30 year 6.90% Mar-2004 21,429 21,517
527 Madison Avenue and
One Lincoln Centre (B).... Interest only 7.47% Oct-2004 65,000 65,000
Sixty State Street.......... 30 year 6.84% Jan-2005 84,924 85,420
Island Corporate Center..... 30 year 6.90% Apr-2005 13,134 13,170
Washington Mutual Tower..... Interest only 7.53% Nov-2005 79,100 79,100
Norwest Center.............. Interest only 8.74% Dec-2005 110,000 110,000
Agoura Hills................ 25 year 6.90% Dec-2005 11,918 12,003
Janss Court................. 30 year 6.90% Dec-2005 18,261 18,357
Bayhill 4,5,6 & 7........... 25 year 6.90% Dec-2006 57,423 57,764
Market Square (C) and 200
Galleria (B).............. Interest only 7.54% Oct-2007 120,000 120,000
Corporate 500 Centre........ 25 year 6.66% Nov-2008 88,044 88,424
188 Embarcadero (D)......... 25 year 7.26% Aug-2009 15,548 15,606
Centerside II (D)........... 25 year 7.26% Aug-2009 24,164 24,254
700 North Brand (D)......... 25 year 7.26% Aug-2009 26,838 26,938
Golden Bear Center (D)...... 25 year 7.26% Aug-2009 20,401 20,477
Bixby Ranch (D)............. 25 year 7.26% Aug-2009 28,422 28,528
One Memorial Drive (D)...... 25 year 7.26% Aug-2009 62,885 63,119
125 Summer Street (E)....... 25 year 7.23% Nov-2009 78,553 78,844
Tower 56 (E)................ 25 year 7.23% Nov-2009 24,932 25,024
Peninsula Office Park
1,3,4,5,6,8 & 9 (E)....... 25 year 7.23% Nov-2009 87,802 88,128
Embarcadero Place (E)....... 25 year 7.23% Nov-2009 38,007 38,149
201 California Street (E)... 25 year 7.23% Nov-2009 44,340 44,504
--------- ---------
TOTAL FIXED RATE DEBT 7.31% (F) 6.9 yrs (F) 1,248,369 1,251,987
========= =========
</TABLE>
<TABLE>
VARIABLE RATE
<S> <C> <C> <C> <C> <C>
Seaport Centre (G)........... 25 year LIBOR plus 1.50% Dec-2000 57,819 58,000
Convertible Promissory
Note due 2001 (H).......... Interest only 8.11%max (I) Jan-2001 12,926 12,926
120 Montgomery Street........ 24 year LIBOR plus 1.40% Nov-2002 48,002 48,160
Norris Tech Center........... 25 year LIBOR plus 1.65% Dec-2003 15,995 16,066
Other loans.................. Various Various Various -- 245
---------- -----------
TOTAL VARIABLE RATE DEBT 7.52% (F) 1.7 yrs (F) 134,742 135,397
---------- -----------
REPAID DEBT
The Pruneyard (J) -- -- -- -- 60,947
---------- -----------
TOTAL REPAID DEBT -- 60,947
---------- -----------
TOTAL DEBT 7.33% (F) 6.4 yrs (F) $1,383,111 $1,448,331
========== ===========
</TABLE>
----------
<PAGE> 12
(A) The interest rate is the stated interest rate (for Cornerstone originated
debt) or the mark to market rate at the time of acquisition (for debt
assumed as part of an acquisition).
(B) The three notes arising from the acquisition of several properties in the
DIHC Portfolio are cross-collateralized, having the effect of forming a
"collateral pool" for the underlying notes.
(C) The collateral for this loan is a pledge of the $181.0 million first
mortgage loan on Market Square that the Company purchased from PGGM.
(D) The six notes arising from the restructuring of certain debt with Prudential
Insurance Company of America and Northwestern Mutual Life Insurance Company
are cross-collateralized, having the effect of forming a "collateral pool"
for the underlying notes.
(E) During October 1999 the Company restructured approximately $219.9 million of
individual property-related debt with Northwestern Mutual Life Insurance
Company. The restructuring involved retiring the individual property-related
debt and creating a single $275.0 million term loan which is
cross-collateralized by six of the original seven properties. The loan has a
ten year term and bears interest at 7.23%. Upon closing the loan, the lien
on 10 Almaden was released and the property was added to Cornerstone's
unencumbered pool.
(F) Weighted-average interest rate and maturity of the Company's long-term debt.
(G) On December 15, 1999, through an extension and modification agreement, the
maturity date of the $58.0 million variable rate debt held on Seaport Centre
was extended from December 31, 1999 to December 31, 2000. At this time, the
note changed from interest only to a 25 year amortizing loan.
(H) The lender, Hines Colorado Limited, has the right to convert the note into
Common Stock at a conversion price of $14.30 per share. At maturity, the
Company is entitled to repay the principal of the note with Common Stock
priced at the lesser of $14.30 per share or the then existing share price.
(I) Lesser of 30-day LIBOR plus 0.5% or 8.11%.
(J) On February 8, 2000, this note was prepaid with proceeds from the Revolving
Credit Facility. This note had an interest rate of LIBOR plus 1.50% and a
maturity of July 2000.
The combined aggregate amount of maturities for all long-term borrowings
for 2000 through 2004 are $122,819,000, $12,926,000, $110,246,000, $15,995,000
and $86,429,000, respectively.
Since most of the long-term debt is property-related, there are
restrictive covenants that limit the total amount of indebtedness that can be
placed on individual properties.
6. CREDIT FACILITY
The Company has a $550.0 million Revolving Credit Facility with a syndicate
of 17 banks led by Deutsche Bank, The Chase Manhattan Bank and Bank of America
for acquisitions and general working capital purposes as well as the issuance of
letters of credit (the "Revolving Credit Facility"). The interest rate on the
facility depends on the Company's ratio of total debt to asset value (as
defined) at the time of borrowing and will be at a spread of 1.10% to 1.40% over
the applicable LIBOR or Prime Rate at the borrower's option. The letters of
credit will be priced at the applicable Eurodollar credit spread. The Revolving
Credit Facility expires on November 3, 2001. As of March 31, 2000, $355.1
million of the facility was outstanding at a rate of approximately 7.5%. Of this
amount, approximately $250.0 million is fixed with interest rate swaps, which
effectively fix the rate at 5.41% through the expiration of the swaps in
December 2000. The Revolving Credit Facility contains certain restrictive
covenants including: (i) a limitation on the Company's dividend to 90.0% of
funds from operations and 110.0% of funds available for distribution, both as
defined in the agreement; (ii) the percentage of total liabilities to total
property asset value (as defined) cannot exceed 55.0%; (iii) the ratio of
adjusted EBITDA to interest expense may not be less than 2.25 to 1.00; (iv) the
fixed charge coverage ratio may not be less than 1.75 to 1.00; and (v) the ratio
of total property asset value (as defined) to secured indebtedness may not be
less than 2.22 to 1.00. The above terms reflect an amendment to the Revolving
Credit Facility that occurred during 1999. The amendment allowed the Company to
temporarily increase its leverage from 55.0% to 60.0% in (ii) above for a short
period, which has since expired. The Company also increased its ability to enter
into mortgage debt under (v) above by decreasing the required ratio from 2.5 to
1.00 to 2.22 to 1.00.
<PAGE> 13
7. COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company is subject to tenant and
property related claims and other litigation. It is the opinion of management,
after consultation with outside counsel, that the resolution of these claims
will not have a material adverse effect on the financial position, results of
operations or cash flows of the Company.
In April 1998, the Company entered into a contract to acquire from the
developer the 928,857 square-foot Piper Jaffray building under construction in
Minneapolis. In November 1999, this contract was amended in connection with a
350,000 square-foot expansion lease with a major tenant of the building. The
contract was amended to provide for a purchase price equal to the costs incurred
in construction and development plus a fixed amount to the developer plus an
additional amount based on the leasing of the building. In addition, at the
Company's election, the closing of the acquisition may occur prior to the
completion of the building, but the developer will remain obligated to complete
the project. Through March 31, 2000, approximately $121.1 million has been spent
on the construction. The project is scheduled to be completed in the year 2000
and is approximately 84.0% pre-leased.
8. STOCKHOLDERS' EQUITY
The 7% Cumulative Convertible Preferred Stock is convertible into Common
Stock at $16.50 per share at any time after August 4, 2000.
On February 6, 1998, Cornerstone completed a secondary public offering of
14,375,000 shares of Common Stock at a price of $18.25 per share. The shares
were placed in the U.S. through a syndicate of seven investment banks led by
Merrill Lynch & Co. Net proceeds to the Company were approximately $247.9
million (approximately $262.3 million gross proceeds less an underwriting
discount of approximately $13.7 million and expenses of approximately $0.7
million). The net proceeds were used to repay outstanding borrowings under the
Revolving Credit Facility and for working capital purposes.
On December 9, 1999, the Company's Board of Directors approved a stock
repurchase program ("Repurchase Program") under which the Company was permitted
to purchase up to $100.0 million of the Company's outstanding Common Stock. The
Company was to make periodic purchases on or prior to December 31, 2000 using
available working capital on the open market at prevailing prices or in
privately negotiated transactions. As of December 31, 1999, the Company had
repurchased 347,400 shares of its outstanding Common Stock for an aggregate cost
of approximately $4.9 million. There were no repurchases made from January 1,
2000 through the February 11, 2000 when the Repurchase Program was discontinued
as a result of the merger with EOP.
<PAGE> 14
The following tables summarize the stock options and restricted stock grants
for certain officers of the Company as of March 31, 2000:
STOCK OPTIONS
<TABLE>
<CAPTION>
Options Granted Exercise Price Options Options Options
Date of Grant (No. of Shares) (Per Share) Vesting Exercised Forfeited Exercisable
------------- --------------- ----------- ------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
August, 1995 ........ 637,500 $14.30 33.3%/yr, 10yr term 75,000 0 562,500
October, 1995 ....... 150,000 $14.30 33.3%/yr, 10yr term 10,500 0 139,500
March, 1997 ......... 880,000 $14.50 33.3%/yr, 10yr term 52,000 0 828,000
November, 1997 ...... 70,000 $18.44 33.3%/yr, 10yr term 0 0 46,667
February, 1998 ...... 70,000 $18.13 33.3%/yr, 10yr term 0 46,667 23,333
February, 1998 ...... 595,000 $18.25 33.3%/yr, 10yr term 0 26,668 382,962
March, 1998 .. ...... 200,000 $18.25 33.3%/yr, 10yr term 0 133,334 66,666
December, 1998 ...... 3,000,000 $17.25 33.3%/yr, 10yr term 0 34,733 991,874
January, 1999 ...... 20,000 $17.25 33.3%/yr, 10yr term 0 0 0
February, 1999 ...... 10,000 $17.25 33.3%/yr, 10yr term 0 10,000 0
June, 1999 .......... 10,000 $17.25 33.3%/yr, 10yr term 0 0 0
January, 2000 ....... 1,500,166 $15.19 33.3%/yr, 10yr term 0 2,000 0
</TABLE>
RESTRICTED STOCK GRANTS
<TABLE>
<CAPTION>
Shares
Value At Grant Shares Initially Shares Forfeited Outstanding Shares Vested
Vesting (A)
Date of Grant Date (Per Share) Granted (No. of Shares) (No. of Shares) (No. of Shares) (No. of Shares)
See Notes
------------- ---------------- ----------------------- ---------------- --------------- ---------------
----------
<S> <C> <C> <C> <C> <C>
August, 1995 ........ $14.30 186,713 19,091 167,622 95,858 (B)
March, 1997 ......... $16.40 100,000 0 100,000
34,112 (C)
November, 1997....... $18.44 12,500 0 12,500
3,333 (D)
March, 1998 ......... $18.13 12,500 10,833 1,667 1,667
March, 1998 ......... $18.25 19,178 0 19,178
19,178 (E)
February, 1999....... $15.50 113,500 1,900 111,800
7,400 (F)
February, 2000....... $16.81 27,708 0 27,708
0 (G)
</TABLE>
----------
(A) Deferred compensation of approximately $6,100,000 is being amortized
according to the respective amortization schedule for each vesting period
noted below, with the unamortized balance shown as a deduction from
stockholders' equity. Regular distributions are paid on restricted stock.
(B) The grant will fully vest with respect to 13.333% on June 30, 1996, 1997,
1998, 1999 and with respect to 46.668% on June 30, 2000. Pursuant to the
terms of a separation agreement, the vesting with respect to 6,462 shares
will be accelerated to fully vest on April 14, 2000.
(C) The grant will fully vest with respect to 13.333% on June 30, 1998, 1999,
2000, 2001 and with respect to 46.668% on June 30, 2002. Pursuant to the
terms of a separation agreement, the vesting with respect to 7,446 shares
will be accelerated to fully vest on April 14, 2000.
(D) The grant will fully vest with respect to 13.333% on June 30, 1998, 1999,
2000, 2001 and with respect to 46.668% on June 30, 2002.
(E) The initial grant was to vest with respect to 13.333% on March 15, 1999,
2000, 2001, 2002 and with respect to 46.668% on March 15, 2003. Pursuant to
the terms of a separation agreement, the vesting with respect to 16,621
shares was accelerated to fully vest on December 31, 1999.
(F) The grant will fully vest on February 1, 2004. Pursuant to the terms of
certain separation agreements, the vesting with respect to 1,400 shares was
accelerated to fully vest on July 1, 1999.
(G) The grant will fully vest on February 15, 2005.
<PAGE> 15
9. STOCKHOLDERS' AND UNITHOLDERS' DISTRIBUTIONS
A distribution of $0.31 per share/unit was declared for the first quarter of
2000 and paid on February 29, 2000, to Common Stockholders and Unitholders of
record as of January 31, 2000.
On March 8, 2000, as provided in the merger agreement with EOP, the Board of
Directors declared a distribution of $0.20 per share/unit, payable on April 14,
2000, to Common Stockholders and Unitholders of record as of March 31, 2000.
This distribution was declared to make Cornerstone's distribution schedule
consistent with that of EOP pending the merger (see Note 1).
10. NET INCOME PER COMMON SHARE
The table below sets forth the calculation of income per common share for
the three months ended March 31, 2000 and 1999 (Dollar amounts in thousands,
except per share amounts):
<TABLE>
<CAPTION>
MARCH 31, 2000 MARCH 31, 1999
------------------------ ------------------------
BASIC DILUTED BASIC DILUTED
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Proceeds upon exercise of options ... -- $ 44,832 -- $ 23,871
Market price of shares
average for the respective year .. -- $ 16.09 -- $ 15.24
Treasury shares that could be
repurchased (options) ............ -- 2,786 -- 1,566
Option shares outstanding ........... -- 3,030 -- 1,657
Weighted common stock equivalent
shares (excess shares under
option over Treasury shares that
could be repurchased) ............ -- 226 -- 91
Convertible preferred stock ......... -- 3,030 -- --
Convertible debt shares ............. -- 904 -- --
Weighted average common shares
outstanding ...................... 129,269 129,269 128,211 128,211
--------- --------- --------- ---------
Adjusted weighted average common
Shares outstanding ............... 129,269 133,429 128,211 128,302
Net income for the period ........... $ 37,575 $ 37,575 $ 29,032 $ 29,032
Interest on convertible debt -- 192 -- --
Income applicable to
preferred stock .................. $ (875) $ -- $ (875) $ (875)
--------- --------- --------- ---------
Net income applicable to
common stock ................... $ 36,700 $ 37,767 $ 28,157 $ 28,157
Net income per common share ......... $ 0.28 $ 0.28 $ 0.22 $ 0.22
</TABLE>
The stock options issued in November 1997, February 1998, March 1998,
December 1998, January 1999, February 1999 and June 1999 were not included in
the calculation of diluted earnings per share as such options were anti-dilutive
during the period. In addition, the Company will be obligated to redeem each
UPREIT Unit held by such unitholder for one share of Common Stock or, at the
option of the Company, cash equal to the fair market value of one share of
Common Stock at the time of redemption. As of March 31, 2000, 1,235,425 UPREIT
Units have been redeemed for shares of Common Stock on a one-for-one basis and
110,848 UPREIT Units have been redeemed for approximately $1.7 million in cash.
16. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest was approximately $30,449,000 and $34,263,000 for
the three months ended March 31, 2000 and 1999, respectively.
NON-CASH INVESTING AND FINANCING ACTIVITIES
During the first quarter of 1999, pursuant to the requirements of SOP 98-5
(as defined in Note 1), the Company wrote off all unamortized organizational
costs and recorded a cumulative effect of a change in accounting principle of
$630,044.
<PAGE> 16
On February 1, 1999, the Company issued 113,500 shares of restricted stock
valued at $15.50 per share to certain employees of the Company. Refer to Note 8
for the vesting of this grant.
On January 21, 2000, the Company acquired 400 Capitol Mall in Sacramento,
California. The total purchase price for the Property was approximately $130.0
million, consisting of approximately $128.0 million in cash which were Section
1031 exchange funds from the sale of One Norwest Center in Denver, Colorado
during 1999, and approximately $2.0 million of which was paid in UPREIT Units
valued at $17.25 per unit.
On February 15, 2000, the Company issued 27,708 shares of restricted stock
valued at $16.81 per share to certain employees of the Company. Refer to Note 8
for the vesting of this grant.
On March 8, 2000, 9,200 UPREIT Units were redeemed for shares of Common
Stock on a one-for-one basis.
On March 30, 2000, 101,050 UPREIT Units were redeemed for shares of Common
Stock on a one-for-one basis.
18. SEGMENT REPORTING
The Company has one reportable segment - real estate. The Company does not
have any foreign operations. The accounting policies of the segment are the same
as those described in Note 1.
The Company evaluates performance based on net operating income from the
individual properties in the segment. Selected results of operations for the
three months ended March 31, 2000 and 1999 and selected asset information as of
March 31, 2000 and December 31, 1999 regarding the Company's operating segment
are as follows (Dollar amounts in thousands):
<TABLE>
<CAPTION>
CORPORATE & COMPANY
TOTAL SEGMENT OTHER(A) TOTAL
--------------- -------------- -----------------
<S> <C> <C> <C>
Total revenues (B):
Three months ended:
March 31, 2000 $ 148,813 $ 2,143 $ 150,956
March 31, 1999 150,786 979 151,765
Total operating and
Interest expenses (C):
Three months ended:
March 31, 2000 $ 48,266 $ 35,272 $ 83,538
March 31, 1999 51,858 39,237 91,095
Net operating income (D):
Three months ended:
March 31, 2000 $ 100,547 $ (33,129) $ 67,418
March 31, 1999 98,928 (38,258) 60,670
Total long-lived assets (E):
March 31, 2000 $3,805,678 $ 85,329 $3,891,007
December 31, 1999 3,770,924 66,064 3,836,988
Total assets:
March 31, 2000 $3,883,939 $ 270,159 $4,154,098
December 31, 1999 3,776,765 393,463 4,170,228
</TABLE>
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(A) Corporate and Other represents all corporate-level items (including
interest income, interest expense and general and administrative
expenses) as well as intercompany eliminations necessary to reconcile to
consolidated Company totals.
(B) Total revenues represents all revenues during the period (including the
Company's earnings in joint ventures). All interest income is excluded
from the segment amounts and is classified in Corporate and Other for
all periods.
(C) Total operating and interest expenses represents the sum of building
operating expenses, real estate taxes, interest expense and general and
administrative expenses. All interest expense (including property level
mortgages) is excluded from the segment amounts and is classified in
Corporate and Other for all periods. Amounts presented exclude
depreciation and amortization of approximately $24,390,000 and
$25,085,000 for March 31, 2000 and 1999, respectively.
(D) Net operating income represents total revenues (as defined in note (B)
above) less total operating and interest expense (as defined in note (C)
above) for the period.
(E) Long-lived assets is composed of total rental property, investments in
joint ventures, other deferred costs, deferred tenant receivables and
certain other assets.
