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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 12, 2000
REGISTRATION NO. 333-35590
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
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EQUITY OFFICE PROPERTIES TRUST
EOP OPERATING LIMITED PARTNERSHIP CORNERSTONE PROPERTIES INC.
(Exact name of registrant as specified in its (Exact name of registrant as specified in its
governing instrument) governing instrument)
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MARYLAND 6798 36-4151656
DELAWARE 6798 36-4156801 NEVADA 6798 74-2170858
(State of (Primary SIC Code No.) (I.R.S. Employer (State of (Primary SIC Code No.) (I.R.S. Employer
Organization) Identification No.) Organization) Identification No.)
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TWO NORTH RIVERSIDE PLAZA, SUITE 2100 TOWER 56, 126 EAST 56TH STREET
CHICAGO, ILLINOIS 60606 NEW YORK, NEW YORK 10022
(312) 466-3300 (212) 605-7100
(Address, including zip code, and telephone number, (Address, including zip code, and telephone number,
including area code, of registrants' principal including area code, of registrant's principal
executive offices) executive offices)
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STANLEY M. STEVENS, ESQ. JOHN S. MOODY
EXECUTIVE VICE PRESIDENT AND CHIEF LEGAL COUNSEL CHIEF EXECUTIVE OFFICER
TWO NORTH RIVERSIDE PLAZA, SUITE 2100 TOWER 56, 126 EAST 56TH STREET
CHICAGO, ILLINOIS 60606 NEW YORK, NEW YORK 10022
(312) 466-3300 (212) 605-7100
(Name, address, including zip code, and telephone (Name, address, including zip code, and telephone
number, including area code, of agent for service) number, including area code, of agent for service)
------------------------------ ------------------------------
COPIES TO: COPIES TO:
J. WARREN GORRELL, JR., ESQ. WILLIAM B. FRYER, ESQ.
GEORGE P. BARSNESS, ESQ. JOHN J. KELLEY III, ESQ.
HOGAN & HARTSON L.L.P. KING & SPALDING
555 THIRTEENTH STREET, N.W. 191 PEACHTREE STREET
WASHINGTON, D.C. 20004-1109 ATLANTA, GA 30303-1763
(202) 637-5600 (404) 572-4600
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after the effective date of this Registration
Statement.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a)
MAY DETERMINE.
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[EQUITY OFFICE LOGO] [CORNERSTONE LOGO]
PARTNERSHIP AND REIT MERGERS PROPOSED -- YOUR VOTE IS VERY IMPORTANT
The board of trustees of Equity Office Properties Trust, the general partner
of EOP Operating Limited Partnership, and the board of directors of Cornerstone
Properties Inc., the general partner of Cornerstone Properties Limited
Partnership, have approved and adopted a merger agreement that provides for the
acquisition of Cornerstone by Equity Office and the acquisition of Cornerstone
Partnership by EOP Partnership.
APPROVAL OF THE MERGERS:
EOP Partnership Unitholders. We are furnishing this consent
solicitation/information statement/prospectus to EOP Partnership unitholders for
your information only. The partnership agreement of EOP Partnership requires the
approval of the REIT merger by the consent of unitholders holding at least a
majority of the outstanding EOP Partnership units, including any EOP Partnership
units held by Equity Office. Because Equity Office owns more than a majority of
the outstanding partnership units of EOP Partnership, no vote or consent of EOP
Partnership unitholders, other than Equity Office, is required for approval of
the REIT merger, and none is being solicited. Equity Office, as the general
partner of EOP Partnership, has already approved the merger of Cornerstone
Partnership with and into EOP Partnership. No other vote or consent of
unitholders of EOP Partnership is required under the partnership agreement of
EOP Partnership for approval of the partnership merger.
Cornerstone Partnership Unitholders. We are furnishing this consent
solicitation/information statement/prospectus to Cornerstone Partnership
unitholders in order for you to approve the merger of Cornerstone with and into
Equity Office and the merger of Cornerstone Partnership with and into EOP
Partnership because the partnership agreement governing Cornerstone Partnership
requires that partners holding a majority of the Cornerstone Partnership units
approve extraordinary transactions, such as the mergers. Only holders of record
of units of Cornerstone Partnership on May 12, 2000 will be eligible to consent
to the merger.
PARTNERSHIP MERGER CONSIDERATION TO BE RECEIVED BY CORNERSTONE PARTNERSHIP
UNITHOLDERS:
In the partnership merger, each of your Cornerstone Partnership units will
be converted into .7009 of a partnership unit of EOP Partnership. Alternatively,
you may elect to redeem all or any portion of your Cornerstone Partnership units
immediately prior to the partnership merger for shares of Cornerstone common
stock, which would then enable you to participate in the REIT merger as a
stockholder of Cornerstone. Cornerstone stockholders may elect to receive for
each share of common stock either $18.00 in cash, without interest, or 0.7009 of
an Equity Office common share, subject to proration if the cash election is
oversubscribed or undersubscribed. You may elect to condition your redemption of
Cornerstone Partnership units upon the ability to receive in the REIT merger
only cash in exchange for all or any specified portion of the Cornerstone common
stock issued in the redemption.
AFTER CAREFUL CONSIDERATION, THE CORNERSTONE BOARD HAS DETERMINED THAT THE
PARTNERSHIP MERGER IS IN YOUR BEST INTERESTS AND IN THE BEST INTERESTS OF
CORNERSTONE STOCKHOLDERS, AND THE BOARD RECOMMENDS THAT YOU VOTE FOR APPROVAL OF
THE MERGERS.
Cornerstone cannot complete the mergers unless they are approved by partners
of Cornerstone Partnership holding a majority of the Cornerstone Partnership
units, including Cornerstone, which must vote its Cornerstone Partnership units
in proportion to the manner in which all outstanding shares of capital stock of
Cornerstone are voted at the special meeting of stockholders of Cornerstone to
be held on Monday, June 19, 2000 in connection with the REIT merger.
This document provides you with detailed information about the consent
solicitation and the proposed mergers, including instructions on how to redeem
your units for shares of Cornerstone common stock prior to the partnership
merger and how to elect to receive Equity Office common shares or cash if you
choose to redeem all or any portion of your units and participate in the REIT
merger as a stockholder of Cornerstone. You also can get information from
publicly available documents filed by Cornerstone, Equity Office and EOP
Partnership with the SEC. WE ENCOURAGE YOU TO READ THIS ENTIRE DOCUMENT
CAREFULLY, INCLUDING THE SECTION ENTITLED "RISK FACTORS" ON PAGE 21.
Your Cornerstone Partnership consent form is due by 5:00 p.m., Eastern Time,
on Friday, June 16, 2000. Your notice of redemption/form of election is due at
least two business days prior to the date of the Cornerstone stockholder special
meeting, which is currently scheduled to occur on Monday, June 19, 2000. This
document also constitutes the information statement of EOP Partnership, the
prospectus of Cornerstone with respect to the shares of common stock of
Cornerstone issued in exchange for units of limited partnership of Cornerstone
Partnership prior to the partnership merger and the prospectus of EOP
Partnership and Equity Office with respect to the units of limited partnership
interest of EOP Partnership to be issued in exchange for Cornerstone Partnership
units in the partnership merger and the Equity Office common shares thereafter
issuable upon redemption of the EOP Partnership units issued in the partnership
merger, respectively.
EACH VOTE IS IMPORTANT.
PLEASE COMPLETE, SIGN, DATE AND RETURN YOUR CONSENT.
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Neither the SEC nor any state securities commission has approved or disapproved
of the securities to be issued in connection with the partnership merger or
passed upon the adequacy or accuracy of this consent solicitation/information
statement/prospectus. Any representation to the contrary is a criminal offense.
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THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
This consent solicitation/information statement/prospectus is dated May , 2000
and it is first being mailed on or about May , 2000.
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TABLE OF CONTENTS
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SUMMARY.............................. 1
The Companies and the
Partnerships.................... 1
Information About the Actions Taken
or to be Taken by the General
Partner of EOP Partnership...... 1
Cornerstone Partnership
Unitholders' Consent
Procedures...................... 2
Cornerstone Voting Agreements...... 2
Approval of the REIT Merger by
Equity Office Common
Shareholders and Cornerstone
Common and Preferred
Stockholders.................... 2
Recommendation of the Cornerstone
Board........................... 2
Fairness Opinion of Cornerstone's
Financial Advisor............... 3
The Partnership Merger............. 3
Accounting Treatment............... 7
Conflicts of Interest of
Cornerstone Directors and
Executive Officers in the
Mergers......................... 7
Trustees of Equity Office Following
the REIT Merger................. 7
Differences in the Rights of
Unitholders and Shareholders.... 7
Partnership Merger Selected
Historical Consolidated
Financial Data.................. 8
Partnership Merger Summary
Unaudited Pro Forma Condensed
Combined Financial Data......... 14
REIT Merger Selected Historical
Consolidated Financial Data..... 16
REIT Merger Selected Unaudited Pro
Forma Condensed Combined
Financial Data.................. 21
RISK FACTORS......................... 23
You may receive EOP Partnership
class A units in the partnership
merger or, if you redeem your
Cornerstone Partnership units
before the partnership merger,
Equity Office common shares in
the REIT merger, with a value of
less than $18.00 per unit or
$18.00 per share................ 23
If you are a Cornerstone
Partnership unitholder, your
distributions per unit after the
partnership merger will be
reduced......................... 23
The directors and executive
officers of Cornerstone may have
interests in the completion of
the mergers that are different
from the interests of
Cornerstone Partnership's
unitholders and Cornerstone's
stockholders.................... 24
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The failure of Cornerstone
Partnership unitholders and
Cornerstone stockholders to
approve the merger agreement may
require, under limited
circumstances, Cornerstone
Partnership to pay termination
fees and may result in a
decrease in the market price of
Cornerstone common stock........ 27
If the aggregate fair market value
of the Equity Office common
shares to be issued in the REIT
merger does not represent at
least 40% of the REIT merger
consideration to be paid at the
time of the closing of the REIT
merger, legal opinions required
to be delivered for the REIT
merger to be completed could not
be delivered, in which case the
mergers would not be completed
and the market price of
Cornerstone common stock could
decline as a result............. 28
Equity Office and Cornerstone may
not be successfully integrated
and intended benefits of the
mergers may not be realized,
which could have a negative
impact on the market price of
Equity Office common shares and
the value of the EOP Partnership
units after completion of the
mergers......................... 28
There is no public market for EOP
Partnership units and none is
expected to develop, which may
cause some difficulty in selling
any EOP Partnership units you
receive in the partnership
merger.......................... 28
The federal income tax consequences
to Cornerstone unitholders of
the partnership merger, any
redemption by Cornerstone
unitholders of Cornerstone
Partnership units before the
partnership merger and the
ownership by Cornerstone
unitholders of EOP Partnership
units after the partnership
merger are complex and should be
carefully considered by you..... 29
A WARNING ABOUT FORWARD-LOOKING
STATEMENTS......................... 31
INFORMATION ABOUT THE ACTIONS TAKEN
OR TO BE TAKEN BY THE GENERAL
PARTNER OF EOP PARTNERSHIP......... 31
CORNERSTONE PARTNERSHIP CONSENT
SOLICITATION....................... 32
Purpose of the Consent
Solicitation.................... 32
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Who Can Consent.................... 32
Consent, Redemption and Election
Procedures...................... 32
Required Vote...................... 33
How You May Revoke Your Notice of
Redemption...................... 34
How You May Revoke Your Consent or
Form of Election................ 34
Cost of This Consent
Solicitation.................... 34
THE PARTNERSHIP MERGER............... 35
Structure of the Mergers;
Partnership Merger Exchange
Ratio........................... 35
Redemption of Cornerstone
Partnership Units; Participation
in Cash/Share Election.......... 35
Background of the Partnership
Merger and the REIT Merger...... 35
Equity Office's Reasons for the
Mergers......................... 39
Opinion of Equity Office's
Financial Advisor............... 40
Cornerstone's Reasons for the
Mergers......................... 45
Opinion of Cornerstone's Financial
Advisor......................... 47
Interests of Cornerstone's
Directors and Executive Officers
in the Mergers.................. 52
Equity Office Board of Trustees and
Executive Officers after the
Mergers......................... 55
Assumption of Cornerstone's
Obligations Under Registration
Rights Agreements............... 56
Accounting Treatment............... 57
Resales of EOP Partnership Units
and Equity Office Common
Shares.......................... 57
No Appraisal Rights................ 58
THE MERGER AGREEMENT................. 58
Closing; Effective Time of the
Partnership Merger and the REIT
Merger.......................... 58
The Partnership Merger............. 59
The REIT Merger.................... 59
REIT Merger Financing.............. 61
Regulatory Approvals............... 62
Treatment of Cornerstone Stock
Options......................... 62
Representations and Warranties of
EOP Partnership and Cornerstone
Partnership..................... 63
Conduct of Business of Equity
Office and EOP Partnership
Pending the Mergers............. 63
Conduct of Business of Cornerstone
and Cornerstone Partnership
Pending the Mergers............. 65
Conditions to the Mergers.......... 67
Tax Related Undertakings of EOP
Partnership..................... 69
No Solicitation by Cornerstone or
Cornerstone Partnership......... 72
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Termination of the Merger
Agreement....................... 73
Expenses; Termination Fee.......... 75
Waiver and Amendment of the Merger
Agreement....................... 77
Indemnification; Directors' and
Officers' Insurance............. 77
Voting Agreements.................. 78
Preferred Stock Option Agreement... 79
Amendments to Equity Office's
Declaration of Trust Relating to
"Domestically-Controlled" REIT
Status.......................... 79
Cornerstone Joint Venture
Properties...................... 80
Acquisition of WCP Services........ 81
MATERIAL FEDERAL INCOME TAX
CONSEQUENCES....................... 81
Overview........................... 81
Summary of the Material Federal
Income Tax Consequences of the
Partnership Merger.............. 83
Tax Status of EOP Partnership...... 84
Tax Status of Cornerstone
Partnership..................... 86
Tax Consequences of the Partnership
Merger to Cornerstone
Partnership Unitholders That
Receive EOP Partnership Units... 86
Effect of Subsequent Events........ 94
Tax Consequences of Ownership of
EOP Partnership Units After the
Partnership Merger.............. 96
Tax Consequences of the Redemption
of Cornerstone Partnership Units
for Cornerstone Common Stock.... 104
Tax Consequences of the REIT
Merger.......................... 105
REIT Qualification................. 109
Taxation of Equity Office as a
REIT............................ 110
Taxation of U.S. Shareholders...... 121
Taxation of Tax-Exempt
Shareholders.................... 122
Backup Withholding and Information
Reporting Consequences to
Shareholders.................... 123
Tax Aspects of Equity Office's
Ownership of Interests in EOP
Partnership and Other
Partnerships.................... 123
Other Tax Consequences for Equity
Office and Its Shareholders..... 125
BUSINESS OF CORNERSTONE
PARTNERSHIP........................ 125
General............................ 125
Operations......................... 125
Ownership and Management of
Cornerstone Partnership
Properties...................... 125
Tenants............................ 131
Recent Developments................ 132
Competition........................ 132
Mortgage Indebtedness.............. 133
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Revolving Credit Facility.......... 135
Legal Proceedings.................. 135
CORNERSTONE PARTNERSHIP MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS......................... 136
Results of Operations.............. 136
Liquidity and Capital Resources.... 138
Other Matters...................... 143
Subsequent Events.................. 145
Quantitative and Qualitative
Disclosures About Market Risk... 146
SECURITY OWNERSHIP OF CORNERSTONE
PARTNERSHIP BY CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT OF
CORNERSTONE........................ 146
CORNERSTONE PARTNERSHIP POLICIES WITH
RESPECT TO CERTAIN ACTIVITIES...... 148
DESCRIPTION OF EOP PARTNERSHIP CLASS
A UNITS............................ 149
Capitalization..................... 149
Issuance of Additional Partnership
Interests....................... 149
Capital Contributions.............. 150
Distributions...................... 150
Preemptive Rights.................. 151
Conversion; Redemption............. 151
Management......................... 153
Sale of Substantially All of the
Partnership Assets.............. 153
Transfers.......................... 153
Amendment of Partnership
Agreement....................... 154
Meetings........................... 155
COMPARISON OF RIGHTS OF
UNITHOLDERS........................ 155
Capitalization..................... 155
Issuance of Additional Partnership
Interests....................... 156
Capital Contributions.............. 157
Distributions...................... 157
Preemptive Rights.................. 159
Conversion; Redemption............. 159
Management......................... 162
Sale of Substantially All of the
Partnership Assets.............. 163
Indemnification.................... 163
Transfers.......................... 165
Amendment of Partnership
Agreement....................... 166
Meetings........................... 169
Financial Statements and Reports... 169
COMPARISON OF RIGHTS OF
SHAREHOLDERS....................... 170
Authorized Shares.................. 170
Voting Rights...................... 171
Classification of the Board........ 171
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Number of Trustees/Directors;
Removal of Trustees/Directors;
Vacancies....................... 171
Limitation of Trustee/Director and
Officer Liability............... 172
Indemnification.................... 173
Duties of Trustees and Directors... 175
Maryland Elective Provisions....... 176
Call of Special Meetings of
Shareholders.................... 177
Shareholder Action by Written
Consent......................... 177
Advance Notice Provisions for
Shareholder Nominations and
Shareholder New Business
Proposals....................... 177
Amendment of the Declaration of
Trust and Articles of
Incorporation................... 177
Amendment of the Bylaws............ 178
Mergers, Consolidations and Sales
of Assets....................... 179
Dissolution of Equity Office or
Cornerstone; Termination of REIT
Status.......................... 180
Business Combinations with
Interested Shareholders......... 180
Control Share Acquisitions......... 180
Other Constituencies............... 181
Dissenters' Rights................. 181
Distributions...................... 182
REIT Ownership Limitations......... 182
LEGAL MATTERS........................ 185
EXPERTS.............................. 185
WHERE YOU CAN FIND MORE
INFORMATION........................ 186
WHAT INFORMATION YOU SHOULD RELY
ON................................. 189
INDEX TO FINANCIAL STATEMENTS........ F-1
EOP Partnership Pro Forma Condensed
Combined Financial Statements... F-2
Equity Office Pro Forma Condensed
Combined Financial Statements... F-10
Cornerstone Partnership Historical
Consolidated Financial
Statements...................... F-20
Cornerstone Partnership Historical
Consolidated Financial Statement
Schedule: Schedule III.......... F-44
Annex A -- Agreement and Plan of
Merger, as amended................. A-1
Annex B -- Opinion of J.P. Morgan
Securities, Inc.................... B-1
Annex C -- Opinion of Lazard Freres &
Co. LLC............................ C-1
Annex D -- Amendments to Equity
Office Declaration of Trust to be
Effected as
Part of the Merger................. D-1
Annex E -- Form of Second Amended and
Restated Agreement of Limited
Partnership of EOP Operating
Limited Partnership................ E-1
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QUESTIONS & ANSWERS ABOUT THE PARTNERSHIP MERGER
Q: WHY ARE EOP PARTNERSHIP AND CORNERSTONE PARTNERSHIP PROPOSING THE PARTNERSHIP
MERGER?
A: Equity Office and EOP Partnership are acquiring Cornerstone and Cornerstone
Partnership in a two-step transaction. The first step involves the merger of
Cornerstone Partnership with and into EOP Partnership, which we refer to as
the "partnership merger." Cornerstone is the sole general partner of, and
holds approximately an 87.1% interest in, Cornerstone Partnership. Equity
Office is the sole general partner of, and holds approximately an 88.2%
interest in, EOP Partnership. The second step involves the merger of
Cornerstone with and into Equity Office, which we refer to as the "REIT
merger." The REIT merger will take place immediately after the partnership
merger.
Both Equity Office and Cornerstone believe that the mergers will provide the
combined company with high quality office buildings in locations that are
complementary to existing EOP Partnership geographic locations. In addition,
by increasing the office space owned and operated by EOP Partnership by
approximately 24% based on square footage, the mergers will solidify its
position as the nation's largest publicly-controlled owner and operator of
office properties. The mergers also are expected to enhance EOP Partnership's
ability to offer its customers a full range of office space options, as well
as provide EOP Partnership with a development pipeline of new office
properties in a supply-constrained market. To review the background and
reasons for the mergers in greater detail, see pages 45-47 and 39-40 of this
document.
Q: WHAT WILL I RECEIVE IN THE PARTNERSHIP MERGER?
A:Cornerstone Partnership Unitholders. Cornerstone Partnership unitholders will
receive 0.7009 of a class A unit of EOP Partnership for each Cornerstone
Partnership class A common unit that is issued and outstanding, and not
redeemed, immediately before the partnership merger.
EOP Partnership Unitholders. Each EOP Partnership class A unit held by EOP
Partnership unitholders will continue to represent one EOP Partnership class A
unit after the partnership merger. Based on the number of EOP Partnership
units and Cornerstone Partnership units outstanding as of the date of this
document, we estimate that, upon completion of the partnership merger and
assuming that all Cornerstone Partnership class A common units are exchanged
for EOP Partnership class A units in the partnership merger, approximately
% of the outstanding EOP Partnership units will be owned by current
Cornerstone Partnership unitholders other than Cornerstone, approximately
% will be owned by persons who are EOP Partnership unitholders before
completion of the partnership merger, other than Equity Office, and
approximately % will be owned by Equity Office.
Q: WILL I HAVE THE RIGHT TO REDEEM THE EOP PARTNERSHIP CLASS A UNITS THAT I
RECEIVE IN THE PARTNERSHIP MERGER?
A: Yes. Under the merger agreement, you will have the right to redeem the EOP
Partnership class A units that you receive in the partnership merger at any
time following the completion of the mergers in accordance with the EOP
Partnership partnership agreement. Under the EOP Partnership partnership
agreement, a class A unit of EOP Partnership is generally redeemable on a
one-for-one basis for an Equity Office common share or its cash equivalent,
at the election of Equity Office.
Q: WILL I BE ABLE TO REDEEM MY CORNERSTONE PARTNERSHIP UNITS BEFORE THE
PARTNERSHIP MERGER?
A: Yes. The methods of redemption are as follows.
Redemption Right under Partnership Agreement of Cornerstone Partnership
You may exercise any unit redemption right that you currently have under the
partnership agreement of Cornerstone Partnership at any time before the
partnership merger. Any exercise by you of your unit redemption right under
the partnership agreement of Cornerstone Partnership will not be conditioned
on completion of the mergers. If you exercise your unit redemption right
under the partnership agreement of Cornerstone Partnership, Cornerstone will
elect to pay you shares of Cornerstone common stock on a one-for-one basis
for the Cornerstone Partnership units
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<PAGE> 7
redeemed. For units that you redeem before the partnership merger, you would not
receive units of EOP Partnership in the partnership merger, but instead would
participate in the REIT merger on the same basis as other common stockholders of
Cornerstone if you continue to own the Cornerstone common stock received in
the redemption at the time of the REIT merger. Generally, a Cornerstone
Partnership unit is redeemable commencing one year after the date it was
first issued. Accordingly, if you received your Cornerstone Partnership units
less than one year ago, you may not have a currently exercisable unit
redemption right under the partnership agreement of Cornerstone Partnership.
Unit Redemption Rights under the Merger Agreement
Under the merger agreement, you have the right to redeem all or any portion of
your Cornerstone Partnership units for Cornerstone common stock on a
one-for-one basis, whether or not you have a currently exercisable right to
redeem your units under the partnership agreement of Cornerstone Partnership.
The exercise by you of the unit redemption right under the merger agreement
will be effective only if the partnership merger is completed. Under the
merger agreement, you also may condition your redemption of units on the
ability to receive in the REIT merger only cash for some or all of the
Cornerstone common stock that you would receive upon redemption of your
Cornerstone Partnership units.
Q: WHAT WILL I RECEIVE IN THE REIT MERGER IF I REDEEM MY CORNERSTONE PARTNERSHIP
UNITS FOR CORNERSTONE COMMON STOCK BEFORE THE PARTNERSHIP MERGER?
A: In the REIT merger, Cornerstone common stockholders may elect to receive for
some or all of their shares of Cornerstone common stock either $18.00 per
share in cash, without interest, or 0.7009 of a common share, par value $.01
per share, of Equity Office, subject to proration if either the cash election
or the share election is oversubscribed.
If you redeem some or all of your Cornerstone Partnership units for
Cornerstone common stock under the provisions of the partnership agreement of
Cornerstone Partnership, or you elect to redeem some or all of your
Cornerstone Partnership units for Cornerstone common stock under the merger
agreement but do not condition the redemption on receiving cash in the REIT
merger for the Cornerstone common stock to be issued to you upon redemption,
you will participate in the REIT merger on the same basis as any other
Cornerstone common stockholder.
If you condition your unit redemption under the merger agreement on the
ability to receive only cash in the REIT merger for some or all of your
Cornerstone Partnership units, your Cornerstone Partnership units will be
redeemed only if the cash condition is met and you will receive in the REIT
merger $18.00 in cash per share of Cornerstone common stock received by you
in the redemption. The cash condition will not be met if there is an
oversubscription of cash by all Cornerstone common stockholders, taking into
account cash elections made by all redeeming Cornerstone Partnership
unitholders. However, if there is an undersubscription of cash, taking into
account cash elections made by all Cornerstone common stockholders, including
Cornerstone Partnership unitholders who redeem their Cornerstone Partnership
units before the partnership merger, but not including cash elections made by
Cornerstone Partnership unitholders who conditioned their unit redemptions on
the ability to receive only cash in the REIT merger, you may nevertheless
have the opportunity to have your units redeemed for Cornerstone common stock
and receive cash in the REIT merger if the cash consideration available after
giving effect to cash elections made by the Cornerstone common stockholders
is sufficient to meet your specified cash condition and your conditional cash
redemption is chosen by lot from among other conditional cash redemptions
that were not initially satisfied.
Q: HOW WILL PRORATION AFFECT ME IF I REDEEM MY CORNERSTONE PARTNERSHIP UNITS FOR
CORNERSTONE COMMON STOCK?
A: Proration is intended to provide each Cornerstone common stockholder with an
equal opportunity to receive, in accordance with such stockholder's election,
the cash consideration and the Equity Office common share consideration that
is available in the REIT merger.
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The aggregate REIT merger consideration to be paid to Cornerstone's common
stockholders is fixed at approximately $1.054 billion in cash, or $18.00
multiplied by 58,551,525 shares, and a total number of Equity Office common
shares equal to 0.7009 of an Equity Office common share multiplied by the
number of shares of Cornerstone common stock issued and outstanding
immediately before the closing of the REIT merger in excess of 58,551,525
shares. Accordingly, each Cornerstone common stockholder who makes a cash
election or a share election may receive a prorated combination of cash and
share consideration if, based on the elections made by other Cornerstone
common stockholders, including Cornerstone Partnership unitholders who redeem
their Cornerstone Partnership units before the partnership merger, cash
elections or share elections are received for more cash consideration or
share consideration, as applicable, than is available as part of the
aggregate REIT merger consideration.
For example:
Oversubscription of Cash
- if cash elections are received in the REIT merger for more than 58,551,525
shares of Cornerstone common stock and you have elected to redeem some or
all of your Cornerstone Partnership units without condition, then you will
receive in the REIT merger:
-- 0.7009 of an Equity Office common share in exchange for each share of
Cornerstone common stock for which you made a share election; and
-- a combination of cash and Equity Office common shares, on a
proportionate basis, for each share of Cornerstone common stock for
which you made a cash election, so that the aggregate number of shares
of Cornerstone common stock converted into cash in the REIT merger
equals 58,551,525 shares, with Equity Office common shares issued in
exchange for the remainder of the shares of Cornerstone common stock
converted in the REIT merger.
If you condition the exercise of your unit redemption right under the merger
agreement on the ability to receive only cash for some or all of the
Cornerstone common stock that you would receive in the redemption, an
oversubscription of cash will cause the cash condition not to be satisfied
and you will receive EOP Partnership units in the partnership merger based
on the 0.7009 exchange ratio for the units that were subject to the cash
condition. However, if there is an undersubscription of cash, taking into
account cash elections made by all Cornerstone common stockholders,
including Cornerstone Partnership unitholders who redeem their Cornerstone
Partnership units before the partnership merger, but not including cash
elections made by Cornerstone Partnership unitholders who conditioned their
unit redemptions on the ability to receive cash in the REIT merger, you may
nevertheless have the opportunity to have your units redeemed for
Cornerstone common stock and receive cash in the REIT merger if the cash
consideration available after giving effect to cash elections made by the
Cornerstone common stockholders is sufficient to meet your specified cash
condition and your conditional cash redemption is chosen by lot from among
other conditional cash redemptions that were not initially satisfied. For
any units redeemed by you that were not subject to the cash election
condition, you will receive cash or Equity Office common shares, as elected
by you, subject to the proration provisions described above.
Oversubscription of Shares
- if share elections are received for more shares of Cornerstone common
stock than the difference between (a) the number of shares of Cornerstone
common stock issued and outstanding immediately before the REIT merger,
taking into account shares of Cornerstone common stock issued to
Cornerstone Partnership unitholders who exercise their unit redemption
rights, and (b) the 58,551,525 shares to be converted into cash in the
REIT merger, and you have elected to redeem some or all of your
Cornerstone Partnership units, then you will receive in the REIT merger:
-- $18.00 in cash, without interest, in exchange for each share of
Cornerstone common stock for which you made a cash election; and
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<PAGE> 9
-- a combination of cash and Equity Office common shares, on a
proportionate basis, for each share of Cornerstone common stock for
which you made a share election, so that the aggregate number of shares
of Cornerstone common stock converted into cash in the REIT merger
equals 58,551,525 shares, with Equity Office common shares issued in
exchange for the remainder of the shares of Cornerstone common stock
converted in the REIT merger.
If there is an oversubscription of Equity Office common shares, the cash
condition to any conditional redemption will be met because cash will be
available for each share of Cornerstone common stock for which cash was
elected.
Undersubscription of Cash and Shares
- if cash elections are received for less than 58,551,525 shares of
Cornerstone common stock AND share elections are received for less than
the maximum number of shares of Cornerstone common stock to be converted
into Equity Office common shares in the REIT merger, and you have elected
to redeem some or all of your Cornerstone Partnership units, then you will
receive in the REIT merger:
-- $18.00 in cash, without interest, in exchange for each share of
Cornerstone common stock for which you made a cash election;
-- 0.7009 of an Equity Office common share in exchange for each share of
Cornerstone common stock for which you made a share election; and
-- a combination of cash and Equity Office common shares, on a
proportionate basis, for each share of Cornerstone common stock for
which you made neither a cash election nor a share election, so that
the aggregate number of shares of Cornerstone common stock converted
into $18.00 in cash, without interest, in the REIT merger equals
58,551,525 shares, with Equity Office common shares issued in exchange
for the remainder of the shares of Cornerstone common stock converted
in the REIT merger.
If there is an undersubscription of cash and an undersubscription of Equity
Office common shares, the cash condition to any conditional unit redemption
will be met because cash will be available for each share of Cornerstone
common stock for which cash was elected.
Q: HOW DO I ELECT TO REDEEM MY CORNERSTONE PARTNERSHIP UNITS AND ELECT THE TYPE
OF CONSIDERATION I WOULD LIKE TO RECEIVE IN THE REIT MERGER?
A: In order to redeem your Cornerstone Partnership units and elect the form of
consideration that you would like to receive in the REIT merger, you must
complete and sign the notice of redemption/form of election included with
this document and return it to Cornerstone Partnership in accordance with the
instructions in the notice of redemption/form of election. The properly
completed notice of redemption/form of election must be received by 5:00
p.m., Eastern Time, June 15, 2000.
Q: IS MY NOTICE OF REDEMPTION REVOCABLE?
A: If you conditionally elect to redeem your Cornerstone Partnership units under
the merger agreement, you can revoke or amend your notice of redemption at
any time before 5:00 p.m., Eastern Time, on June 15, 2000, by submitting
written notice to Cornerstone Partnership, which must receive the notice at
or before that time. A notice of redemption under the provisions of the
merger agreement is conditioned on the completion of the partnership merger
and, if you choose, can be conditioned on the ability to receive only cash
for some or all of the shares of Cornerstone common stock that would be
received in the redemption.
A notice of redemption made under the provisions of the partnership agreement
of Cornerstone Partnership is not revocable and may not be conditioned on
completion of the partnership merger or the ability to receive cash in the
REIT merger.
Q: IF I ELECT TO REDEEM MY CORNERSTONE PARTNERSHIP UNITS FOR CORNERSTONE COMMON
STOCK, IS MY ELECTION TO RECEIVE CASH OR EQUITY OFFICE COMMON SHARES IN THE
REIT MERGER FOLLOWING A REDEMPTION OF MY CORNERSTONE PARTNERSHIP UNITS
REVOCABLE?
A: Yes. You may change your cash or share election or revoke it at any time
prior to the
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<PAGE> 10
deadline for submitting your consent form, as such deadline may be extended
from time to time, by submitting written notice to Cornerstone Partnership,
which must receive the notice at or before that time.
Q: WHAT HAPPENS IF THE PRICE OF EQUITY OFFICE COMMON SHARES AND/OR CORNERSTONE
COMMON STOCK CHANGES BEFORE THE CLOSING OF THE TRANSACTION?
A: No change will be made to the 0.7009 exchange ratio applicable to both the
partnership merger or the REIT merger, or the $18.00 per share cash amount
payable in the REIT merger. The exchange ratio is fixed. Because the market
value of Equity Office common shares will fluctuate before and after the
closing of the REIT merger, the value of any EOP Partnership units that you
will receive in the partnership merger or any Equity Office common shares
that you receive in the REIT merger, as applicable, will fluctuate as well,
and may differ from the $18.00 per share cash amount payable in the REIT
merger. You should obtain current market prices for Equity Office common
shares and shares of Cornerstone common stock, to which the current values of
EOP Partnership units and Cornerstone Partnership units, respectively,
correspond prior to making your elections.
Q: HOW WAS THE EXCHANGE RATIO DETERMINED?
A: The exchange ratio was determined as part of the overall negotiation between
Equity Office and Cornerstone regarding the merger consideration, taking into
account the other terms of the transaction, including the aggregate and per
share amounts of merger consideration payable in cash.
Q: WILL ANY FRACTIONAL EOP PARTNERSHIP UNITS BE ISSUED IN THE PARTNERSHIP
MERGER?
A: No. A Cornerstone Partnership unitholder who, based on the 0.7009 exchange
ratio applicable to the partnership merger, would be entitled to receive a
number of EOP Partnership units that is not a whole number, will receive a
number of EOP Partnership units that is rounded to the nearest whole number.
Q: WILL ANY FRACTIONAL EQUITY OFFICE COMMON SHARES BE ISSUED IN THE REIT MERGER?
A: No. Cash will be paid instead of fractional shares. This cash will be in
addition to the approximately $1.054 billion of cash required to be paid to
holders of Cornerstone common stock as part of the REIT merger consideration,
and it will not be taken into account for purposes of any proration that is
required.
Q: TO WHAT AM I BEING ASKED TO CONSENT?
A: Cornerstone Partnership Unitholders. As a Cornerstone Partnership unitholder,
you are being asked to approve by written consent the mergers, to the extent
required under the partnership agreement of Cornerstone Partnership.
EOP Partnership Unitholders. This document is being sent to you for your
information only. You are not being asked to approve the partnership merger,
the REIT merger or the merger agreement.
Q: AS A CORNERSTONE PARTNERSHIP UNITHOLDER, DO I HAVE APPRAISAL RIGHTS?
A: No. Neither the Cornerstone Partnership partnership agreement nor the merger
agreement provides you with appraisal rights and you have no such rights
under Delaware law.
Q: WILL I RECOGNIZE GAIN OR LOSS AS A RESULT OF THE PARTNERSHIP MERGER?
A: The partnership merger generally is intended to qualify as a nonrecognition
transaction for federal income tax purposes. However, if you experience a
reduction in your share of partnership liabilities of Cornerstone Partnership
when compared to your share of partnership liabilities of EOP Partnership,
you will recognize taxable gain to the extent that the amount of that
reduction in partnership liabilities exceeds your adjusted tax basis in the
EOP Partnership units received immediately after the partnership merger. In
addition, other circumstances present at the time of the partnership merger
and subsequent events could cause you to recognize taxable gain as a result
of the partnership merger.
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<PAGE> 11
The tax consequences of the partnership merger are very complicated and will
vary for each Cornerstone Partnership unitholder according to its own
circumstances. Therefore, it is important that you consult with your own tax
advisor in order to determine the tax consequences to you of the partnership
merger.
Q: IF I CURRENTLY HAVE A DEFICIT RESTORATION OBLIGATION WITH RESPECT TO MY
CORNERSTONE PARTNERSHIP UNITS, WILL I HAVE THE RIGHT TO ENTER INTO A DEFICIT
RESTORATION OBLIGATION WITH RESPECT TO THE EOP PARTNERSHIP UNITS THAT I
RECEIVE IN THE PARTNERSHIP MERGER?
A: Yes. Under the merger agreement, EOP Partnership will allow each Cornerstone
Partnership unitholder that has entered into a deficit restoration obligation
with respect to its Cornerstone Partnership units as of the time of the
partnership merger to enter into a deficit restoration obligation, in the
same amount, with respect to the EOP Partnership units received in the
partnership merger. The former Cornerstone Partnership unitholders as a group
also will have the right to increase the aggregate amount of their deficit
restoration obligations by a specified amount. In addition, under the merger
agreement, EOP Partnership, in its sole discretion, may allow increases in
the deficit restoration obligations of the former Cornerstone Partnership
unitholders under limited circumstances after the partnership merger.
Cornerstone Partnership unitholders who have entered into specific agreements
with Cornerstone Partnership permitting them to enter into and increase
existing deficit restoration obligations will continue to have these rights.
Q: WILL I RECOGNIZE TAXABLE GAIN OR LOSS AS A RESULT OF THE REDEMPTION OF MY
CORNERSTONE PARTNERSHIP UNITS FOR CORNERSTONE COMMON STOCK IMMEDIATELY BEFORE
THE PARTNERSHIP MERGER?
A: Yes. The redemption of Cornerstone Partnership units for Cornerstone common
stock will be treated for federal income tax purposes as a fully-taxable sale
of those units to Cornerstone in exchange for Cornerstone common stock. On
the redemption of your Cornerstone Partnership units, you will recognize any
gain or loss realized in an amount equal to the difference between the amount
realized on the redemption and your adjusted tax basis in your Cornerstone
Partnership units. If you have a "negative capital account" with respect to
your Cornerstone Partnership units, the gain recognized on the redemption
would exceed the value of the Cornerstone common stock received by the amount
of that negative capital account.
If you redeem your Cornerstone Partnership units for Cornerstone common stock
immediately before the partnership merger you will have a basis in the
Cornerstone common stock received in the redemption equal to the fair market
value of that Cornerstone common stock at the time of the redemption. Your
holding period in the Cornerstone common stock received will begin after the
redemption.
The tax consequences of a redemption will vary for each Cornerstone
Partnership unitholder according to its own circumstances and, therefore, it
is important that each Cornerstone Partnership unitholder consult with its
own tax advisor in order to determine the tax consequences to it of a
redemption.
Q: WILL I RECOGNIZE TAXABLE GAIN OR LOSS AS A RESULT OF THE REIT MERGER?
A: If you redeem your Cornerstone Partnership units before the partnership
merger and participate in the REIT merger as a Cornerstone common
stockholder, the following federal income tax consequences generally will
result and will be in addition to any tax consequences that occur upon the
redemption:
- if you exchange Cornerstone common stock solely for Equity Office common
shares in the REIT merger, you will not recognize gain or loss realized
on the REIT merger for federal income tax purposes. However, you will
recognize any taxable gain realized with respect to cash received for
fractional shares;
- if you receive solely cash in exchange for your Cornerstone common
stock, you will recognize any taxable gain or loss realized for federal
income tax purposes on the exchange of your Cornerstone common stock; or
- if you receive both Equity Office common shares and cash, you will
recognize any gain realized up to the amount of cash received, but you
will not recognize any loss on the exchange.
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<PAGE> 12
The tax consequences to Cornerstone stockholders will depend on your
personal situation. You should consult your tax advisor for a full
understanding of the tax consequences of the REIT merger to you.
Q: WHAT WILL MY DISTRIBUTIONS BE AFTER THE PARTNERSHIP MERGER?
A: Until the partnership merger is completed, Cornerstone Partnership
unitholders will continue to receive regular distributions in accordance with
the partnership agreement of Cornerstone Partnership, including any
distributions made in order to permit Cornerstone to pay to its stockholders
immediately before the closing any dividends necessary to maintain
Cornerstone's status as a real estate investment trust, or REIT. As required
by the merger agreement, Cornerstone Partnership intends to pay a special
distribution to its unitholders of $0.03 per unit in order to permit
Cornerstone to pay a special dividend of $0.03 per share on its common stock.
After the completion of the partnership merger, as an EOP Partnership
unitholder, you will receive distributions in accordance with the EOP
Partnership partnership agreement. EOP Partnership's current quarterly
distributions are $0.42 per class A unit per quarter.
Q: IF I REDEEM MY CORNERSTONE PARTNERSHIP UNITS FOR CORNERSTONE COMMON STOCK AND
PARTICIPATE IN THE REIT MERGER, WHAT WILL MY DIVIDENDS BE AFTER THE REIT
MERGER?
A: After the completion of the REIT merger, if you receive Equity Office common
shares in the REIT merger, you will receive the distributions payable to
holders of Equity Office common shares with a record date after the closing.
Equity Office's current quarterly distributions are $0.42 per share per
quarter. You will not receive any distributions or dividends with respect to
the shares of Cornerstone common stock that you receive by redeeming your
Cornerstone Partnership units under the merger agreement.
Q: WHAT SHOULD I DO NOW?
A: If you are a Cornerstone Partnership unitholder, you should indicate on your
consent form whether or not you consent to the mergers and sign and mail it
in the enclosed envelope as soon as possible. You also should send in your
notice of redemption/form of election if you wish to redeem your Cornerstone
Partnership units for Cornerstone common stock and participate in the REIT
merger as a Cornerstone common stockholder.
If you sign and send in your consent form and do not indicate if you consent,
your consent will be assumed to have been given in favor of the proposal to
approve the mergers.
Q: WHO CAN ANSWER MY QUESTIONS?
A: Cornerstone Partnership Unitholders. If you have more questions about the
mergers, any redemption rights under the Cornerstone Partnership agreement or
the merger agreement, or desire additional copies of this document, consent
forms, or notice of redemption/forms of election, you should contact:
Cornerstone Properties Limited Partnership
c/o Cornerstone Properties Inc.
Tower 56
126 East 56th Street, 6th Floor
New York, New York 10022
Attention: Thomas P. Loftus
Telephone: (212) 605-7100
EOP Partnership Unitholders. If you have more questions about the
partnership merger or would like additional copies of this document, you
should contact:
EOP Operating Limited Partnership
c/o Equity Office Properties Trust
Two North Riverside Plaza,
Suite 2100
Chicago, Illinois 60606
Attention: Diane Morefield
Telephone: (312) 466-3286
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<PAGE> 13
SUMMARY
This summary highlights selected information from this consent
solicitation/information statement/prospectus. It may not contain all of the
detailed information that may be important to you. To understand the partnership
merger and the REIT merger fully and for a more complete description of the
legal terms of the mergers, you should read carefully this entire document and
the other documents to which we refer, including the merger agreement, as
amended. For more information about Equity Office, EOP Partnership and
Cornerstone, see "Where You Can Find More Information" on page 186. Each item in
this summary refers to the pages where that subject is discussed more fully.
THE COMPANIES AND THE PARTNERSHIPS
EQUITY OFFICE PROPERTIES TRUST
EOP OPERATING LIMITED PARTNERSHIP
Two North Riverside Plaza
Suite 2100
Chicago, Illinois 60606
(312) 466-3300
Equity Office Properties Trust is the sole general partner of, and owns the
controlling interest in, EOP Operating Limited Partnership. Equity Office owns
all of its assets and conducts all of its operations through EOP Partnership,
which is engaged in acquiring, owning, operating and leasing office properties
and parking facilities. Equity Office is the nation's largest publicly held
owner and operator of office properties, with a portfolio of 294 office
buildings containing 77.0 million square feet in 23 states and the District of
Columbia. Equity Office, which has elected to be taxed as a real estate
investment trust, or REIT, for federal income tax purposes, is an independent
real estate company that manages all aspects of its operations internally.
EOP Partnership, a Delaware limited partnership, was organized in July
1997. Equity Office, a Maryland real estate investment trust, was organized in
1996 and began operations in 1997 to continue and expand the national office
property business of Mr. Samuel Zell, chairman of the board of trustees of
Equity Office, and his affiliates.
CORNERSTONE PROPERTIES INC.
CORNERSTONE PROPERTIES LIMITED PARTNERSHIP
126 East 56th Street
Tower 56
New York, New York 10022
(212) 605-7100
Cornerstone Properties Inc. is a self-administered equity 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. The Cornerstone 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. 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. Cornerstone Properties is
organized as a Nevada corporation.
In January 1998, Cornerstone converted its corporate structure into an
umbrella limited partnership REIT. Cornerstone owns all of its assets and
conducts all of its operations through Cornerstone Partnership. Under this
structure, Cornerstone is the sole general partner of, and owns the controlling
interest in, Cornerstone Properties Limited Partnership.
INFORMATION ABOUT THE ACTIONS TAKEN OR TO BE TAKEN BY THE GENERAL PARTNER OF
EOP PARTNERSHIP (SEE PAGE 31)
Under authority granted in the partnership agreement of EOP Partnership,
Equity Office, as the general partner of EOP Partnership, has determined that
the partnership merger is in the best interests of EOP Partnership and its
unitholders, and has approved the merger agreement and the partnership merger.
No vote or consent of unitholders of EOP Partnership is required under the
partnership agreement of EOP Partnership for approval of the partnership merger.
The partnership agreement of EOP Partnership requires the approval of the
REIT merger by the consent of unitholders holding at least a
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<PAGE> 14
majority of the outstanding EOP Partnership units, including any EOP
Partnership units held by Equity Office. As of May 12, 2000, Equity Office
owned approximately 88.2% of the outstanding EOP Partnership units and intends
to take action by written consent, as permitted under the partnership
agreement of EOP Partnership, to approve the REIT merger on or about the close
of business on June 16, 2000. Because Equity Office owns more than a majority
of the outstanding partnership units of EOP Partnership, no vote or consent of
EOP Partnership unitholders, other than Equity Office, is required for
approval of the REIT merger, and none is being solicited. Accordingly, under
applicable SEC rules, this document is being forwarded to unitholders of EOP
Partnership of record on May 12, 2000 for informational purposes only.
CORNERSTONE PARTNERSHIP UNITHOLDERS' CONSENT PROCEDURES (SEE PAGE 32)
Cornerstone is asking Cornerstone Partnership unitholders to consent to the
mergers. The partnership agreement of Cornerstone Partnership requires the
approval of the mergers by the consent of unitholders holding at least a
majority of the outstanding Cornerstone Partnership units, including any
Cornerstone Partnership units held by Cornerstone. As of May 12, 2000,
Cornerstone owned approximately 87.1% of the Cornerstone Partnership units.
Cornerstone is required to vote its units in proportion to the manner in which
all outstanding shares of capital stock of Cornerstone are voted at the special
meeting of stockholders of Cornerstone to be held on June 19, 2000 in connection
with the REIT merger. You may execute a consent to the mergers if you owned
Cornerstone Partnership units on May 12, 2000.
CORNERSTONE VOTING AGREEMENTS (SEE PAGE 78)
Cornerstone's directors and executive officers have entered into voting
agreements under which they have agreed to vote all of their Cornerstone
Partnership units and shares of Cornerstone common stock to approve the mergers
and against any alternative acquisition proposals. As of the record date for
consent to the mergers by Cornerstone Partnership unitholders, the directors and
executive officers of Cornerstone, including their affiliates, beneficially
owned 5,056,240 Cornerstone Partnership units, representing approximately 3.4%
of the outstanding Cornerstone Partnership units entitled to consent to the
mergers and shares of Cornerstone common stock, representing
approximately % of the outstanding shares of Cornerstone common stock entitled
to vote at the Cornerstone stockholders meeting.
APPROVAL OF THE REIT MERGER BY EQUITY OFFICE COMMON SHAREHOLDERS AND CORNERSTONE
COMMON AND PREFERRED STOCKHOLDERS (SEE PAGE 67)
By separate joint proxy statement/prospectus, the board of trustees of
Equity Office and the board of directors of Cornerstone are soliciting the
approval of the merger agreement and the REIT merger, as applicable, from the
Equity Office common shareholders and the Cornerstone common and preferred
stockholders, respectively. The joint proxy statement/prospectus also
constitutes a prospectus of Equity Office with regard to the Equity Office
common shares to be issued to the Cornerstone common stockholders in the REIT
merger. Approval of the REIT merger requires the affirmative vote of at least a
majority of the outstanding shares of Cornerstone common stock and at least two
thirds of the outstanding shares of Cornerstone 7% cumulative convertible
preferred stock. Approval of the merger agreement and the REIT merger requires
the affirmative vote of not less than a majority of all votes entitled to be
cast by Equity Office common shareholders. The consummation of REIT merger is
conditioned upon completion of the partnership merger and the partnership merger
will not be completed if the REIT merger does not receive the required approval
of the Equity Office shareholders and Cornerstone stockholders.
RECOMMENDATION OF THE CORNERSTONE BOARD (SEE PAGE 45)
The Cornerstone board of directors on behalf of Cornerstone, in its
capacity as general partner of Cornerstone Partnership, has approved and adopted
the merger agreement, including the partnership merger and the REIT merger
contemplated thereby. The Cornerstone board of directors believes that the
mergers are in the best interests of Cornerstone, Cornerstone Partnership and
their respective security holders. Cornerstone Partnership unitholders also
should refer to the reasons that the Cornerstone board of directors considered
in determining whether to approve and adopt the merger agreement on pages 45
through 47.
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<PAGE> 15
FAIRNESS OPINION OF CORNERSTONE'S FINANCIAL ADVISOR (SEE PAGE 47)
In deciding to approve and adopt the merger agreement, the Cornerstone
Board considered the oral opinion, delivered February 10, 2000, of its financial
advisor, Lazard Freres & Co. LLC, that, as of that date, the consideration to be
received in the REIT merger was fair, from a financial point of view, to the
holders of common stock of Cornerstone. Such opinion was confirmed in writing on
February 11, 2000. This opinion is attached as Annex C to this document.
THE PARTNERSHIP MERGER (SEE PAGE 59)
The merger agreement, as amended, is attached at the back of this consent
solicitation statement/information statement/prospectus as Annex A. We urge you
to read the merger agreement, as amended, as it is the legal document that
governs the partnership merger and the REIT merger.
The merger agreement contemplates the following two-step transaction:
- the partnership merger, whereby Cornerstone Partnership will merge into
EOP Partnership and Cornerstone Partnership will cease to exist; followed
by
- the REIT merger, whereby Cornerstone will merge into Equity Office and
Cornerstone will cease to exist.
The REIT merger will be completed immediately after the completion of the
partnership merger.
3
<PAGE> 16
STRUCTURE DIAGRAMS
The following diagrams depict in summary form the structure of Equity
Office and Cornerstone before and after the partnership merger and the merger,
assuming that none of the unitholders of EOP Partnership or Cornerstone
Partnership redeem their units:
CURRENT STRUCTURE:
[FLOW CHART]
AFTER THE PARTNERSHIP MERGER: AFTER THE REIT MERGER:
[FLOW CHART]
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<PAGE> 17
CONDITIONS TO THE PARTNERSHIP MERGER AND THE REIT MERGER (SEE PAGE 67)
Before the partnership merger and the REIT merger can be completed, a
number of conditions must be satisfied. These include:
- approval of the merger agreement and the REIT merger by the requisite
votes of Cornerstone Partnership unitholders and the EOP Partnership
unitholders;
- approval of the merger agreement and the REIT merger by the requisite
vote of Equity Office common shareholders and approval of the merger
agreement by the requisite vote of Cornerstone common and preferred
stockholders;
- absence of law preventing the consummation of either the partnership
merger or the REIT merger;
- delivery of tax opinions that the REIT merger qualifies as a
reorganization under section 368(a) of the Internal Revenue Code and that
EOP Partnership will be treated as a partnership under the Internal
Revenue Code; and
- other customary closing conditions.
Where the law permits, Equity Office or EOP Partnership, on the one hand,
or Cornerstone or Cornerstone Partnership, on the other hand, could decide to
complete the partnership merger and the REIT merger even though one or more
conditions were not satisfied. By law, neither Equity Office or EOP Partnership,
on the one hand, nor Cornerstone or Cornerstone Partnership, on the other hand,
can waive (A) a failure by the requisite vote of shareholders to adopt and
approve the merger agreement and the REIT merger, (B) a failure by the requisite
vote of unitholders of EOP Partnership or Cornerstone Partnership to approve the
merger agreement and the REIT merger or (C) any court order or law preventing
consummation of the partnership merger or the REIT merger. Whether any of the
other conditions would be waived would depend on the facts and circumstances as
determined by the reasonable business judgment of the board of trustees of
Equity Office, acting on its own behalf or in its capacity as general partner of
EOP Partnership, or the board of directors of Cornerstone. If Equity Office and
EOP Partnership or Cornerstone and Cornerstone Partnership waived compliance
with one or more of the conditions and the condition was deemed material to a
vote of Equity Office and/or Cornerstone shareholders or EOP Partnership and/or
Cornerstone Partnership unitholders, Equity Office, Cornerstone and/or
Cornerstone Partnership would have to resolicit the approval by its stockholders
and unitholders, respectively, or, in the case of EOP Partnership, inform its
unitholders of such material change, before the closing of the REIT merger or
the partnership merger.
It is a condition to the consummation of the REIT merger that Hogan &
Hartson L.L.P., counsel to Equity Office, and King & Spalding, counsel to
Cornerstone, deliver opinions that the REIT merger qualifies as a reorganization
under the provisions of section 368(a) of the Code. This condition will not be
waived.
REIT MERGER FINANCING (SEE PAGE 62)
Equity Office intends to finance the $1.1 billion cash portion of the
purchase price to Cornerstone common stockholders in the REIT merger by using
available borrowing capacity under its existing $1.0 billion credit facility and
a new $1.0 billion credit facility expected to be entered into prior to the
closing of the mergers.
REGULATORY APPROVALS (SEE PAGE 62)
Equity Office and Stichting Pensioenfonds voor de Gezondheid Geestelijke en
Maatschappelijke Belangen, or PGGM, Cornerstone's largest stockholder are in the
process of preparing filings with U.S. antitrust authorities under the Hart-
Scott-Rodino Antitrust Improvements Act of 1976 relating to PGGM's acquisition
of Equity Office common shares in the REIT merger. Under the Hart-Scott-Rodino
Antitrust Improvements Act, in a reportable acquisition of assets or voting
securities the acquiring person may not take beneficial ownership of the shares
or assets to be acquired until (a) notification has been given, and required
information furnished, to the Federal Trade Commission and the Antitrust
Division of the Department of Justice and (b) specified waiting period
requirements have been satisfied. The government could terminate the waiting
period early or alternatively extend the waiting period with a request for
additional information.
5
<PAGE> 18
TERMINATION OF THE MERGER AGREEMENT;
TERMINATION FEES (SEE PAGE 73-77)
The merger agreement contains provisions addressing the circumstances under
which Equity Office and EOP Partnership, on the one hand, and Cornerstone and
Cornerstone Partnership, on the other hand, may terminate the merger agreement.
In addition, the merger agreement provides that, in several circumstances,
Cornerstone may be required to pay to Equity Office a termination fee of $100
million.
SUMMARY OF MATERIAL FEDERAL INCOME TAX
CONSEQUENCES (SEE PAGE 81)
A Cornerstone Partnership unitholder who receives only EOP Partnership
units in the partnership merger generally will not recognize taxable gain at the
time of the partnership merger, except to the extent that the unitholder
experiences a reduction in its share of partnership liabilities that exceeds its
adjusted basis in the EOP Partnership units that are received in the partnership
merger. Whether a particular Cornerstone Partnership unitholder will experience
a reduction in its share of partnership liabilities in connection with the
partnership merger will depend upon a number of variables, which are discussed
more fully under the heading "Material Federal Income Tax Consequences -- Tax
Consequences of the Partnership Merger to Cornerstone Partnership Unitholders
That Receive EOP Partnership Units" beginning on page 86. In addition,
subsequent events and transactions could cause a Cornerstone Partnership
unitholder to be required to recognize all or part of the gain deferred at the
time of the partnership merger. See "Material Federal Income Tax
Consequences -- Effect of Subsequent Events" on page 94.
A Cornerstone Partnership unitholder who exercises its unit redemption
right before the partnership merger and receives Cornerstone common stock in
exchange for its Cornerstone Partnership units will recognize taxable gain equal
to the difference between the "amount realized" for tax purposes and the
Cornerstone Partnership unitholder's adjusted basis in its Cornerstone
Partnership units that are redeemed. If you have a "negative capital account"
with respect to your Cornerstone Partnership units, the gain recognized on the
redemption would exceed the value of the Cornerstone common stock received by
the amount of that negative capital account. A Cornerstone Partnership
unitholder who redeems his units for Cornerstone common stock immediately prior
to the partnership merger will have a basis in the Cornerstone common stock
received equal to the fair market value of that Cornerstone common stock at the
time of the redemption. The unitholder's holding period in the Cornerstone
common stock received will begin after the redemption. See "Material Federal
Income Tax Consequences -- Tax Consequences of the Redemption of Cornerstone
Partnership Units for Cornerstone Common Stock" on page 104.
A Cornerstone Partnership unitholder who redeems its Cornerstone
Partnership units for Cornerstone common stock before the partnership merger
will participate in the REIT merger as a Cornerstone common stockholder. The
REIT merger is intended to qualify as a reorganization under section 368(a) of
the Internal Revenue Code. Accordingly, a Cornerstone common stockholder who
receives only Equity Office common shares in the REIT merger will not recognize
gain or loss realized on the REIT merger for federal income tax purposes.
However, a Cornerstone common stockholder will be required to recognize any
taxable gain realized with respect to cash received instead of a fractional
Equity Office common share. A Cornerstone common stockholder who receives only
cash in the REIT merger will recognize any taxable gain or loss realized on the
exchange for federal income tax purposes. A Cornerstone common stockholder who
receives both Equity Office common shares and cash will recognize any gain
realized up to the amount of cash received, but will not recognize any loss
realized. See "Material Federal Income Tax Consequences -- Tax Consequences of
the REIT Merger" on page 105.
The tax consequences of the partnership merger, any redemption, and the
REIT merger to each Cornerstone Partnership unitholder will depend on the
particular situation of that unitholder. Each Cornerstone Partnership
unitholder, therefore, is urged to consult with its own tax advisor for a full
understanding of the tax consequences to the unitholder that will result from
the partnership merger, any redemption of its Cornerstone Partnership units, and
the REIT merger.
6
<PAGE> 19
ACCOUNTING TREATMENT (SEE PAGE 57)
The partnership merger and the REIT merger will be treated as a purchase
for financial accounting purposes.
CONFLICTS OF INTEREST OF CORNERSTONE DIRECTORS AND EXECUTIVE OFFICERS IN THE
MERGERS (SEE PAGE 52)
A number of directors and executive officers of Cornerstone have interests
in the mergers as employees and/or directors that are different from, or in
addition to, yours as a Cornerstone Partnership unitholder. The Cornerstone
board recognized these interests and determined that they did not affect the
benefits of the REIT merger to Cornerstone stockholders or the partnership
merger to Cornerstone Partnership unitholders.
If the mergers take place, William Wilson III, John S. Moody and Jan H.W.R.
van der Vlist will become members of the Equity Office board of trustees. Also,
indemnification arrangements in the merger agreement and directors' and
officers' liability insurance for existing directors and officers of Cornerstone
will be continued by Equity Office after the mergers.
In addition, if the mergers take place, options to purchase Cornerstone
common stock held by Cornerstone's directors and officers will be automatically
converted into options to acquire Equity Office common shares adjusted to
account for the exchange ratio of 0.7009. Further, if the mergers are completed
and Cornerstone executives with whom Cornerstone has severance agreements are
terminated under the circumstances described in "The Partnership
Merger -- Interests of Cornerstone's Directors and Executive Officers in the
Mergers" then such persons would be entitled to aggregate benefits, if the
employment of all of these persons is terminated following completion of the
mergers, of approximately $34.7 million under such agreements. Upon the
completion of the REIT merger, outstanding unvested options to purchase an
aggregate of 3,675,647 shares of Cornerstone common stock will become
exercisable in full. Of these, Messrs. Wilson, Moody and the other Cornerstone
executives with severance agreements hold unvested options to purchase 3,177,476
shares of Cornerstone common stock at a per share weighted average exercise
price of $16.48. Under the merger agreement, Cornerstone optionees may elect to
cash-out their vested options, after completion of the REIT merger and before
the end of the second business day following completion of the REIT merger, for
an amount of cash equal to the excess, if any, of $18.00 over the exercise price
multiplied by the number of shares of Cornerstone common stock subject to the
options. Some Cornerstone optionees also may have additional liquidity rights
for their options.
Mr. Moody and two other executive officers of Cornerstone also will enter
into noncompetition agreements with Equity Office for which they will receive
payments totaling $6.5 million. In addition, an affiliate of Equity Office will
purchase from Messrs. Wilson and Moody the voting capital stock of WCP Services,
Inc., a third-party service subsidiary of Cornerstone, for an aggregate of
$400,000, including the assumption of indebtedness, and Mr. Wilson and others
will enter into a joint venture with an affiliate of Equity Office to develop
assets that currently are in the Cornerstone development pipeline and to pursue
other development opportunities in northern California.
TRUSTEES OF EQUITY OFFICE FOLLOWING THE REIT MERGER (SEE PAGE 55)
The merger agreement provides that Messrs. Moody, Wilson and van der Vlist
will become members of the board of trustees of Equity Office, with terms
expiring in 2002, 2003 and 2003, respectively. In addition, Equity Office has
agreed to renominate Mr. van der Vlist, or a replacement designated by PGGM, and
subject to the approval of Equity Office if such replacement is not an officer,
director or employee of PGGM, to the board of trustees of Equity Office upon the
expiration of his terms in 2003 and 2006, so long as PGGM and its affiliates
continue to own in the aggregate 21,000,000 or more of the issued and
outstanding Equity Office common shares.
DIFFERENCES IN THE RIGHTS OF UNITHOLDERS AND SHAREHOLDERS (SEE PAGES 155 AND
170)
Delaware law and the partnership agreement of Cornerstone Partnership
currently govern the rights of Cornerstone Partnership unitholders. Upon
completion of the partnership merger, Cornerstone Partnership unitholders either
will become Equity Office common shareholders, with rights governed by Maryland
law and Equity Office's declaration of trust and bylaws or EOP Partnership
unitholders, with rights governed by Delaware law and the partnership agreement
of EOP Partnership, depending on whether or not a Cornerstone unitholder redeems
its units of Cornerstone common stock prior to the partnership merger.
7
<PAGE> 20
PARTNERSHIP MERGER SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
EOP PARTNERSHIP
The following table sets forth selected consolidated and combined financial
and operating information on a historical basis for EOP Partnership and its
predecessors. The selected financial data has been derived from the historical
consolidated or combined financial statements of EOP Partnership and its
predecessors, audited by Ernst & Young LLP, independent auditors. The following
information should be read in conjunction with the consolidated and combined
financial statements and financial statement notes of EOP Partnership and its
predecessors incorporated by reference in this consent solicitation/information
statement/prospectus. See "Where You Can Find More Information" on page 186.
<TABLE>
<CAPTION>
EOP OPERATING LIMITED PARTNERSHIP EOP PARTNERSHIP PREDECESSORS
------------------------------------------- -----------------------------------------
FOR THE FOR THE
PERIOD PERIOD
FOR THE YEARS FROM FROM FOR THE YEARS
ENDED JULY 11, 1997 JANUARY 1, 1997 ENDED
DECEMBER 31, THROUGH THROUGH DECEMBER 31,
--------------------------- DECEMBER 31, JULY 10, -----------------------
1999 1998 1997 1997 1996 1995
------------ ------------ ------------- --------------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues:
Rental, parking and
other.................. $ 1,919,056 $ 1,658,420 $ 406,713 $ 327,017 $ 493,396 $ 356,959
------------ ------------ ------------ --------- ---------- ----------
Total revenues.... 1,942,243 1,679,699 412,968 339,104 508,124 371,457
------------ ------------ ------------ --------- ---------- ----------
Expenses:
Interest................. 413,995 338,611 76,675 80,481 119,595 100,566
Depreciation and
amortization........... 358,989 305,982 70,346 66,034 96,237 74,156
Property operating and
ground rent (1)........ 669,763 600,367 155,679 127,285 201,067 151,488
General and
administrative......... 80,927 63,564 17,690 17,201 23,145 21,987
Provision for value
impairment............. -- -- -- -- -- 20,248
------------ ------------ ------------ --------- ---------- ----------
Total expenses.... 1,523,674 1,308,524 320,390 291,001 440,044 368,445
------------ ------------ ------------ --------- ---------- ----------
Income before allocation to
minority interests,
income from investment in
unconsolidated joint
ventures, net gain(loss)
on sales of real estate
and extraordinary
items.................... 418,569 371,175 92,578 48,103 68,080 3,012
Minority interests......... (1,981) (2,114) (789) (912) (2,086) (2,129)
Income from investment in
unconsolidated joint
ventures................. 13,824 11,267 3,173 1,982 2,093 2,305
Net gain(loss) on sales of
real estate and
extraordinary items...... 49,113 4,927 (16,240) 12,236 5,338 31,271
------------ ------------ ------------ --------- ---------- ----------
Net income................. 479,525 385,255 78,722 61,409 73,425 34,459
Put option settlement...... (5,658) -- -- -- -- --
Preferred distributions.... (43,603) (32,202) (649) -- -- --
------------ ------------ ------------ --------- ---------- ----------
Net income available for
units.................... $ 430,264 $ 353,053 $ 78,073 $ 61,409 $ 73,425 $ 34,459
============ ============ ============ ========= ========== ==========
Net income available per
weighted average unit
outstanding -- basic..... $ 1.49 $ 1.25 $ 0.44
============ ============ ============
Net income available per
weighted average unit
outstanding -- diluted... $ 1.48 $ 1.24 $ 0.43
============ ============ ============
Weighted average units
outstanding -- basic..... 288,326,547 282,114,343 178,647,562
============ ============ ============
Weighted average units
outstanding -- diluted... 291,157,204 283,974,532 180,014,027
============ ============ ============
</TABLE>
8
<PAGE> 21
<TABLE>
<CAPTION>
EOP OPERATING LIMITED PARTNERSHIP EOP PARTNERSHIP PREDECESSORS
------------------------------------------- -----------------------------------------
FOR THE FOR THE
PERIOD PERIOD
FOR THE YEARS FROM FROM FOR THE YEARS
ENDED JULY 11, 1997 JANUARY 1, 1997 ENDED
DECEMBER 31, THROUGH THROUGH DECEMBER 31,
--------------------------- DECEMBER 31, JULY 10, -----------------------
1999 1998 1997 1997 1996 1995
------------ ------------ ------------- --------------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (at end
of period):
Investment in real
estate, net of
accumulated
depreciation........... $ 12,572,153 $ 13,331,560 $ 10,976,319 -- $3,291,815 $2,393,403
Total assets............. $ 14,046,058 $ 14,261,291 $ 11,751,672 -- $3,912,565 $2,650,890
Mortgage debt, unsecured
notes and lines of
credit................. $ 5,851,918 $ 6,025,405 $ 4,284,317 -- $1,964,892 $1,434,827
Total liabilities........ $ 6,336,531 $ 6,472,613 $ 4,591,697 -- $2,174,483 $1,529,334
Minority interests....... $ 39,027 $ 28,360 $ 29,612 -- $ 11,080 $ 31,587
Preferred units.......... $ 615,000 $ 615,000 $ 200,000 -- -- --
Partners' Capital/Owners'
equity................. $ 7,055,500 $ 7,145,318 $ 6,930,363 -- $1,727,002 $1,089,969
OTHER DATA:
General and
administrative expenses
as a percentage of
total revenues......... 4.2% 3.8% 4.3% 5.1% 4.6% 5.9%
Number of office
properties............. 294 284 258 -- 84 73
Net rentable square feet
of office properties
(in millions).......... 77.0 75.1 65.3 -- 29.2 23.1
Occupancy of office
properties............. 94% 95% 94% -- 90% 86%
Number of parking
facilities............. 20 19 17 -- 10 3
Number of spaces at
parking facilities..... 20,506 18,059 16,749 -- 7,321 3,323
Funds from
Operations(2).......... $ 748,983 $ 662,585 $ 163,253 $ 113,022 $ 160,460 $ 96,104
============ ============ ============ ========= ========== ==========
Property net operating
income (3)............. $ 1,256,180 $ 1,065,714 $ 253,418 $ 202,108 $ 294,556 $ 206,341
============ ============ ============ ========= ========== ==========
Earnings before interest,
taxes, depreciation,
and amortization (4)... $ 1,228,913 $ 1,049,577 $ 242,969 $ 197,489 $ 286,128 $ 200,438
============ ============ ============ ========= ========== ==========
Cash flow provided by
operating activities... $ 720,711 $ 759,151 $ 190,754 $ 95,960 $ 165,975 $ 93,878
============ ============ ============ ========= ========== ==========
Cash flow (used for)
investing activities... $ (67,138) $ (2,231,712) $ (1,592,272) $(571,068) $ (924,227) $ (380,615)
============ ============ ============ ========= ========== ==========
Cash flow (used for)
provided by financing
activities............. $ (718,315) $ 1,310,788 $ 1,630,346 $ 245,851 $1,057,551 $ 276,513
============ ============ ============ ========= ========== ==========
</TABLE>
- ---------------
(1) Property operating expenses includes real estate taxes, insurance, repairs
and maintenance and other property operating expenses.
(2) The White Paper on Funds from Operations approved by the Board of Governors
of the National Association of Real Estate Investment Trusts ("NAREIT") in
March 1995 defines Funds from Operations as net income (loss), computed in
accordance with GAAP, excluding gains (or losses) from debt restructuring
and sales of properties, plus real estate related depreciation and
amortization and after adjustments for unconsolidated partnerships and joint
ventures. EOP Partnership believes that Funds from Operations is helpful to
investors as a measure of the performance of an equity REIT because, along
with cash flow from operating, investing and financing activities, it
provides investors with an indication of the ability of EOP Partnership to
incur and service debt, to make capital expenditures and to fund other cash
needs. EOP Partnership computes Funds from Operations in accordance with
standards established by NAREIT, which may not be comparable to Funds from
Operations reported by other REITs that do not define the term in accordance
with the current
9
<PAGE> 22
]NAREIT definition or that interpret the current NAREIT definition
differently than EOP Partnership. Funds from Operations does not represent
cash generated from operating activities in accordance with GAAP, nor does
it represent cash available to pay distributions and should not be
considered as an alternative to net income, determined in accordance with
GAAP, as an indication of EOP Partnership's financial performance or to cash
flow from operating activities, determined in accordance with GAAP, as a
measure of EOP Partnership's liquidity, nor is it indicative of funds
available to fund EOP Partnership's cash needs, including its ability to
make cash distributions.
(3) Property net operating income is defined as rental income including tenant
reimbursements, parking and other income less property operating expenses
including real estate taxes, insurance, repairs and maintenance and other
property operating expenses.
(4) Earnings before interest, taxes, depreciation and amortization is defined as
net income excluding interest expense, taxes, depreciation and amortization,
net gain (loss) on sales of real estate, gains (losses) from extraordinary
items and income from investment in unconsolidated joint ventures plus EOP
Partnership's share of the earnings before interest, taxes, depreciation and
amortization for the unconsolidated joint ventures. Earnings before
interest, taxes, depreciation and amortization is presented because EOP
Partnership believes this data is used by some investors to evaluate EOP
Partnership's ability to meet debt service requirements. EOP Partnership
considers earnings before interest, taxes, depreciation and amortization to
be an indicative measure of its operating performance due to the
significance of EOP Partnership's long-lived assets and because this data
can be used to measure EOP Partnership's ability to service debt, fund
capital expenditures and expand its business. However, this data should not
be considered as an alternative to net income, operating profit, cash flows
from operations or any other operating or liquidity performance measure
prescribed by GAAP. In addition, earnings before interest, taxes,
depreciation and amortization as calculated by EOP Partnership may not be
comparable to similarly titled measures reported by other companies.
Interest expense, taxes, depreciation and amortization, which are not
reflected in the presentation of earnings before interest, taxes,
depreciation and amortization, have been, and will be, incurred by EOP
Partnership. Investors are cautioned that these excluded items are
significant components in understanding and assessing EOP Partnership's
financial performance.
10
<PAGE> 23
CORNERSTONE PARTNERSHIP
The following table sets forth selected consolidated financial and
operating information on a historical basis for Cornerstone Partnership. The
selected consolidated operating and balance sheet data of Cornerstone
Partnership as of and for the year ended December 31, 1999 have been derived
from the historical consolidated financial statements audited by
PricewaterhouseCoopers LLP, independent accountants. The selected consolidated
operating and balance sheet data as of and for the year ended December 31, 1998
has been derived from unaudited financial statements of Cornerstone Partnership
and include all adjustments consisting of only normal recurring adjustments that
Cornerstone Partnership's management considers necessary for a fair presentation
of the financial position and results of operations for the year. The following
information should be read in conjunction with the consolidated financial
statements and financial statement notes of Cornerstone Partnership included in
this consent solicitation/information statement/prospectus. See "Cornerstone
Partnership Historical Consolidated Financial Statements" on page F-20.
<TABLE>
<CAPTION>
1999 1998
----------- -----------
(IN THOUSANDS, EXCEPT PER
UNIT AMOUNTS)
<S> <C> <C>
BALANCE SHEET DATA:
Real estate investments before accumulated depreciation..... $3,951,465 $4,262,136
Total assets................................................ 4,170,228 4,281,658
Long-term debt.............................................. 1,435,405 1,519,548
Credit facility............................................. 329,000 465,000
Total liabilities........................................... 1,877,645 2,125,323
Redeemable preferred units.................................. $ -- $ --
OPERATING DATA:
Revenues.................................................... $ 616,316 $ 339,337
Expenses.................................................... 464,929 248,438
Gain (loss) on sale of real estate assets................... 131,034 (173)
Minority interest........................................... (5,755) (4,399)
Cumulative effect of a change in accounting principle....... (630) --
Extraordinary loss.......................................... (10,787) (4,303)
Net income.................................................. $ 265,249 $ 82,024
Income per unit, basic...................................... $ 1.76 $ 0.76
Income per unit, diluted.................................... $ 1.75 $ 0.75
Distributions declared per unit............................. $ 0.90 $ 1.50
OTHER DATA:
Cash Flow from:
Operations................................................ $ 223,115 $ 173,958
Investing................................................. 52,488 (849,830)
Financing................................................. (317,536) 737,484
Funds From Operations (1)................................. $ 242,040 $ 147,535
</TABLE>
<TABLE>
<S> <C>
</TABLE>
- ---------------
(1) Funds From Operations is a calculation which is defined by NAREIT and is not
indicative of either net income or cash flow from operations as calculated
in accordance with GAAP as a measure of performance or liquidity. As
disclosed in Cornerstone Partnership's Management Discussion and Analysis of
Financial Condition and Results of Operation on page 136, Cornerstone
Partnership makes certain additional adjustments to Funds From Operations
which are not contemplated in the NAREIT definition.
EQUIVALENT PER UNIT DATA
We have summarized below the per unit information for our respective
partnerships on an historical basis, pro forma combined basis and pro forma
combined equivalent basis. The pro forma combined
11
<PAGE> 24
summary amounts are based on the purchase method of accounting. The Cornerstone
Partnership per unit pro forma combined equivalents are calculated by
multiplying the pro forma combined per unit amounts by the exchange ratio of
0.7009. Cornerstone Partnership unitholders who receive EOP Partnership units in
the partnership merger will receive 0.7009 of an EOP Partnership unit in
exchange for each Cornerstone Partnership unit. You should note that, in 1999,
Cornerstone Partnership declared distributions equal to $.90 per Cornerstone
Partnership unit but paid distributions equal to $1.20 per Cornerstone
Partnership unit.
The following information should be read together with the historical and
pro forma financial statements included or incorporated by reference in this
document. See "Where You Can Find More Information" on page 186.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1999
------------------
BASIC DILUTED
----- -------
<S> <C> <C>
NET INCOME PER UNIT(1):
EOP Partnership........................................... $1.49 $1.48
Cornerstone Partnership................................... $1.76 $1.75
EOP Partnership and Cornerstone Partnership pro forma
combined before extraordinary items and cumulative
effect of a change in accounting principle............. $1.77 $1.76
Cornerstone Partnership pro forma combined equivalent..... $1.24 $1.23
</TABLE>
- ---------------
(1) The net income per unit amounts include the gain on sales of real estate in
1999 for EOP Partnership and Cornerstone Partnership. Such gains can
fluctuate substantially from year to year. Therefore, the following table
reflects net income per unit before extraordinary items, the cumulative
effect of a change in accounting principle and the gain on sales of real
estate for EOP Partnership and Cornerstone Partnership, net of effect of
minority interest:
<TABLE>
<CAPTION>
BASIC DILUTED
----- -------
<S> <C> <C>
NET INCOME BEFORE EXTRAORDINARY ITEMS, THE
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE AND GAIN ON SALES OF REAL ESTATE PER
UNIT, NET OF EFFECT OF MINORITY INTEREST:
EOP Partnership................................. $1.32 $1.31
Cornerstone Partnership......................... $0.96 $0.96
EOP Partnership and Cornerstone Partnership pro
forma combined................................ $1.23 $1.22
Cornerstone Partnership pro forma combined
equivalent.................................... $0.86 $0.86
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1999
------------------
<S> <C>
CASH DISTRIBUTIONS DECLARED PER UNIT:
EOP Partnership........................................... $ 1.58
Cornerstone Partnership................................... $ 0.90
EOP Partnership and Cornerstone Partnership pro forma
combined............................................... $ 1.58
Cornerstone Partnership pro forma combined equivalent..... $ 1.11
PARTNERS' CAPITAL (BOOK VALUE) PER UNIT (END OF PERIOD):
EOP Partnership........................................... $24.69
Cornerstone Partnership................................... $14.96
EOP Partnership and Cornerstone Partnership pro forma
combined............................................... $24.69
Cornerstone Partnership pro forma combined equivalent..... $17.31
</TABLE>
PRICES OF EOP PARTNERSHIP UNITS AND CORNERSTONE PARTNERSHIP UNITS
The EOP Partnership units and the Cornerstone Partnership units are not
listed on any national securities exchange or quoted in the over the counter
market, and there is no established public trading
12
<PAGE> 25
market for either the EOP Partnership units or the Cornerstone Partnership
units. However, each EOP Partnership unit to be received by Cornerstone
Partnership unitholders in the partnership merger may be redeemed for one Equity
Office common share or its cash equivalent, at Equity Office's option. Under the
partnership agreement of Cornerstone Partnership, those Cornerstone Partnership
units issued more than one year ago may be redeemed for Cornerstone common
shares or, at the option of Cornerstone, the cash equivalent thereof. The
following table sets forth the price per share of Equity Office common shares
and Cornerstone common stock based on the last reported sale prices per share on
the NYSE on February 10, 2000, the last trading day prior to the public
announcement of the execution of the merger agreement, and on May 12, 2000, the
most recent date for which prices are available prior to mailing this consent
solicitation/information statement/prospectus.
<TABLE>
<CAPTION>
PRICE PER SHARE
CORNERSTONE PRO
EQUITY OFFICE CORNERSTONE FORMA EQUIVALENT(1)
------------- ----------- -------------------
<S> <C> <C> <C>
February 10, 2000.................................... $25.6875 $14.875 $18.00
May 12, 2000(2)...................................... $ $ $
</TABLE>
- ---------------
(1) Computed by multiplying the Equity Office common share closing price by the
0.7009 exchange ratio.
(2) The average last reported sale price per Equity Office common share for the
five trading days preceding May 12, 2000 was $ . The Cornerstone pro forma
equivalent, based on such five trading days, would be $ .
13
<PAGE> 26
PARTNERSHIP MERGER SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
The following table sets forth the summary unaudited pro forma combined
financial data for EOP Partnership and Cornerstone Partnership as a combined
entity, giving effect to the partnership merger as if it had occurred on the
dates indicated herein and after giving effect to the pro forma adjustments. The
unaudited pro forma combined operating data are presented as if the partnership
merger had been consummated on January 1, 1999. The unaudited pro forma combined
balance sheet data at December 31, 1999 is presented as if the partnership
merger had occurred on December 31, 1999. In the opinion of management of Equity
Office, all adjustments necessary to reflect the effects of these transactions
have been made. The partnership merger will be accounted for under the purchase
method of accounting in accordance with Accounting Principles Board Opinion No.
16.
The pro forma financial information should be read in conjunction with, and
is qualified in its entirety by, the respective historical audited financial
statements and financial statement notes of EOP Partnership incorporated by
reference into this consent solicitation/information statement/prospectus and of
Cornerstone Partnership. See "Where You Can Find More Information" on page 163
and "Cornerstone Partnership Historical Financial Statements" on page F-20. The
unaudited pro forma operating data are presented for comparative purposes only
and are not necessarily indicative of what the actual combined results of
operations of EOP Partnership and Cornerstone Partnership would have been for
the period presented, nor does such data purport to represent the results of
future periods. See "EOP Operating Limited Partnership Pro Forma Condensed
Combined Financial Statements" on page F-2.
<TABLE>
<CAPTION>
PRO FORMA
FOR THE YEAR ENDED
DECEMBER 31, 1999
----------------------------
(DOLLARS IN THOUSANDS,
EXCEPT PER UNIT DATA)
<S> <C>
OPERATING DATA:
Revenues:
Rental.................................................... $ 1,954,581
Tenant reimbursement...................................... 402,743
Parking................................................... 139,547
Other..................................................... 36,896
Fee income................................................ 11,616
Interest/dividends........................................ 18,459
------------
Total revenues.................................... 2,563,842
------------
Expenses:
Interest:
Expense incurred..................................... $ 639,859
Amortization of deferred financing costs............. 10,366
Depreciation.............................................. 442,831
Amortization.............................................. 14,545
Real estate taxes......................................... 315,332
Insurance................................................. 13,137
Repairs and maintenance................................... 284,358
Property operating........................................ 252,826
Ground rent............................................... 8,294
General and administrative................................ 107,933
------------
Total expenses....................................... 2,089,481
------------
Income before allocation to minority interests, income from
investment in unconsolidated joint ventures and net gain
on sales of real estate................................... 474,361
Minority interests -- partially owned properties............ (7,736)
Income from investment in unconsolidated joint ventures..... 14,546
</TABLE>
14
<PAGE> 27
<TABLE>
<CAPTION>
PRO FORMA
FOR THE YEAR ENDED
DECEMBER 31, 1999
----------------------------
(DOLLARS IN THOUSANDS,
EXCEPT PER UNIT DATA)
<S> <C>
Net gain on sales of real estate............................ 190,695
------------
Net income from continuing operations....................... 671,866
Put option settlement....................................... (5,658)
Preferred distributions..................................... (43,603)
------------
Net income from continuing operations before extraordinary
items and cumulative effect of a change in accounting
principle available for units............................. $ 622,605
============
Net income from continuing operations before extraordinary
items and cumulative effect of a change in accounting
principle per weighted average unit outstanding --basic... $ 1.77
============
Weighted average units outstanding -- basic................. 351,114,475
============
Net income from continuing operations before extraordinary
items and cumulative effect of a change in accounting
principle per weighted average unit
outstanding -- diluted.................................... $ 1.76
============
Weighted average units outstanding -- diluted............... 354,965,413
============
BALANCE SHEET DATA (AT END OF PERIOD):
Investment in real estate net of accumulated
depreciation........................................... $ 16,848,787
============
Total assets.............................................. $ 18,659,040
============
Total debt................................................ $ 8,779,344
============
Total liabilities......................................... $ 9,377,262
============
Minority interests........................................ $ 61,559
============
Partners' capital......................................... $ 9,220,219
============
</TABLE>
15
<PAGE> 28
REIT MERGER SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
EQUITY OFFICE
The following table sets forth selected consolidated and combined financial
and operating information on a historical basis for Equity Office and its
predecessors. The selected financial data has been derived from the historical
consolidated or combined financial statements of Equity Office and its
predecessors, audited by Ernst & Young LLP, independent auditors. The following
information should be read in conjunction with the consolidated and combined
financial statements and financial statement notes of Equity Office and its
predecessors incorporated by reference in this consent solicitation/information
statement/prospectus. See "Where You Can Find More Information" on page 186.
<TABLE>
<CAPTION>
EQUITY OFFICE PROPERTIES TRUST EQUITY OFFICE PREDECESSORS
------------------------------------------- -----------------------------------------
FOR THE FOR THE
PERIOD PERIOD
FOR THE YEARS FROM FROM FOR THE YEARS
ENDED JULY 11, 1997 JANUARY 1, 1997 ENDED
DECEMBER 31, THROUGH THROUGH DECEMBER 31,
--------------------------- DECEMBER 31, JULY 10, -----------------------
1999 1998 1997 1997 1996 1995
------------ ------------ ------------- --------------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental, parking and
other.................... $ 1,919,056 $ 1,658,420 $ 406,713 $ 327,017 $ 493,396 $ 356,959
------------ ------------ ------------ --------- ---------- ----------
Total revenues.... 1,942,243 1,679,699 412,968 339,104 508,124 371,457
------------ ------------ ------------ --------- ---------- ----------
Expenses:
Interest................. 413,995 338,611 76,675 80,481 119,595 100,566
Depreciation and
amortization........... 358,989 305,982 70,346 66,034 96,237 74,156
Property operating and
ground rent(1)......... 669,763 600,367 155,679 127,285 201,067 151,488
General and
administrative......... 80,927 63,564 17,690 17,201 23,145 21,987
Provision for value
impairment............. -- -- -- -- -- 20,248
------------ ------------ ------------ --------- ---------- ----------
Total expenses.... 1,523,674 1,308,524 320,390 291,001 440,044 368,445
------------ ------------ ------------ --------- ---------- ----------
Income before allocation to
minority interests,
income from investment in
unconsolidated joint
ventures, net gain/(loss)
on sales of real estate
and extraordinary
items.................... 418,569 371,175 92,578 48,103 68,080 3,012
Minority interests......... (50,153) (38,340) (7,799) (912) (2,086) (2,129)
Income from investment in
unconsolidated joint
ventures................. 13,824 11,267 3,173 1,982 2,093 2,305
Net gain(loss) on sales of
real estate and
extraordinary items...... 49,113 4,927 (16,240) 12,236 5,338 31,271
------------ ------------ ------------ --------- ---------- ----------
Net income................. 431,353 349,029 71,712 61,409 73,425 34,459
Put option settlement...... (5,658) -- -- -- -- --
Preferred distributions.... (43,603) (32,202) (649) -- -- --
------------ ------------ ------------ --------- ---------- ----------
Net income available for
common shares............ $ 382,092 $ 316,827 $ 71,063 $ 61,409 $ 73,425 $ 34,459
============ ============ ============ ========= ========== ==========
Net income available per
weighted average common
share
outstanding -- basic..... $ 1.49 $ 1.25 $ 0.44
============ ============ ============
Net income available per
weighted average common
share
outstanding -- diluted... $ 1.48 $ 1.24 $ 0.43
============ ============ ============
</TABLE>
16
<PAGE> 29
<TABLE>
<CAPTION>
EQUITY OFFICE PROPERTIES TRUST EQUITY OFFICE PREDECESSORS
------------------------------------------- -----------------------------------------
FOR THE FOR THE
PERIOD PERIOD
FOR THE YEARS FROM FROM FOR THE YEARS
ENDED JULY 11, 1997 JANUARY 1, 1997 ENDED
DECEMBER 31, THROUGH THROUGH DECEMBER 31,
--------------------------- DECEMBER 31, JULY 10, -----------------------
1999 1998 1997 1997 1996 1995
------------ ------------ ------------- --------------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Weighted average common
shares
outstanding -- basic..... 256,045,895 253,167,037 162,591,477
============ ============ ============
Weighted average common
shares
outstanding -- diluted... 291,157,204 283,974,532 180,014,027
============ ============ ============
BALANCE SHEET DATA (at end
of period):
Investment in real
estate, net of
accumulated
depreciation........... $ 12,572,153 $ 13,331,560 $ 10,976,319 -- $3,291,815 $2,393,403
Total assets............. $ 14,046,058 $ 14,261,291 $ 11,751,672 -- $3,912,565 $2,650,890
Mortgage debt, unsecured
notes and lines of
credit................. $ 5,851,918 $ 6,025,405 $ 4,284,317 -- $1,964,892 $1,434,827
Total liabilities........ $ 6,336,531 $ 6,472,613 $ 4,591,697 -- $2,174,483 $1,529,334
Minority interests....... $ 883,454 $ 737,715 $ 754,818 -- $ 11,080 $ 31,587
Preferred shares......... $ 615,000 $ 615,000 $ 200,000 -- -- --
Shareholders' equity/
Owners' equity......... $ 6,211,073 $ 6,435,963 $ 6,205,157 -- $1,727,002 $1,089,969
OTHER DATA:
General and
administrative expenses
as a percentage of
total revenues......... 4.2% 3.8% 4.3% 5.1% 4.6% 5.9%
Number of office
properties............. 294 284 258 -- 84 73
Net rentable square feet
of office properties
(in millions).......... 77.0 75.1 65.3 -- 29.2 23.1
Occupancy of office
properties............. 94% 95% 94% -- 90% 86%
Number of parking
facilities............. 20 19 17 -- 10 3
Number of spaces at
parking facilities..... 20,506 18,059 16,749 -- 7,321 3,323
Funds from
Operations(2).......... $ 748,983 $ 662,585 $ 163,253 $ 113,022 $ 160,460 $ 96,104
============ ============ ============ ========= ========== ==========
Property net operating
income(3).............. $ 1,256,180 $ 1,065,714 $ 253,418 $ 202,108 $ 294,556 $ 206,341
============ ============ ============ ========= ========== ==========
Earnings before interest,
taxes, depreciation,
and amortization(4).... $ 1,228,913 $ 1,049,577 $ 242,969 $ 197,489 $ 286,128 $ 200,438
============ ============ ============ ========= ========== ==========
Cash flow provided by
operating activities... $ 720,711 $ 759,151 $ 190,754 $ 95,960 $ 165,975 $ 93,878
============ ============ ============ ========= ========== ==========
Cash flow (used for)
investing activities... $ (67,138) $ (2,231,712) $ (1,592,272) $(571,068) $ (924,227) $ (380,615)
============ ============ ============ ========= ========== ==========
Cash flow (used for)
provided by financing
activities............. $ (718,315) $ 1,310,788 $ 1,630,346 $ 245,851 $1,057,551 $ 276,513
============ ============ ============ ========= ========== ==========
</TABLE>
17
<PAGE> 30
- ---------------
(1) Property operating expenses includes real estate taxes, insurance, repairs
and maintenance and other property operating expenses.
(2) The White Paper on Funds from Operations approved by the Board of Governors
of NAREIT in March 1995 defines Funds from Operations as net income (loss),
computed in accordance with GAAP, excluding gains (or losses) from debt
restructuring and sales of properties, plus real estate related depreciation
and amortization and after adjustments for unconsolidated partnerships and
joint ventures. Equity Office believes that Funds from Operations is helpful
to investors as a measure of the performance of an equity REIT because,
along with cash flow from operating, investing and financing activities, it
provides investors with an indication of the ability of Equity Office to
incur and service debt, to make capital expenditures and to fund other cash
needs. Equity Office computes Funds from Operations in accordance with
standards established by NAREIT, which may not be comparable to Funds from
Operations reported by other REITs that do not define the term in accordance
with the current NAREIT definition or that interpret the current NAREIT
definition differently than Equity Office. Funds from Operations does not
represent cash generated from operating activities in accordance with GAAP,
nor does it represent cash available to pay distributions and should not be
considered as an alternative to net income, determined in accordance with
GAAP, as an indication of Equity Office's financial performance or to cash
flow from operating activities, determined in accordance with GAAP, as a
measure of Equity Office's liquidity, nor is it indicative of funds
available to fund Equity Office's cash needs, including its ability to make
cash distributions.
(3) Property net operating income is defined as rental income including tenant
reimbursements, parking and other income less property operating expenses
including real estate taxes, insurance, repairs and maintenance and other
property operating expenses.
(4) Earnings before interest, taxes, depreciation and amortization is defined as
net income excluding interest expense, taxes, depreciation and amortization,
minority interest allocation to EOP Partnership, net gain/loss on sales of
real estate, gains/losses from extraordinary items and income from
investment in unconsolidated joint ventures plus Equity Office's share of
the earnings before interest, taxes, depreciation and amortization for the
unconsolidated joint ventures. Earnings before interest, taxes, depreciation
and amortization is presented because Equity Office believes this data is
used by some investors to evaluate Equity Office's ability to meet debt
service requirements. Equity Office considers earnings before interest,
taxes, depreciation and amortization to be an indicative measure of its
operating performance due to the significance of Equity Office's long-lived
assets and because this data can be used to measure Equity Office's ability
to service debt, fund capital expenditures and expand its business. However,
this data should not be considered as an alternative to net income,
operating profit, cash flows from operations or any other operating or
liquidity performance measure prescribed by GAAP. In addition, earnings
before interest, taxes, depreciation and amortization as calculated by
Equity Office may not be comparable to similarly titled measures reported by
other companies. Interest expense, taxes, depreciation and amortization,
which are not reflected in the presentation of earnings before interest,
taxes, depreciation and amortization, have been, and will be, incurred by
Equity Office. Investors are cautioned that these excluded items are
significant components in understanding and assessing Equity Office's
financial performance.
CORNERSTONE
The following table sets forth selected consolidated financial and
operating information on a historical basis for Cornerstone. The selected
financial data has been derived from the historical consolidated financial
statements of Cornerstone audited by PricewaterhouseCoopers LLP, independent
accountants. The following information should be read in conjunction with the
consolidated financial statements and financial statement notes of Cornerstone
incorporated by reference in this consent solicitation/information
statement/prospectus. See "Where You Can Find More Information" on page 186.
18
<PAGE> 31
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---------- ---------- ---------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Real estate investments before
accumulated depreciation..... $3,951,465 $4,262,136 $1,947,272 $799,662 $ 706,988
Total assets................... 4,170,228 4,281,984 2,051,481 766,180 586,089
Long-term debt................. 1,448,331 1,532,474 706,178 400,142 369,600
Credit facility................ 329,000 465,000 187,000 -- --
Total liabilities.............. 1,890,636 2,138,309 940,062 442,375 403,927
Redeemable preferred stock..... $ -- $ -- $ -- $162,743 $ --
OPERATING DATA:
Revenues....................... $ 617,448 $ 359,486 $ 173,911 $116,908 $ 92,387
Expenses....................... 465,675 262,173 134,041 106,646 90,427
Gain (loss) on sale of real
estate assets................ 131,034 (2,076) -- -- --
Minority interest.............. 40,737 7,469 2,368 1,519 3,417
Gain (loss) on interest rate
swap......................... -- -- 99 4,278 (7,672)
Cumulative effect of a change
in accounting principle...... (630) -- -- -- --
Extraordinary loss............. 10,787 4,303 54 3,925 4,445
Net income (loss).............. $ 230,653 $ 83,465 $ 37,547 $ 9,096 $ (13,574)
Net income (loss) per common
share, Basic................. $ 1.76 $ 0.80 $ 0.63 $ 0.19 $ (0.94)
Net income (loss) per common
share, Diluted............... $ 1.74 $ 0.80 $ 0.63 $ 0.19 $ (0.94)
Dividends declared per common
share........................ $ 0.90 $ 1.50 $ 1.04 $ 1.20 $ 1.16
OTHER DATA:
Cash Flow from:
Operations................... $ 223,505 $ 182,797 $ 65,922 $ 34,522 $ 20,036
Investing.................... 52,488 (823,082) (462,837) (57,259) (135,527)
Financing.................... (318,183) 677,424 306,842 129,800 110,725
Funds From Operations(1)..... $ 242,426 $ 155,915 $ 68,308 $ 34,719 $ 21,424
</TABLE>
- ---------------
(1) Funds from Operations is a calculation which is defined by NAREIT and is not
indicative of either net income or cash flow from operations as calculated
in accordance with GAAP as a measure of performance or liquidity.
EQUIVALENT PER SHARE DATA
We have summarized below the per share information for our respective
companies on an historical basis, pro forma combined basis and pro forma
combined equivalent basis. The pro forma combined summary amounts are based on
the purchase method of accounting. The Cornerstone per share pro forma combined
equivalents are calculated by multiplying the pro forma combined per share
amounts by the exchange ratio of 0.7009. Cornerstone stockholders who receive
Equity Office common shares in the REIT merger will receive 0.7009 of an Equity
Office common share in exchange for each share of Cornerstone common stock. You
should note that, in 1999, Cornerstone declared distributions equal to $.90 per
share of Cornerstone common stock but paid distributions equal to $1.20 per
share of Cornerstone common stock during such period.
19
<PAGE> 32
The following information should be read together with the historical and
pro forma financial statements included or incorporated by reference in this
document. See "Where You Can Find More Information" on page 186.
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED
DECEMBER 31,
1999
---------------
BASIC DILUTED
----- -------
<S> <C> <C>
NET INCOME PER COMMON SHARE(1):
Equity Office............................................. $1.49 $1.48
Cornerstone............................................... $1.76 $1.74
Equity Office and Cornerstone pro forma combined before
extraordinary items and cumulative effect of a change
in accounting principle................................ $1.78 $1.76
Cornerstone pro forma combined equivalent................. $1.25 $1.23
</TABLE>
- ---------------
(1) The net income per common share amounts include the gain on sales of real
estate in 1999 for Equity Office and Cornerstone. Such gains can fluctuate
substantially from year to year. Therefore, the following table reflects net
income per share before extraordinary items, cumulative effect of a change
in accounting principle and the gain on sales of real estate for Equity
Office and Cornerstone, net of effect of minority interest:
<TABLE>
BASIC DILUTED
----- -----
<S> <C> <C>
NET INCOME BEFORE EXTRAORDINARY ITEMS, CUMULATIVE
EFFECT OF A CHANGE
IN ACCOUNTING PRINCIPLE AND GAIN ON SALES OF
REAL ESTATE PER COMMON SHARE, NET OF EFFECT OF
MINORITY INTEREST:
Equity Office................................... $1.32 $1.31
Cornerstone..................................... $0.96 $0.96
Equity Office and Cornerstone pro forma
combined...................................... $1.23 $1.22
Cornerstone pro forma combined equivalent....... $0.86 $0.86
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
1999
------------------
<S> <C>
CASH DISTRIBUTIONS DECLARED PER COMMON SHARE:
Equity Office............................................... $ 1.58
Cornerstone................................................. $ 0.90
Equity Office and Cornerstone pro forma combined............ $ 1.58
Cornerstone pro forma combined equivalent................... $ 1.11
SHAREHOLDERS' EQUITY (BOOK VALUE) PER COMMON SHARE (END OF
PERIOD):
Equity Office............................................... $ 24.69
Cornerstone................................................. $ 14.87
Equity Office and Cornerstone pro forma combined............ $ 24.69
Cornerstone pro forma combined equivalent................... $ 17.31
</TABLE>
MARKET PRICES OF EQUITY OFFICE COMMON SHARES AND CORNERSTONE COMMON STOCK
The following table sets forth the price per share of Equity Office common
shares and Cornerstone common stock based on the last reported sale prices per
share on the NYSE on February 10, 2000, the last trading day prior to the public
announcement of the execution of the merger agreement, and on
20
<PAGE> 33
May 12, 2000, the most recent date for which prices are available prior to
mailing this consent solicitation/information statement/prospectus.
<TABLE>
<CAPTION>
PRICE PER SHARE
---------------------------------
CORNERSTONE PRO
EQUITY OFFICE CORNERSTONE FORMA EQUIVALENT(1)
------------- ----------- -------------------
<S> <C> <C> <C>
February 10, 2000.................................... $25.6875 $14.875 $18.00
May 12, 2000(2)...................................... $ $ $
</TABLE>
- ---------------
(1) Computed by multiplying the Equity Office common share closing price by the
0.7009 exchange ratio.
(2) The average last reported sale price per Equity Office common share for the
five trading days preceding May 12, 2000 was $ . The Cornerstone
pro forma equivalent, based on such five trading days, would be $ .
REIT MERGER SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
The following table sets forth the summary unaudited pro forma combined
financial data for Equity Office and Cornerstone as a combined entity, giving
effect to the REIT merger as if it had occurred on the dates indicated herein
and after giving effect to the pro forma adjustments. The unaudited pro forma
combined operating data are presented as if the REIT merger had been consummated
on January 1, 1999. The unaudited pro forma combined balance sheet data at
December 31, 1999 is presented as if the REIT merger had occurred on December
31, 1999. In the opinion of management of Equity Office, all adjustments
necessary to reflect the effects of these transactions have been made. The REIT
merger will be accounted for under the purchase method of accounting in
accordance with Accounting Principles Board Opinion No. 16.
The pro forma financial information should be read in conjunction with, and
is qualified in its entirety by, the respective historical audited financial
statements and financial statement notes of Equity Office and of Cornerstone
incorporated by reference into this consent solicitation/information
statement/prospectus. The unaudited pro forma operating data are presented for
comparative purposes only and are not necessarily indicative of what the actual
combined results of operations of Equity Office and Cornerstone would have been
for the period presented, nor does such data purport to represent the results of
future periods. See "Equity Office Pro Forma Condensed Combined Financial
Statements" on page F-10.
<TABLE>
<CAPTION>
PRO FORMA
FOR THE YEAR ENDED
DECEMBER 31, 1999
---------------------------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C>
OPERATING DATA:
Revenues:
Rental.................................................... $ 1,954,581
Tenant reimbursements..................................... 402,743
Parking................................................... 139,547
Other..................................................... 38,028
Fee income................................................ 11,616
Interest/dividends........................................ 18,459
------------
Total revenues.................................... 2,564,974
------------
</TABLE>
21
<PAGE> 34
<TABLE>
<CAPTION>
PRO FORMA
FOR THE YEAR ENDED
DECEMBER 31, 1999
---------------------------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C>
Expenses:
Interest:
Expense incurred....................................... 639,859
Amortization of deferred financing costs............... 10,366
Depreciation.............................................. 442,831
Amortization.............................................. 14,545
Real estate taxes......................................... 315,332
Insurance................................................. 13,137
Repairs and maintenance................................... 284,358
Property operating........................................ 252,826
Ground rent............................................... 8,294
General and administrative................................ 107,933
------------
Total expenses.................................... 2,089,481
------------
Income before allocation to minority interests, income from
investment in unconsolidated joint ventures and net gain
on sales of real estate................................... 475,493
Minority interests:
EOP Partnership........................................... (81,148)
Partially owned properties................................ (7,736)
Income from investment in unconsolidated joint ventures..... 14,546
Net gain on sales of real estate............................ 190,695
------------
Net income from continuing operations....................... 591,850
Put option settlement....................................... (5,658)
Preferred distributions..................................... (43,603)
------------
Net income from continuing operations before extraordinary
items and cumulative effect of a change in accounting
principle available for common shares..................... $ 542,589
============
Net income from continuing operations before extraordinary
items and cumulative effect of a change in accounting
principle per weighted average common share
outstanding -- basic...................................... $ 1.78
============
Weighted average common shares outstanding -- basic......... 305,424,355
============
Net income from continuing operations before extraordinary
items and cumulative effect of a change in accounting
principle per weighted average common share
outstanding -- diluted.................................... $ 1.76
============
Weighted average common shares outstanding -- diluted....... 354,965,413
============
BALANCE SHEET DATA (AT END OF PERIOD):
Investment in real estate net of accumulated
depreciation........................................... $ 16,848,787
============
Total assets.............................................. $ 18,659,040
============
Total debt................................................ $ 8,779,344
============
Total liabilities......................................... $ 9,377,262
============
Minority interests........................................ $ 1,237,032
============
Shareholders' equity...................................... $ 8,044,746
============
</TABLE>
22
<PAGE> 35
RISK FACTORS
In addition to the risks relating to the businesses of Equity Office, EOP
Partnership and Cornerstone, which are incorporated by reference in this
document from other SEC filings, and the other information included in this
document, including the matters addressed in "A Warning About Forward-Looking
Statements," Cornerstone Partnership unitholders should carefully consider the
following risk factors relating to the mergers in determining whether or not to
vote in favor of the approval of the partnership merger and the REIT merger and
whether or not to redeem your Cornerstone Partnership units for Cornerstone
common stock and thereby participate in the REIT merger.
YOU MAY RECEIVE EOP PARTNERSHIP CLASS A UNITS IN THE PARTNERSHIP MERGER OR, IF
YOU REDEEM YOUR CORNERSTONE PARTNERSHIP UNITS BEFORE THE PARTNERSHIP MERGER,
EQUITY OFFICE COMMON SHARES IN THE REIT MERGER, WITH A VALUE OF LESS THAN $18.00
PER UNIT OR $18.00 PER SHARE
There can be no assurance that any EOP Partnership units you receive in the
partnership merger or, if you redeem your Cornerstone Partnership units before
the partnership merger, any Equity Office common shares you receive in the REIT
merger, will have a redemption value, or trade at a price, in the case of Equity
Office common shares, equal to $18.00, the cash price, on a per unit or per
share equivalent basis at the time of or following the mergers. Each EOP
Partnership unit to be received by Cornerstone Partnership unitholders in the
partnership merger will be redeemable following the partnership merger for one
Equity Office common share or its cash equivalent, at Equity Office's option.
Consequently, the redemption value of the EOP Partnership units you receive in
the partnership merger will be directly affected by price fluctuations of the
Equity Office common shares through the closing of the mergers and thereafter.
The redemption value of the EOP Partnership units and the Cornerstone
Partnership units, as reflected in the relative market prices of the Equity
Office common shares and the shares of Cornerstone common stock, may vary
significantly from the redemption value as reflected in such prices as of the
date of execution of the merger agreement, the date of this document or the date
the mergers are completed. Similarly, any Equity Office common shares you
receive in the REIT merger, if you elect to redeem your Cornerstone Partnership
units before the partnership merger, may vary significantly from the current
market value.
The exchange ratios for Cornerstone Partnership units to be converted into
EOP partnership units in the partnership merger and for shares of Cornerstone
common stock to be converted into Equity Office common shares in the REIT merger
were fixed at the time of the signing of the merger agreement and are not
subject to adjustment based on changes in the trading price of Equity Office
common shares or Cornerstone common stock before the closing of the merger.
Accordingly, the redemption value of the EOP Partnership units you receive in
the partnership merger, and the market value of any Equity Office common shares
that you receive in the REIT merger, if you redeem your Cornerstone Partnership
units prior to the partnership merger, will depend on the market value of Equity
Office common shares at the time of completion of the mergers.
IF YOU ARE A CORNERSTONE PARTNERSHIP UNITHOLDER, YOUR DISTRIBUTIONS PER UNIT
AFTER THE PARTNERSHIP MERGER WILL BE REDUCED
Assuming EOP Partnership continues to make regular quarterly distributions
at its current rate of $.42 per unit after the partnership merger, each
Cornerstone Partnership unitholder will receive an equivalent quarterly
distribution payment of $.29 per Cornerstone Partnership unit, as compared to
Cornerstone Partnership's most recent full quarterly distribution of $.31 per
unit. Based on the .7009 exchange ratio, the Cornerstone Partnership unitholders
will receive an adjusted annualized distribution of $1.18 per Cornerstone
Partnership unit, representing a 4.8% decline from the Cornerstone Partnership
unitholders' current annual distribution of $1.24 per unit. Under the
partnership agreement of EOP Partnership, the amounts of distributions paid to
the limited partners are and will be within the discretion of Equity Office, as
general partner of EOP Partnership. If Equity Office, as general partner of EOP
Partnership, determines to reduce or otherwise limit the amount of such
distributions by EOP Partnership,
23
<PAGE> 36
the limited partners may not receive anticipated distributions, which may
adversely affect the financial planning of such limited partners.
THE DIRECTORS AND EXECUTIVE OFFICERS OF CORNERSTONE MAY HAVE INTERESTS IN THE
COMPLETION OF THE MERGERS THAT ARE DIFFERENT FROM THE INTERESTS CORNERSTONE
PARTNERSHIP'S UNITHOLDERS AND CORNERSTONE'S STOCKHOLDERS
In considering the recommendation of the Cornerstone board with respect to
the partnership merger, Cornerstone unitholders should be aware that, as
described below, certain Cornerstone directors and executive officers and PGGM
have interests in the mergers that differ from, or are in addition to, the
interests of Cornerstone Partnership unitholders and Cornerstone stockholders
generally.
Trustees of Equity Office After the Mergers. Following the mergers, the
current trustees of Equity Office will remain as trustees of the combined
entity. In addition, three current directors of Cornerstone, John S. Moody, Jan
H.W.R. van der Vlist and William Wilson III, will become trustees of Equity
Office, with their terms expiring in 2002, 2003 and 2003, respectively. Under
the terms of the merger agreement, Equity Office is obligated to nominate Mr.
van der Vlist for reelection to the board of trustees in 2003 and 2006 if PGGM
and its affiliates continue to own at least 21,000,000 of the issued and
outstanding Equity Office common shares, as adjusted for share splits or similar
actions, at all times up to the time the trustees are being elected in those
years. If Mr. van der Vlist fails to stand for reelection in 2003 or 2006 for
any reason, or in the event of his death or earlier resignation, and if PGGM
continues to own at least 21,000,000 of the issued and outstanding Equity Office
shares as described above, Equity Office is required to take all action
necessary to nominate a replacement designated by PGGM for election or
reelection as a trustee for an additional three-year term, subject to Equity
Office's approval if the replacement is not an officer, director or employee of
PGGM.
Equity-Based Awards. Under Cornerstone's incentive stock plans, an
aggregate of 89,113 unvested shares of restricted common stock previously
awarded to the executives who are parties to the retention agreements described
below will vest in full upon completion of the mergers and will be converted
into cash or common shares of Equity Office according to the terms of the merger
agreement. In addition, unvested options to purchase an aggregate of 3,177,476
shares of Cornerstone common stock previously awarded to such executives will
vest in connection with the completion of the mergers, and each option may be
surrendered within two business days following the REIT merger by the holder of
the option to Equity Office for cash equal to the difference between $18.00 per
share or, as to certain options, the highest closing trading price of
Cornerstone common stock on the New York Stock Exchange during the 90 days prior
to the mergers and the exercise price of the option or exchanged for options to
purchase common shares of Equity Office according to the terms of the merger
agreement. Certain options retain a cashout feature for 30 days following the
mergers based on the highest closing trading price of Cornerstone common stock
on the New York Stock Exchange during the 90 days prior to the mergers.
Mr. Moody has agreed with Cornerstone to waive the acceleration of his
unvested restricted stock and unvested stock options.
Moody Agreement. Cornerstone has entered into a contract with Mr. Moody
whereby amounts are accrued under an unfunded arrangement to pay Mr. Moody a
supplemental pension. Under the contract, his supplemental pension account was
established with a credit of $250,000 as of July 1, 1995, and Cornerstone is
obligated to credit the account in the amount of $60,000 each subsequent July 1
during the continuance of Mr. Moody's employment.
The account is also credited with any deemed income, gains or losses which
would be attributable to a corresponding investment of an equal cash amount in
such investment as Cornerstone, taking into account Mr. Moody's views, shall
deem the account to be invested. Payment of Mr. Moody's supplemental pension
account is to be made in a lump sum as of the date Mr. Moody terminates his
employment. However, if his employment is terminated for cause, Mr. Moody will
forfeit the account and no payment will be made. The contract also provides
that, outside of a change in control context, if Mr. Moody's employment
terminates for a reason other than cause, an additional credit of $60,000 (or
less, if Mr. Moody resigns without good reason) will be made to the account.
Following a change in control, in
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the event Mr. Moody's employment is terminated by Cornerstone other than for
cause, or if he resigns for good reason, Cornerstone is obligated to credit his
supplemental pension account with an amount equal to $60,000 times the number of
years, including fractional portions of a year, remaining between his age on the
date his employment ceases and age 60.
Retention Agreements. Cornerstone has entered into retention agreements
with some of its officers to address the terms and conditions of their
employment in the event of a change in control. A "change in control" generally
is said to occur when: (a) any person becomes the owner of 25% or more of
Cornerstone's voting securities; (b) directors who constitute the Cornerstone
board at the beginning of any two-year period, and any new directors whose
election or nomination for election was approved by a vote of at least three
quarters of the directors then in office who either were directors at the
beginning of such period or whose election or nomination for election was
previously so approved, cease to constitute a majority; (c) a merger,
consolidation or reorganization in which Cornerstone's voting securities do not
continue to represent at least 50% of the surviving entity; or (d) a
reorganization, liquidation, or sale of all or substantially all of
Cornerstone's assets.
In the event of termination of employment by Cornerstone without cause, or
by the employee for good reason, within two years following a change in control,
Cornerstone will make a lump sum payment of: (a) the pro rata portion of the
annual bonus for the year termination occurred, calculated on the basis of the
target bonus and on the assumption that all performance goals have been or will
be achieved; and (b) three times annual compensation in the case of Messrs.
Wilson and Moody and H. Lee Van Boven and Rodney C. Dimock, and two times annual
compensation in the case of all other officers. Annual compensation generally is
defined as the salary in effect immediately before termination or change in
control, plus the highest of the target annual bonus for the termination year or
the average of the three annual bonuses paid immediately prior to the
termination or the change in control.
An officer may be terminated for "cause" if he or she is convicted of a
felony, reveals confidential information about Cornerstone or refuses to
substantially perform his duties. An officer can terminate for "good reason" if
Cornerstone reduces his salary or bonus target, reduces the value of employee
benefits materially, relocates his office more then 25 miles from the present
location, detrimentally alters his title or position, fails to get a successor
to agree to assume the obligations under the retention agreement or materially
breaches any provision of the agreement.
In addition, the officer and his eligible dependents will continue to be
eligible to participate during the benefit continuation period in the medical,
dental, health, life and other welfare benefit plans and arrangements applicable
to him immediately before his or her termination of employment, on the same
terms and conditions in effect immediately before such termination. "Benefit
continuation period" means the period beginning on the day of termination and
ending on the earlier to occur of: (a) the third anniversary of the date of
termination in the case of Messrs. Wilson, Moody, Van Boven and Dimock and the
second anniversary of the date of termination in the case of all other officers;
and (b) the date that the officer is eligible and elects coverage under the
plans of a subsequent employer which provide substantially equivalent or greater
benefits to the officer and his dependents.
If the payments to an officer under the retention agreement constitute
"parachute payments," as defined in section 280G of the Internal Revenue Code,
and the officer would receive more value after taxes if the payments to be made
to the officer were capped at three times the "base amount" less $1.00, then the
payments will be reduced to that amount.
Equity Office has agreed to assume and to perform Cornerstone's obligations
under the retention agreements in the same manner and to the same extent that
Cornerstone would be required to perform such obligations if the REIT merger had
not taken place. The parties have agreed that the REIT merger will be a "change
in control" for purposes of the retention agreements.
Mr. Moody has agreed to waive any rights to payment of the lump sum payment
and to the continuation of benefits under his retention agreement in
consideration of Cornerstone's payment to Mr. Moody upon completion of the REIT
merger, in recognition of his past service to Cornerstone, of
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$7.3 million or, if the REIT merger is completed on or after July 1, 2000, $6.8
million. Mr. Wilson has agreed to waive his entire retention payment of $1.2
million. Messrs. Van Boven and Dimock have each agreed to waive the payment of
$1.0 million, and R. Matthew Moran has agreed to waive the payment of $0.5
million, of the lump sum payment otherwise payable to each of them in the event
of the termination of their employment other than for cause after the REIT
merger. Mr. Wilson's and Mr. Van Boven's waivers of these payments are being
made in light of their participation in the northern California joint venture
described below.
Noncompetition Agreements. Each of Messrs. Moody, Dimock and Moran have
agreed to enter into noncompetition agreements with Equity Office that will
restrict their ability to engage in business activities that are competitive
with those of Equity Office after the mergers. In order to induce Messrs. Moody,
Dimock and Moran to enter into such agreements, Equity Office will pay $5.0
million to Mr. Moody, $1.0 million to Mr. Dimock and $0.5 million to Mr. Moran
upon the completion of the mergers.
Escrowed Units. In connection with the acquisition of William Wilson &
Associates in December 1998, an aggregate of 387,137 partnership units issued by
the Cornerstone Partnership that would have been distributable to the general
partners or managers of the four Wilson-sponsored opportunity funds acquired by
Cornerstone Partnership in the transaction were placed in escrow pursuant to an
agreement with certain investors in the opportunity funds. These units would
have been distributed to these general partners and managers under the governing
instruments of the opportunity funds if the units were valued at $17.25 per
unit, the agreed-upon value of the Cornerstone shares and units issued in the
Wilson transaction. The units were placed in escrow pending a determination of
their value during the one-year period beginning on the date the units were
released from the lockup provisions applicable to the units issued in the Wilson
acquisition. Pursuant to such provisions, the units will be released from the
lockup provisions prior to the completion of the mergers. Mr. Wilson and other
executives of Cornerstone indirectly beneficially own in the aggregate 319,369
of such escrowed units.
Sale of Cornerstone Aircraft. Cornerstone has agreed to sell to Mr. Wilson
an aircraft owned by Cornerstone for its appraised value, which is approximately
$2.5 million, less an amount representing the sales commissions that would be
payable to a sales agent if Cornerstone were to market and sell the aircraft to
a third party. The carrying value of the aircraft was $2.4 million at December
31, 1999.
Acquisition of WCP Services. An affiliate of Equity Office will purchase
from Messrs. Wilson and Moody the voting capital stock of WCP Services, Inc., a
third-party service subsidiary of Cornerstone, for an aggregate of $400,000,
including the assumption of indebtedness.
Formation of Northern California Joint Venture with William Wilson III and
Others. Equity Office has negotiated with William Wilson III and others,
referred to as the Wilson Group, the broad terms under which an Equity Office
affiliate would form a joint venture to develop assets that currently are in the
Cornerstone development pipeline and to pursue other development opportunities
in northern California. While it has not been finally determined, the Wilson
Group probably will include investments of time or money by William Wilson III,
Lee Van Boven, Matthew Moran, John J. Hamilton III, A. Robert Paratte, Stephen
J. Pilch and John Moody, who are Cornerstone executive officers, and other
non-executive officer employees of Cornerstone. The key terms of the agreement
in principle are as follows:
- the joint venture will be organized as a limited liability company with
the Wilson Group owning 50.1% of the joint venture and an affiliate of
Equity Office owning the remaining 49.9%;
- the joint venture initially will be capitalized with $14 million,
approximately $6 million by the Wilson Group and $8 million by the Equity
Office affiliate, to be used for existing development pipeline projects;
- profits will be divided 50.1% and 49.9% between the Wilson Group and the
Equity Office affiliate, except for special promotional interests to be
allocated solely to the Wilson Group based on the investment returns on
projects, and special allocations of $3 million or more of capital gains
that are to be allocated to the Wilson Group out of profits that would
otherwise be distributed to Equity Office or its affiliate, which gains
would be allocated within the Wilson Group to former executives and
employees of Cornerstone;
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- each venturer additionally may contribute approximately $3 million, and
Equity Office will also provide a $0.5 million working capital line to
the joint venture at an annual interest rate of the greater of 9% or
LIBOR plus 300 basis points;
- the Wilson Group will run the day-to-day operations and will be the
managing member of the joint venture, but the joint venture will have a
four-person board consisting of two members designated by the Wilson
Group and two members designated by Equity Office;
- the joint venture will be responsible for development and construction
management for which it will receive a market rate fee contemplated to be
3% of project costs, Equity Office generally will be responsible for
property management and will receive market rate management fees, and the
joint venture and Equity Office will share responsibilities for leasing;
- it is contemplated that the joint venture will provide up to 40% of the
equity required for projects which it develops, with Equity Office having
the opportunity to provide the remaining equity for projects and to
contribute its interests in existing development projects at market
values to be agreed upon;
- for those projects for which Equity Office provides capital, the Wilson
Group will receive a "promotional" interest and thus earn a
disproportionate share of the profits after Equity Office has achieved
agreed upon levels of returns on its capital investment; and
- while the joint venture and the project entities which it forms will hold
properties for investment, Equity Office will have the ability to
purchase the joint venture's interest in most projects at times in the
future after the projects have been fully leased, and Equity Office will
have the right of first refusal with respect to new development projects
of the joint venture.
THE FAILURE OF CORNERSTONE PARTNERSHIP UNITHOLDERS AND CORNERSTONE STOCKHOLDERS
TO APPROVE THE MERGER AGREEMENT MAY REQUIRE, UNDER LIMITED CIRCUMSTANCES,
CORNERSTONE PARTNERSHIP TO PAY TERMINATION FEES AND MAY RESULT IN A DECREASE IN
THE MARKET PRICE OF CORNERSTONE COMMON STOCK
If the Cornerstone Partnership unitholders and the Cornerstone common and
preferred stockholders fail to approve the merger agreement, or if the mergers
are not completed for any reason, Cornerstone and Cornerstone Partnership may be
subject to material risks, including the risk that, under limited circumstances,
Cornerstone Partnership pay up to $100 million in termination fees and expenses
to EOP Partnership, which could lead to a possible decline in the market price
of Cornerstone common stock to the extent current market prices reflect a market
assumption that the mergers will be completed. For a more detailed discussion on
termination fees and expenses, see "The Merger Agreement -- Expenses;
Termination Fee" on page 75.
If, following termination of the merger agreement, the Cornerstone board of
directors determines to seek another merger or business combination, there can
be no assurance that it will be able to find a partner willing to pay an
equivalent or more attractive price than would be provided by Equity Office and
EOP Partnership in the mergers. Under the terms of the merger agreement, before
the termination of the merger agreement, Cornerstone and Cornerstone Partnership
are not permitted to:
- invite, initiate, solicit or encourage any alternative acquisition
proposal;
- except in circumstances expressly permitted under the merger agreement,
engage in any discussions or negotiations with, or provide any
confidential or non-public information or data to, any person relating
to, or that may reasonably be expected to lead to, an alternative
acquisition proposal;
- enter into any letter of intent, agreement in principle or agreement
relating to an alternative acquisition proposal; or
- publicly propose to agree to do any of the foregoing or otherwise
facilitate any effort or attempt to make or implement an alternative
acquisition proposal. See "The Merger Agreement -- No Solicitation by
Cornerstone or Cornerstone Partnership" on page 72.
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IF THE AGGREGATE FAIR MARKET VALUE OF THE EQUITY OFFICE COMMON SHARES TO BE
ISSUED IN THE REIT MERGER DOES NOT REPRESENT AT LEAST 40% OF THE REIT MERGER
CONSIDERATION TO BE PAID AT THE TIME OF THE CLOSING OF THE REIT MERGER, LEGAL
OPINIONS REQUIRED TO BE DELIVERED FOR THE REIT MERGER TO BE COMPLETED COULD NOT
BE DELIVERED, IN WHICH CASE THE MERGERS WOULD NOT BE COMPLETED AND THE MARKET
PRICE OF CORNERSTONE COMMON STOCK COULD DECLINE AS A RESULT
It is a condition to the consummation of the mergers that Hogan & Hartson
L.L.P., counsel to Equity Office, and King & Spalding, counsel to Cornerstone,
deliver opinions that the REIT merger qualifies as a reorganization under
section 368(a) of the Internal Revenue Code. The required tax opinions will not
be delivered, and the mergers will not be consummated, unless the aggregate fair
market value of the Equity Office common shares issued in the REIT merger
represents at least 40% of the aggregate value of the total consideration issued
by Equity Office in the REIT merger, as of the closing of the REIT merger and
taking into account any cash paid for fractional Equity Office common shares.
For example, if the REIT merger had occurred on May 12, 2000, then based on the
trading price of Equity Office common shares on that date and the number of
shares of Cornerstone common stock issued and outstanding on that date, assuming
that no holders of Cornerstone Partnership units had converted their units into
Cornerstone common stock immediately before the REIT merger, the aggregate fair
market value of the Equity Office common shares that would have been issued in
the REIT merger would represent approximately % of the value of the total
consideration paid by Equity Office in the REIT merger. There is no guarantee,
however, that the trading price of the Equity Office common shares will be high
enough at the scheduled closing of the REIT merger to allow counsel to render
the required tax opinions and the mergers to be consummated.
EQUITY OFFICE AND CORNERSTONE MAY NOT BE SUCCESSFULLY INTEGRATED AND INTENDED
BENEFITS OF THE MERGERS MAY NOT BE REALIZED, WHICH COULD HAVE A NEGATIVE IMPACT
ON THE MARKET PRICE OF EQUITY OFFICE COMMON SHARES AND THE VALUE OF THE EOP
PARTNERSHIP UNITS AFTER COMPLETION OF THE MERGERS
The completion of the mergers poses risks for the ongoing operations of
Equity Office and EOP Partnership, including that:
- following the mergers, Equity Office and EOP Partnership may not achieve
the expected cost savings and operating efficiencies;
- the Cornerstone portfolio may not perform as well as Equity Office
anticipates;
- Equity Office and EOP Partnership may experience difficulties and incur
expenses associated with the assimilation and retention of Cornerstone
non-executive employees; and
- Equity Office and EOP Partnership may not effectively integrate the
operations of Cornerstone and Cornerstone Partnership.
If Equity Office and EOP Partnership fail to successfully integrate
Cornerstone and Cornerstone Partnership and/or fail to realize intended benefits
of the mergers due to any of the foregoing reasons, the market price of Equity
Office common shares and the value of EOP Partnership units could decline from
their market price and redemption value, as applicable, at the time of
completion of the mergers.
THERE IS NO PUBLIC MARKET FOR EOP PARTNERSHIP UNITS AND NONE IS EXPECTED TO
DEVELOP, WHICH MAY CAUSE SOME DIFFICULTY IN SELLING ANY EOP PARTNERSHIP UNITS
YOU RECEIVE IN THE PARTNERSHIP MERGER
There is no public market for EOP Partnership units and none is expected to
develop. However, the partnership agreement of EOP Partnership provides that
unitholders may, subject to specified limitations, redeem their EOP Partnership
units for Equity Office common shares on a one-on-one basis or their cash
equivalent, at the election of Equity Office. The determination of whether the
redeeming party receives cash or Equity Office common shares is within the sole
discretion of Equity Office. If you are unable to redeem your EOP Partnership
units, you may have difficulty selling those units because of the lack of a
public market and the restrictions on transfer contained in the partnership
agreement of EOP Partnership.
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THE FEDERAL INCOME TAX CONSEQUENCES TO CORNERSTONE UNITHOLDERS OF THE
PARTNERSHIP MERGER, ANY REDEMPTION BY CORNERSTONE UNITHOLDERS OF CORNERSTONE
PARTNERSHIP UNITS BEFORE THE PARTNERSHIP MERGER AND THE OWNERSHIP BY CORNERSTONE
UNITHOLDERS OF EOP PARTNERSHIP UNITS AFTER THE PARTNERSHIP MERGER ARE COMPLEX
AND SHOULD BE CAREFULLY CONSIDERED BY YOU
Tax Status of EOP Partnership. The obligations of Cornerstone and
Cornerstone Partnership to consummate the partnership merger are conditioned
upon their receipt of an opinion of Hogan & Hartson L.L.P., counsel to Equity
Office and EOP Partnership, to the effect that EOP Partnership has been and will
be treated as a partnership for federal income tax purposes and not as a
corporation. EOP Partnership will qualify as a partnership for federal income
tax purposes unless it elects to be treated as a corporation for federal income
tax purposes, or it is considered to be a "publicly traded partnership" under
section 7704 of the Code. So long as EOP Partnership qualifies as a partnership,
EOP Partnership generally will not be subject to federal income tax and the
partners of EOP Partnership will be required to take into account in computing
their federal income tax liability their allocable share of income, gains,
losses, deductions and credits of the partnership, regardless of whether cash
distributions are made by the partnership to the partners. EOP Partnership has
not elected, and will not elect, to be treated as a corporation. If EOP
Partnership were considered to be a "publicly traded partnership," it would be
taxed as a corporation unless at least 90 percent of its income consists of
"qualifying income." Equity Office and EOP Partnership believe, but cannot
guarantee, that EOP Partnership would meet this qualifying income test and
therefore EOP Partnership would not be taxed as a corporation. If EOP
Partnership were a "publicly traded partnership," but were to qualify not to be
taxed as corporation by meeting the 90 percent qualifying income requirement, a
former partner of Cornerstone Partnership would be subject to restrictions with
respect to the use of passive losses, regardless. If EOP Partnership were to be
taxed as a corporation, the partnership merger would be a fully taxable
transaction for all Cornerstone Partnership unitholders, and Equity Office would
fail to qualify as a REIT, both of which would have a material adverse effect on
the Cornerstone Partnership unitholders. See "Material Federal Income Tax
Consequences -- Tax Status of EOP Partnership" on page 84.
Tax Consequences of the Partnership Merger. A Cornerstone Partnership
unitholder who receives only EOP Partnership units in exchange for all of its
Cornerstone Partnership units in the partnership merger generally is not
expected to recognize taxable income or gain at the time of the partnership
merger unless the Cornerstone Partnership unitholder receives, or is considered
to receive, in connection with the partnership merger, either a cash
distribution or a deemed cash distribution resulting from the relief from
liabilities that exceeds the Cornerstone Partnership unitholder's aggregate
adjusted tax basis in its Cornerstone Partnership units. However, the particular
tax consequences of the partnership merger for each Cornerstone Partnership
unitholder will depend on a number of factors related to the tax situation of
that individual unitholder. These factors include the Cornerstone Partnership
unitholder's adjusted tax basis in its Cornerstone Partnership units at the time
of the partnership merger, the assets that the Cornerstone Partnership
unitholder originally contributed to Cornerstone Partnership in exchange for its
Cornerstone Partnership units, the indebtedness, if any, of Cornerstone
Partnership secured by the contributed assets at the time of the partnership
merger, the tax basis of these assets in the hands of Cornerstone Partnership at
the time of the partnership merger, the Cornerstone Partnership unitholder's
share of the "unrealized gain" with respect to Cornerstone Partnership's assets
at the time of the partnership merger, and the extent to which the Cornerstone
Partnership unitholder includes in its basis for its Cornerstone Partnership
units a share of Cornerstone Partnership's recourse liabilities by reason of
indemnification or "deficit restoration obligations" that will be eliminated by
reason of the partnership merger. See "Material Federal Income Tax
Consequences -- Tax Consequences of the Partnership Merger to Cornerstone
Partnership Unitholders That Receive EOP Partnership Units" on page 86. Although
the partnership merger is intended to permit Cornerstone Partnership unitholders
to defer the taxable gain that they otherwise would recognize in a fully taxable
transaction, the IRS might contend that at least some Cornerstone Partnership
unitholders must recognize gain in connection with the partnership merger. Each
Cornerstone Partnership unitholder is urged to consult with its own tax advisor
to determine the anticipated tax consequences of the partnership merger for that
Cornerstone Partnership unitholder in light of its specific circumstances.
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Effects of Subsequent Events upon Recognition of Gain. In addition to any
gain that might be recognized by a Cornerstone Partnership unitholder at the
time of the partnership merger, a variety of future events and transactions
(including sales of joint venture interests currently held by Cornerstone
Partnership pursuant to rights of first refusal that become exercisable in
connection with the partnership merger) could cause some or all of the former
Cornerstone Partnership unitholders holding EOP Partnership units as a result of
the partnership merger to recognize part or all of the taxable gain that has
been deferred either through the original contribution of assets to Cornerstone
Partnership in exchange for Cornerstone Partnership units or through the
partnership merger. See "Material Federal Income Tax Consequences -- Effect of
Subsequent Events" on page 94. Equity Office is not required to take into
account the tax consequences to the limited partners in deciding whether to
cause EOP Partnership to undertake specific transactions that could cause the
limited partners to have to recognize gain, and the limited partners generally
have no right to approve or disapprove these transactions (except to the extent
specifically required in certain "debt maintenance and lockup" agreements that
Cornerstone Partnership has previously entered into with certain of its
unitholders and that EOP Partnership will assume in the partnership merger, as
described in "The Merger Agreement -- Tax Related Undertakings of EOP
Partnership" on page 69).
Redemption of EOP Units; Sale of Assets; Dissolution of Partnership. The
receipt of cash or Equity Office common shares by partners upon the exercise of
the unit redemption right or the eventual liquidation of EOP Partnership will be
a taxable transaction and is likely to result in the recognition by the partners
of substantial gain for federal income tax purposes. State and local income and
transfer taxes may apply to the transactions as well. Further, if EOP
Partnership were to sell any of the assets acquired from Cornerstone Partnership
in the partnership merger that have "unrealized gain" at the time of the
partnership merger, i.e., that have a value at the time of the partnership
merger in excess of their adjusted tax basis at that time, former Cornerstone
Partnership unitholders would be specially allocated by EOP Partnership an
amount of taxable gain equal to the "unrealized gain." See "Material Federal
Income Tax Consequences -- Tax Consequences of Ownership of EOP Partnerships
Unit After the Partnership Merger" on page 94.
Other Tax Liabilities of Holders of EOP Partnership Units. In addition to
the federal income tax aspects described above, a Cornerstone Partnership
unitholder should consider the potential state and local tax consequences of
owning EOP Partnership units. Tax returns may be required and tax liability may
be imposed both in the state or local jurisdictions where a partner resides and
in each state or local jurisdiction in which EOP Partnership has assets or
otherwise does business. EOP Partnership will hold assets and/or otherwise
conduct business in approximately 25 states and the District of Columbia. EOP
Partnership anticipates providing EOP Partnership unitholders with any
information reasonably necessary to permit them to satisfy state and local
return filing requirements. A Cornerstone Partnership unitholder should consult
with its personal tax advisor with respect to the state and local income tax
implications for their ownership of EOP Partnership units.
Redemption of Cornerstone Partnership Units for Cornerstone Common Stock
Prior to or in Connection With the Partnership Merger is a Taxable
Transaction. A Cornerstone Partnership unitholder who exercises its unit
redemption right prior to or in connection with the partnership merger and
receives Cornerstone common stock in order to participate as a stockholder in
the REIT merger will recognize taxable gain on that redemption. The amount of
the gain will equal the difference between the "amount realized" for tax
purposes and the Cornerstone Partnership unitholder's adjusted basis in its
units that are redeemed. If you have a "negative capital account" with respect
to your Cornerstone Partnership units, the gain recognized on the redemption
would exceed the value of the Cornerstone common stock received by the amount of
the negative capital account. A Cornerstone Partnership unitholder considering
exercising its unit redemption prior to or in connection with the partnership
merger should consult with its tax advisor concerning the tax consequences of
that exercise.
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A WARNING ABOUT FORWARD-LOOKING STATEMENTS
Equity Office, EOP Partnership, Cornerstone and Cornerstone Partnership
have each made forward-looking statements in this document, and in documents
that are incorporated by reference in this document, that are subject to risks
and uncertainties. Forward-looking statements include the information concerning
possible or assumed future results of operations of Equity Office, EOP
Partnership, Cornerstone and Cornerstone Partnership. Also, statements including
words such as "believes," "expects," "anticipates," "intends," "plans,"
"estimates," or similar expressions are forward-looking statements. Many
factors, some of which are discussed elsewhere in this document and in the
documents incorporated by reference in this document, could affect the future
financial results of Equity Office and EOP Partnership and could cause actual
results to differ materially from those expressed in forward-looking statements
contained or incorporated by reference in this document. Important factors that
could cause actual results to differ materially from the expectations reflected
in the forward-looking statements in this consent solicitation/information
statement/prospectus include, among others, the factors discussed under the
caption "Risk Factors" on page 23 and "Risk Factors" in the Form 10-Ks of Equity
Office and EOP Partnership incorporated herein by reference, changes of a
macroeconomic nature, including changes in the economic conditions affecting
industries in which Equity Office's principal tenants compete, the ability to
timely lease or re-lease square footage at current or anticipated rents, the
ability to achieve economies of scale over time, the demand for tenant services
beyond those traditionally provided by landlords, changes in interest rates,
changes in operating costs, future demand for Equity Office's or EOP
Partnership's debt and equity securities and the ability to complete current and
future development projects on time and on schedule.
Forward-looking statements are not guarantees of performance. They involve
risks, uncertainties and assumptions. The future results and shareholder values
of Equity Office following completion of the REIT merger and unitholder values
of EOP Partnership following completion of the partnership merger may differ
materially from those expressed in these forward-looking statements. Many of the
factors that will determine these results and values are beyond Equity Office's,
EOP Partnership's, Cornerstone's and Cornerstone Partnership's ability to
control or predict. For those statements, Equity Office, EOP Partnership,
Cornerstone and Cornerstone Partnership claim the protection of the safe harbor
for forward-looking statements contained in the Private Securities Litigation
Reform Act of 1995.
INFORMATION ABOUT THE ACTIONS TAKEN OR TO BE TAKEN BY THE GENERAL PARTNER OF EOP
PARTNERSHIP
Under the authority granted in the partnership agreement of EOP
Partnership, Equity Office, as the general partner of EOP Partnership, has
determined that the partnership merger is in the best interests of EOP
Partnership and its unitholders, and has approved the merger agreement and the
partnership merger. No vote or consent of unitholders of EOP Partnership is
required under the partnership agreement of EOP Partnership for approval of the
partnership merger.
The partnership agreement of EOP Partnership requires the approval of the
REIT merger by the consent of unitholders holding at least a majority of the
outstanding EOP Partnership units, including any EOP Partnership units held by
Equity Office. As of May 12, 2000, Equity Office owned approximately 88.2% of
the outstanding EOP Partnership units and intends to take action by written
consent, as permitted under the partnership agreement of EOP Partnership, to
approve the REIT Merger on or about the close of business on June 15, 2000.
Because Equity Office owns more than a majority of the outstanding partnership
units of EOP Partnership, no vote or consent of unitholders of EOP Partnership,
other than Equity Office, is required for approval of the REIT merger, and none
is being solicited. Accordingly, under applicable SEC rules, this document is
being forwarded to unitholders of EOP Partnership of record on May 12, 2000 for
informational purposes only.
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CORNERSTONE PARTNERSHIP CONSENT SOLICITATION
PURPOSE OF THE CONSENT SOLICITATION
Cornerstone is asking Cornerstone Partnership unitholders to consent to the
mergers. The partnership agreement of Cornerstone Partnership requires the
approval of the mergers by the consent of unitholders holding at least a
majority of the outstanding Cornerstone Partnership units, including any
Cornerstone Partnership units held by Cornerstone. As of May 12, 2000,
Cornerstone owned approximately 87.1% of the Cornerstone Partnership units.
Cornerstone is required to vote its units in proportion to the manner in which
all outstanding shares of capital stock of Cornerstone are voted at the special
meeting of stockholders of Cornerstone to be held on Monday, June 19, 2000 in
connection with the REIT merger. You may execute a consent to the mergers if you
owned Cornerstone Partnership units on May 12, 2000.
WHO CAN CONSENT
You are entitled to consent with respect to your Cornerstone Partnership
units if our records showed that you held your Cornerstone Partnership units as
of the close of business on May 12, 2000. At the close of business on that date,
a total of 148,852,333 Cornerstone Partnership units were outstanding and
entitled to consent. Each Cornerstone Partnership unit represents one vote. The
enclosed consent form shows the number of Cornerstone Partnership units for
which you are entitled to consent. Your individual consent is confidential and
will not be disclosed to third parties, other than Equity Office.
CONSENT, REDEMPTION AND ELECTION PROCEDURES
Consent Forms. To consent, simply mark your consent form, sign and date it,
and return it in the postage-paid envelope provided.
Redemption of Cornerstone Partnership Units. You may elect to redeem your
Cornerstone Partnership units under one of two methods. First, you may exercise
any unit redemption right that you currently have under the partnership
agreement of Cornerstone Partnership at any time before the partnership merger.
Any exercise by you of your unit redemption right under the partnership
agreement of Cornerstone Partnership will not be conditioned on completion of
the mergers. By exercising your unit redemption right under the partnership
agreement of Cornerstone Partnership, you would not receive units of EOP
Partnership in the partnership merger, but instead would participate in the REIT
merger on the same basis as other common stockholders of Cornerstone. Generally,
a Cornerstone Partnership unit is redeemable on a one-for-one basis for a share
of Cornerstone common stock commencing one year after the date it was first
issued. Accordingly, if you received your Cornerstone Partnership units less
than one year ago, you may not have a currently exercisable unit redemption
right under the partnership agreement of Cornerstone Partnership.
Alternatively, under the merger agreement, you have the right to redeem
some or all of your Cornerstone Partnership units for Cornerstone common stock
on a one-for-one basis, whether or not you have a currently exercisable right to
redeem your units under the partnership agreement of Cornerstone Partnership.
The exercise by you of the unit redemption right under the merger agreement will
be effective only if the partnership merger is completed. Under the merger
agreement, you also may condition your redemption of units on the ability to
receive in the REIT merger only cash for some or all of the Cornerstone common
stock that you would receive upon redemption of your Cornerstone Partnership
units.
Conditioning Your Redemption. In the REIT merger, Cornerstone common
stockholders may elect to receive for some or all of their shares of Cornerstone
common stock either $18.00 per share in cash, without interest, or 0.7009 of a
common share of Equity Office, subject to proration if either the cash election
or the share election is oversubscribed.
If you redeem some or all of your Cornerstone Partnership units for
Cornerstone common stock under the provisions of the partnership agreement of
Cornerstone Partnership, or you elect to redeem some or all of your Cornerstone
Partnership units for Cornerstone common stock under the merger agreement, but
do
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not condition the redemption on receiving cash in the REIT merger for the
Cornerstone common stock to be issued to you upon redemption, you will
participate in the REIT merger on the same basis as any other Cornerstone common
stockholder.
If you condition your unit redemption under the merger agreement on the
ability to receive only cash in the REIT merger for some or all of your
Cornerstone Partnership units, you will receive in the REIT merger $18.00 in
cash per share of Cornerstone common stock received by you in the redemption
only if the cash condition is met. The cash condition will not be met if there
is an oversubscription of cash by all Cornerstone common stockholders, taking
into account cash elections made by all redeeming Cornerstone Partnership
unitholders. However, if there is an undersubscription of cash, taking into
account cash elections made by all Cornerstone common stockholders, but not
including cash elections made by Cornerstone Partnership unitholders who
conditioned their unit redemptions on the ability to receive cash in the REIT
merger, you may nevertheless have the opportunity to have your units redeemed
for Cornerstone common stock and receive cash in the REIT merger if the cash
consideration available after giving effect to cash elections made by the
Cornerstone common stockholders is sufficient to meet your specified cash
condition and your conditional cash redemption is chosen by lot from among other
conditional cash redemptions that were not initially satisfied. See "The Merger
Agreement -- The Partnership Merger" on page 59 and "The Merger Agreement -- The
REIT Merger" on page 59 for a more complete discussion of how proration in the
REIT merger might affect the consideration you will receive as a result of your
redemption of Cornerstone Partnership units.
Notice of Redemption/Form of Election. In addition to the consent form, a
notice of redemption/form of election will be mailed to each holder of
Cornerstone Partnership units. In order to be effective, a notice of
redemption/form of election must be properly completed, signed and submitted to
the exchange agent listed in the instructions to the notice of redemption/form
of election at least two business days prior to the date of the Cornerstone
stockholders special meeting, which is currently scheduled to occur on Monday,
June 19, 2000. You will be notified if the date of the Cornerstone stockholders
special meeting is moved. If you do not submit a properly completed notice of
redemption/form of election which is received by the exchange agent at least two
business days prior to the Cornerstone stockholders special meeting at the
address provided in the instructions to the notice of redemption/form of
election, then you will be deemed not to have redeemed your Cornerstone
Partnership units and each of such units will be converted in the partnership
merger into 0.7009 of an EOP Partnership unit.
If you properly complete, sign and submit a notice of redemption/form of
election to the exchange agent and the mergers are completed, each share of
Cornerstone common stock issued in redemption of the Cornerstone Partnership
units covered by the notice of redemption will be exchanged for the merger
consideration as indicated on the form of election in accordance with the merger
agreement, any applicable portion, and your conditional redemption election.
EQUITY OFFICE AND CORNERSTONE INTEND TO COMPLETE THE MERGERS IMMEDIATELY
AFTER THE SPECIAL MEETINGS FOR EQUITY OFFICE SHAREHOLDERS AND CORNERSTONE
STOCKHOLDERS, RESPECTIVELY. SUCH COMPLETION, HOWEVER, COULD BE DELAYED BY EQUITY
OFFICE AND CORNERSTONE IN ORDER THAT OTHER CLOSING CONDITIONS CAN BE SATISFIED.
ACCORDINGLY, ONCE A NOTICE OF REDEMPTION/FORM OF ELECTION HAS BEEN DELIVERED, A
CORNERSTONE PARTNERSHIP UNITHOLDER WILL BE UNABLE TO SELL, OR OTHERWISE
TRANSFER, SUCH UNITHOLDER'S UNITS FOR AN INDEFINITE PERIOD OF TIME.
REQUIRED VOTE
Approval of the mergers requires the affirmative consent of the holders of
a majority of the Cornerstone Partnership units. Cornerstone is required to vote
its units in proportion to the manner in which all outstanding shares of capital
stock of Cornerstone are voted at the special meeting of stockholders of
Cornerstone to be held on Monday, June 19, 2000 in connection with the REIT
merger.
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HOW YOU MAY REVOKE YOUR NOTICE OF REDEMPTION
If you conditionally elect to redeem some or all of your Cornerstone
Partnership units under the merger agreement, you can revoke or amend your
notice of redemption at any time before 5:00 p.m., Eastern Time, on Thursday,
June 15, 2000, by submitting written notice to Cornerstone Partnership, with
copies to Cornerstone and the exchange agent, which must receive the notice at
or before that time. A notice of redemption under the provisions of the merger
agreement is conditioned on the completion of the partnership merger and, if you
choose, can be conditioned on the ability to receive only cash for some or all
of the shares of Cornerstone common stock that would be received in the
redemption.
A notice of redemption made under the provisions of the partnership
agreement of Cornerstone Partnership is not revocable and may not be conditioned
on completion of the partnership merger or the ability to receive cash in the
REIT merger.
HOW YOU MAY REVOKE YOUR CONSENT OR FORM OF ELECTION
Revocation of a Consent Form. To revoke your consent form, you must (a) so
advise Cornerstone's secretary, Thomas P. Loftus, c/o Cornerstone Properties
Inc., 126 East 56th Street, New York, New York 10022, in writing received before
the close of business on Friday, June 16, 2000 or (b) deliver to Mr. Loftus
before the close of business on Friday, June 16, 2000 a consent form dated after
your initial consent form.
Revocation of an Election. You may change your cash or share election or
revoke it at any time before 5:00 p.m., Eastern Time, Thursday, June 15, 2000,
by submitting written notice to Cornerstone Partnership, which must receive the
notice at or before that time.
COST OF THIS CONSENT SOLICITATION
Cornerstone Partnership will pay the cost of its consent solicitation. In
addition to soliciting consent forms by mail, we expect that certain of our
officers or other representatives of Cornerstone Partnership or its general
partner, Cornerstone, will solicit Cornerstone Partnership unitholders
personally and by telephone. None of these employees or representatives will
receive any additional or special compensation for doing this. We will, upon
request, reimburse nominees, if any, for their reasonable expenses in sending
consent material to their principals and obtaining their consent.
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THE PARTNERSHIP MERGER
STRUCTURE OF THE MERGERS; PARTNERSHIP MERGER EXCHANGE RATIO
The merger agreement contemplates the following two-step transaction:
- the partnership merger, whereby Cornerstone Partnership will merge with
and into EOP Partnership and Cornerstone Partnership will cease to exist;
followed by
- the REIT merger, whereby Cornerstone will merge with and into Equity
Office and Cornerstone will cease to exist.
In the partnership merger, holders of class A common units of limited
partnership interest in Cornerstone Partnership, including Cornerstone, who have
not elected to redeem their units for shares of Cornerstone common stock, will
receive, for each class A common unit issued and outstanding immediately before
the partnership merger, 0.7009 of a class A unit of limited partnership interest
in EOP Partnership, rounded to the nearest whole unit.
REDEMPTION OF CORNERSTONE PARTNERSHIP UNITS; PARTICIPATION IN CASH/SHARE
ELECTION
The merger agreement provides that, before the partnership merger,
Cornerstone Partnership unitholders, other than Cornerstone, will have the right
to have all or any portion of their Cornerstone Partnership units redeemed by
Cornerstone for shares of Cornerstone common stock and to participate in the
REIT merger as stockholders of Cornerstone. These redemptions will be
conditioned upon the completion of the partnership merger. In addition,
Cornerstone Partnership unitholders who exercise this redemption right will be
able to condition their redemption of all units upon the ability to receive in
the REIT merger only cash in exchange for some or all of the Cornerstone common
stock that would be issued in the redemption. Cornerstone Partnership
unitholders may also exercise any presently exercisable redemption right they
have under the partnership agreement of Cornerstone Partnership and thereby
participate in the REIT merger as stockholders of Cornerstone.
The merger agreement also provides that the former Cornerstone Partnership
unitholders, other than Cornerstone, will have the right, beginning immediately
after the partnership merger, to redeem the EOP Partnership class A units issued
to them in the partnership merger under the partnership agreement of EOP
Partnership. Upon redemption of these units, these unitholders would receive
Equity Office common shares on a one-for-one basis or their cash equivalent, at
the election of Equity Office, on the same basis as other limited partners of
EOP Partnership.
BACKGROUND OF THE PARTNERSHIP MERGER AND THE REIT MERGER
In pursuing their strategies for enhancing unitholder and shareholder
value, each of Equity Office, EOP Partnership, Cornerstone and Cornerstone
Partnership regularly consider opportunities for acquisitions, joint ventures
and other significant transactions.
Throughout the second and third quarters of 1999, senior management of
Cornerstone met on several occasions to determine whether or not Cornerstone
should undertake a comprehensive review of the strategic alternatives available
to the company. These discussions were included as part of Cornerstone's regular
strategic planning sessions. These discussions involved a review of the general
status of the industry, the industry's financial performance and trends in the
capital markets, as well as Cornerstone's financial performance and outlook, the
integration of the William Wilson & Associates merger completed in December
1998, Cornerstone's development pipeline and its asset disposition program. In
addition to an evaluation of Cornerstone's current strategy, this discussion
included an assessment of the potential for a strategic combination with another
office REIT.
At the regularly scheduled Cornerstone board of directors meeting held on
September 28, 1999, John S. Moody, the president and chief executive officer of
Cornerstone, reviewed with the board the current strategic direction of the
company. In his review, Mr. Moody noted the challenges that faced
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Cornerstone as a publicly traded REIT in the current market environment,
particularly in expanding its development capabilities outside of Northern
California, identifying significant acquisition candidates and accessing public
equity markets that were not receptive to REITs raising capital because of the
relative underperformance of REIT stocks in 1998 and 1999. At the September 28,
1999 Cornerstone board meeting, Lazard Freres & Co. LLC presented a financial
analysis of various strategic alternatives, including a more detailed analysis
of a hypothetical business combination with a specific potential merger partner
that had been previously identified to Lazard by Cornerstone's management team
as a logical candidate for a business combination. The board decided only to
explore the possibility of a merger transaction with this particular party. The
Cornerstone board authorized the engagement of Lazard to act as financial
advisor to Cornerstone and authorized management and Lazard to contact such
potential strategic partner to determine its interest in a possible business
combination.
In October and November of 1999, representatives of Cornerstone and Lazard
met on several occasions with representatives of this potential merger partner
and provided financial and operating data regarding Cornerstone to assist the
other party in assessing a possible merger.
In early December 1999, Mr. Moody telephoned Timothy H. Callahan, the
president and chief executive officer of Equity Office, to congratulate Mr.
Callahan on Equity Office's completion of the Lend Lease transaction. During the
conversation, Messrs. Callahan and Moody discussed the general state of the real
estate industry and public market valuations of real estate investment trusts.
Mr. Moody and Mr. Callahan also agreed during the call that public market
valuations of real estate investment trusts at the time made business
combinations very difficult. No specific acquisition proposal was discussed
between Messrs. Moody and Callahan during such conversation. This conversation
was one of several similar conversations Messrs. Moody and Callahan had over the
last several years about the real estate industry in general and the prospects
for consolidation among office real estate investment trusts in particular.
Other executives of Equity Office and Cornerstone also speak with each other
from time to time, as well as with executives of other real estate companies,
regarding the industry in general.
On December 9, 1999, the Cornerstone board met to consider a preliminary
proposal from the party identified at the September 28, 1999 board meeting.
Lazard made a presentation regarding the financial aspects of the proposal. The
Cornerstone board discussed the proposal, asked questions of Lazard and
management and concluded that the proposal did not provide adequate value to the
stockholders of Cornerstone. Based on the advice of management, the board also
concluded that further discussions were not likely to result in a more
attractive proposal. The Cornerstone board also discussed the possibility of
initiating discussions with Equity Office, but determined that public market
valuations of real estate investment trusts at the time made pursuing a business
combination very difficult. Accordingly, the board terminated the engagement of
Lazard and directed management to cease any further discussions of a potential
business combination with the potential strategic partner and not to initiate
discussions with any other party, including Equity Office.
During early January, Mr. Moody and Mr. Callahan again exchanged telephone
calls during which they agreed that the public markets had improved
significantly for real estate investment trusts over the past month. Mr.
Callahan further expressed an interest in meeting with Mr. Moody regarding a
possible business combination between Equity Office and Cornerstone. Mr. Moody
suggested to Mr. Callahan that he should come to New York and meet with him and
with William Wilson III, Cornerstone's chairman of the board. On January 10,
2000, Messrs. Callahan, Wilson and Moody met in New York and discussed the
benefits of a possible acquisition of Cornerstone by Equity Office. No
negotiations took place during this meeting. However, both sides agreed to
pursue additional discussions. On January 13, 2000, Equity Office and
Cornerstone executed a mutual confidentiality agreement and agreed to exchange
non-public information. On January 18, 2000, Mr. Callahan contacted J.P. Morgan,
Equity Office's financial advisor, and requested that J.P. Morgan commence its
research and analysis of Cornerstone.
On January 19, 2000, Messrs. Wilson, Moody and Callahan and Samuel Zell,
Equity Office's chairman of the board, met in New York. At this meeting, Messrs.
Zell and Callahan expressed Equity Office's interest in acquiring Cornerstone in
a cash and stock merger, with Cornerstone common shares
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valued at $17.50 per share, consisting of $6.56 in cash and $10.94 in Equity
Office common shares, subject to completion of due diligence. No negotiations
took place during this meeting, and Mr. Moody indicated that he would have to
ask the Cornerstone board for guidance as to whether to engage in further
discussions.
On January 20, 2000, the Cornerstone board met at a regularly scheduled
meeting. Mr. Moody reported to the Cornerstone board Equity Office's offer to
acquire Cornerstone. At this meeting, the Cornerstone board did not authorize
management to enter into formal discussions with Equity Office, but decided to
engage Lazard to assist in an evaluation of the merits of a possible acquisition
of Cornerstone by Equity Office. Under a letter agreement dated January 28, 2000
between Cornerstone and Lazard, Lazard agreed to act as financial advisor to
Cornerstone in connection with the REIT merger. Over the next ten days,
representatives of Lazard met with representatives of Equity Office and J.P.
Morgan to exchange financial and operating data relating to Cornerstone and
Equity Office and to receive more information about the terms and structure of a
possible transaction.
On January 31, 2000, the Cornerstone board met again to consider the Equity
Office proposal. Lazard reviewed the terms of the proposed transaction and
provided a financial analysis of the REIT transaction and other strategic
alternatives. At the meeting, the Cornerstone board discussed: (a) the financial
terms of the proposed transaction with Equity Office; (b) the potential benefits
of such a business combination; (c) the advantages and disadvantages of the
transaction compared with Cornerstone's other strategic alternatives; (d) the
potential conditions to the completion of the transaction, including approvals
of Cornerstone stockholders and limited partners of Cornerstone Partnership; and
(e) the tax consequences of the proposed transaction. At the conclusion of the
meeting, the Cornerstone board authorized management and Lazard to commence
formal negotiations with Equity Office with a principal objective of achieving a
higher price.
At the regularly scheduled Equity Office board of trustees meeting held on
February 1, 2000, Mr. Callahan updated the board on the discussions with Messrs.
Wilson and Moody and Lazard regarding a possible acquisition of Cornerstone by
Equity Office. At this meeting, various members of the board expressed their
support for such a transaction if it could be accomplished along the lines
described at the meeting.
During the week of January 31 through February 5, senior management of
Equity Office and Cornerstone, together with their respective financial
advisors, engaged in negotiations regarding the financial terms of the proposed
transaction. On February 5, Lazard asked Equity Office to submit its best and
final proposal for a merger transaction no later than the following morning. On
February 5, Equity Office submitted a revised merger proposal, which valued
Cornerstone common stock at $18.00 per share, consisting of $7.06 in cash and
$10.94 in Equity Office common shares, with the exchange ratio to be fixed based
upon the 10-day average closing share prices of Cornerstone and Equity Office
ending at the close of trading on Friday, February 4.
The Cornerstone board met by telephone on the morning of Sunday, February 6
to consider the revised Equity Office proposal. Prior to that meeting, senior
management of Cornerstone and representatives of Lazard discussed by telephone
the terms of the proposal with representatives of PGGM, Cornerstone's largest
stockholder. After considering the proposal, PGGM indicated to management of
Cornerstone and Lazard that it was prepared to approve the revised proposal,
subject to satisfactory negotiation of the definitive agreements. During the
Cornerstone board meeting, Lazard reviewed the negotiations of the past week and
reviewed the financial terms of the revised proposal. At the conclusion of the
meeting, the Cornerstone board authorized management to negotiate a definitive
merger agreement and related documentation with Equity Office.
From February 7, 2000 through February 10, 2000, management of Equity
Office and Cornerstone, and their respective legal and financial advisors, met
to negotiate the terms of the merger agreement, the mergers and the ancillary
documents, including the cash/share election mechanics, a stock option agreement
with the holders of the outstanding shares of Cornerstone preferred stock (see
"The Merger
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Agreement -- Preferred Stock Option Agreement" on page 79) and the voting
agreements. Each of the parties also completed its due diligence review of the
other party.
On the evening of February 10, 2000, the Equity Office board held a special
meeting at which members of management and representatives of J.P. Morgan and
Equity Office's outside counsel, Hogan & Hartson L.L.P., were present in person
or by conference telephone call. The special meeting was held in order for the
Equity Office board to consider and formally act upon the proposed acquisition
of Cornerstone. At this meeting, Equity Office's senior management reviewed with
the board financial and business terms of the proposed transaction, including
the need for Equity Office to finance the cash portion of the proposed REIT
merger consideration, and the results of Equity Office's due diligence review.
J.P. Morgan then presented its financial analysis of the proposed REIT merger,
and delivered to the Equity Office board its oral opinion that the REIT merger
consideration to be paid by Equity Office in the transaction was fair, from a
financial point of view, to Equity Office. Equity Office's legal counsel then
made a presentation to the Equity Office board in which it explained the
material terms of the proposed merger agreement and related agreements,
including closing conditions, termination rights and provisions regarding
break-up fees and termination expenses, and briefed the board on open items.
Following these presentations, the Equity Office trustees asked numerous
questions of management and its legal counsel and financial advisors and
discussed at length the issues raised by the presentations. At the conclusion of
these discussions, the Equity Office board approved the REIT merger, the
partnership merger and the merger agreement on substantially the terms discussed
at the meeting, and authorized management to complete negotiations of, and
execute, the merger agreement, subject to final approval of the transaction
terms by the executive committee of the board and receipt of J.P. Morgan's
written fairness opinion.
On the evening of February 10, 2000, the Cornerstone board met to review
and discuss the terms of the proposed merger agreement and related agreements.
Representatives of Lazard and Cornerstone's outside counsel, King & Spalding,
and senior management reviewed with the Cornerstone board the results of the
company's financial, business and legal due diligence examinations and the terms
of the merger agreement, the voting agreements, the stock option agreement and
the severance and non-competition arrangements with management of Cornerstone.
Lazard presented a financial analysis of the REIT merger and indicated that,
upon completion of definitive documentation relating to the REIT merger and the
partnership merger, it would deliver its opinion that the consideration to be
received in the REIT merger was fair, from a financial point of view, to the
holders of Cornerstone common stock. Counsel for Cornerstone made a presentation
to the Cornerstone board in which it explained the material terms of the
proposed merger agreement and related agreements, including closing conditions,
termination rights and provisions regarding break-up fees and termination
expenses, and highlighted the few issues that were as yet unresolved in the
merger agreement. The Cornerstone board directed management to continue
negotiations through the evening on the definitive merger agreement.
Throughout the night of February 10, 2000, representatives of Equity Office
and Cornerstone and their respective legal counsel negotiated the remaining
unresolved terms of the merger agreement.
On the morning of February 11, 2000, members of the executive committee of
the Equity Office board of trustees approved the final terms of the merger
agreement and the ancillary agreements and J.P. Morgan delivered its written
fairness opinion.
On the morning of February 11, 2000, the Cornerstone board reconvened to
review and discuss the terms of the definitive merger agreement and related
agreements. Cornerstone's counsel reviewed the resolution of the issues that had
been unresolved as of the previous evening's meeting, and reviewed again the
terms of the definitive merger agreement, the voting agreements, the option
agreement with Deutsche Bank and the severance arrangements with management.
After discussion of the foregoing, the Cornerstone board determined that the
mergers were fair to and in the best interests of Cornerstone and the holders of
shares of Cornerstone stock and Cornerstone Partnership unitholders, that the
merger agreement and the transactions contemplated thereby were advisable and
that the board should recommend that the stockholders of Cornerstone and
Cornerstone Partnership unitholders approve the
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merger agreement, the partnership merger and the REIT merger, as applicable, and
approved and adopted the merger agreement, the mergers, the voting agreements,
the option agreement and related matters. The Cornerstone board also determined
that the mergers and the merger agreement were advisable and in the best
interests of Cornerstone Partnership and the limited partners of Cornerstone
Partnership.
Immediately after the Cornerstone board meeting on the morning of February
11, the parties executed the merger agreement, the option agreement, their
respective voting agreements and issued a joint press release announcing the
transaction.
EQUITY OFFICE'S REASONS FOR THE MERGERS
As the general partner of EOP Partnership, Equity Office believes that the
mergers are in the best interests of Equity Office, EOP Partnership and their
respective securityholders. The Equity Office board of trustees has approved the
REIT merger, the merger agreement, and on behalf of Equity Office, in its
capacity as general partner of EOP Partnership, the partnership merger. No vote
of the limited partners of EOP Partnership is required under the partnership
agreement of EOP Partnership for the approval of the partnership merger. The
partnership agreement of EOP Partnership requires the approval of the REIT
merger by the consent of the limited partners holding at least a majority of the
outstanding EOP Partnership units, including EOP Partnership units held by
Equity Office. As of May 12, 2000, Equity Office owned approximately 88.2% of
the outstanding EOP Partnership units. Accordingly, it intends to take action by
written consent, as permitted under the partnership agreement of EOP Partnership
to approve the REIT merger on or about the close of business on June 15, 2000.
In its deliberations with respect to the mergers and the merger agreement,
the Equity Office board consulted with Equity Office's management and the
financial and legal advisors to Equity Office. The factors considered by the
Equity Office board include those described below. While all of these factors
were considered by the Equity Office board, the board did not make
determinations with respect to each factor. Rather, the board made its judgment
with respect to the mergers and the merger agreement based on the total mix of
information available to it, and the judgments of individual trustees may have
been influenced to a greater or lesser degree by their individual views with
respect to different factors.
Positive Factors Considered by the Equity Office Board
In making its determination with respect to the mergers and the merger
agreement, the Equity Office board considered the following material positive
factors:
- Cornerstone Partnership's class A office portfolio will enhance EOP
Partnership's existing presence in such top U.S. markets as Boston, San
Francisco, Washington, D.C., Seattle and Atlanta, all of which are
continuing to experience significant job growth and many of which have
significant impediments to new office supply;
- the mergers present EOP Partnership with the opportunity to acquire a
significant portfolio of well-located, high-quality office properties.
Cornerstone Partnership currently owns or has interests in approximately
82 class A office properties, which comprise nearly 17 million rentable
square feet;
- the mergers, by increasing the number of office properties operated by
EOP Partnership by approximately 24% based on square footage, will
solidify Equity Office's position as the largest publicly traded owner
and operator of office properties in the United States. After the REIT
merger, Equity Office will have an equity market capitalization of
approximately $8.9 billion, assuming a share price of $25.68125, which
equaled Equity Office's average closing share price for the ten business
days from January 24, 2000 through February 4, 2000, and a total market
capitalization of approximately $18.7 billion;
- the mergers should generate efficiencies through anticipated cost savings
and reductions in expenses;
- the mergers should allow EOP Partnership to better meet the needs of its
tenants by offering a fuller range of increased space options;
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- the Equity Office board believes that EOP Partnership should be able to
manage Cornerstone Partnership's office properties efficiently following
the mergers because of the significant geographic overlap of EOP
Partnership's and Cornerstone Partnership's office portfolios;
approximately two-thirds of Cornerstone Partnership's assets are in EOP
Partnership's top eight core markets;
- Cornerstone Partnership will provide EOP Partnership with an existing
development pipeline in the San Francisco Bay area, which has significant
supply constraints;
- the amount of cash payable in the REIT merger and the exchange ratios
applicable to both the REIT merger and the partnership merger are fixed
and not subject to adjustment; and
- the opinion, analyses and presentations of J.P. Morgan described under
"Opinion of Equity Office's Financial Advisor" below, including the
opinion of J.P. Morgan to the effect that, as of the date of such
opinion, and based upon and subject to the matters stated therein, the
consideration to be paid by Equity Office in the REIT merger is fair,
from a financial point of view, to Equity Office.
Negative Factors Considered by the Equity Office Board
The Equity Office board of trustees also considered the following
potentially negative factors in its deliberations concerning the mergers and the
merger agreement:
- the need for EOP Partnership to obtain financing in order to distribute
to Equity Office the cash that will be payable as part of the REIT merger
consideration and the resulting increase in the level of borrowings of
EOP Partnership and exposure to interest rate risk;
- the risk that the anticipated benefits of the mergers to Equity Office,
EOP Partnership, and their respective securityholders may not be realized
as a result of possible changes in the real estate market in general, the
inability to achieve the anticipated cost savings and reduction in
expenses and other potential difficulties in integrating the companies
and their respective operations;
- the significant cost involved in connection with consummating the mergers
and the substantial management time and effort required to effect the
mergers and integrate the businesses of Equity Office and Cornerstone and
of EOP Partnership and Cornerstone Partnership; and
- the risk that the mergers might not be completed based upon the failure
to satisfy covenants or closing conditions.
In view of the wide variety of factors considered, the Equity Office board
did not quantify or otherwise attempt to assign relative weights to the specific
factors that it considered in making its determination. In the view of the
Equity Office board, however, the potentially negative factors considered by it
were not sufficient, either individually or collectively, to outweigh the
positive factors considered in its deliberations relating to the mergers and the
merger agreement.
OPINION OF EQUITY OFFICE'S FINANCIAL ADVISOR
At the meeting of the board of trustees of Equity Office on February 10,
2000, J.P. Morgan rendered its oral opinion to the board of trustees of Equity
Office that, as of such date, the consideration to be paid by Equity Office in
the proposed REIT merger of Cornerstone into Equity Office was fair from a
financial point of view to Equity Office. J.P. Morgan confirmed its February 10,
2000 oral opinion by delivering its written opinion to the board of trustees of
Equity Office, dated February 11, 2000, that, as of such date, the consideration
to be paid by Equity Office in the proposed REIT merger was fair from a
financial point of view to Equity Office. No opinion was rendered by J.P. Morgan
with respect to the partnership merger. J.P. Morgan has not been requested to,
and will not, unless requested by Equity Office, update its opinion before the
closing of the REIT merger. No limitations were imposed by Equity Office's board
of trustees upon J.P. Morgan with respect to the investigations made or
procedures followed by it in rendering its opinion.
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THE FULL TEXT OF THE WRITTEN OPINION OF J.P. MORGAN DATED FEBRUARY 11,
2000, WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITS ON
THE REVIEW UNDERTAKEN, IS ATTACHED AS ANNEX B TO THIS CONSENT
SOLICITATION/INFORMATION STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN BY
REFERENCE. J.P. MORGAN'S WRITTEN OPINION, ADDRESSED TO THE BOARD OF TRUSTEES OF
EQUITY OFFICE, IS DIRECTED ONLY TO THE CONSIDERATION TO BE PAID IN CONNECTION
WITH THE REIT MERGER AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY SHAREHOLDER
OF EQUITY OFFICE AS TO HOW SUCH SHAREHOLDER SHOULD VOTE AT THE EQUITY OFFICE
SPECIAL MEETING BEING HELD TO APPROVE THE REIT MERGER. THE SUMMARY OF THE
OPINION OF J.P. MORGAN SET FORTH IN THIS CONSENT SOLICITATION/INFORMATION
STATEMENT/PROSPECTUS AND IN THE JOINT PROXY STATEMENT/PROSPECTUS DELIVERED
SIMULTANEOUSLY HEREWITH IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL
TEXT OF SUCH OPINION.
In arriving at its opinion, J.P. Morgan, among other things:
- reviewed the merger agreement;
- reviewed the audited financial statements for the twelve months ended
December 31, 1998 and the unaudited financial statements for the nine
months ended September 30, 1999 of Equity Office and Cornerstone;
- reviewed current and historical market prices of Equity Office common
shares and Cornerstone common stock;
- reviewed publicly available information concerning the business of
Cornerstone and of other companies engaged in businesses comparable to
those of Cornerstone, and the reported market prices for other companies'
securities deemed comparable;
- reviewed publicly available terms of transactions involving companies
comparable to Cornerstone and the consideration received for such
companies;
- reviewed the terms of other business combinations deemed relevant by J.P.
Morgan;
- reviewed internal financial analyses and estimates of budgeted 2000
through 2004 funds from operations and net operating income prepared by
Equity Office and Cornerstone and their respective management teams;
- reviewed agreements with respect to outstanding indebtedness or
obligations of Equity Office and Cornerstone;
- held discussions with members of the management of Equity Office and
Cornerstone with respect to various aspects of the REIT merger, and the
past and current business operations of Equity Office and Cornerstone,
the financial condition and future prospects and operations of Equity
Office and Cornerstone and the effects of the REIT merger on the
financial condition and future prospects of Equity Office and
Cornerstone, and other matters believed necessary or appropriate to J.P.
Morgan's inquiry; and
- reviewed such other financial studies and analyses and considered such
other information as J.P. Morgan deemed appropriate for the purposes of
its opinion.
J.P. Morgan relied upon and assumed, without independent verification, the
accuracy and completeness of all information that was publicly available or that
was furnished to it by Equity Office and Cornerstone or otherwise reviewed by
J.P. Morgan, and J.P. Morgan has not assumed any responsibility or liability
therefor. J.P. Morgan has not conducted any valuation or appraisal of any assets
or liabilities, nor have any valuations or appraisals been provided to J.P.
Morgan. In relying on financial analyses and forecasts provided to it, J.P.
Morgan has assumed that they have been reasonably prepared based on assumptions
reflecting the best currently available estimates and judgments by management as
to the expected future results of operations and financial condition of Equity
Office and Cornerstone to which such analyses or forecasts relate. J.P. Morgan
has also assumed that the REIT merger will have the tax consequences described
in discussions with representatives of Equity Office.
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No representation or warranty was made by any party with respect to the
internal financial analysis and estimates referred to above. Financial
projections are subject to contingencies beyond management's control and
realization of the projections depends on numerous factors, including among
other things, the cost of integrating the companies, the completion of pending
developments, the actual cost in relation to such projects and decisions by
management to modify business plans to address changing needs and a changing
operating environment. All material events and circumstances cannot be predicted
and unanticipated events and circumstances are likely to occur. Accordingly,
there may be differences between the projected results of operations and the
actual results of operations of the respective companies, and such differences
could be material. In the event that the financial projections prove to be
materially different, the conclusions reached in the opinion of J.P. Morgan
could be materially affected.
J.P. Morgan's opinions are based on economic, market and other conditions
as in effect on, and the information made available to J.P. Morgan as of, the
date of such opinion. Subsequent developments may affect the written opinion
dated February 11, 2000. J.P. Morgan expressed no opinion as to the price at
which the Equity Office common shares or Cornerstone common stock will trade at
any future time.
In accordance with customary investment banking practice, J.P. Morgan
employed generally accepted valuation methods in reaching its opinion. The
following is a summary of the material financial analyses utilized by J.P.
Morgan in connection with providing its opinion.
Pro Forma Merger Analysis. J.P. Morgan analyzed the effect of the REIT
merger on, among other things, the estimated First Call funds from operations
per fully diluted Equity Office common share, including EOP Partnership units,
for the years ended December 31, 2000 and 2001. In doing so, J.P. Morgan
combined the projected operating results for Equity Office and Cornerstone and
assumed specified savings in general and administrative expenses as well as
additional costs related to the transaction as per estimates provided by the
management of Equity Office. J.P. Morgan observed a total projected post-REIT
merger incremental accretion of $0.01 and $0.04 to Equity Office's First Call
2000 and 2001 funds from operations estimates of $2.80 and $3.03 per share,
respectively. The analysis assumed a transaction closing date of June 30, 2000.
In calculating the purchase price for Cornerstone common stock and Cornerstone
Partnership units, a $25.68125 share price for Equity Office common shares was
assumed.
J.P. Morgan also analyzed the effect of the REIT merger on Equity Office's
2000 pro forma equity market capitalization, total market capitalization,
leverage ratios and distribution payout ratio. In this regard, J.P. Morgan noted
that:
- the pro forma equity market capitalization for Equity Office would be
approximately $8.9 billion, assuming a share price of $25.68125, which
equaled Equity Office's average closing share price for the ten business
days from January 24, 2000 through February 4, 2000, and assuming
347,044,557 Equity Office common shares and EOP Partnership units
outstanding after completion of the merger, and a total post-REIT merger
pro forma market capitalization of approximately $18.7 billion; these
figures do not include the 250,770 shares of Cornerstone common stock
already owned by Equity Office before the REIT merger;
- Equity Office's debt to total market capitalization ratio would increase,
upon completion of the REIT merger, from 43.8% before the merger to 48.9%
after the assumption of Cornerstone's outstanding debt plus the
incremental debt incurred for the cash portion of the transaction
consideration and for the payment of transaction costs;
- the ratio of debt plus preferred shares to total market capitalization
also would increase from 48.2% to 52.2%, assuming the retirement of all
outstanding Cornerstone preferred stock; and
- Equity Office's intent is to retain its current distribution of $1.68 per
share for the combined company.
Net Asset Value Analysis. Using Equity Office's projections of
Cornerstone's performance results for the twelve-month period beginning July 1,
2000 and projected asset and liability balances as of June 30,
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2000, J.P. Morgan calculated the net asset value per share for Cornerstone. In
so doing, J.P. Morgan applied a range of capitalization rates from 8.25% to
8.75% to Equity Office's projections of Cornerstone's stabilized July 1, 2000 to
June 30, 2001 net operating income for the properties, assuming no additional
net operating income from future acquisitions or developments. The resulting
gross real estate value was added to the gross value of Cornerstone's other
assets, including developments in progress, cash and marketable securities, and
fee income (valued at a 5.0x multiple of earnings before interest, taxes,
depreciation and amortization), less Cornerstone's outstanding debt, to arrive
at an equity net asset value. The equity net asset value per share was then
calculated by dividing the equity net asset value by the number of shares of
Cornerstone common stock and Cornerstone Partnership units outstanding on a
fully diluted basis. This analysis indicated a net asset value range of between
$18.59 and $20.35 per share. J.P. Morgan also noted that this range was
generally consistent with equity analysts' published net asset value per share
estimates for Cornerstone of $17.00 to $20.81, based on asset balances as of
September 30, 1999.
Discounted Cash Flow Analysis. J.P. Morgan performed a discounted cash flow
analysis, that is, an analysis of the present value, calculated as of June 30,
2000, of the projected levered cash flows for the period from 2000 to 2004, of
Cornerstone based upon projections provided by Equity Office, using discount
rates reflecting an equity cost of capital ranging from 13.5% to 14.5% and
terminal value multiples applied to 2005 funds from operations ranging from 9.5x
to 10.5x. J.P. Morgan, for the purposes of this valuation, derived 2005 funds
from operations by growing 2004 funds from operations at a rate equal to the
compound annual growth rate of projected funds from operations from 2000-2004.
Based upon Equity Office's projections of Cornerstone cash flows for the years
2000 through 2004, the range of present values per share of Cornerstone common
stock was $18.27 to $20.35. J.P. Morgan noted that the implied price for
Cornerstone common stock was below the indicated discounted cash flow range.
Selected Transaction Analysis. Using publicly available information, J.P.
Morgan examined selected transactions with respect to purchase price per share
to calculate both implied transaction premia and implied transaction funds from
operations multiples. Specifically, J.P. Morgan reviewed all publicly traded
REIT acquisitions since January 1, 1997 with total transaction values of at
least $500 million as follows:
<TABLE>
<CAPTION>
ACQUIROR TARGET
-------- ------
<S> <C>
Olympus Real Estate Fund II L.P. Walden Residential Properties, Inc.
Berkshire Realty Holdings, L.P. Berkshire Realty Company, Inc.
Duke Realty Investments, Inc. Weeks Corporation
The Irvine Company Irvine Apartment Communities, Inc.
ProLogis Trust Meridian Industrial Trust, Inc.
Equity Residential Properties Trust Merry Land & Investment Company, Inc.
Security Capital Pacific Trust Security Capital Atlantic Incorporated
Equity Office Properties Trust Beacon Properties Corporation
Equity Residential Properties Trust Evans Withycombe Residential, Inc.
Equity Residential Properties Trust Wellsford Residential Property Trust
</TABLE>
J.P. Morgan observed a range of implied transaction premia over the target
companies' share price one week before the announcement date of 5.4% to 29.8%
with a median of 20.4%, resulting in a range of equity values for Cornerstone's
common stock of between $15.68 and $19.31 per share. In addition, J.P. Morgan
observed a range of implied transaction First Call funds from operations
multiples for the target companies from 9.4x to 14.8x with a median of 12.4x.
This range was then applied to Cornerstone's First Call 2000 funds from
operations per share of $1.69, resulting in a range of equity values for
Cornerstone's common stock of between $15.92 and $24.94 per share. J.P. Morgan
noted that the implied price for Cornerstone common stock was within the range
based on both transaction premia and transaction multiples.
Public Trading Multiples Analysis. Using publicly available information,
J.P. Morgan compared selected financial and stock market data of Cornerstone
with similar data for selected publicly traded
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companies which J.P. Morgan judged to be analogous to that of Cornerstone's.
These companies generally were those with sufficiently large total market
capitalization and specialization in the office REIT sector. The companies
selected by J.P. Morgan were:
- Boston Properties Inc.;
- CarrAmerica Realty Corporation;
- Equity Office Properties Trust;
- Mack-Cali Realty Corporation;
- Speiker Properties; and
- Vornado Realty Trust.
For each comparable company, publicly available financial performance data
through the nine months ended September 30, 1999 was measured. J.P. Morgan
calculated the multiples of current stock price, as of February 4, 2000, to
analysts' estimates for 2000 First Call funds from operations for each of the
comparable companies to determine the 2000 funds from operations trading
multiples. J.P. Morgan's calculations resulted in a range of 2000 funds from
operations multiples from 7.0x to 10.7x with a median of 9.1x. These multiples
were then applied to Cornerstone's First Call 2000 funds from operations per
share estimate as of February 4, 2000 of $1.69, yielding a range of implied
trading values for Cornerstone's common stock of approximately $11.83 to $18.08
per share. J.P. Morgan noted that the implied price for Cornerstone common stock
was within the indicated trading multiples range. J.P. Morgan also observed that
the comparable companies had a range of debt to total market capitalization of
38.8% to 56.7%.
Share Trading History Analysis. Based on publicly available information,
J.P. Morgan reviewed the history of trading prices for Cornerstone common stock
for the 52-week and 104-week periods ending February 4, 2000. The 52-week
trading range was $13.06 to $16.94 per share and the 104-week trading range was
$13.06 to $18.38 per share. J.P. Morgan noted that the implied price for
Cornerstone common stock was at a premium to the 52-week high, but at a discount
to the 104-week high.
The summary set forth above is not a complete description of the analyses
or data presented by J.P. Morgan. The preparation of a fairness opinion is a
complex process and is not necessarily susceptible to partial analysis or
summary description. J.P. Morgan believes that the summary set forth above and
their analyses must be considered as a whole and that selecting portions,
without considering all of its analyses, could create an incomplete view of the
processes underlying its analyses and opinion. J.P. Morgan based its analyses on
assumptions that it deemed reasonable, including assumptions concerning general
business and economic conditions and industry-specific factors. The other
principal assumptions upon which J.P. Morgan based its analyses are set forth
above under the description of each such analysis. J.P. Morgan's analyses are
not necessarily indicative of actual values or actual future results that might
be achieved, which values may be higher or lower than those indicated. Moreover,
J.P. Morgan's analyses are not and do not purport to be appraisals or otherwise
reflective of the prices at which businesses actually could be bought or sold.
As a part of its investment banking business, J.P. Morgan and its
affiliates are continually engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, investments for passive
and control purposes, negotiated underwritings, secondary distributions of
listed and unlisted securities, private placements, and valuations for estate,
corporate and other purposes. J.P. Morgan was selected to deliver an opinion to
Equity Office's board of trustees with respect to the REIT merger on the basis
of such experience and its familiarity with Equity Office.
For the delivery of its opinion and related advisory work, J.P. Morgan will
receive a total fee of $7.0 million from Equity Office. $1.0 million was due and
payable upon announcement of the REIT merger, with the remaining $6.0 million
payable upon the successful close of the REIT merger. In addition, Equity Office
reimbursed J.P. Morgan for its reasonable expenses incurred in connection with
its services, including the fees and disbursements of counsel, and agreed to
indemnify J.P. Morgan against
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certain liabilities, including liabilities arising under the federal securities
laws. For serving as sole lead arranger and bookrunner in arranging an
additional $1.0 billion credit facility and as co-lead arranger on the amended
existing $1.0 billion credit facility for Equity Office, J.P. Morgan will
receive an advisory fee of $300,000.
J.P. Morgan and its affiliates, including Morgan Guaranty Trust Company of
New York, maintain banking and other business relationships with Equity Office
and its affiliates pursuant to which J.P. Morgan has received an aggregate of
approximately $3.1 million in fees over the past two years. In July 1998, J.P.
Morgan provided a fairness opinion to the William Wilson & Associates investors
relating to the merger of WWA with Cornerstone. J.P. Morgan received a fee of
$500,000 from the WWA investors for the delivery of its opinion in the
transaction. In the ordinary course of their businesses, J.P. Morgan and its
affiliates may actively trade the debt and equity securities of Equity Office or
Cornerstone for their own accounts or for the accounts of customers and,
accordingly, they may at any time hold long or short positions in such
securities.
CORNERSTONE'S REASONS FOR THE MERGERS
The Cornerstone board of directors approved the REIT merger and approved
and adopted the merger agreement at a meeting held on February 11, 2000. On
behalf of Cornerstone, in its capacity as general partner of Cornerstone
Partnership, the Cornerstone board also approved the partnership merger. The
Cornerstone board believes that the terms of the mergers, the merger agreement
and the other transactions contemplated thereby are advisable and in the best
interests of Cornerstone, Cornerstone Partnership and their respective
securityholders.
In considering the recommendation of the Cornerstone board with respect to
the mergers and the merger agreement, Cornerstone Partnership unitholders should
be aware that, following completion of the mergers, three current members of the
Cornerstone board will become trustees of Equity Office. Also, Messrs. Wilson,
Moody and Dimock will receive severance benefits as a result of the REIT merger.
See "-- Interests of Cornerstone's Directors and Executive Officers in the
Mergers -- Retention Agreements" on page 52. Therefore, these Cornerstone
directors have interests in the mergers that are different from, or in addition
to, the interests of the Cornerstone stockholders and the Cornerstone
Partnership unitholders generally.
In its deliberations with respect to the mergers and the merger agreement,
the Cornerstone board consulted with Cornerstone's management and the financial
and legal advisors to Cornerstone. The factors considered by the Cornerstone
board include those described below. While all of these factors were considered
by the Cornerstone board, the board did not make determinations with respect to
each factor. Rather, the board made its judgment with respect to the mergers and
the merger agreement based on the total mix of information available to it, and
the judgments of individual directors may have been influenced to a greater or
lesser degree by their individual views with respect to different factors.
Positive Factors Considered by the Cornerstone Board
In making its determination with respect to the mergers and the merger
agreement, the Cornerstone board considered the following material positive
factors:
- in the partnership merger, each Cornerstone Partnership Class A common
unit will be exchanged for 0.7009 of an EOP Partnership Class A unit.
Consequently, based on the closing price of Equity Office common shares
of $25.6875 on February 10, 2000, the last full trading day before the
mergers were publicly announced, each Cornerstone Partnership class A
common unit will be exchanged in the partnership merger for an EOP
Partnership class A unit having a redemption value of approximately
$18.00, representing a 21% premium over the closing price of $14.875 for
Cornerstone common stock, into which a Cornerstone Partnership class A
common unit is convertible on a one-for-one basis, on February 10, 2000.
In addition, Cornerstone Partnership unitholders will be able to redeem
their units for Cornerstone common stock and participate in the REIT
merger as Cornerstone common stockholders;
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- in the REIT merger, each share of Cornerstone common stock will be
converted, at the election of the stockholder, into either $18.00 per
share in cash, without interest, or 0.7009 of a common share of Equity
Office, subject to proration if either the cash election or the share
election is oversubscribed. Consequently, based on the closing price of
Equity Office common shares of $25.6875 on February 10, 2000, the last
full trading day before the mergers were publicly announced, each
Cornerstone common share will be exchanged in the REIT merger for either
$18.00 in cash or for 0.7009 of an Equity Office common share having a
value of approximately $18.00, representing a 21% premium over the
closing price of $14.875 for Cornerstone common stock on February 10,
2000;
- the combined companies will have an increased presence in major markets,
which should enhance revenue opportunities by providing additional space
options to existing Cornerstone Partnership and EOP Partnership tenants;
- the increased diversity of markets should reduce the combined companies'
dependence on any single market or region, thereby reducing the risk that
a regional economic downturn could affect a large number of their
properties;
- after the partnership merger, EOP Partnership, by virtue of its larger
size and investment grade credit rating, should have improved access to
capital markets, which should make additional debt or other financing
available upon more attractive terms;
- the unit-for-unit nature of the partnership merger will provide
Cornerstone Partnership unitholders with the opportunity to share in any
future appreciation of EOP Partnership while deferring at least a portion
of the taxable gain that would be recognized in a cash transaction;
- Cornerstone Partnership and EOP Partnership have complimentary product
focus and operating strategies, which should result in a successful
integration of the two companies;
- the mergers may generate additional efficiencies through anticipated cost
savings and reductions in expenses;
- the opinion, analysis and presentations of Lazard regarding the REIT
merger described under "Opinion of Cornerstone's Financial Advisor"
below, including the opinion of Lazard to the effect that, as of the date
of such opinion, and based upon and subject to the matters stated
therein, the consideration to be received in the REIT merger was fair,
from a financial point of view, to the holders of common stock of
Cornerstone; and
- other strategic alternatives available to Cornerstone and Cornerstone
Partnership, including the prospects of positioning Cornerstone and
Cornerstone Partnership for the future and enhancing long-term
stockholder and unitholder value by remaining an independent company or
by effecting a strategic business combination with another company, were
not as attractive as the proposed mergers with Equity Office and EOP
Partnership.
Negative Factors Considered by the Cornerstone Board
The Cornerstone board of directors also considered the following
potentially negative factors in its deliberations concerning the mergers and the
merger agreement:
- the exchange ratio is fixed and not subject to adjustment. As a result, a
decrease in the trading price of Equity Office common shares before the
effective time of the mergers will reduce the value of the aggregate
consideration that will be received by the Cornerstone common
stockholders and Cornerstone Partnership unitholders;
- the risk that the anticipated benefits of the mergers to securityholders
may not be realized as a result of possible changes in the real estate
market in general, or as a result of the inability to achieve the
anticipated reduction in expenses and other potential difficulties in
integrating the companies and their respective operations;
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<PAGE> 59
- the effect of the public announcement of the mergers on Cornerstone's and
Cornerstone Partnership's ability to retain employees and on the trading
price of Cornerstone's common stock;
- the significant cost involved in connection with consummating the
mergers, the substantial management time and effort required to
effectuate the mergers and integrate the businesses of the companies and
the related disruption to Cornerstone Partnership's operations; and
- the risk that the mergers might not be completed based upon the failure
to satisfy certain covenants or closing conditions.
The Cornerstone board also considered certain matters described above under
"Risk Factors," including the potential benefits to certain directors and
executive officers discussed in "Risk Factors -- The directors and executive
officers of Cornerstone may have interests in the completion of the mergers that
are different from the interests of Cornerstone Partnership's unitholders and
Cornerstone's stockholders."
In view of the wide variety of factors considered, the Cornerstone board
did not quantify or otherwise attempt to assign relative weights to the specific
factors that it considered in making its determination. In the view of the
Cornerstone board, however, the potentially negative factors considered by it
were not sufficient, either individually or collectively, to outweigh the
positive factors considered in its deliberations relating to the mergers and the
merger agreement.
OPINION OF CORNERSTONE'S FINANCIAL ADVISOR
THE OPINION OF LAZARD ADDRESSES ONLY THE FAIRNESS OF THE REIT MERGER AND
DOES NOT ADDRESS ANY ASPECT OF THE PARTNERSHIP MERGER. LAZARD'S OPINION IS
ADDRESSED TO THE CORNERSTONE BOARD OF DIRECTORS AND NOT TO CORNERSTONE
PARTNERSHIP, NOR ITS GENERAL PARTNER, NOR ITS LIMITED PARTNERS NOR ITS
UNITHOLDERS. ACCORDINGLY, NO PARTNER OR UNITHOLDER OF CORNERSTONE PARTNERSHIP
SHOULD OR IS ENTITLED TO RELY ON LAZARD'S OPINION IN EVALUATING THE TERMS AND
CONDITIONS OF THE PARTNERSHIP MERGER. THE BOARD OF DIRECTORS OF CORNERSTONE
BELIEVES, HOWEVER, THAT THE LAZARD OPINION IS RELEVANT TO THE UNITHOLDERS OF
CORNERSTONE PARTNERSHIP.
At the meeting of the Cornerstone board of directors on February 10, 2000,
Lazard rendered its oral opinion to the Cornerstone board of directors that, as
of such date, the consideration to be received in the REIT merger was fair, from
a financial point of view, to the holders of common stock of Cornerstone. Lazard
confirmed its February 10, 2000 oral opinion by delivering to the Cornerstone
board of directors its written opinion dated February 11, 2000, that, as of such
date, the consideration to be received in the REIT merger was fair, from a
financial point of view, to the holders of common stock of Cornerstone. Lazard's
analysis of the REIT merger assumed that prior to the REIT merger each holder of
units in Cornerstone Partnership will have elected to exercise its redemption
right and receive shares of common stock in Cornerstone in exchange therefor in
the manner provided in the merger agreement. Lazard has not been requested to
and will not update its opinion before the closing of the REIT merger. No
limitations were imposed by the Cornerstone board of directors upon Lazard with
respect to the investigations made or the procedures followed by it in rendering
its opinion.
THE FULL TEXT OF THE WRITTEN OPINION OF LAZARD DATED FEBRUARY 11, 2000,
WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITS ON THE
REVIEW UNDERTAKEN, IS ATTACHED AS ANNEX C TO THIS CONSENT
SOLICITATION/INFORMATION STATEMENT/PROSPECTUS. THE WRITTEN OPINION OF LAZARD
SHOULD BE READ IN ITS ENTIRETY. LAZARD'S WRITTEN OPINION, ADDRESSED TO THE
CORNERSTONE BOARD OF DIRECTORS, IS DIRECTED ONLY TO THE FAIRNESS OF THE
CONSIDERATION TO BE RECEIVED IN THE REIT MERGER TO THE HOLDERS OF COMMON STOCK
OF CORNERSTONE AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY UNITHOLDER OF
CORNERSTONE PARTNERSHIP AS TO WHETHER SUCH UNITHOLDER SHOULD CONSENT TO THE
MERGERS. THE SUMMARY OF THE OPINION OF LAZARD SET FORTH IN THIS CONSENT
SOLICITATION/INFORMATION STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF SUCH OPINION.
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In arriving at its opinion on the REIT merger, Lazard, among other things:
- reviewed the merger agreement as to only the REIT merger;
- analyzed historical business and financial information relating to
Cornerstone and Equity Office, including the audited financial statements
for the twelve months ended December 31, 1998 and the unaudited financial
statements for the nine months ended September 30, 1999 of Cornerstone
and Equity Office;
- reviewed the historical stock prices and trading volumes of Cornerstone's
common stock and Equity Office's common shares;
- reviewed financial forecasts and other data provided to Lazard by
Cornerstone and Equity Office relating to their businesses;
- reviewed public information with respect to certain other companies in
lines of businesses Lazard believed to be comparable to the business of
Cornerstone;
- reviewed the financial terms of certain recent business combinations
involving companies in lines of business Lazard believed to be comparable
to those of Cornerstone;
- held discussions with members of the senior management of Cornerstone and
Equity Office with respect to the respective businesses of Cornerstone
and Equity Office; and
- conducted such other financial studies, analyses and investigations as
Lazard deemed appropriate for the purposes of its opinion.
Lazard relied upon and assumed, without independent verification, the
accuracy and completeness of all information that was furnished to it by Equity
Office and Cornerstone or otherwise reviewed by Lazard, and Lazard has not
assumed any responsibility or liability for the independent verification of such
information or any independent valuation or appraisal of any of the assets or
liabilities of Cornerstone or Equity Office, or concerning the solvency or fair
value of Cornerstone, Cornerstone Partnership, Equity Office, EOP Partnership or
any other entity. In relying on financial analyses and forecasts provided to it,
Lazard has assumed that they have been reasonably prepared based on assumptions
reflecting the best currently available estimates and judgments by management as
to the expected future results of operations and financial condition of Equity
Office and Cornerstone to which such analyses or forecasts relate. Lazard
assumed no responsibility for and expressed no view as to such forecasts or the
assumptions on which they were based. Lazard has also assumed that the REIT
merger will have the tax consequences described in discussions with
representatives of Cornerstone.
No representation or warranty was made by any party with respect to the
financial analyses and estimates referred to above. Financial projections are
subject to contingencies beyond management's control and realization of the
projections depends on numerous factors, including among other things, the cost
of integrating the companies, the completion of pending developments, the actual
cost in relation to such projects and decisions by management to modify business
plans to address changing needs and a changing operating environment. All
material events and circumstances cannot be predicted and unanticipated events
and circumstances are likely to occur. Accordingly, there may be differences
between the projected results of operations and the actual results of operations
of the respective companies, and such differences could be material. In the
event that the financial projections prove to be materially different, the
conclusions reached in the opinion of Lazard could be materially affected.
In rendering its opinion regarding the REIT merger, Lazard assumed that the
REIT merger would be consummated on the terms described in the merger agreement,
without any waiver of any material terms or conditions by Cornerstone or
Cornerstone Partnership, and that obtaining the necessary regulatory approvals
for the REIT merger would not have a material adverse effect on Cornerstone or
Cornerstone Partnership. Lazard's opinions are based on economic, market and
other conditions as in effect on, and the information made available to Lazard
as of, the date of such opinion. Subsequent developments may affect
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the written opinion dated February 11, 2000. Lazard expressed no opinion as to
the price at which the Equity Office common shares or Cornerstone common stock
will trade at any future time.
In arriving at its opinion and making its presentation on the REIT merger
to the Cornerstone board of directors at the February 10, 2000 meeting of the
board, Lazard considered and discussed certain financial analyses and other
factors. In connection with its presentation on the REIT merger on February 10,
2000, Lazard provided the Cornerstone board of directors with a summary of
results obtained by using several different valuation methods as well as other
materials concerning the common stock and business of Cornerstone.
The following paragraphs summarize Lazard's presentation on the REIT
merger.
Public Market Valuation Analysis. Lazard reviewed and compared the
financial and market performance of the following group of eight public United
States REITs:
- Spieker Properties, Inc.;
- Boston Properties, Inc.;
- Equity Office Properties Trust;
- Vornado Realty Trust;
- Duke-Weeks Realty Corporation;
- CarrAmerica Realty Corporation;
- Mack-Cali Realty Corporation; and
- Crescent Real Estate Equities Company.
Lazard examined certain publicly available financial data of the selected
companies and published consensus funds from operations estimates for the
selected companies to derive multiples of share price to projected funds from
operations per share for the fiscal years ending December 31, 1999 and December
31, 2000. The REIT merger price implied funds from operations multiples of
11.39x and 10.65x for 1999 and 2000, respectively, which are higher than the
median funds from operations multiples of the selected companies of 9.49x and
8.56x for 1999 and 2000, respectively.
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Comparable Transaction Analysis. Lazard reviewed the consideration proposed
to be paid in 18 other comparable acquisitions of publicly traded REIT
companies. Specifically, Lazard reviewed the following transactions:
<TABLE>
<CAPTION>
ACQUIROR TARGET DATE
-------- ------ ----
<S> <C> <C>
Equity Office Properties Trust Beacon Properties Corporation 1997
Excel Realty Trust, Inc. New Plan Realty Trust 1998
Equity Residential Properties Trust Evans Withycombe Residential, Inc. 1997
The Irvine Company Irvine Apartment Communities, Inc. 1998
Kimco Realty Corporation The Price REIT, Inc. 1998
Equity Residential Properties Trust Wellsford Residential Property Trust 1997
Bay Apartment Communities, Inc. Avalon Properties, Inc. 1998
Security Capital Pacific Trust Security Capital Atlantic Incorporated 1998
Post Properties, Inc. Columbus Realty Trust 1997
ProLogis Trust Meridian Industrial Trust, Inc. 1998
Equity Residential Properties Trust Merry Land & Investment Company, Inc. 1998
Apartment Investment & Management Company Ambassador Apartments, Inc. 1997
Camden Property Trust Oasis Residential, Inc. 1997
Duke Realty Investments, Inc. Weeks Corporation 1999
Aptco LLC Berkshire Realty Company, Inc. 1999
Public Storage, Inc. Storage Trust Realty 1998
Reckson Associates Tower Realty Trust, Inc. 1998
Prime Retail, Inc. Horizon Group, Inc. 1997
</TABLE>
For each such transaction, Lazard calculated the multiples of merger price
to projected funds from operations per share. The funds from operations multiple
implied by the REIT merger price was 10.54x, which was below 11.63x, the median
implied funds from operations multiple for the selected transactions. However,
Lazard did not view such result as significant due to the substantial decrease
in the stock prices and funds from operations multiples of office and other
REITs since August 1998. Comparing only those mergers announced since August 1,
1998, the REIT merger price is above the median implied funds from operations
multiple of 9.95x for such mergers.
Discounted Cash Flow Analysis. Lazard aggregated (x) the present value of
the projected cash flow of Cornerstone after interest expense and capital
expenditures over the three-year period from 2000 to 2002 with (y) the present
value of the range of terminal values described below. The range of terminal
values was calculated by applying multiples of 8.0x to 10.0x to Cornerstone's
projected funds from operations for the fiscal year 2003. This range of terminal
values represented Cornerstone's value beyond 2002. As part of the discounted
cash flow analysis, Lazard used discount rates ranging from 13% to 15%. Based on
the discounted cash flow analysis, Lazard calculated a range of the equity value
per share of Cornerstone of $14.37 to $18.01.
Net Asset Value Analysis. Lazard also calculated the net asset value of
Equity Office and Cornerstone on a combined basis based on the net asset value
for each company separately based on an 8.25% capitalization rate on 2000 net
operating income and other information provided by each company's management.
Certain adjustments were made to arrive at the combined company's net asset
value. The proposed transaction provides a net increase to net asset value per
share of $0.06 to Cornerstone stockholders.
Accretion/Dilution Analysis. Lazard's merger model assumed that the REIT
merger closes on July 1, 2000 and is based on modified versions of the internal
budgets of Equity Office and Cornerstone that exclude some investments not yet
completed, including selected development projects and acquisitions. General and
administrative expense reductions for Equity Office and Cornerstone on a
combined basis were assumed to save $20 million annually. Purchase accounting
was assumed for accounting purposes and
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debt was marked-to-market and lease revenues were re-straight lined accordingly.
Based on the above assumptions and such budgets, Cornerstone's funds from
operations per share for 2001 was calculated to be $2.11 if the REIT merger is
completed versus $1.79 if the REIT merger is not completed.
Premiums Paid Analysis. Lazard reviewed the consideration proposed to be
paid in 18 other comparable acquisitions of publicly traded REIT companies.
Specifically, Lazard reviewed the following transactions:
<TABLE>
<CAPTION>
ACQUIROR TARGET DATE
-------- ------ ----
<S> <C> <C>
Equity Office Properties Trust Beacon Properties Corporation 1997
Aptco LLC Berkshire Realty Company, Inc. 1999
The Irvine Company Irvine Apartment Communities, Inc. 1998
Security Capital Pacific Trust Security Capital Atlantic Incorporated 1998
Equity Residential Properties Trust Evans Withycombe Residential, Inc. 1997
Kimco Realty Corporation The Price REIT, Inc. 1998
Excel Realty Trust, Inc. New Plan Realty Trust 1998
ProLogis Trust Meridian Industrial Trust, Inc. 1998
Equity Residential Properties Trust Merry Land & Investment Company, Inc. 1998
Duke Realty Investments, Inc. Weeks Corporation 1999
Camden Property Trust Oasis Residential, Inc. 1997
Reckson Associates Tower Realty Trust, Inc. 1998
Equity Residential Properties Trust Wellsford Residential Property Trust 1997
Apartment Investment & Management Company Ambassador Apartments, Inc. 1997
Post Properties, Inc. Columbus Realty Trust 1997
Prime Retail, Inc. Horizon Group, Inc. 1997
Bay Apartment Communities, Inc. Avalon Properties, Inc. 1998
Public Storage, Inc. Storage Trust Realty 1998
</TABLE>
For each such transaction, Lazard calculated the percentage premium
represented by the excess of (x) the acquisition price per share payable in such
transaction over (y) the closing stock price of the target company on the
trading day immediately prior to the announcement of such transaction. The
implied premium represented by the REIT merger price of 21.52% was significantly
higher than the median of the implied premiums for the selected transactions of
11.71%.
Stock Trading History. Lazard examined the history of trading prices for
Cornerstone common stock. Cornerstone went public in April 1997 at a price of
$14.50 per share. Since its initial public offering, Cornerstone common stock
has traded as high as $20.00 per share and as low as $13.00 per share. Over the
52 weeks ended February 9, 2000, Cornerstone common stock traded as high as
$17.00 and as low as $13.00. The average closing price of Cornerstone common
stock during the 30-day period ended February 9, 2000, was $14.97. The REIT
merger price represents a premium of 20.3% over such 30-day average closing
price and is 5.9% above Cornerstone's 52-week high.
The summary set forth above does not purport to be a complete description
of the analyses performed by Lazard. The preparation of a fairness opinion is a
complex process and is not necessarily susceptible to partial analysis or
summary description. In arriving at its opinion and in preparing its
presentation, Lazard performed a variety of financial analyses, the material
portions of which are summarized above. In addition, Lazard believes that its
analyses must be considered as a whole and that selecting portions of such
analyses and the factors considered by it, without considering all of such
analyses and factors, could create an incomplete view of the process underlying
its analyses set forth in the opinion and its presentation to the Cornerstone
board of directors. With regard to the public market valuation, premiums paid
and comparable transaction analysis summarized above, Lazard selected comparable
public companies on the basis of various factors, including the size of the
public company or portfolio of properties and similarity of the line of
business; however, no public company or portfolio of properties utilized as a
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comparison is identical to Cornerstone. Accordingly, an analysis of the
foregoing is not mathematical; rather, it involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the comparable companies or portfolios and other factors that could affect the
acquisition or public trading value of the comparable companies or portfolios to
which Cornerstone or its properties are being compared.
In performing its analyses, Lazard made numerous assumptions with respect
to industry performance, general business and economic conditions and other
matters, many of which are beyond Cornerstone's control. Any estimates contained
in such analyses are not necessarily indicative of actual past or future results
or values, which may be significantly more or less than such estimates.
Estimates of values of companies or parts of companies do not purport to be
appraisals or necessarily to reflect the price at which such companies or parts
may actually be sold, and such estimates are inherently subject to uncertainty.
Lazard is an internationally recognized investment banking firm that
regularly engages in the valuation of businesses and their securities in
connection with mergers and acquisitions. The Cornerstone board of directors
selected Lazard to act as its financial advisor in regards to only the REIT
merger on the basis of Lazard's international reputation and experience in
connection with the office REIT industry, Cornerstone's prior relationship with
Lazard and Lazard's familiarity with Cornerstone.
Under a letter agreement dated January 28, 2000 between Cornerstone and
Lazard, Lazard agreed to act as financial advisor to Cornerstone in connection
with the REIT merger. Pursuant to the engagement letter, Cornerstone is
obligated to pay Lazard a fee of $1 million upon the execution of the definitive
merger agreement and upon the closing of the REIT merger will be obligated to
pay Lazard a fee of $7 million. Cornerstone also agreed to reimburse Lazard for
its reasonable out-of-pocket expenses and to indemnify Lazard and certain
related persons against certain liabilities, including liabilities under the
federal securities laws, relating to, or arising out of, its engagement.
Lazard and its affiliates maintain business relationships with Cornerstone,
Cornerstone Partnership and their affiliates pursuant to which Lazard has
received an aggregate of approximately $9 million in fees since February 1,
1998. Lazard has not received any fees over the past two years from Equity
Office, EOP Partnership or their affiliates. In the ordinary course of their
businesses, Lazard and its affiliates may actively trade the debt and equity
securities of Equity Office, EOP Partnership, Cornerstone or Cornerstone
Partnership for their own accounts or for the accounts of customers and,
accordingly, they may at any time hold long or short positions in such
securities.
As noted under the caption "Cornerstone's Reasons for the Mergers" the
fairness opinion of Lazard on the REIT merger was only one of the many factors
considered by the Cornerstone board of directors in determining to approve and
adopt the merger agreement.
INTERESTS OF CORNERSTONE'S DIRECTORS AND EXECUTIVE OFFICERS IN THE MERGERS
In considering the recommendation of the Cornerstone board with respect to
the REIT merger and the partnership merger, Cornerstone stockholders and
Cornerstone Partnership unitholders should be aware that, as described below,
certain Cornerstone directors and executive officers and PGGM have interests in
the mergers that differ from, or are in addition to, the interests of
unitholders and stockholders generally.
Trustees of Equity Office After the Mergers. Following the mergers, the
current trustees of Equity Office will remain as trustees of the combined
entity. In addition, three current directors of Cornerstone will become trustees
of the combined entity. See "-- Equity Office Board of Trustees and Executive
Officers after the Mergers" on page 55.
Equity-Based Awards. Under Cornerstone's incentive stock plans, an
aggregate of 89,113 unvested shares of restricted common stock previously
awarded to the executives who are parties to the retention agreements described
below will vest in full upon completion of the mergers and will be converted
into cash or common shares of Equity Office according to the terms of the merger
agreement. In addition, unvested options to purchase an aggregate of 3,177,476
shares of Cornerstone common stock previously awarded to such executives will
vest in connection with the completion of the mergers, and each option
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may be surrendered within two business days following the REIT merger by the
holder of the option to Equity Office for cash equal to the difference between
$18.00 per share or, as to certain options, the highest closing trading price of
Cornerstone common stock on the New York Stock Exchange during the 90 days prior
to the mergers and the exercise price of the option or exchanged for options to
purchase common shares of Equity Office according to the terms of the merger
agreement. Certain options retain a cashout feature for 30 days following the
mergers based on the highest closing trading price of Cornerstone common stock
on the New York Stock Exchange during the 90 days prior to the mergers.
Mr. Moody has agreed with Cornerstone to waive the acceleration of his
unvested restricted stock and unvested stock options.
Moody Agreement. Cornerstone has entered into a contract with Mr. Moody
whereby amounts are accrued under an unfunded arrangement to pay Mr. Moody a
supplemental pension. Under the contract, his supplemental pension account was
established with a credit of $250,000 as of July 1, 1995, and Cornerstone is
obligated to credit the account in the amount of $60,000 each subsequent July 1
during the continuance of Mr. Moody's employment.
The account is also credited with any deemed income, gains or losses which
would be attributable to a corresponding investment of an equal cash amount in
such investment as Cornerstone, taking into account Mr. Moody's views, shall
deem the account to be invested. Payment of Mr. Moody's supplemental pension
account is to be made in a lump sum as of the date Mr. Moody terminates his
employment. However, if his employment is terminated for cause, Mr. Moody will
forfeit the account and no payment will be made. The contract also provides
that, outside of a change in control context, if Mr. Moody's employment
terminates for a reason other than cause, an additional credit of $60,000 (or
less, if Mr. Moody resigns without good reason) will be made to the account.
Following a change in control, in the event Mr. Moody's employment is terminated
by Cornerstone other than for cause, or if he resigns for good reason,
Cornerstone is obligated to credit his supplemental pension account with an
amount equal to $60,000 times the number of years, including fractional portions
of a year, remaining between his age on the date his employment ceases and age
60.
Retention Agreements. Cornerstone has entered into retention agreements
with some of its officers to address the terms and conditions of their
employment in the event of a change in control. A "change in control" generally
is said to occur when: (a) any person becomes the owner of 25% or more of
Cornerstone's voting securities; (b) directors who constitute the Cornerstone
board at the beginning of any two-year period, and any new directors whose
election or nomination for election was approved by a vote of at least three
quarters of the directors then in office who either were directors at the
beginning of such period or whose election or nomination for election was
previously so approved, cease to constitute a majority; (c) a merger,
consolidation or reorganization in which Cornerstone's voting securities do not
continue to represent at least 50% of the surviving entity; or (d) a
reorganization, liquidation, or sale of all or substantially all of
Cornerstone's assets.
In the event of termination of employment by Cornerstone without cause, or
by the employee for good reason, within two years following a change in control,
Cornerstone will make a lump sum payment of: (a) the pro rata portion of the
annual bonus for the year termination occurred, calculated on the basis of the
target bonus and on the assumption that all performance goals have been or will
be achieved; and (b) three times annual compensation in the case of Messrs.
Wilson, Moody, Van Boven and Dimock and two times annual compensation in the
case of all other officers. Annual compensation generally is defined as the
salary in effect immediately before termination or change in control, plus the
highest of the target annual bonus for the termination year or the average of
the three annual bonuses paid immediately prior to the termination or the change
in control.
An officer may be terminated for "cause" if he or she is convicted of a
felony, reveals confidential information about Cornerstone or refuses to
substantially perform his duties. An officer can terminate for "good reason" if
Cornerstone reduces his salary or bonus target, reduces the value of employee
benefits materially, relocates his office more then 25 miles from the present
location, detrimentally alters his title or
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position, fails to get a successor to agree to assume the obligations under the
retention agreement or materially breaches any provision of the agreement.
In addition, the officer and his eligible dependents will continue to be
eligible to participate during the benefit continuation period in the medical,
dental, health, life and other welfare benefit plans and arrangements applicable
to him immediately before his or her termination of employment, on the same
terms and conditions in effect immediately before such termination. "Benefit
continuation period" means the period beginning on the day of termination and
ending on the earlier to occur of: (a) the third anniversary of the date of
termination in the case of Messrs. Wilson, Moody, Van Boven and Dimock and the
second anniversary of the date of termination in the case of all other officers;
and (b) the date that the officer is eligible and elects coverage under the
plans of a subsequent employer which provide substantially equivalent or greater
benefits to the officer and his dependents.
If the payments to an officer under the retention agreement constitute
"parachute payments," as defined in section 280G of the Internal Revenue Code,
and the officer would receive more value after taxes if the payments to be made
to the officer were capped at three times the "base amount" less $1.00, then the
payments will be reduced to that amount.
Equity Office has agreed to assume and to perform Cornerstone's obligations
under the retention agreements in the same manner and to the same extent that
Cornerstone would be required to perform such obligations if the REIT merger had
not taken place. The parties have agreed that the REIT merger will be a "change
in control" for purposes of the retention agreements.
Mr. Moody has agreed to waive any rights to payment of the lump sum payment
and to the continuation of benefits under his retention agreement in
consideration of Cornerstone's payment to Mr. Moody upon completion of the REIT
merger, in recognition of his past service to Cornerstone, of $7.3 million or,
if the REIT merger is completed on or after July 1, 2000, $6.8 million. Mr.
Wilson has agreed to waive his entire retention payment of $1.2 million. Messrs.
Van Boven and Dimock have each agreed to waive the payment of $1.0 million, and
Mr. Moran has agreed to waive the payment of $0.5 million, of the lump sum
payment otherwise payable to each of them in the event of the termination of
their employment other than for cause after the REIT merger.
Noncompetition Agreements. Each of Messrs. Moody, Dimock and Moran have
agreed to enter into noncompetition agreements with Equity Office that will
restrict their ability to engage in business activities that are competitive
with those of Equity Office after the mergers. In order to induce Messrs. Moody,
Dimock and Moran to enter into such agreements, Equity Office will pay $5.0
million to Mr. Moody, $1.0 million to Mr. Dimock and $0.5 million to Mr. Moran
upon the completion of the mergers. Mr. Wilson's and Mr. Van Boven's waivers of
these payments are being made in light of their participation in the northern
California joint venture described below.
Escrowed Units. In connection with the acquisition of William Wilson &
Associates in December 1998, an aggregate of 387,137 partnership units issued by
the Cornerstone Partnership that would have been distributable to the general
partners or managers of the four Wilson-sponsored opportunity funds acquired by
Cornerstone Partnership in the transaction were placed in escrow pursuant to an
agreement with certain investors in the opportunity funds. These units would
have been distributed to these general partners and managers under the governing
instruments of the opportunity funds if the units were valued at $17.25 per
unit, the agreed-upon value of the Cornerstone shares and units issued in the
Wilson transaction. The units were placed in escrow pending a determination of
their value during the one-year period beginning on the date the units were
released from the lockup provisions applicable to the units issued in the Wilson
acquisition. Pursuant to such provisions, the units will be released from the
lockup provisions prior to the completion of the mergers. Mr. Wilson and other
executive officers of Cornerstone indirectly beneficially own in the aggregate
319,369 of such escrowed units.
Sale of Cornerstone Aircraft. Cornerstone has agreed to sell to Mr. Wilson
an aircraft owned by Cornerstone for its appraised value, which is approximately
$2.5 million less, an amount representing the sales commissions that would be
payable to a sales agent if Cornerstone were to market and sell the aircraft to
a third party. The carrying value of the aircraft was $2.4 million at December
31, 1999.
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Acquisition of WCP Services. An affiliate of Equity Office will purchase
from Messrs. Wilson and Moody the voting capital stock of WCP Services, Inc., a
third-party service subsidiary of Cornerstone, for an aggregate of $400,000,
including the assumption of indebtedness.
Formation of Northern California Joint Venture with William Wilson III and
Others. Equity Office has negotiated with William Wilson III and others,
referred to as the Wilson Group, the broad terms under which an Equity Office
affiliate would form a joint venture to develop assets that currently are in the
Cornerstone development pipeline and to pursue other development opportunities
in northern California. While it has not been finally determined, the Wilson
Group probably will include investments of time or money by William Wilson III,
Lee Van Boven, Matthew Moran, John J. Hamilton III, A. Robert Paratte, Stephen
J. Pilch and John Moody, who are Cornerstone executive officers, and other
non-executive officer employees of Cornerstone. The key terms of the agreement
in principle are as follows:
- the joint venture will be organized as a limited liability company with
the Wilson Group owning 50.1% of the joint venture and an affiliate of
Equity Office owning the remaining 49.9%;
- the joint venture initially will be capitalized with $14 million,
approximately $6 million by the Wilson Group and $8 million by the Equity
Office affiliate, to be used for existing development pipeline projects;
- profits will be divided 50.1% and 49.9% between the Wilson Group and the
Equity Office affiliate, except for special promotional interests to be
allocated solely to the Wilson Group based on the investment returns on
projects, and special allocations of $3 million or more of capital gains
that are to be allocated to the Wilson Group out of profits that would
otherwise be distributed to Equity Office or its affiliate, which gains
would be allocated within the Wilson Group to former executives and
employees of Cornerstone;
- each venturer additionally may contribute approximately $3 million, and
Equity Office will also provide a $0.5 million working capital line to
the joint venture at an annual interest rate of the greater of 9% or
LIBOR plus 300 basis points;
- the Wilson Group will run the day-to-day operations and will be the
managing member of the joint venture, but the joint venture will have a
four-person board consisting of two members designated by the Wilson
Group and two members designated by Equity Office;
- the joint venture will be responsible for development and construction
management for which it will receive a market rate fee contemplated to be
3% of project costs, Equity Office generally will be responsible for
property management and will receive market rate management fees, and the
joint venture and Equity Office will share responsibilities for leasing;
- it is contemplated that the joint venture will provide up to 40% of the
equity required for projects which it develops, with Equity Office having
the opportunity to provide the remaining equity for projects and to
contribute its interests in existing development projects at market
values to be agreed upon;
- for those projects for which Equity Office provides capital, the Wilson
Group will receive a "promotional" interest and thus earn a
disproportionate share of the profits after Equity Office has achieved
agreed upon levels of returns on its capital investment; and
- while the joint venture and the project entities which it forms will hold
properties for investment, Equity Office will have the ability to
purchase the joint venture's interest in most projects at times in the
future after the projects have been fully leased, and Equity Office will
have the right of first refusal with respect to new development projects
of the joint venture.
EQUITY OFFICE BOARD OF TRUSTEES AND EXECUTIVE OFFICERS AFTER THE MERGERS
Following the mergers, the current trustees of Equity Office will remain as
trustees of the combined entity. In addition, three current directors of
Cornerstone, John S. Moody, Jan H.W.R. van der Vlist and William Wilson III,
will become trustees of the combined entity, with their terms expiring in 2002,
2003 and 2003, respectively. Under the terms of the merger agreement, Equity
Office is obligated to nominate Mr. van der Vlist for reelection to the board of
trustees in 2003 and 2006 if PGGM and its affiliates continue to own at least
21,000,000 of the issued and outstanding Equity Office common shares, as
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adjusted for stock splits or similar actions, at all times up to the time the
trustees are being elected in those years. If Mr. van der Vlist fails to stand
for reelection in 2003 or 2006 for any reason, or in the event of his death or
earlier resignation, and if PGGM continues to own at least 21,000,000 of the
issued and outstanding Equity Office shares as described above, Equity Office is
required to take all action necessary to nominate a replacement designated by
PGGM for election or reelection as a trustee for an additional three-year term,
subject to Equity Office's approval if the replacement is not an officer,
director or employee of PGGM.
Following the mergers, the current executive officers of Equity Office will
remain as executive officers of Equity Office. No current executive officers of
Cornerstone will become executive officers of Equity Office following the
mergers.
ASSUMPTION OF CORNERSTONE'S OBLIGATIONS UNDER REGISTRATION RIGHTS AGREEMENTS
Under the merger agreement, Equity Office has agreed to assume
Cornerstone's obligations under existing registration rights agreements between
Cornerstone and certain holders of Cornerstone Partnership units.
In addition, under the merger agreement, Equity Office has agreed to assume
Cornerstone's obligations under the amended and restated registration rights and
voting agreement, dated December 16, 1998, among Cornerstone, PGGM and Dutch
Institutional Holding Company, Inc., as amended by the voting agreement entered
into concurrently with the merger agreement among Equity Office, EOP
Partnership, WCP Services, Inc. and PGGM. Under this registration rights
agreement, PGGM will have the following rights relating to the registration of
Equity Office common shares:
- Demand Registration: subject to specified limitations, PGGM will have the
right to demand, on no more than eight occasions, that Equity Office
register all or a portion of the Equity Office common shares issued to
PGGM under the merger agreement, subject to a requirement that the market
value of the shares requested to be registered as of the date of any
demand must be equal to or greater than (a) $75 million or (b) the total
aggregate amount of shares held by PGGM, if less than $75 million. Equity
Office must use its commercially reasonable efforts to effect any such
demand registration and will have the ability to defer the filing of a
registration statement relating to a demand in specified circumstances;
- Shelf Registration: within 20 days after the request of PGGM following
the effective time of the REIT merger, Equity Office will use its
commercially reasonable efforts to register all of the Equity Office
common shares issued to PGGM in connection with the merger agreement on a
registration statement which provides for the offering of such securities
on a delayed or continuous basis. Before selling Equity Office common
shares under such registration statement, PGGM must give written notice
to Equity Office of its intent to sell Equity Office common shares.
Equity Office will have the right in specified circumstances to defer
such intended sales; and
- "Piggyback" Registration: in the event that Equity Office exercises its
rights to defer a requested registration, or suspend the effectiveness of
the shelf registration or sales of Equity Office common shares by PGGM
due to a contemplated public offering of Equity Office common shares,
PGGM will have the right to include its shares in Equity Office's
registration statement relating to such public offering. These
"piggyback" registration rights will be subject to specified customary
limitations as well as limitations contained in the other agreements
between Equity Office and its shareholders.
All registrations of PGGM shares described above will be at the expense of
Equity Office, except that PGGM will bear all underwriting discounts and
commissions and fees and expenses of its own counsel.
In addition under the amended and restated registration rights and voting
agreement, PGGM has agreed to a "standstill" provision which provides that PGGM
will not take any of the following actions until 90 days after the date on which
no Equity Office trustee nominated by PGGM in accordance with the PGGM voting
agreement described below on page 78 remains a trustee of Equity Office:
- directly or indirectly purchase or otherwise acquire, or propose or offer
to purchase or otherwise acquire, any of Equity Office's equity
securities if, immediately after such purchase or acquisition,
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PGGM and its affiliates would own 12% or more of the Equity Office common
shares. "Equity security" means any (a) Equity Office common shares, (b)
securities of Equity Office that are convertible into or exchangeable for
Equity Office common shares, and (c) options, rights, warrants and
similar securities issued by Equity Office to acquire Equity Office
common shares;
- directly or indirectly propose to Equity Office or any person or entity a
"business combination," which is defined to mean any one of the following
transactions: (a) any merger or consolidation of Equity Office or any
Equity Office subsidiary with any person or entity, other than Equity
Office; (b) any sale, lease exchange, mortgage, pledge, transfer or other
disposition by Equity Office, in one transaction or a series of
transactions to or with any person or entity, of all or a substantial
portion of the assets of Equity Office and its subsidiaries taken as a
whole; (c) the adoption of any plan or proposal for the liquidation or
dissolution of Equity Office proposed by or on behalf of PGGM or any
affiliate of PGGM; or (d) any reclassification of securities (including
any reverse share split), recapitalization of Equity Office, or any
merger or consolidation of Equity Office with any of its subsidiaries, or
any other transaction to which Equity Office is a party which has the
effect, directly or indirectly, of increasing the proportionate share of
PGGM or any affiliate of PGGM, whether or not with or into or otherwise
involving PGGM or any affiliate of PGGM;
- make, or in any way participate in, any "solicitation" of "proxies" to
vote, as those terms are used in the rules promulgated by the SEC under
section 14(a) of the Securities Exchange Act of 1934, or seek to advise,
encourage or influence any person or entity with respect to the voting of
any capital shares of Equity Office, initiate, propose or otherwise
solicit shareholders of Equity Office for the approval of one or more
shareholder proposals or induce or attempt to induce any other person or
entity to initiate any shareholder proposal; or
- deposit any equity securities of Equity Office into a voting trust or
subject any equity securities to any arrangement or agreement with
respect to the voting of such securities, or form, join or in any way
participate in a "group," within the meaning of section 13(d)(3) of the
Securities and Exchange Act of 1934, with respect to any equity
securities, except as contemplated by the registration rights agreement.
The standstill provision may be waived by Equity Office only upon the
approval of a majority of its board, excluding any trustee nominated by PGGM,
and is not applicable to actions approved by the majority of the Equity Office
board, excluding any trustee nominated by PGGM in circumstances in which any
trustee nominated by PGGM is an "interested director" under section 2-419 of the
Maryland General Corporation Law as applicable to REITs.
ACCOUNTING TREATMENT
EOP Partnership will treat the partnership merger as a purchase for
financial accounting purposes. This means that EOP Partnership will record the
assets acquired and liabilities assumed at their estimated fair values at the
time the partnership merger is completed.
RESALES OF EOP PARTNERSHIP UNITS AND EQUITY OFFICE COMMON SHARES
The EOP Partnership units to be issued to Cornerstone Partnership
unitholders in the partnership merger will be transferable subject to the
restrictions contained in the partnership agreement of EOP Partnership. The
Equity Office common shares to be issued to (a) Cornerstone common stockholders
in the REIT merger, including Cornerstone Partnership unitholders who elect to
redeem their Cornerstone Partnership units under the partnership agreement of
Cornerstone Partnership prior to the REIT merger where solely Cornerstone common
stock is used, other than the use of Cornerstone common stock in connection with
equity-based employee benefit plans or as necessary to maintain REIT status and
(b) the Cornerstone Partnership unitholders upon redemption of their EOP
Partnership units received in the partnership merger, in each case, have been
registered under the Securities Act, and will be transferable freely and without
restriction by those holders of Cornerstone common stock and Cornerstone
Partnership units who receive such shares following consummation of the REIT
merger or upon redemption of the EOP Partnership units issued pursuant thereto
and who are not deemed to be an "affiliate" of Equity
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Office or Cornerstone within the meaning of rule 145 under the Securities Act or
who will become an "affiliate" of Equity Office within the meaning of rule 144
under the Securities Act after the REIT merger. Equity Office common shares
received by persons who are deemed to be Cornerstone affiliates or who become
Equity Office affiliates may be resold by these persons only in transactions
permitted by the limited resale provisions of rule 145 or as otherwise permitted
under the Securities Act. Persons who may be deemed to be affiliates of
Cornerstone generally include individuals or entities that, directly or
indirectly through one or more intermediaries, control, are controlled by or are
under common control with Cornerstone and may include officers, directors and
principal stockholders of Cornerstone. All Cornerstone stockholders who may be
deemed to be affiliates of Cornerstone will be so advised before the completion
of the REIT merger.
Under the merger agreement, Cornerstone will use its commercially
reasonable efforts to obtain an affiliate agreement from each affiliate of
Cornerstone before the completion of the REIT merger by which each Cornerstone
affiliate will agree not to sell, transfer, pledge or otherwise dispose of any
of the Equity Office common shares received in the REIT merger in violation of
the Securities Act or the rules and regulations promulgated under the Securities
Act. Generally, this will require that all sales be made in accordance with rule
145 under the Securities Act, which in turn requires that, for specified
periods, sales be made in compliance with the volume limitations, manner of sale
provisions and current information requirements of rule 144 under the Securities
Act.
Equity Office has the right to place legends on the certificates evidencing
Equity Office common shares issued to Cornerstone affiliates in the REIT merger
summarizing the foregoing restrictions until a sale, transfer, pledge or other
disposition of the Equity Office common shares represented by these certificates
has been registered under the Securities Act or is made in compliance with rule
145 under the Securities Act.
Persons who are not affiliates of Cornerstone may generally sell their
Equity Office common shares without restrictions and without delivering this
consent solicitation/information statement/prospectus.
NO APPRAISAL RIGHTS
Cornerstone Partnership and EOP Partnership are organized under Delaware
law. Holders of Cornerstone Partnership units are not entitled to appraisal
rights as a result of the partnership merger under Delaware law, the partnership
agreement of Cornerstone Partnership or the merger agreement.
THE MERGER AGREEMENT
The following is a summary of the material terms of the merger agreement,
as amended, and is qualified in its entirety by reference to the merger
agreement, which is attached at the back of this consent
solicitation/information statement/prospectus as Annex A. You should read the
merger agreement as it is the legal document that governs the mergers.
CLOSING; EFFECTIVE TIME OF THE PARTNERSHIP MERGER AND THE REIT MERGER
The completion of the partnership merger will occur no later than the third
business day after the satisfaction or waiver of the conditions set forth in the
merger agreement or at such other date or time as may be agreed by Equity Office
and Cornerstone. If the REIT merger is approved at the special meetings, Equity
Office and Cornerstone currently expect to complete the partnership merger and
the REIT merger on that same day.
As soon as practicable after all conditions to the completion of the
mergers are satisfied, EOP Partnership will execute and file a certificate of
merger with the Secretary of State of the State of Delaware relating to the
partnership merger, and immediately after the completion of the partnership
merger, Equity Office and Cornerstone will execute and file articles of merger
with the State Department of Assessments and Taxation of Maryland and with the
Secretary of State of the State of Nevada relating to the REIT merger. The
effective time of the partnership merger will be the time specified in the
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certificate of merger. The effective time of the REIT merger will be the time
specified in the articles of merger.
THE PARTNERSHIP MERGER
The merger agreement contemplates the following two-step transaction:
- the partnership merger, whereby Cornerstone Partnership will merge with
and into EOP Partnership and Cornerstone Partnership will cease to exist;
followed by
- the REIT merger, whereby Cornerstone will merge with and into Equity
Office and Cornerstone will cease to exist.
In the partnership merger, holders of class A units of limited partnership
interest in Cornerstone Partnership, including Cornerstone, who have not elected
to redeem their units for shares of Cornerstone common stock will receive, for
each class A common unit issued and outstanding immediately before the
partnership merger, 0.7009 of a class A unit of limited partnership interest in
EOP Partnership, rounded to the nearest whole unit.
REDEMPTION RIGHT UNDER THE PARTNERSHIP AGREEMENT OF CORNERSTONE PARTNERSHIP
Instead of participating in the partnership merger, you may exercise any
unit redemption right that you currently have under the partnership agreement of
Cornerstone Partnership at any time before the partnership merger. Any exercise
by you of your unit redemption right under the partnership agreement of
Cornerstone Partnership will not be conditioned on completion of the mergers. By
exercising your unit redemption right under the partnership agreement of
Cornerstone Partnership, you would not receive units of EOP Partnership in the
partnership merger, but instead would receive shares of Cornerstone common stock
on a one-for-one basis for each Cornerstone Partnership unit redeemed and you
would participate in the REIT merger on the same basis as other common
stockholders of Cornerstone if you continued to own the Cornerstone common stock
at the time of the REIT merger. Generally, a Cornerstone Partnership unit is
redeemable commencing one year after the date it was first issued. Accordingly,
if you received your Cornerstone Partnership units less than one year ago, you
do not have a currently exercisable unit redemption right under the partnership
agreement of Cornerstone Partnership.
CONDITIONAL UNIT REDEMPTION RIGHT UNDER THE MERGER AGREEMENT
Under the merger agreement, you have the right to redeem all or a portion
of your Cornerstone Partnership units for Cornerstone common stock on a
one-for-one basis, whether or not you have a currently exercisable right to
redeem your units under the partnership agreement of Cornerstone Partnership.
The exercise by you of the unit redemption right under the merger agreement will
be effective only if the partnership merger is completed. Under the merger
agreement, you also may condition your redemption of units on the ability to
receive in the REIT merger only cash for some or all of the Cornerstone common
stock that you would receive upon redemption of your Cornerstone Partnership
units.
THE REIT MERGER
In the REIT merger:
- holders of Cornerstone common stock may elect to receive either $18.00
per share in cash, without interest, or 0.7009 of an Equity Office common
share, subject to proration if either the cash election or the share
election is oversubscribed, as described below; and
- holders of Cornerstone 7% cumulative convertible preferred stock will
receive $18.00 per share in cash, without interest, together with accrued
and unpaid dividends through the date of the closing of the REIT merger.
Under the merger agreement, a total of 58,551,525 shares of Cornerstone
common stock will be converted in the REIT merger into the right to receive
$18.00 per share in cash, without interest, and the
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number of shares of Cornerstone common stock issued and outstanding immediately
before the REIT merger in excess of 58,551,525 shares will be converted into the
right to receive Equity Office common shares based on the 0.7009 exchange ratio.
Upon conversion of the outstanding shares of Cornerstone common stock and
preferred stock into the merger consideration, the Cornerstone common stock and
preferred stock will be cancelled and retired and will cease to exist.
Because the aggregate cash portion of the REIT merger consideration to the
Cornerstone common stockholders is fixed at approximately $1.054 billion, or
$18.00 times 58,551,525 shares, and the number of Equity Office common shares
issuable in the merger is fixed at 0.7009 times the number of shares of
Cornerstone common stock issued and outstanding immediately before the closing
of the REIT merger in excess of 58,551,525 shares, the amount of cash and the
number of Equity Office common shares that each Cornerstone stockholder will
receive in the REIT merger may be subject to proration based on the elections
made by the Cornerstone common stockholders and any redeeming Cornerstone
Partnership unitholders.
For example:
OVERSUBSCRIPTION OF CASH
If cash elections are received in the REIT merger for more than 58,551,525
shares of Cornerstone common stock and you have elected to redeem some or all of
your Cornerstone Partnership units without condition, then you will receive in
the REIT merger:
- 0.7009 of an Equity Office common share in exchange for each share of
Cornerstone common stock for which you made a share election; and
- a combination of cash and Equity Office common shares, on a proportionate
basis, for each share of Cornerstone common stock for which you made a
cash election, so that the aggregate number of shares of Cornerstone
common stock converted into cash in the REIT merger equals 58,551,525
shares, with Equity Office common shares issued in exchange for the
remainder of the shares of Cornerstone common stock converted in the REIT
merger.
If you condition the exercise of your unit redemption right under the
merger agreement on the ability to receive only cash for some or all of the
Cornerstone common stock that you would receive in the redemption, an
oversubscription of cash will cause the cash condition not to be satisfied and
you will receive EOP Partnership units in the partnership merger based on the
0.7009 exchange ratio for the units that were subject to the cash condition.
However, if there is an undersubscription of cash, taking into account cash
elections made by all Cornerstone common stockholders, but not including cash
elections made by Cornerstone Partnership unitholders who conditioned their unit
redemptions on the ability to receive cash in the REIT merger, you may
nevertheless have the opportunity to have your units redeemed for Cornerstone
common stock and receive cash in the REIT merger if the cash consideration
available after giving effect to cash elections made by the Cornerstone common
stockholders is sufficient to meet your specified cash condition and your
conditional cash redemption is chosen by lot from among other conditional cash
redemptions that were not initially satisfied. For any units redeemed by you
that were not subject to the cash election condition, you will receive cash or
Equity Office common shares, as elected by you, subject to the proration
provisions described above.
OVERSUBSCRIPTION OF SHARES
If share elections are received for more shares of Cornerstone common stock
than the difference between (a) the number of shares of Cornerstone common stock
issued and outstanding immediately before the REIT merger, taking into account
shares of Cornerstone common stock issued to Cornerstone Partnership unitholders
who exercise their unit redemption rights, and (b) the 58,551,525 shares to be
converted into cash in the REIT merger, and you have elected to redeem some or
all of your Cornerstone Partnership units, then you will receive in the REIT
merger:
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- $18.00 in cash, without interest, in exchange for each share of
Cornerstone common stock for which you made a cash election; and
- a combination of cash and Equity Office common shares, on a proportionate
basis, for each share of Cornerstone common stock for which you made a
share election, so that the aggregate number of shares of Cornerstone
common stock converted into cash in the REIT merger equals 58,551,525
shares, with Equity Office common shares issued in exchange for the
remainder of the shares of Cornerstone common stock converted in the REIT
merger.
If there is an oversubscription of Equity Office common shares, the cash
condition to any conditional redemption will be met because cash will be
available for each share of Cornerstone common stock for which cash was elected.
UNDERSUBSCRIPTION OF CASH AND SHARES
If cash elections are received for less than 58,551,525 shares of
Cornerstone common stock AND share elections are received for less than the
maximum number of shares of Cornerstone common stock to be converted into Equity
Office common shares in the REIT merger, and you have elected to redeem some or
all of your Cornerstone Partnership units, then you will receive in the REIT
merger:
- $18.00 in cash, without interest, in exchange for each share of
Cornerstone common stock for which you made a cash election;
- 0.7009 of an Equity Office common share in exchange for each share of
Cornerstone common stock for which you made a share election; and
- a combination of cash and Equity Office common shares, on a proportionate
basis, for each share of Cornerstone common stock for which you made
neither a cash election nor a share election, so that the aggregate
number of shares of Cornerstone common stock converted into $18.00 in
cash, without interest, in the REIT merger equals 58,551,525 shares, with
Equity Office common shares issued in exchange for the remainder of the
shares of Cornerstone common stock converted in the REIT merger.
If there is an undersubscription of cash and an undersubscription of Equity
Office common shares, the cash condition to any conditional unit redemption will
be met because cash will be available for each share of Cornerstone common stock
for which cash was elected.
Because the exchange ratio is fixed at 0.7009, the market value of any
Equity Office common shares that Cornerstone common stockholders will receive in
the REIT merger, including any Cornerstone Partnership unitholders who elect to
redeem their units prior to the partnership merger, may differ from $18.00 per
share and from the market value of the Equity Office common shares if the REIT
merger occurred today. On May 12, 2000, the closing price of Equity Office
common shares was $ per share, which, based on the 0.7009 exchange ratio,
would equal a market value equivalent per share of Cornerstone common stock of
$ had the REIT merger been completed on that date. You should obtain current
market prices for Equity Office common shares and shares of Cornerstone common
stock.
A redemption notice and form of election accompany this document. If you
would like to redeem your Cornerstone Partnership units for Cornerstone common
stock and elect to receive cash or Equity Office common shares instead of
receiving EOP Partnership units in the partnership merger, please fill out the
notice of redemption/form of election and return it in the postage-paid envelope
provided at least two business days prior to the date of the Cornerstone
stockholders meeting. See "Cornerstone Partnership Consent Solicitation" on page
32.
REIT MERGER FINANCING
Equity Office intends to finance the $1.1 billion cash portion of the
purchase price to Cornerstone common stockholders in the REIT merger by using
available borrowing capacity under its existing
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$1.0 billion credit facility and a new $1.0 billion credit facility expected to
be entered into prior to the closing of the mergers.
REGULATORY APPROVALS
Equity Office and PGGM, Cornerstone's largest stockholder, are in the
process of preparing filings with U.S. antitrust authorities under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 relating to PGGM's
acquisition of Equity Office common shares in the REIT merger. Under the
Hart-Scott-Rodino Antitrust Improvements Act, in a reportable acquisition of
assets or voting securities the acquiring person may not take beneficial
ownership of the shares or assets to be acquired until (a) notification has been
given, and required information furnished, to the Federal Trade Commission and
the Antitrust Division of the Department of Justice and (b) specified waiting
period requirements have been satisfied. The government could terminate the
waiting period early or alternatively extend the waiting period with a request
for additional information.
Even after the waiting period expires or is terminated, the federal
government, state governments or private litigants could challenge on antitrust
grounds PGGM's acquisition of Equity Office common shares in the REIT merger.
The federal government, state governments or private litigants also could
challenge on antitrust grounds at any time the REIT merger, the partnership
merger or the acquisition by Equity Office Properties Management Corp. of 100%
of the voting securities of WCP Services, Inc. With the exception of PGGM's
acquisition of Equity Office common shares in the REIT merger, none of these
transactions is subject to premerger filing requirements under the
Hart-Scott-Rodino Antitrust Improvements Act.
TREATMENT OF CORNERSTONE STOCK OPTIONS
Upon the completion of the mergers, each Cornerstone stock option
outstanding under Cornerstone's 1998 long-term incentive plan or any other
arrangement, whether or not then vested or exercisable, other than options
surrendered as provided below, will become fully exercisable and vested and each
such Cornerstone stock option will be automatically converted upon the
completion of the mergers into an option to purchase Equity Office common
shares. The substituted option will permit its holder to purchase a number of
Equity Office common shares equal to the number of shares of Cornerstone common
stock that could have been purchased, assuming full vesting, under the
corresponding Cornerstone stock option, multiplied by 0.7009. The exercise price
per Equity Office common share of the substituted option will be equal to the
per-share option exercise price specified in the Cornerstone stock option
divided by 0.7009. Each substituted option will otherwise be subject to the same
terms and conditions as the corresponding Cornerstone stock option.
Holders of Cornerstone stock options also will have the option to surrender
to Equity Office any or all of their options, after the completion of the
mergers and before the end of the second business day immediately following the
completion of the mergers, in exchange for an amount in cash equal to:
- the excess, if any, of $18.00 or, as to certain options, the highest
closing trading price of Cornerstone common stock during the 90 days
prior to the mergers, over the exercise price of such Cornerstone stock
option; multiplied by
- the number of shares of Cornerstone common stock subject to that
Cornerstone stock option.
Certain options retain a cashout feature for 30 days following the mergers
based on the highest closing trading price of Cornerstone common stock on the
New York Stock Exchange during the 90 days prior to the mergers.
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REPRESENTATIONS AND WARRANTIES OF EOP PARTNERSHIP AND CORNERSTONE PARTNERSHIP
The merger agreement contains customary representations and warranties by
each of Cornerstone, Cornerstone Partnership, Equity Office and EOP Partnership
relating to, among other things:
- due organization and good standing;
- capitalization;
- authorization to enter into the merger agreement and to consummate the
REIT merger or the partnership merger, as applicable;
- enforceability of the merger agreement;
- no breach of organizational documents or material agreements as a result
of the merger agreement or the consummation of the REIT merger or the
partnership merger, as applicable;
- required governmental and third-party consents;
- compliance with SEC reporting requirements;
- no undisclosed liabilities;
- no changes since December 31, 1998 that would have a material adverse
effect;
- no material legal proceedings;
- real property;
- environmental matters;
- tax matters;
- finders' fees;
- compliance with laws;
- contracts and debt instruments;
- receipt of opinion of financial advisor;
- anti-takeover statutes;
- compliance with the Investment Company Act of 1940; and
- required stockholder and partner approvals.
In addition, the merger agreement contains customary representations and
warranties by each of Cornerstone and Cornerstone Partnership relating to, among
other things:
- related party transactions;
- employee benefits and labor matters; and
- payments to employees, officers and directors as a result of the mergers
or a termination of service after the mergers.
CONDUCT OF BUSINESS OF EQUITY OFFICE AND EOP PARTNERSHIP PENDING THE MERGERS
Pending the mergers, each of Equity Office and EOP Partnership has agreed
to, among other things:
- preserve intact its business organizations and goodwill;
- use commercially reasonable efforts to keep available the services of its
officers and employees;
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- confer on a regular basis with Cornerstone to report material operational
matters that would reasonably be expected to have a material adverse
effect on the business properties, assets, financial condition or results
of operations of Equity Office and its subsidiaries taken as a whole;
- promptly notify Cornerstone of any material emergency or other material
change in its condition, business, properties, assets, liabilities or
prospects, or of any material governmental complaints, investigations or
hearings;
- promptly deliver to Cornerstone true and correct copies of any report,
statement or schedule filed with the SEC;
- maintain its books and records in accordance with GAAP consistently
applied, and not to change any of its methods, principles or practices of
accounting in any material manner, except as required by the SEC,
applicable law or GAAP; and
- duly and timely file all reports, tax returns and other documents
required to be filed with federal, state, local and other authorities,
subject to extensions permitted by law, provided such extensions do not
adversely affect Equity Office's status as a qualified REIT under the
Internal Revenue Code.
In addition, pending the mergers, each of Equity Office and EOP Partnership
has agreed that, without Cornerstone's prior written consent or except as
otherwise expressly contemplated by the merger agreement, neither Equity Office
and EOP Partnership nor any of its subsidiaries will, among other things:
- make or rescind any express or deemed election relating to taxes unless
required by law or necessary to preserve Equity Office's status as a REIT
or the status of any subsidiary of Equity Office as a partnership for
federal income tax purposes or as a qualified REIT subsidiary as defined
under the Internal Revenue Code, as the case may be;
- amend their organizational documents, except in specified instances,
including the proposed amendments to Equity Office's declaration of trust
described in the joint proxy statement/ prospectus delivered to Equity
Office shareholders and Cornerstone stockholders simultaneously with the
delivery of this consent solicitation/information statement/prospectus;
- authorize, declare, set aside or pay any dividend, other than regular
quarterly dividends, or regular distributions pursuant to the partnership
agreement of EOP Partnership, or redemptions of EOP Partnership units
under the partnership agreement of EOP Partnership where solely Equity
Office common shares are used, or redemptions of Equity Office common
shares under its declaration of trust to maintain REIT status or
repurchases of its common shares pursuant to its publicly announced share
repurchase program;
- enter into or agree to effect any merger, acquisition, consolidation,
reorganization or other business combination with any third party in
which Equity Office is not the surviving party to the transaction or
enter into or agree to effect any merger, acquisition, exchange offer or
other business combination with a third party in which Equity Office is
the surviving party that would result in the issuance of equity
securities representing in excess of 20% of the outstanding Equity Office
common shares on the date any such business combination is entered into
or agreed to unless, in either case, such business combination is
approved by Cornerstone, which approval will not be unreasonably withheld
or delayed, or the business combination agreement provides that the
required vote of Equity Office shareholders for approval of such business
combination is no less than the affirmative vote of holders of Equity
Office common shares representing more than 50% of the sum of the number
of Equity Office common shares outstanding at the time of such approval
plus 50,000,000; and
- authorize, recommend, propose or announce an intention to do any of the
foregoing prohibited actions, or enter into any contract, agreement,
commitment or arrangement to do any of the foregoing prohibited actions.
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CONDUCT OF BUSINESS OF CORNERSTONE AND CORNERSTONE PARTNERSHIP PENDING THE
MERGERS
Pending the mergers, each of Cornerstone and Cornerstone Partnership has
agreed to, among other things:
- conduct its business, and cause its subsidiaries to conduct their
respective businesses, only in the ordinary course and in a manner which
is substantially consistent with past practice;
- preserve intact its business organizations and goodwill;
- use commercially reasonable efforts to keep available the services of its
officers and employees;
- confer on a regular basis with Equity Office to report material
operational matters and, except in specified instances, any proposals to
engage in material transactions;
- promptly notify Equity Office of any material emergency or other material
change in its condition, business, properties, assets, liabilities or
prospects, or of any material governmental complaints, investigations or
hearings;
- promptly deliver to Equity Office true and correct copies of any report,
statement or schedule filed with the SEC;
- maintain its books and records in accordance with GAAP consistently
applied, and to not change any of its methods, principles or practices of
accounting in any material manner, except as required by the SEC,
applicable law or GAAP; and
- duly and timely file all reports, tax returns and other documents
required to be filed with federal, state, local and other authorities,
subject to extensions permitted by law, provided that Cornerstone
notifies Equity Office of any extensions and provided that such
extensions do not adversely affect Cornerstone's status as a qualified
REIT under the Internal Revenue Code.
In addition, pending the mergers, each of Cornerstone and Cornerstone
Partnership has agreed that, without Equity Office's prior written consent or
except as otherwise expressly contemplated by the merger agreement, neither
Cornerstone or Cornerstone Partnership nor any of its subsidiaries will, among
other things:
- make or rescind any express or deemed election relating to taxes unless
required by law or necessary to preserve Cornerstone's status as a REIT
or the status of any subsidiary of Cornerstone as a partnership for
federal income tax purposes or as a qualified REIT subsidiary as defined
under the Internal Revenue Code, as the case may be;
- acquire, enter into any option to acquire, or exercise an option or other
right or election or enter into any commitment for the acquisition of any
real property or, except as permitted in the budget approved in writing
by Equity Office, other transaction involving payments to or by
Cornerstone in excess of $100,000, except in the ordinary course of its
office property business, including leasing activities permitted by
Equity Office approved guidelines;
- encumber assets, commence construction of or enter into any commitment to
develop or construct real estate projects, except in the ordinary course
of its office property business;
- incur or enter into any commitment to incur additional debt, except for
working capital under its revolving line(s) of credit and commitments for
debt specified in the schedules to the merger agreement;
- modify, amend or terminate, or enter into any commitment to modify, amend
or terminate, any debt in existence on the date of the merger agreement;
- amend their organizational documents;
- make any change in the number of shares of capital stock or units of
limited partnership interest issued and outstanding, except in specified
instances;
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- grant options or any other rights or commitments relating to its shares
of capital stock or units of limited partnership interest, or any
security convertible into its shares of capital stock or units of limited
partnership interest, or any security the value of which is measured by
shares of beneficial interest, or any security subordinated to the claim
of its general creditors;
- amend or waive any rights under any options or other stock rights, except
as provided for in the merger agreement;
- authorize, declare, set aside or pay any dividend or make any other
distribution or payment, other than regular quarterly dividends, or
regular distributions pursuant to the partnership agreement of
Cornerstone Partnership, or redemptions of Cornerstone Partnership units
under the partnership agreement of Cornerstone Partnership where solely
Cornerstone common stock is used, or as necessary to maintain REIT
status;
- directly or indirectly redeem, purchase or acquire any shares of capital
stock or units of partnership interest or any option, warrant or right to
acquire, or security convertible into, shares of capital stock or units
of partnership interest of Cornerstone, other than redemptions of
Cornerstone Partnership units under the partnership agreement of
Cornerstone Partnership where solely Cornerstone common stock is used,
other than the use of Cornerstone common stock in connection with
equity-based employee benefit plans or as necessary to maintain REIT
status and other than as set forth in the disclosure letter delivered in
connection with the merger agreement;
- sell, lease, mortgage, subject to lien or otherwise dispose of any real
property, except in specified instances;
- sell, lease, mortgage, subject to lien or otherwise dispose of any
personal property or intangible property, except in the ordinary course
of business and as is not material, individually or in the aggregate;
- make any loans, advances or capital contributions to, or investments in,
any other person, except in specified instances;
- enter into any new, or amend or supplement any existing, contract, lease
or other agreement with WCP Services, Inc.;
- pay, discharge or satisfy any claims, liabilities or obligations whether
absolute, accrued, asserted or unasserted, contingent or otherwise,
except in specified instances;
- guarantee the debt of another person, enter into any "keep well" or other
agreement to maintain any financial statement condition of another person
or enter into any arrangement having the economic effect of any of the
foregoing;
- except in specified instances, enter into any commitment with any
officer, director or affiliate of Cornerstone or any of its subsidiaries
or WCP Services, Inc. or any material commitment with any consultant;
- increase any compensation or enter into or amend any employment agreement
with any of its officers, directors or employees earning more than
$100,000 per year, other than as required by any contract or plan or in
accordance with waivers by employees of benefits under these agreements;
- adopt any new employee benefit plan or amend any existing plans or
rights;
- settle any stockholder derivative or class action claims arising out of
or in connection with any of the transactions contemplated by the merger
agreement;
- change the ownership of any of its subsidiaries or WCP Services, Inc.,
except in specified instances;
- accept a promissory note in payment of the exercise price payable under
any option to purchase shares of Cornerstone common stock;
- except in specified instances, enter into any oral or written "tax
protection agreement" that:
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-- has as one of its purposes to permit a person or entity to assert that
such person or entity could defer federal taxable income that otherwise
might have been recognized upon a transfer of property to the
Cornerstone Partnership or any other Cornerstone subsidiary that is
treated as a partnership for federal income tax purposes, and that (a)
prohibits or restricts in any manner the disposition of any assets of
Cornerstone, any Cornerstone subsidiary, including Cornerstone's
non-controlled subsidiary, (b) requires that Cornerstone, any
Cornerstone subsidiary or the Cornerstone non-controlled subsidiary
maintain, or put in place, or replace, indebtedness, whether or not
secured by one or more of Cornerstone's properties, or (c) requires
that Cornerstone, any Cornerstone subsidiary or Cornerstone's
non-controlled subsidiary offer to any person or entity at any time the
opportunity to guarantee or otherwise assume, directly or indirectly
(including, without limitation, through a "deficit restoration
obligation," indemnification agreement or other similar arrangement),
the risk of loss for federal income tax purposes for indebtedness or
other liabilities of Cornerstone, any Cornerstone subsidiary or
Cornerstone's non-controlled subsidiary;
-- specifies or relates to a method of taking into account book-tax
disparities under section 704(c) of the Internal Revenue Code with
respect to one or more assets of Cornerstone or a Cornerstone
subsidiary; or
-- requires a particular method for allocating one or more liabilities of
Cornerstone or any Cornerstone subsidiary under section 752 of the
Internal Revenue Code; or
- authorize, recommend, propose or announce an intention to do any of the
foregoing prohibited actions, or enter into any contract, agreement,
commitment or arrangement to do any of the foregoing prohibited actions.
CONDITIONS TO THE MERGERS
CONDITIONS TO THE PARTIES' OBLIGATIONS TO EFFECT THE MERGERS
The obligations of Cornerstone, Cornerstone Partnership, Equity Office and
EOP Partnership to complete the mergers are subject to the satisfaction or,
where permissible, waiver of the following conditions:
- the approval of the mergers, as applicable, and the merger agreement by
the affirmative vote of the holders of at least:
-- a majority of the outstanding shares of Cornerstone common stock;
-- a majority of the outstanding Equity Office common shares;
-- two-thirds of the outstanding shares of Cornerstone preferred stock;
-- a majority of all limited partner interests in Cornerstone Partnership
entitled to be cast, in accordance with the partnership agreement of
Cornerstone Partnership; and
-- a majority of all partner interests in EOP Partnership, including
partner interests held by Equity Office;
- the applicable waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 will have expired or been terminated;
- the New York Stock Exchange will have approved for listing the Equity
Office common shares to be issued in the REIT merger and the Equity
Office common shares reserved for issuance upon redemption of EOP
Partnership units issued in the partnership merger, subject to official
notice of issuance;
- the registration statement on Form S-4 of which the REIT merger proxy
statement/prospectus forms a part will have become effective and will not
be the subject of any stop order or proceedings by the SEC seeking a stop
order;
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- the registration statement on Form S-4 of which this consent
solicitation/information statement/prospectus forms a part will have
become effective and will not be the subject of any stop order or
proceedings by the SEC seeking a stop order;
- no temporary restraining order, preliminary or permanent injunction or
other order issued by any court of competent jurisdiction or other legal
restraint or prohibition preventing the completion of the mergers or any
of the other transactions contemplated by the merger agreement will be in
effect; and
- Equity Office and EOP Partnership will have received all state securities
or "blue sky" permits and other authorizations necessary to issue the
Equity Office common shares issuable in the REIT merger and the EOP
Partnership units issuable in the partnership merger.
CONDITIONS TO THE OBLIGATIONS OF EQUITY OFFICE AND EOP PARTNERSHIP TO
EFFECT THE MERGERS
The obligations of Equity Office and EOP Partnership to complete the
mergers are subject to the satisfaction or, where permissible, waiver of the
following conditions:
- each of the representations and warranties of Cornerstone and Cornerstone
Partnership contained in the merger agreement, disregarding all
qualifications and exceptions relating to "materiality" or "material
adverse effect," will be true and correct as of the date of the merger
agreement and as of the closing of the mergers:
-- except to the extent that these representations and warranties are
expressly limited by their terms to another date, in which case these
representations and warranties will be true and correct as of that
other date; and
-- except where the failure of these representations and warranties to be
true and correct would not, individually or in the aggregate,
reasonably be expected to have a material adverse effect on the
business, properties, assets, financial condition or results of
operations of Cornerstone and its subsidiaries taken as a whole;
- Cornerstone and Cornerstone Partnership will have performed in all
material respects all obligations required to be performed by them under
the merger agreement at or before the completion of the mergers;
- since February 11, 2000, there will have been no material adverse change
in the business, financial condition or results of operations of
Cornerstone and its subsidiaries taken as a whole;
- Equity Office will have received a certificate of an officer of
Cornerstone certifying to each of the above;
- Equity Office will have received an opinion, dated as of the closing date
of the REIT merger:
-- from counsel to Cornerstone relating to the REIT status of Cornerstone
and the partnership status of Cornerstone Partnership;
-- from counsel to Equity Office relating to the REIT status of Equity
Office; and
-- from counsel to Equity Office relating to the federal income tax
treatment of the REIT merger; and
- each of William Wilson III and John S. Moody will have entered into
noncompetition and confidentiality agreements.
CONDITIONS TO THE OBLIGATIONS OF CORNERSTONE AND CORNERSTONE PARTNERSHIP TO
EFFECT THE MERGERS
The obligations of Cornerstone and Cornerstone Partnership to complete the
mergers are subject to the satisfaction or, where permissible, waiver of the
following conditions:
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- each of the representations and warranties of Equity Office and EOP
Partnership contained in the merger agreement, disregarding all
qualifications and exceptions relating to "materiality" or "material
adverse effect," will be true and correct as of the date of the merger
agreement and as of the closing of the mergers:
-- except to the extent that these representations and warranties are
expressly limited by their terms to another date, in which case these
representations and warranties will be true and correct as of that
other date; and
-- except where the failure of these representations and warranties to be
true and correct would not reasonably be expected to have a material
adverse effect on the business, properties, assets, financial condition
or results of operations of Equity Office and its subsidiaries taken as
a whole;
- Equity Office and EOP Partnership will have performed in all material
respects all obligations required to be performed by them under the
merger agreement at or before the completion of the mergers;
- since the date of the merger agreement, there will have been no material
adverse change in the business, financial condition or results of
operations of Equity Office and its subsidiaries taken as a whole;
- Cornerstone will have received a certificate of an officer of Equity
Office certifying to each of the foregoing;
- Cornerstone will have received an opinion, dated as of the closing date
of the mergers:
-- from counsel to Equity Office relating to the REIT status of Equity
Office and BeaMetFed, Inc., a Maryland corporation in which EOP
Partnership currently owns 51.6% of the outstanding stock, and the
partnership status of EOP Partnership; and
-- from counsel to Cornerstone relating to the federal income tax
treatment of the REIT merger;
- The Equity Office shareholders will have approved the proposed Equity
Office charter amendment relating to domestically controlled REIT status
at the Equity Office special meeting; and
- Equity Office will have delivered to PGGM a certificate to the effect
that, to Equity Office's knowledge, Equity Office is a
"domestically-controlled REIT" as defined in the Internal Revenue Code.
TAX RELATED UNDERTAKINGS OF EOP PARTNERSHIP
DEFICIT RESTORATION OBLIGATIONS
Under the merger agreement, EOP Partnership has agreed to amend its
partnership agreement to permit, in limited circumstances, Cornerstone
Partnership unitholders to enter into a deficit restoration obligations with
respect to the EOP Partnership units that they will receive in the partnership
merger. EOP Partnership will amend its partnership agreement to reflect this
commitment and to make appropriate changes to its loss allocation provisions at
or before the time of the partnership merger. The form of the amended
partnership agreement of EOP Partnership, to be entered into as of the closing
of the partnership merger, is set forth on Annex E to this document.
Before the completion of the partnership merger, a Cornerstone Partnership
unitholder will be able to enter into a deficit restoration obligation with
respect to the EOP Partnership units that it will receive in the partnership
merger in an amount equal to, or, at the individual unitholder's election, less
than, the maximum amount that the Cornerstone Partnership unitholder was
obligated to restore with respect to its Cornerstone Partnership units
immediately prior to the completion of the partnership merger. After the
partnership merger, a former Cornerstone Partnership unitholder generally will
not be permitted to enter into a deficit restoration obligation or increase the
amount of any deficit restoration obligation with respect to its EOP Partnership
units, except under the following circumstances:
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(1) the former Cornerstone Partnership unitholder will have the right to
increase the amount of its deficit restoration obligation if the
unitholder had this right under a separate agreement with Cornerstone
Partnership, and EOP Partnership assumed the obligations of Cornerstone
Partnership under that agreement as part of the partnership merger;
(2) the former Cornerstone Partnership unitholders as a group will have the
right to increase their deficit restoration obligations by an aggregate
amount of $50 million, which amount will be reduced by any increase in,
or new, deficit restoration obligations made between February 11, 2000
and the completion of the partnership merger, but which will not take
into account the amount of any deficit restoration obligations entered
into by former Cornerstone Partnership unitholders described in (1)
above; and
(3) EOP Partnership may grant, in its sole discretion, a former Cornerstone
Partnership unitholder's request to increase the amount of an existing
deficit restoration obligation if the former Cornerstone Partnership
unitholder demonstrates, to the satisfaction of EOP Partnership, that
without an increase in the amount of its deficit restoration
obligation, the former Cornerstone Partnership unitholder would not be
allocated enough EOP Partnership liabilities under sections 752 and 465
of the Internal Revenue Code to avoid the recognition of gain, other
than gain required to be recognized as a result of actual cash
distributions from EOP Partnership.
EOP Partnership does not offer any assurance that the deficit restoration
obligations will be effective to defer taxable gain that a former Cornerstone
Partnership unitholder otherwise would recognize either at the time of the
partnership merger or thereafter. Among other things, a deficit restoration
obligation would be effective to defer the recognition of gain only if and to
the extent that EOP Partnership has recourse liabilities outstanding equal to
the amount of the deficit restoration obligation and any similar obligations
undertaken by other unitholders of EOP Partnership. However, EOP Partnership
will not be required to maintain any level of partnership recourse debt or incur
any additional recourse liability even though it will permit Cornerstone
Partnership unitholders to elect before the partnership merger to continue their
current deficit restoration obligations or to increase their deficit restoration
obligations following the partnership merger under (2) or (3) above, except as
may be required in order to meet obligations to former Cornerstone Partnership
unitholders pursuant to the tax protection agreements described in the schedules
to the merger agreement that are being assumed by EOP Partnership.
A Cornerstone Partnership unitholder that is entitled to enter into a
deficit restoration obligation with respect to the EOP Partnership units that it
will receive in the partnership merger can do so by entering into an agreement
with EOP Partnership establishing the deficit restoration obligation before the
completion of the partnership merger. A Cornerstone Partnership unitholder who
wishes to enter into such an agreement should contact H. Lee Van Boven at (650)
341-5300.
For a more detailed discussion regarding the federal income tax
consequences of a deficit restoration obligation entered into at the time of the
partnership merger or at a later time, see "Material Federal Income Tax
Consequences -- Tax Consequences of the Partnership Merger to Cornerstone
Partnership Unitholders That Receive EOP Partnership Units" below.
DEBT MAINTENANCE AND LOCK-UP AGREEMENTS
Under the merger agreement, EOP Partnership has agreed to assume the
obligations of Cornerstone Partnership under several agreements with particular
Cornerstone Partnership unitholders with respect to specific properties that
were contributed to Cornerstone Partnership by those Cornerstone Partnership
unitholders, or by entities which were owned by those Cornerstone Partnership
unitholders. Generally, under the agreements assumed from Cornerstone
Partnership, EOP Partnership will be required:
- with respect to Corporate 500 Centre, to maintain a specified amount of
"qualified nonrecourse financing" and not to dispose of that property in
a taxable transaction until the earlier of January 29, 2008 and the date
on which less than 205,699 units are owned by the unitholders that
contributed Corporate 500 Centre to Cornerstone Partnership;
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- with respect to One Memorial Drive, not to dispose of that property in a
taxable transaction until after April 28, 2008;
- with respect to Wilshire Palisades and 201 California, not to prepay
specified loans secured by those properties that were in place at the
time those properties were acquired by Cornerstone Partnership, not to
dispose of those properties in taxable transactions before the earlier of
June 3, 2008 or the date on which Cornerstone Partnership gives notice
that less than 166,566 units are held by unitholders that contributed
Wilshire Palisades and/or 201 California to Cornerstone Partnership, and
to use best efforts not to dispose of those properties in taxable
transactions on or after such date, if adverse tax consequences would
result to the former Cornerstone Partnership unitholders who originally
contributed those properties to Cornerstone Partnership;
- with respect to specified properties acquired by Cornerstone Partnership
from William Wilson & Associates and related entities in December 1998,
to maintain a specified amount of recourse indebtedness until after
December 31, 2009, and, until after December 31, 2009, not to dispose of
specified properties in taxable transactions and to limit taxable
dispositions of specified other properties, based on an annual limitation
on the amount of taxable gain that will be required to be recognized for
federal income tax purposes by the former Cornerstone Partnership
unitholders who originally contributed those properties to Cornerstone
Partnership;
- with respect to Bixby Ranch, to maintain a level of nonrecourse
indebtedness at least equal to the then outstanding balance of specified
nonrecourse indebtedness existing at the time Cornerstone Partnership
acquired Bixby Ranch through maturity of such existing indebtedness; and
- with respect to Wells Fargo Center, not to dispose of that property in a
taxable transaction until after January 21, 2007.
Generally, as a result of these agreements, EOP Partnership will not be
able to dispose of and/or prepay debt secured by the relevant properties during
the proscribed periods unless EOP Partnership either:
- obtains the prior written consent of specified former Cornerstone
Partnership unitholders; or
- compensates those specified former Cornerstone Partnership unitholders
for the acceleration of any tax liability incurred by them due to the
transaction, with any compensation to be paid to a former Cornerstone
Partnership unitholder under these circumstances to be determined under
the existing agreement between Cornerstone Partnership and the
unitholder.
Therefore, even if it were in the best interest of EOP Partnership to sell, or
prepay debt secured by, any of the properties that are subject to these
agreements, it may be difficult or impossible for EOP Partnership to do so
during the applicable lock-up periods.
Except for the agreements described above, EOP Partnership has not made any
commitment to Cornerstone Partnership or any of the Cornerstone Partnership
unitholders not to undertake any transactions relating to properties that EOP
Partnership will acquire from Cornerstone Partnership in the partnership merger.
Currently, and through the closing of the mergers, Cornerstone Partnership is
obligated under some of the above described agreements not to undertake certain
transactions that would cause adverse tax consequences to those Cornerstone
Partnership unitholders who are beneficiaries of such agreements without
complying with specified consent requirements or indemnifying those partners for
such adverse tax consequences. If, and to the extent that, the mergers and the
related transactions cause those Cornerstone Partnership unitholders adverse tax
consequences in violation of those agreements, Cornerstone Partnership may be
required to indemnify those unitholders in accordance with the terms of those
agreements and EOP Partnership would inherit any such indemnification liability
as the surviving partnership in the partnership merger.
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NO SOLICITATION BY CORNERSTONE OR CORNERSTONE PARTNERSHIP
Cornerstone has agreed, for itself and in its capacity as the sole general
partner of Cornerstone Partnership, that neither it nor any Cornerstone
subsidiary will, nor will any of them permit any officer, director, employee,
affiliate, agent, investment banker, financial advisor, attorney, accountant,
broker, finder, consultant or other agent or representative to:
- invite, initiate, solicit or encourage, directly or indirectly, any
inquiries, proposals, discussions or negotiations or the making or
implementation of any proposal or offer, including any proposal or offer
to its stockholders, with respect to an "alternative acquisition
proposal," as defined below;
- engage in any discussions or negotiations with or provide any
confidential or non-public information or data to, any person relating
to, or that may reasonably be expected to lead to, an alternative
acquisition proposal;
- enter into any letter of intent, agreement in principle or agreement
relating to an alternative acquisition proposal;
- propose publicly to agree to do any of the foregoing; or
- otherwise facilitate any effort or attempt to make or implement an
alternative acquisition proposal.
Cornerstone has agreed, for itself and in its capacity as the sole general
partner of Cornerstone Partnership, that it will:
- immediately cease and cause to be terminated any existing activities,
discussions or negotiations with any parties conducted previously with
respect to any alternative acquisition proposal; and
- notify Equity Office promptly if Cornerstone or any of its subsidiaries
receives any such inquiries or proposals, or any requests for such
information, or if any such negotiations or discussions are sought to be
initiated or continued with it, and include in such notice the identity
of the person making such inquiry, proposal or request, the material
terms of such inquiry, proposal or request and, if in writing, will
promptly deliver to Equity Office a copy of such inquiry, proposal or
request along with all other related documentation and correspondence.
Notwithstanding the foregoing, Cornerstone, including in its capacity as
the sole general partner of Cornerstone Partnership, may furnish information to,
or enter into discussions or negotiations with, any person that makes an
unsolicited bona fide written proposal relating to an alternative acquisition
proposal, if, and only to the extent that:
- a majority of the board of directors of Cornerstone determines in good
faith, after consultation with its outside counsel, that such action is
required for the board of directors of Cornerstone to comply with its
fiduciary duties to stockholders imposed by applicable law;
- before furnishing such information to, or entering into discussions or
negotiations with, such person, Cornerstone provides written notice to
Equity Office to the effect that it is furnishing information to, or
entering into discussions with, such person; and
- Cornerstone enters into a confidentiality agreement with that person on
terms in the aggregate not more favorable to that person than the terms
of the confidentiality agreement entered into with Equity Office.
For purposes of the merger agreement, an "alternative acquisition proposal"
means a merger, acquisition, tender offer, exchange offer, transaction resulting
in the issuance of securities representing 10% or more of the outstanding equity
securities of Cornerstone or Cornerstone Partnership, consolidation, business
combination, recapitalization, liquidation, dissolution, share exchange,
business combination, sale, lease, exchange, mortgage, pledge, transfer or other
disposition of 10% or more of the assets or equity securities, including
partnership interests and units, of Cornerstone or Cornerstone Partnership,
other than the mergers.
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Notwithstanding the foregoing, in the event that an alternative acquisition
proposal constitutes a superior alternative acquisition proposal, the board of
directors of Cornerstone may withdraw, modify, amend or qualify its
recommendation of the merger agreement and REIT merger and recommend that
superior alternative acquisition proposal to its stockholders if:
- Cornerstone complies fully with the foregoing provisions and provides
Equity Office with at least three business days' prior written notice of
its intent to withdraw, modify, amend or qualify its recommendation of
the merger agreement and the REIT merger;
- during such three business days Equity Office makes a counter proposal to
such superior alternative acquisition proposal, Cornerstone's board of
directors in good faith, taking into account the advice of its outside
financial advisors of nationally recognized reputation, determines that
the Equity Office counter proposal is:
-- not at least as favorable to Cornerstone's stockholders as the superior
alternative acquisition proposal, from a financial point of view; and
-- not at least as favorable generally to Cornerstone's stockholders,
taking into account all financial and strategic considerations and
other relevant factors, including relevant legal, financial, regulatory
and other aspects of that proposal, and the conditions, prospects and
time required for completion of that proposal; or
- Cornerstone terminates the merger agreement in accordance with its terms
and pays to EOP Partnership the termination fee.
For purposes of the merger agreement, a "superior alternative acquisition
proposal" means a bona fide written proposal made by a third party to acquire,
directly or indirectly, Cornerstone and/or Cornerstone Partnership pursuant to a
tender or exchange offer, merger, share exchange, consolidation or sale of all
or substantially all of the assets of Cornerstone, Cornerstone Partnership, and
their subsidiaries or otherwise:
- on terms which a majority of the board of directors of Cornerstone
determines in good faith, taking into account the advice of Cornerstone's
financial advisors of nationally recognized reputation, are superior,
from a financial point of view, to Cornerstone's stockholders to those
provided for in the REIT merger;
- on terms which a majority of the board of directors of Cornerstone
determines in good faith to be more favorable generally to Cornerstone's
stockholders, taking into account all financial and strategic
considerations and other relevant factors, including relevant legal,
financial, regulatory and other aspects of such proposals, and the
conditions, prospects and time required for completion of such proposal;
- for which financing, to the extent required, is then fully committed and
capable of being obtained; and
- which the board of directors of Cornerstone determines in good faith is
reasonably capable of being consummated.
TERMINATION OF THE MERGER AGREEMENT
RIGHT TO TERMINATE
The merger agreement may be terminated at any time before the completion of
the partnership merger, whether before or after approval of the merger agreement
and the mergers by the Equity Office shareholders, EOP Partnership limited
partners, Cornerstone stockholders or Cornerstone Partnership limited partners,
as follows:
- by mutual written consent duly authorized by the Equity Office board of
trustees and the Cornerstone board of directors;
- by either Equity Office or Cornerstone if:
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-- any judgment, injunction, order, decree or action by any governmental
entity preventing the consummation of either the REIT merger or the
partnership merger becomes final and non-appealable;
-- the REIT merger and the partnership merger have not been completed
before December 31, 2000; however, neither Equity Office nor
Cornerstone may terminate the merger agreement if its breach is the
reason that the mergers have not been completed;
-- the holders of at least a majority of the outstanding shares of
Cornerstone common stock and two-thirds of the outstanding shares of
Cornerstone preferred stock fail to approve the REIT merger and the
merger agreement at the Cornerstone special meeting, or if holders of a
majority of the limited partner interests in Cornerstone Partnership
fail to approve the merger agreement and the REIT merger, but
Cornerstone may not terminate for either of these reasons if it is in
breach in any material respect of its obligations contained in the
merger agreement relating to obtaining the required shareholder and
partner votes; or
-- the holders of Equity Office common shares fail to approve the REIT
merger and the merger agreement at the Equity Office special meeting,
or holders of a majority of the partner interests in EOP Partnership
fail to approve the merger agreement and the REIT merger, but Equity
Office may not terminate for either of these reasons if it is in breach
in any material respect of its obligations contained in the merger
agreement relating to obtaining the required shareholder and partner
votes;
- by Equity Office:
-- upon a breach of or failure to perform any representation, warranty,
covenant, obligation or agreement on the part of Cornerstone or
Cornerstone Partnership contained in the merger agreement, or if any
representation or warranty of Cornerstone or Cornerstone Partnership
becomes untrue, in either case such that the conditions to the
consummation of the mergers contained in the merger agreement would be
incapable of being satisfied by December 31, 2000, or as otherwise
extended by the parties; or
-- if (a) the Cornerstone board of directors has failed to recommend or
has withdrawn, modified, amended or qualified, or proposed publicly not
to recommend or to withdraw, modify, amend or qualify, in any manner
adverse to Equity Office its approval or recommendation of either of
the mergers or the merger agreement or approved or recommended any
superior alternative acquisition proposal, (b) following the
announcement or receipt of an alternative acquisition proposal,
Cornerstone has failed to call the Cornerstone special meeting or
failed to prepare and mail to its stockholders the joint proxy
statement/prospectus or (c) the Cornerstone board of directors or any
committee of the Cornerstone board of directors has resolved to do any
of the foregoing; or
- by Cornerstone:
-- upon a breach of any representation, warranty, covenant obligation or
agreement on the part of Equity Office or EOP Partnership contained in
the merger agreement, or if any representation or warranty of Equity
Office or EOP Partnership becomes untrue, in either case such that the
conditions to the consummation of the mergers contained in the merger
agreement would be incapable of being satisfied by December 31, 2000 or
as otherwise extended by the parties; or
-- if the Cornerstone board of directors has withdrawn, modified, amended
or qualified in any manner adverse to Equity Office its approval or
recommendation of either of the mergers or the merger agreement in
connection with, or approved or recommended, any superior alternative
acquisition proposal, or in order to enter into a binding written
agreement with respect to a superior alternative acquisition proposal,
so long as, in each case, Cornerstone complied with the terms of the no
solicitation provisions contained in the merger agreement and, before
terminating the merger agreement, has paid to EOP Partnership the
termination fee.
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EFFECT OF TERMINATION
Except for provisions in the merger agreement regarding confidentiality of
nonpublic information, payment of fees and expenses, the effect of termination
and specified miscellaneous provisions, if the merger agreement is terminated as
described above, the merger agreement will become void and have no effect. In
addition, if the merger agreement is so terminated, there will be no liability
on the part of Equity Office, EOP Partnership, Cornerstone or Cornerstone
Partnership, except to the extent that such termination results from a material
breach by any party of any of its representations, warranties, covenants or
agreements contained in the merger agreement. The confidentiality agreement,
dated January 13, 2000, between Cornerstone and Equity Office will continue in
effect notwithstanding any termination of the merger agreement.
EXPENSES; TERMINATION FEE
Except as described below, each party to the merger agreement will bear its
own fees and expenses in connection with the transactions contemplated by the
merger agreement.
Cornerstone and Cornerstone Partnership will pay to EOP Partnership a
termination fee if the merger agreement is terminated:
- by Cornerstone, (a) if the Cornerstone board of directors has withdrawn,
modified, amended or qualified in any manner adverse to Equity Office its
approval or recommendation of either of the mergers or the merger
agreement in connection with, or approved or recommended, any superior
alternative acquisition proposal, or (b) in order to enter into a binding
written agreement with respect to a superior alternative acquisition
proposal, so long as, in each case, Cornerstone complied with the terms
of the nonsolicitation provisions contained in the merger agreement;
- by Equity Office if the Cornerstone board of directors has failed to
recommend or has withdrawn, modified, amended or qualified, or proposed
publicly not to recommend or to withdraw, modify, amend or qualify, in
any manner adverse to Equity Office its approval or recommendation of
either of the mergers or the merger agreement or approved or recommended
any superior alternative acquisition proposal, or has resolved to do any
of the foregoing; or
- by either party under the circumstances listed below, but only if (a)
Cornerstone or Cornerstone Partnership has received a proposal for an
alternative acquisition transaction before such termination and (b)
before or within 12 months after such termination, Cornerstone or
Cornerstone Partnership enters into an agreement regarding any
alternative acquisition transaction that is later completed:
-- Cornerstone breaches any of its representations or warranties in the
merger agreement, and such breach has a material adverse effect on
Cornerstone and its subsidiaries taken as a whole and cannot be
rectified by December 31, 2000;
-- Cornerstone fails to perform in all material respects all of its
covenants, obligations or agreements in the merger agreement and such
failure cannot be rectified by December 31, 2000;
-- following Cornerstone's receipt or announcement of an alternative
acquisition proposal, Cornerstone fails to call the Cornerstone special
meeting or fails to prepare and mail to its stockholders the joint
proxy statement/prospectus delivered to Cornerstone stockholders
simultaneously herewith;
-- any judgment, injunction, order, decree or action by any governmental
entity of competent authority, which primarily results from any action,
inaction of Cornerstone, its subsidiaries or its non-controlled
subsidiary and prevents the consummation of the REIT merger or the
partnership merger, becomes final and non-appealable;
-- the REIT merger and the partnership merger are not completed before
December 31, 2000, and the terminating party has not materially
breached its obligations under the merger agreement in
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a way that prevents the REIT merger or the partnership merger from
being completed before December 31, 2000; or
-- the holders of at least a majority of the outstanding shares of
Cornerstone common stock and the holders of at least two-thirds of the
outstanding shares of Cornerstone preferred stock fail to approve the
REIT merger and the merger agreement at the Cornerstone special
meeting.
The termination fee that EOP Partnership may be entitled to receive will be
an amount equal to the lesser of (1) $100 million less termination expenses, as
described below, paid or payable under the merger agreement and (2) the maximum
amount that can be paid to EOP Partnership without causing Equity Office to fail
to meet the REIT income requirements under the Internal Revenue Code.
Cornerstone's and Cornerstone Partnership's obligation to pay any unpaid portion
of the termination fee will terminate on February 11, 2003.
Cornerstone and Cornerstone Partnership will pay to EOP Partnership
termination expenses if the merger agreement is terminated:
- by Equity Office, upon a breach of or failure to perform any
representation, warranty, covenant, obligation or agreement on the part
of Cornerstone or Cornerstone Partnership contained in the merger
agreement, or if any representation or warranty of Cornerstone or
Cornerstone Partnership becomes untrue, in either case such that the
conditions to the consummation of the mergers contained in the merger
agreement would be incapable of being satisfied by December 31, 2000, or
as otherwise extended by the parties, so long as Cornerstone was not
entitled to terminate the merger agreement because of breach of any
representation, warranty, covenant, obligation or agreement on the part
of Equity Office or EOP Partnership; or
- by either Equity Office or Cornerstone, if the holders of a majority of
the outstanding shares of Cornerstone common stock and Cornerstone
preferred stock fail to approve the REIT merger and the merger agreement
at the Cornerstone special meeting, or if holders of a majority of the
limited partner interests in Cornerstone Partnership fail to approve the
merger agreement and the REIT merger, so long as Cornerstone was not
entitled to terminate the merger agreement because of breach of any
representation, warranty, covenant, obligation or agreement on the part
of Equity Office or EOP Partnership.
Equity Office and EOP Partnership will pay to Cornerstone Partnership
termination expenses if the merger agreement is terminated:
- by Cornerstone, upon a breach of any representation, warranty, covenant
obligation or agreement on the part of Equity Office or EOP Partnership
contained in the merger agreement, or if any representation or warranty
of Equity Office or EOP Partnership becomes untrue, in either case such
that the conditions to the consummation of the mergers contained in the
merger agreement would be incapable of being satisfied by December 31,
2000 or as otherwise extended by the parties, so long as Equity Office
was not entitled to terminate the merger agreement because of a breach of
any representation, warranty, covenant, obligation or agreement on the
part of Cornerstone or Cornerstone Partnership; or
- by either Cornerstone or Equity Office, if the holders of a majority of
the outstanding Equity Office common shares fail to approve the REIT
merger and the merger agreement at the Equity Office special meeting, or
if holders of a majority of the partner interests in EOP Partnership fail
to approve the merger agreement and the REIT merger, but neither Equity
Office nor Cornerstone may terminate for either of these reasons if it is
in breach in any material respect of its obligations contained in the
merger agreement relating to obtaining the required shareholder and
partner votes, so long as Equity Office was not entitled to terminate the
merger agreement because of a breach of any representation, warranty,
covenant, obligation or agreement on the part of Cornerstone or
Cornerstone Partnership.
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The termination expenses that EOP Partnership or Cornerstone Partnership
may be entitled to receive will be an amount equal to the lesser of (a)
$7,500,000 or (b) such party's out-of-pocket expenses incurred in connection
with the merger agreement and the transactions contemplated by the merger
agreement, including all attorneys', accountants' and investment bankers' fees
and expenses. If the termination expenses payable to that party exceed the
maximum amount that can be paid to that party without causing that party to fail
to meet the REIT income requirements under the Internal Revenue Code, then the
amount initially payable to that party will be that maximum amount. The paying
party's obligation to pay any unpaid portion of the termination fee will
terminate on February 11, 2003.
In addition, in the event that Equity Office prevails in a suit for a
breach by Cornerstone and Cornerstone Partnership of their obligation to pay the
termination fee or termination expenses under the merger agreement, Equity
Office will be entitled to its costs and expenses in connection with the suit,
with interest.
WAIVER AND AMENDMENT OF THE MERGER AGREEMENT
The merger agreement may be amended by the parties in writing by action of
the Equity Office board of trustees and the Cornerstone board of directors at
any time before the filing of the Delaware certificate of merger relating to the
partnership merger and the Maryland and Nevada articles of merger relating to
the REIT Merger.
At any time before the completion of the mergers, the parties may, in
writing:
- extend the time for the performance of any of the obligations or other
acts of the other party;
- waive any inaccuracies in the representations and warranties of the other
party contained in the merger agreement or in any document delivered
pursuant to the merger agreement; or
- waive compliance with any of the agreements or conditions of the other
party contained in the merger agreement, except as specified.
INDEMNIFICATION; DIRECTORS' AND OFFICERS' INSURANCE
In the merger agreement, Equity Office and EOP Partnership have agreed to
provide exculpation and indemnification for each person who has been at any time
on or before February 11, 2000, or who becomes before the completion of the
mergers, an officer or director of Cornerstone or any Cornerstone subsidiary.
This exculpation and indemnification will be the same as provided to these
persons by Cornerstone and its subsidiaries immediately before the completion of
the mergers in each entity's respective charter, bylaws, partnership, operating
or similar agreement, as applicable, as in effect on February 11, 2000. This
exculpation and indemnification covers actions only on or before the completion
of the mergers, including all transactions contemplated by the merger agreement.
In addition, Equity Office and EOP Partnership also agreed to indemnify and
hold harmless, to the full extent permitted by applicable law, each of the
persons described above against any losses, claims, liabilities, expenses,
judgments, fines and amounts paid in settlement in connection with any
threatened or actual claim, action, suit, proceeding or investigation, whether
civil, criminal or administrative, including any action by or on behalf of any
or all security holders of Cornerstone or Equity Office, or any of their
subsidiaries, or by or in the right of Cornerstone or Equity Office, or any of
their subsidiaries, in which any of these persons is, or is threatened to be,
made a party based in whole or in part on, or arising in whole or in part out
of, or pertaining to:
- the fact that he or she is or was an officer, employee or director of
Cornerstone or any of its subsidiaries or any action or omission by that
person in his capacity as a director; or
- the merger agreement or the transactions contemplated by the merger
agreement, whether in any case asserted or arising before or after the
completion of the mergers.
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After the completion of the mergers, Equity Office and EOP Partnership will
be obligated to promptly pay and advance reasonable expenses and costs incurred
by each of these persons as they become due and payable in advance of the final
disposition of the claim, action, suit, proceeding or investigation to the
fullest extent and in the manner permitted by law. Equity Office is also
obligated to purchase, at or before the completion of the mergers, directors'
liability insurance policy coverage for Cornerstone's directors and executive
officers for a period of six years which will provide the directors and officers
with coverage on substantially similar terms as currently provided by
Cornerstone to these directors and officers.
VOTING AGREEMENTS
CORNERSTONE VOTING AGREEMENTS
Each of the directors and executive officers of Cornerstone, including
their affiliates, and PGGM have entered into voting agreements with Equity
Office and EOP Partnership agreeing to vote all shares of Cornerstone common
stock, and, if applicable, all Cornerstone Partnership units, owned of record by
each of them, or that they otherwise have the power to vote:
- for adoption and approval of the merger agreement and the mergers, as
applicable; and
- against adoption or approval of any action or agreement made or taken in
opposition to or in competition with the REIT merger or the partnership
merger, as applicable.
Each such stockholder also is restricted from soliciting alternative
acquisition proposals with respect to Cornerstone or engaging in any discussions
or negotiations with, or providing any confidential or non-public information
to, any person relating to an alternative acquisition proposal, or otherwise
facilitating any effort or attempt to make or implement an alternative
acquisition proposal.
As of the record date for the Cornerstone special meeting, these persons
and entities beneficially owned, excluding stock options and Cornerstone
Partnership units held by them, shares of Cornerstone common stock,
representing % of the outstanding shares of Cornerstone common stock
entitled to be voted at the Cornerstone special meeting. As of May 12, 2000,
these persons and entities beneficially owned 5,056,240 Cornerstone Partnership
units, representing 3.4% of the outstanding units of Cornerstone Partnership
entitled to consent to the mergers.
PGGM Voting Agreement. In addition to the general terms and conditions
applicable to each of the voting agreements, the voting agreement between Equity
Office, EOP Partnership, WCP Services, Inc. and PGGM also provides, among other
things, that:
- Equity Office will assume Cornerstone's obligations under the amended and
restated registration rights and voting agreement, dated December 16,
1998, among Cornerstone, PGGM and Dutch Institutional Holding Company,
Inc., as amended by the PGGM voting agreement; and
- Jan H.W.R. van der Vlist, a current Cornerstone board member, will become
a trustee of the combined entity, with his term expiring in 2003, and
Equity Office is obligated to nominate Mr. van der Vlist for reelection
to the board of trustees in 2003 and 2006 if PGGM and its affiliates
continue to own at least 21,000,000 of the issued and outstanding Equity
Office common shares, as adjusted for stock splits or similar actions, at
all times up to the time the trustees are being elected in those years.
If Mr. van der Vlist fails to stand for reelection in 2003 or 2006 for
any reason, or in the event of his death or earlier resignation, and if
PGGM continues to own at least 21,000,000 of the issued and outstanding
Equity Office shares as described above, Equity Office is required take
all action necessary to nominate a replacement designated by PGGM for
election or reelection as a trustee for an additional three-year term,
subject to Equity Office's approval if the replacement is not an officer,
director or employee of PGGM.
EQUITY OFFICE VOTING AGREEMENTS
Each of the trustees and executive officers of Equity Office, including
their affiliates, have entered into voting agreements with Cornerstone and
Cornerstone Partnership agreeing to vote all Equity Office
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common shares, and, if applicable, all EOP Partnership units, owned of record by
each of them, or that they otherwise have the power to vote:
- in favor of adoption and approval of the merger agreement, the mergers
and the other transactions contemplated by the merger agreement; and
- against approval or adoption of any action or agreement made or taken in
opposition to or in competition with the REIT merger or the partnership
merger, as applicable.
As of the record date for the Equity Office special meeting, these persons
and entities beneficially owned, excluding share options and EOP Partnership
units held by them, Equity Office common shares, representing
% of the outstanding Equity Office common shares entitled to be voted at
the Equity Office special meeting.
PREFERRED STOCK OPTION AGREEMENT
The holders of all of the outstanding shares of Cornerstone preferred stock
have entered into a stock option agreement with Equity Office and Cornerstone.
Under the agreement, these holders have granted to Cornerstone and Equity
Office, respectively, an option to acquire all of their shares of Cornerstone
preferred stock at any time before the completion of the REIT merger at a
purchase price of $18.00 per share, plus accrued and unpaid dividends, in cash,
subject to adjustment as provided in the agreement. If the merger agreement is
amended to increase the purchase price per share in the REIT merger, either
before or after Cornerstone or Equity Office exercises its option under the
agreement to purchase all of their shares of Cornerstone preferred stock, the
purchase price of the Cornerstone preferred stock will be adjusted to equal the
purchase price contained in the amended merger agreement.
AMENDMENTS TO EQUITY OFFICE'S DECLARATION OF TRUST RELATING TO
"DOMESTICALLY-CONTROLLED" REIT STATUS
Based on the number of Equity Office common shares and shares of
Cornerstone common stock outstanding on the record date, PGGM could own up to
approximately % of the Equity Office common shares following the merger, if
PGGM elects to convert its Cornerstone common stock into Equity Office common
shares in the merger. In order to assist Equity Office in continuing to qualify
as a domestically-controlled REIT following the merger and as required by the
merger agreement, amendments to the declaration of trust of Equity Office will
be effected as part of the merger. The text of these amendments is attached to
this consent solicitation/information statement/prospectus as Annex D.
The amendments restrict the direct or indirect acquisition and ownership of
Equity Office shares, if as a result of the acquisition or ownership, non-U.S.
persons would own directly or indirectly 43% or more of the fair market value of
the issued and outstanding Equity Office shares. This ownership restriction
would not apply to any acquisition of Equity Office preferred shares outstanding
at the time the amendments become effective, or Equity Office common shares
received upon the conversion of any Equity Office preferred shares. If any
transfers of Equity Office shares occur that would result in non-U.S. persons
owning directly or indirectly 43% or more of the fair market value of the issued
and outstanding Equity Office shares as described above, then the number of
shares that would cause a non-U.S. person to violate this restriction will be
automatically transferred to a charitable trust, or if transfer to a charitable
trust would not be effective to prevent violation of this restriction, then the
transfer of shares will be void.
The board of trustees of Equity Office may increase the ownership
limitation to a percentage not to exceed 49% of the fair market value of the
issued and outstanding Equity Office shares, less the percentage of the
aggregate value of all outstanding shares attributable to the value of any
preferred shares that were issued and outstanding at the time the amendments
become effective or the common shares into which they are convertible. The
amendments also require each person who is a beneficial or constructive owner of
Equity Office shares to provide any information as Equity Office may require, in
good faith, in order to determine Equity Office's status as a
domestically-controlled REIT. There is no guarantee, however, that the
amendments will ensure that Equity Office continues to qualify as a
domestically-controlled REIT.
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CORNERSTONE JOINT VENTURE PROPERTIES
Cornerstone Partnership owns interests in the following properties and/or
loans through joint ventures that EOP Partnership will acquire in connection
with the partnership merger:
- 191 Peachtree, Atlanta, Georgia ("Peachtree")
- 500 Boylston, Boston, Massachusetts ("Boylston")
- 222 Berkeley, Boston, Massachusetts ("Berkeley")
- Norwest Center, Minneapolis, Minnesota ("Norwest Center")
- Washington Mutual Tower, Seattle, Washington ("Washington Mutual")
- 120 Montgomery, San Francisco, California ("120 Montgomery")
- McKesson Building, San Francisco, California ("McKesson")
- Market Square, Washington, D.C. ("Market Square")
- Ferry Building, San Francisco, California ("Ferry Building")
- 191 Peachtree (Loan), Atlanta, Georgia ("Peachtree Loan")
The applicable joint venture agreements contain various provisions that are
applicable in the event of certain transfers involving Cornerstone Partnership's
interests in these joint ventures. Based on a review of the joint venture
agreements, Equity Office does not believe it is necessary to seek consent prior
to the mergers from Cornerstone Partnership's joint venture partners, except in
the case of the McKesson joint venture, which consent may not be unreasonably
withheld, and the Ferry Building joint venture. Equity Office is in the process
of seeking these consents. Equity Office does not believe that the failure to
obtain these or any other consents would have a material adverse effect on
Equity Office.
In the case of the Boylston and Berkeley joint ventures, after consummation
of the mergers, Equity Office will be obligated to notify the joint venture
partner, which, in each case, holds an 8.5% interest in the applicable venture,
of the closing. Upon receipt of the notice, each of those joint venture partners
has the right either to consent to the mergers or to require Equity Office to
acquire its interest in the applicable venture based on an appraisal mechanism.
Equity Office intends to provide such notice within the requisite time periods
and is prepared to purchase the joint venture partner's interest if so required.
Under the joint venture agreements for the Norwest Center and Washington
Mutual joint ventures, each joint venture partner has, under certain
circumstances, a right of first refusal to acquire the interest of the other
joint venture partner in the event the other joint venture partner intends to
sell its interest to a third party. Although Equity Office and Cornerstone do
not believe that either the REIT merger or the partnership merger triggers any
of these right of first refusal provisions, Equity Office and Cornerstone intend
to offer Cornerstone's joint venture partner in each of these joint ventures the
right to acquire Cornerstone Partnership's interest in the joint venture. The
purchase price for these interests in each case would be equal to the amount
that Cornerstone Partnership would receive in the event the applicable property
were sold for the value attributable to such property in the mergers and the
applicable joint venture thereafter liquidated. There can be no assurance that
Cornerstone Partnership's joint venture partners will not take the position that
the rights of first refusal provisions are triggered and contend that the
applicable purchase price should be substantially lower than the amounts
specified by Cornerstone and Equity Office. In this regard, the joint venture
partner in Norwest Center informally has advised Equity Office and Cornerstone
of its intent to acquire Cornerstone Partnership's interest in Norwest Center
and has questioned the price allocation. In the event that any of Cornerstone
Partnership's joint venture partners in these properties acquires Cornerstone
Partnership's interest in the applicable joint venture, Equity Office would no
longer have an interest in such property, and depending upon the structure of
the transaction, the former partners in Cornerstone Partnership (including
Equity Office as the successor to Cornerstone) could be required to recognize
substantial amounts of gain for federal income tax purposes.
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To the extent it was able to do so, Equity Office may seek to structure any such
disposition in such a way as to defer the recognition of such gain, but there
can be no assurance that such efforts will be successful.
Under the joint venture agreement for the 120 Montgomery property,
Cornerstone Partnership's joint venture partner has both a right to purchase
Cornerstone Partnership's interest and a right to require that its joint venture
interest be acquired on the same terms that Cornerstone Partnership's interest
is being acquired in the mergers, which would involve the same considerations
discussed in the preceding paragraph. In the event the joint venture partner
declines to exercise its right to purchase Cornerstone Partnership's interest,
Equity Office intends to offer to acquire the joint venture partner's interest
in the 120 Montgomery venture at a price which is not less than the price that
Cornerstone and Equity Office agreed was allocable to this property and upon
other terms consistent with the venture agreement. There can be no assurance,
however, that Cornerstone Partnership's joint venture partner in 120 Montgomery
will not contend that the purchase price should be substantially higher than the
amount specified by Cornerstone and Equity Office.
ACQUISITION OF WCP SERVICES
William Wilson III and John S. Moody are the owners of common shares of
Cornerstone's third-party service subsidiary, WCP Services, Inc., representing
99% of the voting power and 5% of the economic interests in WCP Services.
Messrs. Wilson and Moody have entered into a stock purchase agreement relating
to such common shares of WCP Services. This agreement provides for the sale of
the voting capital stock of WCP Services owned by Messrs. Wilson and Moody to
Equity Office Properties Management Corp., a Delaware corporation in which
Equity Office owns a 95% non-voting equity interest. Each of Messrs. Wilson and
Moody will receive $200,000, including the assumption of indebtedness, in
exchange for his voting capital stock of WCP Services. WCP Services provides
third party management services, tenant services and development services.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
OVERVIEW
The following discussion summarizes the material federal income tax
consequences of:
- the partnership merger, in which Cornerstone Partnership will merge with
and into EOP Partnership and Cornerstone Partnership unitholders will
receive 0.7009 of a class A unit of EOP Partnership in exchange for each
Cornerstone Partnership class A common unit that is not redeemed
immediately prior to the partnership merger;
- the ownership and disposition of EOP Partnership class A units;
- the possible redemption of Cornerstone Partnership class A units for
shares of Cornerstone common stock immediately prior to the partnership
merger, at the election of the Cornerstone Partnership unitholder as
permitted by the merger agreement; and
- the merger of Cornerstone into Equity Office, which is referred to as the
REIT merger, and the receipt of cash, Equity Office common shares, or
both, in the REIT merger by Cornerstone Partnership unitholders who elect
to redeem some or all of their Cornerstone Partnership class A units for
Cornerstone common stock prior to the partnership merger and to
participate in the REIT merger as Cornerstone common stockholders.
The information in this section is based on the current provisions of the
Internal Revenue Code of 1986, as amended, current, temporary and proposed
Treasury Regulations, the legislative history of the Internal Revenue Code,
current administrative interpretations and practices of the Internal Revenue
Service, including its practices and policies as endorsed in private letter
rulings, which are not binding on the Internal Revenue Service except with
respect to the taxpayer that receives such a ruling, and court decisions.
However, future legislation, Treasury Regulations, administrative
interpretations and court decisions could significantly change current law or
adversely affect current interpretations of existing law.
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Changes in the applicable law could apply retroactively. Neither EOP Partnership
nor Cornerstone Partnership has requested or plans to request any rulings from
the Internal Revenue Service concerning the tax treatment of the partnership
merger, the REIT merger or EOP Partnership. Thus, it is possible that the
Internal Revenue Service would challenge the statements in this discussion,
which do not bind the Internal Revenue Service or the courts, and that a court
would agree with the Internal Revenue Service.
As used in this section, the term "EOP Partnership" refers only to EOP
Operating Limited Partnership and the term "Cornerstone Partnership" refers only
to Cornerstone Properties Limited Partnership. "EOP Partnership unit" refers
only to a class A unit of EOP Partnership and "Cornerstone Partnership unit"
refers only to a class A common unit of Cornerstone Partnership.
Because this is a summary that is intended to address only the U.S. federal
income tax consequences of the partnership merger, ownership of EOP Partnership
units, and the REIT merger that would apply to all Cornerstone Partnership class
A unitholders, it may not contain all the information that may be important to
you. As you review this discussion, you should keep in mind that:
- the tax consequences to you may vary depending on your particular tax
situation, including the circumstances under which you originally
acquired your Cornerstone Partnership units and subsequent events that
may have affected your Cornerstone Partnership units;
- you may be subject to special rules that are not discussed below if you
are:
-- a tax-exempt organization;
-- a broker-dealer;
-- a non-U.S. person;
-- a trust;
-- an estate;
-- a regulated investment company;
-- an insurance company; or
-- otherwise subject to special tax treatment under the Internal Revenue
Code;
- this summary does not address any state, local, or non-U.S. tax
consequences;
- this summary does not address any tax consequences to non-U.S.
corporations, non-U.S. partnerships, non-U.S. trusts, non-U.S. estates,
or individuals who are not taxed as citizens or residents of the United
States, all of which may be referred to collectively as "non-U.S.
persons"; and
- this discussion is not intended to be, and should not be construed as,
tax advice.
You are urged to review the following discussion and to consult with your
own tax advisor to determine, among other things, the effect of the partnership
merger and the subsequent ownership and disposition of EOP Partnership units on
your individual tax situation, including any state, local or non-U.S. tax
consequences that may apply to you. In addition, if you are considering an
election to redeem all or any portion of your Cornerstone Partnership units for
Cornerstone common stock prior to the partnership merger so that you may
participate in the REIT merger as a Cornerstone common stockholder, you are
urged to consult with your own tax advisor regarding the effect on your personal
tax situation of the redemption of your Cornerstone Partnership units for
Cornerstone common stock and the subsequent receipt of Equity Office common
shares, cash, or both, in the REIT merger.
As noted above, this discussion does not address any tax consequences to
Cornerstone Partnership unitholders that are non-U.S. persons. Cornerstone
Partnership believes that none of its unitholders is a non-U.S. person for U.S.
federal income tax purposes. However, special tax considerations may apply to a
Cornerstone Partnership unitholder that itself is a U.S. partnership or limited
liability company but which
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has non-U.S. persons as partners or members with respect to the partnership
merger, the redemption of Cornerstone Partnership units for Cornerstone common
stock before the partnership merger, and the subsequent disposition of
Cornerstone common stock in exchange for cash, Equity Office common shares, or
both, in the REIT merger. For example, the partnership merger, a redemption of
Cornerstone Partnership units, and the REIT merger could give rise to
"effectively connected income" with respect to which a Cornerstone Partnership
unitholder that is a partnership with non-U.S. partners would be subject to
withholding requirements under section 1446 of the Internal Revenue Code.
However, a Cornerstone Partnership unitholder that is a partnership will not be
required to withhold as a result of the partnership merger if, due to a
nonrecognition provision of the Internal Revenue Code, the exchange of its
Cornerstone Partnership units for EOP Partnership units does not give rise to
any taxable "effectively connected" gain that is allocable under its partnership
agreement to its non-U.S. partners. In order to avoid withholding and ensure
that the nonrecognition provisions of the Internal Revenue Code apply to the
partnership merger, the partnership and its non-U.S. partners will be required
to comply with Internal Revenue Service reporting requirements. Accordingly, any
Cornerstone Partnership unitholder that is a partnership or limited liability
company and whose partners or members include non-U.S. persons should consult
with its own tax advisor regarding any special U.S. tax consequences to it and
its partners or members that may result from these transactions.
SUMMARY OF THE MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE PARTNERSHIP
MERGER
The partnership merger will be treated for federal income tax purposes as:
- a contribution by Cornerstone Partnership of all of its assets, subject
to all of its existing liabilities, to EOP Partnership in exchange for
EOP Partnership units; and
- the subsequent distribution of those EOP Partnership units to the
Cornerstone Partnership unitholders in liquidation of Cornerstone
Partnership.
A Cornerstone Partnership unitholder who receives only EOP Partnership
units in exchange for all of its Cornerstone Partnership units in the
partnership merger generally will not recognize taxable gain or loss at the time
of the partnership merger unless the Cornerstone Partnership unitholder receives
or is considered to receive, in connection with the partnership merger, either a
cash distribution or a deemed cash distribution resulting from relief from
liabilities that exceeds the aggregate adjusted basis that the Cornerstone
Partnership unitholder has in its EOP Partnership units received in the
partnership merger, or is otherwise required to recognize ordinary income under
the "at-risk recapture" rules.
The determination of whether a Cornerstone Partnership unitholder has
received a deemed cash distribution resulting from relief from liabilities
depends on the unitholder's unique circumstances, including:
- the unitholder's adjusted tax basis in its Cornerstone Partnership units
at the time of the partnership merger;
- the assets originally contributed to Cornerstone Partnership by the
unitholder or by an entity from which the unitholder received its
Cornerstone Partnership units;
- the indebtedness, at the time of the partnership merger, of Cornerstone
Partnership secured by the assets originally contributed by the
unitholder or by an entity from which the unitholder received its
Cornerstone Partnership units;
- Cornerstone Partnership's tax basis at the time of the partnership merger
in the assets originally contributed by the unitholder or by an entity
from which the unitholder received its Cornerstone Partnership units;
- the share of the "unrealized gain" with respect to Cornerstone
Partnership's assets attributable to the unitholder at the time of the
partnership merger;
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- the amount of any recourse liabilities of Cornerstone Partnership
included in the unitholder's basis by reason of indemnification or
"deficit restoration obligations" that will be eliminated in the
partnership merger; and
- whether a unitholder that has a share of recourse liabilities of
Cornerstone Partnership by reason of an indemnification or deficit
restoration obligation elects to enter into a deficit restoration
obligation with respect to EOP Partnership at the time of the partnership
merger and whether that deficit restoration obligation is respected for
federal income tax purposes.
Even if a Cornerstone Partnership unitholder does not recognize taxable
gain at the time of the partnership merger, the occurrence of subsequent events
could cause the unitholder to recognize all or part of the gain that was
deferred either through the original contribution of assets to Cornerstone
Partnership or through the partnership merger. Equity Office, which is the
general partner of EOP Partnership, generally is not required to take into
account the tax consequences to, or obtain the consent of, the limited partners
of EOP Partnership in deciding whether to cause EOP Partnership to undertake
specific transactions that could have adverse tax consequences to the EOP
Partnership unitholders. However, under the merger agreement, Equity Office and
EOP Partnership have agreed not to undertake specific transactions involving
several specific properties that will be acquired from Cornerstone Partnership
in the partnership merger unless EOP Partnership either:
- obtains the prior written consent of specified former Cornerstone
Partnership unitholders; or
- compensates those specified former Cornerstone Partnership unitholders
for the acceleration of any tax liability incurred by them due to the
transaction, with any compensation to be paid to a former Cornerstone
Partnership unitholder under these circumstances to be determined under
the existing agreement between Cornerstone Partnership and the
unitholder.
See "The Merger Agreement -- Tax Related Undertakings of EOP Partnership -- Debt
Maintenance and Lock-up Agreements." Except for these specific commitments, EOP
Partnership and Equity Office have not made any commitment to Cornerstone,
Cornerstone Partnership or any of the Cornerstone Partnership unitholders not to
undertake transactions that will cause the former Cornerstone Partnership
unitholders to recognize all or part of the taxable gain that was deferred
either through the original contribution of assets to Cornerstone Partnership or
through the partnership merger.
TAX STATUS OF EOP PARTNERSHIP
An entity that is classified as a partnership for federal income tax
purposes generally is not a taxable entity and incurs no federal income tax
liability. Instead, each partner is required to take into account its allocable
share of income, gains, losses, deductions and credits of the partnership in
computing its federal income tax liability, even if no cash distributions are
made by the partnership to the partner. Distributions of money by a partnership
to a partner generally are not taxable unless the amount of the distribution
exceeds the partner's adjusted basis in its partnership interest.
The obligations of Cornerstone and Cornerstone Partnership to consummate
the partnership merger are conditioned upon their receipt of an opinion of Hogan
& Hartson L.L.P., counsel to Equity Office and EOP Partnership, to the effect
that EOP Partnership has been during and since 1997, and continues to be,
treated for federal income tax purposes as a partnership and not as a
corporation. This opinion will rely on customary factual assumptions and
customary representations made by Equity Office and EOP Partnership. If any of
the factual assumptions or representations relied upon by counsel is inaccurate,
the opinion may not accurately describe the treatment of EOP Partnership as a
partnership for federal income tax purposes.
Under the Treasury Regulations under section 7701 of the Internal Revenue
Code, an entity that is organized under state law as a partnership that is not a
"publicly traded partnership" will be treated as a partnership for tax purposes
unless it elects to be treated as a corporation. EOP Partnership has not
elected, and will not elect, to be treated as a corporation.
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An entity that is classified as a partnership under these regulations
nevertheless will be taxable as a corporation if it is a "publicly traded
partnership" within the meaning of section 7704 of the Internal Revenue Code
that fails to satisfy a "90% qualifying income" test under section 7704 of the
Internal Revenue Code. A partnership is a publicly traded partnership under
section 7704 of the Internal Revenue Code if:
- interests in the partnership are traded on an established securities
market; or
- interests in the partnership are readily tradable on a "secondary
market," or the "substantial equivalent" of a secondary market.
Under the relevant Treasury Regulations, interests in a partnership will
not be considered readily tradable on a secondary market or on the substantial
equivalent of a secondary market if the partnership qualifies for specified
"safe harbors," which look to the specific facts and circumstances relating to
the partnership and to transfers of interests in the partnership.
EOP Partnership currently takes the reporting position for federal income
tax purposes that it is not a publicly traded partnership. There is a
significant risk, however, that the right of EOP Partnership unitholders to
redeem the EOP Partnership units for EOP common shares could cause EOP
Partnership units to be considered readily tradable on the substantial
equivalent of a secondary market. Moreover, if EOP Partnership units were
considered to be tradable on the substantial equivalent of a secondary market
either now or in the future, EOP Partnership cannot guarantee that it would
qualify for any of the safe harbors mentioned above or that, if it currently
qualifies for a safe harbor, EOP Partnership will continue to qualify for the
safe harbors in the future. For example, EOP Partnership cannot satisfy the
"private placement" safe harbor because it has more than 100 partners and has
issued units in registered offerings, such as the units to be issued in
connection with the partnership merger.
If EOP Partnership is a publicly traded partnership, it will not be taxed
as a corporation if at least 90% of its gross income consists of "qualifying
income" under section 7704 of the Internal Revenue Code. Qualifying income
generally includes real property rents and certain other types of passive
income. EOP Partnership believes that it has and will continue to have
sufficient qualifying income so that it will be taxed as a partnership, even if
it were a publicly traded partnership. The income requirements applicable to
Equity Office in order for it to qualify as a REIT under the Internal Revenue
Code and the definition of qualifying income under the publicly traded
partnership rules are very similar. In addition, failure of EOP Partnership to
qualify as a partnership for tax purposes would cause Equity Office to fail to
qualify as a REIT. Therefore, it is likely that Equity Office will manage EOP
Partnership in such a way that Equity Office will meet the gross income tests
applicable to REITs and EOP Partnership will have qualifying income sufficient
for it to avoid being taxed as a corporation.
If EOP Partnership were a publicly traded partnership, but were not taxed
as a corporation for federal income tax purposes because it satisfies the 90%
qualifying income requirement, EOP Partnership unitholders would be subject to
special passive loss rules applicable to publicly traded partnerships. In
particular, if EOP Partnership were a publicly traded partnership, an EOP
Partnership unitholder would be unable to use passive losses from other passive
activities to offset the unitholder's share of EOP Partnership income and gains.
Similarly, any EOP Partnership losses allocable to an EOP Partnership unitholder
could be used only to offset the unitholder's allocable share of EOP Partnership
income and gains and not against income and gains from other passive activities.
This entire discussion assumes that EOP Partnership will be treated as a
partnership for federal income tax purposes, in accordance with the opinion of
Hogan & Hartson L.L.P. referred to above. If EOP Partnership were instead
taxable as a corporation, most, if not all, of the tax consequences described
below would not apply and distributions to EOP Partnership unitholders could be
materially reduced. In addition, if EOP Partnership were taxable as a
corporation, Equity Office would fail to qualify as a real estate investment
trust under the Internal Revenue Code and would be taxable as a regular
corporation. This would likely have the effect of reducing the value of Equity
Office common shares, which would
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adversely affect the value of EOP Partnership units because the EOP Partnership
units are convertible into Equity Office common shares or their cash equivalent,
at the election of Equity Office.
TAX STATUS OF CORNERSTONE PARTNERSHIP
The obligations of Equity Office and EOP Partnership to consummate the
partnership merger are conditioned upon their receipt of an opinion of King &
Spalding, counsel to Cornerstone and Cornerstone Partnership, to the effect that
Cornerstone Partnership has been during and since December 23, 1997, and
continues to be, treated for federal income tax purposes as a partnership and
not as a corporation. This opinion will rely on customary factual assumptions
and customary representations made by Cornerstone and Cornerstone Partnership.
If any of the factual assumptions or representations relied upon by counsel is
inaccurate, the opinion may not accurately describe the treatment of Cornerstone
Partnership as a partnership for federal income tax purposes.
Under the applicable Treasury Regulations, Cornerstone Partnership will be
classified as a partnership so long as it does not elect to be classified as a
corporation and is not a publicly traded partnership. Cornerstone Partnership
has not elected to be classified as a corporation and currently takes the
reporting position for federal income tax purposes that it is not a publicly
traded partnership. Moreover, Cornerstone Partnership believes that even if it
were a publicly traded partnership, it would not be taxed as a corporation
because at least 90% of its gross income consists of "qualifying income" under
section 7704 of the Internal Revenue Code. See "-- Tax Status of EOP
Partnership" above for a more detailed discussion of the tax consequences of
partnership classification, the publicly traded partnership rules and the
qualifying income exception.
The discussions under the headings "-- Tax Consequences of the Partnership
Merger to Cornerstone Partnership Unitholders that Receive EOP Partnership
Units" and "-- Tax Consequences of the Redemption of Cornerstone Partnership
Units for Cornerstone Common Stock" assume that Cornerstone Partnership will be
treated as a partnership for federal income tax purposes, in accordance with the
opinion of King & Spalding referred to above. If Cornerstone Partnership were
instead taxable as a corporation, most, if not all, of the tax consequences
described in the relevant discussions below would not apply.
TAX CONSEQUENCES OF THE PARTNERSHIP MERGER TO CORNERSTONE PARTNERSHIP
UNITHOLDERS THAT RECEIVE EOP PARTNERSHIP UNITS
As described above, the partnership merger will be treated for federal
income tax purposes as if Cornerstone Partnership contributed all of its assets
to EOP Partnership, subject to the existing liabilities of Cornerstone
Partnership, in exchange for EOP Partnership units, followed by a liquidation of
Cornerstone Partnership and a distribution of the EOP Partnership units to the
Cornerstone Partnership unitholders.
Under section 721 of the Internal Revenue Code, a partnership and its
partners will not recognize gain or loss due to the contribution of property to
the partnership in exchange for an interest in the partnership. In addition,
under section 731 of the Internal Revenue Code, a partner will not have taxable
gain on a distribution from a partnership of property other than "money." For
these purposes, "money" would include a distribution of "marketable securities"
in some circumstances. Section 721 ordinarily applies even when the transferred
property is subject to liabilities, so long as the assumption of liabilities
does not result in a deemed cash distribution to the partner in excess of the
partner's basis in the assets contributed to the partnership. Generally, under
these rules, neither Cornerstone nor a Cornerstone Partnership unitholder will
recognize gain if it only receives EOP Partnership units in the partnership
merger. However, even if a Cornerstone Partnership unitholder receives only EOP
Partnership units in the partnership merger, the unitholder could recognize gain
if one or more of the following situations applies:
- The unitholder receives a deemed cash distribution from EOP Partnership
as a result of a decrease in the unitholder's share of Cornerstone
Partnership liabilities that is not offset by an increase in the
unitholder's share of EOP Partnership liabilities attributable to the EOP
Partnership units acquired in the partnership merger. Under these
circumstances, the unitholder will recognize gain if the
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deemed cash distribution exceeds the unitholder's adjusted basis in its EOP
Partnership units received in the partnership merger. Similarly, gain could also
be recognized by a Cornerstone Partnership unitholder if the unitholder's share
of EOP Partnership liabilities is decreased after the partnership merger,
whether the decrease is due to the repayment by EOP Partnership of all or
part of its liabilities or some other event.
- The contribution of assets by Cornerstone Partnership to EOP Partnership
is treated in whole or in part as a "disguised sale" of the Cornerstone
Partnership assets under section 707 of the Internal Revenue Code.
- The unitholder is considered to receive a taxable distribution of
"marketable securities" under section 731(c) of the Internal Revenue Code
to which an exception does not apply.
- The unitholder is required to recognize income under the recapture rules
of section 465(e) of the Internal Revenue Code.
These potential gain recognition situations are discussed more fully below.
Under specific agreements with certain Cornerstone Partnership unitholders
(described above in "The Merger Agreement -- Tax Undertakings of EOP
Partnership -- Debt Maintenance and Lock-up Agreements"), Cornerstone
Partnership has agreed not to undertake certain transactions that would cause
adverse tax consequences to those Cornerstone Partnership unitholders without
complying with specified consent requirements or indemnifying those partners for
such adverse tax consequences. If, and to the extent that, the partnership
merger and the related transactions cause those Cornerstone Partnership
unitholders adverse tax consequences in violation of those agreements,
Cornerstone Partnership may be required to indemnify those unitholders in
accordance with the terms of those agreements and EOP Partnership would inherit
any such indemnification liability as the surviving partnership in the
partnership merger.
In addition, as mentioned above, subsequent events or transactions could
cause a Cornerstone Partnership unitholder to recognize all or part of its
deferred gain that is not recognized in the partnership merger. See "-- Effect
of Subsequent Events" below.
Reduction in Share of Partnership Liabilities/Deemed Cash Distribution. If
a Cornerstone Partnership unitholder's share of Cornerstone Partnership
liabilities is reduced as a result of the partnership merger, the unitholder
will be considered to receive a deemed cash distribution in connection with the
partnership merger and, accordingly, the Cornerstone Partnership unitholder
could recognize taxable gain at the time of the partnership merger. The
Cornerstone Partnership unitholder, however, will recognize gain only to the
extent that the deemed cash distribution exceeds the Cornerstone Partnership
unitholder's adjusted tax basis in the EOP Partnership units the unitholder
receives in the partnership merger.
In order to determine whether a Cornerstone Partnership unitholder's share
of liabilities is reduced as a result of the partnership merger, the Cornerstone
Partnership unitholder's share of liabilities in Cornerstone Partnership
immediately before the partnership merger will be compared to the unitholder's
share of liabilities as an EOP Partnership unitholder immediately after the
partnership merger. Any reduction in a unitholder's share of liabilities will be
considered to result in a deemed cash distribution from EOP Partner ship, which
will be taxable to the extent that it exceeds the Cornerstone Partnership
unitholder's adjusted tax basis in the EOP Partnership units the unitholder
receives in the partnership merger.
Under section 752 of the Internal Revenue Code and the relevant Treasury
Regulations, the determination of a partner's share of partnership liabilities
depends on whether the liabilities are "recourse" or "non-recourse." A
partnership liability is a recourse liability to the extent that any partner, or
a person related to any partner, bears the economic risk of loss for that
liability. A partnership liability is nonrecourse to the extent that no partner,
and no person related to any partner, bears the economic risk of loss for that
liability.
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Recourse Liabilities. A former Cornerstone Partnership unitholder will not
have any share of the recourse liabilities of EOP Partnership unless, and only
to the extent that, the unitholder enters into a "deficit restoration
obligation" with respect to any deficit in its capital account as an EOP
Partnership unitholder and that deficit restoration obligation is effective for
federal income tax purposes to cause the former Cornerstone Partnership
unitholder to be considered to bear the risk of loss with respect to EOP
Partnership recourse liabilities. Before the completion of the partnership
merger, a Cornerstone Partnership unitholder will be permitted to enter into a
deficit restoration obligation with respect to the EOP Partnership units that it
will receive in the partnership merger in an amount equal to, or, at the
individual unitholder's election, less than, the maximum amount that the
Cornerstone Partnership unitholder was obligated to restore with respect to its
Cornerstone Partnership units immediately prior to the partnership merger. After
the partnership merger, a former Cornerstone Partnership unitholder generally
will not be permitted to enter into a deficit restoration obligation or increase
the amount of any deficit restoration obligation with respect to its EOP
Partnership units, except under the following circumstances:
(1) the former Cornerstone Partnership unitholder will have the right
to increase the amount of its deficit restoration obligation if
the unitholder had this right under a separate agreement with
Cornerstone Partnership, and EOP Partnership assumed the
obligations of Cornerstone Partnership under that agreement as
part of the partnership merger;
(2) the former Cornerstone Partnership unitholders as a group will
have the right to increase their deficit restoration obligations
by an aggregate amount of $50 million, which amount will be
reduced by any increase in, or new, deficit restoration
obligations undertaken between February 11, 2000 and the
completion of the partnership merger, but which will not take into
account the amount of any deficit restoration obligations entered
into by former Cornerstone Partnership unitholders described in
(1) above; and
(3) EOP Partnership may grant, in its sole discretion, a former
Cornerstone Partnership unitholder's request to increase the
amount of an existing deficit restoration obligation if the former
Cornerstone Partnership unitholder demonstrates, to the
satisfaction of EOP Partnership, that without an increase in the
amount of its deficit restoration obligation, the former
Cornerstone Partnership unitholder would not be allocated enough
EOP Partnership liabilities under sections 752 and 465 of the
Internal Revenue Code to avoid the recognition of gain, other than
gain required to be recognized as a result of actual cash
distributions from EOP Partnership.
The deficit restoration obligation is an undertaking to restore to EOP
Partnership the amount of any negative capital account balance upon liquidation
or redemption of the unitholder's interest in EOP Partnership, up to the maximum
amount specified in the unitholder's deficit restoration obligation. The
partnership agreement of EOP Partnership allocates net losses in excess of EOP
Partnership's aggregate capital first to Equity Office, in an amount equal to
the excess of the aggregate recourse debt of EOP Partnership over the aggregate
deficit restoration obligations of all EOP Partnership unitholders, and then to
those unitholders who have deficit restoration obligations in proportion to and
to the extent of such restoration amounts. These special allocations of loss
will be made applicable to Cornerstone Partnership unitholders who enter into
deficit restoration obligations with respect to the EOP Partnership units
received in the partnership merger. For a more detailed discussion of
allocations of income and loss under the partnership agreement of EOP
Partnership, see "-- Tax Consequences of Ownership of EOP Partnership Units
After the Partnership Merger -- Allocations of EOP Partnership Income, Gain,
Loss and Deductions" below.
EOP Partnership does not offer any assurance that the deficit restoration
obligations will be effective to defer taxable gain that a former Cornerstone
Partnership unitholder otherwise would recognize either at the time of the
partnership merger or thereafter. Among other things, a deficit restoration
obligation would be effective to defer the recognition of gain only if and to
the extent that EOP Partnership has recourse liabilities outstanding equal to
the aggregate amount of the deficit restoration obligation of the particular
unitholder and all similar obligations undertaken by other unitholders of EOP
Partnership. However, EOP Partnership will not be required to maintain any
specific level of partnership recourse debt or incur any
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additional recourse liabilities in order to permit Cornerstone Partnership
unitholders to be allocated recourse liabilities of EOP Partnership equal to the
amount of their deficit restoration obligations, except as may be required in
order to meet obligations to former Cornerstone Partnership unitholders pursuant
to the protection agreements described in schedules to the merger agreement and
being assumed by EOP Partnership.
EOP Partnership will take the position for federal income tax reporting
purposes that each former Cornerstone Partnership unitholder that enters into a
deficit restoration obligation, either at the time of the partnership merger or
at a later time, will be allocated a share of EOP Partnership recourse
liabilities equal to the lesser of the amount of the unitholder's deficit
restoration obligation or the percentage of all EOP Partnership recourse
liabilities that the amount of the former Cornerstone Partnership unitholder's
deficit restoration obligation bears to the aggregate amount of the deficit
restoration obligations and similar undertakings of all EOP Partnership
unitholders and other partners. The Internal Revenue Service is not bound by
such position, however, and could assert that recourse liabilities should be
allocated in a different manner. EOP Partnership cannot guaranty that the
Internal Revenue Service would not successfully challenge EOP Partnership's
position.
Each Cornerstone Partnership unitholder who has entered into a deficit
restoration obligation with respect to its Cornerstone Partnership units is
urged to consult with its own tax advisor regarding the desirability of entering
into a deficit restoration obligation with respect to the EOP Partnership units
that it will receive in the partnership merger.
Nonrecourse Liabilities. A partner's share of partnership nonrecourse
liabilities equals the sum of:
- the partner's share of "partnership minimum gain" under section 704(b) of
the Internal Revenue Code and the relevant Treasury Regulations;
- the partner's "section 704(c) minimum gain," which is the amount of any
taxable gain that would be allocated to the partner under section 704(c)
of the Internal Revenue Code or in the same manner as section 704(c) of
the Internal Revenue Code in connection with a revaluation of partnership
property if the partnership disposed of all partnership property subject
to one or more nonrecourse liabilities of the partnership in full
satisfaction of those liabilities and for no other consideration in a
taxable transaction; and
- the partner's share of "excess nonrecourse liabilities" that are not
allocable to the partners under one of the two preceding rules.
Immediately after the partnership merger, EOP Partnership will not have any
partnership minimum gain, and, thus, no EOP Partnership unitholder will be
allocated any share of nonrecourse debt that is attributable to partnership
minimum gain.
The amount of any liabilities attributable to section 704(c) minimum gain
allocable to a Cornerstone Partnership unitholder who becomes an EOP Partnership
unitholder will depend on several factors, including:
- the Cornerstone Partnership unitholder's share of the section 704(c) gain
of Cornerstone Partnership immediately prior to the partnership merger,
which depends, among other things, upon the assets that the unitholder
originally contributed or was deemed to contribute to Cornerstone
Partnership in exchange for its Cornerstone Partnership units, the tax
basis of those assets at the time of the contribution to Cornerstone
Partnership relative to their fair market value at the time, and the
amount of nonrecourse liabilities of Cornerstone Partnership secured by
those assets at the time of the partnership merger;
- the Cornerstone Partnership unitholder's share of any additional 704(c)
minimum gain attributable to the assets of Cornerstone Partnership
created by reason of the partnership merger, if, for example, the
nonrecourse liabilities secured by particular Cornerstone Partnership
assets at the time of the partnership merger exceed the tax basis of
those assets by more than the existing section 704(c) minimum gain
attributable to those assets immediately prior to the partnership merger;
and
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- the extent to which EOP Partnership causes nonrecourse liabilities as to
which there exists section 704(c) minimum gain immediately prior to the
partnership merger to be repaid or refinanced in connection with the
partnership merger in a manner that reduces or eliminates that section
704(c) minimum gain.
EOP Partnership will allocate any excess nonrecourse liabilities by taking
into account various facts and circumstances relating to its unitholders'
interests in the taxable profits of EOP Partnership, including the unitholder's
allocable share of taxable gain specially allocated under section 704(c) of the
Internal Revenue Code, rather than solely based upon the percentage ownership
interests in EOP Partnership. With respect to former Cornerstone Partnership
unitholders, EOP Partnership will not allocate to them less nonrecourse
liabilities than would be allocated to them if EOP Partnership used the
allocation method previously used by Cornerstone Partnership. This method of
allocation of excess nonrecourse liabilities may result in an allocation of a
greater share of the excess nonrecourse liabilities of EOP Partnership to the
Cornerstone Partnership unitholders who become EOP Partnership unitholders in
the partnership merger and who have "negative capital accounts" than would
result if EOP Partnership merely were to allocate excess nonrecourse liabilities
in accordance with the unitholders' percentage ownership interest in EOP
Partnership. EOP Partnership cannot guarantee, however, that the Internal
Revenue Service will respect these methods of allocation of excess nonrecourse
liabilities following the partnership merger. These methods also could result in
changes from year to year in an EOP Partnership unitholder's share of excess
nonrecourse liabilities of EOP Partnership.
A former Cornerstone Partnership unitholder who is deemed to receive a cash
distribution from EOP Partnership as a result of a reduction of its share of
liabilities in connection with the partnership merger will recognize taxable
gain equal to the amount by which the deemed cash distribution exceeds the
unitholder's "initial basis" in its EOP Partnership units received in the
partnership merger. A Cornerstone Partnership unitholder's initial basis in the
EOP Partnership units received in the merger will equal the unitholder's
aggregate basis in its Cornerstone Partnership units at the time of the
partnership merger, before taking into account any deemed cash distribution from
EOP Partnership occurring as a result of the partnership merger.
EOP Partnership cannot guarantee that the nonrecourse liabilities of EOP
Partnership will be allocated in an amount such that no Cornerstone Partnership
unitholder will be deemed to receive a cash distribution in the partnership
merger in excess of the unitholder's basis in its EOP Partnership units received
in the partnership merger. Hence, it is essential that each Cornerstone
Partnership unitholder consult with its own tax advisor and take into account
its own particular circumstances in order to assess the potential impact of a
reduction of the unitholder's partnership liabilities and the resulting deemed
receipt of a cash distribution as a result of the partnership merger.
Disguised Sale. A Cornerstone Partnership unitholder may have taxable gain
if the partnership merger is considered to result in a "disguised sale" to EOP
Partnership of some or all of either the assets of Cornerstone Partnership or
the Cornerstone Partnership unitholder's units. Section 707 of the Internal
Revenue Code and the applicable Treasury Regulations, which are referred to as
the disguised sale regulations, generally provide that a disguised sale of
property has occurred if:
- a partner contributes property to a partnership; and
- the partnership transfers money or other consideration to the partner.
Under the disguised sale regulations, a contribution to a partnership and
any transfer to a partner that occur within two years of each other are presumed
to be a disguised sale unless:
- the facts and circumstances clearly establish that the contribution and
transfer do not constitute a disguised sale; or
- an exception to disguised sale treatment applies.
There previously was no authority applying the disguised sale regulations
to a transaction, such as the partnership merger, in which a partnership is
deemed to transfer property to another partnership in
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exchange for partnership interests and the transferor partnership is deemed to
liquidate. For example, it was not clear whether the Internal Revenue Service
would treat any transfer of money or other consideration from EOP Partnership to
a former Cornerstone Partnership unitholder that is considered part of a
disguised sale as being made to Cornerstone Partnership and then distributed by
Cornerstone Partnership to the Cornerstone Partnership unitholder, as opposed to
being made directly to the Cornerstone Partnership unitholder. If the transfer
was considered to be to Cornerstone Partnership, the gain recognized on the
disguised sale would be determined by reference to the excess of the value of
the Cornerstone Partnership assets over the Cornerstone Partnership's basis in
those assets. In addition, the allocation to the Cornerstone Partnership
unitholders of taxable gain of Cornerstone Partnership could be determined under
the allocation provisions of the partnership agreement of Cornerstone
Partnership, with the result that each Cornerstone Partnership unitholder could
be allocated a share of the resulting gain, even if the money or other
consideration giving rise to disguised sale treatment is only received by other
unitholders.
The Treasury Department, however, has recently proposed regulations that
would permit the parties to a partnership merger to treat any transfers of cash
or other property made by the acquiring partnership to some but not all partners
in the acquired partnership as a direct transaction between the acquiring
partnership and those individual partners, rather than between the acquiring
partnership and the acquired partnership. Under this approach, only the
Cornerstone Partnership unitholders receiving cash or property other than EOP
Partnership units in the partnership merger would be adversely affected by the
disguised sale regulations. There can be no assurance that these proposed
Treasury Regulations will be adopted in their current form or at all, and even
if adopted, they would be effective only for partnership mergers occurring after
the date of adoption. Nevertheless, absent clear authority to the contrary, EOP
Partnership plans to take the position that any receipt or deemed receipt of
cash or other property by a particular Cornerstone Partnership unitholder in, or
in connection with, the partnership merger does not adversely affect other
Cornerstone Partnership unitholders who receive only EOP Partnership units in
the partnership merger.
EOP Partnership will not make a direct transfer of money or of
consideration other than EOP Partnership units either to Cornerstone Partnership
or to any Cornerstone Partnership unitholder in the partnership merger. However,
the disguised sale rules can apply in other circumstances as well.
For purposes of the disguised sale rules, either an assumption of
liabilities by the partnership or a transfer of properties subject to
liabilities is treated as a transfer of money or other property from the
partnership to the partner which may give rise to a disguised sale, even if that
transaction would not otherwise result in a taxable deemed cash distribution in
excess of the partner's basis. However, in connection with a contribution to a
partnership that is not otherwise treated as part of a disguised sale, neither
the assumption of "qualified liabilities" by the partnership nor the acquisition
by the partnership of properties subject to "qualified liabilities" is treated
as part of a disguised sale. Under the disguised sale regulations, a qualified
liability includes:
- any liability incurred more than two years prior to the earlier of the
transfer of the property or the date the partner agrees in writing to the
transfer, as long as the liability has encumbered the transferred
property throughout the two-year period;
- a liability that was not incurred in anticipation of the transfer of the
property to a partnership, but that was incurred by the partner within
the two-year period prior to the earlier of the date the partner agrees
in writing to transfer the property or the date the partner transfers the
property to a partnership and that has encumbered the transferred
property since it was incurred;
- a liability that is traceable under applicable Treasury Regulations to
capital expenditures with respect to the property; and
- a liability that was incurred in the ordinary course of the trade or
business in which property transferred to the partnership was used or
held, but only if all the assets related to that trade or
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business are transferred, other than assets that are not material to a
continuation of the trade or business.
A liability incurred within two years of the transfer is presumed to be
incurred in anticipation of the transfer unless the facts and circumstances
clearly establish that the liability was not incurred in anticipation of the
transfer. However, to the extent that a contributing partner incurs a
refinancing liability and the proceeds thereof are allocable under the Treasury
Regulations to payments discharging all or part of any other liability of that
partner or of the partnership, the refinancing debt is considered the same as
the other liability for purposes of the disguised sale regulations. Finally, if
a partner treats a liability incurred within two years of the transfer as a
qualified liability because the facts clearly establish that it was not incurred
in anticipation of the transfer, such treatment must be disclosed to the
Internal Revenue Service in the manner set forth in the disguised sale
regulations.
Cornerstone and Cornerstone Partnership believe that all liabilities of
Cornerstone Partnership that will be assumed in the partnership merger by EOP
Partnership, or to which the assets of Cornerstone Partnership are subject, are
qualified liabilities and thus will not result in recognition of gain to the
Cornerstone Partnership unitholders under the disguised sale rules. There can be
no assurance, however, that the Internal Revenue Service will not contend
otherwise.
Cash distributions from a partnership to a partner also may be treated as a
transfer of property for purposes of the disguised sale rules. However, a cash
distribution will not be treated as part of a disguised sale if it is
attributable to a "reasonable preferred return" or is a distribution of
"operating cash flow." EOP Partnership anticipates that any ongoing cash
distributions that it make to its unitholders, including the former Cornerstone
Partnership unitholders, will qualify as distributions of operating cash flow
and, thus, will not be considered part of a disguised sale. EOP Partnership
cannot guarantee, however, that circumstances will not change and that EOP
Partnership will not make one or more extraordinary cash distributions that
could be viewed as part of a disguised sale to the extent received by former
Cornerstone Partnership unitholders.
EOP Partnership unitholders have "unit redemption rights," which entitle
the unitholders to require EOP Partnership to pay the unitholder the fair market
value of the EOP partnership unit in cash, unless Equity Office elects to
acquire the unit for cash or an Equity Office common share. The existence of the
unit redemption rights with respect to the EOP Partnership units issued in the
partnership merger should not be considered to be additional consideration for
purposes of the disguised sale rules. However, if a Cornerstone Partnership
unitholder that acquires EOP Partnership units in the partnership merger were to
exercise the unit redemption right at the time of or shortly after the
partnership merger, there may be a risk that the payment of cash by EOP
Partnership would result in disguised sale treatment of the partnership merger
for that unitholder. EOP Partnership intends to take the position that an
exercise of a unit redemption right by a former Cornerstone Partnership
unitholder following the partnership merger does not result in disguised sale
treatment for the partnership merger. EOP Partnership cannot guarantee, however,
that the Internal Revenue Service would not successfully challenge this
position. Furthermore, if the Internal Revenue Service did challenge this
position, EOP Partnership cannot guarantee that the adverse tax effects would be
limited to the unitholder that exercised its unit redemption right, although, as
noted previously, recently proposed Treasury Regulations, if adopted, should
limit disguised sale treatment only to the former Cornerstone Partnership
unitholder that exercised its unit redemption right.
If a disguised sale to EOP Partnership of all or a portion of the assets of
Cornerstone Partnership or a Cornerstone Partnership unitholder's units to EOP
Partnership is deemed to occur, a unitholder could be required to recognize some
or all of the deferred gain represented by the excess of the fair market value
of its Cornerstone Partnership units over the unitholder's basis in those units.
The disguised sale would be treated as a sale for all purposes of the Internal
Revenue Code and would be considered to take place on the date that, under
general principles of federal tax law, EOP Partnership becomes the owner of the
property. If the transfer of money or other consideration from EOP Partnership
occurs after the partnership merger, EOP Partnership would be treated as having
acquired the property at the time of the
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partnership merger and having issued an obligation to transfer to Cornerstone
Partnership or the unitholders, as applicable, money or other consideration at a
later date.
Moreover, if a transfer of property to a partnership is treated as part of
a disguised sale without regard to the partnership's assumption of or taking
subject to a qualified liability, then the partnership's assumption of or taking
subject to that liability is treated as a transfer of additional consideration
to the transferring partner. The amount of a qualified liability that will be
treated as additional consideration is generally an amount determined by
multiplying the amount of the qualified liability by the partner's "net equity
percentage." The net equity percentage is generally the amount of consideration
received by the partner, other than relief from qualified liabilities, divided
by the partner's net equity in the property sold, as calculated under the
disguised sale regulations.
Distribution of Marketable Securities. The partnership merger will be
treated as a contribution of assets by Cornerstone Partnership to EOP
Partnership in exchange for EOP Partnership units, followed by a distribution of
those EOP Partnership units to the Cornerstone Partnership unitholders in
liquidation of Cornerstone Partnership. Under section 731 of the Internal
Revenue Code, a Cornerstone Partnership unitholder could recognize gain or loss
on the distribution by Cornerstone Partnership of EOP Partnership units if the
EOP Partnership units are considered "marketable securities" unless specified
conditions are met. Marketable securities, for these purposes, include actively
traded securities, such as publicly traded REIT shares, or equity interests in
another entity that are readily convertible into or exchangeable for money or
marketable securities. EOP Partnership unitholders have the right to redeem
their units for Equity Office common shares, which are marketable securities, or
cash based upon the value of Equity Office common shares, at the election of
Equity Office. Accordingly, EOP Partnership units could be considered to be
readily exchangeable for money or marketable securities.
However, Treasury Regulations under section 731(c) provide that a
distribution of marketable securities will not be taxable under that section if
specified conditions are met. As applied to the partnership merger, those
conditions would be met if:
- the EOP Partnership units are acquired by Cornerstone Partnership in the
partnership merger and the partnership merger qualifies as a
nonrecognition transaction for EOP Partnership and Cornerstone
Partnership;
- the value at the time of the partnership merger of any securities and
money of Cornerstone Partnership that are contributed to EOP Partnership
in the partnership merger is less than 20% of the value of all the assets
contributed by Cornerstone Partnership to EOP Partnership in the
partnership merger; and
- Cornerstone Partnership distributes the EOP Partnership units to its
unitholders within five years after the partnership merger.
EOP Partnership and Cornerstone Partnership believe that the distribution
of EOP Partnership units in the partnership merger would not be treated as a
taxable distribution of marketable securities under section 731(c) because these
conditions described in the Treasury Regulations would be satisfied.
Section 465(e) Recapture. Under section 465 of the Internal Revenue Code, a
taxpayer's ability to use losses to offset taxable income is limited by rules
that are referred to as the "at-risk" rules. See "-- Tax Consequences of
Ownership of EOP Partnership Units After the Partnership Merger -- Limitations
on Deductibility of Losses; Treatment of Passive Activities and Portfolio
Income" below. In addition, the at-risk rules may require a taxpayer to
"recapture" losses that were previously used by the taxpayer with respect to an
"activity" if the taxpayer's "at-risk amount" for the activity falls below zero
at the close of the taxable year. Losses are recaptured by including the amount
of the losses previously used by the taxpayer in the taxpayer's taxable income
for the year of the recapture.
The identification and scope of an activity and the calculation of the
at-risk amount under the at-risk rules are highly complex and can involve
uncertainties. Generally, a taxpayer's at-risk amount for an activity is the
amount of the taxpayer's investment in the activity, which is increased by the
taxpayer's
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income from the activity and the taxpayer's share of the "qualified nonrecourse
financing," as defined in section 465(b)(6) of the Internal Revenue Code, with
respect to the activity, and reduced by the taxpayer's losses and distributions
from the activity. It is possible that the partnership merger and/or the
repayment or refinancing of some outstanding indebtedness of Cornerstone
Partnership that constitutes qualified nonrecourse financing at the time of or
following the partnership merger could cause a Cornerstone Partnership
unitholder's at-risk amount to be reduced below zero, which could, in turn,
cause the Cornerstone Partnership unitholder to recognize taxable income as a
result of the section 465(e) recapture provisions. The definition of qualified
nonrecourse financing is different from, and sometimes more restrictive than,
the definition of nonrecourse liabilities for purposes of determining basis,
discussed above. For example, debt issued by EOP Partnership in the public debt
markets may not qualify as qualified nonrecourse financing even if it qualifies
as a nonrecourse liability. It is therefore possible that a unitholder could
incur a reduction in its share of qualified nonrecourse financing that causes it
to recognize taxable income under the section 465(e) recapture rules even if the
unitholder does not have a reduction in its nonrecourse liabilities that causes
it to recognize gain as the result of a deemed cash distribution, as described
above.
EFFECT OF SUBSEQUENT EVENTS
Even if a Cornerstone Partnership unitholder is not required to recognize
gain at the time of the partnership merger, subsequent events could cause a
Cornerstone Partnership unitholder who becomes an EOP Partnership unitholder in
the partnership merger to recognize part or all of the unitholder's gain that is
not recognized at the time of the partnership merger. Subsequent events that
could cause the recognition of gain to a former Cornerstone Partnership
unitholder include:
- the sale of individual properties by EOP Partnership, particularly those
acquired from Cornerstone Partnership and with respect to which the
former Cornerstone Partnership unitholder had substantial deferred gain
even before the partnership merger (including a sale by EOP Partnership
of one or more properties that are owned by Cornerstone Partnership
through joint ventures before the partnership merger to the joint venture
partner(s) who owns the remaining interest in the property, whether
pursuant to the exercise by the joint venture partner of a right of first
refusal that may be triggered in connection with the partnership merger
(described above in "The Merger Agreement -- Cornerstone Joint Venture
Properties") or pursuant to a transaction entered into by EOP Partnership
with respect to such property at any time after the partnership merger);
- a distribution by EOP Partnership to one or more EOP Partnership
unitholders of a property formerly held by Cornerstone Partnership with
respect to which gain would have been recognized for tax purposes, but
was deferred, either at the time the former Cornerstone Partnership
unitholder contributed the property to Cornerstone Partnership or at the
time of the partnership merger;
- the refinancing, repayment or other reduction in the amount of existing
debt secured by individual properties, particularly those acquired from
Cornerstone Partnership and with respect to which the former Cornerstone
Partnership unitholder had substantial deferred gain even before the
partnership merger;
- the issuance of additional EOP Partnership units, which could reduce the
former Cornerstone Partnership unitholder's share of EOP Partnership
liabilities;
- an increase in the basis of a property formerly held by Cornerstone
Partnership, due to capital expenditures or otherwise, with respect to
which the former Cornerstone Partnership unitholder had substantial
deferred gain even before the partnership merger; and
- the elimination of the disparity between the current tax bases of the
Cornerstone Partnership properties and the "book bases" of the
properties, which are based on the fair market value of the properties at
the time of the partnership merger, which has the effect of reducing the
amount of indebtedness allocable to former Cornerstone Partnership
unitholders for basis purposes and, therefore, can result in deemed cash
distributions. See "-- Tax Consequences of Ownership of EOP
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Partnership Units After the Partnership Merger -- Tax Allocations with
Respect to Book-Tax Difference on Contributed Properties" below.
Equity Office, as the general partner of EOP Partnership, is not required
to take into account the tax consequences to the remaining EOP Partnership
unitholders, including the former Cornerstone Partnership unitholders, in
deciding whether EOP Partnership will undertake specific transactions, and the
EOP Partnership unitholders generally do not have the right to approve or
disapprove specific transactions. However, under the merger agreement, Equity
Office and EOP Partnership have agreed not to undertake specific transactions
involving several specific properties that will be acquired from Cornerstone
Partnership in the partnership merger unless EOP Partnership either:
- obtains the prior written consent of specified former Cornerstone
Partnership unitholders; or
- compensates those specified former Cornerstone Partnership unitholders
for the acceleration of any tax liability incurred by them due to the
transaction, with any compensation to be paid to a former Cornerstone
Partnership unitholder under these circumstances to be determined under
the existing agreement between Cornerstone Partnership and the
unitholder.
See "The Merger Agreement -- Tax Related Undertakings of EOP Partnership -- Debt
Maintenance and Lock-up Agreements." Except for these specific commitments, EOP
Partnership and Equity Office have not made any commitment to Cornerstone,
Cornerstone Partnership or any of the Cornerstone Partnership unitholders not to
undertake transactions that will cause the former Cornerstone Partnership
unitholders to recognize all or part of the taxable gain that was deferred
either through the original contribution of assets to Cornerstone Partnership
for Cornerstone Partnership units or through the partnership merger.
Sale of Individual Properties. If EOP Partnership sells assets acquired
from Cornerstone Partnership in the partnership merger that have significant
unrealized gain under applicable Treasury Regulations, the former Cornerstone
Partnership unitholders would be specially allocated an amount of taxable gain
equal to the unrealized gain, reduced by any amortized amounts. Those former
Cornerstone Partnership unitholders would report the additional gain on their
individual federal income tax returns, but would not be entitled to any special
distributions from EOP Partnership in connection with a sale of former
Cornerstone Partnership assets by EOP Partnership. Thus, the former Cornerstone
Partnership unitholders may not receive cash distributions from EOP Partnership
sufficient to pay their additional taxes if former Cornerstone Partnership
properties are sold. A former Cornerstone Partnership unitholder, however, may
be able to use any passive losses or passive loss carryforwards to offset any
unrealized gain that it must recognize, subject to any applicable passive loss
limitations, including special limitations that would apply if EOP Partnership
were to be classified as a publicly traded partnership. See "-- Tax Status of
EOP Partnership."
In this regard, EOP Partnership may sell one or more of the joint venture
interests that it acquires by reason of the partnership merger to the third
party joint venture partners pursuant to rights of first refusal existing under
the applicable joint venture agreements. (See the description of these joint
venture properties above in "The Merger Agreement -- Cornerstone Joint Venture
Properties"). Alternatively, EOP Partnership may decide to sell one or more of
its interests in these properties to the applicable joint venture partner even
though no right of first refusal exists or is exercised. In either case, the
former Cornerstone Partnership unitholder(s) who contributed a property that is
sold will be allocated, for federal income tax purposes, the portion of the gain
from any such sale that is attributable to the built-in gain that existed at the
time of the property was contributed to Cornerstone Partnership. Moreover, the
former Cornerstone Partnership unitholders as a group (including Equity Office
as the successor to Cornerstone) will be allocated, for federal income tax
purposes, the portion of the gain from any such sale that is attributable to the
built-in gain that existed at the time of the partnership merger (the
contribution of the Cornerstone Partnership properties to EOP Partnership), less
the built-in gain attributable to the original contributing Cornerstone
Partnership unitholders, if any, described in the preceding sentence.
The treatment of the unrealized gain in the absence of a sale of any former
Cornerstone Partnership assets will depend on the method that EOP Partnership
uses to deal with unrealized gain. For a discussion of the impact to the EOP
Partnership unitholders of unrealized gain in the absence of a sale of a
property,
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see "-- Tax Consequences of Ownership of EOP Partnership Units After the
Partnership Merger -- Tax Allocations with Respect to Book-Tax Difference on
Contributed Properties" below.
Distributions of Property. Upon the distribution by a partnership of
property to another partner within seven years of when the property was
contributed to the partnership, section 704(c)(1)(B) of the Internal Revenue
Code generally requires that the partner who contributed that property to the
partnership recognize any gain that existed, but was deferred, for federal
income tax purposes with respect to the property at time of the contribution.
Similarly, section 737 of the Internal Revenue Code generally requires the
recognition of a contributing partner's deferred gain upon the distribution by a
partnership to that partner of other partnership property within seven years of
when that partner contributed appreciated property to the partnership.
Accordingly, a former Cornerstone Partnership unitholder who contributed
appreciated property to Cornerstone Partnership could recognize gain under
either of these provisions if EOP Partnership either distributes a property
formerly held by Cornerstone Partnership to one or more other EOP Partnership
unitholders or distributes any EOP Partnership property to that Cornerstone
Partnership unitholder within seven years of when the contributing Cornerstone
Partnership unitholder originally contributed the property to Cornerstone
Partnership. However, under specific exceptions in the applicable Treasury
Regulations, neither of these provisions will apply to cause the recognition of
gain by a Cornerstone Partnership unitholder at the time of the partnership
merger. Similarly, gain that is deferred at the time of the partnership merger
with respect to appreciated assets of Cornerstone Partnership that are
contributed to EOP Partnership, to the extent allocable to a former Cornerstone
Partnership unitholder, will be subject to gain recognition under these
provisions upon a distribution of property by EOP Partnership within seven years
after the partnership merger.
Refinancing of the Indebtedness Secured by Individual Properties. As
described above under "-- Tax Consequences of the Partnership Merger to
Cornerstone Partnership Unitholders That Receive EOP Partnership
Units -- Reduction in Share of Partnership Liabilities/Deemed Cash Distribution"
a Cornerstone Partnership unitholder could recognize taxable gain as a result of
a reduction in the unitholder's share of partnership liabilities either in
connection with the partnership merger or due to later events. EOP Partnership
cannot guarantee that a future refinancing of the indebtedness securing a
property would not result in a reduction of the liabilities allocated to the
former Cornerstone Partnership unitholders, causing the former Cornerstone
Partnership unitholders to recognize taxable gain. EOP Partnership's current
long-term financing strategy is to have as little debt as possible that is
secured by individual properties and to have as much of its debt as possible in
the form of unsecured debt, held either by the public or by institutional
investors. This debt may or may not be recourse to Equity Office, as the general
partner of EOP Partnership. In addition, this debt may not qualify as either a
nonrecourse liability for purposes of determining a unitholder's share of
partnership liabilities or as qualified nonrecourse financing under the at-risk
rules. Even if this unsecured debt qualified as a nonrecourse liability, the
amount of section 704(c) minimum gain with respect to properties that previously
secured traditional mortgage indebtedness would likely be reduced significantly,
which would result in a reduction of nonrecourse liabilities allocable to former
Cornerstone Partnership unitholders and thus a deemed cash distribution.
Generally, the maximum amount of gain that any former Cornerstone Partnership
unitholder could recognize as a result of a reduction in liabilities is the
amount by which its share of the indebtedness of Cornerstone Partnership exceeds
its share of the tax basis of the Cornerstone Partnership assets, which amount
is commonly referred to as a "negative tax capital account."
TAX CONSEQUENCES OF OWNERSHIP OF EOP PARTNERSHIP UNITS AFTER THE PARTNERSHIP
MERGER
Income and Deductions in General. Each EOP Partnership unitholder will be
required to report on its income tax return its allocable share of income,
gains, losses, deductions and credits of EOP Partnership. Each EOP Partnership
unitholder will be required to include these items on its federal income tax
return even if the unitholder has not received any cash distributions from EOP
Partnership. For each taxable year, EOP Partnership is required to furnish to
each EOP Partnership unitholder a Schedule K-1 that sets forth the unitholder's
allocable share of any income, gains, losses, deductions and credits of EOP
Partnership. EOP Partnership is not required to pay any federal income tax
directly.
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Treatment of EOP Partnership Distributions. Distributions of money by EOP
Partnership to an EOP Partnership unitholder, including deemed distributions
that result from a reduction in the unitholder's share of EOP Partnership
liabilities, generally will result in taxable gain to the unitholder only if and
to the extent that the distribution exceeds the unitholder's basis in its EOP
Partnership units immediately before the distribution. A portion of the gain may
be taxable as ordinary income. Any reduction in an EOP Partnership unitholder's
share of EOP Partnership's nonrecourse liabilities, whether through repayment,
refinancing with recourse liabilities, refinancing with nonrecourse liabilities
secured by the other properties as to which the unitholder does not have section
704(c) minimum gain, or otherwise, will constitute a deemed distribution of
money to the unitholder. In addition, an issuance of additional units by EOP
Partnership without a corresponding increase in EOP Partnership's nonrecourse
liabilities could decrease an EOP Partnership unitholder's share of EOP
Partnership nonrecourse liabilities, resulting in a deemed distribution of money
to an EOP Partnership unitholder.
A distribution of property other than money by EOP Partnership to its
unitholders ordinarily does not result in the recognition of gain or loss by
either EOP Partnership or the unitholder unless the property is a marketable
security for purposes of section 731(c) of the Internal Revenue Code and the
exceptions to the requirement for recognition of gain do not apply. In that
event, the property would be treated as money and the unitholder would recognize
gain, but not loss, to the extent described above.
Upon the distribution of property to another partner within seven years of
when the property was contributed to the partnership, section 704(c)(1)(B) of
the Internal Revenue Code generally requires that the partner who contributed
that property to the partnership recognize any gain that existed, but was
deferred, for federal income tax purposes with respect to the property at time
of the contribution. Similarly, section 737 of the Internal Revenue Code
generally requires the recognition of a contributing partner's deferred gain
upon the distribution to that partner of other partnership property within seven
years of when that partner contributed appreciated property to the partnership.
For a discussion of these provisions with respect to the partnership merger and
former Cornerstone Partnership unitholders, see "-- Effect of Subsequent
Events -- Distributions of Property" above.
Initial Basis of Units. In general, a Cornerstone Partnership unitholder
who acquires EOP Partnership units in the partnership merger will have an
initial basis in its EOP Partnership units equal to its basis in its Cornerstone
Partnership units, adjusted to reflect the effects of the partnership merger.
An EOP Partnership unitholder's initial basis in its EOP Partnership units
will generally be increased by the unitholder's share of:
- EOP Partnership taxable income;
- any increases in nonrecourse liabilities incurred by EOP Partnership; and
- recourse liabilities to the extent the EOP Partnership unitholder elects
to take on a deficit restoration obligation.
Generally, an EOP Partnership unitholder's initial basis in its units will
be decreased, but not below zero, by the unitholder's share of:
- EOP Partnership distributions;
- decreases in liabilities of EOP Partnership, including any decrease in
its share of the nonrecourse liabilities of the EOP Partnership;
- losses of EOP Partnership; and
- nondeductible expenditures of EOP Partnership that are not chargeable to
capital.
Allocations of EOP Partnership Income, Gain, Loss and Deductions. The
partnership agreement of EOP Partnership generally provides that net losses will
be allocated among the unitholders in proportion to their respective percentage
ownership interests in EOP Partnership. However, a holder of EOP Partnership
class A units will not be allocated net losses that would have the effect of
creating a deficit balance in its
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capital account, as specially adjusted for such purpose, which losses are
referred to as excess losses. Excess losses will be allocated first to Equity
Office in an amount equal to the excess of the aggregate recourse debt of EOP
Partnership over the aggregate deficit restoration obligations of the EOP
Partnership unitholders; second, to EOP Partnership unitholders who have deficit
restoration obligations in proportion to and to the extent of their respective
deficit restoration obligations; and thereafter, to Equity Office.
The partnership agreement of EOP Partnership generally provides that net
income first will be allocated proportionately to unitholders who have deficit
restoration obligations in one amount equal to the cumulative net losses
allocated to such unitholders. Second, Equity Office will be allocated net
income equal to the cumulative net losses allocated to Equity Office that
represented the excess of the aggregate recourse debt of EOP Partnership over
the aggregate deficit restoration obligations of EOP Partnership unitholders.
Third, net income will be allocated to any preferred unitholders to the extent
necessary to reflect and preserve the economic rights associated with the
particular preferred units. Finally, any remaining net income shall be allocated
in proportion to the respective percentage ownership interests of the
unitholders.
In connection with the partnership merger, the partnership agreement of EOP
Partnership will be amended to apply the special allocations of loss with
respect to unitholders who have deficit restoration obligations to former
Cornerstone Partnership unitholders who enter into deficit restoration
obligations with EOP Partnership as permitted under the merger agreement. For a
more detailed discussion of the opportunity of Cornerstone Partnership
unitholders to enter into deficit restoration obligations, see "The Merger
Agreement -- Tax Related Undertakings of EOP Partnership -- Deficit Restoration
Obligations" above.
Under Section 704(b) of the Code, a partnership's allocation of any item of
income, gain, loss or deduction to a partner will be given effect for federal
income tax purposes so long as it has "substantial economic effect," or is
otherwise in accordance with the "partner's interest in the partnership." If an
allocation of an item does not satisfy this standard, it will be reallocated
among the partners on the basis of their respective interests in the
partnership, taking into account all facts and circumstances. EOP Partnership
believes that the allocations of items of income, gain, loss and deduction under
the partnership agreement, as described above, will be considered to have
substantial economic effect under the applicable Treasury Regulations.
Tax Allocations with Respect to Book-Tax Difference on Contributed
Properties. Under section 704(c) of the Internal Revenue Code, income, gain,
loss and deduction attributable to appreciated or depreciated property that is
contributed to a partnership must be allocated for federal income tax purposes
in a manner such that the contributor is charged with, or benefits from, the
unrealized gain or unrealized loss associated with the property at the time of
contribution. The amount of unrealized gain or unrealized loss is generally
equal to the difference between the fair market value of the contributed
property at the time of contribution and the adjusted tax basis of the property
at the time of contribution, which is referred to as the "book-tax difference."
A book-tax difference also can exist with respect to an asset that has not
appreciated or depreciated in economic terms if that asset has been depreciated
for tax purposes. At the time of the partnership merger, a substantial book-tax
difference is likely to exist with respect to the assets acquired from
Cornerstone Partnership, particularly those that Cornerstone Partnership
previously acquired in exchange for its units.
The partnership agreement of EOP Partnership requires allocations of
income, gain, loss and deduction attributable to the Properties be made in a
manner that is consistent with section 704(c) of the Internal Revenue Code.
Treasury Regulations under section 704(c) require partnerships to use a
"reasonable method" for allocation of items affected by section 704(c) of the
Internal Revenue Code. EOP Partnership uses the "traditional method," one of the
three methods outlined by the Treasury Regulations under section 704(c), for its
existing properties, and is required to use such method for the properties it
acquires from Cornerstone Partnership. Under the traditional method, former
Cornerstone Partnership unitholders will be allocated less depreciation and,
therefore, more income with respect to the assets owned by Cornerstone
Partnership prior the partnership merger. The effects of these allocations will
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be different for different Cornerstone Partnership unitholders and will depend
upon which, if any, properties those unitholders originally contributed to
Cornerstone Partnership and the amount of depreciation, if any, that remains to
be claimed with respect to those properties. These reduced allocations of
depreciation and increased allocations of income will be offset at least in part
by increased allocations of depreciation and reduced allocations of income with
respect to properties owned by EOP Partnership before the partnership merger.
If an asset that was acquired from Cornerstone Partnership (including any
joint venture properties as described above under "-- Sale of Individual
Properties") is sold by EOP Partnership, gain equal to any book-tax difference
remaining at the time of such sale must be allocated exclusively to the former
Cornerstone Partnership unitholders, even though the proceeds of the sale will
be allocated proportionately among all EOP Partnership unitholders. Conversely,
no gain attributable to any book-tax difference remaining in an existing EOP
Partnership property at the time of a sale will be allocated to the former
Cornerstone Partnership unitholders. Under the traditional method, however, the
gain required to be specially allocated would not exceed the gain that is
recognized by EOP Partnership on the sale. The amount of gain allocated to
specific former Cornerstone Partnership unitholders with respect to former
Cornerstone Partnership assets would depend upon a number of variables,
including the book-tax difference that existed with respect to such assets
within Cornerstone Partnership before the partnership merger; whether the former
Cornerstone Partnership unitholder owns units issued in exchange for the
contribution of that asset to Cornerstone Partnership; the amount of the
additional book-tax difference that was created as a result of the partnership
merger with respect to the asset; and the amount of the book-tax difference with
respect to that asset that has been amortized since the partnership merger and
before the sale of the asset through the special allocations of depreciation
deductions described above.
The partnership agreement of EOP Partnership also requires that any gain
allocated to the EOP Partnership unitholders upon the sale or other taxable
disposition of any EOP Partnership asset must, to the extent possible after
taking into account other required allocations of gain, be characterized as
recapture income in the same proportions and to the same extent as the
unitholders previously have been allocated any deductions directly or indirectly
giving rise to the treatment of the gains as recapture income.
Liquidation of EOP Partnership. If EOP Partnership liquidates and
dissolves, a distribution of EOP Partnership property other than money generally
will not result in taxable gain to an EOP Partnership unitholder, except to the
extent provided in sections 737, 704(c)(1)(B) and 731(c) of the Internal Revenue
Code. The basis of any distributed property to an EOP Partnership unitholder
will equal the adjusted basis of the unitholder's EOP Partnership units, reduced
by any money distributed in liquidation. A distribution of money upon the
liquidation of EOP Partnership, however, will be taxable to an EOP Partnership
unitholder to the extent that the amount of money distributed in liquidation,
including any deemed distributions of cash as a result of a reduction in the
unitholder's share of partnership liabilities, exceeds the unitholder's tax
basis in its EOP Partnership units. If Equity Office issued its shares of
beneficial interest to EOP Partnership unitholders upon the liquidation of EOP
Partnership, it is likely that each EOP Partnership unitholder would be treated
as if it had exchanged its EOP Partnership units for Equity Office shares and
the unitholder would recognize gain or loss as if its EOP Partnership units were
sold in a fully taxable exchange. See "-- Redemptions of EOP Partnership Units"
below.
Limitations on Deductibility of Losses; Treatment of Passive Activities and
Portfolio Income. Generally, individuals, estates, trusts and some closely held
corporations and personal service corporations can deduct losses from "passive
activities" only to the extent that those losses do not exceed the taxpayer's
income from passive activities. Generally, passive activities are activities or
investments in which the taxpayer does not materially participate, which would
include the ownership of interests in EOP Partnership. If EOP Partnership were
classified as a publicly traded partnership under the Internal Revenue Code, any
losses or deductions allocable to an EOP Partnership unitholder could be used
only against gains or income of EOP Partnership and could not be used to offset
passive income from other passive activities. Similarly, any EOP Partnership
income or gain allocable to an EOP Partnership unitholder could not be offset
with losses from other passive activities of the unitholder. For a more
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detailed discussion of EOP Partnership's possible classification as a publicly
traded partnership, see "-- Tax Status of EOP Partnership" above.
In addition, an EOP Partnership unitholder may not deduct its share of any
EOP Partnership losses to the extent that those losses exceed the lesser of:
- the adjusted tax basis of its EOP Partnership units at the end of EOP
Partnership's taxable year in which the loss occurs; and
- the amount for which such unitholder is considered "at-risk" at the end
of that year.
In general, an EOP Partnership unitholder will be at-risk to the extent of
its basis in its EOP Partnership units, except to the extent that the unitholder
acquired its units using nonrecourse debt. For these purposes, a unitholder's
basis in its EOP Partnership units will include only the unitholder's share of
EOP Partnership's liabilities, as determined under section 752 of the Internal
Revenue Code, that are considered "qualified nonrecourse financing" for purposes
of these at-risk rules. EOP Partnership believes that all of the debt secured by
its properties that otherwise qualifies as nonrecourse liabilities under section
752 of the Internal Revenue Code will constitute qualified nonrecourse financing
for purposes of the at-risk rules, but EOP Partnership cannot guarantee that the
Internal Revenue Service might not successfully contend that some or all of the
debt secured by EOP Partnership's properties is not qualified nonrecourse
financing. In addition, there can be no assurance that EOP Partnership will not
repay some or all of its qualified nonrecourse financing in the future with
proceeds from equity offerings or proceeds of debt that do not constitute
qualified nonrecourse financing.
After the partnership merger, a former Cornerstone Partnership unitholder's
at-risk amount generally will increase or decrease as the adjusted basis in its
EOP Partnership units increases or decreases, except for increases or decreases
attributable to EOP Partnership liabilities that do not constitute qualified
nonrecourse financing. If an EOP Partnership unitholder is not allowed to use
losses in a particular taxable year because of the application of the at-risk
rules, the losses can be carried forward and may be used by the unitholder to
offset income in a subsequent year to the extent that the unitholder's adjusted
basis or at-risk amount, whichever was the limiting factor, is increased in that
subsequent year. The at-risk rules apply to:
- an individual unitholder;
- an individual shareholder or partner of a unitholder that is an S
corporation or partnership; and
- a unitholder that is a corporation if 50% or more of the value of that
corporation's stock is owned, directly or indirectly, by five or fewer
individuals at any time during the last half of the taxable year.
Disposition of EOP Partnership Units. If an EOP Partnership unit is sold,
transferred as a gift, or otherwise disposed of, gain or loss from the
disposition will be based on the difference between the amount realized on the
disposition and the basis attributable to the EOP Partnership unit. The amount
realized on the disposition of a unit generally will equal the sum of:
- any cash received;
- the fair market value of any other property received; and
- the amount of EOP Partnership liabilities allocated to the unit.
Accordingly, a unitholder will recognize gain on the disposition of a unit
to the extent that the amount realized exceeds the unitholder's basis for the
EOP Partnership unit. Because the amount realized includes any amount
attributable to the relief from EOP Partnership liabilities attributable to the
unit, a unitholder could have taxable income, or perhaps even a tax liability,
in excess of the amount of cash and property received upon the disposition the
unit.
Generally, gain recognized on the disposition of an EOP Partnership unit
will be capital gain. However, any portion of the EOP unitholder's amount
realized on the disposition of a unit that is
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attributable to "unrealized receivables" of EOP Partnership, as defined in
section 751 of the Internal Revenue Code, will give rise to ordinary income. The
amount of ordinary income that would have to be recognized would be equal to the
amount by which the unitholder's share of unrealized receivables of EOP
Partnership exceeds the unitholder's basis attributable to those assets.
Unrealized receivables include, to the extent not previously included in EOP
Partnership's income, any rights to payment for services rendered or to be
rendered. Unrealized receivables also include amounts attributable to prior
depreciation deductions that would be subject to recapture as ordinary income if
EOP Partnership had sold its assets at their fair market value at the time of
the redemption.
For individuals, trusts and estates, net capital gain from the sale of an
asset held one year or less is subject to tax at the applicable rate for
ordinary income. For these taxpayers, the maximum rate of tax on the net capital
gain from a sale or exchange of an asset held for more than one year generally
is 20%. However, a 25% rate applies to the extent that net capital gains
attributable to the sale of depreciable real property are attributable to prior
depreciation deductions not otherwise recaptured as ordinary income under other
depreciation recapture rules. The applicable provisions of the Internal Revenue
Code give the Internal Revenue Service the authority to publish Treasury
Regulations regarding the application of the 25% rate to a sale of an interest
in a pass-through entity, such as a partnership, to the extent that the gain
realized on the sale of the interest is attributable to prior depreciation
deductions by the partnership that have not otherwise been recaptured as
ordinary income. The Internal Revenue Service has issued proposed regulations
regarding the application of the 25% rate to sales of interests in partnerships.
While there is some uncertainty regarding whether the 25% rate would apply to
sales of partnership interests before final Treasury Regulations are issued, the
IRS has taken the position, for which there appears to be some support in the
applicable legislative history, that the 25% rate currently applies to sales of
interests in partnerships. Under this view, any gain on the sale of an EOP
Partnership unit held for more than one year could be treated partly as gain
from the sale of a long-term capital asset subject to a 20% tax rate, partly as
gain from the sale of depreciable real property subject to a 25% tax rate to the
extent attributable to prior depreciation deductions by EOP Partnership that
have not been otherwise recaptured as ordinary income, and partly as ordinary
income to the extent attributable to unrealized receivables. Even in the event
that the 25% exception does not currently apply to sales of interests in
partnerships that hold depreciable real property, the IRS has proposed
regulations that, if finalized, would apply the exception definitively to such a
sale. Each EOP Partnership unitholder should consult with its own tax advisor
regarding the application of the 25% rate to a sale of EOP Partnership units and
the potential application of the proposed Treasury Regulations.
Redemptions of EOP Partnership Units. If an EOP Partnership unitholder
exercises his unit redemption right, it is likely that Equity Office will elect
to exercise its right under the EOP Partnership Agreement to acquire the
unitholder's EOP Partnership units in exchange for cash or Equity Office common
shares. However, Equity Office is under no obligation to exercise this right. If
Equity Office does elect to acquire a unitholder's EOP Partnership units in
exchange for cash or Equity Office common shares, the transaction will be a
fully taxable sale to the unitholder. The amount realized by a unitholder on
this kind of disposition of an EOP Partnership unit will equal the sum of:
- any cash received;
- the fair market value of any Equity Office common shares received; and
- the amount of EOP Partnership liabilities allocated to the unit
exchanged.
The unitholder's taxable gain and the tax consequences of that gain would be
determined as described under "-- Disposition of EOP Partnership Units" above.
If Equity Office does not elect to acquire the EOP Partnership unitholder's
units in exchange for cash or Equity Office common shares, EOP Partnership is
required to redeem those EOP Partnership units for cash. If the EOP Partnership
redeems EOP Partnership units for cash contributed by Equity Office in order to
effect the redemption, the redemption likely will be treated as a sale of the
EOP Partnership units
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to Equity Office in a fully taxable transaction, although the matter is not free
from doubt. Under these circumstances, the redeeming unitholder's amount
realized will equal the sum of:
- the cash received; and
- the amount of EOP Partnership liabilities allocated to the unit redeemed.
The unitholder's taxable gain and the tax consequences of that gain would be
determined as described under "-- Disposition of EOP Partnership Units" above.
If an EOP Partnership unit is redeemed for cash that is not contributed by
Equity Office to effect the redemption, the unitholder's tax treatment will
depend upon whether or not the redemption results in a disposition of all of the
unitholder's EOP Partnership units. If all of the unitholder's EOP Partnership
units are redeemed, the unitholder's taxable gain and the tax consequences of
that gain will be determined as described under "-- Disposition of EOP
Partnership Units" above. However, if less than all of a unitholder's EOP
Partnership units are redeemed, the unitholder will not be allowed to recognize
loss on the redemption and will recognize taxable gain only if and to the extent
that the unitholder's amount realized on the redemption, calculated as described
above, exceeds the unitholder's basis in all of its EOP Partnership units
immediately before the redemption.
Partnership Audit Procedures. The federal income tax information returns
filed by EOP Partnership may be audited by the Internal Revenue Service. The
Internal Revenue Code contains partnership audit procedures governing the manner
in which Internal Revenue Service audit adjustments of partnership items are
resolved. Unless and until EOP Partnership elects to be treated as an "electing
large partnership," it is and will continue to be subject to audit rules under
the Tax Equity and Fiscal Responsibility Act of 1982, which is referred to as
TEFRA. See "-- Possible Future Election by EOP Partnership to be Treated as an
Electing Large Partnership" below.
Partnerships generally are treated as separate entities for purposes of
federal tax audits, judicial review of adjustments by the Internal Revenue
Service, and tax settlement proceedings. The tax treatment of partnership items
of income, gain, loss, deduction and credit is determined at the partnership
level in a unified partnership proceeding, rather than in separate proceedings
with each partner. The Internal Revenue Code provides for one partner to be
designated as the "tax matters partner" for these purposes. Equity Office is the
tax matters partner for EOP Partnership.
The tax matters partner is authorized, but not required, to take some
actions on behalf of EOP Partnership and the unitholders and can extend the
statute of limitations for assessment of tax deficiencies against the EOP
Partnership unitholders with respect to EOP Partnership items. The tax matters
partner will make a reasonable effort to keep each unitholder informed of
administrative and judicial tax proceedings with respect to EOP Partnership
items in accordance with Treasury Regulations issued under section 6223 of the
Internal Revenue Code. In connection with adjustments to EOP Partnership tax
returns proposed by the Internal Revenue Service, the tax matters partner may
bind any unitholder with less than a 1% profits interest in EOP Partnership to a
settlement with the Internal Revenue Service unless the unitholder elects not to
give that authority to the tax matters partner by filing a statement to that
effect with the Internal Revenue Service. The tax matters partner may seek
judicial review, to which all unitholders will be bound, of a final EOP
Partnership administrative adjustment. If the tax matters partner fails to seek
judicial review, it may be sought by any unitholder having at least a 1%
interest in the profits of the EOP Partnership and by unitholders having, in the
aggregate, at least a 5% profits interest. Only one judicial proceeding will go
forward, however, and each unitholder with an interest in the outcome may
participate.
Unitholders will generally be required to treat EOP Partnership items on
their federal income tax returns in a manner consistent with the treatment of
the items on the EOP Partnership information return. In general, that
consistency requirement is waived if a unitholder files a statement with the
Internal Revenue Service identifying the inconsistency. Failure to satisfy the
consistency requirement, if not waived, will result in an adjustment to conform
the treatment of the item by the unitholder to the treatment on the EOP
Partnership return. Even if the consistency requirement is waived, adjustments
to the unitholder's tax
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liability with respect to EOP Partnership items may result from an audit of EOP
Partnership's or the unitholder's tax return. Intentional or negligent disregard
of the consistency requirement may subject a unitholder to substantial
penalties. In addition, an audit of the EOP Partnership return may also lead to
an audit of an individual unitholder's tax return, which could result in
adjustment of non-partnership items.
Possible Future Election by EOP Partnership to be Treated as an Electing
Large Partnership. EOP Partnership has not yet elected, but could elect in the
future, to be treated as an "electing large partnership" for federal tax
purposes. This election is available to partnerships, such as EOP Partnership,
that have 100 or more partners and meet other requirements set forth in the
Internal Revenue Code. The election would entitle EOP Partnership to use a
simplified flow-through reporting system and a special audit system. Although
EOP Partnership has not made an election to be treated as an electing large
partnership, EOP Partnership may determine to make this election for future
taxable years.
As an electing large partnership, EOP Partnership would be eligible to use
a simplified flow-through reporting system, under which the number of tax items
that unitholders are required to account for separately will be significantly
reduced. For example:
- miscellaneous itemized deductions will not be separately reported to the
unitholders, but will be allowed to the EOP Partnership to the extent of
30 percent of such deductions;
- charitable contributions will be deductible by EOP Partnership instead of
being reported to the unitholders; and
- capital gains and losses will be netted at the partnership level and only
net capital gain or loss will be reported to the unitholders.
For a description of the reporting rules currently applicable to EOP Partnership
and its unitholders, see "-- Income and Deductions in General" above.
The audit procedures that are applicable to an electing large partnership
differ from the procedures applicable under TEFRA, as described above under "--
Partnership Audit Procedures." An electing large partnership must designate a
representative to act on its behalf for audit purposes. Unlike a tax matters
partner under TEFRA, the representative of an electing large partnership would
not have to be a unitholder. The IRS may challenge a reporting position taken by
an electing large partnership by conducting a single administrative proceeding
that will be binding upon all partners, just as under the TEFRA audit rules.
However, partners in an electing large partnership have no individual right to
notice of the adjustment proceedings, to participate in the proceedings or to
file petitions for judicial review of a final administrative adjustment to
partnership items. Adjustments to partnership items will flow through to the
partners for the year that the adjustment "takes effect" within the meaning of
section 6242 of the Code. Moreover, a partner in an electing large partnership
must report all partnership items consistently with their treatment on the
partnership return. If an underpayment results from the failure to report an
item consistently with the treatment of that item on the partnership return, the
amount of the underpayment will be assessed immediately to the partner as if the
underpayment were due to a mathematical or clerical error.
Alternative Minimum Tax on Items of Tax Preference. The Internal Revenue
Code contains alternative minimum tax rules that are applicable to corporate and
noncorporate taxpayers. EOP Partnership will not be subject to the alternative
minimum tax, but EOP Partnership unitholders are required to take into account
on their own tax returns their respective shares of the EOP Partnership's tax
preference items and adjustments in order to compute their alternative minimum
taxable income. Since the impact of this tax depends on each Cornerstone
Partnership unitholder's particular situation, the Cornerstone Partnership
unitholders are urged to consult with their own tax advisors as to the
applicability of the alternative minimum tax following the partnership merger.
State and Local Taxes. In addition to the federal income tax aspects
described above, a Cornerstone Partnership unitholder should consider the
potential state and local tax consequences of owning EOP Partnership units. Tax
returns may be required and tax liability may be imposed both in the state or
local jurisdictions where a Cornerstone Partnership unitholder resides and in
each state or local jurisdiction in
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which EOP Partnership has assets or otherwise does business. Thus, persons
holding EOP Partnership units either directly or through one or more
partnerships or limited liability companies may be subject to state and local
taxation in a number of jurisdictions in which the EOP Partnership directly or
indirectly holds real property and would be required to file periodic tax
returns in those jurisdictions. EOP Partnership also may be required to withhold
state income tax from distributions otherwise payable to the EOP Partnership
unitholders. After the partnership merger, EOP Partnership will own properties
in approximately 25 states and the District of Columbia. EOP Partnership
anticipates providing the EOP Partnership unitholders with any information
reasonably necessary to permit them to satisfy state and local return filing
requirements. To the extent that an EOP Partnership unitholder pays income tax
with respect to EOP Partnership income to a state where it is not resident or
EOP Partnership is required to pay such tax on behalf of such unitholder, the
unitholder may be entitled to a deduction or credit against income tax that it
otherwise would owe to its state of residence with respect to the same income. A
Cornerstone Partnership unitholder should consult with its personal tax advisor
regarding the state and local income tax implications of owning EOP Partnership
units, including return filing requirements in the various states where EOP
Partnership currently owns properties and will own properties after the
partnership merger.
TAX CONSEQUENCES OF THE REDEMPTION OF CORNERSTONE PARTNERSHIP UNITS FOR
CORNERSTONE COMMON STOCK
Under the merger agreement, a Cornerstone Partnership unitholder may choose
to require Cornerstone Partnership to redeem its Cornerstone Partnership units
for Cornerstone common stock immediately before the consummation of the
partnership merger. If a Cornerstone Partnership unitholder so elects, the
unitholder will become a Cornerstone common stockholder and can elect to
receive, in exchange for its shares of Cornerstone common stock, cash and/or
Equity Office common shares in the REIT merger. The election to receive cash in
the REIT merger will be subject to the proration provisions in the merger
agreement. See "The Merger Agreement -- The REIT Merger."
A Cornerstone Partnership unitholder who elects to have his Cornerstone
Partnership units redeemed for Cornerstone common stock before the partnership
merger may elect to condition that redemption on the ability to receive only
cash in the REIT merger in exchange for the Cornerstone common stock that would
be received upon the redemption. If a Cornerstone Partnership unitholder
conditions the redemption of its units on the ability to receive only cash in
the subsequent REIT merger but, based on the elections made by other Cornerstone
common stockholders, the unitholder will not be able to receive only cash for
the units to be redeemed, the redemption will not take place as to those
Cornerstone Partnership units. These determinations will be completed prior to
consummation of the partnership merger. The Cornerstone Partnership units not
redeemed will be exchanged for EOP Partnership units in the partnership merger.
The redemption of Cornerstone Partnership units will be treated as a fully
taxable sale of units by the Cornerstone Partnership unitholder to Cornerstone
at the time of the redemption. The redeeming Cornerstone unitholder will
recognize gain or loss equal to the difference between:
- the "amount realized" for tax purposes; and
- the unitholder's adjusted basis in its Cornerstone Partnership units that
are redeemed.
The amount realized will be equal to the fair market value of the
Cornerstone common stock received upon redemption, plus the portion of
Cornerstone Partnership's nonrecourse liabilities allocable to the redeemed
Cornerstone Partnership units. Because the deemed discharge of liabilities is
included in the Cornerstone Partnership unitholder's amount realized, it is
possible that the amount of gain recognized, or even the tax liability resulting
from the gain, could exceed the value of the Cornerstone common stock received
in the redemption.
For a description of the applicable tax rates that would apply to gain
recognized upon the redemption of Cornerstone Partnership units, see "-- Tax
Consequences of Ownership of EOP Partnership Units After the Partnership
Merger -- Disposition of EOP Partnership Units."
Generally, a Cornerstone Partnership unitholder who received Cornerstone
Partnership units in exchange for a direct or indirect contribution of property
to Cornerstone Partnership had an initial basis in the Cornerstone Partnership
units equal to the unitholder's basis in the contributed property or, if
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applicable, equal to the unitholder's basis in its interest in the entity that
contributed the property, subject to the application of the disguised sale rules
discussed above. A unitholder's initial basis generally was increased by:
- the unitholder's share of Cornerstone Partnership's taxable income; and
- increases in the unitholder's share of Cornerstone Partnership's
liabilities, including any increase in the unitholder's share of
nonrecourse liabilities.
A unitholder's initial basis generally was decreased, but not below zero,
by:
- the unitholder's share of Cornerstone Partnership's distributions;
- decreases in the unitholder's share of Cornerstone Partnership
liabilities, including nonrecourse liabilities;
- the unitholder's share of losses of Cornerstone Partnership; and
- the unitholder's share of nondeductible expenditures of Cornerstone
Partnership that are not chargeable to capital.
The specific federal income tax consequences of any redemption of
Cornerstone Partnership units prior to the partnership merger will vary for each
Cornerstone Partnership unitholder according to its own circumstances.
Accordingly, each Cornerstone Partnership unitholder is urged to consult with
its own tax advisor before deciding whether to elect to redeem its Cornerstone
Partnership units for Cornerstone common stock before the partnership merger.
Potential Application of the Disguised Sale Rules to a Redemption of
Cornerstone Partnership Units. There is a risk that if a Cornerstone Partnership
unit is redeemed, particularly if it is redeemed within two years of when it was
issued, the IRS might contend that the original transaction in which the units
were issued should be treated as a "disguised sale" of property. Under the IRS's
disguised sale rules, unless an exception applies, a partner's contribution of
property to a partnership and a simultaneous or subsequent transfer of money or
other consideration, including the assumption of or taking subject to a
liability, from the partnership to the partner may be treated as a sale, in
whole or in part, of the property by the partner to the partnership. If money or
other consideration is transferred by a partnership to a partner within two
years of the partner's contribution of property, the transactions are presumed
to be a sale of the contributed property unless the facts and circumstances
clearly establish that the transfers do not constitute a sale. If two years have
passed between the original contribution of property and the subsequent transfer
of money or other consideration, the transactions will not be presumed to be a
sale unless the facts and circumstances clearly establish that the transfers
constitute a sale. For a more detailed discussion of the disguised sale rules,
see "Tax Consequences of the Partnership Merger to Cornerstone Partnership
Unitholders That Receive EOP Partnership Units -- Disguised Sale" above.
Basis and Holding Period in Cornerstone Common Stock Received in the
Redemption. A Cornerstone Partnership unitholder who redeems its units for
Cornerstone common stock immediately before the partnership merger will have a
basis in its Cornerstone common stock received in the redemption equal to the
fair market value of the Cornerstone common stock at the time of the redemption.
Because the basis will depend upon the trading value of Cornerstone's common
stock immediately prior to the partnership merger, that basis may not equal the
value of the consideration that the former Cornerstone Partnership unitholder
will receive for such common stock in the REIT merger. The unitholder's holding
period in the Cornerstone common stock received will begin after the redemption.
TAX CONSEQUENCES OF THE REIT MERGER
The following discussion summarizes the material U.S. federal income tax
consequences relating to the REIT merger and the receipt of cash and/or Equity
Office common shares in the REIT merger by Cornerstone common stockholders. This
discussion is relevant only to a Cornerstone Partnership unitholder who redeems
its Cornerstone Partnership units for Cornerstone common stock before the
partnership merger and only with respect to shares of Cornerstone common stock
received in the redemption. As described above under "Tax Consequences of
Redemption of Cornerstone Partnership Units for
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Cornerstone Common Stock," a redeeming Cornerstone Partnership unitholder will
be subject to federal income tax on the redemption. The federal income tax
consequences in this section are in addition to the federal income tax
consequences described above with respect to the redemption. For purposes of
this discussion, a redeeming Cornerstone Partnership unitholder is referred to
as a Cornerstone common stockholder.
Because this is a summary that is intended to address only federal income
tax consequences of the REIT merger that will apply to all Cornerstone
stockholders, it may not contain all the information that may be important to
you.
YOU ARE URGED BOTH TO REVIEW THE FOLLOWING DISCUSSION AND TO CONSULT WITH
YOUR OWN TAX ADVISOR TO DETERMINE THE EFFECT OF THE REIT MERGER ON YOUR
INDIVIDUAL TAX SITUATION, INCLUDING ANY STATE, LOCAL OR NON-U.S. TAX
CONSEQUENCES.
The information in this section is based on the current Internal Revenue
Code, current, temporary and proposed regulations, the legislative history of
the Internal Revenue Code, current administrative interpretations and practices
of the Internal Revenue Service, including its practices and policies as
endorsed in private letter rulings, which are not binding on the Internal
Revenue Service, and existing court decisions. Future legislation, regulations,
administrative interpretations and court decisions could change current law or
adversely affect existing interpretations of current law. Any change could apply
retroactively. Neither Equity Office nor Cornerstone has requested, or plans to
request, any rulings from the Internal Revenue Service concerning the tax
treatment of the REIT merger. It is possible that the Internal Revenue Service
would challenge the statements in this discussion, which do not bind the
Internal Revenue Service or the courts, and that a court would agree with the
Internal Revenue Service.
General. The REIT merger is intended to qualify as a "reorganization" under
section 368(a) of the Internal Revenue Code. The income tax consequences
summarized below are based on the assumption that the REIT merger will qualify
as a reorganization. The obligation of Equity Office and Cornerstone to
consummate the REIT merger is conditioned upon Hogan & Hartson L.L.P., counsel
to Equity Office, and King & Spalding, counsel to Cornerstone, delivering
opinions to Equity Office and Cornerstone, respectively, that the REIT merger
will qualify as a reorganization under the provisions of section 368(a) of the
Internal Revenue Code. The opinions of counsel will rely on customary
representations made by Equity Office and Cornerstone and applicable factual
assumptions. If any of the factual assumptions or representations relied upon in
the opinions of counsel are inaccurate, the opinions may not accurately describe
the U.S. federal income tax treatment of the REIT merger, and this discussion
may not accurately describe the tax consequences of the REIT merger.
One particularly important representation that counsel will rely upon in
rendering their opinions will be that the aggregate fair market value of the
Equity Office common shares issued in the REIT merger will represent at least
40% of the aggregate value of the total consideration issued by Equity Office in
the REIT merger, as of the closing of the REIT merger and taking into account
any cash paid for fractional Equity Office common shares. For example, if the
REIT merger had occurred on May 12, 2000, then based on the trading price of
Equity Office common shares on that date and the number of shares of Cornerstone
common stock issued and outstanding on that date, and assuming that no
Cornerstone Partnership unitholders had converted their units into Cornerstone
common stock immediately before the REIT merger, the aggregate fair market value
of the Equity Office common shares that would have been issued in the REIT
merger would represent approximately % of the value of the total
consideration paid by Equity Office in the REIT merger. There is no guarantee,
however, that the trading price of the Equity Office common shares will be high
enough at the scheduled closing of the REIT merger to allow counsel to render
the required tax opinions and the REIT merger to be consummated.
Tax Consequences of the REIT Merger to Cornerstone Common Stockholders. If
the REIT merger of Cornerstone with and into Equity Office constitutes a
reorganization within the meaning of section 368(a) of the Internal Revenue
Code, the REIT merger will have the following material federal income tax
consequences to Cornerstone common stockholders:
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- Equity Office Common Shares Only. The exchange in the REIT merger of
Cornerstone common stock solely for Equity Office common shares will not
result in the recognition of gain or loss to a Cornerstone stockholder,
except with respect to cash received for a fractional Equity Office
common share, as discussed below.
A Cornerstone common stockholder that receives only Equity Office common
shares in the REIT merger will have a tax basis in the Equity Office
common shares received equal to the stockholder's adjusted tax basis in
the Cornerstone common stock exchanged.
- Equity Office Common Shares and Cash. A Cornerstone common stockholder
that receives both Equity Office common shares and cash, other than cash
received for a fractional Equity Office common share, will recognize gain
equal to the lesser of the cash received, or the amount by which (A) the
cash plus the fair market value of the Equity Office common shares
received exceeds (B) the stockholder's adjusted tax basis in its
Cornerstone common stock. A Cornerstone common stockholder that receives
both Equity Office common shares and cash in the REIT merger will not
recognize any loss on the exchange.
In general, gain recognized by a Cornerstone common stockholder that
receives both cash and Equity Office common shares will be taxable as
short-term capital gain, assuming that the Cornerstone common stock was
held as a capital asset. However, it is possible that the gain recognized
by a Cornerstone common stockholder that receives both cash and Equity
Office common shares will be taxable as dividend income if the cash
received does not result in a "meaningful reduction" in the Equity Office
common shares that the Cornerstone common stockholder would have received
had it received only Equity Office common shares in the REIT merger. In
determining whether a meaningful reduction has occurred, section 318 of
the Internal Revenue Code requires that the stockholder be treated as
actually owning Equity Office common shares that are owned by the
stockholder's family members or by entities in which the stockholder owns
an interest, or which the stockholder has an option to acquire.
Gain required to be recognized due to the receipt of cash as part of the
REIT merger consideration generally must be calculated separately for
each block of Cornerstone common stock exchanged in the REIT merger. A
block of stock generally is considered to be a group of shares acquired
at the same cost in a single transaction.
A Cornerstone common stockholder that receives both Equity Office common
shares and cash, other than cash received for a fractional Equity Office
common share, will have a tax basis in the Equity Office common shares
received equal to the stockholder's tax basis in its Cornerstone common
stock exchanged, decreased by the amount of any cash received and
increased by the amount of gain recognized in the exchange.
- Cash Only. A Cornerstone stockholder that receives only cash in the REIT
merger generally will recognize short-term capital gain or loss equal to
the difference between the amount of cash received and the stockholder's
adjusted tax basis in its Cornerstone common stock, assuming that the
Cornerstone common stock was held as a capital asset.
- Fractional Shares. A Cornerstone common stockholder that receives cash
instead of a fractional Equity Office common share will be treated as if
the fractional share was received in the REIT merger and then redeemed by
Equity Office. The Cornerstone common stockholder generally will
recognize short-term capital gain or loss equal to the difference between
the amount of cash received for the fractional share and the
stockholder's tax basis in the fractional share, assuming that the
Cornerstone common stock was held as a capital asset.
- Holding Period. The holding period of the Equity Office common shares
received by a Cornerstone common stockholder in the REIT merger will
include the holding period of the Cornerstone
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common stock exchanged, assuming that the Cornerstone common stock was
held as a capital asset.
Backup Withholding. Backup withholding tax at a rate of 31% may apply to
cash paid in the REIT merger to a Cornerstone stockholder. Backup withholding
will not apply, however, if the Cornerstone stockholder:
- furnishes a correct taxpayer identification number and certifies that he
or she is not subject to backup withholding on Internal Revenue Service
Form W-9, or an appropriate substitute form;
- provides a certificate of foreign status on Internal Revenue Service Form
W-8 or W-8 BEN, or an appropriate substitute form; or
- is otherwise exempt from backup withholding.
The Internal Revenue Service may impose a penalty upon any taxpayer that
fails to provide the correct taxpayer identification number.
Tax Consequences to Cornerstone and Equity Office. Equity Office will not
recognize any gain as a result of the REIT merger, whether or not the REIT
merger qualifies as a reorganization under section 368(a) of the Internal
Revenue Code.
Cornerstone will not recognize any gain as a result of the REIT merger if
the REIT merger qualifies as a reorganization under section 368(a) of the
Internal Revenue Code and Cornerstone qualifies as a REIT at the time of the
REIT merger.
Tax Consequences of the REIT Merger if the REIT Merger Did Not Qualify as a
Reorganization or Cornerstone Did Not Qualify as a REIT. Although it is a
condition to consummation of the REIT merger that Equity Office and Cornerstone
receive opinions of counsel that the REIT merger will qualify as a
reorganization for federal income tax purposes, these opinions will not be
binding upon the Internal Revenue Service or the courts. If the REIT merger did
not qualify as a reorganization for federal income tax purposes, the REIT merger
would be treated as a taxable transaction. Accordingly, Cornerstone would
recognize gain or loss equal to the difference between:
- the sum of:
-- the fair market value of the Equity Office common shares issued in the
REIT merger;
-- the cash issued in the REIT merger; and
-- the outstanding debt of Cornerstone, including Cornerstone's allocable
share of the outstanding debt of Cornerstone Partnership, as determined
for tax purposes; and
- Cornerstone's adjusted tax basis in its various properties and assets,
including its interest in Cornerstone Partnership.
In computing its taxable income for the taxable year ending on the date of
the REIT merger, Cornerstone generally would be entitled to a dividends paid
deduction equal to the fair market value of the Equity Office common shares and
cash, including cash paid for fractional shares, issued in the REIT merger.
A Cornerstone stockholder would recognize gain equal to the difference
between:
- the aggregate fair market value of the Equity Office common shares and
the cash received; and
- the stockholder's adjusted tax basis in its Cornerstone stock.
To the extent that Cornerstone's gain, if any, were to exceed the fair
market value of the Equity Office common shares and cash issued in the REIT
merger, the gain generally would be taxable to Cornerstone, and the liability
for this tax would transfer to Equity Office.
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As a condition to the REIT merger, Equity Office will receive an opinion
from King & Spalding, counsel to Cornerstone, that Cornerstone qualifies as a
REIT at the time of the REIT merger. This opinion, however, will not be binding
on the Internal Revenue Service or the courts. If Cornerstone did not qualify as
a REIT at the time of the REIT merger, Cornerstone would be required to
recognize gain with respect to the built-in gain attributable to its assets.
Built-in gain is the amount by which an asset's fair market value exceeds its
adjusted tax basis. As the successor to Cornerstone in the REIT merger, Equity
Office would be liable for any tax owed by Cornerstone as a result of the
recognition of built-in gain. However, under recently published Treasury
Regulations, Equity Office would be able to make an election that would allow
Cornerstone to avoid recognizing its built-in gain if Cornerstone did not
qualify as a REIT at the time of the REIT merger. This election would require
Equity Office to recognize the built-in gain at the highest regular corporate
rate if Equity Office were to dispose of any asset with built-in gain that was
acquired from Cornerstone during the 10 years following the REIT merger. Even
though Equity Office will receive an opinion of King & Spalding, counsel to
Cornerstone, that Cornerstone qualifies for taxation as a REIT at the time of
the REIT merger, Equity Office intends to make a protective election of the type
described above as a precautionary measure in order to ensure that Cornerstone
would not recognize gain at the time of the REIT merger if the Internal Revenue
Service later were to determine that Cornerstone did not qualify as a REIT at
the time of the REIT merger.
REIT QUALIFICATION
Both Equity Office and Cornerstone have elected to be taxed as REITs under
sections 856 through 860 of the Internal Revenue Code. A REIT generally is not
subject to federal income tax on the income that it distributes to shareholders
if it distributes at least 95% of its REIT taxable income and it meets other
requirements. For taxable years starting after December 31, 2000, REITs will
have to distribute only 90% of their REIT taxable income to shareholders.
As a condition to the mergers, Hogan & Hartson L.L.P., counsel to Equity
Office, will deliver an opinion to Equity Office and Cornerstone that commencing
with Equity Office's taxable year ending December 31, 1997, Equity Office was
organized and has operated in conformity with the requirements for qualification
as a REIT, and that after consummation of the mergers, Equity Office's proposed
method of operation will enable it to continue to qualify as a REIT.
This opinion will rely upon customary representations made by Equity Office
about factual matters relating to the organization and operation of Equity
Office, EOP Partnership and its subsidiaries, including BeaMetFed, Inc. In
addition, this opinion will be based upon factual representations of Equity
Office concerning its business and properties as set forth in this consent
solicitation/information statement/prospectus and the other documents
incorporated by reference in this consent solicitation/information
statement/prospectus. Finally, the portion of the Hogan & Hartson L.L.P. opinion
that addresses the qualification of Equity Office as a REIT following the
mergers will be based in part upon the opinion of King & Spalding described
below relating to the qualification of Cornerstone as a REIT at the closing of
the mergers and the representations made by Cornerstone in connection with the
King & Spalding opinion.
Equity Office intends to continue to operate in a manner to qualify as a
REIT following the mergers, but there is no guarantee that Equity Office will
qualify or remain qualified as a REIT. Qualification and taxation as a REIT
depend upon Equity Office's ability to meet, through actual annual operating
results, requirements relating to asset ownership, distribution levels and
diversity of share ownership, and the various REIT qualification requirements
imposed under the Internal Revenue Code. Hogan & Hartson L.L.P. will not review
Equity Office's compliance with these tests on a continuing basis. Given the
complex nature of the REIT qualification requirements, the ongoing importance of
factual determinations and the possibility of future changes in the
circumstances of Equity Office, Equity Office cannot guarantee that its actual
operating results for any particular tax year will satisfy the requirements for
taxation as a REIT under the Internal Revenue Code.
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If Cornerstone did not qualify as a REIT in any of its prior tax years,
Cornerstone would be liable for federal income tax on its income earned in any
year that it did not qualify as a REIT. In addition, if Cornerstone did not
qualify as a REIT at the time of the REIT merger, Equity Office could have to
pay additional taxes if it sold any of the Cornerstone properties within 10
years following the REIT merger. See "Material Federal Income Tax
Consequences -- Tax Consequences of the REIT Merger -- Tax Consequences of the
REIT Merger if the REIT Merger Did Not Qualify as a Reorganization or
Cornerstone Did Not Qualify as a REIT." As a condition to the mergers, King &
Spalding, counsel to Cornerstone, will provide an opinion to Equity Office that
Cornerstone, commencing with its taxable year ended December 31, 1997, through
its short taxable year ending at the closing of the REIT merger, was organized
and has operated in conformity with the requirements for qualification as a
REIT. This opinion will rely upon customary representations made by Cornerstone
about factual matters relating to the organization and operation of Cornerstone,
Cornerstone Partnership and their affiliates. Cornerstone intends to continue to
operate in a manner to qualify or remain qualified as a REIT until the closing
of the REIT merger. Qualification and taxation as a REIT depend upon
Cornerstone's ability to meet, through actual annual operating results,
requirements relating to asset ownership, distribution levels and diversity of
share ownership, and the various REIT qualification requirements imposed under
the Internal Revenue Code. There is no guarantee that Cornerstone's actual
operating results for any of its taxable years, including its short taxable year
ending at the closing of the REIT merger, will have satisfied the requirements
for taxation as a REIT under the Internal Revenue Code.
TAXATION OF EQUITY OFFICE AS A REIT
General. So long as Equity Office qualifies for taxation as a REIT, it
generally will not be subject to federal corporate income tax on its net income
that is distributed currently to its shareholders. This treatment substantially
eliminates double taxation at both the corporate and shareholder levels that
generally results from an investment in a regular corporation. However, Equity
Office will be subject to federal income tax as follows:
- Equity Office will be taxed at regular corporate rates on any
undistributed "REIT taxable income." REIT taxable income is the taxable
income of the REIT subject to certain adjustments, including a deduction
for dividends paid;
- Under some circumstances, Equity Office may be subject to the
"alternative minimum tax" on its items of tax preference;
- If Equity Office has net income from the sale or other disposition of
"foreclosure property" that is held primarily for sale to customers in
the ordinary course of business or other nonqualifying income from
foreclosure property, it will be subject to tax at the highest corporate
rate on this income;
- Equity Office's net income from "prohibited transactions" will be subject
to a 100% tax. In general, prohibited transactions are sales or other
dispositions of property held primarily for sale to customers in the
ordinary course of business other than foreclosure property;
- If Equity Office fails to satisfy either the 75% gross income test or the
95% gross income test discussed below, but nonetheless maintains its
qualification as a REIT because other requirements are met, it will be
subject to a tax equal to the gross income attributable to the greater of
the amount by which Equity Office fails either the 75% or 95% test (or,
for taxable years beginning after December 31, 2000, a 90% test),
multiplied by a fraction intended to reflect its profitability; and
- Equity Office will be subject to a 4% excise tax on the excess of the
required distribution over the sum of amounts actually distributed and
amounts retained for which federal income tax was paid, if Equity Office
fails to distribute during each calendar year at least the sum of:
-- 85% of its REIT ordinary income for the year;
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-- 95% of its REIT capital gain net income for the year; and
-- any undistributed taxable income from prior taxable years.
In addition, if Equity Office acquires any asset from a taxable "C"
corporation in a carry-over basis transaction, it could be liable for certain
tax liabilities inherited from that "C" corporation. To its knowledge, Equity
Office has not acquired any assets from a "C" corporation in a carry-over basis
transaction. Equity Office, however, has acquired assets in carry-over basis
merger transactions with several REITs. If one of those REITs failed to qualify
as a REIT at the time of its merger into Equity Office, it would have been
required to recognize gain with respect to its assets' "built-in gain." Built-in
gain is the amount by which an asset's fair market value exceeds the REIT's
adjusted basis in the asset. As the successor to these REITs, Equity Office
would be liable for any tax owed by them as a result of the recognition of
built-in gain. However, under recently published Treasury Regulations, Equity
Office will be able to make an election that will allow these REITs to have
avoided recognizing gain at the time of their mergers into Equity Office if the
REITs did not qualify as REITs at the time of their mergers. The election will
require Equity Office to recognize the built-in gain and pay tax at the highest
regular corporate rate if Equity Office disposes of any built-in gain asset
during the 10 years following the merger in which the particular built-in gain
asset was acquired. Even though Equity Office believes that each of these REITs
qualified as a REIT for tax purposes at the time of its merger into Equity
Office, Equity Office intends to make the election described above as a
precautionary measure to protect Equity Office if the Internal Revenue Service
later determines that one of these REITs did not qualify as a REIT at the time
of its merger into Equity Office. Similar rules would apply if Equity Office
were to acquire assets from a "C" corporation in the future in a carry-over
basis transaction.
Requirements for Qualification as a REIT. The Internal Revenue Code
defines a REIT as a corporation, trust or association:
(1) that is managed by one or more trustees or directors;
(2) the beneficial ownership of which is evidenced by transferable
shares, or by transferable certificates of beneficial interest;
(3) that would be taxable as a domestic corporation, but for sections
856 through 860 of the Internal Revenue Code, which provide the rules
applicable to REITs;
(4) that is neither a financial institution nor an insurance company
subject to applicable provisions of the Internal Revenue Code;
(5) the beneficial ownership of which is held by 100 or more persons;
(6) during the last half of each taxable year not more than 50% in
value of the outstanding shares of which is owned directly or indirectly by
five or fewer individuals, as defined in the Internal Revenue Code to
include specified entities;
(7) that makes an election to be taxable as a REIT, or has made this
election for a previous taxable year which has not been revoked or
terminated, and satisfies all relevant filing and other administrative
requirements established by the Internal Revenue Service that must be met
in order to elect and maintain REIT status;
(8) that uses a calendar year for federal income tax purposes and
complies with the recordkeeping requirements of the Internal Revenue Code
and regulations promulgated thereunder; and
(9) that meets applicable other tests, described below, regarding the
nature of its income and assets and the amount of its distributions.
Conditions (1), (2), (3), and (4) must be met during the entire taxable
year and condition (5) must be met during at least 335 days of a taxable year of
12 months, or during a proportionate part of a taxable year of less than 12
months. For purposes of determining stock ownership under condition (6), a
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supplemental unemployment compensation benefits plan, a private foundation or a
portion of a trust permanently set aside or used exclusively for charitable
purposes generally is considered an individual. However, a trust that is a
qualified trust under Internal Revenue Code section 401(a) generally is not
considered an individual and beneficiaries of a qualified trust are treated as
holding shares of a REIT in proportion to their actuarial interests in the trust
for purposes of condition (6).
Equity Office believes that it has issued sufficient shares of beneficial
interest with sufficient diversity of ownership to allow it to satisfy the
conditions (5) and (6) above. In addition, Equity Office's declaration of trust
contains restrictions regarding the transfer of shares of beneficial interest
that are intended to assist Equity Office in continuing to satisfy the share
ownership requirements described in conditions (5) and (6) above. These
restrictions, however, may not ensure that Equity Office will be able to satisfy
the share ownership requirements described above. If Equity Office fails to
satisfy these share ownership requirements, it will fail to qualify as a REIT.
To monitor its compliance with condition (6), a REIT is required to send
annual letters to its shareholders requesting information regarding the actual
ownership of its shares. For Equity Office's taxable years beginning on or after
January 1, 1998, if Equity Office complies with the annual letters requirement
and it does not know or, exercising reasonable diligence, would not have known
of its failure to meet condition (6), then it will be treated as having met
condition (6).
To qualify as a REIT, Equity Office cannot have at the end of any taxable
year any undistributed earnings and profits that are attributable to a non-REIT
taxable year. Equity Office has elected to be taxed as a REIT commencing with
its first taxable year. Therefore, Equity Office has not had any undistributed
non-REIT earnings and profits of its own. As a result of the REIT merger, Equity
Office will inherit any undistributed non-REIT earnings and profits that would
result from the failure of Cornerstone to have qualified as a REIT at any point.
Equity Office will receive an opinion from King & Spalding regarding
Cornerstone's REIT qualification, which will rely on Cornerstone's
representations to King & Spalding that Cornerstone does not have any non-REIT
earnings and profits attributable to any taxable year in which Cornerstone did
not elect or qualify to be taxed as a REIT, and that Cornerstone will take all
steps to ensure that it will not have earnings and profits attributable to
non-REIT taxable years at the close of Cornerstone's short taxable year ending
at the time of the REIT merger. In prior years, Equity Office has merged with
other REITs and would have inherited any undistributed non-REIT earnings and
profits that those REITs might have had if any of them had failed to qualify as
a REIT at any point. Equity Office believes that all of the REITs with which it
has merged qualified as REITs throughout their existence. However, the Internal
Revenue Service could determine otherwise.
If the Internal Revenue Service did determine that Equity Office inherited
undistributed non-REIT earnings and profits and Equity Office did not distribute
the non-REIT earnings and profits by the end of that tax year, it appears that
Equity Office could avoid disqualification as a REIT by using "deficiency
dividend" procedures to distribute the non-REIT earnings and profits. The
deficiency dividend procedures would require Equity Office to make a
distribution to shareholders, in addition to the regularly required REIT
distributions, within 90 days of the Internal Revenue Service determination. In
addition, Equity Office would have to pay to the Internal Revenue Service an
interest charge on 50% of the non-REIT earnings and profits that were not
distributed prior to the end of the taxable year in which Equity Office
inherited the undistributed non-REIT earnings and profits. However, it is
possible that the Internal Revenue Service would determine that the deficiency
dividend procedure is not available to Equity Office, in which case Equity
Office would fail to qualify as a REIT. It is also possible that, even if the
procedure were available, Equity Office would be prohibited from qualifying as a
REIT for the year in which any undistributed earnings and profits were acquired,
but would be allowed to qualify as a REIT for subsequent years. For taxable
years of Equity Office beginning after December 31, 2000, changes in the law
clarify that the deficiency dividend procedures should be available to allow
Equity Office to qualify as a REIT in the year in which any undistributed
non-REIT earnings and profits are acquired.
Qualified REIT Subsidiaries. If a REIT owns a corporate subsidiary that is
a "qualified REIT subsidiary" the separate existence of that subsidiary will be
disregarded for federal income tax purposes.
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Generally, a qualified REIT subsidiary is a corporation all of the capital stock
of which is owned by the REIT. All assets, liabilities and items of income,
deduction and credit of the qualified REIT subsidiary will be treated as assets,
liabilities and items of income, deduction and credit of the REIT itself. A
qualified REIT subsidiary of Equity Office will not be subject to federal
corporate income taxation, although it may be subject to state and local
taxation in some states.
Ownership of Partnership Interests by a REIT. A REIT that is a partner in
a partnership will be deemed to own its proportionate share of the assets of the
partnership and will be deemed to earn its proportionate share of the
partnership's income. In addition, the assets and gross income of the
partnership retain the same character in the hands of the REIT for purposes of
the gross income and asset tests applicable to REITs as described below. Thus,
Equity Office's proportionate share of the assets and items of income of EOP
Partnership, including EOP Partnership's share of assets and items of income of
any subsidiaries that are partnerships or limited liability companies, are
treated as assets and items of income of Equity Office for purposes of applying
the asset and income tests. Equity Office has control over EOP Partnership and
each partnership or limited liability company subsidiary of EOP Partnership and
intends to operate them in a manner that is consistent with the requirements for
qualification of Equity Office as a REIT.
Income Tests Applicable to REITs. To qualify as a REIT, Equity Office must
satisfy two gross income tests. First, at least 75% of Equity Office's gross
income, excluding gross income from prohibited transactions, for each taxable
year must be derived directly or indirectly from investments relating to real
property or mortgages on real property, including "rents from real property,"
gains on the disposition of real estate, dividends paid by another REIT and
interest on obligations secured by mortgages on real property or on interests in
real property, or from some types of temporary investments. Second, at least 95%
of Equity Office's gross income, excluding gross income from prohibited
transactions, for each taxable year must be derived from any combination of
income qualifying under the 75% test and dividends, interest, some payments
under hedging instruments and gain from the sale or disposition of stock or
securities and some hedging instruments.
Rents received by Equity Office will qualify as rents from real property in
satisfying the gross income requirements for a REIT described above only if
several conditions are met. First, the amount of rent must not be based in whole
or in part on the income or profits of any person. However, an amount received
or accrued generally will not be excluded from the term rents from real property
solely by reason of being based on a fixed percentage or percentages of receipts
or sales. Second, rents received from a "related party tenant" will not qualify
as rents from real property in satisfying the gross income tests unless, for
periods after December 31, 2000, the tenant is a taxable REIT subsidiary and
certain applicable conditions are met. A tenant is a related party tenant if the
REIT, or an actual or constructive owner of 10% or more of the REIT, actually or
constructively owns 10% or more of the tenant. Third, if rent attributable to
personal property, leased in connection with a lease of real property, is
greater than 15% of the total rent received under the lease, then the portion of
rent attributable to the personal property will not qualify as rents from real
property.
Generally, for rents to qualify as rents from real property for the purpose
of satisfying the gross income tests, Equity Office is only allowed to provide
services that are "usually or customarily rendered" in connection with the
rental of real property and not otherwise considered "rendered to the occupant."
Accordingly, Equity Office may not provide "impermissible services" to the
tenants except through an independent contractor that bears the expenses of
providing the services and from whom Equity Office derives no revenue. Equity
Office, however, may provide some impermissible services directly if the
"impermissible tenant service income" at any particular property for any taxable
year does not exceed 1% of Equity Office's total income from that property.
Impermissible tenant service income is deemed to be at least 150% of Equity
Office's direct cost of providing the service. If the total amount of
impermissible tenant service income from a property does not exceed 1% of Equity
Office's total income from the property, the services will not cause the rent
paid by tenants of that property to fail to qualify as rents from real property,
but the impermissible tenant service income will not qualify as rents from real
property. If the impermissible tenant service income exceeds 1% of Equity
Office's total income from a property,
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then all of the income from that property will fail to qualify as rents from
real property. In addition, after December 31, 2000, Equity Office will be able
to provide impermissible services to tenants through a taxable REIT subsidiary,
subject to certain limitations. A taxable REIT subsidiary is a corporation other
than a REIT in which a REIT directly or indirectly holds stock and that has made
a joint election with the REIT to be treated as a taxable REIT subsidiary. A
taxable REIT subsidiary will be subject to regular federal income taxes. For a
further discussion of taxable REIT subsidiaries, see "-- Changes to REIT
Qualification Requirements" below.
Equity Office does not and does not intend to do any of the following:
- charge rent for any property that is based in whole or in part on the
income or profits of any person, except by reason of being based on a
percentage of receipts or sales, as described above, unless Equity Office
determines that the rent received from a particular tenant under this
type of arrangement is not material and will not jeopardize Equity
Office's status as a REIT;
- rent any property to a related party tenant, unless Equity Office
determines that the rent received from the related party tenant is not
material and will not jeopardize Equity Office's status as REIT;
- derive rental income attributable to personal property other than
personal property leased in connection with the lease of real property,
the amount of which either is less than 15% of the total rent received
under the lease unless such rental income is not material and or is an
amount that will not jeopardize Equity Office's status as a REIT; or
- perform services considered to be noncustomary or rendered to the
occupant of the property, other than through an independent contractor
from whom Equity Office derives no revenue, except where the
impermissible service income would not exceed the 1% limit described
above.
Equity Office provides services and access to third-party service providers
at some or all of its properties. However, based upon Equity Office's experience
in the office rental markets where the properties are located, Equity Office
believes that all access to service providers and services provided to tenants
by Equity Office either are usually or customarily rendered in connection with
the rental of real property and not otherwise considered rendered to the
occupant, or, if considered impermissible services, will not result in
impermissible service income with respect to any property in excess of the 1%
limit. However, Equity Office can not guarantee that the Internal Revenue
Service will agree with these positions. Equity Office monitors the activities
at its properties and believes that the 1% limit has not been exceeded at any
property and intends to continue to monitor the application of the 1% limit at
each of its properties. In the past, Equity Office has engaged Tenant Services
Corp., which is owned by affiliates of Mr. Zell and was structured to qualify as
an independent contractor, to perform services at some properties that Equity
Office believes are customarily offered at similar properties in the same
geographical area, but that might not be permissible for a REIT to perform
directly. Equity Office may continue to engage Tenant Services Corp. to perform
services that, if not performed by an independent contractor, would give rise to
impermissible service income in excess of the 1% limit.
Equity Office has obtained a ruling from the Internal Revenue Service
indicating that amounts received by Equity Office under agreements with
third-party service companies for the operation of qualifying parking facilities
will qualify as rents from real property for purposes of satisfying the 95% and
75% gross income tests. The parking facilities must be part of, adjacent to, or
within the same complex as an Equity Office building, and EOP Partnership must
bear the expenses incurred in operating the parking facilities. Parking
facilities that are within one block of an Equity Office building are considered
adjacent for purposes of the ruling. The parking garages are operated under
parking management agreements with third-party service companies that receive a
management fee which may be a fixed dollar amount or a percentage of gross or
net revenues.
All but one of the stand-alone garages owned by Equity Office are operated
by third-party service companies under lease agreements whereby EOP Partnership
and the service companies share the gross receipts from the parking operation
and EOP Partnership receives fixed rental payments from the service companies
and bears none of the operational expenses. The income received by EOP
Partnership from the
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stand-alone garages under these agreements should qualify as rents from real
property for the purposes of the 95% and 75% gross income tests. One stand-alone
garage agreement provides for the receipt of a percentage of net receipts by EOP
Partnership and, therefore, results in nonqualifying gross income. However, the
amount of nonqualifying income received under this one agreement is
insignificant relative to the total gross income of Equity Office. Equity Office
believes that the income received under this agreement should not affect its
ability to satisfy the 95% and 75% gross income tests in the future.
In addition, Equity Office may acquire interests in stand-alone parking
facilities that are owned by municipalities. Interests in these municipal
parking facilities may be acquired by entering into either leases or concession
agreements with the municipalities, under which Equity Office would have rights
and obligations that would be substantially similar to those of a ground lease.
Equity Office then would enter into subconcession agreements, which would be
substantially similar to subleases, under which third-parties would operate the
parking facilities. Equity Office has requested a ruling from the Internal
Revenue Service that any income received under these subconcession agreements
would be qualifying income for purposes of the 75% and 95% gross income tests
and the subconcession rights would qualify as a "real estate asset" for the REIT
asset tests discussed below.
Equity Office also has received a ruling from the Internal Revenue Service
generally stating that revenue received by Equity Office with respect to
telecommunications services provided to tenants will qualify as rents from real
property for purposes of the 75% and 95% gross income tests. The ruling broadly
defines telecommunications services to include telephone and other
communications services, e-mail, video communications, electronic research,
internet access, communication networking, safety and security systems and
environmental control systems, which may be provided by telecommunications
service providers. The ruling, however, provides that these amounts will not
qualify as rents from real property if they are received from a related party
tenant or if the amounts are based on a percentage of net income. Allied Riser
Communications Corp., a telecommunications service provider, has entered into a
license agreement with Equity Office to provide telecommunications services to
Equity Office tenants. Equity Office believes that amounts paid by Allied Riser
Communications Corp. under the license agreement should qualify as a rents from
real property and not be disqualified as related party rent. Although Mr. Zell
owns a substantial indirect interest in Allied Riser Communications Corp.,
Equity Office has determined that Mr. Zell's interests would not be treated as
owned by Equity Office under the applicable constructive ownership rules and
thereby cause it to be a related party tenant.
Equity Office has received stock and warrants to acquire stock at a nominal
cost or no cost from Allied Riser Communications Corp., and several other
telecommunications services providers, and intends to enter into other similar
arrangements in the future. Equity Office recognizes income at the time it
receives below-market stock and warrants to the extent their fair market value
exceeds any amount that Equity Office may have paid for the stock or warrants.
Equity Office believes that the gross income from the receipt of the
below-market stock and warrants qualifies as rents from real property under its
ruling from the Internal Revenue Service. If, however, the stock and warrants
received by Equity Office would cause a telecommunications service provider to
be a related party tenant, Equity Office would treat any income received from
such provider as nonqualifying income for purposes of the 75% and 95% gross
income tests. For the purpose of determining whether the provider is a related
party tenant, Equity Office will treat any warrants as having been exercised.
As a result of the mergers, Equity Office will acquire from Cornerstone
stock and warrants in Allied Riser Communications Corp., Broadband Office, Inc.
and Cypress Communications, Inc., another telecommunications service provider.
Equity Office believes that the services provided by these providers with
respect to Cornerstone's properties also are covered by Equity Office's
telecommunications ruling. In addition, Equity Office does not believe that
Cornerstone constructively owns 10% or more of any of these providers or that
any of these providers will become related party tenants of Equity Office as a
result of the mergers.
Both Equity Office and Cornerstone have invested in Captivate Network,
Inc., a media company that installs, designs and operates electronic display
screens for use in office building elevators. Both Equity
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Office and Cornerstone have purchased stock in Captivate, and each of them will
also receive below-market warrants for Captivate stock based on the number of
their properties that enter into license agreements with Captivate. Beginning in
2001, Equity Office also will receive a portion of the gross income earned by
Captivate from advertisers' use of the system and all other income earned
directly or indirectly by Captivate from the system. As a result of the mergers,
Equity Office will own constructively more than 10% of Captivate, and Captivate
will be a related party tenant of Equity Office for the entire 2000 taxable
year. Equity Office will treat the income earned by Equity Office as a result of
receiving below market warrants from Captivate, whether received before or after
the mergers, including warrants received for license agreements entered into for
properties acquired from Cornerstone, as nonqualifying related party tenant
income. Equity Office does not believe that the income from the Captivate
warrants or any other income to be earned from Captivate, when combined with
other nonqualifying income of Equity Office, will cause Equity Office not to
satisfy the 95% gross income test.
In 1999, Equity Office and Equity Business Centers Holding Corp., an
unaffiliated entity, formed a new corporation, Equity Business Centers Corp., of
which Equity Office owns 100% of the nonvoting common stock representing 95% of
the equity, but none of the voting common stock. Equity Office also intends to
loan money to Equity Business Centers Corp. to fund its operations. Equity
Business Centers Corp. entered into a joint venture with an affiliate of Regus
Business Centres plc, a company registered in England. The joint venture, Regus
Equity Business Centers, L.L.C., was formed to lease office space from Equity
Office to operate business centers. Equity Office has requested that the
Internal Revenue Service rule that the activities of Regus Equity Business
Centers, L.L.C., will not cause the rents received by Equity Office from tenants
at the properties where Regus Equity Business Centers, L.L.C., operates a
business center, to be considered nonqualifying income. Equity Office, however,
would treat the rent paid by Regus Equity Business Centers, L.L.C. to Equity
Office as related party rent and thus nonqualifying income.
Following the mergers, Equity Office intends to operate the former
Cornerstone properties in a manner so that they do not produce material amounts
of nonqualifying income for purposes of the gross income tests. After the
mergers, Equity Office will own and operate a hotel property currently owned by
Cornerstone. Income from the operation of a hotel does not qualify for purposes
of the REIT income tests. Equity Office believes that the amount of
nonqualifying income generated from this hotel will be an insignificant amount
and will not affect Equity Office's ability to meet the 95% gross income test.
"Interest" generally will be nonqualifying income for purposes of the 75%
or 95% gross income tests if it depends in whole or in part on the income or
profits of any person. However, interest based on a fixed percentage or
percentages of receipt of sales may still qualify under the gross income tests.
Equity Office does not expect to derive significant amounts of interest that
will not qualify under the 75% and 95% gross income tests. Beacon Property
Management Corp. and Beacon Construction Co., Inc., each a taxable "C"
corporation, currently hold loans secured by the Rowes Wharf property. These
loans provide for payments of interest based upon cash flow and might be
recharacterized as equity interests. These loans could not be held directly by
Equity Office without jeopardizing our qualification as a REIT and will continue
to be held in a taxable "C" corporation.
Equity Office Properties Management Corp. and Beacon Property Management
Corp., each a taxable "C" corporation, conduct third-party management services
for properties not wholly owned by EOP Partnership. EOP Office Company, a
taxable "C" corporation, through its interest in Wright Runstad Associates
Limited Partnership, provides development services for properties that are not
wholly owned by EOP Partnership. These entities collectively, together with
Beacon Construction Company, Inc., which has ceased construction operations, and
Beacon Design Corporation, which has an interest in a development project in
Newton, Massachusetts, Real State Insurance Corporation and Equity Business
Centers, Corp. are referred to as the noncontrolled subsidiaries. EOP
Partnership owns 100% of the non-voting stock of each of the noncontrolled
subsidiaries, 1% of the voting stock of Beacon Property Management Corp. and
Beacon Construction Co., Inc. and none of the voting stock of any of the other
noncontrolled subsidiaries. Each of the noncontrolled subsidiaries is taxable as
a regular "C" corporation. Equity Office's share of any dividends received from
the noncontrolled subsidiaries should qualify for purposes of the 95% gross
income
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test but not for purposes of the 75% gross income test. Equity Office does not
anticipate that it will receive sufficient dividends from the noncontrolled
subsidiaries to cause it to exceed the limit on nonqualifying income under the
75% gross income test.
In addition to the 75% and 95% gross income tests, Equity Office had to
meet a 30% gross income test for its taxable year ended December 31, 1997. The
30% gross income test required that short-term gain from the sale or other
disposition of stock or securities, gain from prohibited transactions and gain
on the sale or other disposition of real property held for less than four years,
apart from involuntary conversions and sales of foreclosure property, represent
less than 30% of Equity Office's gross income, including gross income from
prohibited transactions. The 30% gross income test is not applicable for taxable
years starting on or after January 1, 1998.
If Equity Office fails to satisfy one or both of the 75% or 95% gross
income tests for any taxable year, it may nevertheless qualify as a REIT for
that year if it is entitled to relief under the Internal Revenue Code. These
relief provisions generally will be available if Equity Office's failure to meet
the tests is due to reasonable cause and not due to willful neglect, Equity
Office attaches a schedule of the sources of its income to its federal income
tax return, and any incorrect information on the schedule is not due to fraud
with intent to evade tax. It is not possible, however, to state whether in all
circumstances Equity Office would be entitled to the benefit of these relief
provisions. For example, if Equity Office fails to satisfy the gross income
tests because nonqualifying income that Equity Office intentionally incurs
exceeds the limits on nonqualifying income, the Internal Revenue Service could
conclude that the failure to satisfy the tests was not due to reasonable cause.
If these relief provisions are inapplicable to a particular set of circumstances
involving Equity Office, Equity Office will fail to qualify as a REIT. As
discussed above in "-- General," even if these relief provisions apply, a tax
would be imposed with respect to the excess net income. No similar relief
provision is available if Equity Office failed the 30% income test for its
taxable year ended December 31, 1997.
Any gain realized by Equity Office on the sale of any property held as
inventory or other property held primarily for sale to customers in the ordinary
course of business, including Equity Office's share of this type of gain
realized by EOP Partnership, will be treated as income from a prohibited
transaction that is subject to a 100% penalty tax. Under existing law, whether
property is held as inventory or primarily for sale to customers in the ordinary
course of a trade or business is a question of fact that depends on all the
facts and circumstances of a particular transaction. EOP Partnership intends to
hold the properties for investment with a view to long-term appreciation, to
engage in the business of acquiring, developing, owning, and operating the
properties, and other properties, and to make occasional sales of the properties
as are consistent with EOP Partnership's investment objectives. Equity Office
cannot guarantee, however, that the Internal Revenue Service might not contend
that one or more of these sales is subject to the 100% penalty tax.
Asset Tests Applicable to REITs. At the close of each quarter of its
taxable year, Equity Office must satisfy three tests relating to the nature of
its assets:
(1) at least 75% of the value of Equity Office's total assets must be
represented by real estate assets. Equity Office's real estate assets
include, for this purpose, its allocable share of real estate assets held
by EOP Partnership and the non-corporate subsidiaries of EOP Partnership,
as well as stock or debt instruments held for less than one year purchased
with the proceeds of a stock offering, or long-term debt offering of Equity
Office, cash, cash items and government securities;
(2) not more than 25% of Equity Office's total assets may be
represented by securities other than those in the 75% asset class; and
(3) of the investments included in the 25% asset class, except for
REITs or qualified REIT subsidiaries, the value of any one issuer's
securities owned by Equity Office may not exceed 5% of the value of Equity
Office's total assets, and Equity Office may not own more than 10% of any
one issuer's outstanding voting securities. For taxable years commencing
after December 31, 2000, the
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10% test will be modified, and Equity Office will become subject to a new
asset test. See "--Changes to REIT Qualification Requirements."
After initially meeting the asset tests at the close of any quarter, Equity
Office will not lose its status as a REIT if it fails to satisfy the 25% or 5%
asset tests at the end of a later quarter solely by reason of changes in the
relative values of its assets. If the failure to satisfy the 25% or 5% asset
tests results from an acquisition of securities or other property during a
quarter, the failure can be cured by disposition of sufficient nonqualifying
assets within 30 days after the close of that quarter. An acquisition of
securities could include Equity Office increasing its interest in EOP
Partnership as a result of a merger, the exercise by limited partners of their
right to redeem units in EOP Partnership, or an additional capital contribution
of proceeds of an offering of shares of beneficial interest by Equity Office.
Equity Office intends to maintain adequate records of the value of its assets to
ensure compliance with the asset tests and to take any available actions within
30 days after the close of any quarter as may be required to cure any
noncompliance with the 25% or 5% asset tests. If Equity Office fails to cure
noncompliance with the asset tests within this time period, Equity Office would
cease to qualify as a REIT.
Stock interests owned by Equity Office in another REIT are qualifying real
estate assets for purposes of the 75% gross asset test, and, consequently, these
stock interests are not subject to the 10% voting stock limitation or 5% asset
test described above. Equity Office and EOP Partnership currently own, in
aggregate, 51.6% of the outstanding stock of BeaMetFed, Inc., which has elected
to be taxed as a REIT for federal income tax purposes. As a REIT, BeaMetFed,
Inc., is subject to the various REIT qualification requirements. Equity Office
believes that BeaMetFed, Inc. has been organized and has operated in a manner to
qualify for taxation as a REIT for federal income tax purposes and will continue
to be organized and to operate in this manner. If BeaMetFed, Inc. were to fail
to qualify as a REIT, Equity Office's stock interests in BeaMetFed, Inc. would
cease to be qualifying real estate assets for purposes of the 75% gross asset
test and would become subject to the 10% voting stock limitation generally
applicable to Equity Office's ownership in corporations that are neither REITs
nor qualified REIT subsidiaries. Since Equity Office owns 51.6% of the
outstanding stock of BeaMetFed, Inc., if BeaMetFed, Inc. failed to qualify as a
REIT, the 10% voting stock limitation would not be satisfied and Equity Office
itself would fail to qualify as a REIT.
Equity Office does not own more than 1% of the voting stock of any of the
noncontrolled subsidiaries but it does own 100% of the nonvoting stock of each
of the noncontrolled subsidiaries, and it loans money to the noncontrolled
subsidiaries. As described above, Equity Office also owns stock and warrants in
telecommunications service providers and Captivate. None of Equity Office, EOP
Partnership, or any of the non-corporate subsidiaries of EOP Partnership,
however, owns more than 10% of the voting securities of any of these entities.
In making this determination, Equity Office treats warrants and convertible
preferred stock that have a zero or relatively insubstantial exercise or
conversion prices and are currently exercisable for voting stock as if the
warrants or conversion rights had been exercised.
In addition, Equity Office believes that its pro rata share of the value of
the securities, including debt, of each of the noncontrolled subsidiaries and of
each of the telecommunication providers and Captivate, does not exceed 5% of the
total value of Equity Office's assets. Equity Office cannot guarantee, however,
that the Internal Revenue Service might not contend either that the value of the
securities of the noncontrolled subsidiaries held by Equity Office exceeds the
5% value limitation or that nonvoting stock of the noncontrolled subsidiaries or
another corporate entity owned by Equity Office should be considered voting
stock for this purpose.
Equity Office will acquire in the mergers a new non-controlled subsidiary,
WCP Services, Inc., currently owned by Cornerstone. Equity Office will own all
of the non-voting stock and 1% of the voting stock of WCP Services, Inc., which
together represents 95% of the economic interest. The remaining voting stock,
representing 5% of the economic interest, will be acquired by Equity Office
Properties Management Corp., another non-controlled subsidiary of Equity Office.
WCP Services, Inc. is taxable as a regular "C" corporation. Equity Office does
not believe that the value of the securities of WCP Services, Inc. will cause it
to violate the 5% asset test.
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Equity Office also has taken into account for the period after the REIT
merger, warrants and stock of telecommunications service providers and Captivate
owned by Cornerstone in determining that Equity Office will satisfy the 10%
voting securities test and the 5% value limitation.
Changes to REIT Qualification Requirements. As a result of the Work
Incentives Improvement Act, after December 31, 2000, the 5% value test and the
10% voting security test will be modified in three respects. First, the 10%
voting securities test will be expanded so that REITs also will be prohibited
from owning more than 10% of the value of the outstanding securities of any one
issuer. Second, an exception to these tests will be created so that REITs will
be permitted to own securities of a subsidiary that exceed the 5% value test and
the new 10% vote or value test if the subsidiary elects to be a taxable REIT
subsidiary. Equity Office currently owns more than 10% of the total value of the
outstanding securities of the noncontrolled subsidiaries. The expanded 10% vote
or value test, however, will not apply to a noncontrolled subsidiary unless it
engages in a substantial new line of business or acquires any substantial asset
or Equity Office acquired any securities in the noncontrolled subsidiary after
July 12, 1999. Equity Office expects that some or all of its existing
noncontrolled subsidiaries will elect to be treated as taxable REIT
subsidiaries. Under the third new asset test, for taxable years beginning after
December 31, 2000, Equity Office will not be able to own securities of taxable
REIT subsidiaries that represent in the aggregate more than 20% of the value of
Equity Office's total assets.
Rents received by Equity Office from a taxable REIT subsidiary will be
qualifying rents from real property for purposes of the REIT income tests,
described above, and will not be related party rent, so long as at least 90% of
the property is leased to unrelated tenants and the rent paid by the taxable
REIT subsidiary is substantially comparable to the rent paid by the unrelated
tenants for comparable space. In addition, a taxable REIT subsidiary will be
able to perform some impermissible tenant services without causing Equity Office
to receive impermissible tenant services income under the REIT income tests.
Several provisions of the new law will ensure that a taxable REIT subsidiary
will be subject to an appropriate level of federal income taxation. For example,
a taxable REIT subsidiary will be limited in its ability to deduct interest
payments made to an affiliated REIT. In addition, the REIT will have to pay a
100% penalty tax on some payments that it receives if the economic arrangements
between the REIT, the REIT's tenants, and the taxable REIT subsidiary are not
comparable to similar arrangements between unrelated parties.
Equity Office will receive warrants in Captivate that are exercisable into
nonvoting stock prior to January 1, 2001, and exercisable into voting stock
commencing on January 1, 2001. Captivate has agreed to make the election to be a
taxable REIT subsidiary, which generally would allow Equity Office to own any
amount of Captivate's voting stock without violating the REIT asset tests
beginning January 1, 2001. At present, the IRS has not provided guidance about
the mechanics of making the taxable REIT subsidiary election. If Captivate
breached its contractual obligation and failed to make the election, it is
possible that the Internal Revenue Service could assert that Equity Office
failed to qualify as a REIT on January 1, 2001. However, the agreement with
Captivate includes a provision allowing Equity Office to require specific
performance of the agreement. Under these circumstances, Equity Office believes
that the Internal Revenue Service would not take the position that Equity Office
had failed to qualify as a REIT if Captivate breached its obligation to make the
taxable REIT subsidiary election, but there are no assurances that the Internal
Revenue Service would not take that position.
Annual Distribution Requirements Applicable to REITs. In order to qualify
as a REIT, Equity Office is required to distribute dividends, other than capital
gain dividends, to its shareholders in an amount at least equal to (1) the sum
of (a) 95% (90% for taxable years beginning after December 31, 2000) of Equity
Office's REIT taxable income, computed without regard to the dividends paid
deduction and its net capital gain, and (b) 95% (90% for taxable years beginning
after December 31, 2000) of the net income, after tax, from foreclosure
property, minus (2) the sum of certain specified items of noncash income.
In addition, if Equity Office recognizes any built-in gain, Equity Office
will be required, pursuant to Treasury Regulations, to distribute at least 95%
(90% for taxable years beginning after December 31,
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2000) of the built-in gain, after tax, recognized on the disposition of the
applicable asset. These distributions must be paid either in the taxable year to
which they relate, or in the following taxable year if declared before Equity
Office timely files its tax return for the prior year and if paid with or before
the first regular dividend payment date after the declaration is made. See "--
General" above for a discussion of the possible recognition of built-in gain.
Equity Office intends to make timely distributions sufficient to satisfy
its annual distribution requirements. In this regard, the partnership agreement
of EOP Partnership authorizes Equity Office, as general partner, to take steps
as may be necessary to cause EOP Partnership to distribute to its partners an
amount sufficient to permit Equity Office to meet these distribution
requirements. It is expected that Equity Office's REIT taxable income generally
will be less than its cash flow due to the allowance of depreciation and other
noncash charges in computing REIT taxable income. Accordingly, Equity Office
anticipates that it generally will have sufficient cash or liquid assets to
enable it to satisfy the distribution requirements described above. It is
possible, however, that Equity Office, from time to time, may not have
sufficient cash or other liquid assets to meet these distribution requirements.
In this event, Equity Office may find it necessary to arrange for short-term, or
possibly long-term borrowings to fund required distributions or to pay dividends
in the form of taxable stock dividends.
Under some circumstances, Equity Office may be able to rectify a failure to
meet the distribution requirement for a year by paying deficiency dividends to
shareholders in a later year, which may be included in Equity Office's deduction
for dividends paid for the earlier year. Thus, Equity Office may be able to
avoid being taxed on amounts distributed as deficiency dividends; however,
Equity Office will be required to pay interest based upon the amount of any
deduction taken for deficiency dividends.
To the extent that Equity Office does not distribute all of its net capital
gain or distributes at least 95% (90% for taxable years beginning after December
31, 2000), but less than 100%, of its REIT taxable income, as adjusted, it is
subject to tax on these amounts at regular corporate tax rates.
Equity Office will be subject to a 4% excise tax on the excess of the
required distribution over the sum of amounts actually distributed and amounts
retained for which federal income tax was paid, if Equity Office fails to
distribute during each calendar year at least the sum of:
- 85% of its REIT ordinary income for the year;
- 95% of its REIT capital gain net income for the year; and
- any undistributed taxable income from prior taxable years.
A REIT may elect to retain rather than distribute, all or a portion of its
net capital gains and pay the tax on the gains. In such a case, a REIT may elect
to have its shareholders include their proportionate share of the undistributed
net capital gains in income as long-term capital gains and receive a credit for
their share of the tax paid by the REIT. For purposes of the 4% excise tax
described above, any retained amounts would be treated as having been
distributed.
Recordkeeping Requirements. Under applicable Treasury Regulations, Equity
Office must comply with applicable recordkeeping requirements to qualify for
taxation as a REIT.
Failure of Equity Office to Qualify as a REIT. If Equity Office fails to
qualify for taxation as a REIT in any taxable year, and if relief provisions do
not apply, Equity Office will be subject to tax, including any applicable
alternative minimum tax, on its taxable income at regular corporate rates. If
Equity Office fails to qualify as a REIT, Equity Office will not be required to
make any distributions to shareholders and any distributions that are made to
shareholders will not be deductible by Equity Office. As a result, Equity
Office's failure to qualify as a REIT would significantly reduce the cash
available for distributions by Equity Office to its shareholders. In addition,
if Equity Office fails to qualify as a REIT, all distributions to shareholders
will be taxable as ordinary income to the extent of Equity Office's current and
accumulated earnings and profits, whether or not attributable to capital gains
of Equity Office, and corporate shareholders may be eligible for the dividends
received deduction. Unless entitled to relief under specific statutory
provisions, Equity Office also will be disqualified from taxation as a REIT for
the four
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taxable years following the year during which qualification was lost. There is
no guarantee that Equity Office would be entitled to any statutory relief.
TAXATION OF U.S. SHAREHOLDERS
As used in this section, the term "U.S. shareholder" means a holder of
common shares who for United States federal income tax purposes is:
- a citizen or resident of the United States;
- a corporation, partnership, or other entity treated as a corporation or
partnership for federal income tax purposes created or organized in or
under the laws of the United States, or of any state or the District of
Columbia, unless in the case of a partnership Treasury Regulations
otherwise require;
- an estate the income of which is subject to United States federal income
taxation regardless of its source; or
- a trust whose administration is subject to the primary supervision of a
United States court and which has one or more United States persons who
have the authority to control all substantial decisions of the trust.
Distributions by Equity Office. As long as Equity Office qualifies as a
REIT, distributions to U.S. shareholders out of its current or accumulated
earnings and profits that are not designated as capital gain dividends will be
taxable as ordinary income and will not be eligible for the dividends received
deduction generally available for corporations. Distributions in excess of its
current and accumulated earnings and profits will reduce the adjusted tax basis
of the shareholder's shares. Distributions that exceed the U.S. shareholder's
adjusted basis in its shares will be taxable as capital gains if the shares are
held as a capital asset. If Equity Office declares a dividend in October,
November, or December of any year with a record date in one of these months and
pays the dividend on or before January 30 of the following year, Equity Office
will be treated as having paid the dividend and the shareholder will be treated
as having received the dividend on December 31 of the year in which the dividend
was declared.
Equity Office may elect to designate distributions of its net capital gain
as "capital gain dividends." Capital gain dividends are taxed to shareholders as
gain from the sale or exchange of a capital asset held for more than one year,
without regard to how long the U.S. shareholder has held its shares. If Equity
Office designates any portion of a dividend as a capital gain dividend, a U.S.
shareholder will receive an Internal Revenue Service Form 1099-DIV indicating
the amount that will be taxable to the shareholder as capital gain. Corporate
shareholders, however, may be required to treat up to 20% of capital gain
dividends as ordinary income.
Instead of paying capital gain dividends, Equity Office may designate all
or part of its net capital gain as "undistributed capital gain." Equity Office
will be subject to tax at regular corporate rates on any undistributed capital
gain. A U.S. shareholder will be required to include its share of this gain in
income as long-term capital gain. However, the U.S. Shareholder will also be
treated as having paid its share of the tax paid by Equity Office with respect
to the gain. Accordingly, U.S. shareholders will be able to claim a refund or a
credit to the extent that the tax paid by Equity Office exceeds the
shareholders' tax liability on the undistributed capital gain. The U.S.
shareholder's basis in its shares would be increased by its share of this gain
and decreased by its share of applicable tax.
Equity Office will classify portions of any designated capital gain
dividend as either:
- a 20% rate gain distribution, which would be taxable to non-corporate
U.S. shareholders at a maximum rate of 20%; or
- an "unrecaptured section 1250 gain" distribution, which would be taxable
to non-corporate U.S. shareholders at a maximum rate of 25%.
Equity Office must determine the maximum amounts that it may designate as
20% and 25% rate capital gain dividends by performing the computation required
by the Internal Revenue Code as if the
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REIT were an individual whose ordinary income were subject to a marginal tax
rate of at least 28%. Designations made by Equity Office only will be effective
to the extent that they comply with Revenue Ruling 89-91, which requires that
distributions made to different classes of shares be composed proportionately of
dividends of a particular type.
Distributions made by Equity Office and gain arising from the sale or
exchange by a U.S. shareholder of shares will not be treated as passive activity
income, and as a result, U.S. shareholders generally will not be able to apply
any "passive losses" against this income or gain. In addition, taxable
distributions from Equity Office generally will be treated as investment income
for purposes of the investment interest limitations. A U.S. shareholder may
elect to treat capital gain dividends and capital gains from the disposition of
shares as investment income for purposes of the investment interest limitation,
in which case the applicable capital gains will be taxed at ordinary income
rates. Equity Office will notify shareholders regarding the portions of
distributions for each year that constitute ordinary income, return of capital
and capital gain. U.S. shareholders may not include in their individual income
tax returns any net operating losses or capital losses of Equity Office. Equity
Office's operating or capital losses would be carried over by Equity Office for
potential offset against future income, subject to applicable limitations.
Sales of Shares. Upon any taxable sale or other disposition of shares, a
U.S. shareholder will recognize gain or loss for federal income tax purposes in
an amount equal to the difference between:
- the amount of cash and the fair market value of any property received on
the sale or other disposition; and
- the holder's adjusted basis in the shares for tax purposes.
This gain or loss will be a capital gain or loss if the shares have been
held by the U.S. shareholder as a capital asset. Generally, a non-corporate U.S.
shareholder who has held Equity Office shares for more than one year will be
taxable on capital gain at a maximum rate of 20%. However, a maximum rate of 25%
will apply to capital gain that is treated as "unrecaptured section 1250 gain"
for individuals, trusts and estates. The Internal Revenue Service has the
authority to prescribe, but has not yet prescribed, regulations on how the
capital gain rates will apply to sales of shares in REITs. Shareholders are
urged to consult with their own tax advisors with respect to their capital gain
tax liability. A corporate U.S. shareholder will be subject to tax at a maximum
rate of 35% on capital gain from the sale of Equity Office shares held for more
than 12 months. In general, any loss recognized by a U.S. shareholder upon the
sale or other disposition of shares that have been held for six months or more,
after applying the holding period rules, will be treated as a long-term capital
loss, to the extent of distributions received by the U.S. shareholder from
Equity Office that were required to be treated as long-term capital gains.
TAXATION OF TAX-EXEMPT SHAREHOLDERS
Provided that a tax-exempt shareholder has not held its common shares as
"debt financed property" within the meaning of the Internal Revenue Code, the
dividend income from Equity Office will not be unrelated business taxable
income, referred to as UBTI, to a tax-exempt shareholder. Similarly, income from
the sale of shares will not constitute UBTI unless the tax-exempt shareholder
has held its shares as debt financed property within the meaning of the Internal
Revenue Code or has used the shares in a trade or business.
However, for tax-exempt shareholders that are social clubs, voluntary
employee benefit associations, supplemental unemployment benefit trusts, and
qualified group legal services plans exempt from federal income taxation under
sections 501(c)(7), (c)(9), (c)(17) and (c)(20) of the Internal Revenue Code,
respectively, income from an investment in Equity Office will constitute UBTI
unless the organization is able to properly deduct amounts set aside or placed
in reserve for applicable purposes to offset the income generated by its
investment in Equity Office. These tax-exempt shareholders should consult their
own tax advisors concerning these "set aside" and reserve requirements.
Notwithstanding the above, however, a portion of the dividends paid by a
"pension held REIT" are treated as UBTI if received by any trust which is
described in section 401(a) of the Internal Revenue
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Code, is tax-exempt under section 501(a) of the Internal Revenue Code, and holds
more than 10%, by value, of the interests in the REIT. Tax-exempt pension funds
that are described in section 401(a) of the Internal Revenue Code are referred
to below as "pension trusts."
A REIT is a pension held REIT if it meets the following two tests:
- it qualified as a REIT only by reason of section 856(h) (3) of the
Internal Revenue Code, which provides that stock owned by pension trusts
shall be treated, for purposes of determining if the REIT is closely
held, as owned by the beneficiaries of the trust rather than by the trust
itself; and
- either (a) at least one pension trust holds more than 25% of the value of
the REIT's stock, or (b) a group of pension trusts each individually
holding more than 10% of the value of the REIT's shares, collectively
owns more than 50% of the value of the REIT's shares.
The percentage of any REIT dividend treated as UBTI is equal to the ratio
of the UBTI earned by the REIT, treating the REIT as if it were a pension trust
and therefore subject to tax on UBTI, to the total gross income of the REIT. An
exception applies where the percentage is less than 5% for any year. The
provisions requiring pension trusts to treat a portion of REIT distributions as
UBTI will not apply if the REIT is able to satisfy the "not closely held
requirement" without relying upon the "look-through" exception with respect to
pension trusts. Based on both its current share ownership and the limitations on
transfer and ownership of shares contained in its declaration of trust, Equity
Office does not expect to be classified as a pension held REIT.
BACKUP WITHHOLDING AND INFORMATION REPORTING CONSEQUENCES TO SHAREHOLDERS
Generally, Equity Office must report annually to the Internal Revenue
Service and to each Equity Office shareholder the amount of dividends paid
during each calendar year, and the amount of any tax withheld. Information
reporting requirements may apply even if withholding is not required. Copies of
these information reporting returns also may be made available, under provisions
of an applicable income tax treaty or agreement, to the tax authorities in the
country in which a non-U.S. shareholder is resident.
Under the backup withholding rules, a U.S. shareholder may be subject to
backup withholding at the rate of 31% with respect to dividends paid unless the
shareholder:
- is a corporation or comes within other exempt categories, and when
required, demonstrates this fact;
- furnishes a correct taxpayer identification number and certifies that he
or she is not subject to backup withholding on Internal Revenue Service
Form W-9, or an appropriate substitute form; or
- otherwise complies with applicable requirements of the backup withholding
rules.
A U.S. shareholder that does not provide Equity Office with a correct
taxpayer identification number also may be subject to penalties imposed by the
Internal Revenue Service. Any amount paid as backup withholding is creditable
against the shareholder's income tax liability. In addition, Equity Office may
be required to withhold a portion of its capital gain distributions to any
shareholders who fail to certify their nonforeign status to Equity Office.
TAX ASPECTS OF EQUITY OFFICE'S OWNERSHIP OF INTERESTS IN EOP PARTNERSHIP AND
OTHER PARTNERSHIPS
General. All of Equity Office's investments are held indirectly through
EOP Partnership. In general, partnerships are "pass-through" entities that are
not subject to federal income tax at the partnership level. However, a partner
is allocated its proportionate share of the items of income, gain, loss,
deduction and credit of a partnership, and is required to include these items in
calculating its tax liability, without regard to whether it receives a
distribution from the partnership. Equity Office includes its proportionate
share of these partnership items in its income for purposes of the various REIT
income tests and the computation of its REIT taxable income. Moreover, for
purposes of the REIT asset tests, Equity Office includes its
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proportionate share of assets held through EOP Partnership. See "Taxation of
Equity Office as a REIT -- Ownership of Partnership Interests by a REIT" above.
Entity Classification. Equity Office believes that EOP Partnership and
each of the partnerships and limited liability companies in which Equity Office
owns an interest, directly or through another partnership or limited liability
company, will be treated as a partnership or disregarded for federal income tax
purposes and will not be taxable as a corporation. If any of these entities were
treated as a corporation, it would be subject to an entity level tax on its
income and Equity Office could fail to meet the REIT income and asset tests. See
"Taxation of Equity Office as a REIT -- Asset Tests Applicable to REITs" and
"Taxation of Equity Office as a REIT -- Income Tests Applicable to REITs" above.
A partnership is a "publicly traded partnership" under section 7704 of the
Code if:
- interests in the partnership are traded on an established securities
market; or
- interests in the partnership are readily tradeable on a "secondary
market," or the "substantial equivalent" of a secondary market.
Under the relevant Treasury Regulations interests in a partnership will not
be considered readily tradeable on a secondary market or on the substantial
equivalent of a secondary market if the partnership qualifies for specified
"safe harbors," which are based on the specific facts and circumstances relating
to the partnership.
EOP Partnership currently takes the reporting position for federal income
tax purposes that it is not a publicly traded partnership. There is a
significant risk, however, that the right of a holder of EOP Partnership units
to redeem the EOP Partnership units for EOP common shares could cause EOP
Partnership units to be considered readily tradeable on the substantial
equivalent of a secondary market. Moreover, if EOP Partnership units were
considered to be tradeable on the substantial equivalent of a secondary market,
either now or in the future, EOP Partnership cannot guarantee that it would
qualify for any of the safe harbors mentioned above, or that, if it currently
qualifies for a safe harbor, EOP Partnership will continue to qualify for the
safe harbors in the future. For example, EOP Partnership cannot satisfy the
"private placement" safe harbor because it has more than 100 partners and has
issued units in registered offerings, such as units to be issued in connection
with the partnership merger.
If EOP Partnership is a publicly traded partnership, it will be taxed as a
corporation, unless at least 90% of its gross income consists of "qualifying
income" under section 7704 of the Internal Revenue Code. Qualifying income is
generally real property rents and other types of passive income. Equity Office
believes that EOP Partnership will have sufficient qualifying income so that it
will be taxed as a partnership, even if it were a publicly traded partnership.
The income requirements applicable to Equity Office in order for it to qualify
as a REIT under the Internal Revenue Code and the definition of qualifying
income under the publicly traded partnership rules are very similar. Although a
difference exists between these two income tests regarding whether rent is
considered from a related tenant, Equity Office does not believe that this
difference would cause EOP Partnership not to satisfy the 90% gross income test
applicable to publicly traded partnerships.
Allocations of Partnership Income, Gain, Loss and Deduction. A partnership
agreement will generally determine the allocation of income and loss among
partners. However, those allocations will be disregarded for tax purposes if
they do not comply with the provisions of section 704(b) of the Internal Revenue
Code and the applicable Treasury Regulations, which generally require that
partnership allocations respect the economic arrangement of the partners.
If an allocation is not recognized for federal income tax purposes, the
item subject to the allocation will be reallocated in accordance with the
partners' interests in the partnership, which will be determined by taking into
account all of the facts and circumstances relating to the economic arrangement
of the partners with respect to such item. The allocations of taxable income and
loss provided for in the partnership agreement of EOP Partnership are intended
to comply with the requirements of section 704(b) of the Internal Revenue Code
and the regulations promulgated thereunder.
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<PAGE> 137
Tax Allocations with Respect to the Properties. Pursuant to section 704(c)
of the Internal Revenue Code, income, gain, loss and deduction attributable to a
property that is contributed to a partnership in exchange for an interest in the
partnership must be allocated in a manner such that the contributing partner is
charged with, or benefits from, respectively, the difference between the
adjusted tax basis and the fair market value of property at the time of
contribution. The difference is known as the book-tax difference. Section 704(c)
allocations are for federal income tax purposes only and do not affect the book
capital accounts or other economic or legal arrangements among the partners.
Under Treasury Regulations promulgated under section 704(c) of the Internal
Revenue Code, similar rules apply when a partnership elects to "revalue" its
assets in limited situations, such as when a contribution of property is made to
a partnership by a new partner.
The partnership agreement of EOP Partnership requires that such allocations
be made in a manner consistent with section 704(c) of the Internal Revenue Code.
Treasury Regulations under section 704(c) of the Internal Revenue Code provide
partnerships with a choice of several methods of accounting for book-tax
differences, including retention of the "traditional method" or the election of
alternative methods which would permit any distortions caused by a book-tax
difference to be entirely rectified on an annual basis or with respect to a
specific taxable transaction such as a sale. EOP Partnership and Equity Office
have determined to use the traditional method of accounting for book-tax
differences with respect to the properties initially contributed to EOP
Partnership in connection with its formation or subsequently acquired by merger
or contribution.
In general, if any asset contributed to or revalued by EOP Partnership is
determined to have a fair market value that is greater than its adjusted tax
basis, some partners of EOP Partnership, including Equity Office, will be
allocated lower amounts of depreciation deductions as to specific properties for
tax purposes by EOP Partnership and increased taxable income and gain on sale.
Thus, Equity Office may be allocated lower depreciation and other deductions,
and possibly greater amounts of taxable income in the event of a sale of
contributed assets. These amounts may be in excess of the economic or book
income allocated to it as a result of the sale and, as a result, the allocation
might cause Equity Office to recognize taxable income in excess of the cash
distribution received. This excess taxable income is sometimes referred to as
"phantom income." Because Equity Office relies on cash distributions from EOP
Partnership to meet its REIT distribution requirements, which are specified
percentages of its taxable income, the recognition of this phantom income might
adversely affect Equity Office's ability to comply with those requirements. In
this regard, it should be noted that as the general partner of EOP Partnership,
Equity Office will determine, taking into account the tax consequences to it,
when and whether to sell any given property. See "-- Annual Distribution
Requirements Applicable to REITs" above.
OTHER TAX CONSEQUENCES FOR EQUITY OFFICE AND ITS SHAREHOLDERS
Equity Office and its shareholders are subject to state or local taxation
in various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of Equity Office
and its shareholders may not conform to the federal income tax consequences
discussed above. Consequently, prospective shareholders of Equity Office should
consult their own tax advisors regarding the effect of state and local tax laws
on an investment in Equity Office.
A portion of the cash to be used by Equity Office to fund distributions
comes from dividends paid by the noncontrolled subsidiaries (and after December
31, 2000, any new taxable REIT subsidiaries formed by Equity Office). The
noncontrolled subsidiaries are subject to federal and state income tax at the
full applicable corporate rates. Equity Office expects that some or all of its
noncontrolled subsidiaries will elect to be treated as taxable REIT subsidiaries
after December 31, 2000. A taxable REIT subsidiary will be a fully taxable
corporation and, in addition, will be limited in its ability to deduct interest
payments made to Equity Office. For a more detailed discussion of taxable REIT
subsidiaries, see "-- Changes to REIT Qualification Requirements" above. To the
extent that the noncontrolled subsidiaries and any taxable REIT subsidiaries are
required to pay federal, state or local taxes, Equity Office will receive less
dividend income from them and will have less cash available for distribution to
shareholders.
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<PAGE> 138
BUSINESS OF CORNERSTONE PARTNERSHIP
GENERAL
Cornerstone is a self-administered equity real estate investment trust
which owns, through Cornerstone Partnership, interests in 82 class A office
buildings comprising approximately 17 million rentable square feet, a shopping
center, a hotel and developable land. These 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. In January
1998, Cornerstone converted its corporate structure into an umbrella limited
partnership REIT. Under this structure, Cornerstone owns all of its properties
and conducts all of its business through Cornerstone Partnership. Cornerstone is
the sole general partner of Cornerstone Partnership and owns approximately 87.1%
of the Cornerstone Partnership units.
Cornerstone Partnership is a Delaware limited partnership formed in
December 1997. Cornerstone Partnership's principal place of business is located
at Tower 56, 126 East 56th Street, New York, New York 10022. Cornerstone has an
internet web site at http://www.cstoneprop.com.
OPERATIONS
The operations of the Cornerstone Partnership properties are conducted
under the direction of Cornerstone, which is managed by its executive officers
and board of directors.
OWNERSHIP AND MANAGEMENT OF CORNERSTONE PARTNERSHIP PROPERTIES
All of the properties, with the exception of 191 Peachtree Street,
Washington Mutual Tower, Norwest Center, 500 Boylston Street, 222 Berkeley
Street, Market Square, 120 Montgomery Street, and One Post, all of which are
referred to herein as the "joint venture properties," are owned directly or
indirectly by Cornerstone Partnership. Cornerstone Partnership owns only a
partial interest in the joint venture properties. Consequently, Cornerstone
Partnership may not exercise sole decision-making authority with respect to the
joint venture properties.
Cornerstone Partnership conducts third party management operations through
WCP Services, Inc., a partially-owned subsidiary of Cornerstone Partnership.
Cornerstone Partnership owns 1% of the voting stock and 100% of the non-voting
stock of WCP Services, which collectively represent 95% of the economic value of
WCP Services.
Cornerstone Partnership believes that all of the Cornerstone Partnership
properties are adequately covered by insurance. Fifty-nine of the properties are
located in California, an area of particular earthquake risk. Cornerstone
Partnership carries earthquake insurance on all of its properties located in
California; the policies, however, are subject to coverage limitations.
The following table summarizes Cornerstone Partnership's interest in real
estate investments at December 31, 1999. None of the properties listed below had
either net book values equal to 10.0% or
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<PAGE> 139
more of Cornerstone Partnership's total assets as of December 31, 1999 or gross
revenues equal to 10.0% or more of Cornerstone Partnership's consolidated gross
revenues for the year ended December 31, 1999.
<TABLE>
<CAPTION>
CORNERSTONE
MARKET NAME TOTAL RENTABLE PARTNERSHIP 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 74%
One Memorial Drive 352,764 100.0% 1985 100% D
---------- ---
MARKET TOTAL 2,884,826 96%
SAN MATEO COUNTY, CALIFORNIA
Bayhill (4 buildings) 514,255 100.0% 1982-1987 96% 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 99% 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 98% C
---------- ---
MARKET TOTAL 1,647,986 98%
EAST BAY, CALIFORNIA
Corporate Centre (2 buildings) 329,348 100.0% 1985-1987 96% E
ADP Plaza (2 buildings) 300,308 100.0% 1987-1989 95% 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
2700 Ygnacio Valley Road 103,214 100.0% 1984 99% E
Park Plaza 87,040 100.0% 1986 100% E
1600 South Main 83,277 100.0% 1983 98% E
---------- ---
MARKET TOTAL 1,601,849 98%
SEATTLE, WASHINGTON
Washington Mutual Tower (3 buildings) 1,154,560 50.0% 1988 98% G
110 Atrium Place 215,172 100.0% 1981 100% E
Island Corporate Center 100,009 100.0% 1987 97% E
---------- ---
MARKET TOTAL 1,469,741 98%
SANTA CLARA COUNTY, CALIFORNIA
Pruneyard Office (3 buildings) 354,629 100.0% 1971-1999 99% E,H
10 Almaden 294,809 100.0% 1989 100% E
Pruneyard Shopping Center 252,210 100.0% 1970s 90% 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%
</TABLE>
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<PAGE> 140
<TABLE>
<CAPTION>
CORNERSTONE
MARKET NAME TOTAL RENTABLE PARTNERSHIP YEAR
PROPERTY SQUARE FEET INTEREST (A) CONSTRUCTED LEASED NOTES
----------- -------------- ------------ ----------- ------ -----
<S> <C> <C> <C> <C> <C>
SAN FRANCISCO, CALIFORNIA
120 Montgomery Street 420,310 66.7% 1955 95% E
One Post 391,450 50.0% 1969 99% E
201 California Street 240,230 100.0% 1980 96% 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%
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 100% C
TransPotomac Plaza 5 96,392 100.0% 1983 100% C
11 Canal Center 70,365 100.0% 1986 98% C
---------- ---
MARKET TOTAL 993,411 99%
SUBURBAN CHICAGO, ILLINOIS
Corporate 500 Centre (4 buildings) 679,039 100.0% 1986/1990 99% M
One Lincoln Centre 297,040 100.0% 1986 89%
---------- ---
MARKET TOTAL 976,079 96%
SANTA MONICA/WEST LOS ANGELES, CALIFORNIA
West Wilshire (2 buildings) 235,787 100.0% 1960-1976 94% 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 79% E,O
429 Santa Monica 83,243 100.0% 1982 88% E
---------- ---
MARKET TOTAL 848,112 95%
ORANGE COUNTY, CALIFORNIA
Bixby Ranch 277,289 100.0% 1987 98% E
18301 Von Karman 219,508 100.0% 1991 88% E
2677 North Main 213,318 100.0% 1987 94% E
---------- ---
MARKET TOTAL 710,115 94%
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 99% P
---------- ---
MARKET TOTAL 378,965 99%
LOS ANGELES, CALIFORNIA
700 North Brand 202,531 100.0% 1981 94% E
Warner Park Center 57,366 100.0% 1986 100% E
---------- ---
MARKET TOTAL 259,897 95%
CONEJO VALLEY (VENTURA), CALIFORNIA
Westlake Spectrum (2 buildings) 118,990 100.0% 1990 97% E
Agoura Hills 115,208 100.0% 1987 100% E
---------- ---
MARKET TOTAL 234,198 99%
</TABLE>
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<TABLE>
<CAPTION>
CORNERSTONE
MARKET NAME TOTAL RENTABLE PARTNERSHIP YEAR
PROPERTY SQUARE FEET INTEREST (A) CONSTRUCTED LEASED NOTES
----------- -------------- ------------ ----------- ------ -----
<S> <C> <C> <C> <C> <C>
OTHER REGIONS
U.S. West (Murray, Utah) 136,608 100.0% 1985 76% E
Exposition Centre (Sacramento, California) 72,971 100.0% 1984 70% E
---------- ---
MARKET TOTAL 209,579 74%
---------- ---
TOTAL PORTFOLIO 17,981,409 97%
----------
Minority Interest Adjustment (Q) (728,307)
---------- ---
CORNERSTONE PORTFOLIO 17,253,102 96%
========== ===
</TABLE>
- ---------------
(A) Unless noted below, cash flow and residual proceeds will be distributed to
Cornerstone Partnership according to its percentage interest.
(B) On December 31, 1997, Cornerstone 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 Cornerstone
Partnership. Cornerstone Partnership 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
Cornerstone as an $89.6 million liability due to its above-market interest
rate. As of January 20, 1998 all of the interests stated above were
contributed to Cornerstone Partnership in exchange for units.
The second mortgage, which Cornerstone Partnership 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, Cornerstone Partnership 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, which we refer to as the DIHC
Portfolio. Cornerstone acquired the DIHC Portfolio for a purchase price of
approximately $1.06 billion, consisting of approximately 34.2 million shares
of Cornerstone 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
Cornerstone's initial public offering in April 1997 and $54.0 million from
its revolving credit facility. As of January 20, 1998 all of the interests
stated above were contributed to Cornerstone Partnership in exchange for
units. Cornerstone Partnership has since sold the asset in Charlotte as well
as the undeveloped parcel of land in Chicago.
(D) On April 28, 1998, Cornerstone Partnership 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 Cornerstone
Partnership units valued at $17.50 per unit and approximately $60.0 million
of which was paid in Cornerstone's common stock valued at $17.50 per share.
(E) This property was acquired as a result of the Wilson acquisition in December
1998. After receiving stockholder approval on December 14, 1998, Cornerstone
Partnership acquired substantially all of the properties and real estate
operations of William Wilson & Associates and related entities, or WW&A. We
refer to this acquisition as the Wilson acquisition. As part of the Wilson
acquisition, Cornerstone Partnership 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
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San Francisco Bay Area. Cornerstone Partnership has since sold 11 assets
comprising approximately 1.2 million square feet.
Cornerstone and Cornerstone Partnership acquired WW&A for a purchase price
of approximately $1.8 billion, consisting of approximately 14.9 million
shares of Cornerstone's common stock valued at $17.25 per share (recorded
at $16.25 per share for GAAP purposes), approximately 16.2 million
Cornerstone Partnership 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 Cornerstone
Partnership's revolving credit facility and the sale of $200.0 million of
Cornerstone common stock to PGGM, an approximate 33.6% stockholder prior to
the Wilson acquisition, priced at $17.25 per share.
(F) While Cornerstone Partnership'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 Cornerstone Partnership
receiving the remainder of the cash flow of the property.
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 Cornerstone Partnership'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 year ended December 31, 1999, the
Cornerstone Partnership received 100% of the cash distributions from the
partnership that owns Washington Mutual Tower.
(H) The final phase of the Pruneyard complex, Pruneyard Place, 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.
(J) On June 3, 1998, Cornerstone Partnership 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 Cornerstone
Partnership 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 Cornerstone Partnership'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 year ended December 31, 1999, Cornerstone
Partnership's share of earnings and cash distributions from the partnership
that owns Norwest Center was 74.4%.
(L) During 1998, through a series of transactions, Cornerstone Partnership
acquired partnership interests with a stated interest of approximately
70.0% in the partnerships that own Market Square. Cornerstone Partnership'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, Cornerstone Partnership 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 year ended December 31, 1999, Cornerstone Partnership received
100% of the cash flow from the property. On November 14, 1998, Cornerstone
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<PAGE> 143
Partnership 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, Cornerstone Partnership 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 Cornerstone Partnership units valued at
$18.50 per unit, for a total purchase price of approximately $150.0 million.
Cornerstone Partnership financed a portion of the purchase price with an
$80.0 million mortgage loan from Bankers Trust Company, which 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, Cornerstone 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 Cornerstone
common stock. As a result, all of the cash flow and the residual value of
Tower 56 inures to Cornerstone Partnership. As of January 20, 1998 all of
the interests stated above were contributed to Cornerstone Partnership in
exchange for Cornerstone Partnership units.
(Q) Rentable square feet includes an adjustment for the interest of a joint
venture or minority partner. Calculations are based on the partners'
percentage interest in the cash flows of the property.
TENANTS
Cornerstone Parnership's tenants include local, regional, national and
international companies engaged in a variety of businesses. The following table
sets forth, as of December 31, 1999, information concerning the ten largest
tenants ranked by their respective percentages of Cornerstone Partnership's
aggregate annualized rent. Annualized rent is the monthly contractual base rent
under existing leases as of December 31, 1999, multiplied by 12.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE PERCENTAGE PERCENTAGE OF
REMAINING OF AGGREGATE AGGREGATE AGGREGATE
NUMBER OF LEASE TERM PORTFOLIO ANNUALIZED RENTABLE OCCUPIED
TENANT (A) BUILDINGS IN MONTHS (B) RENT (C) SQUARE FEET SQUARE FEET
---------- --------- ------------- -------------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Norwest Corporation (Wells
Fargo) 4 181 2.8% 795,424 4.6%
Massachusetts Financial
Services 1 38 2.4% 328,540 1.9%
Hale & Dorr 1 162 2.4% 319,501 1.9%
Wachovia Bank 1 108 2.2% 380,442 2.2%
King & Spalding 1 109 2.0% 314,443 1.8%
The New England Life 2 105 1.3% 216,978 1.3%
Perkins Coie 1 132 1.2% 240,127 1.4%
Houghton Mifflin 1 86 1.1% 225,883 1.3%
PeopleSoft Corporation 1 105 1.0% 210,940 1.2%
McKesson HBOC, Inc. 1 157 0.6% 132,476 0.8%
--- ---- --------- ----
TOTAL WEIGHTED AVERAGE
(B) 123 17.0% 3,164,754 18.4%
=== ==== ========= ====
</TABLE>
- ---------------
(a) Actual tenant may be a subsidiary of, or an entity affiliated with, the
named tenant.
(b) Weighted average calculation based on aggregate rentable square footage
occupied by each tenant.
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<PAGE> 144
(c) "Annualized Rent" is the monthly contractual base rent under existing leases
as of December 31, 1999 multiplied by 12.
RECENT DEVELOPMENTS
Property Dispositions. In 1999, Cornerstone Partnership sold its interest
in 13 office properties for gross proceeds of $495,705,000, comprising
approximately 3.0 million rentable square feet in Charlotte, Denver, Phoenix
(four properties), the San Francisco Bay Area (six properties) and Southern
California. Also during 1999, Cornerstone Partnership acquired a six-acre
development project in the San Francisco Bay Area for approximately $36 million.
On March 15, 2000 and March 23, 2000, Cornerstone Partnership sold its interest
in two properties located in East Bay, California for gross proceeds of
$14,425,000 and $12,800,000, respectively. The properties had been acquired as
part of the Wilson acquisition in December 1998.
Prudential/Northwestern Debt Restructuring. On June 23, 1999, Cornerstone
Partnership restructured approximately $163.0 million of property-related debt
with Prudential Insurance of Company of America and Northwestern Mutual Life
Insurance Company. The restructuring involved retiring 17 of the individual
property-related debts and creating a single $180.0 million term loan which is
cross-collateralized by six of Cornerstone Partnership's properties. The loan
has a ten-year term and bears interest at 7.26% per annum.
Northwestern Debt Restructuring. On October 6, 1999, Cornerstone
Partnership 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 five
of the original six 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 Partnership's unencumbered pool.
Development Project Modification. In April 1998, Cornerstone Partnership
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 Cornerstone Partnership'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.
400 Capitol Mall Acquisition. On January 21, 2000, Cornerstone Partnership
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 which were section 1031 exchange funds from the sale of One
Norwest Center in Denver, Colorado, and approximately $2.0 million of which was
paid in Cornerstone Partnership units valued at $17.25 per unit.
COMPETITION
The leasing of real estate is highly competitive. Cornerstone Partnership's
properties compete for tenants with similar properties located in its markets
primarily on the basis of location, rent charged, services provided and the
design and condition of the improvements.
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MORTGAGE INDEBTEDNESS
The following table sets forth certain information regarding the
consolidated debt obligations of Cornerstone Partnership as of December 31, 1999
and 1998, including mortgage obligations relating to the properties. All of this
debt is nonrecourse to Cornerstone Partnership. However, notwithstanding the
nonrecourse indebtedness, the lender may have the right to recover deficiencies
from Cornerstone Partnership in certain circumstances, including fraud,
misappropriation of funds and environmental liabilities (dollar amounts in
thousands).
<TABLE>
<CAPTION>
MATURITY
PROPERTY AMORTIZATION INTEREST RATE (A) DATE 12/31/99 12/31/98
- -------- ------------- ----------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
FIXED RATE DEBT
TransPotomac Plaza (B)........ Interest Only 7.28% Oct-2000 $ 65,000 $ 65,000
West Wilshire Office and
Medical..................... 25 year 6.90% Jan-2002 16,926 17,301
Searise Office Tower.......... 25 year 6.90% Jan-2002 11,607 11,864
Exposition Centre............. 25 year 6.90% May-2002 5,081 5,200
Wilshire Palisades............ 22 year 6.70% Jul-2002 29,047 29,902
110 Atrium Place.............. 30 year 6.90% Mar-2004 21,517 21,838
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 85,420 87,627
Island Corporate Center....... 30 year 6.90% Apr-2005 13,170 13,294
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 12,003 12,328
Janss Court................... 30 year 6.90% Dec-2005 18,357 18,723
Bayhill 4, 5, 6 & 7........... 25 year 6.90% Dec-2006 57,764 59,071
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 88,424 89,765
188 Embarcadero (D)........... 25 year 7.26% Aug-2009 15,606 9,135
Centerside II (D)............. 25 year 7.26% Aug-2009 24,254 13,818
700 North Brand (D)........... 25 year 7.26% Aug-2009 26,938 18,108
Golden Bear Center (D)........ 25 year 7.26% Aug-2009 20,477 15,753
Bixby Ranch (D)............... 25 year 7.26% Aug-2009 28,528 20,243
One Memorial Drive (D)........ 25 year 7.26% Aug-2009 63,119 --
125 Summer Street (E)......... 25 year 7.23% Nov-2009 78,844 50,000
Tower 56 (E).................. 25 year 7.23% Nov-2009 25,024 17,548
Peninsula Office Park 1, 3, 4,
5, 6, 8 & 9 (E)............. 25 year 7.23% Nov-2009 88,128 60,242
Embarcadero Place (E)......... 25 year 7.23% Nov-2009 38,149 26,061
201 California Street (E)..... 25 year 7.23% Nov-2009 44,504 33,071
---------- ----------
Total Fixed Rate Debt..... 7.31%(F) 7.1 yrs(F) $1,251,987 $1,069,992
---------- ----------
VARIABLE RATE DEBT
Seaport Centre (G)............ Interest only LIBOR plus 1.50% Dec-2000 58,000 58,000
The Pruneyard................. 24 year LIBOR plus 1.50% Jul-2000 60,947 49,384
120 Montgomery Street......... 24 year LIBOR plus 1.40% Nov-2002 48,160 46,930
Norris Tech Center............ 25 year LIBOR plus 1.65% Dec-2003 16,066 16,392
Other loans................... Various Various Various 245 597
---------- ----------
Total Variable Rate
Debt.................... 7.48%(F) 1.5 yrs(F) $ 183,418 $ 171,303
---------- ----------
</TABLE>
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<PAGE> 146
<TABLE>
<CAPTION>
MATURITY
PROPERTY AMORTIZATION INTEREST RATE (A) DATE 12/31/99 12/31/98
- -------- ------------- ----------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
REPAID DEBT
18301 Von Karman (H).......... -- -- -- -- 10,647
1600 South Main (H)........... -- -- -- -- 5,038
Biltmore Lakes (H)............ -- -- -- -- 11,468
Belmont Shores (H)............ -- -- -- -- 9,839
2677 North Main (H)........... -- -- -- -- 10,774
2700 Ygnacio Valley Road
(H)......................... -- -- -- -- 5,035
Westlake Spectrum (H)......... -- -- -- -- 3,993
Park Plaza (H)................ -- -- -- -- 4,940
Warner Park Center (H)........ -- -- -- -- 5,213
429 Santa Monica (H).......... -- -- -- -- 10,176
Crossroads (H)................ -- -- -- -- 7,339
Westlake Spectrum II (H)...... -- -- -- -- 5,284
Two ADP Plaza (I)............. -- -- -- -- 13,400
Two Corporate Centre (I)...... -- -- -- -- 18,600
One & Two Gateway (J)......... -- -- -- -- 8,679
Scottsdale Centre (J)......... -- -- -- -- 7,745
66 Bovet (J).................. -- -- -- -- 3,939
One Norwest Center (K)........ -- -- -- -- 98,252
1300 South El Camino (J)...... -- -- -- -- 4,007
10 Almaden (L)................ -- -- -- -- 33,885
---------- ----------
Total Repaid Debt......... $ -- $ 278,253
---------- ----------
Total Cornerstone Partnership
Debt before Adjustments..... 7.33%(F) 6.4 yrs(F) $1,435,405 $1,519,548
---------- ----------
Adjustments:
One Post (M).................. 25 year 6.90% Dec-02 17,220 17,250
120 Montgomery (N)............ 24 year LIBOR plus 1.40% Nov-02 (16,037) (15,646)
Norwest Center (N)............ Interest only 8.74% Dec-05 (28,215) (24,310)
---------- ----------
Total Adjustment.............. $ (27,032) $ (22,706)
---------- ----------
Total Cornerstone Partnership
Share of Debt............... 7.30%(F) 6.4 yrs(F) $1,408,373 $1,496,842
========== ==========
</TABLE>
- ---------------
(A) The interest rate is the stated interest rate for Cornerstone Partnership
originated debt or the prevailing 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 from
PGGM 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 Cornerstone Partnership 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) The five notes arising from the restructuring of certain debt with
Northwestern Mutual Life Insurance Company are cross-collateralized, having
the effect of forming a "collateral pool" for the underlying notes.
(F) Weighted-average interest rate and maturity of Cornerstone Partnership'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. All other
terms of the note remain unchanged.
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<PAGE> 147
(H) These 12 notes were prepaid as part of the Prudential Insurance Company of
America and Northwestern Mutual Life Insurance Company restructuring, see
note (D) above. All the notes had a mark to market interest rate of 6.9%
and maturity dates ranging from April 2000 to March 2003.
(I) On January 4, 1999, in connection with the Wilson acquisition, Cornerstone
Partnership prepaid the notes on Two ADP Plaza and Two Corporate Centre.
(J) These notes were prepaid in conjunction with the sale of these properties.
(K) The note was assumed by the purchaser as of the date of closing, in
conjunction with the sale of this property during the fourth quarter.
(L) This note was prepaid as part of the Northwestern Mutual Life Insurance
Company restructuring, see note (E) above. This note had a mark to market
interest rate of 6.9% and a maturity of April 2004.
(M) Amount relates to Cornerstone Partnership's share of property debt as this
property is accounted for under the equity method of accounting.
(N) Amounts relate to the joint venture or minority partners' portion of the
total debt. Calculations are based on the partners' 1999 percentage
participation in the cash flow of such property.
The combined aggregate amount of maturities for all long-term borrowings
for 2000 through 2004 are $183,947,000, $0, $110,821,000, $16,066,000 and
$86,517,000, respectively.
REVOLVING CREDIT FACILITY
Cornerstone Partnership 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, which we refer to as the revolving credit
facility. The interest rate on the facility depends on Cornerstone Partnership'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 December 31, 1999, $329.0 million of the facility was outstanding at
a rate of approximately 8.0%. Of this amount, approximately $250.0 million is
fixed with interest rate swaps, which effectively fix the rate at 6.47%.
Beginning January 2000, the rate will be reduced to 5.41% through the expiration
of the swaps in December 2000. The revolving credit facility contains certain
restrictive covenants including: (a) a limitation on Cornerstone Partnership's
dividend to 90.0% of funds from operations and 110.0% of funds available for
distribution, both as defined in the agreement; (b) the percentage of total
liabilities to total property asset value (as defined) cannot exceed 55.0%; (c)
the ratio of adjusted EBITDA to interest expense may not be less than 2.00 to
1.00 through July 1, 1999 and 2.25 to 1.00 thereafter; (d) the fixed charge
coverage ratio may not be less than 1.75 to 1.00; and (e) 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 Cornerstone
Partnership to temporarily increase its leverage from 55.0% to 60.0% in (b)
above for a short period, which has since expired. Cornerstone Partnership also
increased its ability to enter into mortgage debt under (e) above by decreasing
the required ratio from 2.5 to 1.00 to 2.22 to 1.00.
LEGAL PROCEEDINGS
In the ordinary course of business, Cornerstone Partnership 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 effect on the consolidated financial
condition or results of operations of Cornerstone Partnership.
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CORNERSTONE PARTNERSHIP MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the selected
historical consolidated financial data of Cornerstone Partnership and the
historical consolidated financial statements and notes of Cornerstone
Partnership. See "Summary -- Partnership Merger Selected Historical Consolidated
Financial Data -- Cornerstone Partnership" on page 9 and "Cornerstone
Partnership Historical Consolidated Financial Statements" on page F-20.
When used in the following discussion, the words "believes," "anticipates,"
and similar expressions are intended to identify "forward-looking statements."
Such statements are subject to various risks and uncertainties, which could
cause actual results to differ materially from those projected. Readers are
cautioned not to place undue reliance on these "forward-looking statements,"
which speak only as of the date hereof. Cornerstone Partnership undertakes no
obligation to publicly release the result of any revisions of these
"forward-looking statements," which may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
RESULTS OF OPERATIONS
Cornerstone Partnership's principal source of income is rental revenues
received through its investment in 76 fee simple investments, six real estate
partnerships, one limited liability company, one co-tenancy agreement and one
mortgage. NWC Limited Partnership, which we refer to as NWC, Third and
University Limited Partnership, which we refer to as Third Partnership, One
Ninety One Peachtree Associates, which we refer to as 191 Peachtree, Two Twenty
Two Berkeley Associates, which we refer to as 222 Berkeley, Five Hundred
Boylston West Venture, which we refer to as 500 Boylston, and Avenue Associates
Limited Partnership, which we refer to as Market Square (since November 1,
1998), have been consolidated because Cornerstone Partnership has the majority
interest in the economic benefits and is or has the right to become managing
general partner at its sole discretion. 120 Montgomery Associates, LLC, which we
refer to as 120 Montgomery, has been consolidated because Cornerstone
Partnership has the majority interest in the economic benefits and control of
the major decisions of the limited liability company. Cornerstone Partnership
has accounted for its investment in Market Square (from February 1, 1998 through
October 31, 1998) and One Post using the equity method of accounting because it
did not or, in the case of One Post, does not have sufficient control of the
day-to-day operations of the investment.
PROPERTY RESULTS. For the years ended December 31, 1999 and 1998 property
results can be summarized as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Office and parking rentals.................................. $607,409 $321,097
Less:
Building operating expenses............................... 132,630 71,404
Real estate taxes......................................... 71,554 44,184
Depreciation and amortization............................. 96,726 57,031
-------- --------
Total operating expenses.................................... 300,910 172,619
-------- --------
Total property income....................................... $306,499 $148,478
======== ========
</TABLE>
The increase in property income from 1998 to 1999 of $158.0 million was due
to a net increase of $120.5 million derived from the interests in 69 properties
acquired as part of the Wilson acquisition on December 16, 1998 (Cornerstone
Partnership has since sold 11 of these properties); an increase of $14.2 million
from Market Square, which was consolidated starting November 1998; an increase
of $9.4 million from four properties acquired during 1998 (Wilshire Palisades,
$2.0 million; One Memorial Drive, $2.6 million; 201 California Street, $1.4
million; and Corporate 500 Centre, $3.4 million); and a
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<PAGE> 149
net increase of $15.6 million related to the properties held during both periods
resulting primarily from increased leasing activity, increased rental rates and
a reduction in depreciation due to fully depreciated leasing costs as well as
the discontinued recording of depreciation on properties held for sale. These
increases were offset by a $0.3 million decrease due to an asset sale during
1999 and a $1.4 million decrease at 125 Summer Street due to a large vacant
space for a portion of 1999.
EARNINGS IN JOINT VENTURES
The earnings in joint ventures of approximately $0.9 million in 1999 is
comprised of Cornerstone Partnership's investments in One Post and WCP Services,
Inc., both of which were acquired as part of the Wilson acquisition.
The earnings in joint ventures of approximately $11.6 million in 1998 was
mainly due to the acquisition of the partnership interest in Market Square in
January 1998. The investment in Market Square was accounted for under the equity
method of accounting from February 1998 through October 1998 due to the lack of
sufficient control of the day-to-day operations of the investment. In November
1998, Cornerstone Partnership gained sufficient control of the investment and
began consolidating this investment. The amount attributable to Market Square of
$11.3 million is comprised of approximately $17.1 million of interest earned on
the loans, which was offset by an equity in loss of approximately $5.8 million.
The remaining $0.3 million of earnings in joint ventures is comprised of equity
earnings from Cornerstone Partnership's investments in One Post and WCP
Services, Inc.
INTEREST AND OTHER INCOME
Interest and other income was $8.0 million in 1999 and $6.6 million in
1998. These amounts primarily consist of interest earned from short-term
investments, tenant alteration income in 1998, lease cancellation income,
interest earned on a mortgage note receivable in 1998, a note receivable from a
partner and management fee income.
The 1999 increase in interest and other income of $1.4 million from 1998 is
due to a $1.4 million increase in other income, a $1.5 million increase in
management fee income and a $2.0 million increase in interest earned from
short-term investments. These increases were offset by a $1.0 million decrease
in interest income from the mortgage loan and "buffer loan" on Market Square, a
$2.3 million decrease in tenant alteration income and a $0.2 million decrease in
lease cancellation income.
INTEREST EXPENSE
Interest expense incurred by Cornerstone Partnership was $137.0 million and
$63.4 million for 1999 and 1998, respectively.
The increase in 1999 from 1998 of approximately $73.6 million is due to an
increase of $40.5 million from the property mortgages assumed as part of the
Wilson acquisition; an increase of $24.2 million on the revolving credit
facility mainly due to increased borrowings; a $2.4 million increase in interest
expense related to One Memorial Drive, which is included in the new $180.0
million loan that was completed in June 1999 (see "-- Mortgage Indebtedness"
below); an increase of $1.1 million on the Corporate 500 Centre loan due mainly
to the property being acquired on January 28, 1998; an increase of $1.9 million
on the 201 California Street and Wilshire Palisades loans mainly due to these
properties being acquired on June 3, 1998; an increase of $0.6 million in the
amortization of deferred financing costs; an increase of $1.1 million on the
DIHC portfolio loans due to the sale of the Dearborn land in March 1998; a net
increase of $1.0 million on the Sixty State Street, Washington Mutual Tower and
Norwest Center loans due to the Cornerstone Partnership being formed on January
20, 1998; and an increase of $1.0 million in interest expense related to 125
Summer Street and Tower 56, which were included in the new $275.0 million loan
that was completed in October 1999 (see "-- Mortgage Indebtedness" below). These
increases were offset by a $0.2 million decrease in interest on the One Norwest
Center loan due to the refinancing of this loan in September 1998.
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<PAGE> 150
GENERAL AND ADMINISTRATIVE EXPENSES
The aggregate amount of Cornerstone Partnership's general and
administrative expenses increased to $27.0 million in 1999 from $12.4 million in
1998. The increase of $14.6 million in 1999 from 1998 is due mainly to the
additional employees, space, systems and other support necessary to manage the
substantial growth in assets of Cornerstone Partnership during the most recent
twenty-three month period.
GAIN (LOSS) ON SALE OF REAL ESTATE ASSETS
During 1999, Cornerstone Partnership sold its interest in 13 office
properties for gross proceeds of $495.7 million, comprising approximately 3.0
million rentable square feet in Charlotte, Denver, Phoenix (four properties),
the San Francisco Bay Area (six properties) and Southern California, resulting
in a gain of approximately $131.0 million.
On March 31, 1998, Cornerstone Partnership sold the Dearborn land (an
undeveloped parcel of land in Chicago that was acquired as part of the
acquisition of the PGGM portfolio in October 1997) for gross proceeds of
approximately $19.0 million, resulting in a loss of approximately $0.3 million.
On December 29, 1998, Market Square sold a condominium unit located in
Washington D.C., for gross proceeds of approximately $0.3 million, resulting in
a gain of approximately $0.1 million.
MINORITY INTEREST IN JOINT VENTURES
The increase in minority interest in joint ventures from 1998 to 1999 of
$1.4 million is due to the change in the components of the joint venture
properties, as well as the increased income at the joint venture properties
which affects the allocation of minority interest to the Cornerstone
Partnership's joint venture partners.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW (DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
------------------------
1999 1998
---------- ----------
<S> <C> <C>
CASH FLOW PROVIDED BY (USED IN):
Operating activities....................................... $ 223,115 $ 173,958
Investing activities....................................... 52,488 (849,830)
Financing activities....................................... (317,536) 737,484
Earnings to fixed charges ratio............................ 2.84 2.06
</TABLE>
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Cash provided by operating activities increased to approximately $223.1
million for 1999 from $174.0 million for 1998. The increase is primarily due to
the cash flows from the interests in 69 properties acquired in the Wilson
acquisition. Cornerstone Partnership has since sold 11 of these assets.
Cash provided by investing activities was approximately $52.5 million for
1999 whereas $849.8 million was used for 1998. The net increase in cash provided
by investing activities of $902.3 million is primarily due to the following:
during 1998 Cornerstone Partnership purchased Corporate 500 Centre for $135.0
million, One Memorial Drive for $23.5 million, 201 California Street and
Wilshire Palisades for $29.5 million, and the properties acquired in the Wilson
acquisition for $465.0 million; during 1998, Cornerstone Partnership incurred an
additional $144.2 million in additions to existing properties whereas
Cornerstone Partnership incurred $79.3 million in additions to existing
properties for the same period in 1999; and during 1999, Cornerstone Partnership
sold 13 properties for proceeds net of escrow amounts of $136.7 million whereas
Cornerstone Partnership sold two real estate investments for proceeds of $19.1
million during the same period in 1998. Further adding to the increase was the
net change in
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<PAGE> 151
investments in real estate joint ventures of approximately $31.4 million and a
decrease in other investments of $36.9 million during 1999. These amounts were
offset by a decrease of $1.4 million in the repayment of a notes receivable from
a related party (the note was paid off in January 1999).
Cash used in financing activities was $317.5 million during 1999, whereas
$737.5 million of cash was provided by financing activities for 1998. The net
increase in cash used in financing activities of $1,055.0 million is due to the
following: a decrease in the amount received from unit offerings of $462.3
million (Cornerstone had a secondary offering in February 1998 of approximately
$262.3 million and an additional stock purchase by PGGM of $200.0 million
whereas there were no stock offerings during 1999); an increase in the costs
associated with the repurchase of units of approximately $4.9 million in 1999; a
decrease in borrowings under the credit facility of $437.5 million; an increase
in repayments under mortgage loans of $429.6 million; a decrease in proceeds
received from the distribution reinvestment plan of $4.4 million; an increase of
$13.1 million in debt prepayment costs; an increase of $1.2 million in
unitholder redemptions; a decrease in contributed capital from Cornerstone of
$59.4 million and an increase in distributions to minority partners and
unitholders of $0.7 million and $52.6 million, respectively. These increases
were offset by the following: an increase of $362.6 million in borrowings under
mortgage loans; a decrease of $23.5 million in repayments under the credit
facility; a $4.7 million increase in restricted cash; a decrease of $18.1
million in unit issuance costs; and an increase of $1.8 million in option
exercise proceeds.
The ratio of earnings to fixed charges and dividends on preferred units
increased to 2.84 at December 31, 1999 from 2.06 at December 31, 1998, due
mainly to the net gain on real estate assets during 1999.
EQUITY TRANSACTIONS
On January 20, 1998, Cornerstone converted its corporate structure into an
umbrella limited partnership REIT, which is commonly referred to as an UPREIT.
Under the UPREIT structure, Cornerstone assigned substantially all of its assets
to Cornerstone Partnership in exchange for 3,030,303 preferred units and
82,634,231 common units.
On February 6, 1998, Cornerstone completed a secondary public offering of
14,375,000 shares of common stock at $18.25 per share. The shares were placed in
the U.S. through a syndicate of seven investment banks led by Merrill Lynch &
Co. Cornerstone contributed net proceeds to Cornerstone Partnership of
approximately $247.9 million (approximately $262.3 million in gross proceeds
less an underwriting discount of approximately $13.7 million and expenses of
approximately $0.7 million) in exchange for a corresponding number of units. The
net proceeds were used to repay outstanding borrowings under the revolving
credit facility and for working capital purposes.
On February 27, 1998, through a dividend reinvestment plan, Cornerstone
received proceeds of approximately $2.0 million and issued an additional 109,007
shares of common stock to stockholders. The net proceeds were contributed to
Cornerstone Partnership in exchange for a corresponding number of units.
On April 28, 1998, Cornerstone issued 3,428,571 shares of Common Stock to
the Prudential Insurance Company of America, or Prudential, and Cornerstone
Partnership issued 1,657,426 units to certain other persons as partial
consideration for the acquisition of One Memorial Drive. Such securities were
not registered under the Securities Act of 1933, as amended, and were issued in
an exempt transaction pursuant to section 4(2) of the Securities Act.
Cornerstone has filed a registration statement on Form S-3 to register under the
Securities Act the resale by Prudential of such shares of common stock. In
connection with the acquisition, Cornerstone Partnership issued 3,428,571 units
to Cornerstone in exchange for the corresponding real estate investment.
On May 20, 1998, Cornerstone increased the number of authorized preferred
stock from 15,000,000 shares to 65,000,000 shares and, as a result, Cornerstone
Partnership increased the number of authorized preferred units from 15,000,000
units to 65,000,000 units.
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<PAGE> 152
On May 29, 1998, through a dividend reinvestment plan, Cornerstone received
proceeds of approximately $1.8 million and issued an additional 98,487 shares of
common stock to stockholders. The net proceeds were contributed to Cornerstone
Partnership in exchange for a corresponding number of units.
On June 3, 1998, Cornerstone Partnership issued a total of 1,665,663 units
to certain persons in connection with the acquisition of 201 California Street
and the Wilshire Palisades building. Such securities were not registered under
the Securities Act and were issued in an exempt transaction pursuant to section
4(2) of the Securities Act.
On August 31, 1998, through a dividend reinvestment plan, Cornerstone
received proceeds of approximately $1.5 million and issued an additional 94,610
shares of common stock to stockholders. The net proceeds were contributed to
Cornerstone Partnership in exchange for a corresponding number of units.
On November 30, 1998, through a dividend reinvestment plan, Cornerstone
received proceeds of approximately $1.5 million and issued an additional 95,300
shares of common stock to stockholders. The net proceeds were contributed to
Cornerstone Partnership in exchange for a corresponding number of units.
On December 16, 1998, as part of the consideration paid by Cornerstone
Partnership in connection with the Wilson acquisition, Cornerstone issued
14,884,417 shares of common stock and Cornerstone Partnership issued 16,187,724
units to the former owners of WW&A and the Wilson properties. Such securities
were not registered under the Securities Act and were offered and sold in a
private offering pursuant to section 4(2) of the Securities Act and Regulation D
promulgated thereunder. Cornerstone has filed a registration statement on Form
S-3 to register under the Securities Act the resale by the holders thereof of
the 14,884,417 shares of common stock issued in connection with the Wilson
acquisition and 16,187,724 shares of common stock issuable upon redemption of
the Cornerstone Partnership units issued in connection with the Wilson
acquisition. In connection with the acquisition, Cornerstone Partnership issued
14,884,417 units to Cornerstone in exchange for the corresponding investment.
On December 16, 1998, in connection with the Wilson acquisition,
Cornerstone issued 11,594,203 shares of common stock to PGGM. Such shares were
not registered under the Securities Act and were offered and sold to PGGM in a
private offering pursuant to section 4(2) of the Securities Act. The proceeds
were contributed to Cornerstone Partnership in exchange for a corresponding
number of units.
On May 12, 1999, Cornerstone received proceeds of approximately $1.8
million and issued an additional 127,000 shares of common stock due to the
exercise of certain stock options. The proceeds were contributed to Cornerstone
Partnership in exchange for a corresponding number of units.
On May 28, 1999, through a dividend reinvestment plan, Cornerstone received
proceeds of approximately $1.2 million and issued an additional 76,603 shares of
common stock. The net proceeds were contributed to Cornerstone Partnership in
exchange for a corresponding number of units.
On July 30, 1999, as a result of the redemption of Cornerstone Partnership
units on a one-for-one basis, Cornerstone issued an additional 562,588 shares of
Common stock.
On August 3, 1999, as a result of the redemption of Cornerstone Partnership
units on a one-for-one basis, Cornerstone issued an additional 562,587 shares of
common stock.
On August 17, 1999, Cornerstone reacquired 10,833 shares of restricted
common stock as a result of the forfeiture of these shares by an employee of
Cornerstone.
On August 31, 1999, through a dividend reinvestment plan, Cornerstone
received proceeds of approximately $1.1 million and issued an additional 70,974
shares of common stock. The net proceeds were contributed to Cornerstone
Partnership in exchange for a corresponding number of units.
During December 1999, Cornerstone repurchased 347,400 shares of its
outstanding common stock for an aggregate cost of approximately $4.9 million
through its repurchase program. Cornerstone Partnership redeemed a corresponding
number of units held by Cornerstone and contributed the proceeds to Cornerstone
to effect the repurchase.
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<PAGE> 153
FUNDS FROM OPERATIONS
Cornerstone Partnership calculates funds from operations, or FFO, based
upon guidance from the National Association of Real Estate Investment Trusts, or
NAREIT. FFO is defined as net income or loss (computed in accordance with GAAP),
excluding gains or losses from debt restructuring and sales of properties, plus
real estate related depreciation and amortization and after adjustments for
unconsolidated joint ventures.
Industry analysts generally consider FFO to be an appropriate measure of
performance of a REIT. FFO does not represent cash generated from operating
activities in accordance with generally accepted accounting principles, or GAAP,
and, therefore, should not be considered a substitute for net income as a
measure of performance or a substitute for cash flow from operations as a
measure of liquidity calculated in accordance with GAAP.
Cornerstone Partnership believes that FFO is helpful to investors as a
measure of the performance of an equity REIT because, along with cash flows from
operating activities, financing activities and investing activities, it provides
investors an understanding of the ability of Cornerstone Partnership to generate
earnings from its recurring operations, after the payment of all administrative
costs and interest expense. For cash flows from operating, financing, and
investing activities in accordance with GAAP. See the Consolidated Statements of
Cash Flows included in the Cornerstone Historical Consolidated Financial
Statements on page F-24.
Included in FFO for 1999 and 1998, is approximately $25.3 million and $14.5
million, respectively, for free and deferred rental income (after adjustment for
minority interest).
The table below sets forth the adjustments which were made to the net
income of Cornerstone Partnership in the calculation of FFO for the last two
years (amounts in thousands):
FUNDS FROM OPERATIONS (1)
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
NET INCOME:................................................. $ 265,249 $ 82,024
NAREIT adjustments:
Depreciation and amortization (2)......................... 96,726 57,031
Minority adjustments...................................... (2,686) (2,022)
Unconsolidated depreciation (3)........................... 1,507 4,054
Cumulative effect of a change in accounting principle..... 630 --
(Gain) loss on sale of assets............................. (131,034) 173
Extraordinary loss........................................ 10,787 4,303
OTHER ADJUSTMENTS:
Amortization on rent notes................................ -- 1,494
Severance payments........................................ 861 478
--------- --------
FUNDS FROM OPERATIONS....................................... 242,040 147,535
========= ========
</TABLE>
- ---------------
(1) Although Cornerstone Partnership believes that this table is a full and fair
presentation of Cornerstone Partnership's FFO, similarly captioned items may
be defined differently by other REITs, in which case direct comparisons may
not be possible.
(2) The depreciation and amortization adjustment does not include amortization
of deferred financing costs and depreciation of non-real estate assets in
accordance with guidance from NAREIT. For the years ended December 31, 1999
and 1998, depreciation and amortization includes approximately $4.0 million
and approximately $0.2 million, respectively, of amortization relating to
the intangible management and development company assets that were acquired
as part of the Wilson acquisition.
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(3) For the years ended December 31, 1999 and 1998, the unconsolidated
depreciation adjustment includes approximately $0.7 million and
approximately $0.2 million, respectively, of amortization relating to the
intangible management and development company assets that were acquired as
part of the Wilson acquisition.
The increase in FFO from 1998 to 1999 of approximately $94.5 million is
primarily due to the full year of operations of the 69 properties acquired as
part of the Wilson acquisition (eleven of these assets have since been sold), as
well as the four additional properties acquired during 1998.
MORTGAGE INDEBTEDNESS
On January 28, 1998, Cornerstone Partnership entered into an $80.0 million
first mortgage on Corporate 500 Centre with Bankers Trust Company. The loan
bears interest at a rate of LIBOR plus 1.0% and matures in July 2002.
Cornerstone Partnership had entered into a $80.0 million interest rate swap to
protect it from interest rate fluctuations that could have affected its floating
rate debt on Corporate 500 Centre. The swap effectively fixed the interest rate
on the $80.0 million loan at 6.63%. This agreement was terminated in August 1998
at no cost to Cornerstone Partnership. On October 9, 1998, Cornerstone
Partnership completed the refinancing of the $80.0 million mortgage on Corporate
500 Centre with Teachers Insurance and Annuity Association. As a result of the
refinancing, the principal balance was increased to $90.0 million, the term of
the loan was extended from 4.5 years to 10 years and the interest rate was
increased by three basis points to 6.66%.
On June 3, 1998, Cornerstone Partnership assumed the mortgage on 201
California Street in San Francisco, California. The loan required amortization
based on a 30-year schedule and bore interest at a rate of 6.9%. This mortgage
was restructured as part of the Northwestern Mutual Life Insurance Company
restructuring on October 6, 1999.
On June 3, 1998, Cornerstone Partnership assumed the mortgage on Wilshire
Palisades in Santa Monica, California. The loan requires amortization based on a
22-year schedule and bears interest at a rate of 8.04%. While the face amount of
the loan is $28.8 million, and the interest rate is 8.04%, Cornerstone
Partnership is carrying the debt at $29.0 million, which is the market value of
the loan at the time of the closing, less the amortization of principal and
premium since closing, based upon a market interest rate for similar quality
loans of 6.7%.
On September 25, 1998, Cornerstone Partnership completed the refinancing of
the $96.1 million mortgage on One Norwest Center with the Connecticut General
Life Insurance Company, or CIGNA, and the Massachusetts Mutual Life Insurance
Company, or Mass Mutual. As a result of the refinancing, the principal balance
was increased to $98.5 million, the term of the loan was extended from three
years to ten years and the interest rate was reduced from 7.50% to 6.90%. In
conjunction with the sale of this property during the fourth quarter of 1999,
the mortgage was assumed by the purchaser at closing.
On December 16, 1998, Cornerstone Partnership assumed various mortgages
totaling approximately $760.0 million as part of the Wilson acquisition. The
loans have various amortization periods and interest rates. Certain assumed
loans were prepaid subsequent to the closing but prior to year end.
During June 1999, Cornerstone Partnership restructured approximately $163.0
million of property-related debt with Prudential Insurance Company of America
and Northwestern Mutual Life Insurance Company. The restructuring involved
retiring 17 of the individual property-related debts and creating a single
$180.0 million term loan which is cross-collateralized by six of Cornerstone
Partnership's properties. The loan has a ten-year term and bears interest at
7.26% per annum.
On October 6, 1999, Cornerstone Partnership 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 five of the original six 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 Partnership's
unencumbered pool.
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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. All other terms of the
note remain unchanged.
OTHER INDEBTEDNESS
On November 3, 1998, a syndicate of 17 banks led by Deutsche Bank, The
Chase Manhattan Bank and Bank of America provided Cornerstone Partnership with a
$550.0 million line of credit for acquisitions and general working capital
purposes, which we refer to as the revolving credit facility. The facility is
also available for the issuance of letters of credit. The interest rate on the
revolving credit facility depends on Cornerstone Partnership's ratio of total
debt to total 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 December 31, 1999, $329.0 million of the facility was outstanding at
a rate of approximately 8.0%. Of this amount, approximately $250.0 million is
fixed with interest rate swaps, which effectively fix the rate at 6.47%.
Beginning January 2000, the rate will be reduced to 5.41% through the expiration
of the swaps in December 2000. These swaps are considered hedges for federal
income tax purposes. During 1999, the revolving credit facility was amended to
allow Cornerstone Partnership to temporarily increase its leverage from 55.0% to
60.0% for a short period, which has since expired. The amendment also increased
Cornerstone Partnership's ability to enter into mortgage debt by decreasing the
required ratio of total property asset value (as defined) to secured
indebtedness from 2.5 to 1.00 to 2.22 to 1.00.
Cornerstone Partnership holds debt instruments that are sensitive to
changes in interest rates. The maturity, weighted average interest rates and
fair values are presented in the Cornerstone Partnership Historical Consolidated
Financial Statements on pages F-36 and F-43.
In the normal course of business, Cornerstone Partnership also faces risks
that are either non-financial or non-qualitative. Such risks principally include
credit risks and legal risks and are not included in the above discussion.
LIQUIDITY
At December 31, 1999, Cornerstone Partnership had approximately $19.7
million in cash and cash equivalents and approximately $222.0 million in
restricted cash. Restricted cash includes prepaid rents and security deposits
for some of Cornerstone Partnership'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. Restricted cash also includes
the proceeds from the sale of certain properties during 1999 totaling
approximately $211.5 million which are restricted pursuant to the terms of
section 1031 of the Internal Revenue Code.
At December 31, 1999, Cornerstone Partnership also had $221.0 million
available under its revolving credit facility for general corporate purposes. In
addition, Cornerstone Partnership anticipates it will receive distributions from
its real estate partnerships, rental income from its fee owned properties and
interest income from its mortgages on a monthly basis that will cover normal
operating expenses and pay distributions to its stockholders and unitholders.
Based upon its cash reserves and other sources of funds, including its $550.0
million revolving credit facility, management believes Cornerstone Partnership
has sufficient liquidity to meet its cash requirements for the remainder of
2000.
OTHER MATTERS
GENERAL
Cornerstone Partnership is not aware of any environmental issues at any of
its properties that would have a material adverse impact on Cornerstone
Partnership's operating results or financial condition. Cornerstone Partnership
believes it has sufficient insurance coverage at each of its properties,
including
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earthquake insurance where necessary. A majority of Cornerstone Partnership's
leases with the majority of its tenants require the tenants to pay most
operating expenses and increases in common area maintenance expenses, which
reduces Cornerstone Partnership's exposure to increases in costs and operating
expenses resulting from inflation.
CONCENTRATION OF RISK
Approximately 5.8 million of Cornerstone Partnership's 17 million rentable
square feet is located in the San Francisco metropolitan market, accounting for
approximately 29% of Cornerstone Partnership's total assets at December 31,
1999. In addition, five of Cornerstone Partnership's 82 office properties are
located in the Downtown Boston market, accounting for approximately 19.4% of
Cornerstone Partnership's office and parking revenues for the year ended
December 31, 1999. This concentration of assets makes Cornerstone Partnership
particularly vulnerable to adverse changes in economic conditions in the San
Francisco and Boston metropolitan areas. A significant decline in these economic
conditions could have a material adverse effect on Cornerstone Partnership.
Norwest Corporation and its subsidiary, Norwest Bank Denver N.A., tenants
of Cornerstone Partnership, provided approximately 6.2% and 10.0% of office and
parking rental income for the years ended December 31, 1999 and 1998,
respectively. Included in deferred tenant receivables is approximately $34.8
million and $33.9 million due from Norwest Corporation at December 31, 1999 and
1998, respectively. As a result of the sale of Cornerstone Partnership's
property located in Denver during the fourth quarter of 1999, the concentration
of revenue received from this tenant will be significantly reduced.
RECENTLY ISSUED ACCOUNTING STANDARDS
During the first quarter of 1999, Cornerstone Partnership adopted Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," or SFAS 133. SFAS 133 requires that all
derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if it is, the type of hedge
transaction.
During the first quarter of 1999, Cornerstone Partnership also adopted
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities," or
SOP 98-5. SOP 98-5 requires that certain costs incurred in conjunction with
start-up and organizational activities be expensed. Pursuant to the requirements
of SOP 98-5, Cornerstone Partnership has written off all unamortized
organizational costs and has recorded a cumulative effect of a change in
accounting principle of $630,044.
In addition, during the first quarter of 1999, Cornerstone Partnership
adopted Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," or SOP 98-1. SOP 98-1 provides
guidance on whether the costs of computer software developed or obtained for
internal use should be capitalized or expensed. The adoption of SOP 98-1 did not
have a significant effect on Cornerstone Partnership's financial statements.
YEAR 2000 COMPLIANCE
Cornerstone Partnership previously recognized the material nature of the
business issues surrounding computer processing of dates into and beyond the
Year 2000 and began taking corrective action. Cornerstone Partnership's efforts
included: (a) assessment of compliance of information systems at the corporate
offices in New York, Atlanta and San Mateo; (b) assessment of compliance of
information and real estate operating systems at the property sites; and (c)
assessment of compliance of significant service providers including third party
managers and the buildings they manage, vendors and customers, which we refer to
as External Agents. The plan covered the following major tasks: (a) inventory of
all systems; (b) analysis of inventory including assessment of risk; (c)
verification of compliance of inventory with vendors; (d) testing of critical
equipment and processes; and (e) replacement or modification of systems.
Management believes Cornerstone Partnership has completed all of the activities
within its control to
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ensure that Cornerstone Partnership's systems are Year 2000 compliant and
Cornerstone Partnership has experienced no interruptions to normal operations
due to the start of the Year 2000.
Cornerstone Partnership's total historical Year 2000 readiness costs were
immaterial to Cornerstone Partnership's financial condition. The costs incurred
in the current fiscal year consisted of recurring system upgrades and
replacements, immaterial internal staff costs and other expenses such as
telephone and mailing costs. Cornerstone Partnership does not anticipate
incurring any additional material costs to address Year 2000 issues.
As of March 22, 2000, Cornerstone Partnership has not experienced any
material disruptions of its internal computer systems or software applications,
and has not experienced any problems with the computer systems or software
applications of its External Agents. Cornerstone Partnership will continue to
monitor these External Agents to determine the impact, if any, on the business
of Cornerstone Partnership and the actions Cornerstone Partnership must take, if
any, in the event of non-compliance by any of these External Agents. Based upon
Cornerstone Partnership's assessment of compliance by External Agents, there
appears to be no material business risk posed by any such noncompliance.
Moreover, Cornerstone Partnership generally believes that the vendors that
supply products to Cornerstone Partnership are responsible for the products'
Year 2000 functionality.
Although Cornerstone Partnership's Year 2000 rollover did not present any
material business disruption, there are some remaining Year 2000-related risks,
including risks due to the fact that the Year 2000 is a leap year. These risks
include potential product supply issues and other non-operational issues.
Management believes that appropriate action has been taken to address these
remaining Year 2000 issues and contingency plans are in place to minimize the
financial impact to Cornerstone Partnership. Management, however, cannot be
certain that Year 2000 issues will not have a material adverse impact on
Cornerstone Partnership, since the evaluation process is not yet complete and it
is early in the Year 2000.
DEVELOPMENT PROJECT
In April 1998, Cornerstone Partnership 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 Cornerstone Partnership'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 December 31, 1999, approximately
$109.4 million has been spent on the construction. The project is scheduled to
be completed in the year 2000 and is approximately 75.0% pre-leased.
SUBSEQUENT EVENTS
On January 20, 2000, Cornerstone and Cornerstone Partnership declared a
distribution of $0.31 per share and per unit, respectively, paid on February 29,
2000, to common stockholders and unitholders, respectively, of record as of
January 31, 2000.
On January 21, 2000, Cornerstone Partnership 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 which were section
1031 exchange funds from the sale of One Norwest Center in Denver, Colorado, and
approximately $2.0 million of which was paid in Cornerstone Partnership units
valued at $17.25 per unit.
On February 11, 2000, Cornerstone and Cornerstone Partnership announced
that it had entered into the merger agreement, which provides for the REIT
merger and the partnership merger.
On March 8, 2000, as provided in the merger agreement with Equity Office,
the Board of Directors declared a distribution of $0.20 per share and unit,
respectively, payable on April 14, 2000, to common stockholders and unitholders,
respectively, of record as of March 31, 2000. This distribution was declared
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to make Cornerstone's and Cornerstone Partnership's distribution schedule
consistent with that of Equity Office pending the mergers. Thereafter, it is
anticipated that Cornerstone's and Cornerstone Partnership's distributions will
be paid as of the end of each quarter until the completion of the mergers.
On March 8, 2000, 9,200 Cornerstone Partnership units were redeemed for
shares of Cornerstone common stock on a one-for-one basis.
On March 15, 2000, Cornerstone Partnership sold its interest in a property
located in East Bay, California for gross proceeds of $14,425,000. The property
had been acquired as part of the Wilson acquisition in December 1998.
On March 23, 2000, Cornerstone Partnership sold its interest in a property
located in East Bay, California for gross proceeds of $12,800,000. The property
had been acquired as part of the Wilson acquisition in December 1998.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Approximately $1.3 billion of Cornerstone Partnership's long-term debt
bears interest at fixed rates, and therefore the fair value of these instruments
is affected by changes in market interest rates. The following table presents
principal cash flows (dollar amounts in thousands) based upon expected maturity
dates of the debt obligations and the related weighted-average interest rates by
expected maturity dates for the fixed rate debt. The interest rate on the
variable rate debt as of December 31, 1999 ranged from LIBOR plus 1.40% to LIBOR
plus 1.65%.
Annual rates on advances from the revolving credit facility depend on
Cornerstone Partnership'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 Cornerstone Partnership's option. Of the total advances
outstanding under the facility at December 31, 1999, $250.0 million is fixed
with interest rate swaps, which effectively fix the rate at 6.47%. Beginning
January 2000, the rate will be reduced to 5.41% through the expiration of the
swaps in December 2000.
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004 THEREAFTER TOTAL FAIR VALUE
------- ------- ------ ------ ------ ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LONG-TERM DEBT:
Fixed rate............. 65,000 -- 62,661 -- 86,517 1,037,809 1,251,987 1,183,491
Average interest
rate............... 7.28% -- 6.81% -- 7.33% 7.34%
Variable rate.......... 119,192 329,000 48,160 16,066 -- -- 512,418 512,418
INTEREST RATE SWAPS:
Variable to fixed...... 250,000 -- -- -- -- -- -- --
Average pay rate
(1)................ 5.07% -- -- -- -- -- -- --
Average receive rate
(1)................ 6.46% -- -- -- -- -- -- --
</TABLE>
- ---------------
(1) As of December 31, 1999.
SECURITY OWNERSHIP OF CORNERSTONE PARTNERSHIP BY
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF CORNERSTONE
The following table sets forth certain information with respect to the
beneficial ownership of the Cornerstone Partnership units by:
- each person or entity known by Cornerstone Partnership to be the
beneficial owner of more than 5% of the outstanding units;
- each of Cornerstone's directors and executive officers; and
- all of Cornerstone's directors and executive officers as a group.
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Unless otherwise identified, the address of each of the beneficial owners
identified is c/o Cornerstone Properties Inc., Tower 56, 126 East 56th Street,
New York, NY 10022. Except as otherwise indicated, such beneficial owners have
sole voting and investment power with respect to all units owned by them,
subject to community property laws where applicable.
Percentage of ownership is based on 148,852,333 Cornerstone Partnership
units outstanding on May 12, 2000. Percentage of ownership also is based on:
- 0.7009 EOP Partnership units being issued for each Cornerstone
Partnership unit;
- an estimated EOP Partnership units outstanding following
the partnership merger; and
- no redemptions of Cornerstone Partnership units for Cornerstone common
stock prior to the partnership merger.
<TABLE>
<CAPTION>
UNITS BENEFICIALLY OWNED
PRIOR TO THE PARTNERSHIP PERCENT OF EOP
MERGER PARTNERSHIP UNITS
------------------------ AFTER THE
NAME UNITS PERCENT PARTNERSHIP MERGER
- ---- ------------ -------- ------------------
<S> <C> <C> <C>
Cornerstone Properties Inc........................... 129,638,245 87.1%
Cecil D. Conlee...................................... 0 *
Rodney C. Dimock..................................... 0 *
Blake Eagle.......................................... 0 *
Donald G. Fisher..................................... 539,196(1) *
Randall A. Hack...................................... 0 *
Dr. Karl-Ludwig Hermann.............................. 0 *
Hans C. Mautner...................................... 0 *
Dr. Lutz Mellinger................................... 0 *
John S. Moody........................................ 0 *
Craig R. Stapleton................................... 0 *
Michael J. G. Topham................................. 0 *
Dick van den Bos..................................... 0 *
Jan H.W.R. van der Vlist............................. 0 *
William Wilson III................................... 1,182,572(2) *
John J. Hamilton, III................................ 183,655 *
Thomas P. Loftus..................................... 0 *
Kevin P. Mahoney..................................... 0 *
R. Matthew Moran..................................... 31,889(3) *
Thomas A. Nye........................................ 0 *
Stephen J. Pilch..................................... 0 *
A. Robert Paratte.................................... 7,771 *
H. Lee Van Boven..................................... 29,770 *
All directors and executive officers as a group (22
persons)........................................... 1,974,853 1.3%
</TABLE>
- ---------------
(1) Includes:
- 226,146 units owned jointly with Mr. Fisher's spouse; and
- 313,050 units deemed beneficially owned by Mr. Fisher as a result of his
control of DDRWJ Investment Company.
(2) Includes:
- 22,845 units held by Mr. Wilson as trustee for three trusts for the
benefit of his children;
- 639,191 units held directly by Mr. Wilson;
- 294,630 units deemed beneficially owned by Mr. Wilson as a result of his
control of Wilson Investment Associates, Ltd.; and
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- 225,906 units beneficially owned by Mr. Wilson through a family
partnership.
Does not include 3,160,513 units which may be deemed beneficially owned
by Mr. Wilson as a result of his control of four entities and of which
Mr. Wilson may be deemed to share voting and dispositive power with other
executive officers of Cornerstone.
(3) Includes 27,682 units deemed beneficially owned by Mr. Moran as a result of
his control of Moran Investments LLC.
CORNERSTONE PARTNERSHIP POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of the historical policies of Cornerstone
Partnership with respect to its investments. These policies have been
historically determined by the Cornerstone board of directors and may be amended
or revised from time to time at the discretion of the Cornerstone board without
notice to or a vote of Cornerstone's stockholders or Cornerstone Partnership's
unitholders.
Investments in Real Estate or Interests in Real Estate. All of
Cornerstone's investment activities are conducted through Cornerstone
Partnership. Cornerstone's investment objectives have been to increase cash flow
and the value of its properties, and to acquire established income-producing
office properties with cash flow growth potential. Additionally, where prudent
and possible, Cornerstone has sought to upgrade its existing properties and any
newly acquired office properties. Cornerstone's business has been focused on
office properties. Where appropriate, and subject to the qualification rules
governing REITs, Cornerstone has sold some of its properties.
Cornerstone has pursued its investment objectives through the direct and
indirect ownership of properties and through the ownership of interests in other
entities. Cornerstone has focused on properties in major metropolitan markets
and in new markets targeted by its management. Although management of
Cornerstone does not anticipate any future investments due to the mergers, any
newly acquired properties would be located in the United States, but Cornerstone
would not limit its activities to any specific geographic area of the United
States.
Cornerstone Partnership has also historically participated with other
entities in property ownership through joint ventures or other types of
co-ownership. Equity investments may be subject to existing mortgage financing
and other indebtedness or such financing or indebtedness may have been incurred
in connection with the acquisition of an investment. Any such financing of
indebtedness would have priority over Cornerstone Partnership's equity interest
in such property.
Investments in Real Estate Mortgages. With the exception of its investment
in Sixty State Street, Cornerstone Partnership has not historically invested in
mortgages on office properties or other similar interests with respect to which
Cornerstone Partnership does not own, either fully or partially, including any
joint venture properties, the property underlying the mortgage. Due to the
mergers, Cornerstone Partnership does not intend to invest in mortgages or deeds
of trust in the future, but if the mergers are not completed, Cornerstone
Partnership may engage in such investments, primarily as a strategy for
acquiring ownership of a property or the economic equivalent thereof, subject to
the investment restrictions applicable to REITs. In addition, if the mergers are
not completed, Cornerstone Partnership may invest in mortgage-related securities
and/or may seek to issue securities representing interests in such mortgage-
related securities as a method of raising additional funds.
Investments in Securities of or Interests in Persons Primarily Engaged in
Real Estate Activities and Other Securities. Although Cornerstone Partnership
has not historically made and has no current intention, if the mergers are not
completed, to make such investments, it may legally invest in securities of
entities engaged in real estate activities or securities of other issuers,
including for the purpose of exercising control over such entities, subject to
the gross income and asset tests necessary for qualification of Cornerstone as a
REIT. If the mergers are not completed, Cornerstone Partnership may in the
future
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acquire all or substantially all of the securities or assets of other REITs or
similar entities where such investments would be consistent with Cornerstone
Partnership's investment policies. In any event, Cornerstone Partnership does
not intend that any investment it might make in securities, absent the
completion of the mergers, to require it or Cornerstone Partnership to register
as an "investment company" under the Investment Company Act of 1940.
DESCRIPTION OF EOP PARTNERSHIP CLASS A UNITS
The following summary of the terms of the EOP Partnership class A units is
qualified in its entirety by reference to the partnership agreement of EOP
Partnership. For information on how to obtain a copy of the partnership
agreement of EOP Partnership, see "Where You Can Find More Information" on page
186.
CAPITALIZATION
As of the date of this consent solicitation/information
statement/prospectus, EOP Partnership has the following units issued and
outstanding:
- class A units;
- class B units;
- series A preferred units;
- series B preferred units; and
- series C preferred units.
Equity Office owns all of the series A, series B and series C preferred
units and 88.2% of the class A units. Before the partnership merger, Equity
Office will take all necessary actions to cause EOP Partnership to issue
3,030,303 series D preferred units. EOP Partnership will issue the series D
preferred units in the partnership merger in exchange for the outstanding
Cornerstone Partnership class A preferred units. All of the EOP Partnership
series D preferred units to be issued in the partnership merger will be issued
to Cornerstone and will be acquired by Equity Office in the REIT merger.
Following the REIT merger and the elimination of the Cornerstone 7% cumulative
convertible preferred stock in exchange for cash, the EOP Partnership series D
preferred units will be converted to EOP Partnership class A units.
ISSUANCE OF ADDITIONAL PARTNERSHIP INTERESTS
Equity Office is authorized to cause EOP Partnership to issue additional
partnership units or interests to its partners, including Equity Office and its
affiliates, or other persons. These units may be issued in one or more classes
or in one or more series of any class, with designations, preferences and
relative, participating, optional or other special rights, powers and duties,
including rights, powers and duties senior to those of the class A common units,
as determined by Equity Office in its sole and absolute discretion without the
approval of any limited partner, subject to limitations described below.
No partnership unit or interest may be issued to Equity Office as general
partner or limited partner unless:
- EOP Partnership issues the units or other partnership interests in
connection with the grant, award or issuance of shares or other equity
interests in Equity Office having designations, preferences and other
rights so that the economic interests attributable to the newly issued
shares or other equity interests are substantially similar to the
designations, preferences and other rights of the EOP Partnership units
or other partnership interests issued to Equity Office, and Equity Office
contributes to EOP Partnership the proceeds from the issuance of the
shares or other equity interests received by Equity Office; or
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- EOP Partnership issues the additional EOP Partnership units or other
partnership interests to all partners holding EOP Partnership units or
other partnership interests in the same class or series in proportion to
their respective percentage interests in that class or series.
At the election of Equity Office, in its sole and absolute discretion, EOP
Partnership may issue either class A units or class B units to newly admitted
partners. The major difference between class A units and class B units is that
the class A units receive a full distribution of any cash distributed by EOP
Partnership with respect to its units, without any proration to take into
account the number of days that the class A units were outstanding, while
distributions to the class B units are prorated based upon the number of days in
the applicable distribution period that the class B units were outstanding. Any
EOP Partnership unit that is not specifically designated by Equity Office as
being of a particular class will be deemed to be a class A unit. In the
partnership merger, EOP Partnership class A units will be issued in exchange for
Cornerstone Partnership class A common units and EOP Partnership series D
preferred units will be issued in exchange for Cornerstone Partnership class A
preferred units.
CAPITAL CONTRIBUTIONS
Partners of EOP Partnership are not required to make additional capital
contributions to EOP Partnership unless they have entered into a separate
agreement, generally referred to as a deficit restoration obligation, that
requires additional contributions upon liquidation of EOP Partnership. However,
Equity Office generally is required to contribute net proceeds of any sale of
equity interests in Equity Office to EOP Partnership in exchange for additional
partnership units, as described above. Limited partners of Cornerstone
Partnership receiving EOP Partnership units in the partnership merger will not
be required to pay to EOP Partnership any deficit or negative balance which may
exist in their capital accounts unless in connection with or subsequent to the
partnership merger they elect to enter into an express agreement with EOP
Partnership undertaking a deficit restoration obligation.
DISTRIBUTIONS
The partnership agreement of EOP Partnership requires the distribution, on
a quarterly or shorter basis, of available cash. Available cash is the net
operating cash flow plus any reduction in reserves and minus interest and
principal payments on debt, capital expenditures, any additions to reserves and
other adjustments, as determined by Equity Office in its sole discretion. EOP
Partnership makes distributions to all partners who are partners on the record
date for the distribution in the following order:
- first, to each partner, including Equity Office, who holds a partnership
interest of a class or series that is entitled to a preference according
to the rights of that class or series of partnership interest; and
- second, to the extent that there is available cash available after
payment of any preferences, to the partners who hold a partnership
interest that is not entitled to a preference in distribution, including
class A units and class B units, pro rata to each class or series and,
within each class or series, in proportion to the partner's percentage
share of that class or series.
Unless otherwise specifically agreed to by Equity Office in the partnership
agreement of EOP Partnership or an agreement at the time a new class or series
is created, no partnership interest will be entitled to a distribution in
preference to any other. As a general rule, distributions payable with respect
to any class A units that were not outstanding during the entire quarterly or
shorter period on which the distribution is based will not be prorated based on
the portion of the period that these units were outstanding, but distributions
paid with respect to class B units will be prorated. An EOP Partnership partner
will not in any event receive a distribution of available cash with respect to a
partnership unit if the partner is entitled to receive a distribution out of
that same available cash with respect to an Equity Office share for which that
partnership unit has been exchanged or redeemed.
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Equity Office will make reasonable efforts, as determined by it in its sole
and absolute discretion and consistent with Equity Office's qualification as a
REIT, to distribute available cash:
- to the limited partners so as to preclude the distribution from being
treated as part of a disguised sale for federal tax purposes; and
- to all units so that the amount distributed to Equity Office is
sufficient to enable Equity Office to pay shareholder dividends that
will:
-- satisfy the requirements for qualifying or reelecting as a REIT; and
-- avoid any federal income or excise tax liability for Equity Office.
If Equity Office is not publicly traded, EOP Partnership will make cash
distributions with respect to class A units at least annually for each taxable
year of EOP Partnership beginning before July 11, 2012 in an aggregate amount
that reflects at least 95% of EOP Partnership's taxable income for that year
allocable to the class A units.
PREEMPTIVE RIGHTS
Except to the extent expressly granted by EOP Partnership in an agreement
other than the partnership agreement of EOP Partnership, no person or entity,
including any partner of EOP Partnership, has any preemptive, preferential or
other similar right with respect to:
- additional capital contributions or loans to EOP Partnership; or
- the issuance or sale of any EOP Partnership units or other partnership
interests of EOP Partnership.
CONVERSION; REDEMPTION
Each EOP Partnership class B unit will be converted automatically into an
EOP Partnership class A unit on the day immediately following the record date
for the distribution period during which the EOP Partnership class B unit was
issued.
In the absence of the limitations described below, each holder of class A
units other than Equity Office and some of its affiliates has a unit redemption
right which is a right to require the redemption of its EOP Partnership class A
units by EOP Partnership. As a general rule, a limited partner may exercise the
redemption right at any time beginning on the first anniversary of the issuance
of the partnership units held by it. Specific investors described in the
partnership agreement of EOP Partnership, however, only may exercise the
redemption right on the second anniversary of the issuance of EOP Partnership
units to them. Equity Office may agree to a shorter waiting period, or no
waiting period, on the exercise of the unit redemption right. Cornerstone
Partnership limited partners who receive EOP Partnership class A units in the
partnership merger will be permitted to exercise the unit redemption right at
any time following the partnership merger.
In addition, each limited partner may exercise its unit redemption right,
regardless of the length of time it has held its EOP Partnership units, during
the period commencing on the date Equity Office has given the limited partners
notice of its intention to make an extraordinary distribution of cash or
property to its shareholders or effect a merger, a sale of all or substantially
all of its assets, or any other similar extraordinary transaction, which notice
must be given at least 20 business days prior to the record date for determining
shareholders eligible to receive the distribution or to vote upon the approval
of the merger, sale or other extraordinary transaction, and ending on such
record date. Equity Office, in its sole discretion, may shorten the required
notice period of not less than twenty business days prior to the record date to
determine the shareholders eligible to vote upon a merger transaction (but not
any of the other covered transactions) by up to ten business days (thereby
continuing to afford the holders of units the opportunity to redeem units on or
prior to the record date for the shareholder vote on the merger transaction) so
long as (a) Equity Office will be the surviving entity in such merger
transaction, (b) immediately following the
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merger transaction, persons who held voting securities of Equity Office
immediately prior to such merger transaction will hold, solely by reason of the
ownership of voting securities of Equity Office immediately prior to the merger
transaction, voting securities of Equity Office representing not less than 51%
of the total combined voting power of all outstanding voting securities of
Equity Office after such merger, and (c) in the event that in connection with
such merger transaction EOP Partnership will merge with another entity, EOP
Partnership will be the surviving entity in such merger. If no record date as
described is applicable, the date shall be at least 20 business days before the
consummation of the merger, sale or other extraordinary transaction.
A limited partner may exercise its unit redemption right by giving written
notice to EOP Partnership and Equity Office. The EOP Partnership units specified
in the notice shall be redeemed on the 10th business day following the date
Equity Office received the redemption notice or, in the case of the exercise of
a unit redemption right in connection with an extraordinary transaction, the
date EOP Partnership and Equity Office received the redemption notice.
A notice of redemption delivered to EOP Partnership by the limited partner
exercising the right will exercise the redemption right. A limited partner may
not exercise the redemption right for fewer than 1,000 partnership units, or if
the limited partner holds fewer than 1,000 partnership units, all of the
partnership units held by that limited partner. The redeeming partner will have
no right to receive any distributions paid on or after the redemption date with
respect to those partnership units redeemed.
Unless Equity Office elects to assume and perform EOP Partnership's
obligation with respect to the unit redemption right, as described below, a
limited partner which exercises its unit redemption right will receive cash from
EOP Partnership in an amount equal to the market value of the EOP Partnership
units to be redeemed. The market value of an EOP Partnership unit for this
purpose will be equal to the average of the closing trading price of an Equity
Office common share on the NYSE for the ten trading days before the day on which
the redemption notice was given.
Instead of EOP Partnership acquiring the units being redeemed for cash,
Equity Office has the right to elect to acquire on the redemption date the EOP
Partnership units directly from a limited partner exercising the unit redemption
right in exchange for either cash in the amount specified above or a number of
Equity Office common shares equal to the number of EOP Partnership units offered
for redemption, adjusted as specified in the partnership agreement of EOP
Partnership to take into account prior share dividends or any subdivisions or
combinations of Equity Office common shares. No redemption or exchange can occur
if delivery of common shares by Equity Office would be prohibited either under
the provisions of Equity Office's declaration of trust or under applicable
federal or state securities laws, regardless of whether Equity Office would in
fact elect to assume and satisfy the unit redemption right. Equity Office will
at all times reserve and keep available out of its authorized but unissued
Equity Office common shares, solely for the purpose of effecting the issuance of
Equity Office common shares through a unit redemption right, a number of Equity
Office common shares that would be sufficient for the redemption of all
outstanding EOP Partnership units not owned by Equity Office.
Unless Equity Office exercises its right to purchase the redeeming
partner's EOP Partnership units, as described above, Equity Office has no
obligation to the redeeming partner with respect to the redeeming partner's unit
redemption right. Likewise, if Equity Office exercises this purchase option, EOP
Partnership has no obligation to pay any amount to the redeeming partner with
respect to the unit redemption right. If Equity Office elects to assume and
perform the obligations of EOP Partnership under the unit redemption right, each
of the redeeming partner, EOP Partnership and Equity Office will treat this
transaction between Equity Office and the redeeming partner, for federal tax
purposes, as a sale of the redeeming partner's EOP Partnership units to Equity
Office.
If any Equity Office preferred shares have been called for redemption, a
number of EOP Partnership preferred units equal to the number of Equity Office
preferred shares called for redemption will be redeemed. The redemption shall
occur at a time and in a manner that allows the redemption of Equity Office
preferred shares to be completed in a timely fashion to comply with the
applicable requirements related to the share redemption.
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All EOP Partnership units delivered for redemption must be delivered to EOP
free and clear of all liens.
MANAGEMENT
Except as otherwise expressly provided in the partnership agreement of EOP
Partnership, the business and affairs of EOP Partnership are managed by Equity
Office, which has the exclusive right and full authority and responsibility to
manage and operate the partnership's business. Limited partners do not have any
right to participate in or exercise control or management power over the
business and affairs of EOP Partnership or the power to sign documents for or
otherwise bind EOP Partnership. Equity Office has full power and authority to do
all things it deems necessary or desirable to conduct the business of EOP
Partnership. However, the consent of the limited partners to some limited
matters is necessary in limited circumstances. In particular, Equity Office is
under no obligation to consider the tax consequences to limited partners when
making decisions for the benefit of EOP Partnership. The limited partners have
no power to remove Equity Office as general partner. Equity Office, however, may
not take any action that is contrary to an express limitation or prohibition in
the partnership agreement of EOP Partnership without the written consent of:
- all partners adversely affected; or
- the lower percentage of the limited partners as may be specifically
provided for in the partnership agreement of EOP Partnership.
SALE OF SUBSTANTIALLY ALL OF THE PARTNERSHIP ASSETS
A sale of all or substantially all of the assets of EOP Partnership in a
single transaction or a series of related transactions, including by way of a
merger, consolidation or other combination of EOP Partnership with another
entity, will require the following:
- if the transaction is in connection with a similar transaction involving
Equity Office which has also been approved by a majority of the
outstanding EOP Partnership units, including EOP Partnership units held
directly or indirectly by Equity Office, and in connection with which all
limited partners have the right to receive consideration which, on a per
unit basis, is equivalent in value to the consideration to be received by
the shareholders of Equity Office on a per share basis, approval by a
majority of the outstanding EOP Partnership units, including EOP
Partnership units held directly or indirectly by Equity Office; or
- in the case of any other transaction, the approval of a majority of the
outstanding EOP Partnership units held by persons or entities other than
Equity Office and some of its affiliates.
TRANSFERS
Equity Office may not transfer any of its partnership interests, including
any of its limited partnership interests, except in connection with a merger,
consolidation or other combination with or into another person, a sale of all or
substantially all of its assets or any reclassification, recapitalization or
change of its outstanding shares and only if the transaction has been approved
by the consent of the partners holding at least a majority of the then
outstanding EOP Partnership units, including any EOP Partnership units held by
Equity Office and in connection with which all limited partners have the right
to receive consideration which, on a per unit basis, is equivalent in value to
the consideration to be received by the shareholders of Equity Office, on a per
share basis. Equity Office will not withdraw from EOP Partnership except in
connection with a transaction as described in the preceding sentence.
A limited partner, other than Equity Office, may transfer, with or without
the consent of Equity Office, all or any portion of its partnership interest, or
any of its economic rights as a limited partner, if:
- the transfer does not violate any federal or state securities laws or
regulations applicable to EOP Partnership or the EOP Partnership units;
or
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- the transfer does not change or potentially affect adversely the tax
status of EOP Partnership.
In the case of a proposed transfer of units to a lender to EOP Partnership
or any person related to the lender whose loan constitutes a nonrecourse
liability, the transferring partner must obtain the consent of Equity Office.
No transferee of a limited partnership interest will be admitted as a
limited partner without the consent of Equity Office, which may be given or
withheld in its sole and absolute discretion.
AMENDMENT OF PARTNERSHIP AGREEMENT
Amendments to the partnership agreement of EOP Partnership may be proposed
by Equity Office or by limited partners owning at least 25% of the total
partnership interests. Except as described below, the partnership agreement of
EOP Partnership may be amended with the approval of Equity Office and limited
partners holding a majority of the partnership interests held by the limited
partners, including Equity Office. Equity Office has the power, without the
consent of the limited partners, to amend the partnership agreement of EOP
Partnership as may be required:
- to add to the obligations of the general partner or surrender any right
or power granted to Equity Office or any affiliate of Equity Office for
the benefit of the limited partners;
- to reflect the admission, substitution, termination or withdrawal of
partners in compliance with the partnership agreement of EOP Partnership;
- to declare the designations, rights, powers, duties and preferences of
the holders of any additional partnership interests issued in accordance
with the authority granted to Equity Office;
- to reflect a change that does not affect the limited partners in any
material respect, or to cure any ambiguity, correct or supplement any
provision in the partnership agreement of EOP Partnership not
inconsistent with law or with other provisions of the partnership
agreement of EOP Partnership, or make other changes with respect to
matters arising under the partnership agreement of EOP Partnership that
will not be inconsistent with law or with the provisions of the
partnership agreement of EOP Partnership; and
- to satisfy any requirements, conditions or guidelines contained in any
order, directive, opinion, ruling or regulation of a federal, state or
local law.
The approval of a majority of the partnership interests held by limited
partners other than Equity Office is necessary to amend provisions regarding,
among other things:
- restrictions imposed on the issuance of additional EOP Partnership units
or other partnership interests to Equity Office;
- distribution requirements with respect to the EOP Partnership class A
units if Equity Office is not publicly traded;
- the prohibition against removal of Equity Office by the limited partners;
- restrictions on Equity Office's power to conduct businesses other than
owning partnership interests of EOP Partnership;
- limitations on transactions with affiliates;
- the liability of Equity Office for monetary damages to EOP Partnership;
- partnership consent requirements for the sale of substantially all the
assets of EOP Partnership; or
- the transfer of partnership interests held by Equity Office, the
admission and rights of substituted limited partners or the dissolution
of EOP Partnership.
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Any amendment of the provision of the partnership agreement of EOP
Partnership which allows the voluntary dissolution of EOP Partnership before
December 31, 2046 can be made only with the approval of 90% of the outstanding
partnership interests, including partnership interests held by Equity Office.
Amendments to the partnership agreement of EOP Partnership that would,
among other things:
- convert a limited partner's interest into a general partner's interest;
- modify the limited liability of a limited partner;
- alter the interest of a partner in profits or losses, or the right to
receive any distributions, except as permitted under the partnership
agreement of EOP Partnership with respect to the admission of new
partners or the issuance of additional EOP Partnership units; or
- alter the unit redemption right of the limited partners of EOP
Partnership,
must be approved by each limited partner that would be adversely affected by the
amendment.
MEETINGS
Meetings of the partners may be called by Equity Office by written request
by limited partners holding 25% or more of the partnership interests. The call
must state the nature of the business to be transacted. Notice of any meeting is
required to be given to all partners not less than seven days nor more than 30
days before the date of the meeting. Partners may vote in person or by proxy at
the meeting. Whenever the vote or consent of partners is permitted or required
under the partnership agreement of EOP Partnership, this vote or consent may be
given at a meeting of partners. Except as otherwise expressly provided in the
partnership agreement of EOP Partnership, the consent of a majority of the
percentage interests held by limited partners, including limited partnership
interests held by Equity Office, shall control.
Any action required or permitted to be taken at a meeting of the partners
may be taken without a meeting if a written consent showing the action taken is
signed by a majority of the percentage interests of the partners or another
percentage as required by the partnership agreement of EOP Partnership.
COMPARISON OF RIGHTS OF UNITHOLDERS
At the time of the partnership merger, Cornerstone Partnership unitholders
automatically will become EOP Partnership unitholders and their rights as
partners will be determined by the partnership agreement of EOP Partnership. The
following is a summary of the material differences in the rights of partners of
EOP Partnership and the rights of partners of Cornerstone Partnership. Note that
Equity Office is the general partner of EOP Partnership and Cornerstone is the
general partner of Cornerstone Partnership. As general partners, Equity Office
and Cornerstone have the exclusive right to manage the business and affairs of
EOP Partnership and Cornerstone Partnership, respectively. This summary is not
complete. Therefore, you should refer to the partnership agreements, including
all amendments, of EOP Partnership and Cornerstone Partnership for complete
information.
CAPITALIZATION
EOP Partnership. As of the date of this consent solicitation/information
statement/prospectus, EOP Partnership has the following units issued and
outstanding:
- class A units;
- class B units;
- series A preferred units;
- series B preferred units; and
- series C preferred units.
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Equity Office owns all of the series A, series B and series C preferred
units and 88.2% of the class A units. Before the partnership merger, Equity
Office will take all necessary actions to cause EOP Partnership to issue
3,030,303 series D preferred units. EOP Partnership will issue the series D
preferred units in the partnership merger in exchange for the outstanding
Cornerstone Partnership class A preferred units. All of the EOP Partnership
series D preferred units to be issued in the partnership merger will be issued
to Cornerstone and will be acquired by Equity Office in the REIT merger.
Following the REIT merger and the elimination of the Cornerstone cumulative
convertible preferred stock in exchange for cash, the EOP Partnership series D
preferred units will be converted to EOP Partnership class A units.
Cornerstone Partnership. As of the date of this consent
solicitation/information statement/prospectus, Cornerstone Partnership has
issued and outstanding 148,852,333 class A common units and 3,030,303 class A
preferred units.
ISSUANCE OF ADDITIONAL PARTNERSHIP INTERESTS
EOP Partnership. Equity Office is authorized to cause EOP Partnership to
issue additional partnership units or interests to its partners, including
Equity Office and its affiliates, or other persons. These units may be issued in
one or more classes or in one or more series of any class, with designations,
preferences and relative, participating, optional or other special rights,
powers and duties, including rights, powers and duties senior to those of the
class A common units, as determined by Equity Office in its sole and absolute
discretion without the approval of any limited partner, subject to limitations
described below.
No partnership unit or interest may be issued to Equity Office as general
partner or limited partner unless:
- EOP Partnership issues the units or other partnership interests in
connection with the grant, award or issuance of shares or other equity
interests in Equity Office having designations, preferences and other
rights so that the economic interests attributable to the newly issued
shares or other equity interests are substantially similar to the
designations, preferences and other rights of the EOP Partnership units
or other partnership interests issued to Equity Office, and Equity Office
contributes to EOP Partnership the proceeds from the issuance of the
shares or other equity interests received by Equity Office; or
- EOP Partnership issues the additional EOP Partnership units or other
partnership interests to all partners holding EOP Partnership units or
other partnership interests in the same class or series in proportion to
their respective percentage interests in that class or series.
At the election of Equity Office, in its sole and absolute discretion, EOP
Partnership may issue either class A units or class B units to newly admitted
partners. The major difference between class A units and class B units is that
the class A units receive a full distribution of any cash distributed by EOP
Partnership with respect to its units, without any proration to take into
account the number of days that the class A units were outstanding, while
distributions to the class B units are prorated based upon the number of days in
the applicable distribution period that the class B units were outstanding. Any
EOP Partnership unit that is not specifically designated by Equity Office as
being of a particular class will be deemed to be a class A unit. In the
partnership merger, EOP Partnership class A units will be issued in exchange for
Cornerstone Partnership class A common units and EOP Partnership class D
preferred units will be issued in exchange for Cornerstone Partnership class A
preferred units.
Cornerstone Partnership. Cornerstone is authorized to cause Cornerstone
Partnership to issue additional partnership units or interests to its partners,
including Cornerstone and its affiliates, or other persons. These units may be
issued in one or more classes or in one or more series of any class, with
designations, preferences and relative, participating, optional or other special
rights, powers and duties, including rights, powers and duties senior to those
of the Cornerstone Partnership units, as determined by Cornerstone in its sole
and absolute discretion without the approval of any limited partner, subject to
limitations detailed below.
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No partnership unit or interest may be issued to Cornerstone as general
partner or limited partner unless:
- Cornerstone Partnership issues the units or other partnership interests
in connection with the grant, award or issuance of shares or other equity
interests in Cornerstone having designations, preferences and other
rights so that the economic interests attributable to the newly issued
shares or other equity interests are substantially similar to the
designations, preferences and other rights of the additional partnership
interests issued to Cornerstone, and Cornerstone contributes to
Cornerstone Partnership the proceeds from the issuance of the shares or
other equity interests received by Cornerstone;
- Cornerstone Partnership issues the additional Cornerstone Partnership
units or other partnership interests to all partners holding Cornerstone
Partnership units or other partnership interests in the same class or
series in proportion to their respective percentage interests in that
class or series;
- the additional Cornerstone Partnership units are issued upon the
conversion or redemption of preferred shares of Cornerstone; or
- the additional Cornerstone Partnership units are issued upon the
conversion, redemption or exchange of debt, partnership units or other
securities issued by Cornerstone or Cornerstone Partnership.
Unless specifically designated by Cornerstone, any additional Cornerstone
Partnership interest issued will be deemed a Cornerstone Partnership unit.
CAPITAL CONTRIBUTIONS
EOP Partnership. Partners of EOP Partnership are not required to make
additional capital contributions to EOP Partnership unless they have entered
into a separate agreement, generally referred to as a deficit restoration
obligation, that requires additional contributions upon liquidation of EOP
Partnership. However, Equity Office generally is required to contribute net
proceeds of any sale of equity interests in Equity Office to EOP Partnership in
exchange for additional partnership units, as described above. Limited partners
of Cornerstone Partnership receiving EOP Partnership units in the partnership
merger will not be required to pay to EOP Partnership any deficit or negative
balance which may exist in their capital accounts unless in connection with or
subsequent to the partnership merger they elect to enter into an express
agreement with EOP Partnership undertaking a deficit restoration obligation.
Cornerstone Partnership. Partners are not required to make additional
capital contributions to Cornerstone Partnership unless they have entered into a
separate deficit restoration obligation that requires additional capital
contributions upon liquidation of Cornerstone Partnership. However, Cornerstone
generally is required to contribute to Cornerstone Partnership net proceeds of
any sale of equity interests in Cornerstone.
As described in "The Merger Agreement -- Tax Related Undertakings of EOP
Partnership -- Deficit Restoration Obligations," limited partners in Cornerstone
Partnership that have entered into a deficit restoration obligation to
Cornerstone Partnership prior to the partnership merger will have the right to
make a similar undertaking to EOP Partnership at the time of the partnership
merger; and former limited partners of Cornerstone Partnership will have a
limited opportunity to make new deficit restoration obligation commitments to
EOP Partnership from time to time following the partnership merger.
DISTRIBUTIONS
EOP Partnership. The partnership agreement of EOP Partnership requires the
distribution, on a quarterly or shorter basis, of available cash. Available cash
is the net operating cash flow plus any reduction in reserves and minus interest
and principal payments on debt, capital expenditures, any additions to reserves
and other adjustments, as determined by Equity Office in its sole discretion.
EOP
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Partnership makes distributions to all partners who are partners on the record
date for the distribution in the following order:
- first, to each partner, including Equity Office, who holds a partnership
interest of a class or series that is entitled to a preference according
to the rights of that class or series of partnership interest; and
- second, to the extent that there is available cash available after
payment of any preferences, to the partners who hold a partnership
interest that is not entitled to a preference in distribution, including
class A units and class B units, pro rata to each class or series and,
within each class or series, in proportion to the partner's percentage
share of that class or series.
Unless otherwise specifically agreed to by Equity Office in the partnership
agreement of EOP Partnership or an agreement at the time a new class or series
is created, no partnership interest will be entitled to a distribution in
preference to any other. As a general rule, distributions payable with respect
to any class A units that were not outstanding during the entire quarterly or
shorter period on which the distribution is based will not be prorated based on
the portion of the period that these units were outstanding, but distributions
paid with respect to class B units will be prorated. An EOP Partnership partner
will not in any event receive a distribution of available cash with respect to a
partnership unit if the partner is entitled to receive a distribution out of
that same available cash with respect to an Equity Office share for which that
partnership unit has been exchanged or redeemed.
Equity Office will make reasonable efforts, as determined by it in its sole
and absolute discretion and consistent with Equity Office's qualification as a
REIT, to distribute available cash:
- to the limited partners so as to preclude the distribution from being
treated as part of a disguised sale for federal tax purposes; and
- to all units so that the amount distributed to Equity Office is
sufficient to enable Equity Office to pay shareholder dividends that
will:
-- satisfy the requirements for qualifying or re-electing as a REIT; and
-- avoid any federal income or excise tax liability for Equity Office.
If Equity Office is not publicly traded, EOP Partnership will make cash
distributions with respect to class A units at least annually for each taxable
year of EOP Partnership beginning before July 11, 2012 in an aggregate amount
that reflects at least 95% of EOP Partnership's taxable income for that year
allocable to the class A units.
Cornerstone Partnership. The partnership agreement of Cornerstone
Partnership requires the distribution, at least quarterly, of all or a portion
of available cash generated by the partnership during the time period.
Cornerstone will determine in its sole and absolute discretion the amount of the
distribution to be made. Distributions will be made to all partners who are
partners on the record date for the distribution in the following order:
- first, to each partner, including Cornerstone, who holds a partnership
interest of a class or series that is entitled to a preference according
to the rights of that class or series of partnership interest; and
- second, to the extent that there is available cash remaining after
payment of any preferences, to the partners who hold a partnership
interest that is not entitled to a preference in distribution, including
Cornerstone Partnership units, pro rata to each class or series and,
within each class or series, in proportion to the partner's percentage
share of that class or series.
Unless otherwise specifically agreed to by Cornerstone in the partnership
agreement of Cornerstone Partnership or an agreement at the time a new class or
series is created, no partnership interest will be entitled to a distribution in
preference to any other. Unless otherwise specifically agreed to by Cornerstone,
distributions payable with respect to partnership units that were not
outstanding during the entire quarterly
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or shorter period on which the distribution is based will be prorated based on
the portion of the period that these units were outstanding. A Cornerstone
Partnership partner will in no event receive a distribution of available cash
with respect to a partnership unit if the partner is entitled to receive a
distribution out of that same available cash with respect to a share of
Cornerstone stock for which that partnership unit has been exchanged or
redeemed.
Cornerstone will make reasonable efforts, as determined by it in its sole
and absolute discretion and consistent with Cornerstone's qualification as a
REIT, to distribute available cash:
- to the limited partners so as to preclude all or a portion of the
distribution from being treated as a part of a disguised sale for federal
income tax purposes; and
- to Cornerstone in amounts sufficient to enable Cornerstone to pay
stockholder dividends that will:
-- satisfy the requirements for qualifying or reelecting as a REIT; and
-- avoid any federal income or excise tax liability for Cornerstone.
As long as it would not have a negative impact on the limited partners,
Cornerstone may elect not to cause Cornerstone Partnership to distribute
sufficient amounts to enable Cornerstone to pay stockholder dividends that will
avoid federal income or excise tax liability of Cornerstone.
PREEMPTIVE RIGHTS
EOP Partnership. Except to the extent expressly granted by EOP Partnership
in an agreement other than the partnership agreement of EOP Partnership, no
person or entity, including any partner of EOP Partnership, has any preemptive,
preferential or other similar right with respect to:
- additional capital contributions or loans to EOP Partnership; or
- the issuance or sale of any EOP Partnership units or other partnership
interests of EOP Partnership.
Cornerstone Partnership. Except to the extent expressly granted by
Cornerstone on behalf of Cornerstone Partnership in an agreement other than the
partnership agreement of Cornerstone Partnership, no person or entity,
including, without limitation, any partner of Cornerstone Partnership, shall
have any preemptive, preferential or other similar right with respect to:
- additional capital contributions or loans to Cornerstone Partnership; or
- the issuance or sale of any Cornerstone Partnership units or other
partnership interests of Cornerstone Partnership.
CONVERSION; REDEMPTION
EOP Partnership. Each EOP Partnership class B unit will be converted
automatically into an EOP Partnership class A unit on the day immediately
following the record date for the distribution period during which the EOP
Partnership class B unit was issued.
In the absence of the limitations described below, each holder of class A
units other than Equity Office and some of its affiliates has a unit redemption
right which is a right to require the redemption of its EOP Partnership class A
units by EOP Partnership. As a general rule, a limited partner may exercise the
redemption right at any time beginning on the first anniversary of the issuance
of the partnership units held by it. Specific investors described in the
partnership agreement of EOP Partnership, however only may exercise the
redemption right on the second anniversary of the issuance of EOP Partnership
units to them. Equity Office may agree to a shorter waiting period, or no
waiting period, on the exercise of the unit redemption right. Cornerstone
Partnership limited partners who receive EOP Partnership class A units in the
partnership merger will be permitted to exercise the unit redemption right at
any time following the partnership merger.
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In addition, each limited partner may exercise its unit redemption right,
regardless of the length of time it has held its EOP Partnership units, during
the period commencing on the date Equity Office has given the limited partners
notice of its intention to make an extraordinary distribution of cash or
property to its shareholders or effect a merger, a sale of all or substantially
all of its assets, or any other similar extraordinary transaction, which notice
must be given at least 20 business days prior to the record date for determining
shareholders eligible to receive the distribution or to vote upon the approval
of the merger, sale or other extraordinary transaction, and ending on such
record date. Equity Office, in its sole discretion, may shorten the required
notice period of not less than twenty business days prior to the record date to
determine the shareholders eligible to vote upon a merger transaction (but not
any of the other covered transactions) by up to ten business days (thereby
continuing to afford the holders of units the opportunity to redeem units on or
prior to the record date for the shareholder vote on the merger transaction) so
long as (a) Equity Office will be the surviving entity in such merger
transaction, (b) immediately following the merger transaction, persons who held
voting securities of Equity Office immediately prior to such merger transaction
will hold, solely by reason of the ownership of voting securities of Equity
Office immediately prior to the merger transaction, voting securities of Equity
Office representing not less than 51% of the total combined voting power of all
outstanding voting securities of Equity Office after such merger, and (c) in the
event that in connection with such merger transaction EOP Partnership will merge
with another entity, EOP Partnership will be the surviving entity in such
merger. If no record date as described is applicable, the date shall be at least
20 business days before the consummation of the merger, sale or other
extraordinary transaction.
A limited partner may exercise its unit redemption right by giving written
notice to EOP Partnership and Equity Office. The EOP Partnership units specified
in the notice shall be redeemed on the 10th business day following the date
Equity Office received the redemption notice or, in the case of the exercise of
a unit redemption right in connection with an extraordinary transaction, the
date EOP Partnership and Equity Office received the redemption notice.
A notice of redemption delivered to EOP Partnership by the limited partner
exercising the right will exercise the redemption right. A limited partner may
not exercise the redemption right for fewer than 1,000 partnership units, or if
the limited partner holds fewer than 1,000 partnership units, all of the
partnership units held by that limited partner. The redeeming partner will have
no right to receive any distributions paid on or after the redemption date with
respect to those partnership units redeemed.
Unless Equity Office elects to assume and perform EOP Partnership's
obligation with respect to the unit redemption right, as described below, a
limited partner which exercises its unit redemption right will receive cash from
EOP Partnership in an amount equal to the market value of the EOP Partnership
units to be redeemed. The market value of an EOP Partnership unit for this
purpose will be equal to the average of the closing trading price of an Equity
Office common share on the NYSE for the ten trading days before the day on which
the redemption notice was given.
Instead of EOP Partnership acquiring the units being redeemed for cash,
Equity Office has the right to elect to acquire on the redemption date the EOP
Partnership units directly from a limited partner exercising the unit redemption
right in exchange for either cash in the amount specified above or a number of
Equity Office common shares equal to the number of EOP Partnership units offered
for redemption, adjusted as specified in the partnership agreement of EOP
Partnership to take into account prior share dividends or any subdivisions or
combinations of Equity Office common shares. No redemption or exchange can occur
if delivery of common shares by Equity Office would be prohibited either under
the provisions of Equity Office's declaration of trust or under applicable
federal or state securities laws, regardless of whether Equity Office would in
fact elect to assume and satisfy the unit redemption right. Equity Office will
at all times reserve and keep available out of its authorized but unissued
Equity Office common shares, solely for the purpose of effecting the issuance of
Equity Office common shares through a unit redemption right, a number of Equity
Office common shares that would be sufficient for the redemption of all
outstanding EOP Partnership units not owned by Equity Office.
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Unless Equity Office exercises its right to purchase the redeeming
partner's EOP Partnership units, as described above, Equity Office has no
obligation to the redeeming partner with respect to the redeeming partner's unit
redemption right. Likewise, if Equity Office exercises this purchase option, EOP
Partnership has no obligation to pay any amount to the redeeming partner with
respect to the unit redemption right. If Equity Office elects to assume and
perform the obligations of EOP Partnership under the unit redemption right, each
of the redeeming partner, EOP Partnership and Equity Office will treat this
transaction between Equity Office and the redeeming partner, for federal tax
purposes, as a sale of the redeeming partner's EOP Partnership units to Equity
Office.
If any Equity Office preferred shares have been called for redemption, a
number of EOP Partnership preferred units equal to the number of Equity Office
preferred shares called for redemption will be redeemed. The redemption shall
occur at a time and in a manner that allows the redemption of Equity Office
preferred shares to be completed in a timely fashion to comply with the
applicable requirements related to the share redemption.
All EOP Partnership units delivered for redemption must be delivered to EOP
free and clear of all liens.
Cornerstone Partnership. Each holder of Cornerstone Partnership units,
other than Cornerstone, has a unit redemption right which requires Cornerstone
Partnership to redeem on a specified date all or a portion of the Cornerstone
Partnership units held by that limited partner for cash in an amount equal to
the value of one share of Cornerstone stock for each Cornerstone Partnership
unit being redeemed. Each limited partner may exercise this right:
- any time on or after the day following the first anniversary of the date
its Cornerstone Partnership units were issued or, in the case of
Cornerstone Partnership units issued to an additional limited partner in
December 1998, on or after the earlier of:
-- the first anniversary of the date that the partnership interest was
issued; or
-- a change in control of Cornerstone; or
- any date prior to the first anniversary that Cornerstone designates with
respect to any units then outstanding.
A notice of redemption delivered to Cornerstone Partnership by the limited
partner is necessary to exercise the unit redemption right. A limited partner
may not exercise the unit redemption right for fewer than 1,000 partnership
units, or if the limited partner holds fewer than 1,000 partnership units, all
of the partnership units held by that limited partner. The redeeming partner
will have no right to receive any distributions paid on or after the redemption
date with respect to those partnership units redeemed.
Unless Cornerstone elects to assume and perform Cornerstone Partnership's
obligation with respect to the unit redemption right, as described below, a
limited partner which exercises its unit redemption right will receive cash from
Cornerstone Partnership in an amount equal to the value of one share of
Cornerstone stock for each Cornerstone Partnership unit being redeemed.
Instead of Cornerstone Partnership acquiring the Cornerstone Partnership
units for cash, Cornerstone has the right to acquire on the redemption date the
units being redeemed directly from a limited partner exercising the unit
redemption right in exchange for either cash in the amount specified above or a
number of Cornerstone common shares equal to the number of Cornerstone
Partnership units offered for redemption adjusted as specified in the
partnership agreement of Cornerstone Partnership to take into account prior
share dividends or any subdivisions or combinations of Cornerstone common
shares. No redemption or exchange can occur if delivery of common shares would
be prohibited under the provisions of Cornerstone's Certificate of
Incorporation.
Unless Cornerstone exercises its right to purchase the redeeming partner's
Cornerstone Partnership units, as described above, Cornerstone has no obligation
to the redeeming partner with respect to the redeeming partner's unit redemption
right. Likewise, if Cornerstone exercises this purchase option,
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Cornerstone Partnership has no obligation to pay any amount to the redeeming
partner with respect to the unit redemption right. If Cornerstone elects to
assume and perform the obligations of Cornerstone Partnership under the unit
redemption right, each of the redeeming partner, Cornerstone Partnership and
Cornerstone will treat this transaction between Cornerstone and the redeeming
partner, for federal income tax purposes, as a sale of the redeeming partner's
Cornerstone Partnership units to Cornerstone.
If any Cornerstone preferred shares are redeemed for cash, a number of
Cornerstone Partnership preferred units equal to the number of Cornerstone
preferred shares so redeemed will be redeemed. The redemption shall occur at a
time and in a manner that allows the redemption of Cornerstone preferred shares
to be completed in a timely fashion to comply with the applicable requirements
related to the share redemption.
All Cornerstone Partnership units delivered for redemption must be
delivered to Cornerstone free and clear of all liens.
MANAGEMENT
EOP Partnership. Except as otherwise expressly provided in the partnership
agreement of EOP Partnership, the business and affairs of EOP Partnership are
managed by Equity Office, which has the exclusive right and full authority and
responsibility to manage and operate the partnership's business. Limited
partners do not have any right to participate in or exercise control or
management power over the business and affairs of EOP Partnership or the power
to sign documents for or otherwise bind EOP Partnership. Equity Office has full
power and authority to do all things it deems necessary or desirable to conduct
the business of EOP Partnership. However, the consent of the limited partners to
some limited matters is necessary in limited circumstances. In particular,
Equity Office is under no obligation to consider the tax consequences to limited
partners when making decisions for the benefit of EOP Partnership. The limited
partners have no power to remove Equity Office as general partner. Equity
Office, however, may not take any action that is contrary to an express
limitation or prohibition in the partnership agreement of EOP Partnership
without the written consent of:
- all partners adversely affected; or
- the lower percentage of the limited partners as may be specifically
provided for in the partnership agreement of EOP Partnership.
Cornerstone Partnership. Except as otherwise expressly provided in the
partnership agreement of Cornerstone Partnership, the business and affairs of
Cornerstone Partnership are managed by Cornerstone, which has the exclusive
right and full authority and responsibility to manage and operate the
partnership's business. Limited partners do not have any right to participate in
or exercise control or management power over the business and affairs of
Cornerstone Partnership or the power to sign documents for or otherwise bind
Cornerstone Partnership. Cornerstone has full power and authority to do all
things it deems necessary or desirable to conduct the business of Cornerstone
Partnership. However, the consent of the limited partners to some matters is
necessary in limited circumstances. For example, Cornerstone is under no
obligation to consider the tax consequences to limited partners when making
decisions for the benefit of Cornerstone Partnership. However, if a merger would
cause adverse tax consequences to specified limited partners of Cornerstone
Partnership, written consent of those limited partners may be required. The
limited partners have no power to remove Cornerstone as the general partner.
Cornerstone, however, may not take any action that is contrary to an express
limitation or prohibition in the partnership agreement of Cornerstone
Partnership without the written consent of the limited partners holding a
majority of the Cornerstone Partnership units, including Cornerstone Partnership
units owned by Cornerstone.
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SALE OF SUBSTANTIALLY ALL OF THE PARTNERSHIP ASSETS
EOP Partnership. A sale of all or substantially all of the assets of EOP
Partnership in a single transaction or a series of related transactions,
including by way of a merger, consolidation or other combination of EOP
Partnership with another entity, will require the following:
- if the transaction is in connection with a similar transaction involving
Equity Office which has also been approved by a majority of the
outstanding EOP Partnership units, including EOP Partnership units held
directly or indirectly by Equity Office, and in connection with which all
limited partners have the right to receive consideration which, on a per
unit basis, is equivalent in value to the consideration to be received by
the shareholders of Equity Office on a per share basis, approval by a
majority of the outstanding EOP Partnership units, including EOP
Partnership units held directly or indirectly by Equity Office; or
- in the case of any other transaction, the approval of a majority of the
outstanding EOP Partnership units held by persons or entities other than
Equity Office and some of its affiliates.
Cornerstone Partnership. The partnership agreement of Cornerstone
Partnership does not contain a direct limitation on a sale or other disposition
by Cornerstone Partnership of all or substantially all of its assets. The
partnership agreement of Cornerstone Partnership, however, contains limitations
on "extraordinary transactions" involving Cornerstone that may limit most
transfers of all or substantially all of the assets of Cornerstone Partnership.
INDEMNIFICATION
EOP Partnership. EOP Partnership will indemnify, to the fullest extent
provided by law, any person or entity made a party to a proceeding by reason of
its status as a general partner, a limited partner or a trustee, director or
officer of Equity Office or EOP Partnership and any other persons or entities as
Equity Office may designate, in its sole discretion, from and against any and
all losses, claims, damages, liabilities, joint or several, expenses. Expenses
include, without limitation, attorneys' fees and other legal fees and expenses,
judgments, fines, settlements and other amounts arising from or in connection
with any and all claims, demands, actions, suits or proceedings, civil,
criminal, administrative or investigative, incurred by the indemnitee and
relating to EOP Partnership or Equity Office or the operation of, or the
ownership of property by, either Equity Office or EOP Partnership, as described
in the partnership agreement of EOP Partnership, in which the indemnitee may be
involved, or is threatened to be involved, as a party or otherwise, unless it is
established by a final determination of a court of competent jurisdiction that:
- the act or omission of the indemnitee was material to the matter giving
rise to the proceeding and either was committed in bad faith or was the
result of active and deliberate dishonesty;
- the indemnitee actually received an improper personal benefit in money,
property or services, or
- in the case of any criminal proceeding, the indemnitee had reasonable
cause to believe that the act or omission was unlawful.
Any indemnification will be made only out of the assets of EOP Partnership
and any insurance proceeds from the liability policy covering Equity Office or
EOP Partnership. Indemnitees, Equity Office, and limited partners will have no
obligation to contribute to the capital of EOP Partnership or otherwise provide
funds to enable EOP Partnership to fund its indemnity obligations.
EOP Partnership is obligated to advance amounts to an indemnitee for
expenses upon receipt of:
- a written affirmation of the indemnitee that it believes it has met the
standard of conduct necessary to entitle it to indemnification, and
- a written undertaking of the indemnitee that it will repay any advances
if it shall be ultimately determined that the indemnitee did not meet the
appropriate standard of conduct.
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These indemnification rights are in addition to any other rights afforded
to an indemnitee under any other agreement, by vote of the partners, under
applicable law or otherwise. These rights will continue as to an indemnitee who
has ceased to serve unless otherwise provided in a written agreement under which
indemnitees are indemnified. EOP Partnership is authorized to purchase and
maintain insurance on behalf of the indemnitees with respect to the foregoing
matters.
EOP Partnership will be deemed to have requested an indemnitee to serve as
fiduciary of an employee benefit plan whenever the performance by it of its
duties to EOP Partnership also imposes duties on it, or otherwise involves
services by it, to the plan or participants or beneficiaries of the plan. Excise
taxes assessed on an indemnitee with respect to an employee benefit plan
according to applicable law will constitute fines. Actions taken or omitted by
the indemnitee with respect to an employee benefit plan in the performance of
its duties for a purpose reasonably believed by it to be in the interest of the
participants and beneficiaries of the plan will be deemed to be for a purpose
which is not opposed to the best interests of EOP Partnership.
An indemnitee will not be denied indemnification in whole or in part
because the indemnitee had an interest in the transaction with respect to which
the indemnification applies if the transaction was otherwise permitted by the
terms of the partnership agreement of EOP Partnership.
Cornerstone Partnership. Cornerstone Partnership will indemnify, to the
fullest extent provided by Delaware law, each indemnitee from and against any
and all losses, claims, damages, liabilities, joint or several, expenses,
judgments, fines, settlements, and other amounts arising from any and all
claims, demands, actions, suits or proceedings, civil, criminal, administrative
or investigative, that relate to the operations of Cornerstone Partnership.
Expenses include, without limitation, attorney's fees and other legal fees and
expenses. Indemnification will occur whether the indemnitee is involved or
threatened to be involved as a party or otherwise. Indemnification will occur
unless it is established that:
- the act or omission of the indemnitee was material to the matter giving
rise to the proceeding and either was committed in bad faith or was the
result of active and deliberate dishonesty;
- the indemnitee actually received an improper personal benefit in money,
property, or services; or
- in the case of any criminal proceeding, the indemnitee had reasonable
cause to believe that the act or omission was unlawful.
Any indemnification will be made only out of the assets of Cornerstone
Partnership and any insurance proceeds from the liability policy covering
Cornerstone or Cornerstone Partnership. Neither Cornerstone nor the limited
partners shall have an obligation to contribute to the capital of Cornerstone
Partnership or otherwise provide funds to enable Cornerstone Partnership to fund
its indemnity obligations. It is the intent of the partners that any amounts
paid by Cornerstone Partnership to Cornerstone for indemnification will be
treated as "guaranteed payments" within the meaning of section 707(c) of the
Internal Revenue Code.
Cornerstone Partnership is obligated to advance amounts to an indemnitee
for expenses upon receipt of:
- a written affirmation by the indemnitee that it believes in good faith it
has met the standard of conduct necessary to entitle it to
indemnification; and
- a written undertaking by or on behalf of the indemnitee to repay the
amount if it is ultimately determined that the indemnitee did not meet
the appropriate standard of conduct.
These indemnification rights are in addition to any other rights afforded
to an indemnitee under any other agreement, by vote of the partners, under
applicable law or otherwise. These rights will continue as to an indemnitee who
has ceased to serve unless otherwise provided in a written agreement under which
indemnitees are indemnified. Cornerstone Partnership is authorized to purchase
and maintain insurance on behalf of the indemnitees.
Cornerstone Partnership will be deemed to have requested an indemnitee to
serve as fiduciary of an employee benefit plan whenever the performance by it of
its duties to Cornerstone Partnership also
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imposes duties on it, or otherwise involves services by it, to the plan or
participants or beneficiaries of the plan. Excise taxes assessed on an
indemnitee with respect to an employee benefit plan according to applicable law
will constitute fines and are eligible for indemnification. Actions taken or
omitted by the indemnitee with respect to an employee benefit plan in the
performance of its duties for a purpose reasonably believed by it to be in the
interest of the participants and beneficiaries of the plan will be deemed to be
for a purpose which is not opposed to the best interests of Cornerstone
Partnership.
An indemnitee will not be denied indemnification in whole or in part solely
because the indemnitee had an interest in the transaction with respect to which
the indemnification applies if the transaction was otherwise permitted by the
terms of the partnership agreement of Cornerstone Partnership.
TRANSFERS
EOP Partnership. Equity Office may not transfer any of its partnership
interests, including any of its limited partnership interests, except in
connection with a merger, consolidation or other combination with or into
another person, a sale of all or substantially all of its assets or any
reclassification, recapitalization or change of its outstanding shares and only
if the transaction has been approved by the consent of the partners holding at
least a majority of the then outstanding EOP Partnership units, including any
EOP Partnership units held by Equity Office and in connection with which all
limited partners have the right to receive consideration which, on a per unit
basis, is equivalent in value to the consideration to be received by the
shareholders of Equity Office, on a per share basis. Equity Office will not
withdraw from EOP Partnership except in connection with a transaction as
described in the preceding sentence.
A limited partner, other than Equity Office, may transfer, with or without
the consent of Equity Office, all or any portion of its partnership interest, or
any of its economic rights as a limited partner, if:
- the transfer does not violate any federal or state securities laws or
regulations applicable to EOP Partnership or the EOP Partnership units;
or
- the transfer does not change or potentially affect adversely the tax
status of EOP Partnership.
In the case of a proposed transfer of units to a lender to EOP Partnership
or any person related to the lender whose loan constitutes a nonrecourse
liability, the transferring partner must obtain the consent of Equity Office.
No transferee of a limited partnership interest will be admitted as a
limited partner without the consent of Equity Office, which may be given or
withheld in its sole and absolute discretion.
Cornerstone Partnership. Cornerstone may not engage in an extraordinary
transaction, transfer or withdraw its general partnership interest or transfer
its limited partnership interests, unless:
- the transfer is permitted under the Cornerstone Partnership agreement;
- the transaction has been approved by the consent of the partners that
hold three-fourths of the outstanding Cornerstone Partnership units,
other than units held by Cornerstone or its affiliates; or
- the transfer is to an entity that is wholly owned by Cornerstone and is a
qualified REIT subsidiary.
The partnership agreement of Cornerstone Partnership defines an
extraordinary transaction as any one of the following involving Cornerstone: a
merger, consolidation or other combination; a direct or indirect sale, lease,
exchange or other transfer of all or substantially all assets in one transaction
or a series of transactions; a reclassification, recapitalization or change of
equity interests; a change of control; or an adoption of a plan of liquidation
or dissolution.
In addition to the above, Cornerstone may engage in an extraordinary
transaction if it would fall into one the following categories:
- a transaction in connection with which all the limited partners either
will receive, or will have the right to receive, consideration which, on
a per unit basis, is equivalent in value to the consideration received by
the Cornerstone stockholders taking into account prior share dividends or
subdivisions
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or combinations of the Cornerstone shares. If in connection with the
transaction, a purchase, tender or exchange offer was made to and
accepted by more than 50% of the Cornerstone shares, each limited partner
will receive, or will have the right to receive, consideration equivalent
to the value of what it would have received had it redeemed its
Cornerstone Partnership units and received shares of Cornerstone common
stock immediately before the offer expired and accepted the offer before
the transaction was consummated; or
- a merger, or other combination of assets with another entity, in which:
-- immediately after the transaction, substantially all of the assets
directly or indirectly owned by the surviving entity, other than the
Cornerstone Partnership units held by Cornerstone, are owned directly
or indirectly by Cornerstone Partnership or another limited partnership
or limited liability company which is the survivor of a merger,
consolidation or combination of assets with Cornerstone Partnership;
-- the limited partners own a percentage interest of the surviving entity
based on the relative fair market value of the net assets of
Cornerstone Partnership and the other net assets of the surviving
entity;
-- the rights, preferences and privileges of the limited partners in the
surviving entity are at least as favorable as those in effect
immediately prior to the transaction or as those applicable to any
other limited partners or non-managing member of the surviving entity;
and
-- the limited partners have the right to exchange their interests in the
surviving entity for the consideration described above or, if the
surviving entity is publicly traded, for the common equity securities
with an exchange ratio based on the relative fair market value of those
securities and Cornerstone shares.
Cornerstone will not consummate an extraordinary transaction in connection
with which it conducted a vote of Cornerstone stockholders unless there is a
corresponding vote of the partners of Cornerstone Partnership. In the
corresponding vote, Cornerstone must vote all of its partnership interests in
the same proportion and manner that its outstanding capital stock was voted in
the stockholder vote. In order for the transaction to be approved, the total
votes voted by Cornerstone and the limited partners must be sufficient to
approve the transaction as if it were a vote by Cornerstone's stockholders to
approve the transaction. Each holder of a partnership interest will be entitled
to the number of votes that the holder would be entitled to if it exercised its
right to redeem its partnership interest and were to have received shares of
Cornerstone stock.
A limited partner, other than Cornerstone, may transfer, with or without
the consent of Cornerstone, all or any portion of its partnership interest, or
any of its economic rights as a limited partner, if:
- the transfer does not require filing of a registration statement and does
not violate any federal or state securities laws or regulations
applicable to Cornerstone Partnership or the Cornerstone Partnership
units; or
- the transfer does not change or potentially affect adversely the tax
status of Cornerstone Partnership.
In the case of a proposed transfer to a lender to Cornerstone Partnership
or any person related to a lender whose loan constitutes a nonrecourse
liability, the transferring partner must obtain the consent of Cornerstone.
No transferee of a limited partnership interest will be admitted as a
limited partner without the consent of Cornerstone, which may be given or
withheld in its sole and absolute discretion.
AMENDMENT OF PARTNERSHIP AGREEMENT
EOP Partnership. Amendments to the partnership agreement of EOP
Partnership may be proposed by Equity Office or by limited partners owning at
least 25% of the total partnership interests. Except as
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described below, the partnership agreement of EOP Partnership may be amended
with the approval of Equity Office and limited partners holding a majority of
the partnership interests held by the limited partners, including Equity Office.
Equity Office has the power, without the consent of the limited partners, to
amend the partnership agreement of EOP Partnership as may be required:
- to add to the obligations of the general partner or surrender any right
or power granted to Equity Office or any affiliate of Equity Office for
the benefit of the limited partners;
- to reflect the admission, substitution, termination or withdrawal of
partners in compliance with the partnership agreement of EOP Partnership;
- to declare the designations, rights, powers, duties and preferences of
the holders of any additional partnership interests issued in accordance
with the authority granted to Equity Office;
- to reflect a change that does not affect the limited partners in any
material respect, or to cure any ambiguity, correct or supplement any
provision in the partnership agreement of EOP Partnership not
inconsistent with law or with other provisions of the partnership
agreement of EOP Partnership, or make other changes with respect to
matters arising under the partnership agreement of EOP Partnership that
will not be inconsistent with law or with the provisions of the
partnership agreement of EOP Partnership; and
- to satisfy any requirements, conditions or guidelines contained in any
order, directive, opinion, ruling or regulation of a federal, state or
local law.
The approval of a majority of the partnership interests held by limited
partners other than Equity Office is necessary to amend provisions regarding,
among other things:
- restrictions imposed on the issuance of additional EOP Partnership units
or other partnership interests to Equity Office;
- distribution requirements with respect to the EOP Partnership class A
units if Equity Office is not publicly traded;
- the prohibition against removal of Equity Office by the limited partners;
- restrictions on Equity Office's power to conduct businesses other than
owning partnership interests of EOP Partnership;
- limitations on transactions with affiliates;
- the liability of Equity Office for monetary damages to EOP Partnership;
- partnership consent requirements for the sale of substantially all the
assets of EOP Partnership; or
- the transfer of partnership interests held by Equity Office, the
admission and rights of substituted limited partners or the dissolution
of EOP Partnership.
Any amendment of the provision of the partnership agreement of EOP
Partnership which allows the voluntary dissolution of EOP Partnership before
December 31, 2046 can be made only with the approval of 90% of the outstanding
partnership interests, including partnership interests held by Equity Office.
Amendments to the partnership agreement of EOP Partnership that would,
among other things:
- convert a limited partner's interest into a general partner's interest;
- modify the limited liability of a limited partner;
- alter the interest of a partner in profits or losses, or the right to
receive any distributions, except as permitted under the partnership
agreement of EOP Partnership with respect to the admission of new
partners or the issuance of additional EOP Partnership units; or
- alter the unit redemption right of the limited partners of EOP
Partnership,
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must be approved by each limited partner that would be adversely affected by the
amendment.
Cornerstone Partnership. Only Cornerstone may propose amendments to the
partnership agreement of Cornerstone Partnership. Except as described below, the
partnership agreement of Cornerstone Partnership may be amended with the
approval of Cornerstone and the approval of limited partners holding a majority
of the Cornerstone Partnership units, including Cornerstone. Cornerstone has the
power, without the consent of the limited partners, to amend the partnership
agreement of Cornerstone Partnership as may be required:
- to add to the obligations of Cornerstone or surrender any right or power
granted to Cornerstone or any affiliate of Cornerstone for the benefit of
the limited partners;
- to reflect the admission, substitution, termination or withdrawal of
partners in compliance with the partnership agreement of Cornerstone
Partnership;
- to declare the designations, rights, powers, duties and preferences of
the holders of any additional partnership interests issued according to
the authority of Cornerstone;
- to reflect a change that does not affect the limited partners in any
material respect, or to cure any ambiguity, correct or supplement any
provision in the partnership agreement of Cornerstone Partnership not
inconsistent with law or with other provisions of the partnership
agreement of Cornerstone Partnership, or make other changes with respect
to matters arising under the partnership agreement of Cornerstone
Partnership that will not be inconsistent with law or with the provisions
of the partnership agreement; and
- to satisfy any requirements, conditions or guidelines contained in any
order, directive, opinion, ruling or regulation of a federal, state or
local law.
The approval of a majority of the Cornerstone Partnership units held by
limited partners other than Cornerstone is necessary to amend provisions
regarding, among other things:
- restrictions imposed on the issuance of additional Cornerstone
Partnership units or other partnership interests to Cornerstone;
- restrictions on Cornerstone's power to conduct businesses other than
owning partnership interests of Cornerstone Partnership;
- limitations on Cornerstone or Cornerstone Partnership transactions with
affiliates;
- limitations on Cornerstone to transfer its general partnership interest
or to enter into extraordinary transactions; or
- the meetings of the partners.
Amendments to the partnership agreement of Cornerstone Partnership that
would, among other things:
- convert a limited partner's interest into a general partner's interest;
- modify the limited liability of a limited partner in a manner adverse to
such partner;
- alter the interest of a partner in profits or losses, or the right to
receive any distributions, except as permitted under the partnership
agreement with respect to the admission of new partners or the issuance
of additional Cornerstone Partnership units, or
- alter the unit redemption right of the limited partners of Cornerstone
Partnership,
must be approved by each limited partner that would be adversely affected by the
amendment.
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MEETINGS
EOP Partnership. Meetings of the partners may be called by Equity Office
by written request by limited partners holding 25% or more of the partnership
interests. The call must state the nature of the business to be transacted.
Notice of any meeting is required to be given to all partners not less than
seven days nor more than 30 days before the date of the meeting. Partners may
vote in person or by proxy at the meeting. Whenever the vote or consent of
partners is permitted or required under the partnership agreement of EOP
Partnership, this vote or consent may be given at a meeting of partners. Except
as otherwise expressly provided in the partnership agreement of EOP Partnership,
the consent of a majority of the percentage interests held by limited partners,
including limited partnership interests held by Equity Office, shall control.
Any action required or permitted to be taken at a meeting of the partners
may be taken without a meeting if a written consent showing the action taken is
signed by a majority of the percentage interests of the partners or another
percentage as required by the partnership agreement of EOP Partnership.
Cornerstone Partnership. Meetings of Cornerstone Partnership may only be
called by Cornerstone. The request for a meeting must state the nature of the
business to be transacted. Notice of a meeting must be given to all partners not
less than seven nor more than thirty days before the date of the meeting.
Partners may vote in person or by proxy. Whenever the vote or consent of
partners is permitted or required under the partnership agreement of Cornerstone
Partnership, this vote or consent may be given at a meeting of partners. Except
as otherwise expressly provided in the partnership agreement of Cornerstone
Partnership, the consent of the holders of a majority of the outstanding
Cornerstone Partnership units, including Cornerstone Partnership units held by
Cornerstone (other than preferred units), shall control.
Any action required or permitted to be taken at a meeting of the partners
may be taken without a meeting if a written consent showing the action taken is
signed by holders of a majority of the outstanding Cornerstone Partnership
units, or another percentage as required by the partnership agreement of
Cornerstone Partnership.
FINANCIAL STATEMENTS AND REPORTS
EOP Partnership. On or before the date on which Equity Office mails its
annual report to its shareholders, Equity Office is required to mail to each
limited partner an annual report, as of the close of the most recently ended
fiscal year of EOP Partnership, containing financial statements of EOP
Partnership, or of Equity Office if the Equity Office statements are prepared
solely on a consolidated basis with EOP Partnership, for that fiscal year.
In addition, if Equity Office mails quarterly reports to its shareholders,
Equity Office is required to mail to each limited partner a report containing
unaudited financial statements, as of the last day of the calendar quarter, of
EOP Partnership, or of Equity Office if the Equity Office statements are
prepared solely on a consolidated basis with EOP Partnership.
Cornerstone Partnership. On or before the date on which Cornerstone mails
its annual report to its stockholders, Cornerstone is required to mail to each
limited partner an annual report, as of the close of the most recently ended
fiscal year of Cornerstone Partnership, containing financial statements of
Cornerstone Partnership, or of Cornerstone if the Cornerstone statements are
prepared solely on a consolidated basis with Cornerstone Partnership, for that
fiscal year.
In addition, if and to the extent that Cornerstone mails quarterly reports
to its stockholders, on or before the date on which the reports are mailed,
Cornerstone must mail to each limited partner a report containing unaudited
financial statements, as of the last day of that calendar quarter, of
Cornerstone Partnership, or of Cornerstone if Cornerstone statements are
prepared solely on a consolidated basis with Cornerstone Partnership.
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COMPARISON OF RIGHTS OF SHAREHOLDERS
The following is a summary of the material differences between the rights
of holders of Equity Office common shares and holders of Cornerstone common
stock. As a Maryland real estate investment trust, Equity Office is subject to
Maryland law governing real estate investment trusts organized in Maryland. The
Maryland real estate investment trust law covers some of the same matters
covered by the Maryland General Corporation Law, including liabilities of
trustees and officers, amendment of the declaration of trust and mergers of a
Maryland real estate investment trust with other entities. There are many
corporate governance matters that are addressed in the Maryland General
Corporation Law, however, that are not dealt with in the Maryland real estate
investment trust law. It is the general practice of Maryland real estate
investment trusts to address some of these matters through provisions in the
declaration of trust or bylaws. As a Nevada corporation, Cornerstone is subject
to applicable provisions of the Nevada General Corporation Law applicable to
corporations organized in Nevada.
The following discussion is not intended to be complete and is qualified by
reference to the declaration of trust and bylaws of Equity Office, the articles
of incorporation and bylaws of Cornerstone and applicable Maryland and Nevada
law. The declaration of trust and bylaws of Equity Office and the articles of
incorporation and bylaws of Cornerstone are incorporated by reference in this
consent solicitation/information statement/prospectus, and will be sent to
Cornerstone unitholders upon request. See "Where You Can Find More Information."
AUTHORIZED SHARES
Equity Office. The authorized shares of beneficial interest of Equity
Office consist of 750,000,000 common shares, par value $.01 per share, and
100,000,000 preferred shares, of which 8,000,000 shares are designated as "8.98%
series A cumulative redeemable preferred shares," 7,000,000 shares are
designated as "5.25% series B convertible, cumulative preferred shares" and
4,600,000 shares are designated as "8 5/8% series C cumulative redeemable
preferred shares of beneficial interest."
Under the Equity Office declaration of trust, the Equity Office board of
trustees has the authority to issue authorized but unissued common shares or
preferred shares in one or more classes or series without shareholder approval.
The Equity Office board of trustees also is authorized to reclassify authorized
but unissued common shares into preferred shares, and authorized but unissued
preferred shares into common shares, without shareholder approval. Subject to an
express provision to the contrary in the terms of any class or series of
authorized shares, under the Equity Office declaration of trust the board of
trustees also has the power to divide or combine the outstanding shares of any
class or series, without shareholder approval. Notwithstanding the foregoing,
under the articles supplementary establishing the outstanding series A, series B
and series C preferred shares of Equity Office, the board of trustees may not
authorize, create or increase the authorized amount of any class or series of
shares ranking before the outstanding series A, series B and series C shares
with respect to the payment of distributions or upon liquidation, without the
approval of holders of two thirds of the outstanding shares of these series of
preferred shares voting together as a single class.
At May 12, 2000, there were issued and outstanding Equity Office
common shares, Equity Office series A preferred shares, Equity Office
series B convertible, cumulative preferred shares and Equity Office series
C preferred shares.
Cornerstone. The authorized stock of Cornerstone consists of 250,000,000
shares of common stock, without par value, and 65,000,000 shares of preferred
stock, without par value, of which 3,030,303 shares are designated as "7%
cumulative convertible preferred stock" and 344,828 shares are designated as
"redeemable preferred stock."
Under the Cornerstone articles of incorporation, the Cornerstone board of
directors has the authority to issue authorized but unissued common shares or
preferred shares in one or more series without stockholder approval.
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At May 12, 2000, there were issued and outstanding 130,402,987 shares of
Cornerstone common stock and 3,030,303 shares of Cornerstone 7% cumulative
convertible preferred stock.
VOTING RIGHTS
Equity Office. Each holder of Equity Office common shares is entitled to
one vote per share and to the same and identical voting rights as other holders
of Equity Office common shares. Holders of Equity Office common shares do not
have cumulative voting rights. Except as provided in articles supplementary
establishing a series of Equity Office preferred shares or required by law,
holders of Equity Office preferred shares do not have any voting rights. For a
description of the voting rights of holders of outstanding series A, series B
and series C preferred shares, see "-- Authorized Shares," "-- Number of
Trustees/ Directors; Removal of Trustees/Directors; Vacancies" and "-- Amendment
of the Declaration of Trust and Articles of Incorporation."
Cornerstone. Each holder of Cornerstone common stock is entitled to one
vote per share and to the same and identical voting rights as other holders of
Cornerstone common stock. Holders of Cornerstone common stock do not have
cumulative voting rights. Except as provided by law or in the certificate of
designations creating a series of Cornerstone preferred stock, holders of
Cornerstone preferred stock do not have any voting rights.
CLASSIFICATION OF THE BOARD
Equity Office. The Maryland real estate investment trust law permits a
Maryland real estate investment trust's board of trustees to be divided into up
to three classes with staggered terms of office. The Equity Office declaration
of trust divides the Equity Office board of trustees into three classes, with
classes being elected to three-year terms on a rotating basis.
Cornerstone. The Nevada General Corporation Law permits a Nevada
corporation to divide its board of directors into up to four classes with
staggered terms of office. However, Cornerstone does not have a classified board
of directors. Accordingly, its directors serve for one-year terms and are
elected annually.
NUMBER OF TRUSTEES/DIRECTORS; REMOVAL OF TRUSTEES/DIRECTORS; VACANCIES
Equity Office. The Equity Office declaration of trust provides for a
minimum of nine and a maximum of 15 trustees, with the number of trustees within
this range established by a majority vote of the board of trustees as provided
in the Equity Office bylaws. Under the Equity Office bylaws, except during the
period in which a vacancy exists, at least two-thirds of the Equity Office
trustees must be persons who are not executive officers of Equity Office or
persons affiliated with Samuel Zell or his affiliates.
Under the Equity Office declaration of trust, subject to the rights of one
or more classes or series of preferred shares to elect one or more trustees, a
trustee may be removed at any time, only with cause, at a meeting of the
shareholders by the affirmative vote of the holders of not less than a majority
of the shares then outstanding and entitled to vote generally in the election of
trustees.
Under the Equity Office declaration of trust, subject to the rights of
holders of any class or series of preferred shares, each vacancy on the board of
trustees, including a vacancy resulting from an increase in the number of
trustees, may be filled only by the affirmative vote of a majority of the
remaining trustees in office, even if the remaining trustees do not constitute a
quorum. Any trustee elected to fill a vacancy will hold office for the remainder
of the full term of the class of trustees in which the vacancy occurred and
until a successor is elected and qualifies.
The holders of the outstanding shares of series A, series B and series C
preferred shares of Equity Office are entitled, voting together as a single
class, to elect a total of two trustees to the Equity Office board of trustees
at any time distributions on the preferred shares were in arrears for six or
more quarterly periods.
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Cornerstone. Cornerstone's articles of incorporation provide for a minimum
of three and a maximum of eighteen members of Cornerstone's board of directors.
At present, Cornerstone's board stands at fourteen members. The size of the
board may be increased or decreased by action of the board of directors and,
during certain periods set forth in Cornerstone's bylaws, the approval of the
board affairs committee of Cornerstone's board is required to effect any such
change. Cornerstone's bylaws also require that: (a) until December 16, 2001,
Cornerstone's board of directors shall nominate William Wilson III and two
individuals designated by Mr. Wilson for election to the board; and (b) until
the date that PGGM and its affiliated entities own, collectively, less than 5%
of Cornerstone's issued and outstanding common stock, Cornerstone's board is
required to nominate two persons designated by PGGM for election as directors.
At least one of the two persons designated by Mr. Wilson must satisfy the
criteria for independent directors described in the New York Stock Exchange,
Inc. Listed Company Manual and must satisfy the criteria for non-employee
directors described in rule 16b-3(b)(3)(i) promulgated by the SEC under the
Securities Exchange Act of 1934.
Directors may be removed, with or without cause, at any time by the vote or
written consent of stockholders of record holding at least two-thirds of the
shares of Cornerstone's issued and outstanding common stock.
Vacancies on Cornerstone's board may be filled by the affirmative vote or
written consent of stockholders of record holding at least a majority of the
shares of Cornerstone's issued and outstanding common stock or by vote or
written consent of Cornerstone's board, whether or not sufficient directors are
in office to constitute a quorum. During the periods referred to above in which
either Mr. Wilson or PGGM has a right to designate persons for nomination to the
board of directors, if a vacancy on Cornerstone's board is caused by the absence
of any such person, Cornerstone's board is required to fill the vacancy with a
person designated by Mr. Wilson or PGGM, as the case may be. Any director
elected to fill a vacancy on Cornerstone's board will hold office for the
remainder of the full term of the absent director.
If dividends payable on Cornerstone's 7% cumulative convertible preferred
stock are in arrears for an aggregate number of days equal to six calendar
quarters or more, whether or not consecutive, the holders of such stock have the
right to elect two members of Cornerstone's board of directors at the next
annual meeting of shareholders and at each subsequent meeting of shareholders
until such arrearages have been paid or set apart for payment.
LIMITATION OF TRUSTEE/DIRECTOR AND OFFICER LIABILITY
Equity Office. Under Maryland law, the declaration of trust of a Maryland
real estate investment trust may include a provision expanding or limiting the
liability of its trustees and officers to the trust or its shareholders for
money damages but may not include a provision which restricts or limits the
liability of its trustee or officers to the trust or its shareholders to the
extent that:
- it is proved that the person actually received an improper benefit or
profit in money, property or services, for the amount of the benefit or
profit in money, property or services actually received; or
- a judgment or other final adjudication adverse to the person is entered
in a proceeding based on a finding that the person's action, or failure
to act, was the result of active and deliberate dishonesty and was
material to the cause of action adjudicated in the proceeding.
The Equity Office declaration of trust provides that, to the maximum extent
that Maryland law permits, no trustee or officer of Equity Office shall be
liable to Equity Office or to any shareholder for money damages.
Cornerstone. Nevada law allows a corporation to provide in its articles of
incorporation that the personal liability of the corporation's directors to its
stockholders or the corporation is limited, but such a provision may not extend
to intentional misconduct, fraud or a knowing violation of law or payments of
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distributions to the corporation's shareholders which are not allowed by Nevada
law. Cornerstone's articles of incorporation do not contain any such provision
limiting director liability.
INDEMNIFICATION
Equity Office. Maryland law generally permits a Maryland real estate
investment trust to indemnify any person made a party to any threatened, pending
or completed action, suit or proceeding by reason of the fact that the person is
or was a trustee, officer, employee or agent of the trust or any predecessor
entity, or is or was serving at the request of the trust or predecessor entity
as a director, officer, partner, trustee, employee or agent of another
corporation, partnership, joint venture, trust, other enterprise or employee
benefit plan, unless it is established that:
- the act or omission was material to the matter giving rise to the
proceeding and either was committed in bad faith or was the result of
active and deliberate dishonesty;
- the person actually received an improper personal benefit in money,
property or services; or
- in the case of any criminal proceeding, the person had reasonable cause
to believe that the act or omission was unlawful.
Under Maryland law, indemnity may be provided against judgments, penalties,
fines, settlements and reasonable expenses actually incurred by the person in
connection with the proceeding. The indemnification may be provided, however,
only if authorized for a specific proceeding after a determination has been made
that indemnification is permissible in the circumstances because the person met
the applicable standard of conduct. This determination is required to be made:
- by the board of trustees by a majority vote of a quorum consisting of
trustees not, at the time, parties to the proceeding;
- if such quorum cannot be obtained, then by a majority vote of a committee
of the board consisting solely of two or more trustees not, at the time,
parties to the proceeding;
- by special legal counsel; or
- by the shareholders.
If the proceeding is one by or in the right of the trust, indemnification
may not be provided as to any proceeding in which the person is found liable to
the trust.
A Maryland real estate investment trust may pay, before final disposition,
the expenses, including attorneys' fees, incurred by a trustee, officer,
employee or agent in defending a proceeding. Under Maryland law, expenses may be
advanced to a trustee or officer when the trustee or officer gives an
undertaking to the trust to repay the amounts advanced if it is ultimately
determined that he or she is not entitled to indemnification. Maryland law does
not require that the undertaking be secured and the undertaking may be accepted
without reference to the financial ability of the trustee or officer to repay
the advance. A Maryland trust is required to indemnify any trustee who has been
successful, on the merits or otherwise, in defense of a proceeding for
reasonable expenses. The determination as to reasonableness of expenses is
required to be made in the same manner as required for indemnification.
Under Maryland law, the indemnification and advancement of expenses
provided by statute are not exclusive of any other rights to which a person
seeking indemnification or advancement of expenses may be entitled under any
bylaw, agreement, vote of shareholders, vote of trustees or otherwise.
Under the Equity Office bylaws, Equity Office is required to indemnify and
advance expenses to present and former trustees and officers, and may indemnify
employees and agents, of Equity Office and its predecessors. The Equity Office
bylaws also provide for mandatory indemnification and advancement of expenses to
present and former shareholders of Equity Office or its predecessors made a
party to a proceeding by reason of such status.
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The partnership agreement of EOP Partnership also provides for
indemnification of Equity Office and its officers and trustees to the same
extent that indemnification is provided to officers and trustees of Equity
Office in its declaration of trust, and limits the liability of Equity Office
and its officers and trustees to EOP Partnership and its respective partners to
the same extent that the Equity Office declaration of trust limits the liability
of the officers and trustees of Equity Office to Equity Office and its
shareholders.
Cornerstone. Section 78.7502 of Chapter 78 of the Nevada Revised Statutes
allows Cornerstone to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit or proceeding, whether civil, criminal, administrative or investigative,
other than an action by or in the right of the corporation, by reason of the
fact that he or she is or was a director, officer, employee or agent of the
corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or other enterprise,
against expenses, including attorneys' fees, and against judgments, fines and
amounts paid in settlement actually and reasonably incurred by him or her in
connection with such action, suit or proceeding if:
- he or she acted in good faith and in a manner he or she reasonably
believed to be in, or not opposed to, the best interests of the
corporation; and
- with respect to any criminal action or proceeding, he or she had no
reasonable cause to believe his or her conduct was unlawful.
The termination of any action, suit or proceeding by judgment, order,
settlement or conviction or upon a plea of nolo contendere or its equivalent
does not, of itself, create a presumption that the person did not act in good
faith or in a manner which he or she reasonably believed to be in, or not
opposed to, the best interests of the corporation or that, with respect to any
criminal action or proceeding, he or she had reasonable cause to believe his or
her actions were unlawful.
Section 78.7502 of the Nevada Revised Statutes allows Cornerstone to
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities described above against expenses,
including attorneys' fees, actually and reasonably incurred by him or her in
connection with the defense or settlement of such action or suit if he or she
acted under similar standards to those described above, except that no
indemnification may be made in respect of:
- any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation; or
- amounts paid in settlement to the corporation, unless and only to the
extent that the court in which such action or suit was brought determines
that, despite the adjudication of liability, such person is fairly and
reasonably entitled to indemnity for such expenses as the court deems
proper.
Section 78.7502 of the Nevada Revised Statutes further provides that to the
extent a director or officer of a corporation has been successful in the defense
of any action, suit or proceeding referred to above or in the defense of any
claim, issue or matter therein, he or she shall be indemnified against expenses,
including attorneys' fees, actually and reasonably incurred by him or her in
connection therewith. Article IX of Cornerstone's bylaws provides for
indemnification of its officers and directors that is substantially identical in
scope to the foregoing discussion of the Nevada Revised Statutes.
Section 78.751 of the Nevada Revised Statutes provides that any
indemnification provided for by section 78.7502 of the Nevada Revised Statutes,
by court order or otherwise, shall not be deemed to be exclusive of any other
rights to which the indemnified party may be entitled and that the scope of
indemnification shall continue as to directors, officers, employees or agents
who have ceased to hold such positions, and to their heirs, executors and
administrators. Cornerstone's bylaws also provide, pursuant to section 78.7502
of the Nevada Revised Statutes, that the expenses of officers and directors
incurred in defending any action, suit or proceeding, whether civil, criminal,
administrative or investigative, must be
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paid by Cornerstone as they are incurred and in advance of the final disposition
of the action, suit or proceeding, provided that Cornerstone receives an
undertaking by or on behalf of the director or officer to repay such amounts
unless it shall ultimately be determined that he or she is entitled to be
indemnified by Cornerstone pursuant to Article IX of its bylaws.
Finally, section 78.752 of the Nevada Revised Statutes allows Cornerstone
to purchase and maintain insurance on behalf of any of Cornerstone's directors,
officers, employees or agents against any liability asserted against any of them
in any such capacity or arising out of their status as such, whether or not
Cornerstone would have the power to indemnify them against such liabilities
under section 78.7502. Cornerstone has purchased this type of insurance in
customary amounts for its directors, officers, employees and agents.
DUTIES OF TRUSTEES AND DIRECTORS
Equity Office. Recent Maryland legislation provides increased protection
for Maryland real estate investment trusts against unsolicited takeovers by
affording greater protection to a board of trustees with regard to actions taken
in a takeover context. The Maryland legislation provides that the duties of
trustees will not require them to:
- accept, recommend, or respond to any proposal by a person seeking to
acquire control;
- authorize the real estate investment trust to redeem any rights under,
modify, or render inapplicable a shareholder rights plan;
- make a determination under the Maryland Business Combination Statute or
the Control Share Acquisition Statute, as described below;
- elect to be subject to any or all of the "elective provisions" described
below; or
- act or fail to act solely because of:
-- the effect the act or failure to act may have on an acquisition or
potential acquisition of control; or
-- the amount or type of consideration that may be offered or paid to
shareholders in an acquisition.
The Maryland legislation also states the presumption that any act of a
trustee satisfies the required standard of conduct. In the case of a Maryland
corporation, these are a director's duties to act in good faith, in a manner
that is in the best interests of the corporation and with the care of an
ordinarily prudent person under similar circumstances. In the case of a Maryland
real estate investment trust, the standard of conduct is not explicitly provided
by statute. Under the Maryland legislation, an act of a trustee relating to or
affecting an acquisition or a potential acquisition of control may not be
subject to a higher duty or greater scrutiny than is applied to any other act of
a trustee. This provision creates a Maryland rule which is less exacting than
case law in many other jurisdictions which (a) imposes an enhanced level of
scrutiny when a board implements anti-takeover measures in a change of control
context; and (b) shifts the burden of proof to directors to show that the
defensive mechanism adopted by a board is reasonable in relation to the threat
posed.
The Maryland legislation also provides that the duty of a trustee is only
enforceable by the trust or in the right of the trust. A shareholder suit to
enforce such duty, therefore, can only be brought derivatively.
Partly in response to judicial decisions in Delaware in the takeover
context, Nevada's legislature enacted a statute providing that, in performing
their duties, directors of a corporation may consider factors other than the
short-term interests of the corporation's shareholders, including the interests
of the corporation's employees, suppliers, creditors and customers, the state
and national economy, the interests of the community and society, and the
long-term as well as short-term interests of the corporation and its
stockholders, including the possibility that these interests may be best served
by the corporation's continued independence.
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Cornerstone. Like directors of Maryland corporations, directors of Nevada
corporations enjoy the benefit of a presumption that, in exercising their
powers, directors are acting in good faith, on an informed basis and with a view
to the interests of the corporation. The required standard of care is expressly
stated in the statute: good faith with a view to the interests of the
corporation. Given, however, the case law of other jurisdictions in the
anti-takeover context, it is not clear whether a Nevada court would impose a
more exacting standard of care than that stated in the statute.
MARYLAND ELECTIVE PROVISIONS
Equity Office. Recent Maryland legislation allows publicly-held Maryland
corporations and Maryland real estate investment trusts to elect to be governed
by all or any part of new Maryland law provisions relating to extraordinary
actions and unsolicited takeovers. The election to be governed by one or more of
these provisions can be made by a Maryland real estate investment trust in its
declaration of trust or bylaws or by resolution adopted by the board of trustees
as long as the trust has at last three trustees who, at the time of electing to
be subject to the provisions are not:
- officers or employees of the trust;
- persons seeking to acquire control of the trust;
- directors, officers, affiliates or associates of any person seeking to
acquire control; or
- nominated or designated as trustees by a person seeking to acquire
control.
Articles supplementary must be filed with the Maryland State Department of
Assessments and Taxation if a Maryland corporation or trust elects to be subject
to any or all of the provisions by board resolution or bylaw amendment.
Shareholder approval is not required for the filing of articles supplementary.
The Maryland legislation provides that a trust can elect to be subject to
all or any portion of the following provisions notwithstanding any contrary
provisions contained in the trust's existing declaration of trust or bylaws:
- Classified Board: Equity Office already has a classified board;
- Two-Thirds Shareholder Vote to Remove Trustees Only For Cause: The
shareholders may remove any trustee only by the affirmative vote of at
least two thirds of all the votes entitled to be cast by the shareholders
generally in the election of directors, but a trustee may not be removed
without cause;
- Size of Board Fixed by Vote of Board: Equity Office already has this
provision, subject to the range on the number of trustees contained in
its declaration of trust;
- Board Vacancies Filled by the Board for the Remaining Term: Vacancies
that result from an increase in the size of the board, or the death,
resignation, or removal of a trustee, may be filled only by the
affirmative vote of a majority of the remaining trustees even if they do
not constitute a quorum. Trustees elected to fill vacancies shall hold
office for the remainder of the full term of the class of directors in
which the vacancy occurred (as opposed to until the next annual meeting
of shareholders) and until a successor is elected and qualifies. Equity
Office recently adopted this provision; and
- Shareholder Calls of Special Meetings Only Upon the Written Request of
Holders of at Least a Majority of All Votes Entitled to be Cast: Equity
Office already has this provision.
Cornerstone. Although Nevada's General Corporation Law contains no similar
statute, Cornerstone's bylaws and articles of incorporation address most of the
issues addressed by the Maryland legislation described above. Other than
stockholder calls for special meetings, Cornerstone's approach to the issues
addressed by the Maryland legislation is set forth in the above section entitled
"Number of Trustees/ Directors; Removal of Trustees/Directors; Vacancies."
Nevada law does not provide for stockholder calls
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of special meetings. However, Cornerstone's bylaws provide that holders of
record of at least a majority of the shares of Cornerstone's issued and
outstanding common stock which are entitled to vote at a special meeting may
call such a meeting.
CALL OF SPECIAL MEETINGS OF SHAREHOLDERS
Equity Office. The Equity Office bylaws provide that special meetings of
shareholders may be called by the chairman of the board, the president or
one-third of the trustees. Special meetings of shareholders also may be called
by the holders of shares entitled to cast not less than a majority of all the
votes entitled to be cast at a special meeting of shareholders.
Cornerstone. As noted above, Cornerstone's bylaws provide that holders of
record of at least a majority of the shares of Cornerstone's issued and
outstanding common stock which are entitled to vote at a special meeting may
call a special meeting of stockholders. In addition, Cornerstone's bylaws allow
Cornerstone's board of directors, Chairman of the Board, President or Secretary
to call a special meeting of the stockholders.
SHAREHOLDER ACTION BY WRITTEN CONSENT
Equity Office. The Equity Office bylaws permit any action required or
permitted to be taken at a meeting of shareholders to be taken without a meeting
if a consent in writing, setting forth the action to be taken, is signed by
shareholders entitled to cast a sufficient number of votes to approve the
matter.
Cornerstone. Nevada law and Cornerstone's bylaws also allow any action
required or allowed to be taken at a stockholder's meeting to be taken without a
meeting, notice or a vote of stockholders if a written consent to such action,
setting forth the action, is signed by holders of record of a majority, or if a
higher proportion would be required at a meeting of stockholders, then that
higher proportion, of the corporation's issued and outstanding shares of common
stock.
ADVANCE NOTICE PROVISIONS FOR SHAREHOLDER NOMINATIONS AND SHAREHOLDER NEW
BUSINESS PROPOSALS
Equity Office. The Equity Office bylaws require advance written notice for
shareholders to nominate a trustee or bring other business before a meeting of
shareholders.
For an annual meeting, a shareholder must deliver notice to the secretary
of Equity Office not later than the close of business on the 60th day nor
earlier than the close of business on the 90th day before the first anniversary
of the preceding year's annual meeting. However, if the date of the annual
meeting is advanced by more than 30 days or delayed by more than 60 days from
the applicable anniversary date of the prior year's annual meeting, or the
meeting is a special meeting of shareholders at which trustees will be elected,
notice by the shareholder must be given not earlier than the close of business
on the 90th day before the meeting and not later than the close of business on
the later of the 60th day before the meeting or the tenth day following the day
on which public announcement of the date of the meeting is first made by Equity
Office.
The Equity Office bylaws contain detailed requirements for the contents of
shareholder notices of trustee nominations and new business.
Cornerstone. Neither the Cornerstone articles of incorporation nor its
bylaws contain a comparable provision.
AMENDMENT OF THE DECLARATION OF TRUST AND ARTICLES OF INCORPORATION
Equity Office. Under Maryland law and the Equity Office declaration of
trust, the trustees, by a two-thirds vote, may at any time amend the declaration
of trust solely to enable Equity Office to qualify as a REIT under the Internal
Revenue Code or as a real estate investment trust under Maryland law, without
action by Equity Office shareholders. The Equity Office board of trustees also
may amend the declaration of trust to set the terms of one or more series of
preferred shares without action by holders of Equity
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Office common shares. Other amendments to the declaration of trust must first be
declared advisable by the board of trustees and thereafter must be approved by
shareholders by the affirmative vote of not less than two-thirds of all votes
entitled to be cast, or, in the case of amendments to the declaration of trust
in connection with mergers and other specified business combinations or that
involve an increase or decrease in the number of authorized common shares or
preferred shares, not less than a majority of all votes entitled to be cast.
Under the articles supplementary for each series of outstanding preferred
shares of Equity Office, the approval of holders of each preferred series by a
two-thirds class vote would be required for:
- the authorization, creation or increase in the authorized or issued
amount of any class or series of Equity Office shares ranking before the
outstanding preferred series as to distributions or upon liquidation; or
- any amendment, alteration or repeal of provisions of the declaration of
trust, whether by merger, consolidation, or otherwise, so as to
materially and adversely affect any right, preferences, privileges or
voting power of the outstanding series of preferred shares.
Cornerstone. General amendments to Cornerstone's articles of incorporation
are governed by the provisions of the Nevada General Corporation Law.
Cornerstone's articles expressly provide, however, that Cornerstone's board of
directors may determine the rights, preferences, privileges, designations and
other characteristics of classes and series of Cornerstone's preferred stock.
Under the Nevada General Corporation Law, general amendments to Cornerstone's
articles of incorporation require Cornerstone's board of directors to recommend
the amendment to Cornerstone's stockholders and for holders of record of at
least a majority of the shares of Cornerstone's issued and outstanding common
stock which are entitled to vote to approve such amendment. Nevada's General
Corporation Law provides holders of classes or series of Cornerstone's preferred
stock a right to vote as a class or series on amendments to Cornerstone's
articles of incorporation, regardless of limitations on the voting rights of
such class or series, if the amendment would alter or change any preference or
relative or other right given to such a class or series.
The certificate of designations of the only series of Cornerstone's
preferred stock of which shares are issued and outstanding, the 7% cumulative
convertible preferred stock, provides that the consent or affirmative vote of
holders of at least two-thirds of the shares of the holders thereof shall be
required to:
(a) issue or increase the authorized amount of any class or series of
shares ranking prior with respect to payment of dividends or
distributions of amounts upon liquidation; or
(b) amend, alter or repeal any provision of Cornerstone's articles of
incorporation that would materially and adversely affect any power,
preference or special right of the series.
Notwithstanding (b) above, Nevada's General Corporation Law would require
the approval of the record holders of a majority of issued and outstanding
shares of the 7% cumulative convertible preferred stock that are entitled to
vote, to amend Cornerstone's articles of incorporation, whether or not the
proposed amendment would "materially" alter or change any preference or any
relative or other right given to such stock.
AMENDMENT OF THE BYLAWS
Equity Office. The Equity Office bylaws provide that the power to amend,
repeal or adopt new bylaws is vested exclusively with the board of trustees,
except that any amendments by the board of trustees to the bylaw provisions
relating to meetings of shareholders, the minimum and maximum number of
trustees, and the requirement that at least two-thirds of the trustees must be
persons who are not executive officers of Equity Office or persons affiliated
with Samuel Zell or his affiliates are subject to the approval of shareholders
by vote of a majority of the votes cast.
Cornerstone. Amendment of Cornerstone's bylaws is governed by the terms of
the bylaws. The bylaws provide that amendments may be adopted either by holders
of record of a majority of the corporation's issued and outstanding shares of
common stock or by Cornerstone's board. However, until
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December 16, 2001, amendments to sections 3.02 (number of directors and term),
3.03 (identity of members of the board of directors), 3.04 (relating to the
position of chairman of the board), 3.07 (filling vacancies on the board of
directors), 3.09 (relating to committees of the board of directors), and
10.01(b) (relating to restrictions on amendment of the bylaws), require the
consent of a majority of the members of the entire board and the unanimous
approval of the board affairs committee of the board of directors. In addition,
until the earlier of (a) the date on which PGGM or Dutch Institutional Holding
Company or their respective affiliates own, collectively, less than 25% of
Cornerstone's issued and outstanding common stock and (b) October 31, 2002,
amendments to sections 3.02, 3.03, 3.07, 3.09 or 10.01(c) (relating to
restrictions on amendments of the bylaws) of the bylaws require the consent of a
majority of the members of the entire board and the unanimous approval of the
board affairs committee of the board of directors. Lastly, until PGGM and its
affiliated entities own, collectively, less than 5% of the issued and
outstanding shares of Cornerstone's common stock, amendments to section 3.03(b)
(relating to PGGM's right to designate persons for nomination to Cornerstone's
board of directors) and 10.01(c) also require the consent of a majority of the
members of the entire board and the unanimous approval of the board affairs
committee of the board of directors.
MERGERS, CONSOLIDATIONS AND SALES OF ASSETS
Equity Office. Under Maryland law, a merger involving a Maryland real
estate investment trust generally requires approval by the affirmative vote of
not less than two-thirds of all votes entitled to be cast on the matter, unless
the declaration of trust specifies a greater or lesser percentage, but not less
than a majority. No shareholder approval is required for parent-90% owned
subsidiary mergers or by shareholders of a Maryland successor trust if the
merger does not reclassify or change the outstanding shares or otherwise amend
the declaration of trust and the number of shares to be issued in the merger is
not more than 20% of the number of its shares of the same class or series
outstanding immediately before the merger is completed. The Equity Office
declaration of trust specifies that the affirmative vote of shareholders by not
less than a majority of all votes entitled to be cast is required to approve
mergers for which a shareholder vote is required under Maryland law.
Maryland law does not address the requirements for the approval by
shareholders of a consolidation or sale of all or substantially all of the
assets of a real estate investment trust. However, the Equity Office declaration
of trust requires that a majority of the Equity Office shares entitled to vote
on the matter must approve a consolidation of Equity Office into one or more
other entities or the sale of all or substantially all of the assets of Equity
Office outside the ordinary course of business. Under the Equity Office
declaration of trust, the mortgage, pledge or other creation of a security
interest in any or all of the assets of Equity Office, whether or not in the
ordinary course of business, as well as the sale of all or substantially all of
the assets of Equity Office to a majority owned subsidiary or as a distribution
to shareholders is not deemed to be a sale requiring shareholder approval.
Cornerstone. Mergers and share exchanges involving Nevada corporations are
governed by Chapter 92A of the Nevada Revised Statutes, which we refer to as the
"Merger Statute." Under the Merger Statute, Cornerstone may approve a plan of
merger or exchange of shares if (a) Cornerstone's board of directors recommends
the plan to the stockholders and (b) holders of record of a majority of
Cornerstone's common stock entitled to vote approve the plan. Approval of a
merger by Cornerstone's stockholders is not required if: (x) Cornerstone is to
be the surviving entity in a merger; (y) Cornerstone's articles of incorporation
after the merger will be the same as its articles of incorporation before the
merger; and (z) the number of shares of Cornerstone's common stock outstanding
immediately after the merger, plus the number of such shares issued as a result
of the merger, either by the conversion of securities issued pursuant to the
merger or the exercise of rights and warrants issued pursuant to the merger,
will not exceed the total number of shares of Cornerstone's common stock
outstanding immediately before the merger by more than 20%.
Nevada's General Corporation Law requires the consent of the holders of a
majority of the shares of Cornerstone's common stock entitled to vote for a
sale, lease, or exchange of all of its property and assets.
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DISSOLUTION OF EQUITY OFFICE OR CORNERSTONE; TERMINATION OF REIT STATUS
Equity Office. The Equity Office declaration of trust permits the
termination of the existence of Equity Office if approved by the affirmative
vote of the holders of not less two-thirds of the outstanding Equity Office
shares entitled to vote on the matter. In addition, the board of trustees may
terminate the status of Equity Office as a REIT under the Internal Revenue Code
for any taxable year without a vote of the holders of Equity Office common or
preferred shares.
Cornerstone. Under Nevada's General Corporation Law, Cornerstone may be
dissolved if its board of directors recommends dissolution to the stockholders
and holders of a majority of the shares of Cornerstone's outstanding common
stock entitled to vote approve such dissolution.
BUSINESS COMBINATIONS WITH INTERESTED SHAREHOLDERS
Equity Office. The Maryland Business Combination Statute provides that,
unless exempted, a Maryland real estate investment trust may not engage in
business combinations, including mergers, dispositions of 10% or more of its
assets, issuances of shares and other specified transactions, with an
"interested shareholder" or its affiliates, for five years after the most recent
date on which the interested shareholder became an interested shareholder.
Thereafter, unless specified "price criteria" and other standards are met or an
exemption is available, a business combination with an interested shareholder or
its affiliates must be recommended by the board of trustees and approved by (a)
at least 80% of the outstanding voting shares and (b) at least two-thirds of the
outstanding voting shares, other than voting shares held by the interested
shareholder or any of its affiliates. Under the statute, an "interested
shareholder" generally is defined to mean a person or group which owns
beneficially, directly or indirectly, 10% of more of the outstanding voting
shares of the real estate investment trust. These requirements do not apply to a
business combination with an interested shareholder or its affiliates if
approved by the board of trustees before the time the interested shareholder
first became an interest shareholder.
The Equity Office board of trustees has elected by resolution to exempt
from the provisions of the Maryland Business Combination Statute any business
combination with any person. However, this resolution, by its terms, may be
altered or repealed at any time, in whole or in part, by the board of trustees.
Cornerstone. Nevada's Business Combinations Act prohibits combinations
between a Nevada corporation and an interested stockholder of the corporation
for three years after the stockholder becomes interested unless the combination
or acquisition of shares by the interested stockholder on the date the
stockholder became an interested stockholder was approved by the corporation's
board of directors before that date. An interested stockholder is: (a) a person
who, directly or indirectly, has the ability to control the voting of 10% of the
voting stock of the corporation; or (b) an affiliate or associate of the
corporation who, at any time within three years before the date in question,
satisfied the definition in (a). A combination is broadly defined and includes
mergers, dispositions of 5% or more of its assets, issuances of shares and other
specified transactions.
Although a Nevada corporation may, in its articles of incorporation, opt
out of the Business Combinations Act, Cornerstone has not done so.
CONTROL SHARE ACQUISITIONS
Equity Office. The Maryland Control Share Act provides that shares of a
Maryland real estate investment trust that are acquired in a "control share
acquisition," which is defined as the acquisition of shares comprising
one-fifth, one-third or a majority of all voting shares, have no voting rights
except:
- if approved by shareholders by the affirmative vote of two-thirds of all
the votes entitled to be cast on the matter, excluding all "interested
shares;" or
- if the acquisition of the shares has been approved or exempted at any
time before the acquisition of the shares.
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The Maryland Control Share Act is applicable to a publicly traded Maryland
real estate investment trust unless its charter or bylaws specifically provides
that it shall be inapplicable.
The Equity Office bylaws provide that the Maryland Control Share Act shall
not apply to any acquisition by any person of shares of Equity Office. Any
amendment to this provision by the board of trustees would require the approval
of shareholders by a vote of a majority of the votes cast. See "-- Amendment of
the Bylaws."
Cornerstone. Nevada's Control Shares Act restricts the voting rights of
shares of stock acquired by a stockholder of a Nevada corporation governed by
the act if the acquisition of such shares would provide such stockholder a
controlling interest in the corporation. A controlling interest is ownership of
one-fifth or more but less than one-third, one-third or more but less than a
majority, or a majority or more of the corporation's shares of stock entitled to
vote generally in the election of directors. Thus, the act applies to
acquisitions of shares as a stockholder moves from one level of control to the
next. Only the shares acquired within 90 days immediately preceding the date
when the stockholder acquires the relevant controlling interest are subject to
the limitation on voting rights.
The Control Shares Act applies only to Nevada corporations (a) with 200 or
more stockholders of record, at least 100 of whom have addresses in Nevada
appearing in the corporation's stock ledger and (b) doing business in Nevada
directly or through an affiliated corporation. Cornerstone does not currently
have 100 stockholders of record who have addresses in Nevada appearing in
Cornerstone's stock ledger and Cornerstone does not do business in Nevada
directly or through an affiliated corporation. Moreover, the provisions of the
Control Shares Act do not apply to a Nevada corporation if the corporation's
articles of incorporation or bylaws in effect on the tenth day following the
acquisition of a controlling interest by a stockholder provide that such
provisions do not apply to the corporation or to an acquisition of a controlling
interest specifically by types of existing or future stockholders, whether or
not identified.
Neither Cornerstone's bylaws nor its articles of incorporation contain such
an opt-out provision.
OTHER CONSTITUENCIES
Equity Office. Recent Maryland legislation expressly codifies the
authority of Maryland real estate investment trusts to include in their
declaration of trusts a provision that allows the board of trustees to consider
the effect of a potential acquisition of control on shareholders, employees,
suppliers, customers, creditors and communities in which offices or other
establishments of the trust are located. The Equity Office declaration of trust
does not include a provision of this type. The Maryland legislation also states,
however, that the inclusion or omission of such a provision in the declaration
of trust of a Maryland real estate investment trust allowing the board of
trustees to consider the effect of a potential acquisition of control on the
foregoing constituencies does not create an inference concerning factors that
may be considered by the board of trustees regarding a potential acquisition of
control.
Cornerstone. Nevada law contains a provision similar to the Maryland
legislation described above. The Nevada provision is discussed above under the
heading "-- Duties of Trustees and Directors."
DISSENTERS' RIGHTS
Equity Office. Maryland law applicable to Maryland real estate investment
trusts provides dissenters' rights for any shareholder who objects to a merger
to the same extent as a Maryland corporation's stockholders would enjoy such
rights. The shareholder has the right to demand and receive payment of the fair
value of his or her shares, unless:
- the shares are listed on a national securities exchange or are designated
as a national market security on the interdealer quotation system of the
National Association of Securities Dealers, Inc. on the record date for
determining shareholders entitled to vote on the merger; or
- the shares are those of a successor entity, as long as the merger does
not alter the contract rights of the shares as expressly set forth in the
declaration of trust and the shares are converted in whole or
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in part in the merger into stock, including preferred stock, of the
successor entity or cash, scrip, or other rights or interests arising out
of the treatment of fractional shares.
Cornerstone. Nevada law regarding dissenter's rights is set forth in the
Merger Statute. Under the Merger Statute, a shareholder of a Nevada corporation
may dissent with respect to specified corporation actions and, as a result,
receive fair value for the stockholder's shares. Those actions to which
dissenter's rights apply are: (a) a merger of the corporation if shareholder
approval of the merger is required by the Merger Statute or the corporation's
articles of incorporation and the stockholder is entitled to vote thereon; (b)
merger of the corporation into a parent corporation that owns at least ninety
percent of each class of the outstanding shares of the corporation if the merger
is effected through section 92A.180 of the Nevada Revised Statutes; (c)
consummation of a plan of exchange in which the corporation's shares will be
acquired if the stockholder is entitled to vote thereon; and (d) other
transactions to which the corporation's articles of incorporation attach the
right to dissent and obtain fair payment for dissenter's shares.
Dissenter's rights are not available, however, if the corporation is listed
on a national securities exchange, as Cornerstone is, unless (a) the
corporation's articles of incorporation provide otherwise or (b) the
stockholders are required under the plan of merger or exchange to accept
anything for their shares other than cash, stock or stock and cash in lieu of
fractional shares of stock of the surviving corporation or any other entity
whose stock was listed on a national securities exchange or NASDAQ or which had
at least 2,000 holders of record of such entity's stock, or any combination of
the above. As used in this paragraph, "stock" refers to shares of stock in a
corporation, membership in a nonprofit corporation, the interest of a member in
a limited-liability company or a beneficial owner of a business trust, or the
partnership interest of a partner in a general or limited partnership.
DISTRIBUTIONS
Equity Office. The Equity Office declaration of trust provides that the
trustees will endeavor to declare and pay distributions as necessary for Equity
Office to qualify as a REIT under the Internal Revenue Code. However,
shareholders do not have any right to a distribution unless and until authorized
and declared by the board of trustees. Distributions may not be paid on the
Equity Office common shares unless all accrued but unpaid distributions on each
outstanding series of preferred shares of Equity Office have been declared and
paid or set apart for payment. Payments of distributions by Equity Office are
not limited by any rules concerning the capital or surplus of Equity Office or
the par value of the Equity Office shares.
Cornerstone. Nevada's General Corporation Law provides that the board of
directors may not make a distribution of money or property to its stockholders
if such distribution would prevent the corporation from paying its debts as they
became due in the ordinary course of business or, unless and to the extent
specifically allowed by the corporation's articles of incorporation, if after
the distribution, the corporation's total assets would be less than the sum of
its total liabilities plus that amount that would be needed, if the corporation
were to be dissolved at the time of the distribution, to satisfy the
preferential rights to distributions upon dissolution of the corporation's
shareholders whose rights upon dissolution are superior to those receiving the
distribution.
REIT OWNERSHIP LIMITATIONS
Equity Office. For Equity Office to qualify as a REIT under the Internal
Revenue Code, no more than 50% in value of its outstanding shares of beneficial
interest may be owned, actually or constructively, by five or fewer
"individuals," which, as defined in the Internal Revenue Code for this purpose,
includes certain entities. In addition, if Equity Office, or an actual or
constructive owner of 10% or more of the shares of Equity Office, owns, actually
or constructively, 10% or more of a tenant of Equity Office, then the rent
received by Equity Office from that tenant will not be qualifying income for
purposes of determining whether Equity Office meets the requirements for
qualification as a REIT under the Internal Revenue Code. A REIT's shares also
must be beneficially owned by 100 or more persons.
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As a means of addressing these requirements, the Equity Office declaration
of trust provides that, subject to exceptions, no person may own, or be deemed
to own directly and/or by virtue of the attribution provisions of the Internal
Revenue Code, more than 9.9%, in value or number of shares, whichever is more
restrictive, of the issued and outstanding shares of any class or series of
shares. Under the Equity Office declaration of trust, the board of trustees may
increase the ownership limit with respect to any class or series of shares.
However, after giving effect to this increase, five beneficial owners of common
shares may not beneficially own in the aggregate more than 49.5% of the
outstanding common shares. In addition, the Equity Office board of trustees is
required to waive or modify the ownership limit with respect to one or more
persons who would not be treated as "individuals" under the Internal Revenue
Code if such person submits to the Equity Office board of trustees specified
information that demonstrates, to the reasonable satisfaction of the board of
trustees, that such ownership would not jeopardize Equity Office's status as a
REIT under the Internal Revenue Code. The Equity Office declaration of trust
further prohibits any person from transferring any Equity Office common or
preferred shares if the transfer would result in shares of beneficial interest
of Equity Office being owned by fewer than 100 persons or otherwise would cause
Equity Office not to qualify as a REIT.
If any transfer of shares or any other event would otherwise result in any
person violating the ownership limits, then the declaration of trust provides
that (a) the transfer will be void and of no force or effect with respect to the
prohibited transferee with respect to that number of shares that exceeds the
ownership limits and (b) the prohibited transferee would not acquire any right
or interest in the shares. The shares transferred in violation of the ownership
limit instead would be transferred automatically to a charitable trust, the
beneficiary of which would be a qualified charitable organization selected by
Equity Office.
The trustee of the charitable trust would be required to sell the shares
transferred in violation of the ownership limit to a person or entity who could
own the shares without violating the ownership limit, and to distribute to the
prohibited transferee an amount equal to the lesser of the price paid by such
person for the shares transferred in violation of the ownership limit or the
sales proceeds received by the charitable trust for the shares. In the case of a
transfer for no consideration, such as a gift, the charitable trustee would be
required to sell the shares to a qualified person or entity and distribute to
the prohibited transferee an amount equal to the lesser of the fair market value
of the shares as of the date of the prohibited transfer or the sales proceeds
received by the charitable trust.
Under its declaration of trust, Equity Office, or its designee, would have
the right to purchase the shares from the charitable trust at a price per share
equal to the lesser of (a) the price per share in the transaction that resulted
in the transfer of the shares to the charitable trust, or, in the case of a
devise or gift, the market price at the time of such devise or gift, and (b) the
market price of such shares on the date Equity Office, or its designee, were to
agree to purchase the shares. Any proceeds derived from the sale of the shares
in excess of the amount distributed to the prohibited transferee under these
provisions would be distributed to the beneficiary of the charitable trust.
The charitable trustee will have the sole right to vote the shares that it
holds, and any distributions paid on shares held by the charitable trustee would
be paid to the beneficiary of the charitable trust.
If the transfer to the charitable trust of the shares that were transferred
in violation of the ownership limit is not automatically effective for any
reason, then the transfer to that resulted in the violation of the ownership
limit would be void.
All persons or entities who own, directly or by virtue of the attribution
provisions of the Internal Revenue Code, more than 5%, or such other percentage
between 1/2 of 1% and 5% as provided in applicable rules and regulations under
the Internal Revenue Code, of the lesser of the number or value of the
outstanding Equity Office shares must give a written notice to Equity Office by
January 30 of each year stating the name and address of such owner, the number
of Equity Office shares owned and a description of the manner in which such
Equity Office shares are held. In addition, a holder of record of Equity Office
shares subject to the foregoing requirement who holds its Equity Office shares
as nominee for another person or entity which is required to include in gross
income the dividends received on such
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shares must also give notice of the name and address of such person or entity
and the number of Equity Office shares of such person or entity with respect to
which such holder of record is nominee. In addition, each record, beneficial and
constructive holder of Equity Office shares is required, upon demand of Equity
Office, to disclose to Equity Office in writing any information with respect to
the direct, indirect and constructive ownership of Equity Office shares as the
Equity Office board of trustees deems necessary to comply with the provisions of
the Internal Revenue Code applicable to REITs, to comply with the requirements
of any taxing authority or governmental agency or to determine any such
compliance.
As part of the REIT merger, the Equity Office declaration of trust will be
amended to add an additional limitation on the ownership by non-U.S. persons of
Equity Office common shares and preferred shares issued by Equity Office in the
future. See "The Merger Agreement -- Amendments to Equity Office's Declaration
of Trust Relating to 'Domestically-Controlled' REIT Status." This additional
limitation would result in adverse consequences for a non-U.S. person whose
purchase of Equity Office common shares or any preferred shares of Equity Office
issued in the future caused the foreign ownership limit to be exceeded and,
therefore, may deter additional purchases of Equity Office shares by non-U.S.
persons.
The foregoing restrictions on ownership and transferability would not apply
if the Equity Office board of trustees were to determine that it is no longer in
the best interests of Equity Office to attempt to qualify, or to continue to
qualify, as a REIT under the Internal Revenue Code.
Cornerstone. To help ensure that Cornerstone continues to qualify as a
REIT, Article 8 of Cornerstone's articles of incorporation provides that shares
of Cornerstone's capital stock shall not be transferred to any person if such
transfer would cause such person to become the direct or indirect owner of more
than 6% of the value of the outstanding shares of Cornerstone's capital stock.
Shares of stock acquired in excess of this ownership limit shall be deemed to be
transferred to Cornerstone as trustee for the benefit of the person to whom the
person who acquired the excess shares later transfers such shares. In addition,
excess shares shall be deemed to have been offered for sale to Cornerstone or
its designee at their "fair market value" for a 90-day period. Article 8 further
provides that a person who knowingly violates the ownership limit must indemnify
Cornerstone and its stockholders for losses if such violation causes Cornerstone
either to fail to qualify as a REIT or to be subject to personal holding company
taxes. The affirmative vote of the holders of at least 80% of the outstanding
shares of Cornerstone common stock is required to alter, amend, repeal or adopt
any provision inconsistent with such restrictions.
Cornerstone's articles of incorporation also contain provisions designed to
assist it in becoming a "domestically controlled REIT" under the Internal
Revenue Code. Article 9 of Cornerstone's articles of incorporation provides that
shares of Cornerstone's stock may not be transferred to any non-U.S. person if
such transfer would cause such non-U.S. person to become the direct or indirect
owner of more than 3% of the value of the outstanding shares of any class of
capital stock of Cornerstone. Shares of stock acquired in excess of the non-U.S.
ownership limit are deemed to be transferred to Cornerstone as trustee for the
benefit of the person to whom the non-U.S. person who acquired the excess shares
later transfers such shares. In addition, excess shares are deemed to have been
offered for sale to Cornerstone or its designee at their "fair market value" for
a 90-day period. Article 9 does not apply, however, to transfers by any U.S.
person by operation of law or pursuant to death, a merger or sale of
substantially all of the assets of such person, bankruptcy or pledges of
security.
As used in this section: "non-U.S. person" means (a) a nonresident alien
individual, as defined in the Internal Revenue Code, (b) a foreign corporation,
foreign partnership, foreign trust, foreign estate, foreign government, and any
other organization or entity which is not organized under the laws of the United
States or a State, and (c) any other person or entity treated as a "foreign
person" under regulations promulgated under the Internal Revenue Code. "U.S.
person" means any person other than a non-U.S. person.
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LEGAL MATTERS
The validity of the EOP Partnership units and the Equity Office common
shares offered by this consent solicitation/information statement/prospectus
will be passed upon for EOP Partnership and Equity Office by Hogan & Hartson
L.L.P., Washington, D.C. and New York, NY.
The qualification of the REIT merger as a reorganization under section
368(a) of the Internal Revenue Code and the qualification of Equity Office as a
REIT and the classification of EOP Partnership as a partnership for federal
income tax purposes will be passed upon for Equity Office and EOP Partnership by
Hogan & Hartson L.L.P., Washington, D.C. and New York, NY, counsel for Equity
Office.
The validity of the shares of Cornerstone common stock offered by this
consent solicitation/ information statement/prospectus will be passed upon for
Cornerstone by Lionel, Sawyer & Collins, Las Vegas, Nevada.
The qualification of the REIT merger as a reorganization under section
368(a) of the Internal Revenue Code and the qualification of Cornerstone as a
REIT and the classification of Cornerstone Partnership as a partnership for
federal income tax purposes will be passed upon for Cornerstone and Cornerstone
Partnership by King & Spalding, Atlanta, Georgia and New York, New York, counsel
for Cornerstone.
EXPERTS
Ernst & Young LLP, independent auditors, have audited the consolidated
financial statements and schedule of Equity Office included in Equity Office's
Annual Report on Form 10-K for the year ended December 31, 1999, and have
audited the consolidated financial statements and schedule included in EOP
Partnership's Annual Report on Form 10-K for the year ended December 31, 1999,
as set forth in their reports, which are incorporated by reference in this
consent solicitation/information statement/prospectus and elsewhere in the
registration statement. The Equity Office and EOP Partnership consolidated
financial statements and schedules are incorporated by reference in reliance on
Ernst & Young LLP's reports, given on their authority as experts in accounting
and auditing.
The consolidated financial statements of Cornerstone incorporated in this
consent solicitation/ information statement/prospectus by reference to the
Annual Report on Form 10-K for the year ended December 31, 1999, and the
consolidated financial statements of the Cornerstone Partnership included in
this consent solicitation/information statement/prospectus for the year ended
December 31, 1999, have been so incorporated or included in reliance on the
reports of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
185
<PAGE> 198
WHERE YOU CAN FIND MORE INFORMATION
Equity Office, EOP Partnership and Cornerstone have filed with the SEC a
registration statement on Form S-4 (333-35590), of which this consent
solicitation/information statement/prospectus forms a part. The registration
statement registers (a) the distribution to Cornerstone Partnership unitholders
of the EOP partnership units to be issued in the partnership merger, which are
redeemable by the unitholder for cash or, at the election of Equity Office,
Equity Office common shares, and (b) the distribution of shares of common stock
of Cornerstone to Cornerstone Partnership unitholders who elect to redeem their
Cornerstone Partnership units for Cornerstone common stock prior to the
partnership merger and in connection with the REIT merger. The registration
statement, including the attached exhibits and schedules, contains additional
relevant information about EOP Partnership units. The rules and regulations of
the SEC allow Equity Office, EOP Partnership and Cornerstone to omit certain
information included in the registration statement from this consent
solicitation/information statement/prospectus. In addition, Equity Office, EOP
Partnership and Cornerstone file reports, proxy statements and other information
with the SEC under the Securities Exchange Act of 1934. You may read and copy
any of this information at the following locations of the SEC:
Public Reference Room
450 Fifth Street, N.W.
Room 1024
Washington, D.C. 20549
New York Regional Office
7 World Trade Center
Suite 1300
New York, NY 10048
Chicago Regional Office
Citicorp Center
500 West Madison Street
Suite 1400
Chicago, IL 60661- 2511
You may obtain information on the operation of the SEC's Public Reference
Room by calling the SEC at 1-800-SEC-0330.
The SEC also maintains an Internet web site that contains reports, proxy
statements and other information regarding issuers, including Equity Office, EOP
Partnership and Cornerstone, who file electronically with the SEC. The address
of that site is http://www.sec.gov. Reports, proxy statements and other
information concerning Equity Office and Cornerstone may also be inspected at
the offices of the New York Stock Exchange, which are located at 20 Broad
Street, New York, New York 10005.
The SEC allows Equity Office, EOP Partnership and Cornerstone to
"incorporate by reference" information in this document, which means that they
can disclose important information to you by referring you to another document
filed separately with the SEC. The information incorporated by reference is
considered to be a part of this consent solicitation/information
statement/prospectus, except for any information that is superseded by
information included directly in this document.
The documents listed below that Equity Office, EOP Partnership and
Cornerstone have previously filed with the SEC are considered to be a part of
this consent solicitation/information statement/ prospectus. They contain
important information about these companies and their financial condition.
EQUITY OFFICE SEC FILINGS (FILE NO. 1-13115):
<TABLE>
<S> <C>
1999 Annual Report on Form 10-K.............. Filed on March 29, 2000
Amendment to Form 10-K on Form 10-K/A........ Filed on May 12, 2000
Current Reports on Form 8-K.................. Filed on May 12, 2000 and February 16, 2000
Registration Statement on Form 8-A........... Filed on June 19, 1997, setting forth the
description of Equity Office common shares
</TABLE>
186
<PAGE> 199
EOP PARTNERSHIP SEC FILINGS (FILE NO. 1-13625):
<TABLE>
<S> <C>
1999 Annual Report on Form 10-K.............. Filed on March 29, 2000
Amendment to Form 10-K on Form 10-K/A........ Filed on May 12, 2000
Current Reports on Form 8-K.................. Filed on May 12, 2000, March 24, 2000, March
15, 2000 and February 16, 2000
</TABLE>
CORNERSTONE SEC FILINGS (FILE NO. 1-12861):
<TABLE>
<S> <C>
Annual Report on Form 10-K/A................. Year Ended December 31, 1999
Current Reports on Form 8-K.................. Filed on April 10, 2000, March 10, 2000 and
February 16, 2000, as amended
Registration Statement on Form 8-A........... Filed on March 11, 1997, setting forth the
description of Cornerstone common stock
</TABLE>
Equity Office, EOP Partnership and Cornerstone incorporate by reference
additional documents that they may file with the SEC between the date of this
consent solicitation/information statement/prospectus and the date of the
special meetings of Equity Office and Cornerstone in connection with the REIT
merger. These include periodic reports, such as Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as well as proxy
materials.
If you are a shareholder of Equity Office, a unitholder of EOP Partnership
or a unitholder of Cornerstone Partnership, Equity Office, EOP Partnership or
Cornerstone, as the case may be, may have sent to you some of the documents
incorporated by reference in this document, but you can obtain any of them
through Equity Office, EOP Partnership or Cornerstone, as the case may be, or
through the SEC or the SEC's web site described above. Documents incorporated by
reference are available from Equity Office, EOP Partnership and Cornerstone, as
applicable, without charge, excluding all exhibits unless specifically
incorporated by reference as an exhibit to this document. Shareholders of Equity
Office, holders of EOP Partnership units or stockholders of Cornerstone may
obtain documents incorporated by reference in this document by requesting them
from writing or by telephone from the appropriate company at the following
addresses:
EQUITY OFFICE PROPERTIES TRUST or
EOP OPERATING LIMITED PARTNERSHIP
Two North Riverside Plaza
Suite 2100
Chicago, Illinois 60606
Attention: Stanley M. Stevens
Telephone: (312) 466-3300
CORNERSTONE PROPERTIES INC.
Tower 56
126 East 56th Street, 6th Floor
New York, New York 10022
Attention: Thomas P. Loftus
Telephone: (212) 605-7131
187
<PAGE> 200
IF YOU WOULD LIKE TO REQUEST DOCUMENTS, PLEASE DO SO BY , 2000
IN ORDER TO RECEIVE TIMELY DELIVERY OF SUCH DOCUMENTS. If you request any
incorporated documents, we will mail them to you by first class mail, or another
equally prompt means, within one business day after we receive your request.
Equity Office has supplied all information contained or incorporated by
reference in this consent solicitation/information statement/prospectus relating
to Equity Office and EOP Partnership, and Cornerstone has supplied all such
information relating to Cornerstone and Cornerstone Partnership. This document
constitutes the prospectus of Equity Office and EOP Partnership, the information
statement of EOP Partnership, the prospectus of Cornerstone and the consent
solicitation of Cornerstone Partnership.
188
<PAGE> 201
WHAT INFORMATION YOU SHOULD RELY ON
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION THAT DIFFERS FROM, OR ADDS TO, THE INFORMATION DISCUSSED IN THIS
CONSENT SOLICITATION/INFORMATION STATEMENT/PROSPECTUS OR IN THE ANNEXES ATTACHED
HERETO WHICH ARE SPECIFICALLY INCORPORATED BY REFERENCE. THEREFORE, IF ANYONE
GIVES YOU DIFFERENT OR ADDITIONAL INFORMATION, YOU SHOULD NOT RELY ON IT.
THIS DOCUMENT IS DATED MAY , 2000. THE INFORMATION CONTAINED IN THIS
CONSENT SOLICITATION/INFORMATION STATEMENT/PROSPECTUS SPEAKS ONLY AS OF ITS DATE
UNLESS THE INFORMATION SPECIFICALLY INDICATES THAT ANOTHER DATE APPLIES. THIS
CONSENT SOLICITATION/INFORMATION STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO EXCHANGE OR SELL, OR A SOLICITATION OF AN OFFER TO EXCHANGE OR
PURCHASE, EOP PARTNERSHIP UNITS, EQUITY OFFICE COMMON SHARES, CORNERSTONE
PARTNERSHIP UNITS OR CORNERSTONE COMMON STOCK OR TO SOLICIT CONSENTS, TO OR FROM
ANY PERSON TO WHOM IT IS UNLAWFUL TO DIRECT THESE ACTIVITIES.
189
<PAGE> 202
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
EOP Partnership Pro Forma Condensed Combined Financial
Statements............................................. F-2
EOP Partnership Pro Forma Condensed Combined Balance
Sheet.................................................. F-3
EOP Partnership Pro Forma Condensed Combined Statement of
Operations............................................. F-4
EOP Partnership Notes to Pro Forma Condensed Combined
Financial Statements................................... F-5
Equity Office Pro Forma Condensed Combined Financial
Statements............................................. F-10
Equity Office Pro Forma Condensed Combined Balance
Sheet.................................................. F-11
Equity Office Pro Forma Condensed Combined Statement of
Operations............................................. F-12
Equity Office Notes to Pro Forma Condensed Combined
Financial Statements................................... F-13
Cornerstone Partnership Historical Consolidated Financial
Statements
Report of Independent Accountants......................... F-19
Cornerstone Partnership Consolidated Balance Sheets....... F-20
Cornerstone Partnership Consolidated Statements of
Income................................................. F-21
Cornerstone Partnership Consolidated Statements of
Comprehensive Income................................... F-22
Cornerstone Partnership Consolidated Statements of
Partners' Capital...................................... F-23
Cornerstone Partnership Consolidated Statements of Cash
Flows.................................................. F-24
Cornerstone Partnership Notes to Consolidated Financial
Statements............................................. F-25
Cornerstone Partnership Historical Consolidated Financial
Statement Schedule:
Schedule III........................................ F-44
</TABLE>
F-1
<PAGE> 203
EOP OPERATING LIMITED PARTNERSHIP
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1999
(UNAUDITED)
The accompanying Unaudited Pro Forma Condensed Combined Balance Sheet as of
December 31, 1999 reflects the following transactions as if they had occurred on
December 31, 1999:
- the proposed merger of EOP Partnership and Cornerstone Partnership; and
- the issuance of $500 million of unsecured notes on March 21, 2000, due
March 2006, coupon rate of 8.4% per annum and effective rate of 8.5% per
annum.
The accompanying Unaudited Pro Forma Condensed Combined Statement of
Operations for the year ended December 31, 1999 reflects the following
transactions as if they had occurred on January 1, 1999:
- the proposed merger of EOP Partnership and Cornerstone Partnership; and
- the issuance of $500 million of unsecured notes on March 21, 2000, due
March 2006, coupon rate of 8.4% per annum and effective rate of 8.5% per
annum.
In the opinion of management, all significant adjustments necessary to
reflect the effects of the partnership merger have been made.
F-2
<PAGE> 204
EOP OPERATING LIMITED PARTNERSHIP
PRO FORMA CONDENSED COMBINED BALANCE SHEET
DECEMBER 31, 1999 (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CORNERSTONE
EOP OPERATING PROPERTIES MERGER AND EOP OPERATING
LIMITED PARTNERSHIP LIMITED PARTNERSHIP OTHER LIMITED PARTNERSHIP
HISTORICAL HISTORICAL ADJUSTMENTS (A) PRO FORMA
------------------- ------------------- --------------- -------------------
<S> <C> <C> <C> <C>
ASSETS:
Investment in real estate,
net........................ $12,572,153 $3,565,637 $ 710,997(B) $16,848,787
Cash and cash equivalents.... 2,338 19,679 --(C) 22,017
Rent and other receivables... 193,194 91,968 (77,243)(D) 207,919
Escrow deposits and
restricted cash............ 19,754 222,043 -- 241,797
Investment in unconsolidated
joint ventures............. 865,863 31,725 8,275(B) 905,863
Prepaid expenses and other
assets..................... 392,756 239,176 (199,275)(E) 432,657
----------- ---------- ---------- -----------
TOTAL ASSETS................. $14,046,058 $4,170,228 $ 442,754 $18,659,040
=========== ========== ========== ===========
LIABILITIES AND PARTNERS'
CAPITAL:
Mortgage debt................ $ 1,743,871 $1,435,405 $ (27,326)(F) $ 3,151,950
Unsecured notes.............. 3,655,047 -- 499,320(G) 4,154,367
Lines of credit.............. 453,000 329,000 691,027(H) 1,473,027
Distribution payable......... 5,446 -- -- 5,446
Other liabilities............ 479,167 113,240 65(I) 592,472
----------- ---------- ---------- -----------
TOTAL LIABILITIES............ 6,336,531 1,877,645 1,163,086 9,377,262
----------- ---------- ---------- -----------
Minority interest in
partially owned
properties................. 39,027 22,532 -- 61,559
----------- ---------- ---------- -----------
Preferred shares............. 615,000 50,000 (50,000)(J) 615,000
Partners' capital............ 7,055,500 2,220,051 (670,332)(K) 8,605,219
----------- ---------- ---------- -----------
TOTAL PARTNERS' CAPITAL...... 7,670,500 2,270,051 (720,332) 9,220,219
----------- ---------- ---------- -----------
TOTAL LIABILITIES AND
PARTNERS' CAPITAL.......... $14,046,058 $4,170,228 $ 442,754 $18,659,040
=========== ========== ========== ===========
</TABLE>
F-3
<PAGE> 205
EOP OPERATING LIMITED PARTNERSHIP
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999 (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)
<TABLE>
<CAPTION>
CORNERSTONE EOP
EOP PROPERTIES MERGER OPERATING LIMITED
OPERATING LIMITED LIMITED AND OTHER PARTNERSHIP
PARTNERSHIP PARTNERSHIP ADJUSTMENTS PRO FORMA
----------------- ----------- ----------- -----------------
(A)
<S> <C> <C> <C> <C>
REVENUES:
Rental................................. $ 1,493,196 $455,204 $ 6,181(L) $ 1,954,581
Tenant reimbursements.................. 281,358 121,385 -- 402,743
Parking................................ 112,204 27,343 -- 139,547
Other.................................. 32,298 4,598 -- 36,896
Fee income............................. 8,939 2,677 -- 11,616
Interest/dividends..................... 14,248 4,211 -- 18,459
------------ -------- -------- ------------
Total revenues..................... 1,942,243 615,418 6,181 2,563,842
------------ -------- -------- ------------
EXPENSES:
Interest:
Expense incurred..................... 413,995 135,009 90,855(M) 639,859
Amortization of deferred financing
costs.............................. 4,693 2,004 3,669(N) 10,366
Depreciation........................... 339,751 87,971 15,109(O) 442,831
Amortization........................... 14,545 8,755 (8,755)(P) 14,545
Real estate taxes...................... 243,778 71,554 -- 315,332
Insurance.............................. 9,589 3,548 -- 13,137
Repairs and maintenance................ 209,630 74,728 -- 284,358
Property operating..................... 199,879 52,947 -- 252,826
Ground rent............................ 6,887 1,407 -- 8,294
General and administrative............. 80,927 27,006 --(Q) 107,933
------------ -------- -------- ------------
Total expenses..................... 1,523,674 464,929 100,878 2,089,481
------------ -------- -------- ------------
Income before allocation to minority
interests, income from investment in
unconsolidated joint ventures and net
gain on sales of real estate........... 418,569 150,489 (94,697) 474,361
Minority interests -- partially owned
properties............................. (1,981) (5,755) -- (7,736)
Income from investment in unconsolidated
joint ventures......................... 13,824 898 (176)(R) 14,546
Net gain on sales of real estate......... 59,661 131,034 -- 190,695
------------ -------- -------- ------------
Net income from continuing operations.... 490,073 276,666 (94,873) 671,866
Put option settlement.................... (5,658) -- -- (5,658)
Preferred distributions.................. (43,603) (3,500) 3,500(S) (43,603)
------------ -------- -------- ------------
Net income from continuing operations
before extraordinary items and
cumulative effect of a change in
accounting principle available for
units.................................. $ 440,812 $273,166 $(91,373) $ 622,605
============ ======== ======== ============
Net income from continuing operations
before extraordinary items and
cumulative effect of a change in
accounting principle per weighted
average unit outstanding -- basic...... $ 1.53(T) $ 1.77(T)
============ ============
Weighted average units
outstanding -- basic................... 288,326,547 351,114,475
============ ============
Net income from continuing operations
before extraordinary items and
cumulative effect of a change in
accounting principle per weighted
average unit outstanding -- diluted.... $ 1.51(T) $ 1.76(T)
============ ============
Weighted average units outstanding --
diluted................................ 291,157,204 354,965,413
============ ============
</TABLE>
F-4
<PAGE> 206
EOP OPERATING LIMITED PARTNERSHIP
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1999 (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT DATA)
(A) Represents adjustments to record the merger between EOP Partnership and
Cornerstone Partnership based upon the assumed purchase price of $4.6
billion assuming a value of $24.6818 per unit of EOP Partnership's units and
adjustments to record the issuance of $500 million in unsecured notes which
occurred on March 21, 2000. The calculation of the merger acquisition cost
is as follows:
<TABLE>
<S> <C> <C>
Issuance of 62.8 million EOP Partnership units based on a .7009
exchange rate in exchange for 89.6 million Cornerstone Partnership
units.................................................................. $1,549,719
Cash portion of merger consideration:
Cornerstone Partnership units (58,551,525 @ $18.00)... 1,053,927
Cornerstone preferred units (3,030,303 @ $18.00)...... 54,545 1,108,472
----------
EOP Partnership's current ownership of 250,700 shares of Cornerstone
common stock......................................................... 3,480
Assumption of Cornerstone Partnership's total liabilities.............. 1,877,645
Assumption of the convertible promissory note and related accrued
interest payable owed by Cornerstone Properties, Inc to be assumed by
EOP Partnership in the merger (see Notes F and I).................... 12,991
Adjustment to Cornerstone Partnership's mortgage debt to reflect market
value (see Note F)................................................... (40,252)
Cornerstone Partnership's minority interest allocation for partially
owned properties..................................................... 22,532
Merger costs (see calculation below)................................... 78,000
----------
Total merger acquisition cost................................ $4,612,587
==========
</TABLE>
The following is a calculation of the EOP Partnership units to be issued in
the merger:
<TABLE>
<CAPTION>
UNITS
-----------
<S> <C>
Cornerstone Partnership units outstanding at December 31,
1999...................................................... 148,384,088
Less Cornerstone Partnership units redeemed for cash........ (58,551,525)
Less EOP Partnership's current ownership of 250,700 shares
of Cornerstone common stock............................... (250,700)
-----------
Cornerstone Partnership units to be converted in the merger
into EOP Partnership units at an exchange rate of .7009... 89,581,863
===========
EOP Partnership units to be issued in the merger............ 62,787,928
EOP Partnership units outstanding at December 31, 1999...... 285,786,346
-----------
EOP Partnership units outstanding after the merger........ 348,574,274
===========
</TABLE>
The following is a calculation of estimated merger costs:
<TABLE>
<S> <C>
Employee termination costs.................................. $ 43,800
Investment advisory fees.................................... 15,000
Transfer taxes.............................................. 10,000
Legal, accounting and other fees............................ 7,700
Loan assumption fees........................................ 1,500
-----------
Total merger costs................................ $ 78,000
===========
</TABLE>
F-5
<PAGE> 207
EOP OPERATING LIMITED PARTNERSHIP
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(B) Represents the estimated increase in Cornerstone Partnership's investment
in real estate based upon the merger acquisition cost to reflect the
allocation to other tangible assets of Cornerstone Partnership being
acquired:
<TABLE>
<S> <C>
Merger acquisition cost (see Note A)........................ $4,612,587
----------
Less basis of Cornerstone Partnership's net assets acquired:
Investment in real estate, net......................... 3,565,637
Cash and cash equivalents.............................. 19,679
Rent and other receivables (excluding $77.2 million of
deferred rents receivable)............................ 14,725
Escrow deposits and restricted cash.................... 222,043
Investment in unconsolidated joint ventures............ 31,725
Prepaid expenses and other assets (excluding $199.7
million of deferred leasing, financing and other costs
(see Note E))......................................... 39,506
----------
Subtotal.......................................... 3,893,315
----------
Adjustment to record fair value of Cornerstone Partnership's
investment in real estate and investment in unconsolidated
joint ventures, net....................................... 719,272
Less adjustment allocated to investment in unconsolidated
joint ventures............................................ (8,275)
----------
Adjustment allocated to investment in real estate........... $ 710,997
==========
</TABLE>
(C) There was no change in cash and cash equivalents as a result of the
following transactions:
<TABLE>
<S> <C>
Anticipated borrowings on additional credit facilities to
finance the cash portion of the merger (see Note H)....... $ 691,027
Gross proceeds from the $500 million unsecured notes
offering (see Note G)..................................... 500,000
Less cash portion of merger consideration (see Note A)...... (1,108,472)
Less merger costs (see Note A).............................. (78,000)
Less financing costs related to the $500 million unsecured
notes offering (see Note E)............................... (3,875)
Less discount on the $500 million unsecured notes offering
(see Note G).............................................. (680)
-----------
Net adjustment to cash and cash equivalents............ $ --
===========
</TABLE>
(D) Represents the elimination of Cornerstone Partnership's deferred rents
receivable of $77.2 million which arose from the historical straight-lining
of rental revenue.
(E) Represents an adjustment for the following:
<TABLE>
<S> <C>
Cornerstone Partnership's deferred leasing, financing and
other costs which were not assigned any value in the
allocation of the merger acquisition cost................. $(199,670)
Transfer of EOP Partnership's current ownership of 250,700
shares of Cornerstone common stock to merger acquisition
cost (see Note A)......................................... (3,480)
Additional deferred financing costs associated with the $500
million unsecured note offering........................... 3,875
---------
Total............................................. $(199,275)
=========
</TABLE>
F-6
<PAGE> 208
EOP OPERATING LIMITED PARTNERSHIP
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(F) To reflect the following:
<TABLE>
<S> <C>
Adjustment to Cornerstone Partnership's mortgage debt to
reflect market value (see Note F)......................... $(40,252)
Assumption of the convertible promissory note and related
accrued interest payable from Cornerstone Properties, Inc.
to be assumed by EOP Partnership in the merger............ 12,926
--------
$(27,326)
========
</TABLE>
(G) To reflect the $500 million unsecured notes offering net of a $.7 million
discount.
(H) To reflect borrowings on additional credit facilities to finance the cash
portion of the merger as follows:
<TABLE>
<S> <C>
Cash portion of merger consideration (See Note A)........... $1,108,472
Merger costs (See Note A)................................... 78,000
Less net proceeds from the $500 million unsecured notes
offering (see Note C)..................................... (495,445)
----------
Borrowings on additional credit facilities........ $ 691,027
==========
</TABLE>
(I) To reflect the assumption of the accrued interest payable related to the
convertible promissory note owed by Cornerstone's Properties, Inc to be
assumed by EOP Partnership in the merger.
(J) To record the redemption of Cornerstone's preferred units into cash (see
Note A).
(K) To reflect the net decrease in partners' capital associated with the merger
as follows:
<TABLE>
<S> <C>
Issuance of 62.8 million EOP Partnership units based on the
exchange rate, in exchange for 89.6 million Cornerstone
Partnership units......................................... $ 1,549,719
Less total pre-merger pro forma partners' capital of
Cornerstone Partnership................................... (2,220,051)
-----------
Net decrease to partners' capital................. $ (670,332)
===========
</TABLE>
(L) To reflect the adjustment for the straight-line effect of scheduled rent
increases.
(M) To reflect the additional interest expense incurred from the $500 million
unsecured notes offering and borrowings from additional credit facilities to
finance the cash portion of the merger.
<TABLE>
<S> <C>
Additional borrowings from $500 million unsecured notes
offering (see Note G) and credit facilities (see Note
H)........................................................ $1,190,347
Weighted average interest rate.............................. 7.57%
----------
Additional interest expense................................. 90,109
Interest expense on the convertible promissory note from
Cornerstone's Properties, Inc. that will be assumed by EOP
Partnership in the merger................................. 746
----------
$ 90,855
==========
</TABLE>
<TABLE>
<S> <C> <C>
(N) To reflect the amortization of $3.9 million of financing
costs incurred with the $500 million unsecured notes
offering over the six-year term........................... $ 646
To reflect additional amortization of the adjustment to
Cornerstone Partnership's mortgage debt to market value... 3,023
------
$3,669
======
</TABLE>
F-7
<PAGE> 209
EOP OPERATING LIMITED PARTNERSHIP
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(O) To reflect additional depreciation expense related to the adjustment to the
investment in real estate on a straight-line basis.
<TABLE>
<S> <C>
Adjustment to the investment in real estate (see Note B).... $710,997
Portion allocated to building and improvements.............. 85%
--------
Adjustment to the depreciable basis of Cornerstone
Partnership's investment in real estate, net.............. $604,347
========
Additional depreciation expense based on an estimated useful
life of 40 years.......................................... $ 15,109
========
</TABLE>
(P) To reverse Cornerstone Partnership's historical amortization of deferred
lease commissions due to the write-off of deferred lease commissions as a
result of the merger (see Note E).
(Q) Management has estimated that there will be a reduction of general and
administrative expenses as a result of the merger of approximately $18.0
million on a pro forma basis for 1999. The general and administrative
expense savings have not been included in the pro forma condensed combined
statement of operations. There can be no assurance that EOP Partnership will
be successful in realizing such anticipated cost savings.
(R) To reflect the additional depreciation expense on the adjustment to the
depreciable basis of Cornerstone Partnership's investment in unconsolidated
joint ventures.
<TABLE>
<S> <C>
Adjustment to the basis of the investment in unconsolidated
joint ventures............................................ $8,275
Portion allocated to building and improvements.............. 85%
------
Adjustment to the depreciable basis of Cornerstone
Partnership's investment in unconsolidated joint
ventures.................................................. $7,034
======
Decrease in income from investment in unconsolidated joint
ventures due to additional depreciation expense pertaining
to the adjustment to the basis of the investment in joint
ventures based on an estimated useful life of 40 years.... $ 176
======
</TABLE>
(S) To adjust Cornerstone Partnership's preferred distributions assuming
Cornerstone Partnership's preferred units were converted into cash on
January 1, 1999.
(T) The following table sets forth the computation of basic and diluted
earnings per unit:
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
----------- -----------
<S> <C> <C>
NUMERATOR
Net income from continuing operations before extraordinary
items, cumulative effect of a change in accounting
principle and net gain on sales of real estate available
for units................................................. $381,151 $431,910
Net gain on sales of real estate............................ 59,661 190,695
-------- --------
Numerator for basic earnings per unit -- net income from
continuing operations before extraordinary items and
cumulative effect of a change in accounting principle
available for units....................................... $440,812 $622,605
Interest expense on convertible promissory note............. -- 746
-------- --------
Numerator for basic and diluted earnings per unit -- net
income from continuing operations before extraordinary
items and cumulative effect of a change in accounting
principle available for units............................. $440,812 $623,351
======== ========
</TABLE>
F-8
<PAGE> 210
EOP OPERATING LIMITED PARTNERSHIP
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
----------- -----------
<S> <C> <C>
DENOMINATOR
Denominator for basic earnings per unit -- weighted average
units..................................................... 288,326,547 351,114,475
====== ======
Denominator for diluted earnings per unit -- weighted
average units............................................. 291,157,204 354,965,413
====== ======
BASIC
Net income from continuing operations before extraordinary
items, cumulative effect of a change in accounting
principle and net gain on sales of real estate available
for units................................................. $ 1.32 $ 1.23
Net gain on sales of real estate............................ 0.21 0.54
------ ------
Net income from continuing operations before extraordinary
items and cumulative effect of a change in accounting
principle available for units............................. $ 1.53 $ 1.77
====== ======
DILUTED
Net income from continuing operations before extraordinary
items, cumulative effect of a change in accounting
principle and net gain on sales of real estate available
for units................................................. $ 1.31 $ 1.22
Net gain on sales of real estate............................ 0.20 0.54
------ ------
Net income from continuing operations before extraordinary
items and cumulative effect of a change in accounting
principle available for units............................. $ 1.51 $ 1.76
====== ======
</TABLE>
F-9
<PAGE> 211
EQUITY OFFICE PROPERTIES TRUST
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1999
(UNAUDITED)
The accompanying Unaudited Pro Forma Condensed Combined Balance Sheet as of
December 31, 1999 reflects the following transactions as if they had occurred on
December 31, 1999:
- the proposed merger of Equity Office Properties Trust and Cornerstone
Properties Inc.; and
- the issuance of $500 million of unsecured notes on March 21, 2000, due
March 2006, coupon rate of 8.4% per annum and effective rate of 8.5% per
annum.
The accompanying Unaudited Pro Forma Condensed Combined Statement of
Operations for the year ended December 31, 1999 reflects the following
transactions as if they had occurred on January 1, 1999:
- the proposed merger of Equity Office Properties Trust and Cornerstone
Properties Inc.; and
- the issuance of $500 million of unsecured notes on March 21, 2000, due
March 2006, coupon rate of 8.4% per annum and effective rate of 8.5% per
annum.
In the opinion of management, all significant adjustments necessary to
reflect the effects of the merger have been made.
F-10
<PAGE> 212
EQUITY OFFICE PROPERTIES TRUST
PRO FORMA CONDENSED COMBINED BALANCE SHEET
DECEMBER 31, 1999 (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
EQUITY OFFICE CORNERSTONE MERGER AND EQUITY OFFICE
PROPERTIES TRUST PROPERTIES INC. OTHER PROPERTIES TRUST
HISTORICAL HISTORICAL ADJUSTMENTS (A) PRO FORMA
---------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
ASSETS:
Investment in real estate, net..... $12,572,153 $3,565,637 $ 710,997(B) $16,848,787
Cash and cash equivalents.......... 2,338 19,679 --(C) 22,017
Rent and other receivables......... 193,194 91,968 (77,243)(D) 207,919
Escrow deposits and restricted
cash............................. 19,754 222,043 -- 241,797
Investment in unconsolidated joint
ventures......................... 865,863 31,725 8,275(B) 905,863
Prepaid expenses and other
assets........................... 392,756 239,176 (199,275)(E) 432,657
----------- ---------- ---------- -----------
TOTAL ASSETS....................... $14,046,058 $4,170,228 $ 442,754 $18,659,040
=========== ========== ========== ===========
LIABILITIES AND SHAREHOLDERS'
EQUITY:
Mortgage debt...................... $ 1,743,871 $1,448,331 $ (40,252)(F) $ 3,151,950
Unsecured notes.................... 3,655,047 -- 499,320(G) 4,154,367
Lines of credit.................... 453,000 329,000 691,027(H) 1,473,027
Dividend/distribution payable...... 5,446 -- -- 5,446
Other liabilities.................. 479,167 113,305 -- 592,472
----------- ---------- ---------- -----------
TOTAL LIABILITIES.................. 6,336,531 1,890,636 1,150,095 9,377,262
----------- ---------- ---------- -----------
Commitments and contingencies
Minority Interests:
EOP Partnership.................. 844,427 284,566 46,480(I) 1,175,473
Partially owned properties....... 39,027 22,532 -- 61,559
----------- ---------- ---------- -----------
TOTAL MINORITY INTERESTS........... 883,454 307,098 46,480 1,237,032
----------- ---------- ---------- -----------
Shareholders' Equity:
Preferred shares................. 615,000 50,000 (50,000)(J) 615,000
Common shares.................... 2,516 -- 494(K) 3,010
Additional paid in capital....... 6,208,557 1,922,494 (704,315)(L) 7,426,736
----------- ---------- ---------- -----------
TOTAL SHAREHOLDERS' EQUITY......... 6,826,073 1,972,494 (753,821) 8,044,746
----------- ---------- ---------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY........................... $14,046,058 $4,170,228 $ 442,754 $18,659,040
=========== ========== ========== ===========
</TABLE>
F-11
<PAGE> 213
EQUITY OFFICE PROPERTIES TRUST
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999 (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
EQUITY OFFICE CORNERSTONE MERGER EQUITY OFFICE
PROPERTIES TRUST PROPERTIES INC. AND OTHER PROPERTIES TRUST
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------------- --------------- ----------- ----------------
(A)
<S> <C> <C> <C> <C>
REVENUES:
Rental.................................. $ 1,493,196 $455,204 $ 6,181(M) $ 1,954,581
Tenant reimbursements................... 281,358 121,385 -- 402,743
Parking................................. 112,204 27,343 -- 139,547
Other................................... 32,298 5,730 -- 38,028
Fee income.............................. 8,939 2,677 -- 11,616
Interest/dividends...................... 14,248 4,211 -- 18,459
------------ -------- -------- ------------
Total revenues........................ 1,942,243 616,550 6,181 2,564,974
------------ -------- -------- ------------
EXPENSES:
Interest:
Expense incurred...................... 413,995 135,755 90,109(N) 639,859
Amortization of deferred financing
costs............................... 4,693 2,004 3,669(O) 10,366
Depreciation............................ 339,751 87,971 15,109(P) 442,831
Amortization............................ 14,545 8,755 (8,755)(Q) 14,545
Real estate taxes....................... 243,778 71,554 -- 315,332
Insurance............................... 9,589 3,548 -- 13,137
Repairs and maintenance................. 209,630 74,728 -- 284,358
Property operating...................... 199,879 52,947 -- 252,826
Ground rent............................. 6,887 1,407 -- 8,294
General and administrative.............. 80,927 27,006 --(R) 107,933
------------ -------- -------- ------------
Total expenses.......................... 1,523,674 465,675 100,132 2,089,481
------------ -------- -------- ------------
Income before allocation to minority
interests, income from investment in
unconsolidated joint ventures and net
gain on sales of real estate............ 418,569 150,875 (93,951) 475,493
Minority Interests:
EOP Partnership......................... (48,172) (34,982) 2,006(S) (81,148)
Partially owned properties.............. (1,981) (5,755) -- (7,736)
Income from investment in unconsolidated
joint ventures.......................... 13,824 898 (176)(T) 14,546
Net gain on sales of real estate.......... 59,661 131,034 -- 190,695
------------ -------- -------- ------------
Net income from continuing operations..... 441,901 242,070 (92,121) 591,850
Put option settlement..................... (5,658) -- -- (5,658)
Preferred distributions................... (43,603) (3,500) 3,500(U) (43,603)
------------ -------- -------- ------------
Net income from continuing operations
before extraordinary items and
cumulative effect of a change in
accounting principle available for
common shares........................... $ 392,640 $238,570 $(88,621) $ 542,589
============ ======== ======== ============
Net income from continuing operations
before extraordinary items and
cumulative effect of a change in
accounting principle per weighted
average common share
outstanding -- basic.................... $ 1.53(V) $ 1.78(V)
============ ============
Weighted average common shares
outstanding -- basic.................... 256,045,895 305,424,355
============ ============
Net income from continuing operations
before extraordinary items and
cumulative effect of a change in
accounting principle per weighted
average common share
outstanding -- diluted.................. $ 1.51(V) $ 1.76(V)
============ ============
Weighted average common shares
outstanding -- diluted.................. 291,157,204 354,965,413
============ ============
</TABLE>
F-12
<PAGE> 214
EQUITY OFFICE PROPERTIES TRUST
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1999 (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(A) Represents adjustments to record the merger between Equity Office and
Cornerstone based upon the assumed purchase price of $4.6 billion assuming a
market value of $24.6818 per share of Equity Office's common shares and
adjustments to record the issuance of $500 million in unsecured notes which
occurred on March 21, 2000. The calculation of the merger acquisition cost
is as follows:
<TABLE>
<S> <C> <C>
Issuance of 49.4 million Equity Office common shares and 13.4 million
EOP Partnership units based on a .7009 exchange rate in exchange for
70.5 million shares of Cornerstone common stock and 19.1 million
Cornerstone Partnership units (see Note I)............................. $1,549,719
Cash portion of merger consideration:
Cornerstone common stock (58,551,525 @ $18.00)......... 1,053,927
Cornerstone preferred stock (3,030,303 @ $18.00)....... 54,545 1,108,472
---------
Equity Office's current ownership of 250,700 shares of Cornerstone
common stock......................................................... 3,480
Assumption of Cornerstone's total liabilities.......................... 1,890,636
Adjustment to Cornerstone's mortgage debt to reflect market value (see
Note F).............................................................. (40,252)
Cornerstone's minority interest allocation for partially owned
properties........................................................... 22,532
Merger costs (see calculation below)................................... 78,000
----------
Total merger acquisition cost................................ $4,612,587
==========
</TABLE>
The following is a calculation of estimated merger costs:
<TABLE>
<S> <C>
Employee termination costs.................................. $ 43,800
Investment advisory fees.................................... 15,000
Transfer taxes.............................................. 10,000
Legal, accounting and other fees............................ 7,700
Loan assumption fees........................................ 1,500
----------
Total merger costs................................ $ 78,000
==========
</TABLE>
(B) Represents the estimated increase in Cornerstone's investment in real
estate based upon the merger acquisition cost to reflect the allocation to
other tangible assets of Cornerstone being acquired:
<TABLE>
<S> <C>
Meger acquisition cost (see Note A)......................... $4,612,587
----------
Less basis of Cornerstone's net assets acquired:
Investment in real estate, net......................... 3,565,637
Cash and cash equivalents.............................. 19,679
Rent and other receivables (excluding $77.2 million of
deferred rents receivable)............................ 14,725
Escrow deposits and restricted cash.................... 222,043
Investment in unconsolidated joint ventures............ 31,725
Prepaid expenses and other assets (excluding $199.7
million of deferred leasing, financing and other costs
(see Note E))......................................... 39,506
----------
Subtotal.......................................... 3,893,315
----------
Adjustment to record fair value of Cornerstone's investment
in real estate and investment in unconsolidated joint
ventures, net............................................. 719,272
Less adjustment allocated to investment in unconsolidated
joint ventures............................................ (8,275)
----------
Adjustment allocated to investment in real estate........... $ 710,997
==========
</TABLE>
F-13
<PAGE> 215
EQUITY OFFICE PROPERTIES TRUST
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(C) There was no change in cash and cash equivalents as a result of the
following transactions:
<TABLE>
<S> <C>
Anticipated borrowings on additional credit facilities to
finance the cash portion of the merger (see Note H)....... $ 691,027
Gross proceeds from the $500 million unsecured notes
offering (see Note G)..................................... 500,000
Less cash portion of merger consideration (see Note A)...... (1,108,472)
Less merger costs (see Note A).............................. (78,000)
Less financing costs related to the $500 million unsecured
note offering (see Note E)................................ (3,875)
Less discount on the $500 million unsecured notes offering
(see Note G).............................................. (680)
-----------
Net adjustment to cash and cash equivalents....... $ --
===========
</TABLE>
(D) Represents the elimination of Cornerstone's deferred rents receivable of
$77.2 million which arose from the historical straight-lining of rental
revenue.
(E) Represents an adjustment for the following:
<TABLE>
<S> <C>
Cornerstone's deferred leasing, financing and other costs
which were not assigned any value in the allocation of the
merger acquisition cost................................... $(199,670)
Transfer of Equity Office's current ownership of 250,700
shares of Cornerstone common stock to merger acquisition
cost (see Note A)......................................... (3,480)
Additional deferred financing costs associated with the $500
million unsecured notes offering.......................... 3,875
---------
Total............................................. $(199,275)
=========
</TABLE>
(F) To adjust Cornerstone's mortage debt to market value.
(G) To reflect the $500 million unsecured notes offering net of a $.7 million
discount.
(H) To reflect borrowings on additional credit facilities to finance the cash
portion of the merger as follows:
<TABLE>
<S> <C>
Cash portion of merger consideration (See Note A)........... $1,108,472
Merger costs (See Note A)................................... 78,000
Less net proceeds from the $500 million unsecured notes
offering (see Note C)..................................... (495,445)
----------
Borrowings on additional credit facilities........ $ 691,027
==========
</TABLE>
F-14
<PAGE> 216
EQUITY OFFICE PROPERTIES TRUST
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(I) To adjust minority interests in the EOP Partnership to reflect the merger
as follows:
<TABLE>
<S> <C>
Equity Office historical common shareholders' equity and
minority interests in EOP Partnership..................... $7,055,500
Cornerstone historical common shareholders' equity and
minority interests in Cornerstone Partnership............. 2,207,060
Pro forma adjustments to common shareholders' equity........ (657,341)
----------
Total............................................. 8,605,219
Minority interests ownership percentage of EOP Partnership
after the merger (see below).............................. 13.66%
----------
Minority interest ownership of EOP Partnership after the
merger.................................................... 1,175,473
Less historical minority interest ownership of EOP
Partnership prior to the merger........................... (844,427)
Less historical minority interest ownership of Cornerstone
Partnership prior to the merger........................... (284,566)
----------
Adjustment to minority interest ownership of EOP
Partnership to reflect the merger............... $ 46,480
==========
</TABLE>
The 13.66% minority interests ownership of EOP Partnership is calculated as
follows:
<TABLE>
<CAPTION>
SHARES UNITS SHARES AND UNITS
----------- ---------- ----------------
<S> <C> <C> <C>
Shares of Cornerstone common stock and
Cornerstone Partnership units outstanding
at December 31, 1999...................... 129,252,303 19,131,785 148,384,088
Less shares of Cornerstone common stock
redeemed for cash (see Note A)............ (58,551,525) -- (58,551,525)
Less shares of Cornerstone common stock
currently held by Equity Office (see Note
A)........................................ (250,700) -- (250,700)
----------- ---------- -----------
Shares of Cornerstone common stock and
Cornerstone Partnership units to be
converted in the merger into Equity Office
common shares and EOP Partnership units at
an exchange rate of .7009................. 70,450,078 19,131,785 89,581,863
=========== ========== ===========
Equity Office common shares and EOP
Partnership units to be issued in the
merger.................................... 49,378,460 13,409,468 62,787,928
Equity Office common shares and EOP
Partnership units outstanding at December
31, 1999.................................. 251,582,434 34,203,912 285,786,346
----------- ---------- -----------
Equity Office common shares and EOP
Partnership units outstanding after the
merger.................................... 300,960,894 47,613,380 348,574,274
=========== ========== ===========
Minority interests ownership percentage of
EOP Partnership........................... 13.66%
===========
Equity Office ownership percentage of EOP
Partnership............................... 86.34%
===========
</TABLE>
(J) To record the redemption of Cornerstone's preferred stock into cash (see
Note A).
F-15
<PAGE> 217
EQUITY OFFICE PROPERTIES TRUST
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(K) To record the par value of 49.4 million Equity Office common shares issued
to Cornerstone common stockholders.
(L) To reflect the net decrease in additional paid in capital associated with
the merger as follows:
<TABLE>
<S> <C>
Issuance of 49.4 million Equity Office common shares and
13.4 million EOP Partnership units at the .7009 exchange
rate, in exchange for 70.5 million shares of Cornerstone
common stock and 19.1 million Cornerstone Partnership
units (see Note I)........................................ $ 1,549,719
Less par value of Equity Office common shares issued to
Cornerstone common stockholders (see Note K).............. (494)
Adjustment to minority interests in EOP Partnership (see
Note I)................................................... (46,480)
Less historical minority interests in the ownership of
Cornerstone Partnership................................... (284,566)
Less Cornerstone's historical additional paid in capital.... (1,922,494)
-----------
Net decrease in paid in capital................... $ (704,315)
===========
</TABLE>
(M) To reflect the adjustment for the straight-line effect of scheduled rent
increases.
(N) To reflect the additional interest expense incurred from the $500 million
unsecured notes offering and borrowings from additional credit facilities to
finance the cash portion of the merger.
<TABLE>
<S> <C>
Additional borrowings from $500 million unsecured notes
offering (see Note G) and credit facilities (see Note
H)........................................................ $1,190,347
Weighted average interest rate.............................. 7.57%
----------
Additional interest expense................................. $ 90,109
==========
</TABLE>
<TABLE>
<S> <C> <C>
(O) To reflect the amortization of $3.9 million of financing
costs incurred with the $500 million unsecured notes
offering over the six-year term........................... $ 646
To reflect additional amortization of the adjustment to
Cornerstone's mortgage debt to market value............... 3,023
------
$3,669
======
</TABLE>
(P) To reflect additional depreciation expense related to the adjustment to the
investment in real estate
<TABLE>
<S> <C>
Adjustment to investment in real estate (see Note B)........ $710,997
Portion allocated to building and improvements.............. 85%
--------
Adjustment to the depreciable basis of Cornerstone's
investment in real estate, net............................ $604,347
========
Additional depreciation expense based on an estimated useful
life of 40 years.......................................... $ 15,109
========
</TABLE>
(Q) To reverse Cornerstone's historical amortization of deferred lease
commissions due to the write-off of deferred lease commissions as a result
of the merger (see Note E).
(R) Management has estimated that there will be a reduction of general and
administrative expenses as a result of the merger of approximately $18.0
million on a pro forma basis for 1999. The general and administrative
expense savings have not been included in the pro forma condensed combined
statement of operations. There can be no assurance that Equity Office will
be successful in realizing such anticipated cost savings.
(S) To adjust the minority interests income allocation to EOP Partnership after
the merger to 13.01%.
F-16
<PAGE> 218
EQUITY OFFICE PROPERTIES TRUST
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(T) To reflect the additional depreciation expense on the adjustment to the
depreciable basis of Cornerstone's investment in unconsolidated joint
ventures.
<TABLE>
<S> <C>
Adjustment to the basis of the investment in unconsolidated
joint ventures............................................ $8,275
Portion allocated to building and improvements.............. 85%
------
Adjustment to the depreciable basis of Cornerstone's
investment in unconsolidated joint ventures............... $7,034
======
Decrease in income from investment in unconsolidated joint
ventures due to additional depreciation expense pertaining
to the adjustment to the basis of the investment in joint
ventures based on an estimated useful life of 40 years.... $ 176
======
</TABLE>
(U) To adjust Cornerstone's preferred distributions assuming the shares of
Cornerstone preferred stock were redeemed for cash on January 1, 1999.
(V) The following table sets forth the computation of basic and diluted earnings
per common share:
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
----------- -----------
NUMERATOR
------------------------------------------------------------
<S> <C> <C>
Net income from continuing operations before extraordinary
items, cumulative effect of a change in accounting
principle and net gain on sales of real estate available
for common shares......................................... $332,979 $351,894
Net gain on sales of real estate............................ 59,661 190,695
-------- --------
Numerator for basic earnings per share -- net income from
continuing operations before extraordinary items and
cumulative effect of a change in accounting principle
available for common shares............................... 392,640 542,589
Minority interest in EOP Partnership........................ 48,172 81,148
Interest expense on convertible promissory note............. -- 746
-------- --------
Numerator for diluted earnings per share -- net income from
continuing operations before extraordinary items and
cumulative effect of a change in accounting principle
available for common shares............................... $440,812 $624,483
======== ========
<CAPTION>
DENOMINATOR
-----------
<S> <C> <C>
Denominator for basic earnings per share -- weighted average
common shares............................................. 256,045,895 305,424,355
=========== ===========
Denominator for diluted earnings per share -- weighted
average common shares..................................... 291,157,204 354,965,413
=========== ===========
<CAPTION>
BASIC
-----
<S> <C> <C>
Net income from continuing operations before extraordinary
items, cumulative effect of a change in accounting
principle and net gain on sales of real estate available
for common shares......................................... $ 1.30 $ 1.15
Net gain on sales of real estate............................ 0.23 0.63
------ ------
Net income from continuing operations before extraordinary
items and cumulative effect of a change in accounting
principle available for common shares..................... $ 1.53 $ 1.78
====== ======
</TABLE>
F-17
<PAGE> 219
EQUITY OFFICE PROPERTIES TRUST
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
----------- -----------
DILUTED
-------
<S> <C> <C>
Net income from continuing operations before extraordinary
items, cumulative effect of a change in accounting
principle and net gain on sales of real estate available
for common shares......................................... $ 1.31 $ 1.22
Net gain on sales of real estate............................ 0.20 0.54
------ ------
Net income from continuing operations before extraordinary
items and cumulative effect of a change in accounting
principle available for common shares..................... $ 1.51 $ 1.76
====== ======
</TABLE>
F-18
<PAGE> 220
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of Cornerstone
Properties Limited Partnership
In our opinion, the accompanying consolidated balance sheet and the statements
of income, comprehensive income, partners' capital and cash flows present
fairly, in all material respects, the financial position of Cornerstone
Properties Limited Partnership and subsidiaries ("Cornerstone Partnership") at
December 31, 1999, and the results of their operations and their cash flows for
the year then ended, in conformity with accounting principles generally accepted
in the United States. In addition, in our opinion, the financial statement
schedule listed in the accompanying index presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Partnership's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audit. We conducted our
audit of these statements in accordance with auditing standards generally
accepted in the United States, which 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
As discussed in Note 1 of the consolidated financial statements, on February 11,
2000, Cornerstone Partnership announced a definitive plan of merger with Equity
Office Properties Operating Limited Partnership.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
New York, New York
April 12, 2000
F-19
<PAGE> 221
CORNERSTONE PROPERTIES LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
---------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Developments in progress:
Land...................................................... $ 46,132 $ 10,437
Development costs......................................... 17,000 2,519
Rental Property at cost:
Land...................................................... 646,852 702,840
Buildings, leasehold interests and improvements........... 3,084,466 3,403,152
Deferred lease costs...................................... 157,015 143,188
---------- ----------
3,951,465 4,262,136
Less: Accumulated depreciation and amortization........... 290,998 286,664
---------- ----------
Total Development and Rental Property.................. 3,660,467 3,975,472
Assets held for sale........................................ 62,185 77,568
Cash and cash equivalents................................... 19,679 61,612
Restricted cash............................................. 222,043 9,114
Investment in unconsolidated joint ventures................. 31,725 31,500
Other deferred costs, net of accumulated amortization of
$7,092 and $999........................................... 42,655 47,807
Deferred tenant receivables................................. 77,243 53,489
Tenant and other receivables, net........................... 14,725 10,257
Other assets................................................ 39,506 14,839
---------- ----------
TOTAL ASSETS................................................ $4,170,228 $4,281,658
========== ==========
LIABILITIES
Long-term debt, inclusive of $16,149 and $25,031 of
unamortized premium....................................... $1,435,405 $1,519,548
Credit facility............................................. 329,000 465,000
Accrued interest............................................ 10,896 10,873
Accrued real estate taxes................................... 16,457 16,395
Accounts payable and accrued expenses....................... 45,006 51,454
Distributions payable....................................... -- 38,163
Unearned revenue and other liabilities...................... 40,881 23,890
---------- ----------
TOTAL LIABILITIES........................................... 1,877,645 2,125,323
---------- ----------
MINORITY INTEREST IN JOINT VENTURES......................... 22,532 23,420
---------- ----------
Commitments and contingencies
PARTNERS' CAPITAL
Redeemable preferred units; 344,828 units authorized; 0
issued and outstanding.................................... -- --
7% Cumulative convertible preferred units, $16.50 stated
value; 65,000,000 units authorized; 3,030,303 issued and
outstanding............................................... 50,000 50,000
General Partners' Capital................................... 22,125 20,846
Limited Partners Capital.................................... 2,190,514 2,063,769
Accumulated other comprehensive income...................... 9,424 --
Deferred compensation....................................... (2,012) (1,700)
---------- ----------
TOTAL PARTNERS' CAPITAL..................................... 2,270,051 2,132,915
---------- ----------
TOTAL LIABILITIES AND PARTNERS' CAPITAL..................... $4,170,228 $4,281,658
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-20
<PAGE> 222
CORNERSTONE PROPERTIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
REVENUES
Office and parking rentals................................ $ 607,409 $ 321,097
Earnings in joint ventures................................ 898 11,615
Interest and other income................................. 8,009 6,625
------------ ------------
TOTAL REVENUES......................................... 616,316 339,337
------------ ------------
EXPENSES
Building operating expenses............................... 132,630 71,404
Real estate taxes......................................... 71,554 44,184
Interest expense.......................................... 137,013 63,426
Depreciation and amortization............................. 96,726 57,031
General and administrative................................ 27,006 12,393
------------ ------------
TOTAL EXPENSES......................................... 464,929 248,438
------------ ------------
151,387 90,899
------------ ------------
OTHER INCOME (EXPENSES)
Gain (loss) on sale of real estate assets................. 131,034 (173)
------------ ------------
TOTAL OTHER INCOME (EXPENSES).......................... 131,034 (173)
------------ ------------
MINORITY INTEREST IN JOINT VENTURES......................... (5,755) (4,399)
------------ ------------
INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE AND EXTRAORDINARY LOSS.......................... 276,666 86,327
Cumulative effect of a change in accounting principle....... (630) --
Extraordinary loss.......................................... (10,787) (4,303)
------------ ------------
NET INCOME.................................................. $ 265,249 $ 82,024
============ ============
INCOME APPLICABLE TO PREFERRED UNITS........................ $ (3,500) $ (3,500)
------------ ------------
INCOME AVAILABLE FOR UNITS.................................. $ 261,749 $ 78,524
============ ============
INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE AND EXTRAORDINARY LOSS PER UNIT................. $ 1.84 $ 0.80
============ ============
EXTRAORDINARY LOSS PER UNIT................................. $ (0.08) $ (0.04)
============ ============
BASIC INCOME PER UNIT....................................... $ 1.76 $ 0.76
============ ============
BASIC WEIGHTED AVERAGE UNITS OUTSTANDING.................... 148,654,779 103,881,682
============ ============
DILUTED INCOME PER UNIT..................................... $ 1.75 $ 0.75
============ ============
DILUTED WEIGHTED AVERAGE UNITS OUTSTANDING.................. 151,830,347 104,252,294
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-21
<PAGE> 223
CORNERSTONE PROPERTIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
-------- -----------
(UNAUDITED)
<S> <C> <C>
Net income.................................................. $265,249 $82,024
======== =======
OTHER COMPREHENSIVE INCOME:
Unrealized gain on investments............................ 3,911 --
Unrealized gain on interest rate swaps during the
period................................................. 5,513 --
-------- -------
OTHER COMPREHENSIVE INCOME................................ 9,424 --
-------- -------
COMPREHENSIVE INCOME........................................ $274,673 $82,024
======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-22
<PAGE> 224
CORNERSTONE PROPERTIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
GENERAL LIMITED 7% CUMULATIVE OTHER
PARTNERS PARTNERS CONVERTIBLE COMPREHENSIVE DEFERRED
CAPITAL CAPITAL PREFERRED UNITS INCOME COMPENSATION TOTAL
-------- ---------- --------------- ------------- ------------ ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1998......... -- $ -- $ -- $ -- $ -- $ --
Contributed capital -- REIT.... 10,706 1,059,933 50,000 -- (2,188) 1,118,451
Contributed
capital -- others............ 6,383 631,915 -- -- -- 638,298
Proceeds from issuance of
units, net of $14,463 in
issuance costs............... 4,479 443,402 -- -- -- 447,881
Distribution reinvestment, net
of $410 in issuance costs.... 63 6,231 -- -- -- 6,294
Restricted share awards........ 6 571 -- -- (577) --
Restricted share awards
vesting...................... -- -- -- -- 1,065 1,065
Net income..................... 820 81,204 -- -- -- 82,024
Preferred unit distributions... (35) (3,465) -- -- -- (3,500)
Distributions -- REIT.......... (1,509) (149,419) -- -- -- (150,928)
Distributions -- others........ (67) (6,603) -- -- -- (6,670)
------- ---------- ------- ------ ------- ----------
BALANCE, DECEMBER 31, 1998....... $20,846 $2,063,769 $50,000 $ -- $(1,700) $2,132,915
Unit issuance costs............ (4) (374) -- -- -- (378)
Restricted share awards........ 18 1,742 -- -- (1,760) --
Restricted share awards
vesting...................... -- -- -- -- 1,448 1,448
Net income..................... 2,652 262,597 -- -- -- 265,249
Unrealized gain on
investments.................. -- -- -- 3,911 -- 3,911
Unrealized gain on swaps....... -- -- -- 5,513 -- 5,513
Distribution reinvestment...... 23 2,295 -- -- -- 2,318
Share awards exercised......... 18 1,809 -- -- -- 1,827
Partner redemptions............ (12) (1,157) -- -- -- (1,169)
Contributed capital -- REIT.... 7 695 -- -- -- 702
Repurchase of units for
treasury..................... (50) (4,961) -- -- -- (5,011)
Preferred unit distributions... (35) (3,465) -- -- -- (3,500)
Distributions -- REIT.......... (1,160) (114,843) -- -- -- (116,003)
Distributions -- Others........ (178) (17,593) -- -- -- (17,771)
------- ---------- ------- ------ ------- ----------
BALANCE, DECEMBER 31, 1999....... $22,125 $2,190,514 $50,000 $9,424 $(2,012) $2,270,051
======= ========== ======= ====== ======= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-23
<PAGE> 225
CORNERSTONE PROPERTIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
-------- -----------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $265,249 $ 82,024
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 90,790 56,733
Deferred compensation amortization...................... 1,312 1,016
Net change in real estate joint ventures................ (225) 5,670
Cumulative effect of a change in accounting principle... 630 --
Net gain on interest rate swap.......................... -- --
Extraordinary loss...................................... 10,787 4,303
Unbilled rental revenue................................. (25,858) (13,712)
Increase in accrued interest............................ 23 6,739
Minority interest share of income....................... 5,755 4,399
(Gain) loss on sale of real estate assets............... (131,034) 173
Increase in tenant and other receivables and other
assets................................................. (15,745) (6,902)
Increase in accounts payable, accrued expenses and other
liabilities............................................ 21,431 33,515
-------- ---------
Total adjustments..................................... (42,134) 91,934
-------- ---------
Net cash provided by operating activities............. 223,115 173,958
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to investment property.......................... (79,359) (797,181)
Repayment of notes receivable............................. 134 1,518
Other investments......................................... (5,000) (41,893)
Investments in real estate joint ventures................. -- (31,391)
Proceeds from sale of real estate assets net of amounts in
escrow.................................................. 136,713 19,117
-------- ---------
Net cash provided by (used in) investing activities... 52,488 (849,830)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Units issued................................ -- 462,344
Contributed capital -- REIT............................... 647 60,060
Repurchase of units for treasury shares................... (4,889) --
Borrowings under mortgage loans........................... 455,000 92,377
Borrowings under credit facility.......................... 130,000 567,500
Repayments under credit facility.......................... (266,000) (289,500)
Repayments under mortgage loans........................... (432,958) (3,426)
Proceeds from distribution reinvestment plan.............. 2,318 6,704
Debt prepayment costs..................................... (14,898) (1,762)
Increase in restricted cash............................... (2,542) (7,211)
Unit issuance costs....................................... (2,758) (20,813)
Option exercise........................................... 1,827 --
Unitholder redemptions.................................... (1,169) --
Distributions to minority interest in joint ventures...... (6,643) (5,855)
Distributions to preferred unitholders.................... (3,500) (3,500)
Distributions to unitholders.............................. (171,971) (119,434)
-------- ---------
Net cash (used in) provided by financing activities... (317,536) 737,484
-------- ---------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS............ (41,933) 61,612
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ 61,612 --
-------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 19,679 $ 61,612
======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-24
<PAGE> 226
CORNERSTONE PROPERTIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
1. NATURE OF COMPANY'S BUSINESS AND SIGNIFICANT
ACCOUNTING POLICIES
NATURE OF THE COMPANY'S BUSINESS
As used herein, "Company" refers to Cornerstone Properties Limited
Partnership, a Delaware limited partnership, individually or together with its
subsidiaries. The Company is a subsidiary of Cornerstone Properties Inc. (the
"Trust"), a self-administered equity real estate investment trust ("REIT"). The
Company owns, through subsidiaries, interests in 83 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. Substantially all of the Trust's operations are
conducted through the Company. The Trust is the managing general partner of the
Company.
On February 11, 2000, the Trust 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 the Trust with and
into EOP and a merger of the Company with and into EOP Operating Limited
Partnership. In the mergers, holders of common stock of the Trust and holders of
Units in the Company 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 Company 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
the Trust's 7% Cumulative Convertible Preferred Stock, liquidation preference
$16.50 per share, 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 the Trust's 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 common stock
exchanged in the merger. The merger is also expected in most cases to be
tax-free to 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 the Trust and the approval of the partnership
merger, to the extent necessary, by the partners of EOP Operating Limited
Partnership and the Company.
PRINCIPLES OF CONSOLIDATION
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: NWC Limited Partnership
("NWC"); Third and University Limited Partnership ("Third Partnership"); Two
Twenty Two Berkeley Venture ("222 Berkeley"); Five Hundred Boylston West Venture
("500
F-25
<PAGE> 227
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.
INVESTMENT PROPERTY
The costs of the buildings, garages, leasehold interests and improvements
are being depreciated using the straight-line method over their estimated useful
lives, ranging from 20 years for electrical and mechanical installations to 40
years for structural components. Tenant improvements are being amortized over
the terms of the related leases.
Investment properties are carried at cost less accumulated depreciation.
Whenever events or changes in circumstances indicate that the carrying value of
an asset may not be recoverable (such as a significant adverse action by a
regulator, a significant physical change in the property or significant changes
in market conditions), the Company's policy is to assess any impairment in value
by making a comparison of the current and projected cash flows of each property
over its remaining useful life (undiscounted and without interest charges) to
the carrying amount of each property. Such carrying amount would be adjusted, if
necessary, to estimated fair value to reflect the impairment in value of the
property. No significant adjustments have been made in the accompanying
financial statements.
Costs directly related to the acquisition and development of rental
properties are capitalized. Capitalized development costs include interest,
property taxes, insurance and other project costs incurred during the period of
construction. Ordinary repairs and maintenance are expensed as incurred; major
replacements and betterments, which improve or extend the life of the asset, are
capitalized and depreciated over their estimated useful lives.
ASSETS HELD FOR SALE
Included in Assets Held for Sale at December 31, 1999 are four properties,
which are expected to be sold by the Company within the next year. The
Properties are valued at approximately $62.2 million, the lower of the carrying
amount or the fair value less estimated costs to sell. For the year ended
December 31, 1999, the fair value less estimated costs to sell exceeds the
carrying amount for each of these properties and therefore, the Company has not
recorded a write down on these assets. The Company discontinues the recognition
of depreciation on the assets when the property is considered held for sale.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include
investments with original maturities of three months or less from the date of
purchase. At December 31, 1999 and 1998, the Company had on deposit with major
financial institutions substantially all of its cash and cash equivalents which
balances at times exceed federally insurable limits. The Company believes it
mitigates its risk by investing in or through major financial institutions.
Recoverability of investments is dependent upon the performance of the issuer.
DEFERRED LEASE COSTS
As an inducement to execute a lease, incentives are sometimes offered which
may include cash and/or other allowances. These incentives and other lease
costs, such as commissions, which are directly related to specific leases, are
deferred and amortized over the terms of the related leases.
OTHER DEFERRED COSTS
Costs incurred in the underwriting and issuance of long-term debt and
revolving lines of credit are being amortized over the term of the debt. As part
of the acquisition of the DIHC Portfolio (see Note 2),
F-26
<PAGE> 228
the Trust purchased several management contracts to which Stichting
Pensioenfonds Voor de Gezondheid Geestelijke en Maatschappelijke Belangen
("PGGM") was a party, which were subsequently contributed to the Company. The
price paid for these contracts is being amortized over four years. Included in
Other Deferred Costs is the purchase price for the intangible management and
development company assets that were acquired as part of the Wilson Acquisition
which are being amortized over a term of ten years (see Note 2).
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. ("ARC") and its $3.5 million equity investment
in Cypress Communications, Inc. ("Cypress"). ARC and Cypress are providers of
voice, video and data telecommunications services. As part of the terms of the
agreements with both ARC and Cypress, the Company received warrants for shares
of common stock by providing ARC and Cypress access to certain of the Company's
buildings. As such, the value of the warrants received from ARC and Cypress 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 ("SFAS 115"), the Company recorded an unrealized gain on its total
investment in ARC as of December 31, 1999 of $3.9 million. A corresponding
adjustment was posted to a separate component of partner's capital through Other
Comprehensive Income. As of December 31, 1999, Cypress was not publicly traded
and did not fall within the scope of SFAS 115.
MINORITY INTEREST
Minority interest in joint ventures represents the minority partner's or
venture'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.
Reliability of the debit balances is continually monitored by calculating pro
forma sales proceeds under the respective agreements.
REVENUE RECOGNITION
Rental revenue is recognized ratably as earned over the terms of the
leases. Deferred tenant receivables result from rental revenues, which have been
earned but will be received in future periods as a result of rent concessions
provided to tenants and scheduled future rent increases. Deferred tenant
receivables were approximately $77,243,000 and $53,489,000 at December 31, 1999
and 1998, respectively. Expense reimbursement and escalation income for the
years ended December 31, 1999 and 1998 was approximately $101,595,000 and
$74,590,000, respectively.
An allowance for doubtful accounts of approximately $3,803,000 and $253,000
has been recorded at December 31, 1999 and 1998, respectively, relating to
tenant and other receivables. Bad debt expense totaled approximately $3,694,000
and $232,000 during 1999 and 1998 respectively. The Company's policy is to
reserve against all trade receivables greater than 90 days past due.
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
F-27
<PAGE> 229
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 6.47% for 1999 and
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 December 31, 1999, the Company recorded an unrealized
gain of $5,513,000 in Other Assets with a corresponding adjustment posted to a
separate component of partners' capital 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.
FEDERAL INCOME TAXES
The Company is not liable for federal taxes as the partners recognize their
proportionate share of the Company's income or loss in their tax returns. The
Trust has elected to be taxed as a REIT under Sections 856-859 of the United
States Internal Revenue Code (the "Code"). Under these sections of the Code, the
Trust is permitted to deduct dividends paid to stockholders in computing its
taxable income. All taxable earnings and profits of the Trust since inception
have been distributed to the stockholders.
RECENTLY ISSUED ACCOUNTING STANDARDS
During the first quarter of 1999, the Company adopted Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives are recorded each period in current earnings or in
other comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and, if it is, the type of hedge transaction.
During the first quarter of 1999, the Company also adopted Statement of
Position 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"). SOP
98-5 requires that certain costs incurred in conjunction with start-up and
organizational activities be expensed. Pursuant to the requirements of SOP 98-5,
the Company has written off all unamortized organizational costs and has
recorded a cumulative effect of a change in accounting principle of $630,044.
In addition, during the first quarter of 1999, the Company adopted
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides guidance
on whether the costs of computer software developed or obtained for internal use
should be capitalized or expensed. The adoption of SOP 98-1 did not have a
significant effect on the Company's financial statements.
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, and
the recoverability of deferred tenant receivables and the qualification of the
Trust as a REIT. Actual results could differ from those estimates.
F-28
<PAGE> 230
2. PROPERTIES
The following table summarizes the Company's interest in real estate
investments at December 31, 1999:
<TABLE>
<CAPTION>
MARKET NAME TOTAL RENTABLE COMPANY 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 74%
One Memorial Drive........................ 352,764 100.0% 1985 100% D
---------- ---
MARKET TOTAL.............................. 2,884,826 96%
SAN MATEO COUNTY, CALIFORNIA
Bayhill (4 buildings)..................... 514,255 100.0% 1982-1987 96% 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 99% 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 98% C
---------- ---
MARKET TOTAL.............................. 1,647,986 98%
EAST BAY, CALIFORNIA
Corporate Centre (2 buildings)............ 329,348 100.0% 1985-1987 96% E
ADP Plaza (2 buildings)................... 300,308 100.0% 1987-1989 95% 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
2700 Ygnacio Valley Road.................. 103,214 100.0% 1984 99% E
Park Plaza................................ 87,040 100.0% 1986 100% E
1600 South Main........................... 83,277 100.0% 1983 98% E
---------- ---
MARKET TOTAL.............................. 1,601,849 98%
SEATTLE, WASHINGTON
Washington Mutual Tower (3 buildings)..... 1,154,560 50.0% 1988 98% G
110 Atrium Place.......................... 215,172 100.0% 1981 100% E
Island Corporate Center................... 100,009 100.0% 1987 97% E
---------- ---
MARKET TOTAL.............................. 1,469,741 98%
SANTA CLARA COUNTY, CALIFORNIA
Pruneyard Office (3 buildings)............ 354,629 100.0% 1971-1999 99% E,H
10 Almaden................................ 294,809 100.0% 1989 100% E
Pruneyard Shopping Center................. 252,210 100.0% 1970s 90% 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%
</TABLE>
F-29
<PAGE> 231
<TABLE>
<CAPTION>
MARKET NAME TOTAL RENTABLE COMPANY YEAR
PROPERTY SQUARE FEET INTEREST(A) CONSTRUCTED LEASED NOTES
----------- -------------- ----------- ----------- ------ -----
<S> <C> <C> <C> <C> <C>
SAN FRANCISCO, CALIFORNIA
120 Montgomery Street..................... 420,310 66.7% 1955 95% E
One Post.................................. 391,450 50.0% 1969 99% E
201 California Street..................... 240,230 100.0% 1980 96% 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%
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 100% C
TransPotomac Plaza 5...................... 96,392 100.0% 1983 100% C
11 Canal Center........................... 70,365 100.0% 1986 98% C
---------- ---
MARKET TOTAL.............................. 993,411 99%
SUBURBAN CHICAGO, ILLINOIS
Corporate 500 Centre (4 buildings)........ 679,039 100.0% 1986/1990 99% M
One Lincoln Centre........................ 297,040 100.0% 1986 89%
---------- ---
MARKET TOTAL.............................. 976,079 96%
SANTA MONICA/WEST LOS ANGELES, CALIFORNIA
West Wilshire (2 buildings)............... 235,787 100.0% 1960-1976 94% 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 79% E,O
429 Santa Monica.......................... 83,243 100.0% 1982 88% E
---------- ---
MARKET TOTAL.............................. 848,112 95%
ORANGE COUNTY, CALIFORNIA
Bixby Ranch............................... 277,289 100.0% 1987 98% E
18301 Von Karman.......................... 219,508 100.0% 1991 88% E
2677 North Main........................... 213,318 100.0% 1987 94% E
---------- ---
MARKET TOTAL.............................. 710,115 94%
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 99% P
---------- ---
MARKET TOTAL.............................. 378,965 99%
LOS ANGELES, CALIFORNIA
700 North Brand........................... 202,531 100.0% 1981 94% E
Warner Park Center........................ 57,366 100.0% 1986 100% E
---------- ---
MARKET TOTAL.............................. 259,897 95%
</TABLE>
F-30
<PAGE> 232
<TABLE>
<CAPTION>
MARKET NAME TOTAL RENTABLE COMPANY YEAR
PROPERTY SQUARE FEET INTEREST(A) CONSTRUCTED LEASED NOTES
----------- -------------- ----------- ----------- ------ -----
<S> <C> <C> <C> <C> <C>
CONEJO VALLEY (VENTURA), CALIFORNIA
Westlake Spectrum (2 buildings)........... 118,990 100.0% 1990 97% E
Agoura Hills.............................. 115,208 100.0% 1987 100% E
---------- ---
MARKET TOTAL.............................. 234,198 99%
OTHER REGIONS
U.S. West (Murray, Utah).................. 136,608 100.0% 1985 76% E
Exposition Centre (Sacramento,
California)............................ 72,971 100.0% 1984 70% E
---------- ---
MARKET TOTAL.............................. 209,579 74%
TOTAL PORTFOLIO........................... 17,981,409 97%
Minority Interest Adjustment(Q)........... (728,307)
----------
CORNERSTONE PORTFOLIO..................... 17,253,102 96%
===
Adjustment For Pruneyard Inn.............. (94,500)
----------
CORNERSTONE OFFICE PORTFOLIO.............. 17,158,602
==========
</TABLE>
- ---------------
(A) Unless noted below, cash flow and residual proceeds will be distributed to
the Company according to its percentage interest.
(B) On December 31, 1997, the Trust 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
Trust as an $89.6 million liability due to its above-market interest rate.
As of January 20, 1998 all of the interest stated above were contributed to
the Company in exchange for units.
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 Trust 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 Trust
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 Trust's initial public
offering in April 1997 and $54.0 million from its Revolving Credit
Facility. As of January 20, 1998 all of the interest stated above were
contributed to the Company in exchange for units. 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 Units valued at $17.50 per
unit and approximately $60.0 million of which was paid in the Trust's
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
F-31
<PAGE> 233
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 eleven assets comprising
approximately 1.2 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 the Trust's
Common Stock valued at $17.25 per share (recorded at $16.25 per share for
GAAP purposes), approximately 16.2 million 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.
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 year ended December 31, 1999, 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.
(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 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 year ended December 31, 1999, the Company's share of earnings
and cash distributions from the partnership that owns Norwest Center was
74.4%.
(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.
F-32
<PAGE> 234
During the year ended December 31, 1999, 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 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, 126,000-square foot Class A mixed-use
building. In addition to 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 Trust 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 inured to
the Trust. As of January 20, 1998 all of the interest stated above were
contributed to the Company in exchange for units.
(Q) Rentable square feet includes an adjustment for the interest of a joint
venture or minority partner. Calculations are based on the partners'
percentage interest in the cash flows of the Property.
On March 31, 1998, the Company sold the Dearborn Land (an undeveloped
parcel of land in Chicago that was acquired as part of the acquisition of the
DIHC Portfolio in October 1997) for gross proceeds of approximately $19,000,000,
resulting in a loss of approximately $0.3 million.
On April 29, 1998, the Trust sold the Frick Building, located in
Pittsburgh, Pennsylvania, for net proceeds of approximately $26,748. The net
proceeds were contributed to the Company.
On December 29, 1998, Avenue Associates Limited Partnership sold a
condominium unit in Market Square, located in Washington D.C., for gross
proceeds of $326,154, resulting in a gain of approximately $0.1 million.
During 1999, the Company sold thirteen properties for gross proceeds of
$496,530,000 resulting in a net gain of $131,033,847.
The future minimum lease payments to be received by the Company under
noncancellable operating leases as of December 31, 1999 are as follows (Dollar
amounts in thousands):
<TABLE>
<S> <C>
2000........................................................ $ 396,159
2001........................................................ 373,079
2002........................................................ 327,096
2003........................................................ 269,223
2004........................................................ 211,497
Thereafter.................................................. 737,345
----------
Total....................................................... $2,314,399
==========
</TABLE>
F-33
<PAGE> 235
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 $211.5 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 UNCONSOLIDATED JOINT VENTURES
Investment in unconsolidated 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 the Company.
5. LONG-TERM DEBT
The following table sets forth certain information regarding the
consolidated debt obligations of the Company as of December 31, 1999 and 1998,
including mortgage obligations relating to the Properties. All of this debt, 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>
INTEREST MATURITY
PROPERTY AMORTIZATION RATE(A) DATE 12/31/99 12/31/98
-------- ------------- ---------------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
FIXED RATE
- --------------------------------
TransPotomac Plaza(B)........... Interest Only 7.28% Oct-2000 $ 65,000 $ 65,000
West Wilshire Office and 25 year
Medical....................... 6.90% Jan-2002 16,926 17,301
Searise Office Tower............ 25 year 6.90% Jan-2002 11,607 11,864
Exposition Centre............... 25 year 6.90% May-2002 5,081 5,200
Wilshire Palisades.............. 22 year 6.70% Jul-2002 29,047 29,902
110 Atrium Place................ 30 year 6.90% Mar-2004 21,517 21,838
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 85,420 87,627
Island Corporate Center......... 30 year 6.90% Apr-2005 13,170 13,294
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 12,003 12,328
Janss Court..................... 30 year 6.90% Dec-2005 18,357 18,723
Bayhill 4, 5, 6 & 7............. 25 year 6.90% Dec-2006 57,764 59,071
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 88,424 89,765
188 Embarcadero(D).............. 25 year 7.26% Aug-2009 15,606 9,135
Centerside II(D)................ 25 year 7.26% Aug-2009 24,254 13,818
</TABLE>
F-34
<PAGE> 236
<TABLE>
<CAPTION>
INTEREST MATURITY
PROPERTY AMORTIZATION RATE(A) DATE 12/31/99 12/31/98
-------- ------------- ---------------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
FIXED RATE
- --------------------------------
700 North Brand(D).............. 25 year 7.26% Aug-2009 $ 26,938 $ 18,108
Golden Bear Center(D)........... 25 year 7.26% Aug-2009 20,477 15,753
Bixby Ranch(D).................. 25 year 7.26% Aug-2009 28,528 20,243
One Memorial Drive(D)........... 25 year 7.26% Aug-2009 63,119 --
125 Summer Street(E)............ 25 year 7.23% Nov-2009 78,844 50,000
Tower 56(E)..................... 25 year 7.23% Nov-2009 25,024 17,548
Peninsula Office Park 1, 3, 4,
5, 6, 8
& 9(E)........................ 25 year 7.23% Nov-2009 88,128 60,242
Embarcadero Place(E)............ 25 year 7.23% Nov-2009 38,149 26,061
201 California Street (E)....... 25 year 7.23% Nov-2009 44,504 33,071
---------- ----------
Total Fixed Rate Debt........... 7.31%(F) 7.1 yrs(F) $1,251,987 $1,069,992
---------- ----------
VARIABLE RATE
- --------------------------------
Seaport Centre(G)............... Interest only LIBOR plus 1.50% Dec-2000 58,000 58,000
The Pruneyard................... 24 year LIBOR plus 1.50% Jul-2000 60,947 49,384
120 Montgomery Street........... 24 year LIBOR plus 1.40% Nov-2002 48,160 46,930
Norris Tech Center.............. 25 year LIBOR plus 1.65% Dec-2003 16,066 16,392
Other loans..................... Various Various Various 245 597
---------- ----------
Total Variable Rate Debt........ 7.48%(F) 1.5 yrs(F) $ 183,418 $ 171,303
---------- ----------
REPAID DEBT
- --------------------------------
18301 Von Karman(H)............. -- -- -- -- 10,647
1600 South Main(H).............. -- -- -- -- 5,038
Biltmore Lakes(H)............... -- -- -- -- 11,468
Belmont Shores(H)............... -- -- -- -- 9,839
2677 North Main(H).............. -- -- -- -- 10,774
2700 Ygnacio Valley Road(H)..... -- -- -- -- 5,035
Westlake Spectrum(H)............ -- -- -- -- 3,993
Park Plaza(H)................... -- -- -- -- 4,940
Warner Park Center(H)........... -- -- -- -- 5,213
429 Santa Monica(H)............. -- -- -- -- 10,176
Crossroads(H)................... -- -- -- -- 7,339
Westlake Spectrum II(H)......... -- -- -- -- 5,284
Two ADP Plaza(I)................ -- -- -- -- 13,400
Two Corporate Centre(I)......... -- -- -- -- 18,600
One & Two Gateway(J)............ -- -- -- -- 8,679
Scottsdale Centre(J)............ -- -- -- -- 7,745
66 Bovet(J)..................... -- -- -- -- 3,939
One Norwest Center(K)........... -- -- -- -- 98,252
1300 South El Camino(J)......... -- -- -- -- 4,007
10 Almaden(L)................... -- -- -- -- 33,885
------------- ---------------- -------- ---------- ----------
Total Repaid Debt............... $ -- $ 278,253
---------- ----------
Total Debt...................... 7.33%(F) 6.4yrs(F) $1,435,405 $1,519,548
========== ==========
</TABLE>
- ---------------
(A) The interest rate is the stated interest rate (for Company 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.
F-35
<PAGE> 237
(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 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. All other terms of
the note remain unchanged.
(H) These 12 notes were prepaid as part of the Prudential Insurance Company of
America and Northwestern Mutual Life Insurance Company restructuring, see
note (D) above. All the notes had a mark to market interest rate of 6.9% and
maturity dates ranging from April 2000 to March 2003.
(I) On January 4, 1999, in connection with the Wilson Acquisition, the Company
prepaid the notes on Two ADP Plaza and Two Corporate Centre.
(J) These notes were prepaid in conjunction with the sale of these properties.
(K) The note was assumed by the purchaser as of the date of closing, in
conjunction with the sale of this property during the fourth quarter.
(L) This note was prepaid as part of the Northwestern Mutual Life Insurance
Company restructuring, see note (E) above. This note had a mark to market
interest rate of 6.9% and a maturity of April 2004.
The combined aggregate amount of maturities for all long-term borrowings
for 2000 through 2004 are $183,947,000, $0, $110,821,000, $16,066,000 and
$86,517,000, 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 DB Alex Brown, 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 the 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 December 31, 1999, $329.0
million of the facility was outstanding at a rate of approximately 8.0%. Of this
amount, approximately $250.0 million is fixed with interest rate swaps, which
effectively fix the rate at 6.47%. Beginning January 2000, the rate will be
reduced to 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 2.00 to 1.00 through July 1, 1999 and 2.25 to 1.00
thereafter; (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 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 ratio from 2.5 to 1.00 to 2.22 to 1.00.
F-36
<PAGE> 238
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 December 31, 1999, approximately $109.4 million has been
spent on the construction. The project is scheduled to be completed in the year
2000 and is approximately 75.0% pre-leased.
8. PARTNERS' CAPITAL
As of December 31, 1999, the Trust and its subsidiaries had a 1% general
partnership interest and an approximate 86.1% limited partnership interest in
the Company. The remaining limited partners had an approximate 12.9% interest in
the Company and consist of various individuals and entities that contributed
their properties to the Company in exchange for partnership interest and are
represented by 19,131,785 Units which are exchangeable on a one-for-one basis
into the Trust's Common Shares.
The 7% Cumulative Convertible Preferred Units are convertible into Common
Stock at $16.50 per share at any time after August 4, 2000.
On February 6, 1998, the Trust 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), which were contributed to the Company in exchange for a corresponding
number of Units. The net proceeds were used to repay outstanding borrowings
under the Revolving Credit Facility and for working capital purposes.
9. UNITHOLDERS' DISTRIBUTIONS
On December 7, 1998, in connection with the Wilson Acquisition, the Company
declared a distribution of $0.15 per unit to Unitholders of record as of
December 15, 1998 and a distribution of $0.15 per unit to Unitholders of record
as of January 29, 1999. Both distributions were paid on February 26, 1999. A
distribution of $0.30 per unit was declared for the second quarter of 1999 and
paid on May 28, 1999, to Unitholders of record as of April 30, 1999. A
distribution of $0.30 per unit was declared for the third quarter of 1999 and
paid on August 31, 1999, to Unitholders of record as of July 30, 1999. A
distribution of $0.30 per unit was declared on September 28, 1999 for the fourth
quarter of 1999 and paid on November 30, 1999, to Unitholders of record as of
October 29, 1999.
On August 4, 1999, the Company paid a dividend of $1.155 per share to all
preferred unitholders of record as of July 30, 1999.
10. EXTRAORDINARY LOSS
For the year ended December 31, 1999, the Company recorded extraordinary
loss of approximately $10.8 million. This amount represents the prepayment fees
paid in connection with the property debt restructurings that were completed
during June 1999 and October 1999, as well as the write off of any remaining
unamortized premium/discount recorded by the Company related to the retired
debt. See Notes 5 and 16 for more information about the two restructurings.
F-37
<PAGE> 239
11. NET INCOME PER UNIT
The table below sets forth the calculation of income per Unit for 1999 and
1998 (Dollar amounts in thousands, except per unit amounts):
<TABLE>
<CAPTION>
1999 1998
--------------------------- ---------------------------
BASIC DILUTED BASIC DILUTED
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Units issuable upon exercise of Trust
share options....................... -- 3,175,570 -- 370,612
Weighted average Units................ 148,654,779 148,654,779 103,881,682 103,881,682
------------ ------------ ------------ ------------
Adjusted weighted average Units....... 148,654,779 151,830,349 103,881,682 104,252,294
------------ ------------ ------------ ------------
Net income available to Units before
cumulative effect of a change in
accounting principle and
extraordinary loss.................. $ 276,666 $ 276,666 $ 86,327 $ 86,327
Income applicable to preferred
units............................... (3,500) -- (3,500) --
Cumulative effect of a change in
accounting principle................ (630) (630) -- --
Extraordinary loss.................... (10,787) (10,787) (4,303) (4,303)
------------ ------------ ------------ ------------
Income available to units............. $ 261,749 $ 265,249 $ 78,524 $ 82,024
------------ ------------ ------------ ------------
Net income available to Units before
extraordinary items................. $ 1.84 $ 1.82 $ 0.80 $ 0.79
Cumulative effect of a change in
accounting principle................ -- -- -- --
Extraordinary loss.................... (0.08) (0.07) (0.04) (0.04)
------------ ------------ ------------ ------------
Income available to units............. $ 1.76 $ 1.75 $ 0.76 $ 0.75
------------ ------------ ------------ ------------
</TABLE>
The options issued in February 1998, March 1998, December 1998, January
1999, February 1999 and June 1999 were not included in the calculation of
diluted earnings per Unit as such options were anti-dilutive during the period.
As of December 31, 1999, 1,125,175 Units have been redeemed for shares of the
Trust's Common Stock on a one-for-one basis and 76,647 Units have been redeemed
for approximately $1.2 million in cash.
12. RETIREMENT AND SHARE OPTION PLANS
Eligible employees of the Company participate in a noncontributory
age-weighted profit sharing plan. The Company's cash contribution to such plan
was approximately $134,000, and $100,000, for the years ended December 31, 1999
and 1998, respectively.
Eligible employees of the Company also participate in a 401(k) contributory
savings plan. Under the plan, the Company matches contributions made by eligible
employees based on a percentage of the employee's salary. The Company will match
100% of contributions up to 5.0% of such employee's salary with an annual
maximum matching contribution of $4,000 per employee. The Company's matching
contribution was approximately $654,000, and $69,600, for the years ended
December 31, 1999, and 1998, respectively.
The Company has adopted the Cornerstone Properties Inc. 1998 Long-Term
Incentive Plan (the "Incentive Plan") to provide incentives to attract and
retain officers and key employees. Under the Incentive Plan as amended and
restated on December 14, 1998, the number of shares available for option grant
are approximately 7,400,000. During 1999, options on approximately 40,000 shares
of Common Stock at an exercise price of $17.25 per share have been granted under
the plan. As of December 31, 1999, 10,000 of these shares have been forfeited.
F-38
<PAGE> 240
The following tables summarize the Trust's stock options and restricted
stock grants for certain officers of the Company as of December 31, 1999, which
is included in the financial statements because any Common Shares issued
pursuant to the officer plan will result in the Company issuing Units to the
Trust on a one-for-one basis:
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 0 534,666
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 26,668 198,333
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 34,533 978,800
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
</TABLE>
The weighted average fair value of options granted during 1999 and 1998 was
$0.33 per share and $0.28 per share, respectively. The weighted average life of
options outstanding at December 31, 1999 was approximately 7.6 years.
RESTRICTED STOCK GRANTS
<TABLE>
<CAPTION>
VALUE OF GRANT SHARES INITIALLY SHARES
DATE GRANTED SHARES FORFEITED OUTSTANDING SHARES VESTED VESTING(A)
DATE OF GRANT (PER SHARES) (NO. OF SHARES) (NO. OF SHARE) (NO. OF SHARES) (NO. OF SHARES) SEE NOTES
------------- -------------- ---------------- ---------------- --------------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C>
August, 1995......... $14.30 186,713 19,091 167,622 89,396 (B)
March, 1997.......... $16.40 100,000 0 100,000 26,666 (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 (E)
March, 1998.......... $18.25 19,178 0 19,178 19,178 (F)
February, 1999....... $15.50 113,500 1,700 111,800 1,400 (G)
</TABLE>
- ---------------
(A) Deferred compensation of approximately $5,600,000 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.
(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.
(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 grant will fully vest with respect to 13.333% on March 15, 1999, 2000,
2001, 2002 and with respect to 46.668% on March 15, 2003.
(F) 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.
(G) 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.
F-39
<PAGE> 241
The Trust has adopted the disclosure-only provision of Statement of
Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"). Accordingly, no compensation cost has been recognized for the
options described above since the exercise price equaled the fair value at the
grant date. Had compensation cost for these options been determined based on the
fair value at the grant date consistent with the provisions of SFAS 123, the
Trust's net income and net income per common share would have been reduced to
the following pro forma amounts (Dollar amounts in thousands, except per share
amounts):
<TABLE>
<CAPTION>
BASIC DILUTED
NET INCOME PER NET INCOME PER
NET INCOME COMMON SHARE COMMON SHARE
---------- -------------- --------------
<S> <C> <C> <C>
Year ended December 31, 1999........ $229,622 $1.76 $1.73
Year ended December 31, 1998........ $ 81,561 $0.73 $0.73
</TABLE>
The Company has computed the value of all stock options using the
Black-Scholes option pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
ASSUMPTIONS 1999 1998
----------- ------- -------
<S> <C> <C>
Risk-free interest rate.................................... 5.31% 5.31%
Assumed dividend yield..................................... 7.50% 7.50%
Expected term.............................................. 6 years 6 years
Assumed volatility......................................... 10.00% 10.00%
</TABLE>
13. CONCENTRATION OF RISK
Approximately 5.8 million of the Company's 17 million rentable square feet
is located in the San Francisco metropolitan market, accounting for
approximately 29% of the Company's total assets at December 31, 1999. In
addition, five of the Company's 83 office Properties are located in the Downtown
Boston market, accounting for approximately 19.4% of the Company's office and
parking revenues for the year ended December 31, 1999. This concentration of
assets makes the Company particularly vulnerable to adverse changes in economic
conditions in the San Francisco and Boston metropolitan areas. A significant
decline in these economic conditions could have a material adverse effect on the
Company.
Norwest Corporation and its subsidiary, Norwest Bank Denver N.A., tenants
of the Company, provided approximately 6.2%, and 9.5% of office and parking
rental income for the years ended December 31, 1999 and 1998, respectively.
Included in deferred tenant receivables is approximately $34.8 million and $33.9
million due from Norwest Corporation at December 31, 1998 and 1997,
respectively. As a result of the sale of the Company's property located in
Denver during the fourth quarter of 1999, the concentration of revenue received
from this tenant will be significantly reduced.
14. RELATED PARTY TRANSACTIONS
The Company has entered into $250.0 million of mortgage debt with one of
the Trust's major stockholders, PGGM, as further described in Note 5.
In connection with the Wilson Acquisition, certain third-party services
business of WW&A was acquired by WCP Services, Inc., a Delaware corporation
("WCP Services"). The Company owns 100% of the non-voting common stock and 1% of
the voting common stock of WCP Services. Mr. Wilson and Mr. Moody each own 49.5%
of the voting common stock of WCP Services. To fund the purchase of such shares
of voting common stock, the Company loaned $178,750 to each of Mr. Wilson and
Mr. Moody, all of which remained outstanding as of December 31, 1999. The notes
accrue interest at a rate equal to 140 basis points plus the one-year London
Interbank Offered Rate, which rate is adjusted annually. The notes are due and
payable on or before December 16, 2008. In connection with the EOP Merger
Agreement, Messrs. Wilson and Moody entered into an agreement to sell their
voting common stock of WCP Services to EOP at a purchase price of $200,000 each.
F-40
<PAGE> 242
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company is required to disclose the fair value of financial instruments
for which it is practicable to estimate that value. The Company determines the
fair value based on discounting future cash flows at a rate that approximates
the Company's effective current borrowing rate (see also Note 5). For the year
ended December 31, 1999 and 1998, the fair value of the Company's long term debt
was approximately $1,367,000 million and $1,542,000 million, respectively.
16. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest was approximately $138,375 million and $60,992
million for the years ended December 31, 1999 and 1998, respectively.
NON-CASH INVESTING AND FINANCING ACTIVITIES
On January 20, 1998, the Trust converted its corporate structure into an
umbrella limited partnership REIT ("UPREIT"). Under the UPREIT structure, the
Trust assigned substantially all of its interest in its properties and
substantially all of its operations to the Company.
On January 28, 1998, the Company purchased Corporate 500 Centre. As part of
the total purchase price of approximately $150.0 million, the Company issued
822,794 Units valued at $18.50 per unit.
On April 28, 1998, the Company purchased One Memorial Drive. As part of the
total purchase price of approximately $112.5 million, the Trust issued 3,428,571
shares of common stock and the Company issued 1,657,426 Units, both valued at
$17.50.
On June 3, 1998, the Company purchased 201 California Street and Wilshire
Palisades. As part of the total purchase price for the Properties of
approximately $121.5 million, the Company assumed $64.6 million in debt and
issued 1,665,663 Units valued at $17.50 per unit.
On September 25, 1998, in conjunction with the refinancing of the One
Norwest Center mortgage, the Company incurred an extraordinary loss of
approximately $2,269,000, which represents the unamortized deferred financing
costs and prepayment fees on the previous One Norwest Center mortgage at the
time of the refinancing.
On October 9, 1998, in conjunction with the refinancing of the Corporate
500 Centre mortgage, the Company incurred an extraordinary loss of $354,717,
which represents the unamortized deferred financing costs on the previous
Corporate 500 Centre mortgage at the time of the refinancing.
On November 3, 1998, the Company obtained a $550.0 million Revolving Credit
Facility from a syndicate of 17 banks led by Bankers Trust Company, The Chase
Manhattan Bank and NationsBank. In conjunction with obtaining this new Revolving
Credit Facility, the Company incurred an extraordinary loss of $1,680,016, which
represents the unamortized deferred financing costs related to the previous
$350.0 million facility, which was extinguished at the time that the new
Revolving Credit Facility was obtained.
On December 16, 1998, the Company consummated the Wilson Acquisition for a
purchase price of approximately $1.8 billion, consisting of approximately 14.9
million shares of the Trust's Common Stock valued at $17.25 per share (recorded
at $16.25 per share for GAAP purposes), approximately 16.2 million Units valued
at $17.25 per unit (recorded at $16.25 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 Company also recorded a minority interest of $241.0 million in connection
with this acquisition.
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.
On February 1, 1999, the Trust issued 113,500 shares of restricted stock
valued at $15.50 per share to certain employees of the Company. Units were also
issued to the Trust on a one-for-one basis.
F-41
<PAGE> 243
On June 23, 1999, in conjunction with the restructuring of property-related
debt with Prudential Insurance Company of America and Northwestern Mutual Life
Insurance Company, the Company incurred an extraordinary loss of approximately
$3,355,000, of which approximately $1,560,000 represents the unamortized
premium/discounts associated with various debt instruments that were assumed as
part of the Wilson Acquisition. See Note 5 for more information about this
restructuring.
During 1999, 1,700 shares of the Trust's restricted Common Stock issued to
certain employees of the Company were forfeited as a result of their separation
from the Company.
On July 30, 1999, 562,588 Units were redeemed for shares of the Trust's
Common Stock on a one-for-one basis.
On August 3, 1999, 562,587 Units were redeemed for shares of the Trust's
Common Stock on a one-for-one basis.
On August 17, 1999, the Trust reacquired 10,833 shares of restricted Common
Stock as a result of the forfeiture of these shares by a certain employee of the
Company.
On October 6, 1999, in conjunction with the restructuring of
property-related debt with Northwestern Mutual Life Insurance Company, the
Company incurred an extraordinary loss of approximately $7,432,000, of which
approximately $2,551,000 represents the unamortized premium/discounts associated
with various debt instruments. See Note 5 for more information about this
restructuring.
On December 10, 1999, in conjunction with the sale of One Norwest Center in
Denver, Colorado, $97.3 million of outstanding debt was assumed by the
purchaser.
On December 31, 1999 an affiliate of the Trust, Corpro Real Estate
Management Company, Inc., was dissolved. The remaining assets were contributed
to the Company.
17. 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. See Note 13 for information regarding
concentration of risk.
The Company evaluates performance based on net operating income from the
individual properties in the segment. (Dollar amounts in thousands)
<TABLE>
<CAPTION>
CORPORATE & COMPANY
TOTAL SEGMENT OTHER(A) TOTAL
------------- ----------- ----------
<S> <C> <C> <C>
Total revenues(B):
1999........................................... $ 611,657 $ 4,659 $ 616,316
1998........................................... 336,922 2,415 339,337
Total operating and Interest expenses(C):
1999........................................... $ 212,686 $ 155,517 $ 368,203
1998........................................... 112,271 79,136 191,407
Net operating income(D):
1999........................................... $ 398,971 $(150,858) $ 248,113
1998........................................... 224,651 (76,721) 147,930
Total long-lived assets(E):
1999........................................... $3,770,924 $ 66,064 $3,836,988
1998........................................... 4,137,302 54,782 4,192,084
Total assets:
1999........................................... $3,776,765 $ 393,463 $4,170,228
1998........................................... 4,198,099 83,559 4,281,658
</TABLE>
- ---------------
(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.
F-42
<PAGE> 244
(B) Total revenues represents all revenues during the period (including the
Company's earnings in real estate 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 $96,726,000 and $57,031,000 in 1999 and 1998,
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 rentals property, investments in
joint ventures, other deferred costs, deferred tenant receivables and
certain other assets.
18. SUBSEQUENT EVENTS
On January 20, 2000, the Company declared a distribution of $0.31 per unit
paid on February 29, 2000, Unitholders of record as of January 31, 2000.
On January 21, 2000, the Company purchased Wells Fargo Center 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 of which $104.8
million was 1031 exchange funds (see Note 3) and approximately $2.0 million of
which was paid in Units valued at $17.25 per unit.
On March 8, 2000, the Company declared a distribution of $0.20 per unit
paid to all unitholders on April 14, 2000.
On March 15, 2000, the Company sold it interests in a property for gross
proceeds of $14,425,000 located in East Bay, California. The property was
acquired as part of the Wilson Acquisition in December 1998.
On March 23, 2000, the Company sold its interest in a Property located in
East Bay, California for gross proceeds of $12,800,000. The Property had been
acquired as part of the Wilson Acquisition in December 1998.
On March 30, 2000, 101,050 Units were redeemed for shares of the Trust's
Common Stock on a one-for-one basis.
F-43
<PAGE> 245
CORNERSTONE PROPERTIES LIMITED PARTNERSHIP
REAL ESTATE AND ACCUMULATED DEPRECIATION
SCHEDULE III
DECEMBER 31, 1999
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ----------------------- ------------ ----------------------- ---------------- ------------------------------------
COST CAPITALIZED
SUBSEQUENT TO GROSS AMOUNT AT WHICH CARRIED
INITIAL COST TO COMPANY ACQUISITION AT CLOSE OF PERIOD
----------------------- ---------------- ------------------------------------
BUILDING & LAND & BUILDING &
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS TOTAL
- ----------- ------------ -------- ------------ ---------------- -------- ------------ ----------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Boston, Massachusetts
Sixty State Street.... $85,420 $ -- $ 221,568 $ 6,813 $ -- $ 228,381 $ 228,381
500 Boylston Street... 45,132 181,574 (112) 45,132 181,462 226,594
222 Berkeley Street... 29,262 118,180 284 29,262 118,464 147,726
125 Summer Street..... 78,844 15,750 89,250 7,867 15,750 97,117 112,867
One Memorial Drive.... 63,119 22,500 90,873 (6) 22,500 90,867 113,367
San Mateo County,
California
Bayhill (4
buildings).......... 57,764 26,353 105,412 2,166 26,353 107,578 133,931
Peninsula Office Park
(7 buildings)....... 88,128 25,426 101,705 2,885 25,426 104,590 130,016
Seaport Centre........ 58,000 23,530 94,119 5,259 23,530 99,378 122,908
Bay Park Plaza (2
buildings).......... 13,139 52,556 244 13,139 52,800 65,939
One Bay Plaza......... 9,125 36,499 1,165 9,125 37,664 46,789
East Bay, California
Corporate Centre (2
buildings).......... 9,808 39,233 637 9,808 39,870 49,678
ADP Plaza (2
buildings).......... 10,278 41,110 502 10,278 41,612 51,890
PeopleSoft Plaza...... 10,025 40,100 644 10,025 40,744 50,769
Norris Tech Center (3
buildings).......... 16,066 7,223 28,893 379 7,223 29,272 36,495
Golden Bear Center.... 20,477 6,426 25,705 250 6,426 25,955 32,381
2700 Ygnacio Valley
Road................ 2,375 9,498 192 2,375 9,690 12,065
Park Plaza............ 2,673 10,693 323 2,673 11,016 13,689
1600 South Main....... 2,501 10,003 175 2,501 10,178 12,679
Atlanta, Georgia
191 Peachtree
Street.............. 40,110 228,962 4,575 40,110 233,537 273,647
200 Galleria.......... 120,000(B) 11,994 48,443 3,621 12,726 51,332 64,058
Seattle, Washington
Washington Mutual
Tower (3
buildings).......... 79,100 21,167 43,153 150,354 21,173 193,501 214,674
110 Atrium Place...... 21,517 7,810 31,242 357 7,810 31,599 39,409
Island Corporate
Center.............. 13,170 3,751 15,004 325 3,751 15,329 19,080
Santa Clara, California
Pruneyard Office (3
buildings).......... 60,947 11,896 47,583 13,162 11,896 60,745 72,641
10 Almaden............ 14,306 57,223 314 14,306 57,537 71,843
Pruneyard Shopping
Center.............. 8,491 33,966 1,053 8,491 35,019 43,510
Embarcadero Place (4
buildings).......... 38,149 11,728 46,913 (63) 11,728 46,850 58,578
Pruneyard Inn (C)..... 3,057 12,228 3,126 3,057 15,354 18,411
<CAPTION>
COLUMN A COLUMN F COLUMN G COLUMN H COLUMN I
- ----------------------- ------------ ----------- ----------- ---------------
LIFE ON WHICH
DEPRECIATION IN
(UNAUDITED) (UNAUDITED) LATEST INCOME
ACCUMULATED YEAR DATE STATEMENTS IS
DESCRIPTION DEPRECIATION CONSTRUCTED ACQUIRED COMPUTED(A)
- ----------- ------------ ----------- ----------- ---------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Boston, Massachusetts
Sixty State Street.... $ (11,312) 1979 12/31/97 40
500 Boylston Street... (9,949) 1988 10/27/97 40
222 Berkeley Street... (6,515) 1991 10/27/97 40
125 Summer Street..... (12,611) 1989 11/1/95 40
One Memorial Drive.... (3,812) 1985 4/28/98 40
San Mateo County,
California
Bayhill (4
buildings).......... (2,836) 1982-1987 12/16/98 40
Peninsula Office Park
(7 buildings)....... (2,759) 1971-1998 12/16/98 40
Seaport Centre........ (2,772) 1988 12/16/98 40
Bay Park Plaza (2
buildings).......... (1,403) 1985-1998 12/16/98 40
One Bay Plaza......... (997) 1979 12/16/98 40
East Bay, California
Corporate Centre (2
buildings).......... (1,066) 1985-1987 12/16/98 40
ADP Plaza (2
buildings).......... (1,110) 1987-1989 12/16/98 40
PeopleSoft Plaza...... (1,069) 1984 12/16/98 40
Norris Tech Center (3
buildings).......... (761) 1984-1998 12/16/98 40
Golden Bear Center.... (702) 1986 12/16/98 40
2700 Ygnacio Valley
Road................ (155) 1984 12/16/98 40
Park Plaza............ (321) 1986 12/16/98 40
1600 South Main....... (271) 1983 12/16/98 40
Atlanta, Georgia
191 Peachtree
Street.............. (13,469) 1991 10/27/97 40
200 Galleria.......... (3,146) 1985 10/27/97 40
Seattle, Washington
Washington Mutual
Tower (3
buildings).......... (82,749) 1988 5/1/88 40
110 Atrium Place...... (839) 1981 12/16/98 40
Island Corporate
Center.............. (404) 1987 12/16/98 40
Santa Clara, California
Pruneyard Office (3
buildings).......... (1,517) 1971-1999 12/16/98 40
10 Almaden............ (1,510) 1989 12/16/98 40
Pruneyard Shopping
Center.............. (922) 1970s 12/16/98 40
Embarcadero Place (4
buildings).......... (1,221) 1984 12/16/98 40
Pruneyard Inn (C)..... (339) 1989 12/16/98 40
</TABLE>
F-44
<PAGE> 246
CORNERSTONE PROPERTIES LIMITED PARTNERSHIP
REAL ESTATE AND ACCUMULATED DEPRECIATION
SCHEDULE III -- (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ----------------------- ------------ ----------------------- ---------------- ------------------------------------
COST CAPITALIZED
SUBSEQUENT TO GROSS AMOUNT AT WHICH CARRIED
INITIAL COST TO COMPANY ACQUISITION AT CLOSE OF PERIOD
----------------------- ---------------- ------------------------------------
BUILDING & LAND & BUILDING &
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS TOTAL
- ----------- ------------ -------- ------------ ---------------- -------- ------------ ----------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
San Francisco,
California
120 Montgomery
Street.............. 48,160 16,427 65,709 2,958 16,427 68,667 85,094
201 California
Street.............. 44,504 11,350 46,040 2,007 11,350 48,047 59,397
188 Embarcadero....... 15,606 4,718 18,871 399 4,718 19,270 23,988
Minneapolis, Minnesota
Norwest Center........ 110,000 18,000 33,613 152,888 18,000 186,501 204,501
Washington, D.C./
Alexandria, Virginia
Market Square (2
buildings).......... (B) 50,199 201,084 2,964 50,199 204,048 254,247
99 Canal Center....... 4,551 18,380 1,574 4,551 19,954 24,505
TransPotomac Plaza
5................... 65,000(B) 2,124 8,577 1,000 2,124 9,577 11,701
11 Canal Center....... 2,326 9,394 500 2,326 9,894 12,220
Suburban Chicago,
Illinois
Corporate 500 Centre
(4 buildings)....... 88,424 30,000 120,163 3,456 30,000 123,619 153,619
One Lincoln Centre.... 65,000(B) 2,192 47,758 4,302 2,192 52,060 54,252
Santa Monica/West Los
Angeles, California
West Wilshire (2
buildings).......... 16,926 7,492 29,970 629 7,492 30,599 38,091
Wilshire Palisades.... 29,047 12,650 52,247 1,291 12,650 53,538 66,188
Janss Court (D)....... 18,357 7,274 29,098 147 7,274 29,245 36,519
Searise Office
Tower............... 11,607 6,043 24,172 347 6,043 24,519 30,562
Commerce Park......... 2,653 10,613 149 -- 13,415 13,415
429 Santa Monica...... 3,899 15,595 317 3,899 15,912 19,811
Orange County,
California
Bixby Ranch........... 28,528 9,681 38,723 300 9,681 39,023 48,704
18301 Von Karman...... 8,052 32,206 2,224 8,052 34,430 42,482
2677 South Main....... 5,696 22,786 1,571 5,696 24,357 30,053
San Diego, California
Centerside II......... 24,254 7,524 30,094 609 7,523 30,703 38,226
Crossroads............ 3,207 12,828 222 3,207 13,050 16,257
Los Angeles, California
700 North Brand....... 26,938 8,112 32,450 145 8,112 32,595 40,707
Warner Park Center.... 1,746 6,986 123 1,746 7,109 8,855
New York City, New York
527 Madison Avenue.... (B) 21,440 46,643 2,627 21,440 49,270 70,710
Tower 56.............. 25,024 5,528 25,203 9,434 5,528 34,637 40,165
Conejo Valley
(Ventura), California
Westlake Spectrum (2
buildings).......... 3,510 14,038 177 3,510 14,215 17,725
Agoura Hills.......... 12,003 3,821 15,284 241 3,821 15,525 19,346
<CAPTION>
COLUMN A COLUMN F COLUMN G COLUMN H COLUMN I
- ----------------------- ------------ ----------- ----------- ---------------
LIFE ON WHICH
DEPRECIATION IN
(UNAUDITED) (UNAUDITED) LATEST INCOME
ACCUMULATED YEAR DATE STATEMENTS IS
DESCRIPTION DEPRECIATION CONSTRUCTED ACQUIRED COMPUTED(A)
- ----------- ------------ ----------- ----------- ---------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
San Francisco,
California
120 Montgomery
Street.............. (1,846) 1955 12/16/98 40
201 California
Street.............. (1,845) 1969 6/3/98 40
188 Embarcadero....... (504) 1980 12/16/98 40
Minneapolis, Minnesota
Norwest Center........ (84,164) 1988 7/1/88 40
Washington, D.C./
Alexandria, Virginia
Market Square (2
buildings).......... (6,142) 1990 11/1/98 40
99 Canal Center....... (1,089) 1986 10/27/97 40
TransPotomac Plaza
5................... (544) 1983 10/27/97 40
11 Canal Center....... (573) 1986 10/27/97 40
Suburban Chicago,
Illinois
Corporate 500 Centre
(4 buildings)....... (5,958) 1986/1990 1/28/98 40
One Lincoln Centre.... (4,361) 1986 11/8/96 40
Santa Monica/West Los
Angeles, California
West Wilshire (2
buildings).......... (411) 1960-1976 12/16/98 40
Wilshire Palisades.... (2,155) 1981 6/3/98 40
Janss Court (D)....... (772) 1989 12/16/98 40
Searise Office
Tower............... (657) 1975 12/16/98 40
Commerce Park......... (349) 1977 12/16/98 40
429 Santa Monica...... (411) 1982 12/16/98 40
Orange County,
California
Bixby Ranch........... (1,024) 1987 12/16/98 40
18301 Von Karman...... (971) 1991 12/16/98 40
2677 South Main....... (681) 1987 12/16/98 40
San Diego, California
Centerside II......... (803) 1987 12/16/98 40
Crossroads............ (358) 1983 12/16/98 40
Los Angeles, California
700 North Brand....... (852) 1981 12/16/98 40
Warner Park Center.... (183) 1986 12/16/98 40
New York City, New York
527 Madison Avenue.... (3,762) 1986 2/14/97 40
Tower 56.............. (3,501) 1983 4/24/96 40
Conejo Valley
(Ventura), California
Westlake Spectrum (2
buildings).......... (367) 1990 12/16/98 40
Agoura Hills.......... (417) 1987 12/16/98 40
</TABLE>
F-45
<PAGE> 247
CORNERSTONE PROPERTIES LIMITED PARTNERSHIP
REAL ESTATE AND ACCUMULATED DEPRECIATION
SCHEDULE III -- (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ----------------------- ------------ ----------------------- ---------------- ------------------------------------
COST CAPITALIZED
SUBSEQUENT TO GROSS AMOUNT AT WHICH CARRIED
INITIAL COST TO COMPANY ACQUISITION AT CLOSE OF PERIOD
----------------------- ---------------- ------------------------------------
BUILDING & LAND & BUILDING &
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS TOTAL
- ----------- ------------ -------- ------------ ---------------- -------- ------------ ----------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Other
U.S. West (Murray,
Utah)............... 3,311 13,245 185 3,311 13,430 16,741
Exposition Centre
(Sacramento, CA).... 5,081 1,772 7,089 209 1,772 7,298 9,070
Projects under
development........... -- 46,720 10,103 6,309 46,132 17,000 63,132
----------- -------- ---------- -------- -------- ---------- ----------
Grand Total............ $1,435,160 $707,854 $2,900,650 $405,795 $705,350 $3,308,948 $4,014,298
=========== ======== ========== ======== ======== ========== ==========
<CAPTION>
COLUMN A COLUMN F COLUMN G COLUMN H COLUMN I
- ----------------------- ------------ ----------- ----------- ---------------
LIFE ON WHICH
DEPRECIATION IN
(UNAUDITED) (UNAUDITED) LATEST INCOME
ACCUMULATED YEAR DATE STATEMENTS IS
DESCRIPTION DEPRECIATION CONSTRUCTED ACQUIRED COMPUTED(A)
- ----------- ------------ ----------- ----------- ---------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Other
U.S. West (Murray,
Utah)............... (375) 1985 12/16/98 40
Exposition Centre
(Sacramento, CA).... (222) 1984 12/16/98 40
Projects under
development........... -- N/A -- N/A
--------- ----------- -------- ---
Grand Total............ $(291,834)
=========
</TABLE>
- ---------------
(A) The life to compute depreciation on Buildings is 40 years. The life to
compute depreciation on Building Improvements is 3 to 40 years.
(B) The three notes arising from the acquisition of several properties from PGGM
(a major stockholder and related party) are cross-collateralized, having the
effect of forming a "collateral pool" for the underlying notes. In addition,
the $181.0 million first mortgage loan on Market Square, which the Company
purchased from PGGM in 1997, has been pledged as collateral for the $120.0
million 200 Galleria loan.
(C) The Pruneyard Inn is a 172-room hotel.
(D) In addition to 92,000 square feet of retail and office space, Janss Court
contains 32 apartments comprising 33,000 rentable square feet of residential
space.
F-46
<PAGE> 248
CORNERSTONE PROPERTIES LIMITED PARTNERSHIP
REAL ESTATE AND ACCUMULATED DEPRECIATION
SCHEDULE III
DECEMBER 31, 1999
(CONTINUED)
RECONCILIATION OF "REAL ESTATE AND ACCUMULATED DEPRECIATION"
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
INVESTMENT IN REAL ESTATE AND ASSETS HELD FOR SALE
Balance, beginning of period................................ $4,340,449 $1,918,746
Additions during period:
Acquisitions........................................... 38,437 2,410,427
Improvements........................................... 14,904 30,690
Deductions during period:
Properties disposed of................................. (358,670) (19,414)
Retirements and writeoffs.............................. (20,822) --
---------- ----------
Balance, end of period...................................... $4,014,298 $4,340,449
========== ==========
ACCUMULATED DEPRECIATION
Balance, beginning of period................................ $ 288,448 $ 231,421
Additions during period:
Depreciation........................................... 96,726 57,031
Deductions during period:
Properties disposed of................................. (73,131)
Retirements and writeoffs.............................. (20,209) (4)
---------- ----------
$ 291,834 $ 288,448
========== ==========
</TABLE>
F-47
<PAGE> 249
ANNEX A
AGREEMENT AND PLAN OF MERGER
DATED AS OF FEBRUARY 11, 2000, AS AMENDED
<PAGE> 250
AGREEMENT AND PLAN OF MERGER
AMONG
EQUITY OFFICE PROPERTIES TRUST,
EOP OPERATING LIMITED PARTNERSHIP,
CORNERSTONE PROPERTIES INC.
AND
CORNERSTONE PROPERTIES LIMITED PARTNERSHIP
DATED AS OF FEBRUARY 11, 2000
<PAGE> 251
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
ARTICLE 1 THE MERGERS................................................. A-2
1.1 Election by Limited Partners in Cornerstone Partnership to
Exercise the Redemption Right; The Partnership Merger....... A-2
1.2 The Merger.................................................. A-3
1.3 Closing..................................................... A-3
1.4 Effective Time.............................................. A-4
1.5 Effect of Partnership Mergers on Agreement of Limited
Partnership................................................. A-4
1.6 Effect of Merger on Declaration of Trust and Bylaws......... A-4
1.7 Trustees of EOP............................................. A-4
1.8 Effect on Shares............................................ A-5
1.9 Effect on Partnership Interests............................. A-5
1.10 Exchange Ratios and Other Merger Consideration.............. A-5
1.11 Election by Holders of Cornerstone Common Stock to Receive
EOP Common Shares or Cash................................... A-6
1.12 Proration................................................... A-7
1.13 Partner Approval............................................ A-8
1.14 No Appraisal Rights......................................... A-8
1.15 Exchange of Certificates; Pre-Closing Dividends; Fractional
Shares...................................................... A-8
ARTICLE 2 REPRESENTATIONS AND WARRANTIES OF CORNERSTONE AND
CORNERSTONE PARTNERSHIP..................................... A-11
2.1 Organization, Standing and Power............................ A-12
2.2 Cornerstone Subsidiaries.................................... A-12
2.3 Capital Structure........................................... A-13
2.4 Other Interests............................................. A-14
2.5 Authority; Noncontravention; Consents....................... A-14
2.6 SEC Documents; Financial Statements; Undisclosed
Liabilities................................................. A-16
2.7 Absence of Certain Changes or Events........................ A-16
2.8 Litigation.................................................. A-17
2.9 Properties.................................................. A-17
2.10 Environmental Matters....................................... A-19
2.11 Related Party Transactions.................................. A-20
2.12 Employee Benefits........................................... A-20
2.13 Employee Policies........................................... A-21
2.14 Taxes....................................................... A-22
2.15 No Payments to Employees, Officers or Directors............. A-23
2.16 Broker; Schedule of Fees and Expenses....................... A-23
2.17 Compliance with Laws........................................ A-23
2.18 Contracts; Debt Instruments................................. A-23
2.19 Opinion of Financial Advisor................................ A-25
2.20 State Takeover Statutes..................................... A-25
2.21 Investment Company Act of 1940.............................. A-25
2.22 Definition of Knowledge of Cornerstone...................... A-25
2.23 Required Stockholder Approvals and Partner Approvals........ A-25
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF EOP AND EOP PARTNERSHIP... A-25
3.1 Organization, Standing and Power of EOP..................... A-26
3.2 EOP Subsidiaries............................................ A-26
3.3 Capital Structure........................................... A-26
3.4 Other Interests............................................. A-27
</TABLE>
i
<PAGE> 252
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
3.5 Authority; Noncontravention; Consents....................... A-28
3.6 SEC Documents; Financial Statements; Undisclosed
Liabilities................................................. A-29
3.7 Absence of Certain Changes or Events........................ A-29
3.8 Litigation.................................................. A-30
3.9 Properties.................................................. A-30
3.10 Environmental Matters....................................... A-31
3.11 Taxes....................................................... A-32
3.12 Brokers; Schedule of Fees and Expenses...................... A-33
3.13 Compliance with Laws........................................ A-33
3.14 Contracts; Debt Instruments................................. A-33
3.15 Opinion of Financial Advisor................................ A-33
3.16 State Takeover Statutes..................................... A-33
3.17 Investment Company Act of 1940.............................. A-33
3.18 Definition of Knowledge of EOP.............................. A-33
3.19 Required Shareholder Approvals and Partner Approvals........ A-33
ARTICLE 4 COVENANTS................................................... A-33
4.1 Conduct of Cornerstone's and Cornerstone Partnership's
Business Pending Merger..................................... A-33
4.2 Conduct of EOP's and EOP Partnership's Business Pending
Merger...................................................... A-36
4.3 No Solicitation............................................. A-37
4.4 Affiliates.................................................. A-39
4.5 Other Actions............................................... A-39
ARTICLE 5 ADDITIONAL COVENANTS........................................ A-40
5.1 Preparation of the Form S-4 and the Proxy Statement;
Cornerstone Stockholders Meeting, Cornerstone Unitholders
Consent Solicitation and EOP Shareholders Meeting........... A-40
5.2 Access to Information; Confidentiality...................... A-42
5.3 Commercially Reasonable Efforts; Notification............... A-42
5.4 Tax Matters................................................. A-43
5.5 Public Announcements........................................ A-44
5.6 Listing..................................................... A-44
5.7 Transfer and Gains Taxes.................................... A-44
5.8 Benefit Plans and Other Employee Arrangements............... A-45
5.9 Indemnification............................................. A-46
5.10 Declaration of Dividends and Distributions.................. A-48
5.11 Transfer of Non-Controlled Subsidiary Voting Shares......... A-48
5.12 Notices..................................................... A-49
5.13 Resignations................................................ A-49
5.14 Assumption of Existing Tax Protection Agreements............ A-49
5.15 EOP Partnership Agreement................................... A-49
5.16 Registration Rights Agreements.............................. A-49
5.17 Cornerstone Convertible Promissory Note..................... A-49
ARTICLE 6 CONDITIONS.................................................. A-49
6.1 Conditions to Each Party's Obligation to Effect the
Mergers..................................................... A-49
6.2 Conditions to Obligations of EOP and EOP Partnership........ A-50
6.3 Conditions to Obligations of Cornerstone and Cornerstone
Partnership................................................. A-51
ARTICLE 7 TERMINATION, AMENDMENT AND WAIVER........................... A-52
7.1 Termination................................................. A-52
7.2 Certain Fees and Expenses................................... A-53
7.3 Effect of Termination....................................... A-55
7.4 Amendment................................................... A-55
</TABLE>
ii
<PAGE> 253
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
7.5 Extension; Waiver........................................... A-55
ARTICLE 8 GENERAL PROVISIONS.......................................... A-55
8.1 Nonsurvival of Representations and Warranties............... A-55
8.2 Notices..................................................... A-55
8.3 Interpretation.............................................. A-56
8.4 Counterparts................................................ A-56
8.5 Entire Agreement; No Third-Party Beneficiaries.............. A-56
8.6 Governing Law............................................... A-56
8.7 Assignment.................................................. A-57
8.8 Enforcement................................................. A-57
8.9 Severability................................................ A-57
8.10 Exculpation................................................. A-57
8.11 Joint and Several Obligations............................... A-57
</TABLE>
EXHIBITS
Exhibit "A" -- Form of Certificate of Merger
Exhibit "B" -- Form of Maryland Articles of Merger
Exhibit "C" -- Form of Nevada Articles of Merger
Exhibit "D" -- Form of Proposed EOP Charter Amendment Relating to Certain Voting
Requirements
Exhibit "E" -- Form of Proposed EOP Charter Amendment Relating to Domestically
Controlled REIT Status
iii
<PAGE> 254
INDEX OF DEFINED TERMS
<TABLE>
<S> <C>
AICPA Statement............................................. 5.1(b)
Acquisition Proposal........................................ 4.3(a)(i)
Affiliate................................................... 2.11
Agreement................................................... Preamble
Base Amount................................................. 7.2
BeaMet...................................................... 3.11(b)
Break-Up Fee................................................ 7.2
Break-Up Fee Tax Opinion.................................... 7.2
Break-Up Expenses........................................... 7.2
Cash Election............................................... 1.11(a)
Cash Election Shares........................................ 1.12(a)
Cash Fraction............................................... 1.12(b)
CERCLA...................................................... 2.10(a)
Certificate of Merger....................................... C
Certificate................................................. 1.10(b)(iv)
Closing..................................................... 1.3
Closing Date................................................ 1.3
Cornerstone................................................. Preamble
Cornerstone Acquisition Agreement........................... 7.2
Cornerstone Articles........................................ 2.1
Cornerstone Bylaws.......................................... 2.1
Cornerstone Common Stock.................................... 1.10(b)(i)
Cornerstone Convertible Promissory Note..................... 2.3(c)
Cornerstone Disclosure Letter............................... Art. 2
Cornerstone Financial Statement Date........................ 2.7
Cornerstone Material Adverse Change......................... 2.7
Cornerstone Material Adverse Effect......................... 2.1
Cornerstone Non-controlled Subsidiary....................... J
Cornerstone OP Unit......................................... 1.1(a)
Cornerstone Other Interests................................. 2.4
Cornerstone Partner Approvals............................... 1.13
Cornerstone Partnership..................................... Preamble
Cornerstone Partnership Agreement........................... 1.5
Cornerstone Preferred OP Unit............................... 1.10(a)(ii)
Cornerstone Properties...................................... 2.9(a)
Cornerstone Rent Roll....................................... 2.9(e)
Cornerstone SEC Documents................................... 2.6
Cornerstone 7% Preferred Stock.............................. 1.10(b)(iii)
Cornerstone Stockholder Approvals........................... 2.5(a)
Cornerstone Stockholders Meeting............................ 5.1(d)
Cornerstone Space Lease..................................... 2.9(e)
Cornerstone Stock Options................................... 2.3(b)
Cornerstone Stock Rights.................................... 2.3(b)
Cornerstone Subsidiaries.................................... 2.2(a)
Cornerstone Voting Agreement................................ K
Code........................................................ F
Commitment.................................................. 4.1(i)
Common Stock Exchange Ratio................................. 1.10(b)(ii)
Confidentiality Agreement................................... 2.18(k)
Controlled Group Member..................................... 2.12
Department.................................................. 1.4
</TABLE>
iv
<PAGE> 255
<TABLE>
<S> <C>
DRULPA...................................................... 1.1(b)
Effective Time.............................................. 1.4
Electing Cornerstone OP Units............................... 1.11
Election.................................................... 1.11(a)
Election Date............................................... 1.11(d)
Employee Plan............................................... 2.12
Encumbrances................................................ 2.9(a)
Environmental Law........................................... 2.10(a)
Environmental Permits....................................... 2.10(b)(iv)
EOP......................................................... Preamble
EOP Bylaws.................................................. 1.6
EOP Common Share............................................ 1.10(b)(ii)
EOP Counter Proposal........................................ 4.3(c)
EOP Declaration of Trust.................................... 1.6
EOP Disclosure Letter....................................... Art. 3
EOP Financial Statement Date................................ 3.7
EOP Material Adverse Change................................. 3.7
EOP Material Adverse Effect................................. 3.1
EOP NCS Sub................................................. J
EOP Options................................................. 3.3(b)
EOP OP Unit................................................. 1.10(a)(i)
EOP Other Interests......................................... 3.4
EOP Partner Approvals....................................... 1.13
EOP Partnership............................................. Preamble
EOP Partnership Agreement................................... 1.5
EOP Preferred OP Unit....................................... 1.10(a)(ii)
EOP Preferred Units......................................... 3.3(e)
EOP Preferred Shares........................................ 3.3(a)
EOP Properties.............................................. 3.9(a)
EOP Rent Roll............................................... 3.9(g)
EOP SEC Documents........................................... 3.6
EOP Shareholder Approvals................................... 3.5(a)
EOP Shareholders Meeting.................................... 5.1(c)
EOP Space Lease............................................. 3.9(g)
EOP Subsidiaries............................................ 3.1
ERISA....................................................... 2.12
Exchange Act................................................ 2.6
Exchange Agent.............................................. 1.15(a)
Exchange Fund............................................... 1.15(b)
Exercise.................................................... 1.1(a)(i)
Final Company Dividend...................................... 1.15(d)(i)
Form of Election............................................ 1.11(b)
Form S-4.................................................... 5.1(a)
Former Cornerstone Properties............................... 2.10(b)(ii)
GAAP........................................................ 2.6
Governmental Entity......................................... 2.5(c)
Hazardous Materials......................................... 2.10
HSR Act..................................................... 2.5(c)
Indebtedness................................................ 2.18(b)
Indemnification Parties..................................... 5.9(b)
Indemnified Parties......................................... 5.9(a)
Indemnifying Parties........................................ 5.9(a)
Joint Proxy Statement....................................... 5.1(a)
</TABLE>
v
<PAGE> 256
<TABLE>
<S> <C>
Knowledge of Cornerstone.................................... 2.22
Knowledge of EOP............................................ 3.18
Laws........................................................ 2.5(c)
Liens....................................................... 2.2(b)
Maryland Articles of Merger................................. D
Maximum Amount.............................................. 7.2
Merger...................................................... A
Mergers..................................................... B
Merger Consideration........................................ 1.10(b)
Nevada Articles of Merger................................... E
Non-Electing Shares......................................... 1.12(e)
NRS......................................................... 1.2
NYSE........................................................ 1.15(g)(ii)
Partner Approvals........................................... 1.13
Partnership Merger.......................................... B
Payor....................................................... 7.2
Pension Plan................................................ 2.12
Permitted Title Exceptions.................................. 2.9(a)
Person...................................................... 2.2(a)
PGGM........................................................ 6.3(h)
Prohibited Transaction...................................... 2.12(c)
Property Restrictions....................................... 2.9(a)
Proposed EOP Charter Amendment Relating to Domestically
Controlled REIT Status.................................... 4.2(h)
Proposed EOP Charter Amendment Relating to Certain Voting
Requirements.............................................. 4.2(h)
Proposed EOP Charter Amendments............................. 4.2(h)
Qualifying Income........................................... 7.2
Recipient................................................... 7.2
REIT........................................................ 2.14(b)
REIT Requirements........................................... 7.2
Release..................................................... 2.10(a)
Rule 145 Affiliates......................................... 4.4
SEC......................................................... 2.5(c)
Section 704(c) values....................................... 5.4(b)
Securities Act.............................................. 2.3(g)
Share Election.............................................. 1.11(a)
Shareholder Approvals....................................... 3.5(a)
Stock Election Shares....................................... 1.12(a)
Stock Fraction.............................................. 1.12(c)
Stock Purchase Agreement.................................... J
Subsidiary.................................................. 2.2(a)
Substituted Option.......................................... 5.8(c)
Superior Acquisition Proposal............................... 4.3(d)
Surviving Trust............................................. 1.2
Takeover Statute............................................ 2.20
Taxes....................................................... 2.14(a)
Tax Protection Agreements................................... 2.18(j)
Title 3..................................................... 1.2
Title 8..................................................... 1.2
Transfer and Gains Taxes.................................... 5.7
Welfare Plan................................................ 2.12
1940 Act.................................................... 2.21
</TABLE>
vi
<PAGE> 257
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of February
11, 2000, by and among EQUITY OFFICE PROPERTIES TRUST, a Maryland real estate
investment trust ("EOP"), EOP OPERATING LIMITED PARTNERSHIP, a Delaware limited
partnership ("EOP Partnership"), CORNERSTONE PROPERTIES INC., a Nevada
corporation ("Cornerstone"), and CORNERSTONE PROPERTIES LIMITED PARTNERSHIP, a
Delaware limited partnership ("Cornerstone Partnership").
RECITALS:
A. The Board of Trustees of EOP and the Board of Directors of Cornerstone
deem it advisable and in the best interests of their respective shareholders and
stockholders, upon the terms and subject to the conditions contained herein,
that Cornerstone shall merge with and into EOP (the "Merger").
B. EOP, as the managing general partner of EOP Partnership, and
Cornerstone, as the sole general partner of Cornerstone Partnership, deem it
advisable and in the best interests of their respective limited partners,
subject to the conditions and other provisions contained herein, that,
immediately prior to the Merger, Cornerstone Partnership shall merge with and
into EOP Partnership, with the holders of partnership interests in Cornerstone
Partnership at the time of the Partnership Merger receiving in any event units
of limited partnership interest in EOP Partnership, as set forth herein (the
"Partnership Merger" and, together with the Merger, the "Mergers"). As an
alternative to receiving units of limited partnership interest in EOP
Partnership in connection with the Partnership Merger, limited partners in
Cornerstone Partnership (other than Cornerstone) shall have the right to elect,
effective immediately prior to the Partnership Merger, to exercise their
redemption right under the Cornerstone Partnership Agreement (as defined
herein), regardless of whether or not they would otherwise be entitled to
exercise that redemption right under the Cornerstone Partnership Agreement, and
Cornerstone shall issue shares of Cornerstone Common Stock (as defined herein)
in satisfaction of that right, thereby allowing former limited partners in
Cornerstone Partnership (other than Cornerstone) to participate in the Merger as
holders of Cornerstone Common Stock.
C. Upon the terms and subject to the conditions set forth herein,
immediately prior to the Merger, EOP Partnership and Cornerstone Partnership
shall execute a Certificate of Merger (the "Certificate of Merger") in
substantially the form attached hereto as Exhibit A and shall file such
Certificate of Merger in accordance with Delaware law to effectuate the
Partnership Merger.
D. Upon the terms and subject to the conditions set forth herein,
immediately following the effectiveness of the Partnership Merger, EOP and
Cornerstone shall execute Articles of Merger (the "Maryland Articles of Merger")
in substantially the form attached hereto as Exhibit B and shall file such
Maryland Articles of Merger in accordance with Maryland law to effectuate the
Merger.
E. Upon the terms and subject to the conditions set forth herein,
immediately following the effectiveness of the Partnership Merger, EOP and
Cornerstone shall execute Articles of Merger (the "Nevada Articles of Merger")
in substantially the form attached hereto as Exhibit C and concurrently with the
filing of the Maryland Articles of Merger, shall file such Nevada Articles of
Merger in accordance with Nevada law to effectuate the Merger.
F. For federal income tax purposes, it is intended that the Merger shall
qualify as a reorganization under Section 368(a) of the Internal Revenue Code of
1986, as amended (the "Code"), and that this Agreement shall constitute a plan
of reorganization under Section 368(a) of the Code.
G. For federal income tax purposes, it is intended that the Partnership
Merger, regardless of form, be treated as a contribution by Cornerstone
Partnership of all of its assets to EOP Partnership in exchange for partnership
interests in EOP Partnership, as provided for herein, under Section 721 of the
Code, and a distribution of such partnership interests by Cornerstone
Partnership to its partners under Section 731 of the Code.
A-1
<PAGE> 258
H. EOP and Cornerstone have each received a fairness opinion relating to
the transactions contemplated hereby as more fully described herein.
I. EOP, EOP Partnership, Cornerstone and Cornerstone Partnership desire to
make certain representations, warranties and agreements in connection with the
Mergers.
J. Concurrently with the execution of this Agreement and as an inducement
to EOP and EOP Partnership to enter into this Agreement, William Wilson III and
John S. Moody, as the owners of 99% of the voting capital stock of WCP Services,
Inc., a Delaware corporation (the "Cornerstone Non-controlled Subsidiary"), have
entered into a Stock Purchase Agreement, dated as of the date hereof, relating
to the voting capital stock of the Cornerstone Non-controlled Subsidiary (the
"Stock Purchase Agreement"), providing for the sale of all of the outstanding
voting capital stock of the Cornerstone Non-controlled Subsidiary to EOP Office
Properties Management Corporation ("EOP NCS Sub") or its assigns.
K. As an inducement to EOP to enter into this Agreement, (a) Stichting
Pensioenfonds voor de Gezondheid, Geestelijke en Maatschappelijke Belangen, a
stichting formed according to the laws of the Kingdom of The Netherlands, each
of the directors and certain executive officers of Cornerstone (and the spouses
of certain of the foregoing) and certain entities controlled by any of the
foregoing have entered into a voting agreement (each, a "Cornerstone Voting
Agreement"), pursuant to which such person or entity has agreed, among other
things, to vote his or its shares of Cornerstone Common Stock and Cornerstone OP
Units (as defined herein) to approve this Agreement, the respective Mergers and
any other matter which requires his or its vote in connection with the
transactions contemplated by this Agreement and (b) the holders of the
outstanding Cornerstone 7% Preferred Stock (as defined herein) have entered into
a stock option agreement, pursuant to which such holders have granted
Cornerstone and EOP an option to acquire, among other things, all of their
Cornerstone 7% Preferred Stock at any time prior to the Effective Time (as
defined herein) of the Merger at a per share purchase price of $18.00, together
with accrued and unpaid dividends to the Effective Time, in cash (subject to
adjustment).
L. As an inducement to Cornerstone to enter into this Agreement, each of
the trustees and certain executive officers of EOP (and the spouses of certain
of the foregoing) and certain entities controlled by any of the foregoing have
entered into a voting agreement pursuant to which such person or entity has
agreed, among other things, to vote his or its EOP Common Shares (as defined
herein) to approve this Agreement, the Merger and any other matter which
requires his or its vote in connection with the transactions contemplated by
this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
representations, warranties, covenants and agreements contained herein, the
parties hereto hereby agree as follows:
ARTICLE 1
THE MERGERS
1.1 Election by Limited Partners in Cornerstone Partnership to Exercise the
Redemption Right; The Partnership Merger.
(a) Notwithstanding any limitation or restriction contained in the
Cornerstone Partnership Agreement with respect to the ability of a Limited
Partner (as defined in the Cornerstone Partnership Agreement) to exercise the
Redemption Right (as defined in the Cornerstone Partnership Agreement)
(including, without limitation, any limitation or restriction contained in
Section 8.6A of the Cornerstone Partnership Agreement), every Limited Partner
shall have the right to exercise the Redemption Right by submitting to
Cornerstone Partnership (with a copy to Cornerstone) during the period between
the mailing date of the Joint Proxy Statement (as defined herein) for the
Cornerstone Stockholders Meeting (as defined herein) and 5:00 p.m., Eastern
time, on the second business day prior to the date of the Cornerstone
Stockholders Meeting a Notice of Redemption (as defined in the Cornerstone
Partnership Agreement) specifying the number of Class A Partnership Common Units
(as defined in the Cornerstone Partnership Agreement) of Cornerstone Partnership
(the "Cornerstone OP Units") which such Limited Partner desires to have
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redeemed pursuant to Section 8.6A of the Cornerstone Partnership Agreement (as
modified by this Section 1.1(a)), which Notice of Redemption shall be
conditioned upon the closing of the Partnership Merger and can be conditional as
set forth in clause (v) below; provided, that,
(i) with respect to each Notice of Redemption (a copy of the form of
which shall accompany or form a part of the Form of Election (as defined
herein)) properly submitted by a Limited Partner in accordance with this
Section 1.1(a) (an "Exercise"), Cornerstone shall elect in accordance with
Section 8.6B of the Cornerstone Partnership Agreement to purchase the
Cornerstone OP Units relating to such Exercise by paying the REIT Shares
Amount (as defined in the Cornerstone Partnership Agreement) and not the
Cash Amount (as defined in the Cornerstone Partnership Agreement);
(ii) notwithstanding the provisions of Section 8.6B of the Cornerstone
Partnership Agreement, Cornerstone shall not be required to notify the
Redeeming Partner (as defined in the Cornerstone Partnership Agreement) of
Cornerstone's election to purchase the Cornerstone OP Units as described in
the foregoing clause (i);
(iii) the Specified Redemption Date (as defined in the Cornerstone
Partnership Agreement) shall be the Closing Date (as defined herein) at a
time prior to the consummation of the Partnership Merger;
(iv) each Redeeming Partner shall be treated as an owner of the shares
of Cornerstone Common Stock issued pursuant to this Agreement at the
Effective Time (as defined herein) of the Merger and shall have the same
right as each of the other holders of shares of Cornerstone Common Stock to
make an Election (as defined herein) pursuant to Section 1.11 as to the
form of consideration to be received in the Merger with respect to such
shares of Cornerstone Common Stock; and
(v) a Redeeming Partner shall have the option, in its discretion, to
make its Notice of Redemption conditional upon part or all of the shares of
Cornerstone Common Stock that would be issued pursuant thereto being
converted solely into the right to receive cash in the Merger pursuant to
Section 1.10(b)(i) and the procedures set forth in Sections 1.11 and 1.12,
in which event the Notice of Redemption shall not be effective with respect
to any Cornerstone OP Units for which the shares of Cornerstone Common
Stock that would be received therefor would not be converted entirely into
the right to receive cash in the Merger (and any Cornerstone OP Units not
redeemed as a result thereof would be converted into EOP OP Units (as
defined herein) in the Partnership Merger as set forth in Section
1.10(a)(i)).
(b) Upon the terms and subject to the conditions of this Agreement, and in
accordance with Title 6, Chapter 17 of the Delaware Code Annotated, as amended
(the "DRULPA"), immediately prior to the consummation of the Merger, Cornerstone
Partnership shall be merged with and into EOP Partnership, with EOP Partnership
as the surviving limited partnership or limited liability company, and with the
holders of partnership interests in Cornerstone Partnership receiving in any
event units of partnership interest in EOP Partnership, as set forth in Section
1.10.
1.2 The Merger. Upon the terms and subject to the conditions set forth in
this Agreement, and in accordance with Title 3 of the Corporations and
Associations Article of the Annotated Code of Maryland, as amended ("Title 3"),
Title 8 of the Corporations and Associations Article of the Annotated Code of
Maryland, as amended ("Title 8"), and Chapter 92A of Title 7 of the Nevada
Revised Statutes Annotated (the "NRS"), immediately following the effectiveness
of the Partnership Merger, Cornerstone shall be merged with and into EOP, with
EOP surviving as a real estate investment trust (the "Surviving Trust").
1.3 Closing. The closing of the Mergers (the "Closing") will take place
commencing at 9:00 a.m., local time, on the date to be specified by the parties,
which (subject to satisfaction or waiver of the conditions set forth in Article
6) shall be no later than the third business day after satisfaction or waiver of
the conditions set forth in Section 6.1(a) (the "Closing Date"), at the offices
of Hogan & Hartson L.L.P., 555 Thirteenth Street, N.W., Washington, D.C. 20004,
unless another date or place is agreed to in writing by the parties.
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1.4 Effective Time. As soon as practicable following the satisfaction or
waiver of the conditions set forth in Article 6, (i) EOP Partnership and
Cornerstone Partnership shall execute and file the Certificate of Merger,
executed in accordance with the DRULPA, with the Office of the Secretary of
State of the State of Delaware, and (ii) EOP and Cornerstone shall then execute
and file the Maryland Articles of Merger, executed in accordance with Title 3
and Title 8, with the State Department of Assessments and Taxation of Maryland
(the "Department"), and the Nevada Articles of Merger, executed in accordance
with Title 7 of the NRS with the Secretary of State of the State of Nevada, and
shall make all other filings and recordings required, with respect to the
Partnership Merger, under the DRULPA or, with respect to the Merger, under Title
3, Title 8 and the NRS. The Mergers shall become effective (each an "Effective
Time" and collectively the "Effective Times") at such times as EOP and
Cornerstone shall agree should be specified in the Certificate of Merger, the
Maryland Articles of Merger and the Nevada Articles of Merger (not to exceed
thirty (30) days after the Maryland Articles of Merger are accepted for record
by the Department). Unless otherwise agreed, the parties shall cause the
Effective Times to occur on the Closing Date, with not less than one hour
between the Effective Time of the Partnership Merger and the Effective Time of
the Merger.
1.5 Effect of Partnership Merger on Agreements of Limited Partnership. The
Agreement of Limited Partnership, as amended, of EOP Partnership, as in effect
immediately prior to the Effective Time of the Partnership Merger (the "EOP
Partnership Agreement"), shall continue in full force and effect after the
Partnership Merger until further amended in accordance with applicable Delaware
law. The Agreement of Limited Partnership, as amended, of Cornerstone
Partnership, as in effect immediately prior to the Effective Time of the
Partnership Merger (the "Cornerstone Partnership Agreement") shall terminate at
the Effective Time of Partnership Merger.
1.6 Effect of Merger on Declaration of Trust and Bylaws. The Articles of
Amendment and Restatement of Declaration of Trust, as amended, of EOP (the "EOP
Declaration of Trust") and the Bylaws of EOP (the "EOP Bylaws"), as in effect
immediately prior to the Effective Time of the Merger and, if approved by the
EOP shareholders, as amended by the Proposed EOP Charter Amendment Relating to
Domestically Controlled REIT Status (as defined herein) and the Proposed EOP
Charter Amendment Relating to Certain Voting Requirements (as defined herein),
shall continue in full force and effect after the Merger and, until further
amended in accordance with applicable Maryland law and, if approved by the EOP
shareholders, as amended by the Proposed EOP Charter Amendment Relating to
Domestically Controlled REIT Status (as defined herein) and the Proposed EOP
Charter Amendment Relating to Certain Voting Requirements (as defined herein).
1.7 Trustees of EOP. The trustees of EOP following the Merger shall consist
of the trustees of EOP immediately prior to the Effective Time of the Merger,
who shall continue to serve for the balance of their unexpired terms or their
earlier death, resignation or removal, together with John S. Moody, William
Wilson III and Jan van der Vlist, each of whom shall, no later than the third
business day after the Effective Time of the Merger, become a trustee with terms
expiring in 2002, 2003 and 2003, respectively. Upon the expiration of the terms
of Mr. van der Vlist in 2003 and 2006, so long as PGGM and its Affiliates
continue to own in the aggregate 21,000,000 (as adjusted for stock splits,
reverse stock splits, stock dividends and similar actions) or more of the issued
and outstanding EOP Common Shares at all times up to the meeting of shareholders
at which trustees are being elected in such years, EOP shall take all action
necessary to nominate Mr. van der Vlist for re-election as a trustee of EOP for
an additional three-year term at any special or annual meeting of shareholders
at which trustees are being elected (or in connection with a written consent in
lieu of a meeting pursuant to which trustees are proposed to be elected). In the
event that Mr. Van der Vlist shall fail to stand for re-election as aforesaid
for any reason in either 2003 or 2006 or in the event of his earlier death or
resignation, and so long as PGGM and its Affiliates continue to own in the
aggregate 21,000,000 (as adjusted for stock splits, reverse stock splits, stock
dividends and similar actions) or more of the issued and outstanding EOP Common
Shares at such time, EOP shall take all action necessary to nominate a
replacement designated by PGGM, which replacement shall be subject to the
approval of EOP if such replacement is not an officer, director or employee of
PGGM, for election or re-election as a trustee of EOP for an additional
three-year term at
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any special or annual meeting of shareholders at which trustees are being
elected (or in connection with a written consent in lieu of a meeting pursuant
to which trustees are proposed to be elected) or, in the case of a vacancy, at a
meeting of the Board of Trustees called for such purpose. Except as expressly
provided above in this Section 1.7, following their election as trustees, such
persons shall serve for their designated terms, subject to their earlier death,
resignation or removal.
1.8 Effect on Shares. The effect of the Merger on the shares of capital
stock of Cornerstone shall be as provided in the Articles of Merger and in
Section 1.10 hereof. The Merger shall not change the shares of beneficial
interest of EOP outstanding immediately prior to the Merger.
1.9 Effect on Partnership Interests. The effect of the Partnership Merger
on the partnership interests of Cornerstone Partnership shall be as provided in
the Certificate of Merger and in Section 1.10 hereof. The Partnership Merger
shall not change the partnership interests of EOP Partnership outstanding
immediately prior to the Merger.
1.10 Exchange Ratios and Other Merger Consideration.
(a) (i) The exchange ratio relating to the Partnership Merger shall be
0.7009 of a Class A Unit (as defined in the EOP Partnership Agreement) of EOP
Partnership ("EOP OP Unit"), for each Cornerstone OP Unit outstanding
immediately prior to the Effective Time of the Partnership Merger. The holders
of the EOP OP Units issued in the Partnership Merger (other than Cornerstone and
Subsidiaries (as defined herein) of Cornerstone) shall be entitled to redeem
such EOP OP Units immediately following the consummation of the Partnership
Merger (and thereafter) pursuant to the terms of the EOP Partnership Agreement,
except that for purposes of the exchange provisions thereof such EOP OP Units
shall be deemed to have been issued as of the date the related Cornerstone OP
Units were issued by Cornerstone Partnership (or if earlier, one year prior to
the Effective Time of the Partnership Merger), and shall be entitled to the same
rights and privileges as the holders of EOP OP Units outstanding on the date
hereof.
(ii) The exchange ratio relating to the Partnership Merger shall be one
Class D Preferred Unit (as defined in the EOP Partnership Agreement), designated
a Class D 7.0% Cumulative Convertible Preferred Unit, of EOP Partnership ("EOP
Preferred OP Units"), for each Class A Partnership Preferred Unit (as defined in
the Cornerstone Partnership Agreement), designated a Class A 7% Cumulative
Convertible Preferred Unit of Cornerstone Partnership ("Cornerstone Preferred OP
Unit") outstanding immediately prior to the Effective Time of the Partnership
Merger. EOP, as the holder of the EOP Preferred OP Units issued in the
Partnership Merger, shall be entitled to the same rights and privileges as
Cornerstone, as the holder of the Cornerstone Preferred Units outstanding on the
date hereof.
(b) The merger consideration to be paid to holders of capital stock of
Cornerstone in the Merger (collectively, the "Merger Consideration") is as
follows:
(i) Each share of common stock with no par value of Cornerstone
("Cornerstone Common Stock") issued and outstanding immediately prior to
the Effective Time of the Merger, which under the terms of Section 1.12 is
to be converted into cash, shall be converted into the right to receive
$18.00 in cash, without interest;
(ii) Except as otherwise provided in Sections 1.10(b)(i) and 1.12, and
subject to Section 1.15(g), each share of Cornerstone Common Stock issued
and outstanding immediately prior to the Effective Time of the Merger
(other than shares to be converted into the right to receive cash pursuant
to Sections 1.10(b)(i) and 1.12) shall be converted into the right to
receive 0.7009 of a validly issued, fully paid and nonassessable common
share of beneficial interest, par value $.01 per share, of EOP (an "EOP
Common Share") (the "Common Stock Exchange Ratio");
(iii) Each share of 7.0% Cumulative Convertible Preferred Stock with
no par value of Cornerstone ("Cornerstone 7% Preferred Stock") outstanding
immediately prior to the Effective Time of the Merger shall be converted
into the right to receive $18.00, together with accrued and unpaid
dividends to the Effective Time of the Merger, in cash, without interest;
and
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(iv) All such shares of Cornerstone Common Stock, when so converted as
provided in Section 1.10(b)(i) or (ii), and all such shares of Cornerstone
7% Preferred Stock, when so converted as provided in Section 1.10(b)(iii),
shall no longer be outstanding and shall automatically be cancelled and
retired and shall cease to exist, and each holder of a certificate (a
"Certificate") theretofore representing any such shares shall cease to have
any rights with respect thereto, except the right to receive, upon the
surrender of such Certificate in accordance with Section 1.15(c), as
applicable, (A) any dividends and other distributions in accordance with
Section 1.15(d), (B) certificates representing the EOP Common Shares into
which such shares of Cornerstone Common Stock are converted pursuant to
Section 1.10(c)(ii) (if any), (C) cash into which such shares of
Cornerstone Common Stock are converted pursuant to Section 1.10(c)(i), (D)
cash into which such shares of Cornerstone 7% Preferred Stock are converted
pursuant to Section 1.10(b)(iii), and (E) any cash, without interest, in
lieu of fractional EOP Common Shares to be issued or paid in consideration
for Cornerstone Common Stock upon the surrender of such Certificate in
accordance with Sections 1.15(c) and 1.15(g).
1.11 Election by Holders of Cornerstone Common Stock to Receive EOP Common
Shares or Cash. Each holder of shares of Cornerstone Common Stock (including,
without limitation, Limited Partners of Cornerstone Partnership who elect to
exercise, on a conditional or unconditional basis, the Redemption Right with
respect to all or a portion of their Cornerstone OP Units held by such Limited
Partners pursuant to Section 1.1(a) (with the Cornerstone OP Units with respect
to which such Exercise is made referred to as "Electing Cornerstone OP Units"))
shall have the right to submit a Form of Election specifying the number of
shares of Cornerstone Common Stock which such holder desires to have converted
into the right to receive EOP Common Shares in the Merger pursuant to Section
1.10(a)(ii) and the number which such holder desires to have converted into the
right to receive cash pursuant to Section 1.10(a)(i) in accordance with the
following procedures:
(a) Each holder of shares of Cornerstone Common Stock and each holder of
Electing Cornerstone OP Units may specify in a request made in accordance with
the provisions of this Section 1.11 (an "Election") (i) the number of such
shares which such holder desires to have converted into the right to receive
cash in the Merger pursuant to Section 1.10(a)(i) (a "Cash Election") and (ii)
the number of such shares which such holder desires to have converted into the
right to receive EOP Common Shares in the Merger pursuant to Section 1.10(a)(ii)
(a "Share Election").
(b) EOP and Cornerstone shall prepare, for use by stockholders of
Cornerstone (and each holder of Electing Cornerstone OP Units) in surrendering
Certificates representing shares of Cornerstone Common Stock, a form of election
(the "Form of Election") pursuant to which each holder of Cornerstone Common
Stock and each holder of Electing Cornerstone OP Units may make Elections. The
Form of Election shall be mailed to stockholders of record of Cornerstone as of
the record date for the Cornerstone Stockholders Meeting (as defined herein) and
to each holder of Cornerstone OP Units and shall accompany the Joint Proxy
Statement (as defined herein).
(c) Cornerstone shall use commercially reasonable efforts to make the Form
of Election available to all persons who become stockholders of record of
Cornerstone and to all Limited Partners of Cornerstone Partnership during the
period between such record date and the second business day prior to the date of
the Cornerstone Stockholders Meeting, provided that only a Limited Partner of
Cornerstone Partnership who is a holder of Electing Cornerstone OP Units may
submit a Form of Election and such Form of Election shall apply only with
respect to shares of Cornerstone Common Stock issued to such Limited Partner
prior to the Effective Time of the Partnership Merger pursuant to the Redemption
Right as set forth in Section 1.1(a).
(d) An Election shall have been properly made only if the Exchange Agent
(as defined herein) shall have received, by 5:00 p.m., Eastern Standard Time, on
the second business day (such time on such day being referred to herein as the
"Election Date") preceding the date of the Cornerstone Stockholders Meeting, a
Form of Election properly completed and signed (and not revoked) and accompanied
(in the case of holders of shares of Cornerstone Common Stock) by the
Certificate or Certificates representing the
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shares of Cornerstone Common Stock to which such Form of Election relates, duly
endorsed in blank or otherwise in form acceptable for transfer on the books of
Cornerstone (or by an appropriate guarantee of delivery of such Certificate or
Certificates as set forth in such Form of Election from a member of any
registered national securities exchange or of the National Association of
Securities Dealers, Inc. or a commercial bank or trust company having an office
or correspondent in the United States, provided such Certificate or Certificates
are in fact delivered by the time set forth in such guarantee of delivery).
(e) Any holder of record of shares of Cornerstone Common Stock (and any
holder of Electing Cornerstone OP Units) may at any time prior to the Election
Date change such holder's Election by written notice received by the Exchange
Agent at or prior to the Election Date accompanied by a properly completed Form
of Election. EOP and Cornerstone shall have the right in their sole discretion
and by mutual agreement to permit changes in Elections after the Election Date.
(f) Any holder of record of shares of Cornerstone Common Stock (and any
holder of Electing Cornerstone OP Units) may at any time prior to the Election
Date revoke such holder's Election by written notice received by the Exchange
Agent at or prior to the Election Date or by withdrawal prior to the Election
Date of such holder's Certificates previously deposited with the Exchange Agent.
Any revocation of an Election may be withdrawn by notice of such withdrawal
delivered at or prior to the Election Date. Any such holder who shall have
deposited Certificates with the Exchange Agent shall have the right to withdraw
such Certificates by written notice received by the Exchange Agent and thereby
revoke such holder's Election as of the Election Date at any time after the
expiration of the period of 60 days following the Election Date if the Merger
shall not have been consummated prior thereto. EOP shall obtain from the
Exchange Agent an agreement to return all Forms of Election and accompanying
Certificates to the stockholders submitting the same in the event this Agreement
shall be terminated in accordance with its terms.
(g) EOP and Cornerstone by mutual agreement shall have the right to make
rules, not inconsistent with the terms of this Agreement, governing the validity
of Forms of Election, the manner and extent to which Elections are to be taken
into account in making the determinations prescribed by Section 1.12, the
issuance and delivery of certificates for EOP Common Shares into which shares of
Cornerstone Common Stock are converted in the Merger and the payment for shares
of Cornerstone Common Stock converted into the right to receive cash in the
Merger.
1.12 Proration. The determination of whether shares of Cornerstone Common
Stock shall be converted in the Merger into EOP Common Shares in accordance with
the Common Stock Exchange Ratio or the right to receive $18.00 in cash shall be
made as set forth in this Section 1.12.
(a) As is more fully set forth below, 58,551,525 shares of Cornerstone
Common Stock shall be converted in the Merger into the right to receive $18.00
per share in cash (which shares of Cornerstone Common Stock are referred to as
the "Cash Election Shares"), and all shares of Cornerstone Common Stock issued
and outstanding immediately prior to the Effective Time of the Merger in excess
of 58,551,525 shares shall be converted in the Merger into the right to receive
EOP Common Shares in accordance with the Common Stock Exchange Ratio (which
shares of Cornerstone Common Stock are referred to as the "Stock Election
Shares").
(b) If Cash Elections are received for a number of shares of Cornerstone
Common Stock which is greater than 58,551,525 shares of Cornerstone Common
Stock, each Non-Electing Share (as defined herein) and each share of Cornerstone
Common Stock for which a Share Election has been received shall be converted in
the Merger into EOP Common Shares in accordance with the Common Stock Exchange
Ratio, and the shares of Cornerstone Common Stock for which Cash Elections have
been received shall be converted in the Merger into the right to receive cash
and EOP Common Shares in accordance with the Common Stock Exchange Ratio in the
following manner:
each share of Cornerstone Common Stock covered by a Cash Election
shall be converted into the right to receive (i) an amount in cash, without
interest, equal to the product of (x) $18.00 and (y) a fraction (the "Cash
Fraction") the numerator of which shall be 58,551,525 and the
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denominator of which shall be the aggregate number of shares of Cornerstone
Common Stock covered by all Cash Elections, and (ii) a number of EOP Common
Shares equal to the product of (x) the Common Stock Exchange Ratio and (y)
a fraction equal to one minus the Cash Fraction.
(c) If Share Elections are received for a number of shares of Cornerstone
Common Stock which is greater than the total number of Stock Election Shares
issued and outstanding immediately prior to the Effective Time of the Merger,
each Non-Electing Share and each share of Cornerstone Common Stock for which a
Cash Election has been received shall be converted in the Merger into the right
to receive $18.00 in cash, without interest, and the shares of Cornerstone
Common Stock for which Share Elections have been received shall be converted in
the Merger into EOP Shares in accordance with the Common Stock Exchange Ratio
and the right to receive cash in the following manner:
each share of Cornerstone Common Stock covered by a Share Election
shall be converted into the right to receive (i) a number of EOP Common
Shares equal to the product of (x) the Common Stock Exchange Ratio and (y)
a fraction (the "Stock Fraction"), the numerator of which shall be a number
equal to the total number of Stock Election Shares issued and outstanding
immediately prior to the Effective Time of the Merger and the denominator
of which shall be the aggregate number of shares of Cornerstone Common
Stock covered by all Share Elections, and (ii) an amount in cash, without
interest, equal to the product of (x) $18.00 and (y) a fraction equal to
one minus the Stock Fraction.
(d) If Non-Electing Shares (as defined herein) are not converted under
either Section 1.12(b) or Section 1.12(c), then each Non-Electing Share shall be
converted into the right to receive EOP Common Shares and the right to receive
cash on a proportionate basis, relative to all other Non-Electing Shares, so
that the aggregate number of shares of Cornerstone Common Stock converted into
the right to receive EOP Common Shares equals, as closely as possible, the
number of Stock Election Shares, and the aggregate number of shares of
Cornerstone Common Stock converted into the right to receive cash equals, as
closely as possible, the number of Cash Election Shares.
(e) For purposes of this Section 1.12, outstanding shares of Cornerstone as
to which an election is not in effect at the Election Date and shares as to
which an Election has been withdrawn after the 60-day period following the
Election Date and prior to the Effective Time of the Merger shall be called
"Non-Electing Shares." If EOP and Cornerstone shall determine for any reason
that any Election was not properly made with respect to shares of Cornerstone
Common Stock, such Election shall be deemed ineffective and shares of
Cornerstone Common Stock covered by such Election shall, for purposes hereof, be
deemed to be Non-Electing Shares.
1.13 Partner Approval. Cornerstone shall seek the requisite approval of the
partners of Cornerstone Partnership of the Merger, the withdrawal of Cornerstone
as general partner and the Partnership Merger to the extent required by the
Cornerstone Partnership Agreement to effectuate the transactions contemplated by
this Agreement (collectively, the "Cornerstone Partner Approvals"). EOP shall
seek the requisite approval of the partners of EOP Partnership of the Merger and
the Partnership Merger to the extent required by the EOP Partnership Agreement
to effectuate the transactions contemplated by this Agreement (collectively, the
"EOP Partner Approvals," and together with the Cornerstone Partner Approvals,
the "Partner Approvals").
1.14 No Appraisal Rights. The holders of Cornerstone Common Stock,
Cornerstone OP Units, EOP Common Shares and EOP OP Units are not entitled under
applicable law to appraisal or similar rights as a result of the Mergers and, in
the case of the holders of the Cornerstone 7% Preferred Stock, such holders
irrevocably have waived all such rights.
1.15 Exchange of Certificates; Pre-Closing Dividends; Fractional Shares.
(a) Exchange Agent. Prior to the Effective Time, EOP shall appoint
Equiserve LLC as the exchange agent, or another bank or trust company reasonably
acceptable to Cornerstone, to act as exchange agent (the "Exchange Agent") for
the exchange of the Merger Consideration upon surrender of certificates
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representing issued and outstanding shares of Cornerstone Common Stock and
Cornerstone 7% Preferred Stock.
(b) EOP to Provide Merger Consideration. EOP shall provide to the Exchange
Agent on or before the Effective Time of the Merger, for the benefit of the
holders of Cornerstone Common Stock and Cornerstone 7% Preferred Stock, the
Merger Consideration issuable in exchange for the issued and outstanding
Cornerstone Common Stock and Cornerstone 7% Preferred Stock pursuant to Section
1.10, together with any cash required to make payments in lieu of any fractional
shares pursuant to Section 1.15(g) (the "Exchange Fund"). The Exchange Agent
shall invest any cash included in the Exchange Fund as directed by EOP, on a
daily basis. Any interest or other income resulting from such investments shall
be paid to EOP. Cornerstone shall provide to the Exchange Agent not later than
one business day prior to the Effective Time of the Merger, for the benefit of
the holders of Cornerstone Common Stock, cash payable in respect of any
dividends required pursuant to Section 1.15(d)(i) or (ii). Such cash shall be
invested in accordance with written directions delivered by Cornerstone to the
Exchange Agent not later than one business day prior to the Effective Time of
the Merger, with any cash earned on such investments to be paid to EOP as the
successor to Cornerstone in the Merger. EOP shall use commercially reasonable
efforts to cause the Exchange Agent to mail the Merger Consideration to the
holders of Cornerstone Common Stock (including to holders of Electing
Cornerstone OP Units who made an unconditional Exercise of the Redemption Right
or who made a conditional exercise thereof and who will receive cash in the
Merger, in each case who have properly submitted a Form of Election prior to the
Election Date) and Cornerstone 7% Preferred Stock not later than five business
days after the Effective Time of the Merger.
(c) Exchange Procedure. As soon as reasonably practicable after the
Effective Time, EOP shall use commercially reasonable efforts to cause the
Exchange Agent to mail to each holder of record of a Certificate or Certificates
which immediately prior to the Effective Time represented outstanding shares of
Cornerstone Common Stock (other than to holders of Cornerstone Common Stock who
previously surrendered with their Forms of Election their Certificates for
Cornerstone Common Stock) or Cornerstone 7% Preferred Stock Certificate whose
shares were converted into the right to receive the Merger Consideration
pursuant to Section 1.10, (i) a letter of transmittal (which shall specify that
delivery shall be effected, and risk of loss and title to the Certificates shall
pass, only upon delivery of the Certificates to the Exchange Agent and shall be
in a form and have such other provisions as EOP may reasonably specify) and (ii)
instructions for use in effecting the surrender of the Certificates in exchange
for the Merger Consideration. To the extent not previously surrendered with a
Form of Election, upon surrender of a Certificate for cancellation to the
Exchange Agent or to such other agent or agents as may be appointed by EOP,
together with such letter of transmittal, duly executed, and such other
documents as may reasonably be required by the Exchange Agent, the holder of
such Certificate shall be entitled to receive in exchange therefor the Merger
Consideration into which the shares of Cornerstone Common Stock or Cornerstone
7% Preferred Stock, as applicable, theretofore represented by such Certificate
shall have been converted pursuant to Section 1.10, together with any dividends
or other distributions to which such holder is entitled pursuant to Section
1.15(d) and cash, if any, payable in lieu of fractional shares pursuant to
Section 1.15(g), to be mailed (or made available for collection by hand if so
elected by the surrendering holder) within five business days of receipt
thereof, and the Certificate so surrendered shall forthwith be canceled. In the
event of a transfer of ownership of shares of Cornerstone Common Stock or
Cornerstone 7% Preferred Stock which is not registered in the transfer records
of Cornerstone, payment may be made to a person other than the person in whose
name the Certificate so surrendered is registered if such Certificate shall be
properly endorsed or otherwise be in proper form for transfer and the person
requesting such payment either shall pay any transfer or other taxes required by
reason of such payment being made to a person other than the registered holder
of such Certificate or establish to the satisfaction of EOP that such tax or
taxes have been paid or are not applicable. Until surrendered as contemplated by
this Section 1.15, each Certificate shall be deemed at any time after the
Effective Time to represent only the right to receive upon such surrender the
Merger Consideration, without interest, into which the shares of Cornerstone
Common Stock or Cornerstone 7% Preferred Stock heretofore represented by such
Certificate shall have been converted pursuant to Section 1.10, and any
dividends or other distributions to
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which such holder is entitled pursuant to Section 1.15(d). No interest will be
paid or will accrue on the Merger Consideration upon the surrender of any
Certificate or on any cash payable pursuant to Section 1.15(d) or Section
1.15(g). EOP or the Exchange Agent, as applicable, shall be entitled, in its
sole and absolute discretion, to deduct and withhold from the cash or EOP Common
Shares, or any combination thereof, that otherwise is payable pursuant to this
Agreement to any holder of shares of Cornerstone Common Stock or Cornerstone 7%
Preferred Stock such amounts as EOP or the Exchange Agent is required to deduct
and withhold with respect to the making of such payment under the Code or under
any provision of state, local or foreign tax law, provided that in determining
whether withholding under Section 1445 of the Code is required, EOP shall take
into account (and shall request the Exchange Agent to take into account) Section
1445(b)(6) of the Code and Treasury Regulations Section 1.1445-2(c)(2). For this
purpose, any EOP Common Shares deducted and withheld by EOP shall be valued at
the last trading price of the EOP Common Shares on the New York Stock Exchange
on the Effective Date of the Merger. To the extent that amounts are so withheld
by EOP or the Exchange Agent, such withheld amounts shall be treated for all
purposes of this Agreement as having been paid to the holder of the shares of
Cornerstone Common Stock or Cornerstone 7% Preferred Stock, as applicable, in
respect of which such deduction and withholding was made by EOP or the Exchange
Agent.
(d) Record Dates for Final Dividends; Distributions with Respect to
Unexchanged Shares.
(i) To the extent necessary to satisfy the requirements of Section
857(a)(1) of the Code for the taxable year of Cornerstone ending at the
Effective Time of the Merger (and avoid the payment of tax with respect to
undistributed income), Cornerstone shall declare a dividend (the "Final
Company Dividend") to holders of shares of Cornerstone Common Stock and
Cornerstone 7% Preferred Stock, the record date for which shall be the
close of business on the last business day prior to the Effective Time of
the Merger, in an amount equal to the minimum dividend sufficient to permit
Cornerstone to satisfy such requirements. If Cornerstone determines it is
necessary to declare the Final Company Dividend, it shall notify EOP at
least 10 days prior to the date for the Cornerstone Stockholders Meeting,
and EOP shall declare a dividend per share to holders of shares of EOP
Common Shares, the record date for which shall be the close of business on
the last business day prior to the Effective Time, in an amount per EOP
Common Share equal to the quotient obtained by dividing (x) the Final
Company Dividend paid by Cornerstone with respect to each share of
Cornerstone Common Stock by (y) the Common Stock Exchange Ratio. The
dividends payable hereunder to holders of Cornerstone Common Stock and
Cornerstone 7% Preferred Stock shall be paid on the last business day
immediately preceding the Closing Date.
(ii) No dividends or other distributions with respect to EOP Common
Shares with a record date after the Effective Time shall be paid to the
holder of any unsurrendered Certificate with respect to the shares of EOP
Common Shares represented thereby, and no cash payment in lieu of
fractional shares shall be paid to any such holder pursuant to Section
1.15(g), in each case until the surrender of such Certificate in accordance
with this Section 1.15. Subject to the effect of applicable escheat laws,
following surrender of any such Certificate there shall be paid to the
holder of such Certificate, without interest, (i) at the time of such
surrender, the amount of any cash payable pursuant to Section 1.10 and/or
in lieu of any fractional EOP Common Shares to which such holder is
entitled pursuant to Section 1.15(g) and (ii) if such Certificate is
exchangeable for one or more whole EOP Common Shares, (x) at the time of
such surrender the amount of dividends or other distributions with a record
date after the Effective Time theretofore paid with respect to such whole
EOP Common Shares and (y) at the appropriate payment date, the amount of
dividends or other distributions with a record date after the Effective
Time but prior to such surrender and with a payment date subsequent to such
surrender payable with respect to such whole EOP Common Shares.
(e) No Further Ownership Rights in Cornerstone Common Stock and Cornerstone
7% Preferred Stock. All Merger Consideration paid upon the surrender of
Certificates in accordance with the terms of this Section 1.15 (including any
cash paid pursuant to Section 1.15(g)) shall be deemed to have been paid in full
satisfaction of all rights pertaining to the Cornerstone Common Stock and
Cornerstone 7% Preferred Stock, as applicable, theretofore represented by such
Certificates; provided, however, that
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Cornerstone shall transfer to the Exchange Agent cash sufficient to pay any
dividends or make any other distributions with a record date prior to the
Effective Time which may have been declared or made by Cornerstone on such
Cornerstone Common Stock or Cornerstone 7% Preferred Stock in accordance with
the terms of this Agreement or prior to the date of this Agreement and which
remain unpaid at the Effective Time and have not been paid prior to such
surrender, and there shall be no further registration of transfers on the stock
transfer books of Cornerstone of the Cornerstone Common Stock or Cornerstone 7%
Preferred Stock which were outstanding immediately prior to the Effective Time.
If, after the Effective Time, Certificates are presented to EOP for any reason,
they shall be canceled and exchanged as provided in this Section 1.15.
(f) No Liability. None of Cornerstone, EOP or the Exchange Agent shall be
liable to any person in respect of any Merger Consideration or dividends
delivered to a public official pursuant to any applicable abandoned property,
escheat or similar law. Any portion of the Exchange Fund delivered to the
Exchange Agent pursuant to this Agreement that remains unclaimed for 12 months
after the Effective Time shall be redelivered by the Exchange Agent to EOP, upon
demand, and any holders of Certificates who have not theretofore complied with
Section 1.15(c) shall thereafter look only to EOP for delivery of the Merger
Consideration and any unpaid dividends, subject to applicable escheat and other
similar laws.
(g) No Fractional Shares
(i) No certificates or scrip representing fractional EOP Common Shares
shall be issued upon the surrender for exchange of Certificates, and such
fractional share interests will not entitle the owner thereof to vote, to
receive dividends or to any other rights of a shareholder of EOP.
(ii) No fractional EOP Common Shares shall be issued pursuant to this
Agreement. In lieu of the issuance of any fractional EOP Common Shares
pursuant to this Agreement, each holder of Cornerstone Common Stock upon
surrender of a Certificate for exchange shall be paid an amount in cash
(without interest), rounded to the nearest cent, determined by multiplying
(i) the average closing price of one EOP Common Share on the New York Stock
Exchange on the five trading days immediately preceding the Closing Date by
(ii) the fractional amount of 0.7009 of an EOP Common Share which such
holder would otherwise be entitled to receive under this Section 1.15.
(h) Lost Certificates. If any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such Certificate to be lost, stolen or destroyed and, if required by EOP or the
Exchange Agent, the posting by such person of a bond in such reasonable amount
as EOP or the Exchange Agent may direct (but consistent with the practices EOP
applies to its own shareholders) as indemnity against any claim that may be made
against them with respect to such Certificate, the Exchange Agent will issue in
exchange for such lost, stolen or destroyed Certificate the EOP Common Shares or
cash to which the holders thereof are entitled pursuant to Section 1.10, any
cash payable pursuant to Section 1.15(g) to which the holders thereof are
entitled and any dividends or other distributions to which the holders thereof
are entitled pursuant to Section 1.15(d).
(i) Applicability to Partnership Merger. Except for the provisions relating
to the Exchange Agent, certificates and the exchange procedure (which shall not
be applicable), all other provisions of this Section 1.15 shall apply to
Cornerstone Partnership, EOP Partnership, the Cornerstone OP Units and the
Cornerstone OP Preferred Units with respect to the Partnership Merger.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF CORNERSTONE
AND CORNERSTONE PARTNERSHIP
Except as set forth in the Cornerstone SEC Documents (as defined herein) or
in the letter of even date herewith signed by the President and Chief Executive
Officer or the Chief Operating Officer of
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Cornerstone and delivered to EOP prior to the execution hereof (the "Cornerstone
Disclosure Letter"), Cornerstone and Cornerstone Partnership represent and
warrant to EOP and EOP Partnership as follows:
2.1 Organization, Standing and Power. Cornerstone has been duly organized
and is validly existing and in good standing under the laws of the State of
Nevada. Cornerstone has all requisite corporate power and authority to own,
operate, lease and encumber its properties and carry on its business as now
being conducted. The Cornerstone Restated Articles of Incorporation, as amended
(the "Cornerstone Articles") are in effect, and no dissolution, revocation or
forfeiture proceedings regarding Cornerstone have been commenced. Cornerstone is
duly qualified or licensed to do business as a foreign corporation and is in
good standing in each jurisdiction in which the nature of its business or the
ownership or leasing of its properties makes such qualification or licensing
necessary, other than in such jurisdictions where the failure to be so qualified
or licensed, individually or in the aggregate, would not have a material adverse
effect on the business, properties, assets, financial condition or results of
operations of Cornerstone, Cornerstone Partnership and the Cornerstone
Subsidiaries (as defined herein), taken as a whole (a "Cornerstone Material
Adverse Effect"). Cornerstone has delivered to EOP complete and correct copies
of the Cornerstone Articles and Cornerstone's Amended and Restated Bylaws (the
"Cornerstone Bylaws"), in each case, as amended or supplemented to the date of
this Agreement.
2.2 Cornerstone Subsidiaries.
(a) Schedule 2.2 to the Cornerstone Disclosure Letter sets forth (i) each
Subsidiary (as defined herein) of Cornerstone (the "Cornerstone Subsidiaries")
and the Cornerstone Non-controlled Subsidiary (which Cornerstone Non-controlled
Subsidiary constitutes the only entity in which Cornerstone owns a non-voting
equity interest and has no right to control except as set forth on Schedule 2.4
of the Cornerstone Disclosure Letter), (ii) the ownership interest therein of
Cornerstone, (iii) if not, directly or indirectly, wholly owned by Cornerstone,
the identity and ownership interest of each of the other owners of such
Cornerstone Subsidiary or Cornerstone Non-controlled Subsidiary, as applicable,
(iv) each office property and other commercial property owned by such
Cornerstone Subsidiary or Cornerstone Non-controlled Subsidiary, as applicable,
and (v) if not wholly owned by such Cornerstone Subsidiary or Cornerstone
Non-controlled Subsidiary, as applicable, the identity and ownership interest of
each of the other owners of such property. As used in this Agreement,
"Subsidiary" of any Person (as defined herein) means any corporation,
partnership, limited liability company, joint venture, trust or other legal
entity of which such Person owns (either directly or through or together with
another Subsidiary of such Person) either (i) a general partner, managing member
or other similar interest, or (ii)(A) 10% or more of the voting power of the
voting capital stock or other equity interests, or (B) 10% or more of the
outstanding voting capital stock or other voting equity interests of such
corporation, partnership, limited liability company, joint venture or other
legal entity. As used herein, "Person" means an individual, corporation,
partnership, limited liability company, joint venture, association, trust,
unincorporated organization or other entity. Schedule 2.4 of the Cornerstone
Disclosure Letter sets forth a true and complete list of the equity securities
owned by Cornerstone, directly or indirectly, in any corporation, partnership,
limited liability company, joint venture or other legal entity, excluding
Cornerstone Subsidiaries and the Cornerstone Non-controlled Subsidiary.
(b) Except as set forth in Schedule 2.2 to the Cornerstone Disclosure
Letter, (i) all of the outstanding shares of capital stock of each Cornerstone
Subsidiary and Cornerstone Non-controlled Subsidiary that is a corporation have
been duly authorized, validly issued and are (A) fully paid and nonassessable
and not subject to preemptive rights, (B) owned by Cornerstone or by another
Cornerstone Subsidiary or Cornerstone Non-controlled Subsidiary and (C) owned
free and clear of all pledges, claims, liens, charges, encumbrances and security
interests of any kind or nature whatsoever (collectively, "Liens") and (ii) all
equity interests in each Cornerstone Subsidiary that is a partnership, joint
venture, limited liability company or trust which are owned by Cornerstone, by
another Cornerstone Subsidiary or Cornerstone Non-controlled Subsidiary or by
Cornerstone and another Cornerstone Subsidiary or Cornerstone Non-controlled
Subsidiary are owned free and clear of all Liens other than pledges, if any,
contained in organizational documents of such Cornerstone Subsidiary and given
to secure performance thereunder. Each Cornerstone Subsidiary and Cornerstone
Non-controlled Subsidiary that is a corporation
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is duly incorporated, validly existing and in good standing under the laws of
its jurisdiction of incorporation and has the requisite corporate power and
authority to own, operate, lease and encumber its properties and carry on its
business as now being conducted, and each Cornerstone Subsidiary that is a
partnership, limited liability company or trust is duly organized, validly
existing and in good standing under the laws of its jurisdiction of organization
and has the requisite power and authority to own, operate, lease and encumber
its properties and carry on its business as now being conducted. Each
Cornerstone Subsidiary and Cornerstone Non-controlled Subsidiary is duly
qualified or licensed to do business and is in good standing in each
jurisdiction in which the nature of its business or the ownership or leasing of
its properties makes such qualification or licensing necessary, other than in
such jurisdictions where the failure to be so qualified or licensed,
individually or in the aggregate, would not reasonably be expected to have a
Cornerstone Material Adverse Effect. Complete and correct copies of the Articles
of Incorporation, Bylaws, organization documents and partnership, joint venture
and operating agreements of each Cornerstone Subsidiary and Cornerstone
Non-controlled Subsidiary, as amended to the date of this Agreement, have been
previously delivered or made available to EOP. No effective amendment has been
made to the Cornerstone Partnership Agreement since January 21, 2000.
2.3 Capital Structure.
(a) The authorized shares of capital stock of Cornerstone consist of
250,000,000 shares of Cornerstone Common Stock, 129,638,245 of which are issued
and 129,280,012 of which are outstanding on the date of this Agreement, and
65,000,000 shares of preferred stock with no par value, of which 3,030,303
shares of Cornerstone 7% Preferred Stock are issued and outstanding and 344,828
shares of Redeemable Preferred Stock are designated with none outstanding on the
date of this Agreement.
(b) Set forth in Schedule 2.3(b) to the Cornerstone Disclosure Letter is a
true and complete list of the following: (i) each qualified or nonqualified
option to purchase shares of Common Stock granted under Cornerstone's 1998
Long-Term Incentive Plan or any other formal or informal arrangement
(collectively, the "Cornerstone Stock Options"); and (ii) all other warrants or
other rights to acquire Cornerstone Common Stock, all stock appreciation rights,
restricted stock, dividend equivalents, deferred compensation accounts,
performance awards, restricted stock unit awards and other awards which are
outstanding on the date of this Agreement ("Cornerstone Stock Rights"). Schedule
2.3(b) to the Cornerstone Disclosure Letter sets forth for each Cornerstone
Stock Option and Cornerstone Stock Right the name of the grantee, the date of
the grant, the number of shares of Cornerstone Common Stock subject to each
option or other award, and the exercise price per share. On the date of this
Agreement, except as set forth in this Section 2.3 or in Schedule 2.3(b) to the
Cornerstone Disclosure Letter, no shares of Cornerstone Common Stock were
outstanding or reserved for issuance.
(c) All outstanding shares of Cornerstone Common Stock are duly authorized,
validly issued, fully paid and nonassessable and not subject to preemptive
rights. There are no bonds, debentures, notes or other indebtedness of
Cornerstone having the right to vote (or convertible into, or exchangeable for,
securities having the right to vote) on any matters on which shareholders of
Cornerstone may vote, except for the Cornerstone convertible promissory note
dated as of January 1, 1996 which does not have voting rights but is convertible
into Cornerstone Common Stock (the "Cornerstone Convertible Promissory Note").
(d) Other than (i) as set forth in this Section 2.3 or in Schedule 2.3(b),
2.3(c), or 2.3(d) to the Cornerstone Disclosure Letter, (ii) Cornerstone OP
Units, which may be redeemed for cash or, at the option of Cornerstone,
Cornerstone Common Stock at a rate of one share of Cornerstone Common Stock for
each Cornerstone OP Unit, (iii) shares of Cornerstone Common Stock issuable upon
the conversion of Cornerstone 7% Preferred Stock, and (iv) shares of Cornerstone
Common Stock issuable pursuant to the Cornerstone Convertible Promissory Note,
as of the date of this Agreement, there are no outstanding securities, options,
warrants, calls, rights, commitments, agreements, arrangements or undertakings
of any kind to which Cornerstone or any Cornerstone Subsidiary or Cornerstone
Non-controlled Subsidiary is a party or by which such entity is bound,
obligating Cornerstone or any Cornerstone Subsidiary or Cornerstone
Non-controlled Subsidiary to issue, deliver or sell, or cause to be issued,
delivered or sold,
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additional shares of capital stock, voting securities or other ownership
interests of Cornerstone or any Cornerstone Subsidiary or Cornerstone
Non-controlled Subsidiary or obligating Cornerstone or any Cornerstone
Subsidiary or Cornerstone Non-controlled Subsidiary to issue, grant, extend or
enter into any such security, option, warrant, call, right, commitment,
agreement, arrangement or undertaking (other than to Cornerstone or a
Cornerstone Subsidiary or a Cornerstone Non-controlled Subsidiary).
(e) As of the date of this Agreement, 148,735,829 Cornerstone OP Units are
validly issued and outstanding, fully paid and nonassessable and not subject to
preemptive rights, of which 129,638,245 are owned by Cornerstone and 3,030,303
Cornerstone Preferred OP Units are validly issued and outstanding, fully paid
and nonassessable and not subject to preemptive rights, all of which are owned
by Cornerstone. Schedule 2.3(e) to the Cornerstone Disclosure Schedule sets
forth the name of each holder of Cornerstone OP Units and the number of
Cornerstone OP Units owned by each such holder as of the date of this Agreement.
Except as provided in the Cornerstone Partnership Agreement or as set forth on
Schedule 2.3(d), Cornerstone Partnership has not issued or granted and is not a
party to any outstanding commitments of any kind relating to, or any presently
effective agreements or understandings with respect to, the issuance or sale of
interests in Cornerstone Partnership, whether issued or unissued, or securities
convertible or exchangeable into interests in Cornerstone Partnership.
(f) Except for the distribution of $0.31 per share of Cornerstone Common
Stock and per Cornerstone OP Unit declared on January 20, 2000, and payable on
February 29, 2000, to holders of record on January 31, 2000, of shares of
Cornerstone Common Stock and Cornerstone OP Units, all dividends on Cornerstone
Common Stock and Cornerstone 7% Preferred Stock and all distributions on
Cornerstone OP Units, which have been declared prior to the date of this
Agreement, have been paid in full.
(g) Set forth on Schedule 2.3(g) to the Cornerstone Disclosure Letter is a
list of each registration rights agreement or other agreement between
Cornerstone and/or Cornerstone Partnership, on the one hand, and one or more
other parties, on the other hand, which sets forth the rights of any such other
party or parties to cause the registration of any securities of Cornerstone
and/or Cornerstone Partnership pursuant to the Securities Act of 1933, as
amended (the "Securities Act").
2.4 Other Interests. Except for interests in the Cornerstone Subsidiaries,
the Cornerstone Non-controlled Subsidiary and certain other entities as set
forth in Schedule 2.4 to the Cornerstone Disclosure Letter (the "Cornerstone
Other Interests"), none of Cornerstone, Cornerstone Partnership, any Cornerstone
Subsidiary or the Cornerstone Non-controlled Subsidiary owns directly or
indirectly any interest or investment (whether equity or debt) in any
corporation, partnership, joint venture, business, trust, limited liability
company or other entity (other than investments in short-term investment
securities). With respect to the Cornerstone Other Interests, Cornerstone
Partnership owns such interests free and clear of all Liens other than pledges,
if any, contained in organizational documents of such Cornerstone Other
Interests and given to secure performance thereunder. None of Cornerstone,
Cornerstone Partnership, any Cornerstone Subsidiary or the Cornerstone
Non-controlled Subsidiary is in material breach of any provision of any
agreement, document or contract which is of a material nature governing its
rights in or to the Cornerstone Other Interests, all of which agreements,
documents and contracts are (a) listed in Schedule 2.4 to the Cornerstone
Disclosure Letter, (b) unmodified except as described therein and (c) in full
force and effect. To the Knowledge of Cornerstone (as defined herein), the other
parties to any such agreement, document or contract which is of a material
nature are not in material breach of any of their respective obligations under
such agreements, documents or contracts.
2.5 Authority; Noncontravention; Consents.
(a) Cornerstone has the requisite corporate power and authority to enter
into this Agreement and, subject to the requisite Cornerstone stockholder
approval of the Merger Agreement and the Merger and any other matters reasonably
and timely requested by any other party to effectuate the transactions
contemplated by this Agreement (collectively, the "Cornerstone Stockholder
Approvals"), to consummate the transactions contemplated by this Agreement to
which Cornerstone is a party. The execution and delivery of this Agreement by
Cornerstone and the consummation by Cornerstone of the transactions contemplated
by this Agreement to which Cornerstone is a party have been duly authorized by
all
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necessary action on the part of Cornerstone, except for and subject to the
Cornerstone Stockholder Approvals and the Cornerstone Partner Approvals. This
Agreement has been duly executed and delivered by Cornerstone and constitutes a
valid and binding obligation of Cornerstone, enforceable against Cornerstone in
accordance with and subject to its terms, subject to applicable bankruptcy,
insolvency, moratorium or other similar laws relating to creditors' rights and
general principles of equity.
(b) Cornerstone Partnership has the requisite partnership power and
authority to enter into this Agreement and, subject to the requisite Cornerstone
Partner Approvals, to consummate the transactions contemplated by this Agreement
to which Cornerstone Partnership is a party. The execution and delivery of this
Agreement by Cornerstone Partnership and the consummation by Cornerstone
Partnership of the transactions contemplated by this Agreement to which
Cornerstone Partnership is a party have been duly authorized by all necessary
action on the part of Cornerstone Partnership, except for and subject to the
Cornerstone Stockholder Approvals and the Cornerstone Partner Approvals. This
Agreement has been duly executed and delivered by Cornerstone Partnership and
constitutes a valid and binding obligation of Cornerstone Partnership,
enforceable against Cornerstone Partnership in accordance with and subject to
its terms, subject to applicable bankruptcy, insolvency, moratorium or other
similar laws relating to creditors' rights and general principles of equity.
(c) Except as set forth in Schedule 2.5(c)(1) to the Cornerstone Disclosure
Letter, the execution and delivery of this Agreement by Cornerstone do not, and
the consummation of the transactions contemplated by this Agreement to which
Cornerstone is a party and compliance by Cornerstone with the provisions of this
Agreement will not, conflict with, or result in any violation of, or default
(with or without notice or lapse of time, or both) under, or give rise to a
right of termination, cancellation or acceleration of any material obligation or
to material loss of a benefit under, or result in the creation of any Lien upon
any of the properties or assets of Cornerstone or any Cornerstone Subsidiary
under, (i) the Cornerstone Articles or Cornerstone Bylaws or the comparable
charter or organizational documents or partnership, operating, or similar
agreement (as the case may be) of any Cornerstone Subsidiary or Cornerstone
Non-controlled Subsidiary, each as amended or supplemented, (ii) any loan or
credit agreement, note, bond, mortgage, indenture, merger or other acquisition
agreement, reciprocal easement agreement, lease or other agreement, instrument,
permit, concession, franchise or license applicable to Cornerstone or any
Cornerstone Subsidiary or Cornerstone Non-controlled Subsidiary or their
respective properties or assets or (iii) subject to the governmental filings and
other matters referred to in the following sentence, any judgment, order,
decree, statute, law, ordinance, rule or regulation (collectively, "Laws")
applicable to Cornerstone or any Cornerstone Subsidiary or Cornerstone
Non-controlled Subsidiary, or their respective properties or assets, other than,
in the case of clause (ii) or (iii), any such conflicts, violations, defaults,
rights, loss or Liens that individually or in the aggregate would not (x) have a
Cornerstone Material Adverse Effect or (y) prevent the consummation of the
transactions contemplated by this Agreement. No consent, approval, order or
authorization of, or registration, declaration or filing with, any federal,
state or local government or any court, administrative or regulatory agency or
commission or other governmental authority or agency, domestic or foreign (a
"Governmental Entity"), is required by or with respect to Cornerstone or any
Cornerstone Subsidiary or Cornerstone Non-controlled Subsidiary in connection
with the execution and delivery of this Agreement by Cornerstone or the
consummation by Cornerstone of the transactions contemplated by this Agreement,
except for (i) the filing with the Securities and Exchange Commission (the
"SEC") of the Joint Proxy Statement (as defined herein), (ii) the acceptance for
record of the Maryland Articles of Merger by the Department, (iii) the filing of
the Nevada Articles of Merger with the Secretary of State of the State of
Nevada, (iv) the filing of the Certificate of Merger with the Office of the
Secretary of State of the State of Delaware and (v) such other consents,
approvals, orders, authorizations, registrations, declarations and filings (A)
as are set forth in Schedule 2.5(c)(2) to the Cornerstone Disclosure Letter, (B)
as may be required under (w) the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended (the "HSR Act"), (x) laws requiring transfer, recordation or
gains tax filings, (y) federal, state or local environmental laws or (z) the
"blue sky" laws of various states, to the extent applicable or (C) which, if not
obtained or made, would not prevent or delay in any material respect the
consummation of any of the transactions contemplated by this Agreement or
otherwise prevent Cornerstone from performing its obligations under
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this Agreement in any material respect or reasonably be expected to have,
individually or in the aggregate, a Cornerstone Material Adverse Effect.
2.6 SEC Documents; Financial Statements; Undisclosed
Liabilities. Cornerstone has filed all required reports, schedules, forms,
statements and other documents with the SEC since January 1, 1997 through the
date hereof (the "Cornerstone SEC Documents"). Schedule 2.6(a) to the
Cornerstone Disclosure Letter contains a complete list of all Cornerstone SEC
Documents filed by Cornerstone with the SEC under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), between January 1, 1997 and the date of
this Agreement. All of the Cornerstone SEC Documents (other than preliminary
material), as of their respective filing dates, complied in all material
respects with all applicable requirements of the Securities Act and the Exchange
Act and, in each case, the rules and regulations promulgated thereunder
applicable to such Cornerstone SEC Documents. None of the Cornerstone SEC
Documents at the time of filing contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading, except to the extent such statements
have been modified or superseded by later Cornerstone SEC Documents filed and
publicly available prior to the date of this Agreement. The consolidated
financial statements of Cornerstone included in the Cornerstone SEC Documents
complied as to form in all material respects with applicable accounting
requirements and the published rules and regulations of the SEC with respect
thereto, have been prepared in accordance with generally accepted accounting
principles ("GAAP") (except, in the case of unaudited statements, as permitted
by the applicable rules and regulations of the SEC) applied on a consistent
basis during the periods involved (except as may be indicated in the notes
thereto) and fairly presented in all material respects, in accordance with the
applicable requirements of GAAP and the applicable rules and regulations of the
SEC, the consolidated financial position of Cornerstone and its Subsidiaries
taken as a whole, as of the dates thereof and the consolidated results of
operations and cash flows for the periods then ended (subject, in the case of
unaudited statements, to normal year-end audit adjustments). Except as set forth
in Schedule 2.6(b) to the Cornerstone Disclosure Letter, Cornerstone has no
Subsidiaries which are not consolidated for accounting purposes. Except for
liabilities and obligations set forth in the Cornerstone SEC Documents or in
Schedule 2.6(c) to the Cornerstone Disclosure Letter, none of Cornerstone, any
Cornerstone Subsidiary or the Cornerstone Non-controlled Subsidiary has any
liabilities or obligations of any nature (whether accrued, absolute, contingent
or otherwise) required by GAAP to be set forth on a consolidated balance sheet
of Cornerstone or in the notes thereto and which, individually or in the
aggregate, would have a Cornerstone Material Adverse Effect.
2.7 Absence of Certain Changes or Events. Except as disclosed in the
Cornerstone SEC Documents or in Schedule 2.7 to the Cornerstone Disclosure
Letter, since the date of the most recent audited financial statements included
in Cornerstone SEC Documents (the "Cornerstone Financial Statement Date"),
Cornerstone, its Subsidiaries and the Cornerstone Non-controlled Subsidiary have
conducted their business only in the ordinary course (taking into account prior
practices, including the acquisition and disposition of properties and issuance
of securities) and there has not been (a) any material adverse change in the
business, financial condition or results of operations of Cornerstone and its
Subsidiaries taken as a whole (a "Cornerstone Material Adverse Change"), nor has
there been any occurrence or circumstance that with the passage of time would
reasonably be expected to result in a Cornerstone Material Adverse Change, (b)
except for regular quarterly distributions not in excess of $0.31 per share of
Cornerstone Common Stock or Cornerstone OP Unit and except for regular annual
distributions not in excess of $1.155 per share of Cornerstone 7% Preferred
Stock (or, in each case, with respect to the period commencing on the date
hereof and ending on the Closing Date, distributions as necessary to maintain
REIT (as defined herein) status), in each case with customary record and payment
dates, any authorization, declaration, setting aside or payment of any dividend
or other distribution (whether in cash, stock or property) with respect to the
Cornerstone Common Stock, the Cornerstone OP Units or the Cornerstone 7%
Preferred Stock, (c) any split, combination or reclassification of the
Cornerstone Common Stock, the Cornerstone OP Units or the Cornerstone 7%
Preferred Stock or any issuance or the authorization of any issuance of any
other securities in respect of, in lieu of or in substitution for, or giving the
right to acquire by exchange or exercise, shares of stock of Cornerstone or
partnership interests in Cornerstone Partnership or any issuance
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of an ownership interest in, any Cornerstone Subsidiary or the Cornerstone
Non-controlled Subsidiary, (d) any damage, destruction or loss, whether or not
covered by insurance, that has or would have a Cornerstone Material Adverse
Effect, (e) any change in accounting methods, principles or practices by
Cornerstone or any Cornerstone Subsidiary or the Cornerstone Non-controlled
Subsidiary materially affecting its assets, liabilities or business, except
insofar as may have been disclosed in Cornerstone SEC Documents or required by a
change in GAAP, or (f) any amendment of any employment, consulting, severance,
retention or any other agreement between Cornerstone and any officer or director
of Cornerstone.
2.8 Litigation. Except as disclosed in the Cornerstone SEC Documents or in
Schedule 2.8 to the Cornerstone Disclosure Letter, and other than personal
injury and other routine tort litigation arising from the ordinary course of
operations of Cornerstone, the Cornerstone Subsidiaries and the Cornerstone Non-
controlled Subsidiary (a) which are covered by adequate insurance subject to a
reasonable deductible or retention limit or (b) for which all material costs and
liabilities arising therefrom are reimbursable pursuant to common area
maintenance or similar agreements, there is no suit, action or proceeding
pending (in which service of process has been received by an employee of
Cornerstone, a Cornerstone Subsidiary or a Cornerstone Non-controlled
Subsidiary) or, to the Knowledge of Cornerstone (as hereinafter defined),
threatened in writing against or affecting Cornerstone, or any Cornerstone
Subsidiary or Cornerstone Non-controlled Subsidiary that, individually or in the
aggregate, would reasonably be expected to (i) have a Cornerstone Material
Adverse Effect or (ii) prevent the consummation of any of the transactions
contemplated by this Agreement, nor is there any judgment, decree, injunction,
rule or order of any court or Governmental Entity or arbitrator outstanding
against Cornerstone, any Cornerstone Subsidiary or the Cornerstone
Non-controlled Subsidiary having, or which, insofar as reasonably can be
foreseen, in the future would have, any such effect. Notwithstanding the
foregoing, (y) Schedule 2.8 to the Cornerstone Disclosure Letter sets forth each
and every material uninsured claim, equal employment opportunity claim and claim
relating to sexual harassment and/or discrimination pending or, to the Knowledge
of Cornerstone, threatened as of the date hereof, and (z) no claim has been made
under any directors' and officers' liability insurance policy maintained at any
time by Cornerstone, any of the Cornerstone Subsidiaries or the Cornerstone
Non-controlled Subsidiary.
2.9 Properties.
(a) Except as provided in Schedule 2.2 or Schedule 2.9(a) to the
Cornerstone Disclosure Letter, Cornerstone or the Cornerstone Subsidiary or
Cornerstone Non-controlled Subsidiary set forth on Schedule 2.2 to the
Cornerstone Disclosure Letter owns fee simple title to or holds a leasehold
interest in each of the real properties identified in Schedule 2.2 to the
Cornerstone Disclosure Letter (the "Cornerstone Properties"), which are all of
the real estate properties owned by them, in each case (except for the Permitted
Title Exceptions (as defined herein)) free and clear of liens, mortgages or
deeds of trust, claims against title, charges which are liens, security
interests or other encumbrances on title ("Encumbrances"). Schedule 2.2 to the
Cornerstone Disclosure Letter further identifies which of the Cornerstone
Properties are owned in fee simple by Cornerstone or the Cornerstone Subsidiary
or the Cornerstone Non-controlled Subsidiary and which of the Cornerstone
Properties are subject to a ground lease. Except as set forth in Schedule 2.2 to
the Cornerstone Disclosure Letter, no other Person has any ownership interest in
any of the Cornerstone Properties, and any such ownership interest so scheduled
does not materially detract from the value of the Cornerstone Subsidiary's or
Cornerstone Non-controlled Subsidiary's (as the case may be) interest in, or
materially interfere with the present use of, any of the Cornerstone Properties
subject thereto or affected thereby. Except as set forth in Schedule 2.9(a) to
the Cornerstone Disclosure Letter, none of the Cornerstone Properties is subject
to any restriction on the sale or other disposition thereof or on the financing
or release of financing thereon. The Cornerstone Properties are not subject to
any rights of way, written agreements, laws, ordinances and regulations
affecting building use or occupancy, or reservations of an interest in title
(collectively, "Property Restrictions") or Encumbrances, except for the
following (collectively, the "Permitted Title Exceptions") (i) Property
Restrictions and Encumbrances set forth in the Cornerstone Disclosure Letter,
(ii) Property Restrictions imposed or promulgated by law or any governmental
body or authority with respect to real property,
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including zoning regulations, which do not materially adversely affect the
current use of any Cornerstone Property, (iii) Property Restrictions and
Encumbrances disclosed on existing title reports or policies or existing surveys
or subsequently granted by Cornerstone or the Cornerstone Subsidiary or
Cornerstone Non-controlled Subsidiary, which Property Restrictions and
Encumbrances, in any event, do not materially detract from the value of, or
materially interfere with the present use of, any of the Cornerstone Properties
subject thereto or affected thereby and (iv) liens for real estate taxes not yet
due and payable, mechanics', carriers', workmen's, repairmen's liens and other
Encumbrances and Property Restrictions, if any, which, individually or in the
aggregate, do not materially detract from the value of or materially interfere
with the present use of any of the Cornerstone Properties subject thereto or
affected thereby. Schedule 2.9(a) to the Cornerstone Disclosure Letter lists
each of the Cornerstone Properties which are under development as of the date of
this Agreement and describes the status of such development as of the date
hereof.
(b) Except as provided in Schedule 2.2 or Schedule 2.9(b) to the
Cornerstone Disclosure Letter, valid policies of title insurance or fully-paid
and enforceable commitments therefor have been issued insuring the applicable
Cornerstone Subsidiary's or Cornerstone Non-controlled Subsidiary's (as the case
may be) fee simple title or leasehold estate, as the case may be, to the
Cornerstone Properties owned by it in amounts approximately equal to the
purchase price therefor paid by such Cornerstone Subsidiary or Cornerstone
Non-controlled Subsidiary, subject only to the matters disclosed above and in
the Cornerstone Disclosure Letter. Such policies are, at the date hereof, in
full force and effect. No claim has been made against any such policy.
(c) Except as provided in Schedule 2.9(c) to the Cornerstone Disclosure
Letter, Cornerstone has no Knowledge (i) that, any certificate, permit or
license from any governmental authority having jurisdiction over any of the
Cornerstone Properties or any agreement, easement or other right which is
necessary to permit the lawful use and operation of the buildings and
improvements on any of the Cornerstone Properties or which is necessary to
permit the lawful use and operation of all driveways, roads and other means of
egress and ingress to and from any of the Cornerstone Properties has not been
obtained and is not in full force and effect, or of any pending threat of
modification or cancellation of any of the same which would have a material
adverse effect on such Cornerstone Property, (ii) of any written notice of any
violation of any federal, state or municipal law, ordinance, order, regulation
or requirement affecting any of the Cornerstone Properties issued by any
governmental authority which would have a material adverse effect on such
Cornerstone Property, (iii) of any structural defects relating to any
Cornerstone Property which would have a material adverse effect on such
Cornerstone Property, (iv) of any Cornerstone Property whose building systems
are not in working order so as to have a material adverse effect on such
Cornerstone Property, or (v) of any physical damage to any Cornerstone Property
which would have a material adverse effect on such Cornerstone Property for
which there is no insurance in effect covering the cost of the restoration.
(d) None of Cornerstone, any Cornerstone Subsidiary or the Cornerstone
Non-controlled Subsidiary has received any written or published notice to the
effect that (i) any condemnation or rezoning proceedings are pending or
threatened with respect to any of the Cornerstone Properties or (ii) any zoning,
building or similar law, code, ordinance, order or regulation is or will be
violated by the continued maintenance, operation or use of any buildings or
other improvements on any of the Cornerstone Properties or by the continued
maintenance, operation or use of the parking areas which would have a material
adverse effect on such Cornerstone Property. Except as set forth in Schedule
2.9(d) to the Cornerstone Disclosure Letter, all work required to be performed,
payments required to be made and actions required to be taken prior to the date
hereof pursuant to any agreement entered into with a governmental body or
authority in connection with a site approval, zoning reclassification or other
similar action relating to any Cornerstone Properties (e.g., Local Improvement
District, Road Improvement District, Environmental Mitigation) have been
performed, paid or taken, as the case may be, and Cornerstone has no Knowledge
of any planned or proposed work, payments or actions that may be required after
the date hereof pursuant to such agreements, except as set forth in development
or operating budgets for such Cornerstone Properties delivered to EOP and EOP
Partnership prior to the date hereof
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and other than those which would not reasonably be expected to have a material
adverse effect on any of Cornerstone or the Cornerstone Subsidiaries or the
Cornerstone Non-controlled Subsidiary.
(e) The rent rolls previously provided by Cornerstone to EOP (the
"Cornerstone Rent Roll") list each Cornerstone Space Lease (as defined herein)
in effect as of the dates set forth therein, none of which are earlier than
December 31, 1999. "Cornerstone Space Lease" means each lease or other right of
occupancy affecting or relating to a property in which Cornerstone Partnership
(or an entity in which it directly or indirectly has an interest) is the
landlord, either pursuant to the terms of the lease agreement or as successor to
any prior landlord, but excluding any ground lease. Cornerstone has made
available to EOP true, correct and complete copies of all Cornerstone Space
Leases, including all amendments, modifications, supplements, renewals,
extensions and guarantees related thereto, as of the date hereof. Except for
discrepancies that, either individually or in the aggregate, would not
reasonably be expected to have a Cornerstone Material Adverse Effect, all
information set forth in the Cornerstone Rent Roll is true, correct and complete
as of the date thereof. Except as set forth in a delinquency report made
available to EOP, none of Cornerstone, any Cornerstone Subsidiary or the
Cornerstone Non-controlled Subsidiary, on the one hand, nor, to the knowledge of
Cornerstone or Cornerstone Partnership, any other party, on the other hand, is
in monetary default under any Cornerstone Space Lease, except for such defaults
that would not reasonably be expected to have a Cornerstone Material Adverse
Effect.
2.10 Environmental Matters.
(a) "Environmental Law" shall mean all applicable Laws relating to the
protection of human health or safety and natural resources or the environment,
including, without limitation, Laws relating to the use, manufacturing,
generation, recycling, reuse, sale, storage, handling, transport, treatment or
disposal of any Hazardous Materials (including the Comprehensive Environmental
Response, Compensation, and Liability Act, as amended, 42 U.S.C. sec.sec. 9601
et seq. ("CERCLA")). "Hazardous Materials" shall mean substances, wastes or
materials listed, regulated or defined under any Environmental Law, and shall
include "hazardous wastes," "hazardous substances," "hazardous materials,"
petroleum or any fraction thereof, asbestos, lead-paint, urea-formaldehyde, and
polychlorinated biphenyls. "Release" shall have the meaning set forth in Section
101 of CERCLA, without regard to the exclusions set forth therein.
(b) Except as disclosed in the Cornerstone SEC Documents or in Schedule
2.10(a) to the Cornerstone Disclosure Letter,
(i) none of Cornerstone, any of the Cornerstone Subsidiaries or the
Cornerstone Non-controlled Subsidiary or, to Cornerstone's Knowledge, any
other Person has caused or permitted the presence of any Hazardous
Materials at, on or under any of the Cornerstone Properties and none of
Cornerstone, any of the Cornerstone Subsidiaries or the Cornerstone
Non-controlled Subsidiary has any knowledge of the presence of any
Hazardous Materials at, on or under any of the Cornerstone Properties, in
each of the foregoing cases, such that the presence of such Hazardous
Materials (including the presence of asbestos in any buildings or
improvements at the Cornerstone Properties) would, individually or in the
aggregate, reasonably be expected to have a Cornerstone Material Adverse
Effect;
(ii) except in accordance with the Environmental Permits (as defined
herein) there have been no Releases of Hazardous Materials at, on, under or
from (A) the Cornerstone Properties or (B) any real property previously
owned, operated or leased by Cornerstone, the Cornerstone Subsidiaries, or
the Cornerstone Non-controlled Subsidiary (the "Former Cornerstone
Properties") during the period of such ownership, operation or tenancy, and
none of Cornerstone, any of the Cornerstone Subsidiaries or the Cornerstone
Non-controlled Subsidiary has any knowledge of any Releases of Hazardous
Materials having occurred or presently occurring at, on, under or from the
Cornerstone Properties or the Former Cornerstone Properties, which would,
individually or in the aggregate, reasonably be expected to have a
Cornerstone Material Adverse Effect;
(iii) Cornerstone, the Cornerstone Subsidiaries and the Cornerstone
Non-controlled Subsidiary have not failed to comply with all Environmental
Laws, and none of Cornerstone, any of the Cornerstone Subsidiaries or the
Cornerstone Non-controlled Subsidiary has any liability under the
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Environmental Laws, except to the extent that any such failure to comply or
any such liability, individually or in the aggregate, would not reasonably
be expected to have a Cornerstone Material Adverse Effect; and
(iv) Cornerstone, the Cornerstone Subsidiaries and the Cornerstone
Non-controlled Subsidiary have been duly issued, and currently have and
will maintain through the Closing Date, all permits, licenses, certificates
and approvals required under any Environmental Law (collectively, the
"Environmental Permits") necessary to operate their businesses as currently
operated except where the failure to obtain and maintain such Environmental
Permit would not have a material adverse effect on the Cornerstone
Property. Cornerstone, the Cornerstone Subsidiaries and the Cornerstone
Non-controlled Subsidiary have timely filed applications for all
Environmental Permits. All of the Environmental Permits are transferable
and none require consent, notification or other action to remain in full
force and effect following consummation of the transactions contemplated
hereby.
(c) Cornerstone has previously delivered or made available to EOP complete
copies of all material information, documents and reports, including, without
limitation, environmental investigations and testing or analysis that are in the
possession or control of any of Cornerstone, the Cornerstone Subsidiaries and
the Cornerstone Non-controlled Subsidiary and which relate to compliance with
Environmental Laws by any of them or to the past or current environmental
condition of the Cornerstone Properties.
2.11 Related Party Transactions. Set forth in Schedule 2.11 to the
Cornerstone Disclosure Letter is a list of all material arrangements, agreements
and contracts entered into by Cornerstone, any Cornerstone Subsidiary and the
Cornerstone Non-controlled Subsidiary with (a) any investment banker or
financial advisor, (b) any person who is an officer, director or Affiliate (as
defined herein) of Cornerstone or any Subsidiary or the Cornerstone
Non-controlled Subsidiary, any relative of any of the foregoing or any entity of
which any of the foregoing is an Affiliate or (c) any person who acquired
Cornerstone Common Stock, Cornerstone OP Units or Cornerstone 7% Preferred Stock
in a private placement, in each case which remain in effect and are not
otherwise disclosed in the SEC Documents. Such documents, copies of all of which
have previously been delivered or made available to EOP, are listed in Schedule
2.11 to the Cornerstone Disclosure Letter. As used in this Agreement, the term
"Affiliate" shall have the same meaning as such term is defined in Rule 405
promulgated under the Securities Act.
2.12 Employee Benefits. As used herein, the term "Employee Plan" includes
any pension, retirement, savings, disability, medical, dental, health, life,
death benefit, group insurance, profit sharing, deferred compensation, stock
option, bonus, incentive, vacation pay, tuition reimbursement, severance pay, or
other employee benefit plan, trust, agreement, contract, agreement, policy or
commitment (including, without limitation, any pension plan, as defined in
Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended,
and the rules and regulations promulgated thereunder ("ERISA") ("Pension Plan"),
and any welfare plan as defined in Section 3(1) of ERISA ("Welfare Plan")),
whether any of the foregoing is funded, insured or self-funded, written or oral,
(i) sponsored or maintained by Cornerstone, any Cornerstone Subsidiary or the
Cornerstone Non-controlled Subsidiary (each, a "Controlled Group Member") and
covering any Controlled Group Member's active or former employees (or their
beneficiaries), (ii) to which any Controlled Group Member is a party or by which
any Controlled Group Member (or any of the rights, properties or assets thereof)
is bound or (iii) with respect to which any current Controlled Group Member may
otherwise have any material liability (whether or not such Controlled Group
Member still maintains such Employee Plan). Each Employee Plan is listed on
Schedule 2.12 to the Cornerstone Disclosure Letter. Except as disclosed in
Schedule 2.12 to the Cornerstone Disclosure Letter, with respect to the Employee
Plans:
(a) No Controlled Group Member has any continuing liability under any
Welfare Plan which provides for continuing benefits or coverage for any
participant or any beneficiary of a participant after such participant's
termination of employment, except as may be required by Section 4980B of the
Code or Section 601 (et seq.) of ERISA, or under any applicable state law, and
at the expense of the participant or the beneficiary of the participant.
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(b) Each Employee Plan complies in all material respects with the
applicable requirements of ERISA and any other applicable law governing such
Employee Plan, and, to the Knowledge of Cornerstone, each Employee Plan has at
all times been properly administered in all material respects in accordance with
all such requirements of law, and in accordance with its terms and the terms of
any applicable collective bargaining agreement to the extent consistent with all
such requirements of law. Each Pension Plan which is intended to be qualified is
qualified under Section 401(a) of the Code, has received a favorable
determination letter from the IRS stating that such Plan meets the requirements
of Section 401(a) of the Code and that the trust associated with such Plan is
tax-exempt under Section 501(a) of the Code and, to the Knowledge of
Cornerstone, no event has occurred which would jeopardize the qualified status
of any such plan or the tax exempt status of any such trust under Sections
401(a) and Section 501(a) of the Code, respectively. No lawsuits, claims (other
than routine claims for benefits) or complaints to, or by, any person or
governmental entity have been filed, are pending or, to the Knowledge of
Cornerstone, threatened with respect to any Employee Plan and, to the Knowledge
of Cornerstone, there is no fact or contemplated event which would be expected
to give rise to any such lawsuit, claim (other than routine claims for benefits)
or complaint with respect to any Pension Plan. Without limiting the foregoing,
the following are true with respect to each Employee Plan:
(i) all Controlled Group Members have complied in all material
respects with the reporting and disclosure requirements of ERISA, the Code,
or both, with respect to each Employee Plan and no Controlled Group Member
has incurred any material liability in connection with such reporting or
disclosure;
(ii) all contributions and payments with respect to Employee Plans
that are required to be made by a Controlled Group Member with respect to
periods ending on or before the Closing Date (including periods from the
first day of the current plan or policy year to the Closing Date) have
been, or will be, made or accrued before the Closing Date in accordance
with the appropriate plan document, actuarial report, collective bargaining
agreements or insurance contracts or arrangements or as otherwise required
by ERISA or the Code; and
(iii) with respect to each such Employee Plan, to the extent
applicable, Cornerstone has delivered to or has made available to EOP true
and complete copies of (A) plan documents, or any and all other documents
that establish the existence of the plan, trust, arrangement, contract,
policy or commitment and all amendments thereto, (B) the most recent
determination letter, if any, received from the IRS, (C) the three most
recent Form 5500 Annual Reports (and all schedules and reports relating
thereto) and actuarial reports and (D) all related trust agreements,
insurance contract or other funding agreements that implement each such
Employee Plan.
(c) With respect to each Employee Plan, to the Knowledge of Cornerstone,
there has not occurred, and no person or entity is contractually bound to enter
into, any "prohibited transaction" within the meaning of Section 4975(c) of the
Code or Section 406 of ERISA, which transaction is not exempt under Section
4975(d) of the Code or Section 408 of ERISA and which could subject Cornerstone
or any Controlled Group Member to material liability.
(d) No Controlled Group Member has maintained or been obligated to
contribute to any Employee Plan subject to Code Section 412 or Title IV of
ERISA. No Employee Plan subject to Code Section 412 or Title IV of ERISA has
been terminated.
(e) With respect to each Pension Plan maintained by any Controlled Group
Member, such Plan provides the Plan Sponsor the authority to amend or terminate
the Plan at any time, subject to applicable requirements of ERISA and the Code.
2.13 Employee Policies. The employee handbooks of Cornerstone, the
Cornerstone Subsidiaries and the Cornerstone Non-controlled Subsidiary currently
in effect are attached as Schedule 2.13 to the Cornerstone Disclosure Letter and
fairly and accurately summarize all material employee policies, vacation
policies and payroll policies.
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2.14 Taxes.
(a) Each of Cornerstone, the Cornerstone Subsidiaries and the Cornerstone
Non-controlled Subsidiary (A) has filed all Tax returns and reports required to
be filed by it (after giving effect to any filing extension properly granted by
a Governmental Entity having authority to do so) and all such returns and
reports are accurate and complete in all material respects, (B) has paid (or
Cornerstone has paid on its behalf) all Taxes (as defined herein) shown on such
returns and reports as required to be paid by it, and (C) has complied in all
material respects with all applicable laws, rules and regulations relating to
the payment and withholding of Taxes (including, without limitation, withholding
of Taxes pursuant to Sections 1441, 1442, 1445, 3121, and 3402 of the Code or
similar provisions under any foreign laws) and has, within the time period
prescribed by law, withheld and paid over to the proper governmental entities
all amounts required to be so withheld and paid over under applicable laws and
regulations, except, with respect to all of the foregoing, where the failure to
file such tax returns and reports or failure to pay such Taxes or failure to
comply with such withholding requirements would not reasonably be expected to
have a Cornerstone Material Adverse Effect. The most recent audited financial
statements contained in the Cornerstone SEC Documents reflect an adequate
reserve for all material Taxes payable by Cornerstone, the Cornerstone
Subsidiaries and the Cornerstone Non-controlled Subsidiary for all taxable
periods and portions thereof through the date of such financial statements.
Since the Cornerstone Financial Statement Date, Cornerstone has incurred no
liability for Taxes under Sections 857(b), 860(c) or 4981 of the Code, including
without limitation any Tax arising from a prohibited transaction described in
Section 857(b)(6) of the Code, and none of Cornerstone, any Cornerstone
Subsidiary or the Cornerstone Non-controlled Subsidiary has incurred any
material liability for Taxes other than in the ordinary course of business. No
event has occurred, and no condition or circumstance exists, which presents a
material risk that any material Tax described in the preceding sentences will be
imposed upon Cornerstone, any Cornerstone Subsidiary, or the Cornerstone
Non-controlled Subsidiary. None of Cornerstone, any Cornerstone Subsidiary or
the Cornerstone Non-controlled Subsidiary is the subject of any audit,
examination, or other proceeding in respect of federal income Taxes, and to
Cornerstone's Knowledge, no audit, examination or other proceeding in respect of
federal income Taxes involving any of Cornerstone, any Cornerstone Subsidiary,
or the Cornerstone Non-controlled Subsidiary is being considered by any Tax
authority. To the Knowledge of Cornerstone, no deficiencies for any Taxes have
been proposed, asserted or assessed against Cornerstone, any Cornerstone
Subsidiary or the Cornerstone Non-controlled Subsidiary, and no requests for
waivers of the time to assess any such Taxes are pending. As used in this
Agreement, "Taxes" shall include all taxes, charges, fees, levies and other
assessments, including, without limitation, income, gross receipts, excise,
property, sales, withholding (including, without limitation, dividend
withholding and withholding required pursuant to Sections 1445 and 1446 of the
Code), social security, occupation, use, service, license, payroll, franchise,
transfer and recording taxes, fees and charges, including estimated taxes,
imposed by the United States or any taxing authority (domestic or foreign),
whether computed on a separate, consolidated, unitary, combined or any other
basis, and any interest, fines, penalties or additional amounts attributable to,
or imposed upon, or with respect to any such taxes, charges, fees, levies or
other assessments.
(b) Cornerstone (i) for all taxable years for which the Internal Revenue
Service could assert a tax liability, has been subject to taxation as a real
estate investment trust (a "REIT") within the meaning of Section 856 of the Code
and has satisfied all requirements to qualify as a REIT for all such years, (ii)
has operated since December 31, 1999 to the date of this representation, and
intends to continue to operate, in such a manner as to qualify as a REIT for the
taxable year ending on the earlier of December 31, 2000 or the Closing Date and,
if later, for the taxable year of Cornerstone ending on the Closing Date, and
(iii) has not taken or omitted to take any action which would reasonably be
expected to result in a challenge to its status as a REIT and, to Cornerstone's
Knowledge, no such challenge is pending or threatened. Each Cornerstone
Subsidiary which is a partnership, joint venture or limited liability company
(i) has been since its formation and continues to be treated for federal income
tax purposes as a partnership and not as a corporation or an association taxable
as a corporation and (ii) has not since the later of its formation or the
acquisition by Cornerstone of a direct or indirect interest therein, owned any
assets (including, without limitation, securities) that would cause Cornerstone
to violate Section
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856(c)(4) of the Code. Cornerstone Partnership is not a publicly-traded
partnership within the meaning of Section 7704(b) of the Code that is taxable as
a corporation pursuant to Section 7704(a) of the Code. Each Cornerstone
Subsidiary which is a corporation has been since its formation a qualified REIT
subsidiary under Section 856(i) of the Code. Neither Cornerstone nor any
Cornerstone Subsidiary holds any asset (x) the disposition of which would be
subject to rules similar to Section 1374 of the Code as a result of an election
under IRS Notice 88-19 or Temporary Treas. Reg. sec.1.337(d)-5T or (y) which is
subject to a consent filed pursuant to Section 341(f) of the Code and the
regulations thereunder.
2.15 No Payments to Employees, Officers or Directors. Schedule 2.15 to the
Cornerstone Disclosure Letter contains a true and complete list of all
arrangements, agreements or plans pursuant to which cash and non-cash payments
which will become payable (and the maximum aggregate amount which may be payable
thereunder) to each employee, officer or director of Cornerstone, any
Cornerstone Subsidiary or the Cornerstone Non-controlled Subsidiary as a result
of the Merger or a termination of service subsequent to the consummation of the
Merger. Except as described in Schedule 2.15 to the Cornerstone Disclosure
Letter, or as otherwise provided for in this Agreement, there is no employment
or severance contract, or other agreement requiring payments, cancellation of
indebtedness or other obligation to be made on a change of control or otherwise
as a result of the consummation of any of the transactions contemplated by this
Agreement or as a result of a termination of service subsequent to the
consummation of any of the transactions contemplated by this Agreement, with
respect to any employee, officer or director of Cornerstone, any Cornerstone
Subsidiary or the Cornerstone Non-controlled Subsidiary. There is no agreement
or arrangement with any employee, officer or other service provider under which
Cornerstone, any Cornerstone Subsidiary or any Cornerstone Non-controlled
Subsidiary has agreed to pay any tax that might be owed under Section 4999 of
the Code with respect to payments to such individuals.
2.16 Broker; Schedule of Fees and Expenses. No broker, investment banker,
financial advisor or other person, other than Lazard Freres & Co. L.L.C. the
fees and expenses of which are described in the engagement letter dated January
28, 2000, between Lazard Freres & Co. L.L.C. and Cornerstone, a true, correct
and complete copy of which has previously been given to EOP, is entitled to any
broker's, finder's, financial advisor's or other similar fee or commission in
connection with the transactions contemplated hereby based upon arrangements
made by or on behalf of Cornerstone or any Cornerstone Subsidiary.
2.17 Compliance with Laws. None of Cornerstone, any Cornerstone Subsidiary
or the Cornerstone Non-controlled Subsidiary has violated or failed to comply
with any statute, law, ordinance, regulation, rule, judgment, decree or order of
any Governmental Entity applicable to its business, properties or operations,
except to the extent that such violation or failure would not reasonably be
expected to have a Cornerstone Material Adverse Effect.
2.18 Contracts; Debt Instruments.
(a) None of Cornerstone, any Cornerstone Subsidiary or the Cornerstone
Non-controlled Subsidiary has received a written notice that it is in violation
of or in default under (nor to the Knowledge of Cornerstone does there exist any
condition which upon the passage of time or the giving of notice or both would
cause such a violation of or default under) any material loan or credit
agreement, note, bond, mortgage, indenture, lease, permit, concession,
franchise, license or any other material contract, agreement, arrangement or
understanding, to which it is a party or by which it or any of its properties or
assets is bound, nor to the Knowledge of Cornerstone does such a violation or
default exist, except to the extent that such violation or default, individually
or in the aggregate, would not reasonably be expected to have a Cornerstone
Material Adverse Effect.
(b) Except for any of the following expressly identified in Cornerstone SEC
Documents, Schedule 2.18(b) to the Cornerstone Disclosure Letter sets forth a
list of each material loan or credit agreement, note, bond, mortgage, indenture
and any other agreement or instrument pursuant to which any Indebtedness (as
defined herein) of Cornerstone, the Cornerstone Subsidiaries and the Cornerstone
Non-controlled Subsidiary, other than Indebtedness payable to Cornerstone, a
Cornerstone Subsidiary or a Cornerstone Non-controlled Subsidiary, is
outstanding or may be incurred. For purposes of this Section 2.18,
"Indebtedness" shall mean (i) indebtedness for borrowed money, whether secured
or unsecured,
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(ii) obligations under conditional sale or other title retention agreements
relating to property purchased by such person, (iii) capitalized lease
obligations, (iv) obligations under interest rate cap, swap, collar or similar
transaction or currency hedging transactions (valued at the termination value
thereof) and (v) guarantees of any such indebtedness of any other person.
(c) To the extent not set forth in response to the requirements of Section
2.18(b), Schedule 2.18(c) to the Cornerstone Disclosure Letter sets forth each
interest rate cap, interest rate collar, interest rate swap, currency hedging
transaction, and any other agreement relating to a similar transaction to which
Cornerstone, any Cornerstone Subsidiary or the Cornerstone Non-controlled
Subsidiary is a party or an obligor with respect thereto.
(d) Except as set forth in Schedule 2.18(d) of the Cornerstone Disclosure
Letter, none of Cornerstone, any Cornerstone Subsidiary or the Cornerstone
Non-controlled Subsidiary is a party to any agreement which would restrict any
of them from prepaying any of their Indebtedness without penalty or premium at
any time or which requires any of them to maintain any amount of Indebtedness
with respect to any of the Cornerstone Properties.
(e) Except as set forth in Schedule 2.18(e) to the Cornerstone Disclosure
Letter, none of Cornerstone, any Cornerstone Subsidiary or the Cornerstone
Non-controlled Subsidiary is a party to any agreement relating to the management
of any Cornerstone Property by any Person other than Cornerstone, a Cornerstone
Subsidiary or a Cornerstone Non-controlled Subsidiary.
(f) None of Cornerstone, any Cornerstone Subsidiary or the Cornerstone
Non-controlled Subsidiary is a party to any agreement pursuant to which
Cornerstone, any Cornerstone Subsidiary or the Cornerstone Non-controlled
Subsidiary manages or provides services with respect to any real properties
other than Cornerstone Properties, except for the agreements described in
Schedule 2.18(f) to the Cornerstone Disclosure Letter.
(g) Cornerstone has delivered to EOP prior to the date of this Agreement a
true and complete capital budget for the year 2000 relating to budgeted capital
improvements and development. Schedule 2.18(g) to the Cornerstone Disclosure
Letter lists all material agreements entered into by Cornerstone, each of the
Cornerstone Subsidiaries and the Cornerstone Non-controlled Subsidiary relating
to the development or construction of, or additions or expansions to, any
Cornerstone Real Properties (or any properties with respect to which Cornerstone
has executed as of the date of this Agreement a purchase agreement or other
similar agreement) which are currently in effect and under which Cornerstone or
any of the Cornerstone Subsidiaries or the Cornerstone Non-controlled Subsidiary
currently has, or expects to incur, an obligation in excess of $250,000 in the
aggregate. True, correct and complete copies of such agreements have previously
been delivered or made available to EOP.
(h) Schedule 2.18(h) to the Cornerstone Disclosure Letter lists all
agreements entered into by Cornerstone, any Cornerstone Subsidiary or the
Cornerstone Non-controlled Subsidiary providing for the sale of, or option to
sell, any Cornerstone Properties or the purchase of, or option to purchase, by
Cornerstone, any Cornerstone Subsidiary or the Cornerstone Non-controlled
Subsidiary, on the one hand, or the other party thereto, on the other hand, any
real estate which are currently in effect.
(i) Except as set forth in Schedule 2.18(i) to the Cornerstone Disclosure
Letter, none of Cornerstone, any Cornerstone Subsidiary or the Cornerstone
Non-controlled Subsidiary has any material continuing contractual liability (A)
for indemnification or otherwise under any agreement relating to the sale of
real estate previously owned, whether directly or indirectly, by Cornerstone,
any Cornerstone Subsidiary or Cornerstone Non-controlled Subsidiary or (B) to
pay any additional purchase price for any of the Cornerstone Properties.
(j) Except as set forth in Schedule 2.18(j) to the Cornerstone Disclosure
Letter, none of Cornerstone, any Cornerstone Subsidiary or the Cornerstone
Non-controlled Subsidiary has entered into or is subject, directly or
indirectly, to any "Tax Protection Agreements." As used herein, a Tax Protection
Agreement is an agreement, oral or written, (A) that has as one of its purposes
to permit a person or entity to take the position that such person or entity
could defer federal taxable income that otherwise
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might have been recognized upon a transfer of property to the Cornerstone
Partnership or any other Cornerstone Subsidiary that is treated as a partnership
for federal income tax purposes, and that (i) prohibits or restricts in any
manner the disposition of any assets of Cornerstone, any Cornerstone Subsidiary
or the Cornerstone Non-controlled Subsidiary, (ii) requires that Cornerstone,
any Cornerstone Subsidiary or the Cornerstone Non-controlled Subsidiary
maintain, or put in place, or replace, indebtedness, whether or not secured by
one or more of the Cornerstone Properties, or (iii) requires that Cornerstone,
any Cornerstone Subsidiary or the Cornerstone Non-controlled Subsidiary offer to
any person or entity at any time the opportunity to guarantee or otherwise
assume, directly or indirectly (including, without limitation, through a
"deficit restoration obligation," indemnification agreement or other similar
arrangement), the risk of loss for federal income tax purposes for indebtedness
or other liabilities of Cornerstone, any Cornerstone Subsidiary or the
Cornerstone Non-controlled Subsidiary, (B) that specifies or relates to a method
of taking into account book-tax disparities under Section 704(c) of the Code
with respect to one or more assets of Cornerstone or a Cornerstone Subsidiary,
or (C) that requires a particular method for allocating one or more liabilities
of Cornerstone or any Cornerstone Subsidiary under Section 752 of the Code. None
of Cornerstone, any Cornerstone Subsidiary or the Cornerstone Non-controlled
Subsidiary is in violation of or in default under any Tax Protection Agreement.
(k) Except as set forth in Schedule 2.18(k) to the Cornerstone Disclosure
Letter and for the Confidentiality Agreement, dated January 13, 2000 between
Cornerstone and EOP (the "Confidentiality Agreement") and other confidentiality
agreements entered into in the ordinary course of business, neither Cornerstone
nor any Cornerstone Subsidiary or the Cornerstone Non-controlled Subsidiary is a
party to any confidentiality, standstill, lock-up or voting agreement.
2.19 Opinion of Financial Advisor. Cornerstone has received the written
opinion of Lazard Freres & Co. L.L.C. Cornerstone's financial advisor, to the
effect that the proposed consideration to be received by the holders of
Cornerstone Common Stock is fair to such holders from a financial point of view.
2.20 State Takeover Statutes. Cornerstone has taken all action necessary to
exempt the transactions contemplated by this Agreement between EOP and
Cornerstone and its Affiliates from the operation of any "fair price,"
"moratorium," "control share acquisition" or any other anti-takeover statute or
similar statute enacted under the laws of the State of Nevada and the State of
Delaware or federal laws of the United States or similar statute or regulation
(a "Takeover Statute").
2.21 Investment Company Act of 1940. None of Cornerstone, any Cornerstone
Subsidiary or the Cornerstone Non-controlled Subsidiary is, or at the Effective
Time will be, required to be registered under the Investment Company Act of
1940, as amended (the "1940 Act").
2.22 Definition of "Knowledge of Cornerstone". As used in this Agreement,
the phrase "Knowledge of Cornerstone" (or words of similar import) means the
actual knowledge of those individuals identified in Schedule 2.22 to the
Cornerstone Disclosure Letter.
2.23 Required Stockholder Approvals and Partner Approvals. The affirmative
vote of the holders of at least a majority of the outstanding Cornerstone Common
Stock and the holders of at least a majority of the outstanding Cornerstone 7%
Preferred Stock are the only votes of the holders of any class or series of
Cornerstone capital stock necessary or required under this Agreement or under
applicable law to approve the Merger and this Agreement. The approval of
Cornerstone and the affirmative vote of at least a majority of all Cornerstone
limited partner interests entitled to be cast, voting in accordance with the
Cornerstone Partnership Agreement, is the only vote of the holders of any class
or series of Cornerstone Partnership's partnership interests necessary or
required under this Agreement or under applicable law to approve the Merger, the
withdrawal of Cornerstone as general partner and the Partnership Merger.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF EOP AND EOP PARTNERSHIP
Except as set forth in the EOP SEC Documents (as defined herein) or in the
letter of even date herewith signed by the President or an Executive Vice
President of EOP and delivered to Cornerstone
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prior to the execution hereof (the "EOP Disclosure Letter"), EOP and EOP
Partnership represent and warrant to Cornerstone and Cornerstone Partnership as
follows:
3.1 Organization, Standing and Power of EOP. EOP is a real estate
investment trust duly organized, validly existing and in good standing under the
laws of Maryland and has all requisite power and authority to own, operate,
lease and encumber its properties and carry on its business as now being
conducted. EOP is duly qualified or licensed to do business as a foreign trust
and is in good standing in each jurisdiction in which the nature of its business
or the ownership or leasing of its properties makes such qualification or
licensing necessary, other than in such jurisdictions where the failure to be so
qualified or licensed, individually or in the aggregate, would not reasonably be
expected to have a material adverse effect on the business, properties, assets,
financial condition or results of operations of EOP and the Subsidiaries of EOP
(collectively, "EOP Subsidiaries"), taken as a whole (an "EOP Material Adverse
Effect"). EOP has delivered to Cornerstone complete and correct copies of the
EOP Declaration of Trust (as the same is proposed to be modified by each of the
Proposed EOP Charter Amendments (as defined herein)) and the EOP Bylaws, as
amended or supplemented to the date of this Agreement.
3.2 EOP Subsidiaries.
(a) Schedule 3.2(a) to the EOP Disclosure Letter sets forth (i) each EOP
Subsidiary and each entity in which EOP holds non-voting equity securities (but
no voting equity securities) (collectively, the "EOP Non-controlled
Subsidiaries"), (ii) the ownership interest therein of EOP, (iii) if not wholly
owned by EOP, the identity and ownership interest of each of the other owners of
such EOP Subsidiary, (iv) each office property and other commercial property
owned by such Subsidiary, and (v) if not wholly owned by such Subsidiary, the
identity and ownership interest of each of the other owners of such property.
(b) Except as set forth in Schedule 3.2(b) to the EOP Disclosure Letter,
(i) all the outstanding shares of capital stock of each EOP Subsidiary and each
EOP Non-controlled Subsidiary that is a corporation have been duly authorized,
validly issued and are (A) fully paid and nonassessable and not subject to
preemptive rights, (B) owned by EOP or by another EOP Subsidiary and (C) owned
free and clear of all Liens and (ii) all equity interests in each EOP Subsidiary
that is a partnership, joint venture, limited liability company or trust which
are owned by EOP, by another EOP Subsidiary or by EOP and another EOP Subsidiary
are owned free and clear of all Liens other than pledges, if any, contained in
organizational documents of such EOP Subsidiary and given to secure performance
thereunder. Each EOP Subsidiary that is a corporation is duly incorporated,
validly existing and in good standing under the laws of its jurisdiction of
incorporation and has the requisite corporate power and authority to own,
operate, lease and encumber its properties and carry on its business as now
being conducted, and each EOP Subsidiary that is a partnership, limited
liability company or trust is duly organized, validly existing and in good
standing under the laws of its jurisdiction of organization and has the
requisite power and authority to own, operate, lease and encumber its properties
and carry on its business as now being conducted. Each EOP Subsidiary is duly
qualified or licensed to do business and is in good standing in each
jurisdiction in which the nature of its business or the ownership or leasing of
its properties makes such qualification or licensing necessary, other than in
such jurisdictions where the failure to be so qualified or licensed,
individually or in the aggregate, would not reasonably be expected to have an
EOP Material Adverse Effect. Complete and correct copies of the Articles of
Incorporation, Bylaws, organization documents and partnership, joint venture and
operating agreements of each EOP Subsidiary, as amended to the date of this
Agreement, have been previously delivered or made available to Cornerstone. No
effective amendment has been made to the EOP Partnership Agreement since January
31, 2000.
3.3 Capital Structure.
(a) The authorized shares of beneficial interest of EOP consist of
750,000,000 EOP Common Shares, 248,812,828 of which were issued and outstanding
as of January 31, 2000, and 100,000,000 preferred shares of beneficial interest,
18,562,900 of which were issued or outstanding as of January 31, 2000
(collectively, the "EOP Preferred Shares").
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(b) Set forth in Schedule 3.3(b) to the EOP Disclosure Letter is a true and
complete list of the following: (i) each qualified or nonqualified option to
purchase EOP's shares of beneficial interest granted under the Employee Share
Option and Restricted Share Plan or any other formal or informal arrangement
(collectively, the "EOP Options"); and (ii) all other warrants or other rights
to acquire EOP's shares of beneficial interest, all share appreciation rights,
phantom shares, dividend equivalents, performance units and performance shares
which are outstanding on the date of this Agreement. Schedule 3.3(b) to the EOP
Disclosure Letter sets forth the EOP Options granted to EOP's Chief Executive
Officer and four other most highly compensated officers, the date of each grant,
the status of each EOP Option as qualified or nonqualified under Section 422 of
the Code, the number of EOP Common Shares subject to each EOP Option, the number
and type of EOP's Common Shares subject to EOP Options that are currently
exercisable, the exercise price per share, and the number and type of such
shares subject to share appreciation rights. On the date of this Agreement,
except as set forth in this Section 3.3 or in Schedule 3.3(b) to the EOP
Disclosure Letter, no shares of beneficial interest of EOP were outstanding or
reserved for issuance (except for EOP Common Shares reserved for issuance upon
redemption of EOP OP Units).
(c) All outstanding shares of beneficial interest of EOP are duly
authorized, validly issued, fully paid and nonassessable and not subject to
preemptive rights. There are no bonds, debentures, notes or other indebtedness
of EOP having the right to vote (or convertible into, or exchangeable for,
securities having the right to vote) on any matters on which shareholders of EOP
may vote.
(d) Except (i) as set forth in this Section 3.3 or in Schedule 3.3(d) to
the EOP Disclosure Letter and (ii) EOP OP Units, which may be redeemed for EOP
Common Shares, as of the date of this Agreement, there are no outstanding
securities, options, warrants, calls, rights, commitments, agreements,
arrangements or undertakings of any kind to which EOP or any EOP Subsidiary is a
party or by which such entity is bound, obligating EOP or any EOP Subsidiary to
issue, deliver or sell, or cause to be issued, delivered or sold, additional
shares of beneficial interest, voting securities or other ownership interests of
EOP or any EOP Subsidiary or obligating EOP or any EOP Subsidiary to issue,
grant, extend or enter into any such security, option, warrant, call, right,
commitment, agreement, arrangement or undertaking (other than to EOP or an EOP
Subsidiary).
(e) As of January 31, 2000, 282,476,889 EOP OP Units, 8,000,000 8.98%
Series A Preferred Units of Limited Partnership Interest, 6,000,000 5.25% Series
B Preferred Units of Limited Partnership Interest, and 4,562,900 8 5/8% Series C
Preferred Units of Limited Partnership Interest (collectively, the "EOP
Preferred Units") are validly issued and outstanding, fully paid and
nonassessable and not subject to preemptive rights, of which 248,812,828 EOP OP
Units and all of the EOP Preferred Units are owned by EOP and EOP Subsidiaries.
Schedule 3.3(e) to the EOP Disclosure Schedule sets forth the name of each
holder of EOP OP Units and the number of EOP OP Units owned by each such holder
as of the date of this Agreement. The EOP OP Units and EOP Preferred Units are
subject to no restrictions except as set forth in the EOP Partnership Agreement.
EOP Partnership has not issued or granted and is not a party to any outstanding
commitments of any kind relating to, or any presently effective agreements or
understandings with respect to, interests in EOP Partnership, whether issued or
unissued, or securities convertible or exchangeable into interests in EOP
Partnership.
(f) All dividends on EOP Common Shares and all distributions on EOP OP
Units and EOP Preferred Units, which have been declared prior to the date of
this Agreement have been paid in full, except that the dividends payable on EOP
Common Shares (along with the corresponding distributions payable on EOP OP
Units) which were declared on February 1, 2000 and are payable on April 14, 2000
have not yet been paid.
(g) The EOP Common Shares and the EOP Preferred Shares to be issued by EOP,
and the EOP OP Units to be issued by the EOP Partnership pursuant to this
Agreement have been duly authorized for issuance, and upon issuance will be duly
and validly issued, fully paid and nonassessable.
3.4 Other Interests. Except for interests in the EOP Subsidiaries and
certain other entities as set forth in Schedule 3.2(a), 3.2(b) or 3.4(a) to the
EOP Disclosure Letter (the "EOP Other Interests"), neither
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EOP nor any of its Subsidiaries owns directly or indirectly any interest or
investment (whether equity or debt) in any corporation, partnership, joint
venture, business, trust or other entity (other than investments in short-term
investment securities). With respect to such other interests, EOP or EOP
Partnership is a partner or shareholder in good standing, and owns such
interests free and clear of all Liens other than pledges, if any, contained in
organizational documents of such EOP Other Interests and given to secure
performance. Neither EOP nor any of the EOP Subsidiaries is in breach of any
provision of any agreement, document or contract governing its rights in or to
the interests owned or held by it, all of which agreements, documents and
contracts are (a) listed in Schedule 3.4(b) to the EOP Disclosure Letter (or
disclosed in the EOP SEC Documents (as defined herein)), (b) unmodified except
as described therein and (c) in full force and effect. To the Knowledge of EOP
(as defined herein), the other parties to any such agreement, document or
contract which is of a material nature are not in breach of any of their
respective obligations under such agreements, documents or contracts.
3.5 Authority; Noncontravention; Consents.
(a) EOP has the requisite power and authority to enter into this Agreement
and, subject to the requisite shareholder approval of the Merger (the "EOP
Shareholder Approvals" and, together with the Cornerstone Stockholder Approvals,
the "Shareholder Approvals"), to consummate the transactions contemplated by
this Agreement to which EOP is a party. The execution and delivery of this
Agreement by EOP and the consummation by EOP of the transactions contemplated by
this Agreement to which EOP is a party have been duly authorized by all
necessary action on the part of EOP, except for and subject to the EOP
Shareholder Approvals and the requisite approval, if any is required, of the
partners of EOP Partnership. This Agreement has been duly executed and delivered
by EOP and constitutes a valid and binding obligation of EOP, enforceable
against EOP in accordance with and subject to its terms, subject to applicable
bankruptcy, insolvency, moratorium or other similar laws relating to creditors'
rights and general principles of equity.
(b) EOP Partnership has the requisite partnership power and, subject to the
requisite partner approval of the Partnership Merger (if any), authority to
enter into this Agreement and to consummate the transactions contemplated by
this Agreement to which EOP Partnership is a party. The execution and delivery
of this Agreement by EOP Partnership and the consummation by EOP Partnership of
the transactions contemplated by this Agreement to which EOP Partnership is a
party have been duly authorized by all necessary action on the part of EOP
Partnership, except for and subject to the EOP Partnership Approvals. This
Agreement has been duly executed and delivered by EOP Partnership and
constitutes a valid and binding obligation of EOP Partnership, enforceable
against EOP Partnership in accordance with and subject to its terms, subject to
applicable bankruptcy, insolvency, moratorium or other similar laws relating to
creditors' rights and general principles of equity.
(c) Except as set forth in Schedule 3.5(c)(1) to the EOP Disclosure Letter,
the execution and delivery of this Agreement by EOP and EOP Partnership do not,
and the consummation of the transactions contemplated by this Agreement to which
EOP or EOP Partnership is a party and compliance by EOP or EOP Partnership with
the provisions of this Agreement will not, conflict with, or result in any
violation of or default (with or without notice or lapse of time, or both)
under, or give rise to a right of termination, cancellation or acceleration of
any material obligation or to loss of a material benefit under, or result in the
creation of any Lien upon any of the properties or assets of EOP or any EOP
Subsidiary under, (i) the EOP Declaration of Trust or the EOP Bylaws or the
comparable charter or organizational documents or partnership, operating or
similar agreement (as the case may be) of any other EOP Subsidiary, each as
amended or supplemented to the date of this Agreement, (ii) any loan or credit
agreement, note, bond, mortgage, indenture, reciprocal easement agreement, lease
or other agreement, instrument, permit, concession, franchise or license
applicable to EOP or any EOP Subsidiary or their respective properties or assets
or (iii) subject to the governmental filings and other matters referred to in
the following sentence, any Laws applicable to EOP or any EOP Subsidiary or
their respective properties or assets, other than, in the case of clause (ii) or
(iii), any such conflicts, violations, defaults, rights, loss or Liens that
individually or in the aggregate would not (x) reasonably be expected to have an
EOP Material Adverse Effect or (y) prevent the consummation of the transactions
contemplated by this
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Agreement. No consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Entity is required by or with
respect to EOP or any EOP Subsidiary in connection with the execution and
delivery of this Agreement or the consummation by EOP of any of the transactions
contemplated by this Agreement, except for (i) the filing with the SEC of (x)
the Form S-4 (as defined herein) and (y) such reports under Section 13 (a) of
the Exchange Act as may be required in connection with this Agreement and the
transactions contemplated by this Agreement, (ii) the acceptance for record of
the Articles of Merger by the Department, (iii) the filing of the Certificate of
Merger with the Office of the Secretary of State of the State of Delaware, (iv)
such filings as may be required in connection with the payment of any transfer
and gains taxes and (v) such other consents, approvals, orders, authorizations,
registrations, declarations and filings (A) as are set forth in Schedule
3.5(c)(2) to the EOP Disclosure Letter or (B) as may be required under (x)
federal, state or local environmental laws or (y) the "blue sky" laws of various
states, to the extent applicable, or (C) which, if not obtained or made, would
not prevent or delay in any material respect the consummation of any of the
transactions contemplated by this Agreement or otherwise prevent EOP from
performing its obligations under this Agreement in any material respect or
reasonably be expected to have, individually or in the aggregate, an EOP
Material Adverse Effect.
3.6 SEC Documents; Financial Statements; Undisclosed Liabilities. EOP and
EOP Partnership have filed all required reports, schedules, forms, statements
and other documents with the SEC since July 8, 1997 and November 19, 1997,
respectively, through the date hereof (the "EOP SEC Documents"). Schedule 3.6(a)
to the EOP Disclosure Letter contains a complete list of all EOP SEC Documents
filed by EOP and EOP Partnership with the SEC under the Exchange Act on or prior
to the date of this Agreement. All of the EOP SEC Documents (other than
preliminary material), as of their respective filing dates, complied in all
material respects with all applicable requirements of the Securities Act and the
Exchange Act and, in each case, the rules and regulations promulgated thereunder
applicable to such EOP SEC Documents. None of the EOP SEC Documents at the time
of filing contained any untrue statement of a material fact or omitted to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading, except to the extent such statements have been modified or
superseded by later EOP SEC Documents filed and publicly available prior to the
date of this Agreement. The consolidated financial statements of EOP and the EOP
Subsidiaries included in the EOP SEC Documents complied as to form in all
material respects with applicable accounting requirements and the published
rules and regulations of the SEC with respect thereto, have been prepared in
accordance with GAAP (except, in the case of unaudited statements, as permitted
by the applicable rules and regulations of the SEC) applied on a consistent
basis during the periods involved (except as may be indicated in the notes
thereto) and fairly presented in all material respects, in accordance with the
applicable requirements of GAAP and the applicable rules and regulations of the
SEC, the consolidated financial position of EOP and the EOP Subsidiaries, taken
as a whole, as of the dates thereof and the consolidated results of operations
and cash flows for the periods then ended (subject, in the case of unaudited
statements, to normal year-end audit adjustments). Except for liabilities and
obligations set forth in the EOP SEC Documents or in Schedule 3.6(b) to the EOP
Disclosure Letter, neither EOP nor any EOP Subsidiary has any liabilities or
obligations of any nature (whether accrued, absolute, contingent or otherwise)
required by GAAP to be set forth on a consolidated balance sheet of EOP or in
the notes thereto and which, individually or in the aggregate, would reasonably
be expected to have an EOP Material Adverse Effect.
3.7 Absence of Certain Changes or Events. Except as disclosed in the EOP
SEC Documents or in Schedule 3.7 to the EOP Disclosure Letter, since the date of
the most recent audited financial statements included in the EOP SEC Documents
(the "EOP Financial Statement Date"), EOP and the EOP Subsidiaries have
conducted their business only in the ordinary course (taking into account prior
practices, including the acquisition of properties and issuance of securities)
and there has not been (a) any material adverse change in the business,
financial condition or results of operations of EOP and the EOP Subsidiaries
taken as a whole (a "EOP Material Adverse Change"), nor has there been any
occurrence or circumstance that with the passage of time would reasonably be
expected to result in an EOP Material Adverse Change, (b) except for regular
quarterly distributions not in excess of $0.42 per EOP Common
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Share or EOP OP Unit or the stated distribution rate for each EOP Preferred
Share or EOP Preferred Unit, subject to rounding adjustments as necessary and
with customary record and payment dates, any authorization, declaration, setting
aside or payment of any dividend or other distribution (whether in cash, shares
or property) with respect to EOP Common Shares, EOP OP Units, EOP Preferred
Shares or EOP Preferred Units, (c) any split, combination or reclassification of
any of EOP's shares of beneficial interest, (d) any damage, destruction or loss,
whether or not covered by insurance, that has or would reasonably be expected to
have an EOP Material Adverse Effect or (e) any change made prior to the date of
this Agreement in accounting methods, principles or practices by EOP or any EOP
Subsidiary materially affecting its assets, liabilities or business, except
insofar as may have been disclosed in the EOP SEC Documents or required by a
change in GAAP.
3.8 Litigation. Except as disclosed in the EOP SEC Documents or in Schedule
3.8 to the EOP Disclosure Letter, and other than personal injury and other
routine tort litigation arising from the ordinary course of operations of EOP
and the EOP Subsidiaries (a) which are covered by adequate insurance subject to
a reasonable deductible or retention limit or (b) for which all material costs
and liabilities arising therefrom are reimbursable pursuant to common area
maintenance or similar agreements, there is no suit, action or proceeding
pending (in which service of process has been received by an employee of EOP or
an EOP Subsidiary) or, to the Knowledge of EOP (as defined herein), threatened
in writing against or affecting EOP or any EOP Subsidiary that, individually or
in the aggregate, would reasonably be expected to (i) have an EOP Material
Adverse Effect or (ii) prevent the consummation of any of the transactions
contemplated by this Agreement, nor is there any judgment, decree, injunction,
rule or order of any Governmental Entity or arbitrator outstanding against EOP
or any EOP Subsidiary having, or which, insofar as reasonably can be foreseen,
in the future would have, any such effect.
3.9 Properties.
(a) Except as set forth in Schedule 3.9(a) to the EOP Disclosure Letter,
EOP or one of the EOP Subsidiaries owns fee simple title to each of the real
properties listed in the EOP SEC Filings as owned by it (the "EOP Properties"),
except where the failure to own such title would not have an EOP Material
Adverse Effect.
(b) The EOP Properties are not subject to any Encumbrances or Property
Restrictions which reasonably could be expected to cause an EOP Material Adverse
Effect.
(c) Valid policies of title insurance or fully-paid and enforceable
commitments therefor have been issued insuring EOP's or the applicable EOP
Subsidiary's fee simple title or leasehold estate, as the case may be, to the
EOP Properties in amounts which are, except in the case of San Felipe Plaza, at
least equal to the purchase price thereof paid by EOP or the applicable EOP
Subsidiaries therefor, except where the failure to obtain such title insurance
would not reasonably be expected to have an EOP Material Adverse Effect.
(d) EOP has no Knowledge (i) that it has failed to obtain a certificate,
permit or license from any governmental authority having jurisdiction over any
of the EOP Properties where such failure would reasonably be expected to have an
EOP Material Adverse Effect or of any pending threat of modification or
cancellation of any of the same which would reasonably be expected to have an
EOP Material Adverse Effect, (ii) of any written notice of any violation of any
federal, state or municipal law, ordinance, order, rule, regulation or
requirement affecting any of the EOP Properties issued by any governmental
authorities which would reasonably be expected to have an EOP Material Adverse
Effect or (iii) of any structural defects relating to EOP Properties, EOP
Properties whose building systems are not in working order, physical damage to
any EOP Property for which there is no insurance in effect covering the cost of
restoration, any current renovation or uninsured restoration, except such
structural defects, building systems not in working order, physical damage,
renovation and restoration which, in the aggregate, would not reasonably be
expected to have an EOP Material Adverse Effect.
(e) Except as set forth in Schedule 3.9(e) to the EOP Disclosure Letter,
neither EOP nor any of the EOP Subsidiaries has received any written or
published notice to the effect that (i) any condemnation or
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rezoning proceedings are pending or threatened with respect to any of the EOP
Properties or (ii) any zoning, building or similar law, code, ordinance, order
or regulation is or will be violated by the continued maintenance, operation or
use of any buildings or other improvements on any of the EOP Properties or by
the continued maintenance, operation or use of the parking areas, other than
such notices which, in the aggregate, would not reasonably be expected to have
an EOP Material Adverse Effect.
(f) Except as set forth on Schedule 3.9(f) to the EOP Disclosure Letter,
all work to be performed, payments to be made and actions to be taken by EOP or
the EOP Subsidiaries prior to the date hereof pursuant to any agreement entered
into with a governmental body or authority in connection with a site approval,
zoning reclassification or similar action relating to any EOP Properties (e.g.,
Local Improvement District, Road Improvement District, Environmental
Mitigation), has been performed, paid or taken, as the case may be, except where
the failure to do so would, in the aggregate, not reasonably be expected to have
an EOP Material Adverse Effect, and EOP has no Knowledge of any planned or
proposed work, payments or actions that may be required after the date hereof
pursuant to such agreements.
(g) The rent roll previously provided by EOP to Cornerstone (the "EOP Rent
Roll") lists each EOP Space Lease (as defined herein) in effect as of the
respective dates indicated in the EOP Rent Roll. "EOP Space Lease" means each
lease or other right of occupancy affecting or relating to a property in which
EOP Partnership (or an entity in which it directly or indirectly has an
interest) is the landlord, either pursuant to the terms of the lease agreement
or as successor to any prior landlord, but excluding any ground lease. EOP has
made available to Cornerstone true, correct and complete copies of all EOP Space
Leases, including all amendments, modifications, supplements, renewals,
extensions and guarantees related thereto, as of the date hereof. Except for
discrepancies that, either individually or in the aggregate, would not
reasonably be expected to have an EOP Material Adverse Effect, all information
set forth in the EOP Rent Roll is true, correct, and complete as of the date
thereof. Except as set forth in a delinquency report made available to
Cornerstone, neither EOP nor any EOP Subsidiary, on the one hand, nor, to the
Knowledge of EOP or EOP Partnership, any other party, on the other hand, is in
monetary default under any EOP Space Lease, except for such defaults that would
not reasonably be expected to have an EOP Material Adverse Effect.
3.10 Environmental Matters.
Except as disclosed in the EOP SEC Documents,
(i) none of EOP, any of the EOP Subsidiaries or, to EOP's Knowledge, any
other Person has caused or permitted the presence of any Hazardous Materials at,
on or under any of the EOP Properties, such that the presence of such Hazardous
Materials (including the presence of asbestos in any buildings or improvements
at the EOP Properties) would, individually or in the aggregate, reasonably be
expected to have an EOP Material Adverse Effect;
(ii) except in accordance with the Environmental Permits, there have been
no Releases of Hazardous Materials at, on, under or from (A) the EOP Properties,
or (B) any real property formerly owned, operated or leased by EOP or the EOP
Subsidiaries during the period of such ownership, operation or tenancy, which
would, individually or in the aggregate, reasonably be expected to have an EOP
Material Adverse Effect;
(iii) EOP and the EOP Subsidiaries have not failed to comply in any
material respect with all Environmental Laws, and neither EOP nor any of the EOP
Subsidiaries has any liability under the Environmental Laws, except to the
extent such failure to comply or any such liability, individually or in the
aggregate, would not reasonably be expected to have an EOP Material Adverse
Effect; and
(iv) EOP and the EOP Subsidiaries have been duly issued, and currently have
and will maintain through the Closing Date, all Environmental Permits except
where the failure to obtain and maintain such Environmental Permits would not
have a material adverse effect on the EOP Property necessary to operate their
businesses as currently operated. EOP and the EOP Subsidiaries have timely filed
applications for all Environmental Permits.
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3.11 Taxes.
(a) Each of EOP and the EOP Subsidiaries (i) has filed all Tax returns and
reports required to be filed by it (after giving effect to any filing extension
properly granted by a Governmental Entity having authority to do so), and all
such returns and reports are accurate and complete in all material respects,
(ii) has paid (or EOP has paid on its behalf) all Taxes shown on such returns
and reports as required to be paid by it and (iii) has complied in all material
respects with all applicable laws, rules and regulations relating to the payment
and withholding of Taxes (including, without limitation, withholding of Taxes
pursuant to Sections 1441, 1442, 1445, 3121, and 3402 of the Code or similar
provisions under any foreign laws) and has, within the time period prescribed by
law, withheld and paid over to the proper governmental entities all amounts
required to be so withheld and paid over under applicable laws and regulations,
except, with respect to all of the foregoing, where the failure to file such tax
returns or reports or failure to pay such Taxes or failure to comply with such
requirements would not reasonably be expected to have an EOP Material Adverse
Effect. The most recent audited financial statements contained in the EOP SEC
Documents reflect an adequate reserve for all material Taxes payable by EOP and
the EOP Subsidiaries for all taxable periods and portions thereof through the
date of such financial statements. Since the EOP Financial Statement Date, EOP
has incurred no liability for Taxes under Sections 857(b), 860(c) or 4981 of the
Code, including without limitation any Tax arising from a prohibited transaction
described in Section 857(b)(6) of the Code, and neither EOP nor any EOP
Subsidiary has incurred any material liability for Taxes other than in the
ordinary course of business. No event has occurred, and no condition or
circumstance exists, which presents a material risk that any material Tax
described in the preceding sentence will be imposed upon EOP or any EOP
Subsidiary. Neither EOP nor any EOP Subsidiary is the subject of any audit,
examination, or other proceeding in respect of federal income Taxes, and to
EOP's Knowledge, no audit, examination or other proceeding in respect of federal
income Taxes involving any of EOP or any EOP Subsidiary is being considered by
any Tax authority. To the Knowledge of EOP, no deficiencies for any Taxes have
been proposed, asserted or assessed against EOP or any of the EOP Subsidiaries,
and no requests for waivers of the time to assess any such Taxes are pending.
(b) EOP (i) for all taxable years commencing with 1997, which is the first
year of EOP's existence for federal income tax purposes, through December 31,
1999, has been subject to taxation as a REIT within the meaning of Section 856
of the Code and has qualified as a REIT for all such years, (ii) has operated
since December 31, 1999 to the date of this representation, and intends to
continue to operate, in such a manner as to qualify as a REIT for the taxable
year that includes the Closing Date and (iii) has not taken or omitted to take
any action which would reasonably be expected to result in a challenge to its
status as a REIT and, to EOP's Knowledge, no such challenge is pending or
threatened. BeaMetFed, Inc. ("BeaMet") (i) for all taxable years commencing with
1997 through December 31, 1999 has been subject to taxation as a REIT within the
meaning of Section 856 of the Code and has qualified as a REIT for all such
years, (ii) has operated since December 31, 1999 to the date of this
representation, and intends to continue to operate, in such a manner as to
qualify as a REIT for the taxable year that includes the Closing Date and (iii)
has not taken or omitted to take any action which would reasonably be expected
to result in a challenge to its status as a REIT and, to EOP's Knowledge, no
such challenge is pending or threatened. Each EOP Subsidiary which is a
partnership, joint venture or limited liability company (i) has been treated
since its formation and continues to be treated for federal income tax purposes
as a partnership and not as a corporation or as an association taxable as a
corporation and (ii) has not since the later of its formation or the acquisition
by EOP of a direct or indirect interest therein, owned any assets (including,
without limitation, securities) that would cause EOP to violate Section
856(c)(4) of the Code. EOP Partnership is not a publicly-traded partnership
within the meaning of Section 7704(b) of the Code that is taxable as a
corporation pursuant to Section 7704(a) of the Code. Each EOP Subsidiary which
is a corporation has been since its formation a qualified REIT subsidiary under
Section 856(i) of the Code. Except as set forth in Schedule 3.11 to the EOP
Disclosure Letter, neither EOP nor any EOP Subsidiary holds any asset (x) the
disposition of which would be subject to rules similar to Section 1374 of the
Code as a result of an election under IRS Notice 88-19 or Temporary Treas. Reg.
sec.1.337(d)-5T or (y) which is subject to a consent filed pursuant to Section
341(f) of the Code and the regulations thereunder.
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(c) To EOP's knowledge, as of the date hereof, EOP is a
"domestically-controlled REIT" within the meaning of Section 897(h)(4)(B) of the
Code.
3.12 Brokers; Schedule of Fees and Expenses. No broker, investment banker,
financial advisor or other person, other than J.P. Morgan & Co. Incorporated,
the fees and expenses of which will be paid by EOP and are described in the
engagement letters between J.P. Morgan & Co. Incorporated and EOP, a true,
correct and complete copy of which has previously been given to Cornerstone, is
entitled to any broker's, finder's, financial advisor's or other similar fee or
commission in connection with the transactions contemplated hereby based upon
arrangements made by or on behalf of EOP or any EOP Subsidiary.
3.13 Compliance with Laws. Neither EOP nor any of the EOP Subsidiaries has
violated or failed to comply with any statute, law, ordinance, regulation, rule,
judgment, decree or order of any Governmental Entity applicable to its business,
properties or operations, except to the extent that such violation or failure
would not reasonably be expected to have an EOP Material Adverse Effect.
3.14 Contracts; Debt Instruments. Neither EOP nor any EOP Subsidiary has
received a written notice that EOP or any EOP Subsidiary is in violation of or
in default under (nor to the Knowledge of EOP does there exist any condition
which upon the passage of time or the giving of notice or both would cause such
a violation of or default under) any material loan or credit agreement, note,
bond, mortgage, indenture, lease, permit, concession, franchise, license or any
other material contract, agreement, arrangement or understanding, to which it is
a party or by which it or any of its properties or assets is bound, nor to the
Knowledge of EOP does such a violation or default exist, except to the extent
such violation or default, individually or in the aggregate, would not
reasonably be expected to have an EOP Material Adverse Effect, except as set
forth in the EOP SEC Documents or in Schedule 3.14 to the EOP Disclosure Letter.
3.15 Opinion of Financial Advisor. EOP has received the opinion of J.P.
Morgan & Co. Incorporated, EOP's financial advisor, to the effect that the
consideration to be paid by EOP in connection with the Merger is fair, from a
financial point of view, to EOP.
3.16 State Takeover Statutes. EOP has taken all action necessary to exempt
transactions between EOP and Cornerstone and its Affiliates from the operation
of Takeover Statutes.
3.17 Investment Company Act of 1940. Neither EOP nor any of the EOP
Subsidiaries is, or at the Effective Time will be, required to be registered
under the 1940 Act.
3.18 Definition of "Knowledge of EOP". As used in this Agreement, the
phrase "Knowledge of EOP" (or words of similar import) means the actual
knowledge of those individuals identified in Schedule 3.19 to the EOP Disclosure
Letter.
3.19 Required Shareholder Approvals and Partner Approvals. The affirmative
vote of the holders of not less than a majority of all votes entitled to be cast
by holders of EOP Common Shares, and the affirmative vote of the partners of EOP
Partnership holding at least a majority of the outstanding EOP Partnership
interests (including partnership interests held by EOP), are the only votes of
the holders of any class or series of EOP capital shares necessary or required
under this Agreement or under applicable law to approve the Merger and this
Agreement. The approval of the Partnership Merger by EOP is the only vote
necessary or required under this Agreement or under applicable law to approve
the Partnership Merger and this Agreement.
ARTICLE 4
COVENANTS
4.1 Conduct of Cornerstone's and Cornerstone Partnership's Business Pending
Merger. During the period from the date of this Agreement to the Effective
Times, except as consented to in writing by EOP or as expressly provided for in
this Agreement, Cornerstone and Cornerstone Partnership shall, and shall cause
(or, in the case of Cornerstone Subsidiaries and the Cornerstone Non-controlled
Subsidiary that
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Cornerstone or Cornerstone Partnership do not control, shall use commercially
reasonable efforts to cause) each of the Cornerstone Subsidiaries and
Cornerstone Non-controlled Subsidiary to:
(a) conduct its business only in the usual, regular and ordinary course and
in substantially the same manner as heretofore conducted;
(b) preserve intact its business organizations and goodwill and use
commercially reasonable efforts to keep available the services of its officers
and employees;
(c) confer on a regular basis with one or more representatives of EOP to
report operational matters of materiality and, subject to Section 4.3, any
proposals to engage in material transactions;
(d) promptly notify EOP of any material emergency or other material change
in the condition (financial or otherwise), business, properties, assets,
liabilities or the normal course of its businesses or in the operation of its
properties, or of any material governmental complaints, investigations or
hearings (or communications indicating that the same may be contemplated);
(e) promptly deliver to EOP true and correct copies of any report,
statement or schedule filed with the SEC subsequent to the date of this
Agreement;
(f) maintain its books and records in accordance with GAAP consistently
applied and not change in any material manner any of its methods, principles or
practices of accounting in effect at the Cornerstone Financial Statement Date,
except as may be required by the SEC, applicable law or GAAP;
(g) duly and timely file all reports, tax returns and other documents
required to be filed with federal, state, local and other authorities, subject
to extensions permitted by law, provided Cornerstone notifies EOP that it is
availing itself of such extensions and provided such extensions do not adversely
affect Cornerstone's status as a qualified REIT under the Code;
(h) not make or rescind any express or deemed election relative to Taxes
(unless required by law or necessary to preserve Cornerstone's status as a REIT
or the status of any Cornerstone Subsidiary as a partnership for federal income
tax purposes or as a qualified REIT subsidiary under Section 856(i) of the Code,
as the case may be);
(i) not (A) acquire, enter into any option to acquire, or exercise an
option or other right or election or enter into any other commitment or
contractual obligation (each, a "Commitment") for the acquisition of any real
property or, except as permitted in a budget approved in writing by EOP, other
transaction (other than Commitments referred to in Schedule 4.1(i) to the
Cornerstone Disclosure Letter) involving in excess of $100,000, encumber assets
or commence construction of, or enter into any Commitment to develop or
construct other real estate projects, except in the ordinary course of its
office property business, including leasing activities pursuant to EOP-approved
guidelines (B) incur or enter into any Commitment to incur additional
indebtedness (secured or unsecured) except for working capital under its
revolving line(s) of credit and Commitments for indebtedness described on
Schedule 4.1(i) to the Cornerstone Disclosure Letter or (C) modify, amend or
terminate, or enter into any Commitment to modify, amend or terminate, any
indebtedness (secured or unsecured) in existence as of the date hereof;
(j) not amend the Cornerstone Articles or the Cornerstone Bylaws, or the
articles or certificate of incorporation, bylaws, code of regulations,
partnership agreement, operating agreement or joint venture agreement or
comparable charter or organization document of any Cornerstone Subsidiary or
Cornerstone Non-controlled Subsidiary;
(k) make no change in the number of shares of capital stock or units of
limited partnership interest issued and outstanding, other than pursuant to (i)
the exercise of options disclosed in Schedule 2.3 to the Cornerstone Disclosure
Letter, (ii) the conversion of the Cornerstone 7% Preferred Stock or the
Cornerstone Convertible Promissory Note if required by their terms, (iii) the
redemption of Cornerstone OP Units under existing contracts described on
Schedule 2.18, (iv) the redemption of Cornerstone OP Units pursuant to Section
1.1 of this Agreement, (v) the redemption of Cornerstone OP Units under the
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Cornerstone Partnership Agreement solely for shares of Cornerstone Common Stock,
or (vi) Cornerstone OP Units issuable upon the exercise of the First and Howard
option;
(l) grant no options or other right or commitment relating to its shares of
capital stock or units of limited partnership interest or any security
convertible into its shares of capital stock or units of limited partnership
interest, or any security the value of which is measured by shares of beneficial
interest, or any security subordinated to the claim of its general creditors
and, other than or pursuant to Section 5.8(c) or (d) of this Agreement, not
amend or waive any rights under any of the Cornerstone Stock Options or
Cornerstone Stock Rights;
(m) except as provided in Section 5.10 and in connection with the use of
Cornerstone Common Stock to pay the exercise price or tax withholding in
connection with equity-based employee benefit plans by the participants therein,
not (i) authorize, declare, set aside or pay any dividend or make any other
distribution or payment with respect to any Cornerstone Common Stock,
Cornerstone 7% Preferred Stock or Cornerstone OP Units or (ii) directly or
indirectly redeem, purchase or otherwise acquire any shares of capital stock or
units of partnership interest or any option, warrant or right to acquire, or
security convertible into, shares of capital stock or units of partnership
interest of Cornerstone, except for (A) deemed transfers of Cornerstone excess
shares required under Article 8 of the Cornerstone Articles in order to preserve
the status of Cornerstone as a REIT under the Code or Article 9 of the
Cornerstone Articles, and (B) redemptions of Cornerstone OP Units, whether or
not outstanding on the date of this Agreement, under the Cornerstone Partnership
Agreement in which solely Cornerstone Common Stock is utilized;
(n) not sell, lease, mortgage, subject to Lien or otherwise dispose of any
of the Cornerstone Properties, except in connection with a transaction that is
permitted by Section 4.1(i), that is made in the ordinary course of business and
is the subject of a binding contract in existence on the date of this Agreement
and disclosed in Schedule 2.18 to the Cornerstone Disclosure Letter or in
connection with a transaction that is permitted by the leasing guidelines set
forth on Schedule 4.1(n) to the Cornerstone Disclosure Letter;
(o) not sell, lease, mortgage, subject to Lien or otherwise dispose of any
of its personal property or intangible property, except in the ordinary course
of business and is not material, individually or in the aggregate;
(p) not make any loans, advances or capital contributions to, or
investments in, any other Person, other than loans, advances and capital
contributions to Cornerstone Subsidiaries or the Cornerstone Non-controlled
Subsidiary in existence on the date hereof and ordinary course expense advances
to employees and except in connection with a transaction permitted by Section
4.1(i), and not enter into any new, or amend or supplement any existing,
contract, lease or other agreement with the Cornerstone Non-controlled
Subsidiary;
(q) not pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise), other than
the payment, discharge or satisfaction, in the ordinary course of business
consistent with past practice or in accordance with their terms, of liabilities
reflected or reserved against in, or contemplated by, the most recent
consolidated financial statements (or the notes thereto) furnished to EOP or
incurred in the ordinary course of business consistent with past practice;
(r) not guarantee the indebtedness of another Person, enter into any "keep
well" or other agreement to maintain any financial statement condition of
another Person or enter into any arrangement having the economic effect of any
of the foregoing;
(s) except as disclosed in Schedule 4.1(s) of the Cornerstone Disclosure
Letter, not enter into any Commitment with any officer, director or Affiliate of
Cornerstone or any of the Cornerstone Subsidiaries or the Cornerstone
Non-controlled Subsidiary or any material Commitment with any consultant;
(t) except as disclosed in Schedule 4.1(t) of the Cornerstone Disclosure
Letter, not increase any compensation or enter into or amend any employment
agreement described in Schedule 2.18 to the
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Cornerstone Disclosure Letter with any of its officers, directors or employees
earning more than $100,000 per annum, other than as required by any contract or
Plan or in accordance with waivers by employees of benefits under such
agreements;
(u) not adopt any new employee benefit plan or amend any existing plans or
rights;
(v) not settle any stockholder derivative or class action claims arising
out of or in connection with any of the transactions contemplated by this
Agreement;
(w) not change the ownership of any of its Subsidiaries or the Cornerstone
Non-controlled Subsidiary, except changes which arise as a result of the
acquisition of Cornerstone OP Units in exchange for Cornerstone Common Stock
pursuant to exercise of the Cornerstone OP Unit redemption right under Section
8.6 of the Cornerstone Partnership Agreement;
(x) not accept a promissory note in payment of the exercise price payable
under any option to purchase shares of Cornerstone Common Stock;
(y) not enter into any Tax Protection Agreement;
(z) not settle or compromise any material federal, state, local or foreign
tax liability; and
(aa) not authorize, recommend, propose or announce an intention to do any
of the foregoing prohibited actions, or enter into any contract, agreement,
commitment or arrangement to do any of the foregoing prohibited actions.
4.2 Conduct of EOP's and EOP Partnership's Business Pending Merger. During
the period from the date of this Agreement to the Effective Times, except as
consented to in writing by Cornerstone or as expressly provided for in this
Agreement, EOP and EOP Partnership shall, and shall cause (or, in the case of
Cornerstone Subsidiaries that Cornerstone or Cornerstone Partnership do not
control, shall use commercially reasonable efforts to cause) each of the EOP
Subsidiaries to:
(a) preserve intact its business organizations and goodwill and use
commercially reasonable efforts to keep available the services of its officers
and employees;
(b) confer on a regular basis with one or more representatives of
Cornerstone to report operational matters of materiality which would reasonably
be expected to have an EOP Material Adverse Effect;
(c) promptly notify Cornerstone of any material emergency or other material
change in the condition (financial or otherwise), business, properties, assets,
liabilities, prospects or the normal course of its businesses or in the
operation of its properties, or of any material governmental complaints,
investigations or hearings (or communications indicating that the same may be
contemplated);
(d) promptly deliver to Cornerstone true and correct copies of any report,
statement or schedule filed with the SEC subsequent to the date of this
Agreement;
(e) maintain its books and records in accordance with GAAP consistently
applied and not change in any material manner any of its methods, principles or
practices of accounting in effect at the EOP Financial Statement Date, except as
may be required by the SEC, applicable law or GAAP;
(f) duly and timely file all reports, tax returns and other documents
required to be filed with federal, state, local and other authorities, subject
to extensions permitted by law, provided such extensions do not adversely affect
EOP's status as a qualified REIT under the Code;
(g) not make or rescind any express or deemed election relative to Taxes
(unless required by law or necessary to preserve EOP's status as a REIT or the
status of any EOP Subsidiary as a partnership for federal income tax purposes or
as a qualified REIT subsidiary under Section 856(i) of the Code, as the case may
be);
(h) not amend the EOP Declaration of Trust, the EOP Bylaws or the EOP
Partnership Agreement (except for the Proposed EOP Charter Relating to Voting
Requirements, the Proposed EOP Charter Amendment Relating to Domestically
Controlled REIT Status (as defined herein), the proposed
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amendment to Section 7.4 of the EOP Partnership Agreement, the amendments to the
EOP Partnership Agreement described in Section 5.4(c), the filing of Articles
Supplementary to elect to be subject to the provisions of Section 3-804(c) of
the Maryland General Corporation Law and to the extent necessary to reflect the
admission of additional limited partners and other amendments in connection
therewith that can be made by EOP without a vote of limited partners and that
will not, individually or in the aggregate, materially adversely affect the
rights or obligations of holders of EOP OP Units); as used herein, (i) "Proposed
EOP Charter Amendment Relating to Certain Voting Requirements" means the
proposed amendment to EOP's Declaration of Trust, substantially the form
attached hereto as Exhibit D, which has been approved by the Board of Trustees
of EOP and is proposed to be submitted to a vote of the shareholders of EOP,
(ii) "Proposed EOP Charter Amendment Relating to Domestically Controlled REIT
Status" means the proposed amendment to EOP's Declaration of Trust,
substantially the form attached hereto as Exhibit E, which has been approved by
the Board of Trustees of EOP and is proposed to be submitted to a vote of the
shareholders of EOP at the EOP Shareholders Meeting (as defined below) and (iii)
"Proposed EOP Charter Amendments" means, collectively, the Proposed EOP Charter
Relating to Voting Requirements and the Proposed EOP Charter Amendment Relating
to Domestically Controlled REIT Status;
(i) except as provided in Section 5.10 hereof and in connection with the
use of EOP Common Shares to pay the exercise price or tax withholding in
connection with equity-based employee benefit plans by the participants therein,
not (i) authorize, declare, set aside or pay any dividend or make any other
distribution or payment with respect to any EOP Common Shares or EOP OP Units or
(ii) directly or indirectly redeem, purchase or otherwise acquire any shares of
capital stock, membership interests or units of partnership interest or any
option, warrant or right to acquire, or security convertible into, shares of
capital stock, membership interests, or units of partnership interest of EOP,
except for (A) redemptions of EOP Common Shares required under Section 7.3.6 of
the EOP Declaration of Trust in order to preserve the status of EOP as a REIT
under the Code, (B) redemptions of EOP OP Units, whether or not outstanding on
the date of this Agreement, under the EOP Partnership Agreement in which EOP
Common Shares are utilized, and (C) repurchases of EOP Common Shares pursuant to
its publicly announced share repurchase program;
(j) not (A) enter into or agree to effect any merger, acquisition,
consolidation, reorganization or other business combination with any third party
in which EOP is not the surviving party thereto or (B) enter into or agree to
effect any merger, acquisition, exchange offer or other business combination
with a third party in which EOP is the surviving party that would result in the
issuance of equity securities representing in excess of 20% of the outstanding
EOP Common Shares on the date any such business combination is entered into or
agreed to unless, in either such case, such business combination is approved by
Cornerstone, which approval shall not be unreasonably withheld or delayed, or
the business combination agreement provides that the required vote of EOP
shareholders for approval of such business combination is no less than the
affirmative vote of holders of EOP Common Shares representing more than 50% of
the sum of (x) the number of EOP Common Shares outstanding at the time of such
approval plus (y) 50,000,000; and
(k) not authorize, recommend, propose or announce an intention to do any of
the foregoing prohibited actions, or enter into any contract, agreement,
commitment or arrangement to do any of the foregoing prohibited actions.
4.3 No Solicitation.
(a) Prior to the Effective Time of the Merger, Cornerstone agrees, for
itself and in its capacity as the sole general partner of the Cornerstone
Partnership, that:
(i) none of it, Cornerstone Partnership, any Cornerstone Subsidiary or
the Cornerstone Non-controlled Subsidiary shall invite, initiate, solicit
or encourage, directly or indirectly, any inquiries, proposals, discussions
or negotiations or the making or implementation of any proposal or offer
(including, without limitation, any proposal or offer to its stockholders)
with respect to a merger, acquisition, tender offer, exchange offer,
transaction resulting in the issuance of securities representing 10% or
more of the outstanding equity securities of Cornerstone or Cornerstone
Partnership,
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consolidation, business combination, recapitalization, liquidation,
dissolution, share exchange, business combination, sale, lease, exchange,
mortgage, pledge, transfer or other disposition of 10% or more of the
assets or equity securities (including, without limitation, partnership
interests and units) of Cornerstone or Cornerstone Partnership, other than
the Mergers (any such proposal or offer being hereinafter referred to as an
"Acquisition Proposal"), or engage in any discussions or negotiations with
or provide any confidential or non-public information or data to, any
person relating to, or that may reasonably be expected to lead to, an
Acquisition Proposal, or enter into any letter of intent, agreement in
principle or agreement relating to an Acquisition Proposal, or propose
publicly to agree to do any of the foregoing, or otherwise facilitate any
effort or attempt to make or implement an Acquisition Proposal;
(ii) none of it, Cornerstone Partnership, any Cornerstone Subsidiary
or the Cornerstone Non-controlled Subsidiary will permit any officer,
director, employee, affiliate, agent, investment banker, financial advisor,
attorney, accountant, broker, finder, consultant or other agent or
representative of Cornerstone to engage in any of the activities described
in Section 4.3(a);
(iii) it, Cornerstone Partnership and the Cornerstone Subsidiaries and
Cornerstone Non-controlled Subsidiary will immediately cease and cause to
be terminated any existing activities, discussions or negotiations with any
parties conducted heretofore with respect to any of the foregoing and will
take the necessary steps to inform the individuals or entities referred to
in Section 4.3(b) of the obligations undertaken in this Section 4.3; and
(iv) it will notify EOP promptly (but in any event within 24 hours) if
Cornerstone, Cornerstone Partnership, any Cornerstone Subsidiary, the
Cornerstone Non-controlled Subsidiary or any individual or entity referred
to in Section 4.3(b) receives any such inquiries or proposals, or any
requests for such information, or if any such negotiations or discussions
are sought to be initiated or continued with it, and include in such notice
the identity of the Person making such inquiry, proposal or request, the
material terms of such inquiry, proposal or request and, if in writing,
shall promptly deliver to EOP a copy of such inquiry, proposal or request
along with all other related documentation and correspondence;
(b) Notwithstanding Section 4.3(a), the Board of Directors of Cornerstone
(including with respect to Cornerstone's capacity as the sole general partner of
Cornerstone Partnership) shall not be prohibited from furnishing information to
or entering into discussions or negotiations with, any person or entity that
makes an unsolicited bona fide written Acquisition Proposal, if, and only to the
extent that (i) a majority of the Board of Directors of Cornerstone determines
in good faith, after consultation with its outside counsel, that such action is
required for the Board of Directors of Cornerstone to comply with its fiduciary
duties to stockholders imposed by applicable law, (ii) prior to furnishing such
information to, or entering into discussions or negotiations with, such person
or entity, Cornerstone provides written notice to EOP to the effect that it is
furnishing information to, or entering into discussions with such person or
entity and (iii) Cornerstone enters into a confidentiality agreement with such
Person on terms in the aggregate not more favorable to such Person than the
terms of the Confidentiality Agreement.
(c) Notwithstanding anything to the contrary set forth in Section 4.3(a) or
4.3(b), in the event that an Acquisition Proposal constitutes a Superior
Acquisition Proposal (as defined herein), nothing contained in this Section 4.3
shall prohibit the Board of Directors of Cornerstone from withdrawing,
modifying, amending or qualifying its recommendation of this Agreement and the
Merger as required under Section 5.1(d) hereof and recommending such Superior
Acquisition Proposal to its stockholders: (i) if but only if, Cornerstone: (A)
complies fully with this Section 4.3 and (B) provides EOP with at least three
(3) business days' prior written notice of its intent to withdraw, modify, amend
or qualify its recommendation of this Merger Agreement and the Merger, (ii) if,
in the event that during such three (3) business days EOP makes a counter
proposal to such Superior Acquisition Proposal (any such counter proposal being
referred to in this Agreement as the "EOP Counter Proposal"), Cornerstone's
Board of Directors in good faith, taking into account the advice of its outside
financial advisors of nationally recognized reputation, determines (A) that the
EOP Counter Proposal is not at least as favorable to Cornerstone's stockholders
as the Superior Acquisition Proposal, from a financial point of view, and
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(B) the EOP Counter Proposal is not at least as favorable generally to
Cornerstone's stockholders (taking into account all financial and strategic
considerations and other relevant factors, including relevant legal, financial,
regulatory and other aspects of such proposals, and the conditions, prospects
and time required for completion of such proposal), and (iii) Cornerstone shall
have terminated this Agreement in accordance with Section 7.1(h).
(d) For all purposes of this Agreement, "Superior Acquisition Proposal"
means a bona fide written proposal made by a third party to acquire, directly or
indirectly, Cornerstone and/or Cornerstone Partnership pursuant to a tender or
exchange offer, merger, share exchange, consolidation or sale of all or
substantially all of the assets of Cornerstone, Cornerstone Partnership, and the
Cornerstone Subsidiaries or otherwise (i) on terms which a majority of the Board
of Directors of Cornerstone determines in good faith, (A) taking into account
the advice of Cornerstone's financial advisors of nationally recognized
reputation, are superior, from a financial point of view, to Cornerstone's
stockholders to those provided for in the Merger and (B) to be more favorable
generally to Cornerstone's stockholders (taking into account all financial and
strategic considerations and other relevant factors, including relevant legal,
financial, regulatory and other aspects of such proposals, and the conditions,
prospects and time required for completion of such proposal), (ii) for which
financing, to the extent required, is then fully committed and capable of being
obtained and (iii) which the Board of Directors of Cornerstone determines in
good faith is reasonably capable of being consummated.
(e) Any disclosure that the Board of Directors of Cornerstone may be
compelled to make with respect to the receipt of an Acquisition Proposal in
order to comply with its duties to shareholders imposed by applicable law or
Rule 14d-9 or 14e-2 of the Exchange Act will not constitute a violation of this
Section 4.3.
(f) Nothing in this Section 4.3 shall (i) permit Cornerstone to terminate
this Agreement (except as expressly provided in Article 7) or (ii) affect any
other obligations of Cornerstone under this Agreement.
4.4 Affiliates. Prior to the Effective Time of the Merger, Cornerstone
shall cause to be prepared and delivered to EOP a list (reasonably satisfactory
to counsel for EOP) identifying all persons who, at the time of the Cornerstone
Stockholders Meeting and the EOP Shareholders Meeting, may be deemed to be
"affiliates" of Cornerstone or Cornerstone Partnership as that term is used in
paragraphs (c) and (d) of Rule 145 under the Securities Act (the "Rule 145
Affiliates"). Cornerstone shall use its commercially reasonable efforts to cause
each person who is identified as a Rule 145 Affiliate in such list to deliver to
EOP on or prior to the Effective Time a written agreement, in the form
previously approved by the parties hereto, that such Rule 145 Affiliate will not
sell, pledge, transfer or otherwise dispose of any EOP Common Shares and EOP OP
Units issued to such Rule 145 Affiliate pursuant to the Merger, except pursuant
to an effective registration statement under the Securities Act or in compliance
with paragraph (d) of Rule 145 or as otherwise permitted by the Securities Act.
EOP shall be entitled to place legends as specified in such written agreements
on the certificates representing any EOP Common Shares to be received pursuant
to the terms of this Agreement by such Rule 145 Affiliates who have executed
such agreements and to issue appropriate stop transfer instructions to the
transfer agent for the EOP Common Shares and EOP OP Units issued to such Rule
145 Affiliates, consistent with the terms of such agreements. EOP and EOP OP
shall timely file the reports required to be filed by it under the Exchange Act
and the rules and regulations adopted by the SEC thereunder, and it will take
such further action as any Rule 145 Affiliate of Cornerstone or EOP may
reasonably request, all to the extent required from time to time to enable such
Rule 145 Affiliate to sell shares of beneficial interest of EOP received by such
Rule 145 Affiliate in the Merger without registration under the Securities Act
pursuant to (i) Rule 145(d)(1) under the Securities Act, as such rule may be
amended from to time, or (ii) any successor rule or regulation hereafter adopted
by the SEC.
4.5 Other Actions. Each of Cornerstone and Cornerstone Partnership, on the
one hand, and EOP and EOP Partnership, on the other hand, shall not take, and
shall use commercially reasonable efforts to cause their respective Subsidiaries
not to take, any action that would result in (i) any of the representations and
warranties of such party (without giving effect to any "knowledge"
qualification) set forth in this Agreement that are qualified as to materiality
becoming untrue, (ii) any of such representations and
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warranties (without giving effect to any "knowledge" qualification) that are not
so qualified becoming untrue in any material respect or (iii) except as
contemplated by Section 4.3, any of the conditions to the Merger set forth in
Article 6 not being satisfied.
ARTICLE 5
ADDITIONAL COVENANTS
5.1 Preparation of the Form S-4 and the Proxy Statement; Cornerstone
Stockholders Meeting, Cornerstone Unitholders Consent Solicitation and EOP
Shareholders Meeting.
(a) As promptly as practicable after execution of this Agreement, (i) each
of Cornerstone and EOP shall prepare and file with the SEC (with appropriate
requests for confidential treatment, unless the parties hereto otherwise agree)
under the Exchange Act, one or more joint proxy statements/prospectuses, forms
of proxies and information statements (such joint proxy
statement(s)/prospectus(es) and information statements together with any
amendments to supplements thereto, the "Joint Proxy Statement") relating to the
stockholder meeting of Cornerstone and the shareholder meeting of EOP, the vote
of the stockholders of Cornerstone with respect to this Agreement and the
shareholders of EOP with respect to the Merger and the Proposed EOP Charter
Amendment Relating to Domestically Controlled REIT Status, and the consent, if
any, of partners of Cornerstone Partnership and EOP Partnership in connection
with any required Partner Approvals and (ii) in connection with the clearance by
the SEC of the Joint Proxy Statement, EOP and Cornerstone, if applicable, shall
prepare and file with the SEC under the Securities Act one or more registration
statements on Form S-4 (such registration statements, together with any
amendments or supplements thereto, the "Form S-4"), in which the Joint Proxy
Statement will be included, as one or more prospectuses in connection with the
registration under the Securities Act of the EOP Common Shares and EOP OP Units
to be distributed to the holders of Cornerstone Common Stock and Cornerstone OP
Units in the Mergers. The respective parties will cause the Proxy Statement and
the Form S-4 to comply as to form in all material respects with the applicable
provisions of the Securities Act, the Exchange Act and the rules and regulations
thereunder. Each of Cornerstone, Cornerstone Partnership, EOP and EOP
Partnership shall furnish all information about itself and its business and
operations and all necessary financial information to the other as the other may
reasonably request in connection with the preparation of the Joint Proxy
Statement and the Form S-4. EOP and Cornerstone, if applicable, shall use its
commercially reasonable efforts, and Cornerstone will cooperate with it, to have
the Form S-4 declared effective by the SEC as promptly as practicable (including
clearing the Proxy Statement with the SEC. Each of Cornerstone and Cornerstone
Partnership, on the one hand, and EOP and EOP Partnership, on the other hand,
agree promptly to correct any information provided by it for use in the Joint
Proxy Statement and the Form S-4 if and to the extent that such information
shall have become false or misleading in any material respect, and each of the
parties hereto further agrees to take all steps necessary to amend or supplement
the Joint Proxy Statement and the Form S-4 and to cause the Joint Proxy
Statement and the Form S-4 as amended or supplemented to be filed with the SEC
and to be disseminated to their respective stockholders and shareholders and
partners, in each case as and to the extent required by applicable federal and
state securities laws. Each of Cornerstone, Cornerstone Partnership, EOP and EOP
Partnership agrees that the information provided by it for inclusion in the
Joint Proxy Statement or the Form S-4 and each amendment or supplement thereto,
at the time of mailing thereof and at the time of the respective meetings of
stockholders and shareholders of Cornerstone and EOP and at the time of the
respective taking of consents, if any, of partners of Cornerstone Partnership
and EOP Partnership, will not include an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading. EOP will advise and deliver copies (if any) to
Cornerstone, promptly after it receives notice thereof, of any request by the
SEC for amendment of the Joint Proxy Statement or the Form S-4 or comments
thereon and responses thereto or requests by the SEC for additional information
(regardless of whether such requests relate to EOP or EOP Partnership, on the
one hand, and Cornerstone or Cornerstone Partnership, on the other hand), and
EOP shall promptly notify Cornerstone, and Cornerstone shall promptly notify
EOP, if applicable, of (i) the time
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when the Form S-4 has become effective, (ii) the filing of any supplement or
amendment thereto, (iii) the issuance of any stop order, and (iv) the suspension
of the qualification and registration of the EOP Common Shares and EOP OP Units
issuable in connection with the Mergers.
(b) Each of Cornerstone, Cornerstone Partnership, EOP and EOP Partnership
shall use its commercially reasonable efforts to timely mail the joint proxy
statement/prospectus contained in the Form S-4 to its stockholders or
shareholders. It shall be a condition to the mailing of the joint proxy
statement/prospectus that (i) EOP and EOP Partnership shall have received a
"comfort" letter from PricewaterhouseCoopers LLP, independent public accountants
for Cornerstone and Cornerstone Partnership, of the kind contemplated by the
Statement of Auditing Standards with respect to Letters to Underwriters
promulgated by the American Institute of Certified Public Accountants (the
"AICPA Statement"), dated as of the date on which the Form S-4 shall become
effective and as of the Effective Time, addressed to EOP and EOP Partnership, in
form and substance reasonably satisfactory to EOP and EOP Partnership,
concerning the procedures undertaken by PricewaterhouseCoopers LLP with respect
to the financial statements and information of Cornerstone and Cornerstone
Partnership and their subsidiaries and the Cornerstone Non-controlled Subsidiary
contained in the Form S-4 and the other matters contemplated by the AICPA
Statement and otherwise customary in scope and substance for letters delivered
by independent public accountants in connection with transactions such as those
contemplated by this Agreement and (ii) Cornerstone shall have received a
"comfort" letter from Ernst & Young LLP, independent public accountants for EOP
and EOP Partnership, of the kind contemplated by the AICPA Statement, dated as
of the date on which the Form S-4 shall become effective and as of the Effective
Time, addressed to Cornerstone and Cornerstone Partnership, in form and
substance reasonably satisfactory to Cornerstone, concerning the procedures
undertaken by Ernst & Young LLP with respect to the financial statements and
information of EOP, EOP Partnership and their subsidiaries contained in the Form
S-4 and the other matters contemplated by the AICPA Statement and otherwise
customary in scope and substance for letters delivered by independent public
accountants in connection with transactions such as those contemplated by this
Agreement.
(c) EOP will duly call and give notice of and, as soon as practicable
following the date of this Agreement (but in no event sooner than 20 business
days following the date the Joint Proxy Statement is mailed to the shareholders
of EOP), convene and hold a meeting of its shareholders (the "EOP Shareholders
Meeting") for the purpose of obtaining the EOP Shareholder Approvals. EOP shall,
through its Board of Trustees, recommend to its shareholders approval of this
Agreement, the Merger and the transactions contemplated by this Agreement.
(d) Cornerstone will duly call and give notice of and, as soon as
practicable following the date of this Agreement (but in no event sooner than 20
business days following the date the Joint Proxy Statement is mailed to the
stockholders of Cornerstone), convene and hold a meeting of its stockholders
(the "Cornerstone Stockholders Meeting") for the purpose of obtaining the
Cornerstone Stockholder Approvals. Cornerstone shall, through its Board of
Directors, recommend to its stockholders approval of this Agreement, the Merger
and the transactions contemplated by this Agreement and include such
recommendation in the Proxy Statement; provided, however, that prior to the
Cornerstone Stockholders Meeting, such recommendation may be withdrawn,
modified, amended or qualified if and only to the extent permitted by Section
4.3(c) hereof.
(e) EOP and Cornerstone shall use their commercially reasonable efforts to
convene their respective shareholder and stockholder meetings on the same day,
which day, subject to the provisions of Sections 5.1(c), 5.1(d) and 5.3, shall
be a day not later than 60 days after the date the Joint Proxy Statement is
mailed.
(f) If on the date for the EOP Shareholders Meeting and Cornerstone
Stockholders Meeting established pursuant to Section 5.1(e) of this Agreement,
either EOP or Cornerstone has not received duly executed proxies for a
sufficient number of votes to approve the Merger, then both parties shall
recommend the adjournment of their respective shareholders and stockholders
meetings until one or more dates not later than the date 10 days after the
originally scheduled date of the shareholders meetings.
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(g) Cornerstone shall request written consents for approval by the limited
partners of Cornerstone Partnership of each of the matters described in the
definition of Cornerstone Partner Approvals. Cornerstone hereby agrees to vote
in favor of or consent to, as applicable, the Partnership Merger, to the extent
approval thereof is required by the Cornerstone Partnership Agreement.
Cornerstone shall recommend to the limited partners of Cornerstone Partnership
that they approve such matters. EOP shall request written consents, if any is
required, by the limited partners, of EOP Partnership of each of the matters
described in the definition of EOP Partner Approvals. EOP hereby agrees to vote,
if any is required, in favor of such matters and to recommend to the limited
partners of EOP Partnership that they approve such matters.
5.2 Access to Information; Confidentiality. Subject to the requirements of
confidentiality agreements with third parties in existence on the date hereof,
each of the parties shall, and shall cause each of its Subsidiaries (and, in the
case of Cornerstone, the Cornerstone Non-controlled Subsidiary) to, afford to
the other parties and to the officers, employees, accountants, counsel,
financial advisors and other representatives of such other parties, reasonable
access during normal business hours prior to the Effective Time to all their
respective properties, books, contracts, commitments, personnel and records and,
during such period, each of the parties shall, and shall cause each of its
Subsidiaries (and, in the case of Cornerstone, the Cornerstone Non-controlled
Subsidiary) to, furnish promptly to the other parties (a) a copy of each report,
schedule, registration statement and other document filed by it during such
period pursuant to the requirements of federal or state securities laws and (b)
all other information concerning its business, properties and personnel as such
other party may reasonably request. Each of the parties shall, and shall cause
its Subsidiaries (and in the case of Cornerstone, the Cornerstone Non-controlled
Subsidiary) to, use commercially reasonable efforts to cause its officers,
employees, accountants, counsel, financial advisors and other representatives
and affiliates to, hold any nonpublic information in confidence in accordance
with the Confidentiality Agreement, which shall remain in full force and effect
pursuant to the terms thereof, notwithstanding the execution and delivery of
this Agreement or the termination hereof.
5.3 Commercially Reasonable Efforts; Notification.
(a) Subject to the terms and conditions herein provided, each of the
parties shall: (i) use commercially reasonable efforts to cooperate with one
another in (A) determining which filings are required to be made prior to the
Effective Time with, and which consents, approvals, permits or authorizations
are required to be obtained prior to the Effective Time from, governmental or
regulatory authorities of the United States, the several states and foreign
jurisdictions and any third parties in connection with the execution and
delivery of this Agreement, and the consummation of the transactions
contemplated hereby, including, without limitation, any filing under the HSR
Act, and (B) timely making all such filings and timely seeking all such
consents, approvals, permits and authorizations; (ii) use commercially
reasonable efforts (other than the payment of money which is not contractually
required to be paid) to obtain in writing any consents required from third
parties to effectuate the Mergers, such consents to be in form reasonably
satisfactory to each of the parties (including, without limitation, taking the
actions contemplated under Schedule 5.3(a)(ii)); and (iii) use commercially
reasonable efforts to take, or cause to be taken, all other action and do, or
cause to be done, all other things necessary, proper or appropriate to
consummate and make effective the transactions contemplated by this Agreement.
If at any time after the Effective Time any further action is necessary or
desirable to carry out the purpose of this Agreement, each party shall take all
such necessary action.
(b) Cornerstone and Cornerstone Partnership shall use commercially
reasonable efforts to obtain from PricewaterhouseCoopers LLP access to all work
papers relating to audits of Cornerstone and Cornerstone Partnership performed
by PricewaterhouseCoopers LLP, and the continued cooperation of
PricewaterhouseCoopers LLP with regard to the preparation of consolidated
financial statements for the Surviving Trust.
(c) Cornerstone and Cornerstone Partnership shall give prompt notice to EOP
and EOP Partnership, and EOP and EOP Partnership shall give prompt notice to
Cornerstone and Cornerstone Partnership, (i) if any representation or warranty
made by it contained in this Agreement that is qualified as to
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materiality becomes untrue or inaccurate in any respect or any such
representation or warranty that is not so qualified becomes untrue or inaccurate
in any material respect or (ii) of the failure by it to comply with or satisfy
in any material respect any covenant, condition or agreement to be complied with
or satisfied by it under this Agreement; provided, however, that no such
notification shall affect the representations, warranties, covenants or
agreements of the parties or the conditions to the obligations of the parties
under this Agreement.
5.4 Tax Matters.
(a) Each of EOP and Cornerstone shall use its commercially reasonable
efforts before and after the Effective Time to cause the Merger to qualify as a
reorganization under the provisions of Sections 368(a) of the Code and to obtain
the opinions of counsel referred to in Sections 6.2(e) and 6.3(e).
(b) Unless, and only to the extent, expressly provided otherwise in the Tax
Protection Agreements described in Schedule 2.18(j) to the Cornerstone
Disclosure Letter to be assumed by EOP pursuant to Section 5.14, EOP Partnership
and its Subsidiaries shall use the "traditional method" under Treasury
Regulations Section 1.704-3(b) for purposes of making allocations under Section
704(c) of the Code with respect to the properties of Cornerstone Partnership and
its Subsidiaries acquired in the Partnership Merger to take into account
differences as of the Effective Time of the Partnership Merger between the
adjusted tax bases of such properties and their respective fair market values
(referred to as the "Section 704(c) values"), with no curative allocations to
offset the effect of the "ceiling rule." EOP Partnership and Cornerstone
Partnership shall negotiate in good faith to agree upon the "Section 704(c)
values" of the properties of Cornerstone Partnership and its Subsidiaries as of
the Effective Time of the Partnership Merger. Unless, and only to the extent,
expressly provided otherwise in the Tax Protection Agreements described in
Schedule 2.18(j) to the Cornerstone Disclosure Letter to be assumed by EOP
pursuant to Section 5.14, EOP Partnership and its Subsidiaries shall determine
in their reasonable discretion the method to be used for allocating "excess
nonrecourse liabilities" of EOP Partnership pursuant to Treasury Regulations
Section 1.752-3(a)(3) following the Closing Date, provided that (i) EOP
Partnership shall not use with respect to the former limited partners in
Cornerstone Partnership a method that is less favorable than the method used by
EOP Partnership with respect to the other limited partners of EOP Partnership
who are not parties to an express agreement specifying a particular method to be
used for such purposes, and (ii) in the case of a Cornerstone Partner who, prior
to the Partnership Merger, had been specially allocated a portion of a
Cornerstone Partnership nonrecourse liability secured by a property with respect
to which such Cornerstone Partner has a built-in gain under Section 704(c) of
the Code to take into account such Cornerstone Partner's share of such built-in
gain that was not taken into account in making the allocation of such liability
under Treasury Regulation Section 1.752-3(a)(2), EOP Partnership shall continue
such method of allocating such liability following the Merger.
(c) EOP Partnership shall amend the EOP Partnership Agreement at or prior
to the Effective Time of the Partnership Merger to incorporate provisions
relating to the restoration of deficit capital accounts that will permit each
limited partner of Cornerstone Partnership who has entered into an agreement
with Cornerstone Partnership prior to the Partnership Merger relating to the
restoration of deficit capital accounts to continue to be obligated to restore
any deficit in its capital account in EOP Partnership in an amount that is not
less than the maximum potential amount that such limited partner was obligated
to restore to Cornerstone Partnership immediately prior to the Effective Time of
the Partnership Merger. Such deficit capital account restoration provisions to
be incorporated in the EOP Partnership Agreement shall be in substantially the
form of the deficit capital account restoration provisions incorporated in the
Cornerstone Partnership Agreement pursuant to the Fourth Amendment of Agreement
of Limited Partnership of Cornerstone Properties Limited Partnership, with such
changes thereto as shall be approved by Cornerstone Partnership, provided,
however, that except as set forth in the next sentence below or in the Tax
Protection Agreements listed on Schedule 2.18(j) to the Cornerstone Disclosure
Letter, no Cornerstone Partner shall have the right to increase the amount of
its deficit restoration obligation following the Partnership Merger to an amount
in excess of the maximum potential amount that such limited partner was
obligated to restore to Cornerstone Partnership immediately prior to the
Effective Time of the Partnership Merger. Notwithstanding the proviso in the
immediately preceding sentence, the
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Cornerstone Partners as a group shall have the right, at any time following the
Merger and without the consent of EOP, to increase their maximum potential
deficit restoration obligations as a group (as determined immediately prior to
the Merger) by an aggregate amount of up to $50 million, reduced by the amount
of any increase therein that shall occur under the Cornerstone Partnership
Agreement during the period commencing on the date hereof and ending immediately
prior to the Effective Time of the Partnership Merger. Any election to increase
or to take on a deficit restoration obligation election permitted under a Tax
Protection Agreement listed on Schedule 2.18(j) to the Cornerstone Disclosure
Letter shall not be taken into account in applying the foregoing $50 million
limitation. Notwithstanding any the foregoing, EOP Partnership shall not be
obligated to maintain any level of partnership recourse debt in excess of the
amounts otherwise specifically required to be maintained under the Tax
Protection Agreements listed on Schedule 2.18(j) to the Cornerstone Disclosure
Letter. In addition, the amendment to the EOP Partnership Agreement will contain
a provision to the effect that (i) EOP Partnership will consider in good faith a
request from a former Cornerstone Partner to increase the amount of its deficit
restoration obligation from time to time after the Partnership Merger if the
former Cornerstone Partner shall provide information from its professional tax
advisor satisfactory to EOP Partnership showing that, in the absence of such an
increase, such former Cornerstone Partner would not likely be allocated from EOP
Partnership sufficient indebtedness under Section 752 of the Code and the
at-risk provisions under Section 465 of the Code to avoid the recognition of
gain (other than gain required to be recognized by reason of actual cash
distributions from EOP Partnership following the Partnership Merger); (ii) EOP
Partnership and its professional tax advisors will cooperate in good faith with
the former Cornerstone Partner and its professional tax advisor to provide such
information regarding the allocation of the EOP Partnership liabilities and the
nature of such liabilities as is reasonably necessary in order to determine the
former Cornerstone Partner's adjusted tax basis in its EOP OP Units and at-risk
amount; (iii) in deciding whether or not to grant such request, EOP Partnership
shall be entitled to take into account all factors related to EOP Partnership,
including, without limitation, the existing and anticipated debt structure of
EOP Partnership, the tax situations of other holders of EOP OP Units and the
effect that such a deficit restoration commitment might have on their tax
situation, and the anticipated term long term business needs of EOP; (iv) in no
event shall EOP Partnership be required to incur additional indebtedness that
would be considered a "recourse liability" for purposes of Section 752 of the
Code to facilitate such additional deficit capital account restoration
commitments; and (v) EOP Partnership's only obligation shall be to act in good
faith, and a former Cornerstone Partner's exclusive remedy under such provision
would be an action for specific performance, with no entitlement to monetary
damages.
5.5 Public Announcements. Each party will consult with each other party
before issuing, and provide each other the opportunity to review and comment
upon, any press release or other written public statements, including, without
limitation, any press release or other written public statement which address in
any manner the transactions contemplated by this Agreement, and shall not issue
any such press release or make any such written public statement prior to such
consultation, except as may be required by applicable law, court process or by
obligations pursuant to any listing agreement with any national securities
exchange. The parties agree that the initial press release to be issued with
respect to the transactions contemplated by this Agreement will be in the form
agreed to by the parties prior to the execution of this Agreement.
5.6 Listing. EOP shall use commercially reasonable efforts to cause the EOP
Common Shares to be issued in the Merger, and the EOP Common Shares reserved for
issuance upon redemption of EOP OP Units issued in the Partnership Merger, to be
approved for listing on the NYSE, subject to official notice of issuance, prior
to the Effective Time.
5.7 Transfer and Gains Taxes. Each party shall cooperate in the
preparation, execution and filing of all returns, questionnaires, applications
or other documents regarding any real property transfer or gains, sales, use,
transfer, value added stock transfer and stamp taxes, any transfer, recording,
registration and other fees and any similar taxes which become payable in
connection with the transactions contemplated by this Agreement (together with
any related interests, penalties or additions to tax, "Transfer and Gains
Taxes"). From and after the Effective Time, EOP shall pay or cause EOP Operating
Partnership, as
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appropriate, to pay or cause to be paid, without deduction or withholding from
any amounts payable to the holders of EOP Common Shares or EOP OP Units, as
applicable, all Transfer and Gains Taxes (which term shall not in any event be
construed to include for these purposes any Tax imposed under the Code).
5.8 Benefit Plans and Other Employee Arrangements.
(a) Benefit Plans. After the Effective Time, all employees of Cornerstone
who are employed by the Surviving Trust shall, at the option of the Surviving
Trust, either continue to be eligible to participate in an "employee benefit
plan", as defined in Section 3(3) of ERISA, of Cornerstone which is, at the
option of the Surviving Trust, continued by the Surviving Trust, or
alternatively shall be eligible to participate in the same manner as other
similarly situated employees of the Surviving Trust who were formerly employees
of EOP in any "employee benefit plan," as defined in Section 3(3) of ERISA,
sponsored or maintained by the Surviving Trust after the Effective Time. With
respect to each such employee benefit plan, service with Cornerstone or any
Cornerstone Subsidiary (as applicable) and the predecessor of any of them shall
be included for purposes of determining eligibility to participate, vesting (if
applicable) and determination of the level of entitlement to, benefits under
such employee benefit plan. EOP shall, or shall cause the Surviving Trust and
its Subsidiaries to, (i) waive all limitations, as to preexisting conditions
exclusions and waiting periods with respect to participation and coverage
requirements applicable to all employees of Cornerstone who are employed by the
Surviving Trust under any welfare plan that such employees may be eligible to
participate in after the Effective Time, other than limitations or waiting
periods that are already in effect with respect to such employees and that have
not been satisfied as of the Effective Time under any welfare plan maintained
for such employees immediately prior to the Effective Time, and (ii) provide
each such employee of Cornerstone who is employed by the Surviving Trust with
credit for any co-payments and deductibles paid prior to the Effective Time in
satisfying any applicable deductible or out-of-pocket requirements under any
welfare plans that such employees are eligible to participate in after the
Effective Time.
(b) Stock Option and Restricted Stock Plans. The stock option plans or
programs of Cornerstone and the restricted stock plans or programs of
Cornerstone shall be discontinued.
(c) Cornerstone Stock Options. As of the Effective Time, each outstanding
Cornerstone Stock Option shall, whether or not then vested or exercisable,
effective as of the Effective Time, become fully exercisable and vested and each
such Cornerstone Stock Option shall be automatically converted at the Effective
Time into an option (a "Substituted Option") to purchase a number of shares of
EOP Common Shares equal to the number of shares of Cornerstone Common Stock that
could have been purchased (assuming full vesting) under such Cornerstone Stock
Option multiplied by 0.7009 (rounded down to the nearest whole number of shares
of Cornerstone Common Stock) at an exercise price per share of EOP Common Shares
equal to the per-share option exercise price specified in the Cornerstone Stock
Option divided by 0.7009 (rounded up to the nearest whole cent). Such
Substituted Option shall otherwise be subject to the same terms and conditions
as such Cornerstone Stock Option. For purposes of expiration and otherwise, the
date of grant of the Substituted Option shall be the date on which the
corresponding Cornerstone Stock Option was granted. If the holder of such
Cornerstone Stock Option surrenders such option after the Effective Time and
prior to 11:59 p.m., Eastern Time, on the second business day immediately
following the Effective Time, EOP shall, subject to reduction for required
withholding taxes, pay to each such holder of Cornerstone Stock Options an
amount in cash in respect thereof equal to the product of (i) the excess, if
any, of $18.00 over the exercise price of such Cornerstone Stock Option and (ii)
the number of shares of Cornerstone Common Stock subject thereto. At the
Effective Time, (i) all references in the related stock option agreements to
Cornerstone shall be deemed to refer to EOP and (ii) EOP shall assume all of
Cornerstone's obligations with respect to Cornerstone Stock Options as so
amended. As promptly as reasonably practicable after the Effective Time, EOP
shall issue to each holder of an outstanding Cornerstone Stock Option a document
evidencing the foregoing assumption by EOP.
In respect of each Cornerstone Stock Option assumed by EOP and converted
into a Substituted Option, and the EOP Common Shares underlying such Substituted
Option, EOP shall, as soon as
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practicable after the Effective Time, file and keep current a Registration
Statement on Form S-8 or other appropriate registration statement for as long as
Substituted Options remain outstanding.
(d) Restricted Stock. All unvested shares of restricted stock of
Cornerstone set forth in Schedule 5.8(d) of the Cornerstone Disclosure Schedule,
shall, by virtue of this Agreement and without further action of Cornerstone,
EOP or the holder of such shares of restricted stock, to the extent required in
the plan, agreement or instrument pursuant to which such shares of restricted
stock were granted, vest and become free of all restrictions immediately prior
to the Effective Time and shall be converted into the Merger Consideration
pursuant to Section 1.10.
(e) Retention Agreements and Retention Plan. From and after the Effective
Time, EOP or EOP Partnership shall assume the obligations of Cornerstone under
the Retention Agreements and the Cornerstone retention plan set forth on
Schedule 5.9(e) of the Cornerstone Disclosure Letter. The transactions
contemplated by this Agreement shall be deemed a "Change in Control" for
purposes of such agreements, and EOP shall perform the obligations of
Cornerstone under such agreements and plan in accordance with the terms thereof.
(f) Withholding. To the extent required by applicable law, Cornerstone
shall require each employee who exercises a Cornerstone Stock Option or who
receives Cornerstone Common Stock pursuant to any existing commitment to pay to
Cornerstone in cash or Cornerstone Common Stock an amount sufficient to satisfy
in full Cornerstone's obligation to withhold Taxes incurred by reason of such
exercise or issuance (unless and to the extent such withholding is satisfied
pursuant to the provision regarding withholding in Section 1.15(c)).
5.9 Indemnification.
(a) From and after the Effective Time, EOP and EOP Partnership
(collectively, the "Indemnifying Parties") shall provide exculpation and
indemnification for each person who is now or has been at any time prior to the
date hereof or who becomes prior to the Effective Time of the Merger, an officer
or director of Cornerstone or any Cornerstone Subsidiary (the "Indemnified
Parties") which is the same as the exculpation and indemnification provided to
the Indemnified Parties by Cornerstone and the Cornerstone Subsidiaries
immediately prior to the Effective Time of the Merger in its charter, Bylaws or
in its partnership, operating or similar agreement, as in effect on the date
hereof.
(b) In addition to the rights provided in Section 5.9(a) above, in the
event of any threatened or actual claim, action, suit, proceeding or
investigation, whether civil, criminal or administrative, including, without
limitation, any action by or on behalf of any or all security holders of
Cornerstone or EOP, or any Cornerstone Subsidiary or EOP Subsidiary, or by or in
the right of Cornerstone or EOP, or any Cornerstone Subsidiary or EOP
Subsidiary, or any claim, action, suit, proceeding or investigation in which any
person who is now, or has been, at any time prior to the date hereof, or who
becomes prior to the Effective Time of the Merger, an officer, employee or
director of Cornerstone or any Cornerstone Subsidiary (the "Indemnification
Parties") is, or is threatened to be, made a party based in whole or in part on,
or arising in whole or in part out of, or pertaining to (i) the fact that he is
or was an officer, employee or director of Cornerstone or any of the Cornerstone
Subsidiaries or any action or omission by such person in his capacity as a
director, or (ii) this Agreement or the transactions contemplated by this
Agreement, whether in any case asserted or arising before or after the Effective
Time of the Merger, the Indemnifying Parties shall, from and after the Effective
Time of the Merger, indemnify and hold harmless, as and to the full extent
permitted by applicable law, each Indemnification Party against any losses,
claims, liabilities, expenses (including reasonable attorneys' fees and
expenses), judgments, fines and amounts paid in settlement in accordance
herewith in connection with any such threatened or actual claim, action, suit,
proceeding or investigation. Any Indemnification Party proposing to assert the
right to be indemnified under this Section 5.9(b) shall, promptly after receipt
of notice of commencement of any action against such Indemnification Party in
respect of which a claim is to be made under this Section 5.9(b) against the
Indemnifying Parties, notify the Indemnifying Parties of the commencement of
such action, enclosing a copy of all papers served; provided, however, that the
failure to provide such notice shall not affect the obligations of the
Indemnifying Parties except to the extent such failure to notify
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materially prejudices the Indemnifying Parties' ability to defend such claim,
action, suit, proceeding or investigation; and provided, further, however, that,
in the case of any action pending at the Effective Time of the Merger,
notification pursuant to this Section 5.9(b) shall be received by EOP prior to
such Effective Time. If any such action is brought against any of the
Indemnification Parties and such Indemnification Parties notify the Indemnifying
Parties of its commencement, the Indemnifying Parties will be entitled to
participate in and, to the extent that they elect by delivering written notice
to such Indemnification Parties promptly after receiving notice of the
commencement of the action from the Indemnification Parties, to assume the
defense of the action and after notice from the Indemnifying Parties to the
Indemnification Parties of their election to assume the defense, the
Indemnifying Parties will not be liable to the Indemnification Parties for any
legal or other expenses except as provided below. If the Indemnifying Parties
assume the defense, the Indemnifying Parties shall have the right to settle such
action without the consent of the Indemnification Parties; provided, however,
that the Indemnifying Parties shall be required to obtain such consent (which
consent shall not be unreasonably withheld) if the settlement includes any
admission of wrongdoing on the part of the Indemnification Parties or any decree
or restriction on the Indemnification Parties; provided, further, that no
Indemnifying Parties, in the defense of any such action shall, except with the
consent of the Indemnification Parties (which consent shall not be unreasonably
withheld), consent to entry of any judgment or enter into any settlement that
does not include as an unconditional term thereof the giving by the claimant or
plaintiff to such Indemnification Parties of a release from all liability with
respect to such action. The Indemnification Parties will have the right to
employ their own counsel in any such action, but the fees, expenses and other
charges of such counsel will be at the expense of such Indemnification Parties
unless (i) the employment of counsel by the Indemnification Parties has been
authorized in writing by the Indemnifying Parties, (ii) the Indemnification
Parties have reasonably concluded (based on written advice of counsel to the
Indemnification Parties) that there may be legal defenses available to them that
are different from or in addition to and inconsistent with those available to
the Indemnifying Parties, (iii) a conflict or potential conflict exists (based
on written advice of counsel to the Indemnification Parties) between the
Indemnification Parties and the Indemnifying Parties (in which case the
Indemnifying Parties will not have the right to direct the defense of such
action on behalf of the Indemnification Parties) or (iv) the Indemnifying
Parties have not in fact employed counsel to assume the defense of such action
within a reasonable time after receiving notice of the commencement of the
action from the Indemnification Parties, in each of which cases the reasonable
fees, disbursements and other charges of counsel will be at the expense of the
Indemnifying Parties and shall promptly be paid by each Indemnifying Party as
they become due and payable in advance of the final disposition of the claim,
action, suit, proceeding or investigation to the fullest extent and in the
manner permitted by law; provided, however, that in no event shall any
contingent fee arrangement be considered reasonable. Notwithstanding the
foregoing, the Indemnifying Parties shall not be obligated to advance any
expenses or costs prior to receipt of an undertaking by or on behalf of the
Indemnification Party to repay any expenses advanced if it shall ultimately be
determined that the Indemnification Party is not entitled to be indemnified
against such expense. It is understood that the Indemnifying Parties shall not,
in connection with any proceeding or related proceedings in the same
jurisdiction, be liable for the reasonable fees, disbursements and other charges
of more than one separate firm admitted to practice in such jurisdiction at any
one time for all such Indemnification Parties unless (a) the employment of more
than one counsel has been authorized in writing by the Indemnifying Parties, (b)
any of the Indemnification Parties have reasonably concluded (based on written
advice of counsel to the Indemnification Parties) that there may be legal
defenses available to them that are different from or in addition to and
inconsistent with those available to other Indemnification Parties or (c) a
conflict or potential conflict exists (based on written advice of counsel to the
Indemnification Parties) between any of the Indemnification Parties and the
other Indemnification Parties, in each case of which the Indemnifying Parties
shall be obligated to pay the reasonable fees and expenses of such additional
counsel or counsels. Notwithstanding anything to the contrary set forth in this
Agreement, the Indemnifying Parties (i) shall not be liable for any settlement
effected without their prior written consent and (ii) shall not have any
obligation hereunder to any Indemnification Party to the extent that a court of
competent jurisdiction shall determine in a final and non-appealable order that
such indemnification is prohibited by applicable law. In the event of a final
and non-appealable determination
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by a court that any payment of expenses is prohibited by applicable law, the
Indemnification Parties shall promptly refund to the Indemnifying Parties the
amount of all such expenses theretofore advanced pursuant hereto.
(c) At or prior to the Effective Time of the Merger, EOP shall purchase
directors' and officers' liability insurance covering acts or omissions
occurring prior to the Effective Time of the Merger for a period of six years
with respect to those persons who are currently covered by Cornerstone's
directors' and officers' liability insurance policy on terms with respect to
such coverage and amount no less favorable to Cornerstone's directors and
officers currently covered by such insurance than those of such policy in effect
on the date hereof.
(d) This Section 5.9 is intended for the irrevocable benefit of, and to
grant third-party rights to, the Indemnified Parties, the Indemnification
Parties and their successors, assigns and heirs and shall be binding on all
successors and assigns of EOP and EOP Operating Partnership. Each of the
Indemnified Parties and the Indemnification Parties shall be entitled to enforce
the covenants contained in this Section 5.9 and EOP and EOP Partnership
acknowledge and agree that each Indemnified Party and Indemnification Party
would suffer irreparable harm and that no adequate remedy at law exists for a
breach of such covenants and such Indemnified Party or such Indemnification
Party shall be entitled to injunctive relief and specific performance in the
event of any breach of any provision in this Section 5.9.
(e) If EOP or EOP Partnership or any of its respective successors or
assigns (i) consolidates with or merges into any other person and shall not be
the continuing or surviving corporation or entity of such consolidation or
merger or (ii) transfers all or substantially all of its properties and assets
to any person, then, and in each such case the successors and assigns of such
entity shall assume the obligations set forth in this Section 5.9, which
obligations are expressly intended to be for the irrevocable benefit of, and
shall be enforceable by, each director and officer covered hereby.
5.10 Declaration of Dividends and Distributions. From and after the date of
this Agreement, neither Cornerstone nor EOP shall make any dividend or
distribution to its respective stockholders or shareholders without the prior
written consent of the other party; provided, however, the written consent of
the other party shall not be required for the authorization and payment of (a)
distributions at their respective stated dividend or distribution rates with
respect to EOP Preferred Shares or Cornerstone 7% Preferred Stock, (b) quarterly
distribution with respect to the Cornerstone Common Stock of up to $0.24 per
share for the quarter ending March 31, 2000 and up to $0.31 per share thereafter
and (c) quarterly distributions with respect to the EOP Common Share of up to
$0.42 per share for the quarter ending March 31, 2000 and for each quarter
thereafter; provided, however, except for the record date previously set on
January 31, 2000, the record date for each distribution with respect to the
Cornerstone Common Stock shall be the same date as the record date for the
quarterly distribution for the EOP Common Shares, as provided to Cornerstone by
notice not less than twenty (20) business days prior to the record date for any
quarterly EOP distribution. From and after the date of this Agreement,
Cornerstone Partnership shall not make any distribution to the holders of
Cornerstone OP Units except a distribution per Cornerstone OP Unit in the same
amount as a dividend per share of Cornerstone Common Stock permitted pursuant to
this Section 5.10, with the same record and payment dates as such dividend on
the Cornerstone Common Stock. The foregoing restrictions shall not apply,
however, to the extent a distribution (or an increase in a distribution) by
Cornerstone or EOP is necessary for Cornerstone or EOP, as applicable, to
maintain REIT status, avoid the incurrence of any taxes under Section 857 of the
Code, avoid the imposition of any excise taxes under Section 4981 of the Code,
or avoid the need to make one or more extraordinary or disproportionately larger
distributions to meet any of the three preceding objectives.
5.11 Transfer of Non-Controlled Subsidiary Voting Shares. At the Closing
and pursuant to the Stock Purchase Agreement, each of the holders of voting
capital stock of the Cornerstone Non-controlled Subsidiary (other than
Cornerstone Partnership, to the extent it owns any such voting capital stock)
shall transfer to EOP NCS Sub or such person or persons as EOP NCS Sub shall
designate by written notice delivered to them prior to the Closing, all of the
shares of each such Company owned by them, constituting all the outstanding
shares of such companies which are not owned by Cornerstone Partnership,
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for an aggregate consideration in an amount equal to the purchase price set
forth in the Stock Purchase Agreement. EOP shall use commercially reasonable
efforts to cause EOP NCS Sub to perform its obligations under the Stock Purchase
Agreement
5.12 Notices. EOP shall provide such notice to its preferred shareholders
of the Merger as is required under Maryland law or the EOP Declaration of Trust.
5.13 Resignations. On the Closing Date, Cornerstone shall cause the
directors and officers of Cornerstone and of each of the Cornerstone
Subsidiaries to submit their resignations from such positions, effective as of
the Effective Time of the Merger.
5.14 Assumption of Existing Tax Protection Agreements. Effective as of the
Effective Time of the Partnership Merger, EOP and EOP Partnership shall assume
the obligations of Cornerstone, Cornerstone Partnership and/or the applicable
Cornerstone Subsidiary, as the case may be, under the Tax Protection Agreements
as described in Schedule 2.18(j) to the Cornerstone Disclosure Letter.
Immediately prior to the Effective Time of the Partnership Merger, EOP and EOP
Partnership shall enter into agreements with Cornerstone and Cornerstone
Partnership, for the benefit of and enforceable by the individuals and entities
who are intended to be protected by the provisions of the Tax Protection
Agreements, confirming such assumption effective as of the Effective Time of the
Partnership Merger.
5.15 EOP Partnership Agreement. At the Closing, EOP Partnership shall
assume and perform any obligations that Cornerstone Partnership or any
Cornerstone Subsidiary has immediately prior to the Effective Time to issue
securities in accordance with the terms of any partnership or other agreement to
which Cornerstone Partnership or such Cornerstone Subsidiary is a party and that
are described on Schedule 5.15, in the same manner and to the same extent that
Cornerstone Partnership or such Cornerstone Subsidiary would be required to
perform such obligation if no Merger had been consummated.
5.16 Registration Rights Agreements. At the Closing, (a) Cornerstone shall
assign and EOP shall assume by appropriate instrument the Registration Rights
Agreements described on Schedule 5.16 to the Cornerstone Disclosure Letter, and
(b) Cornerstone shall assign and EOP shall assume the obligations of Cornerstone
under the Amended and Restated Registration Rights and Voting Agreement dated
December 16, 1998 between Cornerstone, PGGM and Dutch Institutional Holding
Company, Inc., as and to the extent set forth in PGGM's Cornerstone Voting
Agreement.
5.17 Cornerstone Convertible Promissory Note. Following the Effective Time
of the Mergers, the holders of the Cornerstone Convertible Promissory Note shall
have the right to obtain upon the exercise of its conversion rights pursuant to
such Cornerstone Convertible Promissory Note, in lieu of each share of
Cornerstone Common Stock theretofor issuable upon exercise of such conversion
rights, EOP Common Shares that it would have owned immediately after the Merger
if it had converted the Cornerstone Convertible Promissory Note immediately
before the Effective Time of the Merger.
ARTICLE 6
CONDITIONS
6.1 Conditions to Each Party's Obligation to Effect the Mergers. The
obligations of each party to effect the Mergers and to consummate the other
transactions contemplated by this Agreement to occur on the Closing Date shall
be subject to the fulfillment at or prior to the Closing Date of the following
conditions:
(a) Shareholder and Partner Approvals. The Cornerstone Stockholder
Approvals, the EOP Shareholder Approvals and the Partner Approvals shall have
been obtained.
(b) HSR Act. The waiting period (and any extension thereof) applicable to
the Partnership Merger, the Merger or the transactions contemplated by the Stock
Purchase Agreement under the HSR Act, if
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applicable to the Partnership Merger, the Merger or and the transactions
contemplated by the Stock Purchase Agreement, shall have expired or been
terminated.
(c) Listing of Shares. The NYSE shall have approved for listing the EOP
Common Shares to be issued in the Merger and the EOP Common Shares reserved for
issuance upon redemption of EOP OP Units issued in the Partnership Merger,
subject to official notice of issuance.
(d) Form S-4. The Form S-4 shall have become effective under the Securities
Act and shall not be the subject of any stop order or proceedings by the SEC
seeking a stop order.
(e) No Injunctions or Restraints. No temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the Mergers or any of the other transactions contemplated hereby
shall be in effect.
(f) Blue Sky Laws. EOP and EOP Partnership shall have received all state
securities or "blue sky" permits and other authorizations necessary to issue the
EOP Common Shares and EOP OP Units issuable in the Mergers.
6.2 Conditions to Obligations of EOP and EOP Partnership. The obligations
of EOP and EOP Partnership to effect the Mergers and to consummate the other
transactions contemplated to occur on the Closing Date are further subject to
the following conditions, any one or more of which may be waived by EOP:
(a) Representations and Warranties. Each of the representations and
warranties of Cornerstone and Cornerstone Partnership set forth in this
Agreement, disregarding all qualifications and exceptions contained therein
relating to materiality or Cornerstone Material Adverse Effect, shall be true
and correct as of the date of this Agreement and as of the Closing Date as
though made on and as of the Closing Date (except to the extent that such
representations and warranties are expressly limited by their terms to another
date, in which case such representations and warranties shall be true and
correct as of such other date), except where the failure of such representations
and warranties to be true and correct would not, individually or in the
aggregate, reasonably be expected to have a Cornerstone Material Adverse Effect;
and EOP shall have received a certificate (which certificate may be qualified by
Knowledge to the same extent as the representations and warranties of
Cornerstone and Cornerstone Partnership contained herein are so qualified)
signed on behalf of Cornerstone by the chief executive officer or the chief
financial officer of Cornerstone, in such capacity, to such effect.
(b) Performance of Obligations of Cornerstone and Cornerstone
Partnership. Cornerstone and Cornerstone Partnership shall have performed in
all material respects all obligations required to be performed by them under
this Agreement at or prior to the Effective Time, and EOP shall have received a
certificate signed on behalf of Cornerstone by the chief executive officer or
the chief operating officer of Cornerstone, in such capacity, to such effect.
(c) Material Adverse Change. Since the date of this Agreement, there shall
have been no Cornerstone Material Adverse Change and EOP shall have received a
certificate of the chief executive officer or chief operating officer of
Cornerstone, in such capacity, certifying to such effect.
(d) Tax Opinions Relating to REIT Status and Partnership Status. EOP shall
have received (i) an opinion of King & Spalding or other counsel to Cornerstone
reasonably satisfactory to EOP, dated as of the Closing Date, to the effect
that, commencing with its taxable year ended December 31, 1997, (x) Cornerstone
was organized and has operated in conformity with the requirements for
qualification as a REIT under the Code, and (y) Cornerstone Partnership has been
during and since December 23, 1997, and continues to be, treated for federal
income tax purposes as a partnership and not as a corporation or association
taxable as a corporation (with customary exceptions, assumptions and
qualifications and based upon customary representations) and (ii) an opinion of
Hogan & Hartson L.L.P. or other counsel to EOP reasonably satisfactory to
Cornerstone, dated as of the Closing Date, to the effect that, commencing with
its taxable year ended December 31, 1997, EOP was organized and has operated in
conformity with the
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requirements for qualification as a REIT under the Code and that, after giving
effect to the Merger, EOP's proposed method of operation will enable it to
continue to meet the requirements for qualification and taxation as a REIT under
the Code (with customary exceptions, assumptions and qualifications and based
upon customary representations and based upon and subject to the opinion of
counsel to Cornerstone described in clause (i) above).
(e) Tax Opinion Relating to the Merger. EOP shall have received an opinion
dated the Closing Date from Hogan & Hartson L.L.P. or other counsel reasonably
satisfactory to EOP, based upon customary certificates and letters, which
letters and certificates are to be in a form to be agreed upon by the parties
and dated the Closing Date, to the effect that the Merger will qualify as a
reorganization under the provisions of Section 368(a) of the Code.
(f) "Comfort" Letter. EOP and EOP Partnership shall have received a
"comfort" letter from PricewaterhouseCoopers LLP, as described in Section
5.1(b).
(g) Noncompetition Agreements. Each of William Wilson III and John S. Moody
shall have entered into noncompetition and confidentiality agreements
substantially in the forms set forth in Schedule 6.2(g) hereto.
6.3 Conditions to Obligations of Cornerstone and Cornerstone
Partnership. The obligations of Cornerstone and Cornerstone Partnership to
effect the Mergers and to consummate the other transactions contemplated to
occur on the Closing Date is further subject to the following conditions, any
one or more of which may be waived by Cornerstone:
(a) Representations and Warranties. Each of the representations and
warranties of EOP and EOP Partnership set forth in this Agreement, disregarding
all qualifications and exceptions contained therein relating to materiality or
EOP Material Adverse Effect, shall be true and correct as of the date of this
Agreement and as of the Closing Date as though made on and as of the Closing
Date (except to the extent that such representations and warranties are
expressly limited by their terms to another date, in which case such
representations and warranties shall be true and correct as of such other date),
except where the failure of such representations and warranties to be true and
correct would not, individually or in the aggregate, reasonably be expected to
have a EOP Material Adverse Effect; and Cornerstone shall have received a
certificate (which certificate may be qualified by Knowledge to the same extent
as the representations and warranties of EOP and EOP Partnership contained
herein are so qualified) signed on behalf of EOP by the chief executive officer
or the chief financial officer of EOP, in such capacity, to such effect.
(b) Performance of Obligations of EOP and EOP Partnership. EOP and EOP
Partnership shall have performed in all material respects all obligations
required to be performed by it under this Agreement at or prior to the Effective
Time, and Cornerstone shall have received a certificate of EOP signed on behalf
of EOP by a duly authorized executive officer of EOP, in such capacity, to such
effect.
(c) Material Adverse Change. Since the date of this Agreement, there shall
have been no EOP Material Adverse Change and Cornerstone shall have received a
certificate of a duly authorized executive officer of EOP, in such capacity,
certifying to such effect.
(d) Tax Opinions Relating to REIT Status and Partnership Status.
Cornerstone shall have received the opinion of Hogan & Hartson L.L.P. or other
counsel to EOP reasonably satisfactory to Cornerstone, dated as of the Closing
Date, that, commencing with its taxable year ended December 31, 1997, (i) EOP
was organized and has operated in conformity with the requirements for
qualification as a REIT under the Code and that, after giving effect to the
Merger, EOP's proposed method of operation will enable it to continue to meet
the requirements for qualification and taxation as a REIT under the Code (with
customary exceptions, assumptions and qualifications and based upon customary
representations and based upon and subject to the opinion of counsel to
Cornerstone described in Section 6.2(d) of this Agreement), (ii) BeaMet was
organized and has operated in conformity with the requirements for qualification
as a REIT under the Code (with customary exceptions, assumptions and
qualifications and based upon customary representations), and (iii) EOP
Partnership has been during and since 1997, and continues to
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be, treated for federal income tax purposes as a partnership and not as a
corporation or association taxable as a corporation (with customary exceptions,
assumptions and qualifications and based upon customary representations).
(e) Tax Opinion Relating to the Merger. Cornerstone shall have received an
opinion dated the Closing Date from King & Spalding or other counsel reasonably
satisfactory to Cornerstone, based upon customary certificates and letters,
which letters and certificates are to be in a form to be agreed upon by the
parties and dated the Closing Date, to the effect that the Merger will qualify
as a reorganization under the provisions of Section 368(a) of the Code.
(f) Proposed EOP Charter Amendment Relating to Domestically Controlled REIT
Status. The EOP Shareholders shall have approved the Proposed EOP Charter
Amendment Relating to Domestically Controlled REIT Status at the EOP
Shareholders Meeting.
(g) "Comfort" Letter. Cornerstone and Cornerstone Partnership shall have
received a "comfort" letter from Ernst & Young LLP, as described in Section
5.1(b).
(h) Certificate Regarding "Domestically Controlled REIT" Status to PGGM.
EOP shall have delivered to Stichting Pensioenfonds voor de Gezondheid,
Geestelijke en Maatschappelijke Belangen ("PGGM") a certification dated within
fifteen (15) days of the Closing Date that to EOP's knowledge, after reasonable
inquiry, EOP is a "domestically controlled REIT" within the meaning of Section
897(h)(4)(B) of the Code as of the date thereof. For purposes of such
certification, reasonable inquiry shall include (but not necessarily be limited
to) review of all Schedule 13D and 13G filings made under the Exchange Act with
the SEC with respect to EOP, all IRS Form 1042 filings made by or on behalf of
EOP, the list of EOP's registered shareholders as of a date within 60 days of
such certificate (and to the extent reasonably available, as of a date within 60
days of the end of each of 1997, 1998, and 1999), a list of "non-objecting
beneficial owners" of shares of EOP obtained as of a date within 60 days of such
certificate (and to the extent reasonably available, as of a date within 60 days
of the end of each of 1997, 1998, and 1999), and a report of a shareholder
tracking service obtained within 60 days of such certificate (together with such
other reports as are in the possession of EOP). Such certificate shall be
accompanied by copies of information that has been obtained or relied upon by
EOP for purposes of such certificate, provided that PGGM shall have executed an
agreement with EOP to treat such information as confidential and to use such
information solely for the purposes of evaluating the accuracy of such
certification.
ARTICLE 7
TERMINATION, AMENDMENT AND WAIVER
7.1 Termination. This Agreement may be terminated at any time prior to the
Effective Time of the Partnership Merger, whether such action occurs before or
after any of the Cornerstone Stockholder Approvals, the EOP Shareholder
Approvals or either of the Cornerstone Partner Approvals are obtained:
(a) by mutual written consent duly authorized by the Board of Trustees of
EOP and the Board of Directors of Cornerstone;
(b) by EOP, upon a breach of or failure to perform any representation,
warranty, covenant, obligation or agreement on the part of Cornerstone or
Cornerstone Partnership set forth in this Agreement, or if any representation or
warranty of Cornerstone or Cornerstone Partnership shall become untrue, in
either case such that the conditions set forth in Section 6.2(a) or Section
6.2(b), as the case may be, would be incapable of being satisfied by December
31, 2000 (or as otherwise extended);
(c) by Cornerstone, upon a breach of any representation, warranty, covenant
obligation or agreement on the part of EOP or EOP Partnership set forth in this
Agreement, or if any representation or warranty of EOP or EOP Partnership shall
become untrue, in either case such that the conditions set forth in Section
6.3(a) or Section 6.3(b), as the case may be, would be incapable of being
satisfied by December 31, 2000 (or as otherwise extended);
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(d) by either EOP or Cornerstone, if any judgment, injunction, order,
decree or action by any Governmental Entity of competent authority preventing
the consummation of either of the Mergers shall have become final and
non-appealable;
(e) by either EOP or Cornerstone, if the Mergers shall not have been
consummated before December 31, 2000; provided, however, that a party may not
terminate pursuant to this clause (e) if the terminating party shall have
breached in any material respect its obligations under this Agreement in any
manner that shall have caused either of the Mergers not to have been consummated
by such date;
(f) by either EOP or Cornerstone (unless Cornerstone or Cornerstone
Partnership is in breach in any material respect of its obligations under
Section 5.1) if, upon a vote at a duly held Cornerstone Stockholders Meeting or
any adjournment thereof, the Cornerstone Stockholder Approvals shall not have
been obtained as contemplated by Section 5.1 or if the Cornerstone Partner
Approvals have not been obtained as contemplated by Section 5.1;
(g) by either Cornerstone or EOP (unless EOP or EOP Partnership is in
breach in any material respect of its obligations under Section 5.1 if, upon a
vote at a duly held EOP Shareholders Meeting or any adjournment thereof, the EOP
Shareholder Approvals shall not have been obtained as contemplated by Section
5.1 or if the EOP Partner Approvals have not been obtained as contemplated by
Section 5.1;
(h) by Cornerstone (i) if the Board of Directors of Cornerstone shall have
withdrawn, modified, amended or qualified in any manner adverse to EOP its
approval or recommendation of either of the Merger or this Agreement in
connection with, or approved or recommended, any Superior Acquisition Proposal,
or, (ii) in order to enter into a binding written agreement with respect to a
Superior Acquisition Proposal, provided that, in each case, Cornerstone shall
have complied with the terms of Section 4.3 and, prior to terminating pursuant
to this Section 7.1(h), has paid to EOP Partnership the Break-Up Fee (as defined
herein) as provided by Section 7.2 hereof; and
(i) by EOP, if (1) the Board of Directors of Cornerstone shall have failed
to recommend or withdrawn, modified, amended or qualified, or proposed publicly
not to recommend or to withdraw, modify, amend or qualify, in any manner adverse
to EOP its approval or recommendation of either of the Mergers or this Agreement
or approved or recommended any Superior Acquisition Proposal, (2) following the
announcement or receipt of an Acquisition Proposal, Cornerstone shall have
failed to call the Cornerstone Stockholders Meeting in accordance with Section
5.1(a) or failed to prepare and mail to its stockholders the Joint Proxy
Statement in accordance with Section 5.1(a) or 5.1(b), or (3) the Board of
Directors of Cornerstone or any committee thereof shall have resolved to do any
of the foregoing.
7.2 Certain Fees and Expenses. If this Agreement shall be terminated (i)
pursuant to Section 7.1(h), 7.1(i)(1) or 7.1(i)(3), then Cornerstone and
Cornerstone Partnership thereupon shall pay to EOP Partnership a fee equal to
the Break-Up Fee (as defined herein), and (ii) pursuant to Section 7.1(b) or
7.1(f), then Cornerstone and Cornerstone Partnership shall pay to EOP
Partnership (provided that Cornerstone was not entitled to terminate this
Agreement pursuant to Section 7.1(c) at the time of such termination) an amount
equal to the Break-Up Expenses (as defined herein). If this Agreement shall be
terminated pursuant to Section 7.1(c) or 7.1(g), then EOP and EOP Partnership
shall pay to Cornerstone Partnership (provided that EOP was not entitled to
terminate this Agreement pursuant to Section 7.1(b) at the time of such
termination) an amount equal to the Break-Up Expenses. If this Agreement shall
be terminated pursuant to Section 7.1(b), 7.1(d) (if primarily resulting from
any action or inaction of Cornerstone, Cornerstone Partnership or any
Cornerstone Subsidiary or the Cornerstone Non-controlled Subsidiary), 7.1(e),
7.1(f), 7.1(i)(2) and prior to the time of such termination an Acquisition
Proposal has been received by Cornerstone or Cornerstone Partnership, and either
prior to the termination of this Agreement or within twelve (12) months
thereafter, Cornerstone or Cornerstone Partnership enters into any written
agreement to consummate a transaction or series of transactions which, had such
agreement been proposed or negotiated during the term of this Agreement, would
have constituted an Acquisition Proposal pursuant to Section 4.3 (each, a
"Cornerstone Acquisition Agreement"), which is subsequently consummated (whether
or not any Cornerstone Acquisition Agreement relates to the same Acquisition
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Proposal which had been received at the time of the termination of this
Agreement), then Cornerstone and Cornerstone Partnership shall pay the Break-Up
Fee to EOP Partnership.
The payment of the Break-Up Fee shall be compensation for the loss suffered
by EOP and EOP Partnership as a result of the failure of the Mergers to be
consummated (including, without limitation, opportunity costs and out-of-pocket
costs and expenses) and to avoid the difficulty of determining damages under the
circumstances. The Break-Up Fee shall be paid by Cornerstone and Cornerstone
Partnership to EOP Partnership, or the Break-Up Expenses shall be paid by
Cornerstone and Cornerstone Partnership to EOP Partnership or EOP Partnership to
Cornerstone Partnership (as applicable), in immediately available funds within
two (2) business days after the date the event giving rise to the obligation to
make such payment occurred (except as otherwise provided in Section 7.1(h) or
7.1(i)). Cornerstone acknowledges that the agreements contained in this Section
7.2 are integral parts of this Agreement; accordingly, if Cornerstone and
Cornerstone Partnership fail to promptly pay the Break-Up Fee or Break-Up
Expenses due pursuant to this Section 7.2 and, in order to obtain payment, EOP
commences a suit which results in a judgment against Cornerstone or Cornerstone
Partnership for any amounts owed pursuant to this Section 7.2, Cornerstone and
Cornerstone Partnership shall pay to EOP its costs and expenses (including
attorneys' fees and expenses) in connection with such suit, together with
interest on the amount owed at the rate on six-month U.S. Treasury obligations
in effect on the date such payment was required to be made plus 300 basis
points.
As used in this Agreement, "Break-Up Fee" shall be an amount equal to the
lesser of (i) $100,000,000 less Break-Up Expenses paid or payable under this
Section 7.2 (the "Base Amount") and (ii) the sum of (A) the maximum amount that
can be paid to EOP Partnership without causing EOP to fail to meet the
requirements of Sections 856(c)(2) and (3) of the Code determined as if the
payment of such amount did not constitute income described in Sections
856(c)(2)(A)-(H) and 856(c)(3)(A)-(I) of the Code ("Qualifying Income"), as
determined by independent accountants to EOP, and (B) in the event EOP receives
a letter from outside counsel (the "Break-Up Fee Tax Opinion") indicating that
EOP has received a ruling from the IRS holding that EOP Partnership's receipt of
the Base Amount would either constitute Qualifying Income or would be excluded
from gross income of EOP within the meaning of Sections 856(c)(2) and (3) of the
Code (the "REIT Requirements") or that the receipt by EOP Partnership of the
remaining balance of the Base Amount following the receipt of and pursuant to
such ruling would not be deemed constructively received prior thereto, the Base
Amount less the amount payable under clause (A) above. Cornerstone's and
Cornerstone Partnership's obligation to pay any unpaid portion of the Break-Up
Fee shall terminate three years from the date of this Agreement. In the event
that EOP Partnership is not able to receive the full Base Amount, Cornerstone
and Cornerstone Partnership shall place the unpaid amount in escrow and shall
not release any portion thereof to EOP Partnership unless and until Cornerstone
receives either one of the following: (i) a letter from EOP's independent
accountants indicating the maximum amount that can be paid at that time to EOP
Partnership without causing EOP to fail to meet the REIT Requirements or (ii) a
Break-Up Fee Tax Opinion, in either of which events Cornerstone and Cornerstone
Partnership shall pay to EOP Partnership the lesser of the unpaid Base Amount or
the maximum amount stated in the letter referred to in (i) above.
The "Break-Up Expenses" payable to EOP Partnership or Cornerstone
Partnership, as the case may be (the "Recipient"), shall be an amount equal to
the lesser of (i) $7,500,000 or (ii) the Recipient's out-of-pocket expenses
incurred in connection with this Agreement and the transactions contemplated
hereby (including, without limitation, all attorneys', accountants' and
investment bankers' fees and expenses). If the Break-Up Expenses payable to the
Recipient exceed the maximum amount that can be paid to the Recipient without
causing the Recipient to fail to meet the requirements of Sections 856(c)(2) and
(3) of the Code determined as if the payment of such amount did not constitute
Qualifying Income, as determined by independent accountants to the Recipient
(the "Maximum Amount"), the amount initially payable to the Recipient shall be
limited to the Maximum Amount. If, however, within the three-year period
commencing on the date of this Agreement, the Recipient receives a Break-Up Fee
Tax Opinion indicating that it has received a ruling from the IRS holding that
the Recipient's receipt of the Break-Up
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Expenses would either constitute Qualifying Income or would be excluded from
gross income of the Recipient within the meaning of the REIT Requirements or
that receipt by the Recipient of the balance of the Break-Up Expenses above the
Maximum Amount following the receipt of and pursuant to such ruling would not be
deemed constructively received prior thereto, the Recipient shall be entitled to
have payable to it the full amount of the Break-Up Expenses. The obligation of
EOP and EOP Partnership or Cornerstone and Cornerstone Partnership, as
applicable ("Payor"), to pay any unpaid portion of the Break-Up Expenses shall
terminate three years from the date of this Agreement. In the event that the
Recipient is not able to receive the full Break-Up Expenses, the Payor shall
place the unpaid amount in escrow and shall not release any portion thereof to
the Recipient unless and until the Payor receives either one of the following:
(i) a letter from the independent accountants of EOP or Cornerstone, as the case
may be, indicating the maximum amount that can be paid at that time to the
Recipient without causing it to fail to meet the REIT Requirements or (ii) a
Break-Up Expense Tax Opinion, in either of which events the Payor shall pay to
the Recipient the lesser of the unpaid Break-Up Expenses or the maximum amount
stated in the letter referred to in (i) above.
7.3 Effect of Termination. In the event of termination of this Agreement by
either Cornerstone or EOP as provided in Section 7.1, this Agreement shall
forthwith become void and have no effect, without any liability or obligation on
the part of EOP, EOP Partnership, Cornerstone or Cornerstone Partnership, other
than the last sentence of Section 5.2, Section 7.2, this Section 7.3 and Article
8, and except to the extent that such termination results from a material breach
by any party of any of its representations, warranties, covenants or agreements
set forth in this Agreement.
7.4 Amendment. This Agreement may be amended by the parties in writing by
action of the respective Board of Trustees or Board of Directors of EOP and
Cornerstone at any time before or after any Shareholder Approvals are obtained
and prior to the filing of the Articles of Merger with the Department; provided,
however, that, after the Shareholder Approvals and Partner Approvals are
obtained, no such amendment, modification or supplement shall be made which by
law requires the further approval of shareholders or partners without obtaining
such further approval. The parties agree to amend this Agreement in the manner
provided in the immediately preceding sentence to the extent required to (a)
continue the status of each party as a REIT or (b) preserve the Merger as a
reorganization under Section 368(a) of the Code.
7.5 Extension; Waiver. At any time prior to the Effective Time, the parties
may (a) extend the time for the performance of any of the obligations or other
acts of the other party, (b) waive any inaccuracies in the representations and
warranties of the other party contained in this Agreement or in any document
delivered pursuant to this Agreement or (c) subject to the proviso of Section
7.4, waive compliance with any of the agreements or conditions of the other
party contained in this Agreement. Any agreement on the part of a party to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party. The failure of any party to this
Agreement to assert any of its rights under this Agreement or otherwise shall
not constitute a waiver of those rights.
ARTICLE 8
GENERAL PROVISIONS
8.1 Nonsurvival of Representations and Warranties. None of the
representations and warranties in this Agreement or in any instrument delivered
pursuant to this Agreement confirming the representations and warranties in this
Agreement shall survive the Effective Time. This Section 8.1 shall not limit any
covenant or agreement of the parties which by its terms contemplates performance
after the Effective Time.
8.2 Notices. All notices, requests, claims, demands and other
communications under this Agreement shall be in writing and shall be delivered
personally, sent by overnight courier (providing proof of delivery) to the
parties or sent by telecopy (providing confirmation of transmission) at the
following addresses or
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telecopy numbers (or at such other address or telecopy number for a party as
shall be specified by like notice):
(a) if to EOP or EOP Partnership, to:
Equity Office Properties Trust
Two North Riverside Plaza, 22nd Floor
Chicago, Illinois 60606
Attention: Timothy H. Callahan, President
Stanley M. Stevens, Chief Counsel
Fax No.: (312) 559-5021
with a copy to:
Hogan & Hartson L.L.P.
555 Thirteenth Street, N.W.
Washington, D.C. 20004-1109
Attention: J. Warren Gorrell, Jr., Esq.
George P. Barsness, Esq.
Fax No.: (202) 637-5910
(b) if to Cornerstone or Cornerstone Partnership, to:
Cornerstone Properties Inc.
Tower 56
126 East 56th Street, 6th Floor
New York, New York 10022
Attention: John S. Moody, President
Fax No.: (212) 605-7199
with a copy to:
King & Spalding
191 Peachtree Street
Atlanta, GA 30303-1763
Attention: William B. Fryer, Esq.
Fax No.: (404) 572-5100
All notices shall be deemed given only when actually received.
8.3 Interpretation. When a reference is made in this Agreement to a
Section, such reference shall be to a Section of this Agreement unless otherwise
indicated. The table of contents and headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Whenever the words "include", "includes" or
"including" are used in this Agreement, they shall be deemed to be followed by
the words "without limitation."
8.4 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party.
8.5 Entire Agreement; No Third-Party Beneficiaries. This Agreement, the
Cornerstone Disclosure Letter, the EOP Disclosure Letter, the Confidentiality
Agreement, the Voting Agreements and the other agreements entered into in
connection with the Mergers (a) constitute the entire agreement and supersede
all prior agreements and understandings, both written and oral between the
parties with respect to the subject matter of this Agreement and (b) except as
provided in Section 5.9 ("Third Party Provisions"), are not intended to confer
upon any person other than the parties hereto any rights or remedies.
8.6 Governing Law. THE PARTNERSHIP MERGER SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF DELAWARE,
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REGARDLESS OF THE LAWS THAT MIGHT OTHERWISE GOVERN UNDER APPLICABLE PRINCIPLES
OF CONFLICT OF LAWS THEREOF. EXCEPT AS PROVIDED IN THE IMMEDIATELY PRECEDING
SENTENCE, THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH,
THE LAWS OF THE STATE OF MARYLAND, REGARDLESS OF THE LAWS THAT MIGHT OTHERWISE
GOVERN UNDER APPLICABLE PRINCIPLES OF CONFLICT OF LAWS THEREOF.
8.7 Assignment. Neither this Agreement nor any of the rights, interests or
obligations under this Agreement shall be assigned or delegated, in whole or in
part, by operation of law or otherwise by any of the parties without the prior
written consent of the other parties. Subject to the preceding sentence, this
Agreement will be binding upon, inure to the benefit of, and be enforceable by,
the parties and their respective successors and assigns.
8.8 Enforcement. The parties agree that irreparable damage would occur in
the event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any federal court located in
Maryland or in any state court located in Maryland this being in addition to any
other remedy to which they are entitled at law or in equity. In addition, each
of the parties hereto (a) consents to submit itself (without making such
submission exclusive) to the personal jurisdiction of any federal court located
in Maryland or any state court located in Maryland in the event any dispute
arises out of this Agreement or any of the transactions contemplated by this
Agreement and (b) agrees that it will not attempt to deny or defeat such
personal jurisdiction by motion or other request for leave from any such court.
8.9 Severability. Any term or provision of this Agreement which is invalid
or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable.
8.10 Exculpation. This Agreement shall not impose any personal liability on
any shareholder, trustee, trust manager, officer, employee or agent of EOP or
Cornerstone, and all Persons shall look solely to the property of EOP or
Cornerstone for the payment of any claim hereunder or for the performance of
this Agreement.
8.11 Joint and Several Obligations. In each case where both Cornerstone and
Cornerstone Partnership, on the one hand, or EOP and EOP Partnership, on the
other hand, are obligated to perform the same obligation hereunder, such
obligation shall be joint and several.
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IN WITNESS WHEREOF, EOP, EOP Partnership, Cornerstone and Cornerstone
Partnership have caused this Agreement to be signed by their respective officers
(or general partners) thereunto duly authorized all as of the date first written
above.
EQUITY OFFICE PROPERTIES TRUST
By: /s/ TIMOTHY H. CALLAHAN
----------------------------------
Name: Timothy H. Callahan
Title: President
EOP OPERATING LIMITED PARTNERSHIP
By: Equity Office Properties Trust,
its
managing general partner
By: /s/ TIMOTHY H. CALLAHAN
----------------------------------
Name: Timothy H. Callahan
Title: President
CORNERSTONE PROPERTIES INC.
By: /s/ JOHN S. MOODY
----------------------------------
Name: John S. Moody
Title: President & CEO
CORNERSTONE PROPERTIES LIMITED
PARTNERSHIP
By: Cornerstone Properties Inc.,
its sole general partner
By: /s/ JOHN S. MOODY
----------------------------------
Name: John S. Moody
Title: President & CEO
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FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER
THIS FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER (this "First
Amendment") is entered into as of May 11, 2000 by and among EQUITY OFFICE
PROPERTIES TRUST, a Maryland real estate investment trust ("EOP"), EOP OPERATING
LIMITED PARTNERSHIP, a Delaware limited partnership ("EOP Partnership"),
CORNERSTONE PROPERTIES INC., a Nevada corporation ("Cornerstone"), and
CORNERSTONE PROPERTIES LIMITED PARTNERSHIP, a Delaware limited partnership
("Cornerstone Partnership"), for the purpose of amending the Agreement and Plan
of Merger, dated as of February 11, 2000, entered into by and among EOP, EOP
Partnership, Cornerstone, and Cornerstone Partnership (the "Merger Agreement").
All capitalized terms herein and not otherwise defined shall have the meanings
ascribed to them in the Merger Agreement.
WHEREAS, the parties hereto desire to amend certain provisions of the
Merger Agreement to clarify certain matters as provided herein;
NOW, THEREFORE, in consideration of the mutual covenants set forth herein,
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
SECTION 1. SELECTION OF UNSATISFIED CONDITIONAL REDEMPTIONS BY LOT;
CLARIFICATION OF PRORATION PROVISIONS.
(a) Section 1.1(a)(v) of the Merger Agreement is amended by redesignating
such section as Section 1.1(a)(v)(A).
(b) Section 1.1(a)(v) of the Merger Agreement is amended further by
changing the phrase "the procedures set forth in Sections 1.11 and 1.12" to read
"the procedures set forth in Sections 1.1(a)(v)(B), 1.11 and 1.12".
(c) Section 1.1(a)(v) of the Merger Agreement is amended further by adding
the following new subparagraph (B):
(B) In the event that Section 1.12(b)(ii)(B) is applicable and Excess
Cash (as defined in Section 1.12(b)(ii)(B)) is allocated to the Conditional
Cash Elections (as defined in Section 1.12(b)(i)(B)), each conditional
Exercise made pursuant to Section 1.1(a)(v)(A) that, pursuant to Section
1.1(a)(v)(A), would not be not effective (before giving effect to the
procedures set forth in this subparagraph (B)) shall, together with all
other such conditional Exercises, be subject to being chosen by lot from
among other such conditional Exercises to receive a portion of the Excess
Cash. Any conditional Exercise that is chosen by lot shall be made
effective if sufficient remaining Excess Cash is available (after taking
into account all prior conditional Exercises chosen by lot) to pay to the
Redeeming Partner who submitted such conditional Exercise cash for each
share of Cornerstone Common Stock that must be converted into solely cash
in order for such conditional Exercise to be effective. Conditional
Exercises described in the first sentence of this subparagraph (B) shall be
subject to being chosen by lot until the amount of remaining Excess Cash
available is less than the amount of cash that would be required to allow
any of the remaining conditional Exercises to become effective pursuant to
the requirements of Section 1.1(a)(v)(A).
(d) Section 1.12(a) of the Merger Agreement is amended by adding the
following sentence at the end thereof:
Except as otherwise expressly provided pursuant to this Section 1.12,
each share of Cornerstone Common Stock for which a Cash Election is
received shall be converted into the right to receive $18.00 per share in
cash, without interest, and each share of Cornerstone Common Stock for
which a Share Election is received shall be converted into EOP Common
Shares in accordance with the Common Stock Exchange Ratio.
<PAGE> 317
(e) Section 1.12(b) of the Merger Agreement is amended by deleting the
indented language and substituting therefor the following subparagraphs (i) and
(ii):
(i) in the event that Non-conditional Cash Elections (defined to mean
all Cash Elections received other than Conditional Cash Elections as
defined in Section 1.12(b)(i)(B), below) are received for a number of
shares of Cornerstone Common Stock that is greater than 58,551,525 shares
of Cornerstone Common Stock, then:
(A) each share of Cornerstone Common Stock covered by a
Non-conditional Cash Election shall be converted into the right to
receive (1) an amount in cash, without interest, equal to the product of
(x) $18.00 and (y) a fraction (the "Cash Fraction") the numerator of
which shall be 58,551,525 and the denominator of which shall be the
aggregate number of shares of Cornerstone Common Stock covered by all
Non-conditional Cash Elections, and (2) a number of EOP Common Shares
equal to the product of (x) the Common Stock Exchange Ratio and (y) a
fraction equal to one minus the Cash Fraction; and
(B) each Conditional Cash Election (defined to mean any Cash
Election received with respect to Electing Cornerstone OP Units with
respect to which a conditional Exercise is made pursuant to Section
1.1(a)(v)(A)) shall be of no force and effect; and
(ii) in the event that Non-conditional Cash Elections are received for
a number of shares of Cornerstone Common Stock that is equal to or less
than 58,551,525 shares of Cornerstone Common Stock, then:
(A) each share of Cornerstone Common Stock covered by a
Non-conditional Cash Election shall be converted into the right to
receive an amount in cash, without interest, equal to $18.00; and
(B) an amount of cash equal to the product of (x) $18.00 and (y)
the excess, if any, of 58,551,525 over the number of shares of
Cornerstone Common Stock for which Non-conditional Cash Elections are
received (referred to as "Excess Cash") shall be allocated to the
Conditional Cash Elections as a group, to be applied as provided for in
Section 1.1(a)(v)(B).
SECTION 2. NOTICE PERIOD FOR FINAL DIVIDEND.
Section 1.15(d)(i) of the Merger Agreement is amended by deleting the
number "10" in the second sentence of Section 1.15(d)(i) and substituting the
number "20" therefor.
SECTION 3. FRACTIONAL EOP OP UNITS.
(a) Section 1.15(g) of the Merger Agreement is amended by adding "; No
Fractional EOP OP Units" after the word "Shares" in the caption.
(b) Section 1.15(g) of the Merger Agreement is amended by adding the
following new paragraph (iii):
(iii) No fractional EOP Partnership Units shall be issued pursuant to
this Agreement. In lieu of the issuance of any fractional EOP Partnership
Units pursuant to this Agreement, each holder of Cornerstone OP Units who
would receive, based on the exchange ratio specified in Section 1.10(a)(i),
a number of EOP OP Units that is not a whole number shall receive instead a
number of EOP OP Units that is equal to the whole number that is nearest to
the fractional number of EOP OP Units that otherwise would be paid to such
holder of Cornerstone OP Units based on the exchange ratio specified in
Section 1.10(a)(i).
(c) Section 1.15(i) of the Merger Agreement is amended by adding "," and
deleting the word "and" after the word "certificates" in the second clause and
adding "and fractional EOP Common Shares" after the word "procedure" in such
second clause.
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SECTION 4. AMENDMENT OF SECTION 5.10 TO PROVIDE FOR A SPECIAL DIVIDEND BY
CORNERSTONE OF $0.03 PER SHARE OF COMMON STOCK.
Section 5.10 is amended to add at the end thereof the following new
language:
Notwithstanding any of the foregoing or any provision of Section
1.15(d), in the event that EOP and Cornerstone do not declare their regular
dividend distributions for the second quarter of 2000 prior to the
Effective Time of the Merger, (i) Cornerstone shall declare and pay to the
holders of Cornerstone Common Stock a special dividend in the amount of
$0.03 per share, the record date for which shall be not later than the
close of business on the last day prior the Effective Time of the Merger
(the "Special Dividend"), and Cornerstone shall cause to be withheld from
the Special Dividend payable to Persons who are not "United States persons"
(as defined in Section 7701(a)(30) of the Code) $0.02 per share or such
higher amount as shall be sufficient so that Cornerstone shall be
considered to have complied fully with the withholding requirements
applicable to it under Treasury Regulations Section 1.1445-8 and Section
1445 of the Code with respect to all distributions paid by it during
calendar year 2000 (and to the extent such treatment is necessary, or
Cornerstone deems it to be desirable, to permit or facilitate such
withholding, Cornerstone shall treat the Special Dividend as a "capital
gain dividend" for purposes of Treasury Regulations Section 1.1445-8 and
Section 1445 of the Code), and (ii) Cornerstone Partnership shall make a
distribution to the holders of the Cornerstone OP Units at a time and in an
amount sufficient to permit Cornerstone to pay the Special Dividend as
contemplated hereby. The Special Dividend shall be paid on or prior to the
last business day prior to the Closing Date. EOP shall not make any
distribution to the holders of the EOP Common Shares to correspond to the
Special Dividend to be paid to the holders of Cornerstone Common Stock.
SECTION 5. INDEX OF DEFINED TERMS.
The Index of Defined Terms contained in the Merger Agreement is amended by
adding the following new entries:
<TABLE>
<S> <C>
"Conditional Cash Election"......................... 1.12(b)(i)(B)"
"Excess Cash........................................ 1.12(b)(ii)(B)"
"Non-conditional Cash Election"..................... 1.12(b)(i)"
"Special Dividend".................................. 5.10"
</TABLE>
SECTION 6. CONSTRUCTION OF MERGER AGREEMENT.
The Merger Agreement shall be read together and shall have the same force
and effect as if the provisions of the Merger Agreement and this First Amendment
were contained in one document. Except as expressly amended by this First
Amendment, the Merger Agreement shall remain in full force and effect in
accordance with its terms.
SECTION 7. COUNTERPARTS.
This First Amendment may be executed in any number of counterparts and by
the parties hereto in separate counterparts, each of which when so executed
shall be deemed to be an original and all of which taken together shall
constitute one and the same agreement.
A-3
<PAGE> 319
IN WITNESS WHEREOF, EOP, EOP Partnership, Cornerstone and Cornerstone
Partnership have caused this First Amendment to be signed by their respective
officers (or general partners) thereunto duly authorized all as of the date
first written above.
EQUITY OFFICE PROPERTIES TRUST
By: /s/ STANLEY M. STEVENS
----------------------------------
Name: Stanley M. Stevens
Title: Executive Vice President
EOP OPERATING LIMITED PARTNERSHIP
By: Equity Office Properties Trust,
its general partner
By: /s/ STANLEY M. STEVENS
----------------------------------
Name: Stanley M. Stevens
Title: Executive Vice President
CORNERSTONE PROPERTIES INC.
By: /s/ JOHN S. MOODY
----------------------------------
Name: John S. Moody
Title: President & CEO
CORNERSTONE PROPERTIES LIMITED
PARTNERSHIP
By: Cornerstone Properties Inc., its
sole general partner
By: /s/ JOHN S. MOODY
----------------------------------
Name: John S. Moody
Title: President & CEO
A-4
<PAGE> 320
ANNEX B
[LETTERHEAD OF J.P. MORGAN]
February 11, 2000
The Board of Trustees
Equity Office Properties Trust
Two N. Riverside Plaza
Chicago, IL 60606
Attention: Mr. Samuel Zell
Chairman
Ladies and Gentlemen:
You have requested our opinion as to the fairness, from a financial point
of view, to Equity Office Properties Trust ("EOP" or the "Company") of the
consideration proposed to be paid by the Company in connection with the proposed
merger (the "Merger") of Cornerstone Properties Inc. (the "Seller") with and
into the Company. Pursuant to the Agreement and Plan of Merger, dated as of
February 11, 2000 (the "Agreement"), among the Company, the Seller, and their
operating partnership subsidiaries, the Seller will be merged with and into the
Company, with the Company as the survivor of such merger, and each share of
common stock, no par value, of the Seller will be converted into the right to
receive either $18.00 or 0.7009 common shares of beneficial interest, $.01 par
value, of the Company, or a combination of such cash and stock consideration
according to the election and proration provisions in the Agreement.
In arriving at our opinion, we have reviewed (i) the Agreement; (ii)
certain publicly available information concerning the business of the Seller and
of certain other companies engaged in businesses comparable to those of the
Seller, and the reported market prices for certain other companies' securities
deemed comparable; (iii) publicly available terms of certain transactions
involving companies comparable to the Seller and the consideration received for
such companies; (iv) current and historical market prices of the common stock of
the Seller and the Company; (v) the audited financial statements of the Company
and the Seller for the fiscal year ended December 31, 1998, and the unaudited
financial statements of the Company and the Seller for the period ended
September 30, 1999; (vi) certain agreements with respect to outstanding
indebtedness or obligations of the Company and the Seller; (vii) certain
internal financial analyses and forecasts prepared by the Company and the Seller
and their respective managements; and (viii) the terms of other business
combinations that we deemed relevant.
In addition, we have held discussions with certain members of the
management of the Company and the Seller with respect to certain aspects of the
Merger, and the past and current business operations of the Company and the
Seller, the financial condition and future prospects and operations of the
Company and the Seller, the effects of the Merger on the financial condition and
future prospects of the Company and the Seller, and certain other matters we
believed necessary or appropriate to our inquiry. We have reviewed such other
financial studies and analyses and considered such other information as we
deemed appropriate for the purposes of this opinion.
In giving our opinion, we have relied upon and assumed, without independent
verification, the accuracy and completeness in all material respects of all
information that was publicly available or was furnished to us by the Company
and the Seller or otherwise reviewed by us, and we have not assumed any
responsibility or liability therefor. We have not conducted any valuation or
appraisal of any assets or liabilities, nor have any such valuations or
appraisals been provided to us. In relying on financial analyses and forecasts
provided to us, we have assumed that they have been reasonably prepared based on
assumptions reflecting the best currently available estimates and judgments by
management as to the expected future results of operations and financial
condition of the Company and the Seller to which such analyses or forecasts
relate. We have also assumed that the Merger will have the tax consequences
B-1
<PAGE> 321
described in discussions with, and materials furnished to us by, representatives
of the Company, and that the other transactions contemplated by the Agreement
will be consummated as described in the Agreement. We have relied as to all
legal matters relevant to rendering our opinion upon the advice of counsel.
Our opinion is necessarily based on economic, market and other conditions
as in effect on, and the information made available to us as of, the date
hereof. It should be understood that subsequent developments may affect this
opinion and that we do not have any obligation to update, revise, or reaffirm
this opinion. We are expressing no opinion herein as to the price at which the
Company's shares will trade at any future time.
We have acted as financial advisor to the Company with respect to the
proposed Merger and will receive a fee from the Company for our services
performed to date. We will also receive an additional fee if the proposed Merger
is consummated. In the ordinary course of their businesses, our affiliates may
actively trade the debt and equity securities of the Company or the Seller for
their own account or for the accounts of customers and, accordingly, they may at
any time hold long or short positions in such securities.
On the basis of and subject to the foregoing, it is our opinion as of the
date hereof that the consideration proposed to be paid by the Company in the
Merger is fair, from a financial point of view, to the Company.
This letter is provided to the Board of Trustees of the Company in
connection with and for the purposes of its evaluation of the Merger. This
opinion does not constitute a recommendation to any shareholder of the Company
as to how such shareholder should vote with respect to the Merger. This opinion
may not be disclosed, referred to, or communicated (in whole or in part) to any
third party for any purpose whatsoever except with our prior written consent in
each instance. This opinion may be reproduced in full in any filing made by the
Company with the Securities and Exchange Commission in connection with the
Merger.
Very truly yours,
J.P. MORGAN SECURITIES INC.
By: /s/ JOHN PERKINS
--------------------------------
Name: John Perkins
Title: Vice President
B-2
<PAGE> 322
ANNEX C
[LETTERHEAD OF LAZARD FRERES]
February 11, 2000
The Board of Directors
Cornerstone Properties Inc.
126 East 56th Street
New York, NY
Dear Members of the Board:
We understand that Cornerstone Properties Inc. ("Cornerstone") has entered
into an Agreement and Plan of Merger with Equity Office Properties Trust
("Equity Office") dated as of February 11, 2000 (the "Merger Agreement"),
pursuant to which Cornerstone will merge with and into Equity Office and
Cornerstone Properties Limited Partnership ("Cornerstone OP") will merge with
and into EOP Operating Limited Partnership ("Equity Office OP") (collectively,
the "Merger"). Pursuant to the Merger (as set out in the Merger Agreement), each
outstanding share of common stock of Cornerstone ("Common Stock") would be
converted into the right to receive either $18.00 in cash or .7009 shares of
Equity Office common stock as elected by the holders of Cornerstone Common
Stock, and subject to pro ration and adjustment as provided in the Merger
Agreement.
You have requested our opinion as to the fairness, from a financial point
of view, to the holders of Common Stock of the consideration to be received by
such holders in the Merger. In connection with this opinion, we have:
(i) Reviewed the financial terms and conditions of the Merger
Agreement;
(ii) Analyzed certain historical business and financial information
relating to Cornerstone and Equity Office;
(iii) Reviewed various financial forecasts and other data provided to
us by each of Cornerstone and Equity Office and relating to their
respective businesses;
(iv) Held discussions with members of the senior management of
Cornerstone and Equity Office with respect to the businesses, prospects and
strategic objectives of each company;
(v) Reviewed public information with respect to certain other
companies in lines of business we believe to be generally comparable to the
business of Cornerstone;
(vi) Reviewed the financial terms of certain business combinations
involving companies in lines of business we believe to be generally
comparable to those of Cornerstone;
(vii) Reviewed the historical stock prices and trading volumes of the
Common Stock and the common stock of Equity Office; and
(viii) Conducted such other financial studies, analyses and
investigations as we deemed appropriate.
We have relied upon the accuracy and completeness of the foregoing
information, and have not assumed any responsibility for any independent
verification of such information or any independent valuation or appraisal of
any of the assets or liabilities of Cornerstone or Equity Office, or concerning
the solvency or fair value of Cornerstone, Cornerstone OP, Equity Office, Equity
Office OP or any other entity. With respect to financial forecasts, we have
assumed that they have been reasonably prepared on bases reflecting the best
currently available estimates and judgments of management of Cornerstone and
Equity Office as to the future financial performance of Cornerstone and Equity
Office, respectively. We
C-1
<PAGE> 323
assume no responsibility for and express no view as to such forecasts or the
assumptions on which they are based.
Further, our opinion is necessarily based on economic, monetary, market and
other conditions as in effect on, and the information made available to us as of
the date hereof. As you know, we have not been asked to solicit nor have we
solicited indications of interest from any other parties.
In rendering our opinion, we have assumed that the Merger will be
consummated on the terms described in the Merger Agreement, without any waiver
of any material terms or conditions by Cornerstone or Cornerstone OP, and that
obtaining the necessary regulatory approvals for the Merger will not have an
adverse effect on Cornerstone or Cornerstone OP. We note that Cornerstone OP
unitholders have an option, exercisable prior to the Merger, to receive Equity
Office OP Units to be issued in the partnership merger or to redeem their units
for shares of Cornerstone Common Stock and elect to receive cash in the Merger
of Cornerstone into Equity Office, with respect to which we do not express a
view. However, our analysis has assumed that prior to the Merger each holder of
units in Cornerstone OP has elected to exercise its redemption right and receive
shares of Common Stock in Cornerstone in exchange therefor in the manner
provided in the Merger Agreement.
Lazard Freres & Co. LLC is acting as investment banker to Cornerstone in
connection with the Merger and will receive a fee for our services paid partly
upon announcement and the balance upon the closing of the Merger. We have in the
past provided investment banking services to Cornerstone for which we have
received customary fees.
Our engagement and the opinion expressed herein are for the benefit of
Cornerstone's Board of Directors and our opinion does not constitute a
recommendation as to how the holders of Common Stock of Cornerstone (and the
holders of limited partnership interests in Cornerstone OP) should vote with
respect to the matters contemplated by the Merger Agreement. Except as provided
in the engagement letter dated January 28, 2000, between Cornerstone and us, it
is understood that this letter may not be disclosed or otherwise referred to
without our prior consent, except as may otherwise be required by law or by a
court of competent jurisdiction.
Based on and subject to the foregoing, we are of the opinion that the
consideration to be received in the Merger as set forth above is fair, from a
financial point of view, to the holders of Common Stock of Cornerstone.
Very truly yours,
LAZARD FRERES & CO. LLC
By /s/ MATTHEW J. LUSTIG
------------------------------------
Matthew J. Lustig
Managing Director
C-2
<PAGE> 324
ANNEX D
AMENDMENTS TO EQUITY OFFICE DECLARATION OF TRUST
RELATING TO "DOMESTICALLY-CONTROLLED" REIT STATUS
1. AMENDMENT TO SECTION 7.2.1(A)
Section 7.2.1(a) is amended to add the following new subparagraph (iv):
(iv) No Person shall acquire Beneficial Ownership of any Shares after
the Effective Time if, as a result of such acquisition of Beneficial
Ownership, the fair market value of the Shares owned directly and
indirectly by Non-U.S. Persons for purposes of Section 897(h)(4)(B) of the
Code would comprise forty three percent (43%) or more of the fair market
value of the issued and outstanding Shares; provided, however, that the
foregoing shall not apply to any acquisition of Beneficial Ownership of any
Preferred Shares outstanding at the Effective Time or any Common Shares
upon the conversion of any such Preferred Shares.
2. AMENDMENTS TO SECTION 7.1
Section 7.1 is amended to add the following new definitions:
Effective Time. The term "Effective Time" shall mean the later of (i)
the time the SDAT accepts for record articles of merger relating to the
merger of Cornerstone Properties, Inc. with and into the Trust or (ii) the
time established under such articles, not to exceed 30 days after the
articles are accepted for record by the SDAT.
Non-U.S. Person. The term "Non-U.S. Person" shall mean a Person other
than a U.S. Person.
U.S. Person. The term "U.S. Person" shall mean (a) a citizen or
resident of the United States, (b) a partnership created or organized in
the United States or under the laws of the United States or any state
therein (including the District of Columbia), (c) a corporation created or
organized in the United States or under the laws of the United States or
any state therein (including the District of Columbia), and (d) any estate
or trust (other than a foreign estate or foreign trust, within the meaning
of Section 7701(a)(31) of the Code).
3. AMENDMENTS TO SECTION 7.2.1(B)
Section 7.2.1(b) is amended to read as follows:
(b) Transfer in Trust. If any Transfer of Shares (whether or not such
Transfer is the result of transaction entered into through the facilities
of the NYSE or any other national securities exchange or automated
inter-dealer quotation system) occurs which, if effective, would result in
any Person Beneficially Owning or Constructively Owning Shares in violation
of Section 7.2.1(a)(i), (ii) or (iv),
(i) then that number of Shares the Beneficial or Constructive
Ownership of which otherwise would cause such Person to violate Section
7.2.1(a)(i), (ii) or (iv), as applicable (rounded up to the nearest
whole share) shall be automatically transferred to a Charitable Trust
for the benefit of a Charitable Beneficiary, as described in Section
7.3, effective as of the close of business on the Business Day prior to
the date of such Transfer, and such Person shall acquire no rights in
such Shares; or
(ii) if the transfer to the Charitable Trust described in clause
(i) of this sentence would not be effective for any reason to prevent
the violation of Section 7.2.1(a)(i), (ii) or (iv), as applicable, then
the Transfer of that number of Shares that otherwise would cause such
Person to violate Section 7.2.1(a)(i), (ii) or (iv), as applicable
(rounded up to the nearest whole share) shall be void ab initio, and the
intended transferee shall acquire no rights in such Shares.
D-1
<PAGE> 325
4. AMENDMENT TO SECTION 7.2.4(B)
The existing Section 7.2.4(b) is amended to read as follows:
(b) each Person who is a Beneficial or Constructive Owner of Shares
and each Person (including the shareholder of record) who is holding Shares
for a Beneficial or Constructive Owner shall provide to the Trust such
information as the Trust may require, in good faith, in order to determine
the Trust's status as a REIT or a "domestically controlled REIT" (within
the meaning of Section 897(h)(4)(B) of the Code) and to comply with the
requirements of any taxing authority or to determine such compliance.
5. AMENDMENT TO ADD NEW SECTION 7.2.9
The existing Section 7.2.9 is renumbered as Section 7.2.10 and the
following new Section 7.2.9 is added:
Section 7.2.9 Increase in Percentage Set Forth in Section
7.2.1(a)(iv). The Board of Trustees may from time to time increase the
percentage set forth in Section 7.2.1(a)(iv) from forty three percent (43%)
to such higher percentage as shall be determined by the Board of Trustees;
provided, however, that in no event shall such percentage exceed forty nine
percent (49%) less the percentage of the aggregate fair market value of the
total issued and outstanding Shares represented by the fair market value of
any Preferred Shares then outstanding that were outstanding at the
Effective Time (as such fair market values are determined by the Board of
Trustees in good faith).
6. AMENDMENTS TO SECTION 7.2.10
The first sentence of the legend set forth in Section 7.2.10 (as renumbered
pursuant to the other amendments made pursuant hereto) is amended to delete the
word "and" immediately preceding the following: "(iv) no Person may Transfer
Shares . . .", and to insert the following new language at the end of such first
sentence:
; and (v) no Person may acquire Beneficial Ownership of any Shares
after the Effective Date if, as a result of such acquisition, the fair
market value of the Shares owned directly and indirectly by Non-U.S.
Persons would comprise more than forty three percent (43%) of the fair
market value of the issued and outstanding Shares; provided, however, that
clause (v) shall not apply to any acquisition of any Preferred Shares
outstanding at the Effective Time.
D-2
<PAGE> 326
ANNEX E
FORM OF SECOND AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP
OF EOP OPERATING LIMITED PARTNERSHIP
<PAGE> 327
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE I DEFINED TERMS............................................... E-1
ARTICLE II ORGANIZATIONAL MATTERS...................................... E-12
Section Organization................................................ E-12
2.1
Section Name........................................................ E-12
2.2
Section Registered Office and Agent; Principal Office............... E-12
2.3
Section Term........................................................ E-12
2.4
ARTICLE III PURPOSE..................................................... E-12
Section Purpose and Business........................................ E-12
3.1
Section Powers...................................................... E-13
3.2
ARTICLE IV CAPITAL CONTRIBUTIONS AND ISSUANCES OF PARTNERSHIP
INTERESTS................................................... E-13
Section Capital Contributions of the Partners....................... E-13
4.1
Section Issuances of Partnership Interests.......................... E-14
4.2
Section No Preemptive Rights........................................ E-15
4.3
Section Other Contribution Provisions............................... E-15
4.4
Section No Interest on Capital...................................... E-15
4.5
Section Separate Agreements......................................... E-15
4.6
ARTICLE V DISTRIBUTIONS............................................... E-15
Section Requirement and Characterization of Distributions........... E-15
5.1
Section Amounts Withheld............................................ E-17
5.2
Section Distributions Upon Liquidation.............................. E-18
5.3
Section Revisions to Reflect Issuance of Partnership Interests...... E-18
5.4
ARTICLE VI ALLOCATIONS................................................. E-18
Section Allocations For Capital Account Purposes.................... E-18
6.1
Section Revisions to Allocations to Reflect Issuance of Partnership
6.2 Interests................................................... E-19
ARTICLE VII MANAGEMENT AND OPERATIONS OF BUSINESS....................... E-19
Section Management.................................................. E-19
7.1
Section Certificate of Limited Partnership.......................... E-22
7.2
Section Title to Partnership Assets................................. E-22
7.3
Section Reimbursement of the General Partner........................ E-23
7.4
Section Outside Activities of the General Partner; Relationship of
7.5 Shares to Partnership Units; Funding Debt................... E-24
Section Transactions with Affiliates................................ E-26
7.6
Section Indemnification............................................. E-26
7.7
Section Liability of the General Partner............................ E-28
7.8
Section Other Matters Concerning the General Partner................ E-28
7.9
Section Reliance by Third Parties................................... E-30
7.10
Section Restrictions on General Partner's Authority................. E-30
7.11
Section Loans by Third Parties...................................... E-31
7.12
ARTICLE VIII RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS.................. E-31
Section Limitation of Liability..................................... E-31
8.1
Section Management of Business...................................... E-31
8.2
Section Outside Activities of Limited Partners...................... E-31
8.3
Section Return of Capital........................................... E-32
8.4
Section Rights of Limited Partners Relating to the Partnership...... E-32
8.5
Section Redemption Right............................................ E-33
8.6
ARTICLE IX BOOKS, RECORDS, ACCOUNTING AND REPORTS...................... E-35
Section Records and Accounting...................................... E-35
9.1
Section Fiscal Year................................................. E-35
9.2
Section Reports..................................................... E-35
9.3
</TABLE>
i
<PAGE> 328
<TABLE>
<S> <C> <C>
ARTICLE X TAX MATTERS................................................. E-36
Section Preparation of Tax Returns.................................. E-36
10.1
Section Tax Elections............................................... E-36
10.2
Section Tax Matters Partner......................................... E-36
10.3
Section Organizational Expenses..................................... E-37
10.4
Section Withholding................................................. E-37
10.5
ARTICLE XI TRANSFERS AND WITHDRAWALS................................... E-38
Section Transfer.................................................... E-38
11.1
Section Transfers of Partnership Interests of General Partner....... E-38
11.2
Section Limited Partners' Rights to Transfer........................ E-39
11.3
Section Substituted Limited Partners................................ E-40
11.4
Section Assignees................................................... E-41
11.5
Section General Provisions.......................................... E-41
11.6
ARTICLE XII ADMISSION OF PARTNERS....................................... E-43
Section Admission of a Successor General Partner.................... E-43
12.1
Section Admission of Additional Limited Partners.................... E-43
12.2
Section Amendment of Agreement and Certificate of Limited
12.3 Partnership................................................. E-44
ARTICLE XIII DISSOLUTION AND LIQUIDATION................................. E-44
Section Dissolution................................................. E-44
13.1
Section Winding Up.................................................. E-44
13.2
Section Compliance with Timing Requirements of Regulations.......... E-45
13.3
Section Rights of Limited Partners.................................. E-46
13.4
Section Notice of Dissolution....................................... E-47
13.5
Section Cancellation of Certificate of Limited Partnership.......... E-47
13.6
Section Reasonable Time for Winding Up.............................. E-47
13.7
Section Waiver of Partition......................................... E-47
13.8
Section Liability of Liquidator..................................... E-47
13.9
ARTICLE XIV AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS................ E-47
Section Amendments.................................................. E-47
14.1
Section Meetings of the Partners.................................... E-48
14.2
ARTICLE XV GENERAL PROVISIONS.......................................... E-49
Section Addresses and Notice........................................ E-49
15.1
Section Titles and Captions......................................... E-49
15.2
Section Pronouns and Plurals........................................ E-49
15.3
Section Further Action.............................................. E-50
15.4
Section Binding Effect.............................................. E-50
15.5
Section Creditors................................................... E-50
15.6
Section Waiver...................................................... E-50
15.7
Section Counterparts................................................ E-50
15.8
Section Applicable Law.............................................. E-50
15.9
Section Invalidity of Provisions.................................... E-50
15.10
Section Power of Attorney........................................... E-50
15.11
Section Entire Agreement............................................ E-51
15.12
Section No Rights as Shareholders................................... E-51
15.13
Section Limitation to Preserve REIT Status.......................... E-51
15.14
</TABLE>
ii
<PAGE> 329
EXHIBIT A
PARTNERS AND PARTNERSHIP INTERESTS
EXHIBIT B
CAPITAL ACCOUNT MAINTENANCE
EXHIBIT C
SPECIAL ALLOCATION RULES
EXHIBIT D
NOTICE OF REDEMPTION
EXHIBIT E
PROTECTED PARTNERS AND PROTECTED AMOUNTS
EXHIBIT E-1
(CAP AGREEMENT)
EXHIBIT E-2
(1120 AGREEMENT)
EXHIBIT E-3
(WRIGHT RUNSTAD AGREEMENT)
EXHIBIT E-4
(GALBREATH AGREEMENT)
EXHIBIT E-5
(PALO ALTO SQUARE AGREEMENT)
EXHIBIT E-6
(CORNERSTONE AGREEMENT)
iii
<PAGE> 330
ATTACHMENT A
(SERIES A PREFERRED UNITS)
ATTACHMENT B
(SERIES B PREFERRED UNITS)
ATTACHMENT C
(SERIES C PREFERRED UNITS)
ATTACHMENT D
(SERIES D PREFERRED UNITS)
iv
<PAGE> 331
FORM OF
SECOND AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
EOP OPERATING LIMITED PARTNERSHIP
THIS SECOND AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP, dated as
of , 2000, is entered into by and among Equity Office Properties
Trust, a Maryland real estate investment trust, as the General Partner, and the
Persons whose names are set forth on Exhibit A hereto as Limited Partners,
together with any other Persons who become Partners in the Partnership as
provided herein.
WHEREAS, Equity Office Properties Trust, Zell/Merrill Lynch Real Estate
Opportunity Partners Limited Partnership II, an Illinois limited Partnership,
and certain other persons named therein entered into an Agreement of Limited
Partnership of EOP Operating Limited Partnership dated as of July 3, 1997,
pursuant to which the Partnership was formed (the "Original Partnership
Agreement");
WHEREAS, the General Partner and the other Partners in the Partnership
entered into eleven amendments to the Original Partnership Agreement (the "Prior
Amendments") and 20 addenda to the Original Partnership Agreement effecting the
admission of Additional Limited Partners to the Partnership, the withdrawal of
certain Partners from the Partnership, and, in some cases, certain amendments to
provisions of the Original Partnership Agreement made in connection therewith
(the "Prior Addenda");
WHEREAS, the General Partner and the Persons named on Exhibit A hereto as
Limited Partners entered into the First Amended and Restated Agreement of
Limited Partnership, dated as of May 1, 2000, to incorporate the Original
Partnership Agreement, the Prior Amendments, and the Addenda (the "First Amended
and Restated Agreement"); and
WHEREAS, the General Partner and the other Partners in the Partnership now
desire to enter into amendments to the First Amended and Restated Agreement of
Limited Partnership by entering into this Second Amended and Restated Agreement
of Limited Partnership;
NOW, THEREFORE, in consideration of the mutual covenants set forth herein,
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto hereby amend and restate the
First Amended and Restated Agreement of Limited Partnership in its entirety and
agree to continue the Partnership as a limited partnership under the Delaware
Revised Uniform Limited Partnership Act, as amended from time to time, as
follows:
ARTICLE I
DEFINED TERMS
The following definitions shall be for all purposes, unless otherwise
clearly indicated to the contrary, applied to the terms used in this Agreement.
"Act" means the Delaware Revised Uniform Limited Partnership Act, as it may
be amended from time to time, and any successor to such statute.
"Additional Limited Partner" means a Person admitted to the Partnership as
a Limited Partner pursuant to Section 12.2 hereof and who is shown as such on
the books and records of the Partnership.
"Adjusted Capital Account" means the Capital Account maintained for each
Partner as of the end of each Partnership Year (i) increased by any amounts
which such Partner is obligated to restore pursuant to any provision of this
Agreement or is deemed to be obligated to restore pursuant to the penultimate
sentences of Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5) and (ii)
decreased by the items described in Regulations Sections
1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5) and 1.704-1(b)(2)(ii)(d)(6).
The foregoing definition of Adjusted Capital Account is intended to comply with
the provisions of Regulations Section 1.704-1(b)(2)(ii)(d) and shall be
interpreted consistently therewith.
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"Adjusted Capital Account Deficit" means, with respect to any Partner, the
deficit balance, if any, in such Partner's Adjusted Capital Account as of the
end of the relevant Partnership Year.
"Adjusted Property" means any property the Carrying Value of which has been
adjusted pursuant to Exhibit B.
"Adjustment Date" has the meaning set forth in Section 4.2.B.
"Affiliate" means, with respect to any Person, (i) any Person directly or
indirectly controlling, controlled by or under common control with such Person,
(ii) any Person owning or controlling ten percent (10%) or more of the
outstanding voting interests of such Person, (iii) any Person of which such
Person owns or controls ten percent (10%) or more of the voting interests or
(iv) any officer, director, general partner or trustee of such Person or any
Person referred to in clauses (i), (ii), and (iii) above. For purposes of this
definition, "control," when used with respect to any Person, means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise,
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Aggregate Protected Amount" means the aggregate balances of the Protected
Amounts, if any, of all Protected Partners, as determined on the date in
question.
"Agreed Value" means (i) in the case of any Contributed Property, the
704(c) Value of such property as of the time of its contribution to the
Partnership, reduced by any liabilities either assumed by the Partnership upon
such contribution or to which such property is subject when contributed, as the
same is reflected in the books and records of the Partnership; and (ii) in the
case of any property distributed to a Partner by the Partnership, the
Partnership's Carrying Value of such property at the time such property is
distributed, reduced by any indebtedness either assumed by such Partner upon
such distribution or to which such property is subject at the time of
distribution as determined under Section 752 of the Code and the regulations
thereunder.
"Agreement" means this Second Amended and Restated Agreement of Limited
Partnership, as it may be amended, supplemented or restated from time to time.
"Assignee" means a Person to whom one or more Partnership Units have been
transferred in a manner permitted under this Agreement, but who has not become a
Substituted Limited Partner, and who has the rights set forth in Section 11.5.
"Available Cash" means, with respect to any period for which such
calculation is being made:
(a) all cash revenues and funds received by the Partnership from
whatever source (excluding the proceeds of any Capital Contribution) plus
the amount of any reduction (including, without limitation, a reduction
resulting because the General Partner determines such amounts are no longer
necessary) in reserves of the Partnership, which reserves are referred to
in clause (b)(iv) below;
(b) less the sum of the following (except to the extent made with the
proceeds of any Capital Contribution):
(i) all interest, principal and other debt payments made during
such period by the Partnership,
(ii) all cash expenditures (including capital expenditures) made by
the Partnership during such period,
(iii) investments in any entity (including loans made thereto) to
the extent that such investments are permitted under this Agreement and
are not otherwise described in clauses (b)(i) or (ii), and
(iv) the amount of any increase in reserves established during such
period which the General Partner determines is necessary or appropriate
in its sole and absolute discretion.
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Notwithstanding the foregoing, Available Cash shall not include any cash
received or reductions in reserves, or take into account any disbursements made
or reserves established, after commencement of the dissolution and liquidation
of the Partnership.
"Book-Tax Disparities" means, with respect to any item of Contributed
Property or Adjusted Property, as of the date of any determination, the
difference between the Carrying Value of such Contributed Property or Adjusted
Property and the adjusted basis thereof for federal income tax purposes as of
such date. A Partner's share of the Partnership's Book-Tax Disparities in all of
its Contributed Property and Adjusted Property will be reflected by the
difference between such Partner's Capital Account balance as maintained pursuant
to Exhibit B and the hypothetical balance of such Partner's Capital Account
computed as if it had been maintained strictly in accordance with federal income
tax accounting principles.
"Business Day" means any day except a Saturday, Sunday or other day on
which commercial banks in Chicago, Illinois are authorized or required by law to
close.
"Capital Account" means the Capital Account maintained for a Partner
pursuant to Exhibit B.
"Capital Contribution" means, with respect to any Partner, any cash, cash
equivalents or the Agreed Value of Contributed Property which such Partner
contributes or is deemed to contribute to the Partnership pursuant to Section
4.1 or 4.2.
"Carrying Value" means (i) with respect to a Contributed Property or
Adjusted Property, the 704(c) Value of such property reduced (but not below
zero) by all Depreciation with respect to such Contributed Property or Adjusted
Property, as the case may be, charged to the Partners' Capital Accounts and (ii)
with respect to any other Partnership property, the adjusted basis of such
property for federal income tax purposes, all as of the time of determination.
The Carrying Value of any property shall be adjusted from time to time in
accordance with Exhibit B, and to reflect changes, additions (including capital
improvements thereto) or other adjustments to the Carrying Value for
dispositions and acquisitions of Partnership properties, as deemed appropriate
by the General Partner.
"Cash Amount" means an amount of cash equal to the Value on the Valuation
Date of the Shares Amount.
"Certificate" means the Certificate of Limited Partnership relating to the
Partnership filed in the office of the Delaware Secretary of State, as amended
from time to time in accordance with the terms hereof and the Act.
"Class A" has the meaning set forth in Section 5.1.C.
"Class A Share" has the meaning set forth in Section 5.1.C.
"Class A Unit" means any Partnership Unit that is not specifically
designated by the General Partner as being of another specified class of
Partnership Units.
"Class B" has the meaning set forth in Section 5.1.C.
"Class B Share" has the meaning set forth in Section 5.1.C.
"Class B Unit" means a Partnership Unit that is specifically designated by
the General Partner as being a Class B Unit.
"Code" means the Internal Revenue Code of 1986, as amended and in effect
from time to time, as interpreted by the applicable regulations thereunder. Any
reference herein to a specific section or sections of the Code shall be deemed
to include a reference to any corresponding provision of future law.
"Consent" means the consent or approval of a proposed action by a Partner
given in accordance with Section 14.2.
"Consent of the Outside Limited Partners" means the Consent of Limited
Partners (excluding for this purpose any Limited Partnership Interests held by
the General Partner, any Person of which the General
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Partner owns or controls more than fifty percent (50%) of the voting interests
and any Person directly or indirectly owning or controlling more than fifty
percent (50%) of the outstanding voting interests of the General Partner)
holding Percentage Interests that are greater than fifty percent (50%) of the
aggregate Percentage Interest of all Limited Partners who are not excluded for
the purposes hereof.
"Consolidation" means (i) the transactions whereby the Partnership acquired
interests in certain office properties owned by the Opportunity Partnerships and
certain asset management and property management businesses that provided
services to those properties and to other office properties, in exchange for
Partnership Units, and (ii) the merger of the ZML Investors, Inc., ZML Investors
II, Inc., Zell/Merrill Lynch Real Estate Opportunity Partners III Trust and
Zell/Merrill Lynch Real Estate Opportunity Partners IV Trust with and into
Equity Office Properties Trust, all as described in a Joint Proxy
Statement/Offering Memorandum dated March 25, 1997.
"Contributed Property" means each property or other asset contributed to
the Partnership, in such form as may be permitted by the Act, but excluding cash
contributed or deemed contributed to the Partnership. Once the Carrying Value of
a Contributed Property is adjusted pursuant to Exhibit B, such property shall no
longer constitute a Contributed Property for purposes of Exhibit B, but shall be
deemed an Adjusted Property for such purposes.
"Conversion Factor" means 1.0; provided that, if the General Partner Entity
(i) declares or pays a dividend on its outstanding Shares in Shares or makes a
distribution to all holders of its outstanding Shares in Shares, (ii) subdivides
its outstanding Shares or (iii) combines its outstanding Shares into a smaller
number of Shares, the Conversion Factor shall be adjusted by multiplying the
Conversion Factor by a fraction, the numerator of which shall be the number of
Shares issued and outstanding on the record date for such dividend,
distribution, subdivision or combination (assuming for such purposes that such
dividend, distribution, subdivision or combination has occurred as of such time)
and the denominator of which shall be the actual number of Shares (determined
without the above assumption) issued and outstanding on the record date for such
dividend, distribution, subdivision or combination; and provided further that if
an entity shall cease to be the General Partner Entity (the "Predecessor
Entity") and another entity shall become the General Partner Entity (the
"Successor Entity"), the Conversion Factor shall be adjusted by multiplying the
Conversion Factor by a fraction, the numerator of which is the Value of one
Share of the Predecessor Entity, determined as of the date when the Successor
Entity becomes the General Partner Entity, and the denominator of which is the
Value of one Share of the Successor Entity, determined as of that same date.
(For purposes of the second proviso in the preceding sentence, if any
shareholders of the Predecessor Entity will receive consideration in connection
with the transaction in which the Successor Entity becomes the General Partner
Entity, the numerator in the fraction described above for determining the
adjustment to the Conversion Factor (that is, the Value of one Share of the
Predecessor Entity) shall be the sum of the greatest amount of cash and the fair
market value (as determined in good faith by the General Partner) of any
securities and other consideration that the holder of one Share in the
Predecessor Entity could have received in such transaction (determined without
regard to any provisions governing fractional shares).) Any adjustment to the
Conversion Factor shall become effective immediately after the effective date of
the event retroactive to the record date, if any, for the event giving rise
thereto, it being intended that (x) adjustments to the Conversion Factor are to
be made to avoid unintended dilution or anti-dilution as a result of
transactions in which Shares are issued, redeemed or exchanged without a
corresponding issuance, redemption or exchange of Partnership Units and (y) if a
Specified Redemption Date shall fall between the record date and the effective
date of any event of the type described above, that the Conversion Factor
applicable to such redemption shall be adjusted to take into account such event.
"Convertible Funding Debt" has the meaning set forth in Section 7.5.F.
"Debt" means, as to any Person, as of any date of determination, (i) all
indebtedness of such Person for borrowed money or for the deferred purchase
price of property or services, (ii) all amounts owed by such Person to banks or
other Persons in respect of reimbursement obligations under letters of credit,
surety bonds and other similar instruments guaranteeing payment or other
performance of obligations by
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such Person, (iii) all indebtedness for borrowed money or for the deferred
purchase price of property or services secured by any lien on any property owned
by such Person, to the extent attributable to such Person's interest in such
property, even though such Person has not assumed or become liable for the
payment thereof, and (iv) obligations of such Person incurred in connection with
entering into a lease which, in accordance with generally accepted accounting
principles, should be capitalized.
"Declaration of Trust" means the Articles of Amendment and Restatement of
Declaration of Trust of Equity Office Properties Trust filed in the State of
Maryland on July 9, 1997, as amended or restated from time to time.
"Deemed Partnership Interest Value" means, as of any date with respect to
any class of Partnership Interests, the Deemed Value of the Partnership Interest
of such class multiplied by the applicable Partner's Percentage Interest of such
class.
"Deemed Value of the Partnership Interest" means, as of any date with
respect to any class of Partnership Interests, (a) if the common shares of
beneficial interest (or other comparable equity interests) of the General
Partner Entity are Publicly Traded (i) the total number of shares of beneficial
interest (or other comparable equity interest) of the General Partner Entity
corresponding to such class of Partnership Interest (as provided for in Section
4.2.B) issued and outstanding as of the close of business on such date
(excluding any treasury shares) multiplied by the Value of a share of such
beneficial interest (or other comparable equity interest) on such date divided
by (ii) the Percentage Interests of the General Partner, held directly or
indirectly through another entity, in such class of Partnership Interests on
such date, and (b) otherwise, the aggregate Value of such class of Partnership
Interests determined as set forth in the fourth and fifth sentences of the
definition of Value. For purposes of clause (a) of the preceding sentence,
"Value" means the average of the daily market price of such corresponding shares
of beneficial interest (or other comparable equity interests) of the General
Partner Entity for such number of consecutive trading days or the Business Day
immediately preceding the date with respect to which Value must be determined
(which number of days or the Business Day shall be determined by the General
Partner in its sole discretion), with the market price for each such trading day
being the closing price, regular way, on such day, or if no such sale takes
place on such day, the average of the closing bid and asked prices on such day.
Notwithstanding any of the foregoing, with respect to any class or series of
Partnership Interests that is entitled to a preference as compared to the class
of Partnership Interests corresponding to common shares of beneficial interests
(or other comparable equity interests) of the General Partner Entity, "Value"
means the stated liquidation preference or value of such class or series of
Partnership Interests provided in the instrument establishing such class or
series of Partnership Interests (unless otherwise provided in such instrument).
"Depreciation" means, for each fiscal year, an amount equal to the federal
income tax depreciation, amortization, or other cost recovery deduction
allowable with respect to an asset for such year, except that if the Carrying
Value of an asset differs from its adjusted basis for federal income tax
purposes at the beginning of such year or other period, Depreciation shall be an
amount which bears the same ratio to such beginning Carrying Value as the
federal income tax depreciation, amortization, or other cost recovery deduction
for such year bears to such beginning adjusted tax basis; provided, however,
that if the federal income tax depreciation, amortization, or other cost
recovery deduction for such year is zero, Depreciation shall be determined with
reference to such beginning Carrying Value using any reasonable method selected
by the General Partner.
"Distribution Period" has the meaning set forth in Section 5.1.C.
"Effective Date" means the date of the closing of the Consolidation.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Partner" means either any (a) Limited Partner or (b) holder of
shares of beneficial interest in the General Partner that received such Shares
in the mergers of ZML Investors, Inc., ZML Investors II, Inc., Zell/Merrill
Lynch Real Estate Opportunity Partners III Trust, and Zell/Merrill Lynch Real
Estate Opportunity Partners IV Trust into the General Partner, and which Limited
Partner or shareholder
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is either (i) an employee benefit plan subject to Title I of ERISA or section
4975 of the Code, or (ii) a nominee for or a trust established pursuant to such
employee benefit plan, or (iii) which is an entity whose underlying assets
include assets of such employee benefit plan by reason of such plan's investment
in such entity.
"ERISA Plan" means an "employee benefit plan" as that term is defined in 29
U.S.C. Section 1002(3), and which is not exempt from regulation under ERISA by
virtue of 29 U.S.C. Section 1003(b).
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Value" shall have the meaning described in Section 7.09.E(iv).
"Funding Debt" means the incurrence of any Debt by or on behalf of the
General Partner Entity for the purpose of providing funds to the Partnership.
"General Partner" means Equity Office Properties Trust, a Maryland real
estate investment trust, or its successor, as general partner of the
Partnership.
"General Partner Entity" means the General Partner; provided, however, that
if (i) the common shares of beneficial interest (or other comparable equity
interests) of the General Partner are at any time not Publicly Traded and (ii)
the common shares of beneficial interest (or other comparable equity interests)
of an entity that owns, directly or indirectly, fifty percent (50%) or more of
the common shares of beneficial interest (or other comparable equity interests)
of the General Partner are Publicly Traded, the term "General Partner Entity"
shall refer to such entity whose common shares of beneficial interest (or other
comparable equity securities) are Publicly Traded. If both requirements set
forth in clauses (i) and (ii) above are not satisfied, then the term "General
Partner Entity" shall mean the General Partner.
"General Partnership Interest" means a Partnership Interest held by the
General Partner that is a general partnership interest. A General Partnership
Interest may be expressed as a number of Partnership Units.
"General Partner Payment" has the meaning set forth in Section 15.14
hereof.
"IRS" means the Internal Revenue Service, which administers the internal
revenue laws of the United States.
"Immediate Family" means, with respect to any natural Person, such natural
Person's spouse, parents, descendants, nephews, nieces, brothers, and sisters.
"Incapacity" or "Incapacitated" means, (i) as to any individual who is a
Partner, death, total physical disability or entry by a court of competent
jurisdiction adjudicating such Partner incompetent to manage his or her Person
or estate, (ii) as to any corporation which is a Partner, the filing of a
certificate of dissolution, or its equivalent, for the corporation or the
revocation of its charter, (iii) as to any partnership or limited liability
company which is a Partner, the dissolution and commencement of winding up of
the partnership or limited liability company, (iv) as to any estate which is a
Partner, the distribution by the fiduciary of the estate's entire interest in
the Partnership, (v) as to any trustee of a trust which is a Partner, the
termination of the trust (but not the substitution of a new trustee) or (vi) as
to any Partner, the bankruptcy of such Partner. For purposes of this definition,
bankruptcy of a Partner shall be deemed to have occurred when (a) the Partner
commences a voluntary proceeding seeking liquidation, reorganization or other
relief under any bankruptcy, insolvency or other similar law now or hereafter in
effect, (b) the Partner is adjudged as bankrupt or insolvent, or a final and
nonappealable order for relief under any bankruptcy, insolvency or similar law
now or hereafter in effect has been entered against the Partner, (c) the Partner
executes and delivers a general assignment for the benefit of the Partner's
creditors, (d) the Partner files an answer or other pleading admitting or
failing to contest the material allegations of a petition filed against the
Partner in any proceeding of the nature described in clause (b) above, (e) the
Partner seeks, consents to or acquiesces in the appointment of a trustee,
receiver or liquidator for the Partner or for all or any substantial part of the
Partner's properties, (f) any proceeding seeking liquidation,
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reorganization or other relief under any bankruptcy, insolvency or other similar
law now or hereafter in effect has not been dismissed within one hundred twenty
(120) days after the commencement thereof, (g) the appointment without the
Partner's consent or acquiescence of a trustee, receiver of liquidator has not
been vacated or stayed within ninety (90) days of such appointment or (h) an
appointment referred to in clause (g) is not vacated within ninety (90) days
after the expiration of any such stay.
"Indemnitee" means (i) any Person made a party to a proceeding by reason of
its status as (A) the General Partner, (B) a Limited Partner, or (C) a trustee,
director or officer of the Partnership, or the General Partner and (ii) such
other Persons (including Affiliates of the General Partner, a Limited Partner or
the Partnership) as the General Partner may designate from time to time (whether
before or after the event giving rise to potential liability), in its sole and
absolute discretion.
"Limited Partner" means any Person named as a Limited Partner in Exhibit A,
as such Exhibit may be amended from time to time, or any Substituted Limited
Partner or Additional Limited Partner, in such Person's capacity as a Limited
Partner in the Partnership.
"Limited Partnership Interest" means a Partnership Interest of a Limited
Partner in the Partnership representing a fractional part of the Partnership
Interests of all Limited Partners and includes any and all benefits to which the
holder of such a Partnership Interest may be entitled as provided in this
Agreement, together with all obligations of such Person to comply with the terms
and provisions of this Agreement. A Limited Partnership Interest may be
expressed as a number of Partnership Units.
"Liquidating Event" has the meaning set forth in Section 13.1.
"Liquidator" has the meaning set forth in Section 13.2.A.
"Net Income" means, for any taxable period, the excess, if any, of the
Partnership's items of income and gain for such taxable period over the
Partnership's items of loss and deduction for such taxable period. The items
included in the calculation of Net Income shall be determined in accordance with
Exhibit B. If an item of income, gain, loss or deduction that has been included
in the initial computation of Net Income is subjected to the special allocation
rules in Exhibit C, Net Income or the resulting Net Loss, whichever the case may
be, shall be recomputed without regard to such item.
"Net Loss" means, for any taxable period, the excess, if any, of the
Partnership's items of loss and deduction for such taxable period over the
Partnership's items of income and gain for such taxable period. The items
included in the calculation of Net Loss shall be determined in accordance with
Exhibit B. If an item of income, gain, loss or deduction that has been included
in the initial computation of Net Loss is subjected to the special allocation
rules in Exhibit C, Net Loss or the resulting Net Income, whichever the case may
be, shall be recomputed without regard to such item.
"New Securities" means (i) any rights, options, warrants or convertible or
exchangeable securities having the right to subscribe for or purchase Shares,
excluding grants under any Share Option Plan, or (ii) any Debt issued by the
General Partner Entity that provides any of the rights described in clause (i).
"Nonrecourse Built-in Gain" means, with respect to any Contributed
Properties or Adjusted Properties that are subject to a mortgage or negative
pledge securing a Nonrecourse Liability, the amount of any taxable gain that
would be allocated to the Partners pursuant to Section 2.B of Exhibit C if such
properties were disposed of in a taxable transaction in full satisfaction of
such liabilities and for no other consideration.
"Nonrecourse Deductions" has the meaning set forth in Regulations Section
1.704-2(b)(1), and the amount of Nonrecourse Deductions for a Partnership Year
shall be determined in accordance with the rules of Regulations Section
1.704-2(c).
"Nonrecourse Liability" has the meaning set forth in Regulations Section
1.752-1(a)(2).
"Notice of Redemption" means a Notice of Redemption substantially in the
form of Exhibit D.
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"Opportunity Partnerships" means, Zell/Merrill Lynch Real Estate
Opportunity Partners Limited Partnership, Zell/Merrill Lynch Real Estate
Opportunity Partners Limited Partnership II, Zell/Merrill Lynch Real Estate
Opportunity Partners Limited Partnership III, and Zell/Merrill Lynch Real Estate
Opportunity Partners Limited Partnership IV.
"Partner" means the General Partner or a Limited Partner, and "Partners"
means the General Partner and the Limited Partners.
"Partner Minimum Gain" means an amount, with respect to each Partner
Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if
such Partner Nonrecourse Debt were treated as a Nonrecourse Liability,
determined in accordance with Regulations Section 1.704-2(i)(3).
"Partner Nonrecourse Debt" has the meaning set forth in Regulations Section
1.704-2(b)(4).
"Partner Nonrecourse Deductions" has the meaning set forth in Regulations
Section 1.704-2(i), and the amount of Partner Nonrecourse Deductions with
respect to a Partner Nonrecourse Debt for a Partnership Year shall be determined
in accordance with the rules of Regulations Section 1.704-2(i)(2).
"Partnership" means the limited partnership formed under the Act upon the
terms and conditions set forth in the Original Partnership Agreement and
continued pursuant to this Agreement, or any successor to such limited
partnership.
"Partnership Interest" means a Limited Partnership Interest or a General
Partnership Interest and includes any and all benefits to which the holder of
such a Partnership Interest may be entitled as provided in this Agreement,
together with all obligations of such Person to comply with the terms and
provisions of this Agreement. A Partnership Interest may be expressed as a
number of Partnership Units.
"Partnership Minimum Gain" has the meaning set forth in Regulations Section
1.704-2(b)(2), and the amount of Partnership Minimum Gain, as well as any net
increase or decrease in Partnership Minimum Gain, for a Partnership Year shall
be determined in accordance with the rules of Regulations Section 1.704-2(d).
"Partnership Record Date" means the record date established by the General
Partner either (i) for the distribution of Available Cash pursuant to Section
5.1 hereof, which record date shall be the same as the record date established
by the General Partner Entity for a distribution to its shareholders of some or
all of its portion of such distribution, or (ii) if applicable, for determining
the Partners entitled to vote on or consent to any proposed action for which the
consent or approval of the Partners is sought pursuant to Section 14.2 hereof.
"Partnership Unit" means a fractional, undivided share of the Partnership
Interests of all Partners issued pursuant to Sections 4.1 and 4.2, and includes
Class A Units, Class B Units, Series A Preferred Units, Series B Preferred
Units, Series C Preferred Units, and any other classes or series of Partnership
Units established after the date hereof. The number of Partnership Units
outstanding and the Percentage Interests in the Partnership represented by such
Partnership Units are set forth in Exhibit A, as such Exhibit may be amended
from time to time.
"Partnership Year" means the fiscal year of the Partnership, which shall be
the calendar year.
"Percentage Interest" means, as to a Partner holding a class of Partnership
Interests, its interest in such class, determined by dividing the Partnership
Units of such class owned by such Partner by the total number of Partnership
Units of such class then outstanding as specified in Exhibit A, as such exhibit
may be amended from time to time, multiplied by the aggregate Percentage
Interest allocable to such class of Partnership Interests. If the Partnership
shall at any time have outstanding more than one class of Partnership Interests,
the Percentage Interest attributable to each class of Partnership Interests
shall be determined as set forth in Section 4.2.B.
"Person" means a natural person, partnership (whether general or limited),
trust, estate, association, corporation, limited liability company,
unincorporated organization, custodian, nominee or any other individual or
entity in its own or any representative capacity.
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"Predecessor Entity" has the meaning set forth in the definition of
"Conversion Factor" herein.
"Protected Amount" means the amount specified on Exhibit E with respect to
any Protected Partner, as such Exhibit may be amended from time to time.
"Protected Partner" means a Partner designated as a Protected Partner on
Exhibit E, as such Exhibit may be amended from time to time, which Protected
Partner is obligated to make certain contributions, not in excess of such
Protected Partner's Protected Amount, to the Partnership with respect to any
deficit balance in such Partner's Capital Account upon the occurrence of certain
events. A Protected Partner who is obligated to make any such contribution only
upon liquidation of the Partnership shall be designated on Exhibit E as a Part I
Protected Partner and a Protected Partner who is obligated to make any such
contribution to the Partnership either upon liquidation of the Partnership or
upon liquidation of such Protected Partner's Partnership Interest shall be
designated on Exhibit E as a Part II Protected Partner.
"Publicly Traded" means listed or admitted to trading on the New York Stock
Exchange, the American Stock Exchange or another national securities exchange or
designated for quotation on the NASDAQ National Market, or any successor to any
of the foregoing.
"Qualified REIT Subsidiary" means any Subsidiary of the General Partner
that is a "qualified REIT subsidiary" within the meaning of Section 856(i) of
the Code.
"Qualified Transferee" means an "Accredited Investor" as defined in Rule
501 promulgated under the Securities Act.
"Recapture Income" means any gain recognized by the Partnership (computed
without regard to any adjustment required by Section 734 or Section 743 of the
Code) upon the disposition of any property or asset of the Partnership, which
gain is characterized either as ordinary income or as "unrecaptured Section 1250
gain" (as defined in Section 1(h)(7) of the Code because it represents the
recapture of deductions previously taken with respect to such property or asset.
"Recourse Liabilities" means the amount of liabilities owed by the
Partnership (other than Nonrecourse Liabilities and liabilities to which Partner
Nonrecourse Deductions are attributable in accordance with Section 1.704-(2)(i)
of the Regulations).
"Redeeming Partner" has the meaning set forth in Section 8.6.A.
"Redemption Amount" means either the Cash Amount or the Shares Amount, as
determined by the General Partner, in its sole and absolute discretion; provided
that if the Shares are not Publicly Traded at the time a Redeeming Partner
exercises its Redemption Right, the Redemption Amount shall be paid only in the
form of the Cash Amount unless the Redeeming Partner, in its sole and absolute
discretion, consents to payment of the Redemption Amount in the form of the
Shares Amount. A Redeeming Partner shall have no right, without the General
Partner's consent, in its sole and absolute discretion, to receive the
Redemption Amount in the form of the Shares Amount.
"Redemption Right" has the meaning set forth in Section 8.6.A.
"Regulations" means the Treasury Regulations promulgated under the Code, as
such regulations may be amended from time to time (including corresponding
provisions of succeeding regulations).
"REIT" means a real estate investment trust under Section 856 of the Code.
"REIT Requirements" has the meaning set forth in Section 5.1.A.
"Residual Gain" or "Residual Loss" means any item of gain or loss, as the
case may be, of the Partnership recognized for federal income tax purposes
resulting from a sale, exchange or other disposition of Contributed Property or
Adjusted Property, to the extent such item of gain or loss is not allocated
pursuant to Section 2.B.1(a) or 2.B.2(a) of Exhibit C to eliminate Book-Tax
Disparities.
"Safe Harbor" has the meaning set forth in Section 11.6.F.
"Securities Act" means the Securities Act of 1933, as amended.
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"Series A Preferred Shares" means the 8.98% Series A Cumulative Redeemable
Preferred Shares of Equity Office Properties Trust issued in connection with the
merger of Beacon Properties Corporation into Equity Office Properties Trust on
December 19, 1997.
"Series A Preferred Units" means the series of Partnership Units
representing units of Limited Partnership Interest designated as the 8.98%
Series A Cumulative Redeemable Preferred Units with the designations,
preferences and other rights set forth in Attachment A hereto.
"Series B Preferred Shares" means the 5.25% Series B Convertible,
Cumulative Preferred Shares of the Company, with the preferences, conversion and
other rights, voting powers, restrictions, limitations as to distributions,
qualifications and terms and conditions of redemption of shares as described in
the Articles Supplementary to the Declaration of Trust filed with the State
Department of Assessments and Taxation of Maryland on February 19, 1998,
establishing the series of preferred shares, designated Series B Preferred
Shares.
"Series B Preferred Units" means the series of Partnership Units
representing units of Limited Partnership Interest designated as the 5.25% B
Convertible, Cumulative Preferred Units, with the preferences, conversion and
other rights, voting powers, restrictions, limitations as to distributions,
qualification and terms and conditions of redemption of units set forth in
Attachment B hereto.
"Series C Preferred Shares" means the 8 5/8% Series C Cumulative Redeemable
Preferred Shares of Beneficial Interest of the Company issued and sold in the
underwritten public offering made pursuant to the Company's effective shelf
registration statement on Form S-3 (Reg. No. 333-58729), its prospectus dated
July 22, 1998, and its related prospectus supplement dated December 1, 1998.
"Series C Preferred Units" means the series of Partnership Units
representing units of Limited Partnership Interest designated as the 8 5/8%
Series C Cumulative Redeemable Preferred Units, with the designations,
preferences and other rights set forth in Attachment C hereto.
"Series D Preferred Units" means the series of Partnership Units
representing units of Limited Partnership Interest designated as the 7%
Cumulative Convertible Preferred Units, with the designations, preferences and
other rights set forth in Attachment D hereto.
"704(c) Value" of any Contributed Property means the fair market value of
such property at the time of contribution as determined by the General Partner
using such reasonable method of valuation as they may adopt; provided, however,
subject to Exhibit B, the General Partner shall, in its sole and absolute
discretion, use such method as it deems reasonable and appropriate to allocate
the aggregate of the 704(c) Value of Contributed Properties in a single or
integrated transaction among each separate property on a basis proportional to
its fair market values.
"Share" means a share of beneficial interest (or other comparable equity
interest) of the General Partner Entity. Shares may be issued in one or more
classes or series in accordance with the terms of the Declaration of Trust (or,
if the General Partner is not the General Partner Entity, the organizational
documents of the General Partner Entity). If there is more than one class or
series of Shares, the term "Shares" shall, as the context requires, be deemed to
refer to the class or series of Shares that correspond to the class or series of
Partnership Interests for which the reference to Shares is made. When used with
reference to Class A Units, the term "Shares" refers to common shares of
beneficial interest (or other comparable equity interest) of the General Partner
Entity.
"Shares Amount" means a number of Shares equal to the product of the number
of Partnership Units offered for redemption by a Redeeming Partner times the
Conversion Factor; provided that, if the General Partner Entity issues to all
holders of Shares rights, options, warrants or convertible or exchangeable
securities entitling such holders to subscribe for or purchase Shares or any
other securities or property (collectively, the "rights"), then the Shares
Amount shall also include such rights that a holder of that number of Shares
would be entitled to receive.
"Share Option Plan" means any equity incentive plan of the General Partner,
the General Partner Entity, the Partnership and/or any Affiliate of the
Partnership.
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"Specified Redemption Date" means the tenth Business Day after receipt by
the General Partner of a Notice of Redemption; provided that, if the Shares are
not Publicly Traded, the Specified Redemption Date means the thirtieth Business
Day after receipt by the General Partner of a Notice of Redemption.
"Subsidiary" means, with respect to any Person, any corporation, limited
liability company, trust, partnership or joint venture, or other entity of which
a majority of (i) the voting power of the voting equity securities or (ii) the
outstanding equity interests is owned, directly or indirectly, by such Person.
"Substituted Limited Partner" means a Person who is admitted as a Limited
Partner to the Partnership pursuant to Section 11.4.
"Successor Entity" has the meaning set forth in the definition of
"Conversion Factor" herein.
"Terminating Capital Transaction" means any sale or other disposition of
all or substantially all of the assets of the Partnership for cash or a related
series of transactions that, taken together, result in the sale or other
disposition of all or substantially all of the assets of the Partnership for
cash.
"Termination Transaction" has the meaning set forth in Section 11.2.B.
"Unrealized Gain" attributable to any item of Partnership property means,
as of any date of determination, the excess, if any, of (i) the fair market
value of such property (as determined under Exhibit B) as of such date, over
(ii) the Carrying Value of such property (prior to any adjustment to be made
pursuant to Exhibit B) as of such date.
"Unrealized Loss" attributable to any item of Partnership property means,
as of any date of determination, the excess, if any, of (i) the Carrying Value
of such property (prior to any adjustment to be made pursuant to Exhibit B) as
of such date, over (ii) the fair market value of such property (as determined
under Exhibit B) as of such date.
"Valuation Date" means the date of receipt by the General Partner of a
Notice of Redemption or, if such date is not a Business Day, the first Business
Day thereafter.
"Value" means, with respect to any outstanding Shares of the General
Partner Entity that are Publicly Traded, the average of the daily market price
for the ten consecutive trading days immediately preceding the date with respect
to which value must be determined. The market price for each such trading day
shall be the closing price, regular way, on such day, or if no such sale takes
place on such day, the average of the closing bid and asked prices on such day.
If the outstanding Shares of the General Partner Entity are Publicly Traded and
the Shares Amount includes rights that a holder of Shares would be entitled to
receive, then the Value of such rights shall be determined by the General
Partner acting in good faith on the basis of such quotations and other
information as it considers, in its reasonable judgment, appropriate. If the
Shares of the General Partner Entity are not Publicly Traded, the Value of the
Shares Amount per Partnership Unit offered for redemption (which will be the
Cash Amount per Partnership Unit offered for redemption payable pursuant to
Section 8.6.A) means the amount that a holder of one Partnership Unit would
receive if each of the assets of the Partnership were to be sold for its fair
market value on the Specified Redemption Date, the Partnership were to pay all
of its outstanding liabilities, and the remaining proceeds were to be
distributed to the Partners in accordance with the terms of this Agreement. Such
Value shall be determined by the General Partner, acting in good faith and based
upon a commercially reasonable estimate of the amount that would be realized by
the Partnership if each asset of the Partnership (and each asset of each
partnership, limited liability company, trust, joint venture or other entity in
which the Partnership owns a direct or indirect interest) were sold to an
unrelated purchaser in an arms' length transaction where neither the purchaser
nor the seller were under economic compulsion to enter into the transaction
(without regard to any discount in value as a result of the Partnership's
minority interest in any property or any illiquidity of the Partnership's
interest in any property). In connection with determining the Deemed Value of
the Partnership Interest for purposes of determining the number of additional
Partnership Units issuable upon a Capital Contribution funded by an underwritten
public offering or an arm's length private placement of shares of beneficial
interest (or other comparable equity interest) of the General Partner, the Value
of such shares shall be the public offering or arm's length
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private placement price per share of such class of beneficial interest (or other
comparable equity interest) sold.
ARTICLE II
ORGANIZATIONAL MATTERS
SECTION 2.1 ORGANIZATION
The Partnership is a limited partnership organized pursuant to the
provisions of the Act and upon the terms and conditions set forth in the
Original Agreement, as amended by the Prior Amendments, the Prior Addenda, and
the First Amended and Restated Agreement. The Partners hereby agree to continue
the business of the Partnership on the terms set forth in this Agreement. Except
as expressly provided herein to the contrary, the rights and obligations of the
Partners and the administration and termination of the Partnership shall be
governed by the Act. The Partnership Interest of each Partner shall be personal
property for all purposes.
SECTION 2.2 NAME
The name of the Partnership is EOP Operating Limited Partnership. The
Partnership's business may be conducted under any other name or names deemed
advisable by the General Partner, including the name of any of the General
Partner or any Affiliate thereof. The words "Limited Partnership," "L.P.,"
"Ltd." or similar words or letters shall be included in the Partnership's name
where necessary for the purposes of complying with the laws of any jurisdiction
that so requires. The General Partner in its sole and absolute discretion may
change the name of the Partnership at any time and from time to time and shall
notify the Limited Partners of such change in the next regular communication to
the Limited Partners.
SECTION 2.3 REGISTERED OFFICE AND AGENT; PRINCIPAL OFFICE
The address of the registered office of the Partnership in the State of
Delaware shall be located at Corporation Trust Center, 1209 Orange Street,
Wilmington, County of New Castle, Delaware 19801, and the registered agent for
service of process on the Partnership in the State of Delaware at such
registered office shall be Corporation Trust Company. The principal office of
the Partnership shall be Two North Riverside Plaza, Suite 2100, Chicago,
Illinois 60606, or such other place as the General Partner may from time to time
designate by notice to the Limited Partners. The Partnership may maintain
offices at such other place or places within or outside the State of Delaware as
the General Partner deems advisable.
SECTION 2.4 TERM
The term of the Partnership commenced on November 1, 1996, and shall
continue until December 31, 2095, unless it is dissolved sooner pursuant to the
provisions of Article XIII or as otherwise provided by law.
ARTICLE III
PURPOSE
SECTION 3.1 PURPOSE AND BUSINESS
The purpose and nature of the business to be conducted by the Partnership
is (i) to conduct any business that may be lawfully conducted by a limited
partnership organized pursuant to the Act; provided, however, that such business
shall be limited to and conducted in such a manner as to permit the General
Partner Entity at all times to be classified as a REIT, unless the General
Partner Entity ceases to qualify or is not qualified as a REIT for any reason or
reasons not related to the business conducted by the
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Partnership, (ii) to enter into any corporation, partnership, joint venture,
trust, limited liability company or other similar arrangement to engage in any
of the foregoing or the ownership of interests in any entity engaged, directly
or indirectly, in any of the foregoing and (iii) to do anything necessary or
incidental to the foregoing. In connection with the foregoing, the Partners
acknowledge that the status of the General Partner Entity as a REIT inures to
the benefit of all the Partners and not solely to the General Partner Entity or
its Affiliates.
SECTION 3.2 POWERS
The Partnership is empowered to do any and all acts and things necessary,
appropriate, proper, advisable, incidental to or convenient for the furtherance
and accomplishment of the purposes and business described herein and for the
protection and benefit of the Partnership, including, without limitation, full
power and authority, directly or through its ownership interest in other
entities, to enter into, perform and carry out contracts of any kind, borrow
money and issue evidences of indebtedness, whether or not secured by mortgage,
deed of trust, pledge or other lien, acquire, own, manage, improve and develop
real property, and lease, sell, transfer and dispose of real property; provided,
however, that the Partnership shall not take, or refrain from taking, any action
which, in the judgment of the General Partner, in its sole and absolute
discretion, (i) could adversely affect the ability of the General Partner Entity
to continue to qualify as a REIT, (ii) could subject the General Partner Entity
to any taxes under Section 857 or Section 4981 of the Code or (iii) could
violate any law or regulation of any governmental body or agency having
jurisdiction over either the General Partner or the General Partner Entity or
its securities, unless such action (or inaction) shall have been specifically
consented to by the General Partner in writing.
ARTICLE IV
CAPITAL CONTRIBUTIONS AND ISSUANCES
OF PARTNERSHIP INTERESTS
SECTION 4.1 CAPITAL CONTRIBUTIONS OF THE PARTNERS
Prior to the execution of this Agreement, the Partners have made the
Capital Contributions as set forth in Exhibit A. The Partners own Partnership
Units in the amounts set forth in Exhibit A and have Percentage Interests in the
Partnership as set forth in Exhibit A, which number of Partnership Units and
Percentage Interest shall be adjusted in Exhibit A from time to time by the
General Partner to the extent necessary to reflect accurately redemptions,
Capital Contributions, the issuance of additional Partnership Units or similar
events having an effect on a Partner's Percentage Interest occurring after the
date hereof in accordance with the terms of this Agreement. To the extent the
Partnership acquires any property by the merger of any other Person into the
Partnership, Persons who receive Partnership Interests in exchange for their
interests in the Person merging into the Partnership shall become Partners and
shall be deemed to have made Capital Contributions as provided in the applicable
merger agreement and as set forth in Exhibit A. A number of Partnership Units
held by the General Partner equal to one percent (1%) of the aggregate number of
Partnership Units owned by the General Partner shall be deemed to be the General
Partner Partnership Units and shall be the General Partnership Interest of the
General Partner. All other Partnership Units held by the General Partner shall
be deemed to be Limited Partnership Interests and shall be held by the General
Partner in its capacity as a Limited Partner in the Partnership. Except as
provided in Sections 7.5, 10.5, and 13.3 hereof, the Partners shall have no
obligation to make any additional Capital Contributions or provide any
additional funding to the Partnership (whether in the form of loans, repayments
of loans or otherwise). Except as otherwise set forth in Section 13.3 hereof, no
Partner shall have any obligation to restore any deficit that may exist in its
Capital Account, either upon a liquidation of the Partnership or otherwise.
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SECTION 4.2 ISSUANCES OF PARTNERSHIP INTERESTS
A. General. The General Partner is hereby authorized to cause the
Partnership from time to time to issue to Partners (including the General
Partner and its Affiliates) or other Persons (including, without limitation, in
connection with the contribution of property to the Partnership) Partnership
Units or other Partnership Interests in one or more classes, or in one or more
series of any of such classes, with such designations, preferences and relative,
participating, optional or other special rights, powers and duties, including
rights, powers and duties senior to Limited Partnership Interests, all as shall
be determined, subject to applicable Delaware law, by the General Partner in its
sole and absolute discretion, including, without limitation, (i) the allocations
of items of Partnership income, gain, loss, deduction and credit to each such
class or series of Partnership Interests, (ii) the right of each such class or
series of Partnership Interests to share in Partnership distributions and (iii)
the rights of each such class or series of Partnership Interests upon
dissolution and liquidation of the Partnership; provided that no such
Partnership Units or other Partnership Interests shall be issued to the General
Partner unless either (a) the Partnership Interests are issued in connection
with the grant, award or issuance of Shares or other equity interests in the
General Partner having designations, preferences and other rights such that the
economic interests attributable to such Shares or other equity interests are
substantially similar to the designations, preferences and other rights (except
voting rights) of the Partnership Interests issued to the General Partner in
accordance with this Section 4.2.A or (b) the additional Partnership Interests
are issued to all Partners holding Partnership Interests in the same class in
proportion to their respective Percentage Interests in such class. If the
Partnership issues Partnership Interests pursuant to this Section 4.2.A, the
General Partner shall make such revisions to this Agreement (including but not
limited to the revisions described in Section 5.4, Section 6.2 and Section 8.6)
as it deems necessary to reflect the issuance of such Partnership Interests.
B. Percentage Interest Adjustments in the Case of Capital Contributions for
Partnership Units. Upon the acceptance of additional Capital Contributions in
exchange for Partnership Units and so long as the Partnership shall have
outstanding more than one class of Partnership Interests, the Percentage
Interest related thereto shall be equal to a fraction, the numerator of which is
equal to the amount of cash, if any, plus the Agreed Value of Contributed
Property, if any, contributed with respect to such additional Partnership Units
and the denominator of which is equal to the sum of (i) the Deemed Value of the
Partnership Interests for all outstanding classes (computed as of the Business
Day immediately preceding the date on which the additional Capital Contributions
are made (an "Adjustment Date")) plus (ii) the aggregate amount of additional
Capital Contributions contributed to the Partnership on such Adjustment Date in
respect of such additional Partnership Units. The Percentage Interest of each
other Partner holding Partnership Interests not making a full pro rata Capital
Contribution shall be adjusted to a fraction the numerator of which is equal to
the sum of (i) the Deemed Partnership Interest Value of such Limited Partner
(computed as of the Business Day immediately preceding the Adjustment Date) plus
(ii) the amount of additional Capital Contributions (such amount being equal to
the amount of cash, if any, plus the Agreed Value of Contributed Property, if
any, so contributed), if any, made by such Partner to the Partnership in respect
of such Partnership Interest as of such Adjustment Date and the denominator of
which is equal to the sum of (i) the Deemed Value of the Partnership Interests
of all outstanding classes (computed as of the Business Day immediately
preceding such Adjustment Date) plus (ii) the aggregate amount of the additional
Capital Contributions contributed to the Partnership on such Adjustment Date in
respect of such additional Partnership Interests. For purposes of calculating a
Partner's Percentage Interest pursuant to this Section 4.2.B, cash Capital
Contributions by the General Partner will be deemed to equal the cash
contributed by the General Partner plus (a) in the case of cash contributions
funded by an offering of any equity interests in or other securities of the
General Partner, the offering costs attributable to the cash contributed to the
Partnership, and (b) in the case of Partnership Units issued pursuant to Section
7.5.E, an amount equal to the difference between the Value of the Shares sold
pursuant to any Share Option Plan and the net proceeds of such sale.
C. Classes of Partnership Units. Subject to Section 4.2.A above and
Section 4.2.D below, the Partnership shall have two classes of Partnership Units
entitled "Class A Units" and "Class B Units."
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Either Class A Units or Class B Units, at the election of the General Partner,
in its sole and absolute discretion, may be issued to newly admitted Partners in
exchange for the contribution by such Partners of cash, real estate partnership
interests, stock, notes or other assets or consideration; provided that any
Partnership Unit that is not specifically designated by the General Partner as
being of a particular class shall be deemed to be a Class A Unit. Each Class B
Unit shall be converted automatically into a Class A Unit on the day immediately
following the Partnership Record Date for the Distribution Period (as defined in
Section 5.1.C) in which such Class B Unit was issued, without the requirement
for any action by either the Partnership or the Partner holding the Class B
Unit.
D. Preferred Units Outstanding. Pursuant to Section 4.2.A, the Partnership
has heretofore established and issued Series A Preferred Units, Series B
Preferred Units, and Series C Preferred Units, and the Partnership is
establishing and issuing the Series D Preferred Units in connection with the
adoption of this Agreement. The terms and conditions of the Series A Preferred
Units, the Series B Preferred Units, the Series C Preferred Units, and the
Series D Preferred Units are set forth in Attachment A, Attachment B, Attachment
C, and Attachment D, respectively, attached hereto and made part hereof.
SECTION 4.3 NO PREEMPTIVE RIGHTS
Except to the extent expressly granted by the Partnership pursuant to
another agreement, no Person shall have any preemptive, preferential or other
similar right with respect to (i) additional Capital Contributions or loans to
the Partnership or (ii) issuance or sale of any Partnership Units or other
Partnership Interests.
SECTION 4.4 OTHER CONTRIBUTION PROVISIONS
If any Partner is admitted to the Partnership and is given a Capital
Account in exchange for services rendered to the Partnership, such transaction
shall be treated by the Partnership and the affected Partner as if the
Partnership had compensated such Partner in cash, and the Partner had
contributed such cash to the capital of the Partnership.
SECTION 4.5 NO INTEREST ON CAPITAL
No Partner shall be entitled to interest on its Capital Contributions or
its Capital Account.
SECTION 4.6 SEPARATE AGREEMENTS
In connection with the issuance of Partnership Units to certain Additional
Limited Partners, the Partnership has entered into separate agreements that set
forth additional rights and obligations of such Additional Limited Partners and
additional terms and conditions of such Additional Limited Partner's Partnership
Interests. Such agreements are described in Exhibits E-1 through E-6 attached
hereto and made part hereof.
ARTICLE V
DISTRIBUTIONS
SECTION 5.1 REQUIREMENT AND CHARACTERIZATION OF DISTRIBUTIONS
A. General. The General Partner shall distribute at least quarterly an
amount equal to one hundred percent (100%) of Available Cash generated by the
Partnership during such quarter or shorter period to the Partners who are
Partners on the Partnership Record Date with respect to such quarter or shorter
period as provided in Sections 5.1.B, 5.1.C and 5.1.D. Notwithstanding anything
to the contrary contained herein, in no event may a Partner receive a
distribution of Available Cash with respect to a Partnership Unit for a quarter
or shorter period if such Partner is entitled to receive a distribution with
respect to a Share for which such Partnership Unit has been redeemed or
exchanged. Unless otherwise expressly
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provided for herein, in Attachment A, Attachment B, Attachment C, and Attachment
D hereto, with respect to Series A Preferred Units, Series B Preferred Units,
Series C Preferred Units, and Series D Preferred Units, respectively, or in an
agreement at the time a new class or series of Partnership Interests is created
in accordance with Article IV hereof, no Partnership Interest shall be entitled
to a distribution in preference to any other Partnership Interest. The General
Partner shall make such reasonable efforts, as determined by it in its sole and
absolute discretion and consistent with the qualification of the General Partner
Entity as a REIT, to distribute Available Cash (a) to Limited Partners so as to
preclude any such distribution or portion thereof from being treated as part of
a sale of property to the Partnership by a Limited Partner under Section 707 of
the Code or the Regulations thereunder; provided that, the General Partner and
the Partnership shall not have liability to a Limited Partner under any
circumstances as a result of any distribution to a Limited Partner being so
treated, and (b) to the General Partner in an amount sufficient to enable the
General Partner Entity to make distributions to its shareholders that will
enable the General Partner Entity to (1) satisfy the requirements for
qualification as a REIT under the Code and the Regulations (the "REIT
Requirements"), and (2) avoid any federal income or excise tax liability.
B. Method. (i) Each holder of Partnership Interests that is entitled to
any preference in distribution (including, without limitation, the preferences
in distribution set forth in Attachment A, Attachment B, Attachment C, and
Attachment D hereto with respect to Series A Preferred Units, Series B Preferred
Units, Series C Preferred Units, and Series D Preferred Units, respectively)
shall be entitled to a distribution in accordance with the rights of any such
class of Partnership Interests (and, within such class, pro rata in proportion
to the respective Percentage Interests on such Partnership Record Date); and
(ii) To the extent there is Available Cash remaining after the payment
of any preference in distribution in accordance with the foregoing clause
(i), with respect to Partnership Interests that are not entitled to any
preference in distribution, pro rata to each such class in accordance with
the terms of such class (and, within each such class, pro rata in
proportion to the respective Percentage Interests on such Partnership
Record Date).
C. Distributions When Class B Units Are Outstanding. If for any quarter or
shorter period with respect to which a distribution is to be made (a
"Distribution Period") Class B Units are outstanding on the Partnership Record
Date for such Distribution Period, the General Partner shall allocate the
Available Cash with respect to such Distribution Period available for
distribution with respect to the Class A Units and Class B Units collectively
between the Partners who are holders of Class A Units ("Class A") and the
Partners who are holders of Class B Units ("Class B") as follows:
(1) Class A shall receive that portion of the Available Cash (the
"Class A Share") determined by multiplying the amount of Available Cash by
the following fraction:
A X Y
------------------------
(A X Y) + (B X X)
(2) Class B shall receive that portion of the Available Cash (the
"Class B Share") determined by multiplying the amount of Available Cash by
the following fraction:
B X X
------------------------
(A X Y) + (B X X)
(3) For purposes of the foregoing formulas, (i) "A" equals the number
of Class A Units outstanding on the Partnership Record Date for such
Distribution Period; (ii) "B" equals the number of Class B Units
outstanding on the Partnership Record Date for such Distribution Period;
(iii) "Y" equals the number of days in the Distribution Period; and (iv)
"X" equals the number of days in the Distribution Period for which the
Class B Units were issued and outstanding.
The Class A Share shall be distributed among Partners holding Class A Units
on the Partnership Record Date for the Distribution Period in accordance with
the number of Class A Units held by each Partner on such Partnership Record
Date; provided that in no event may a Partner receive a distribution of
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Available Cash with respect to a Class A Unit if a Partner is entitled to
receive a distribution out of such Available Cash with respect to a Share for
which such Class A Unit has been redeemed or exchanged. The Class B Shares shall
be distributed among the Partners holding Class B Units on the Partnership
Record Date for the Distribution Period in accordance with the number of Class B
Units held by each Partner on such Partnership Record Date. In no event shall
any Class B Units be entitled to receive any distribution of Available Cash for
any Distribution Period ending prior to the date on which such Class B Units are
issued.
D. Distributions When Class B Units Have Been Issued on Different
Dates. If Class B Units which have been issued on different dates are
outstanding on the Partnership Record Date for any Distribution Period, then the
Class B Units issued on each particular date shall be treated as a separate
series of Partnership Units for purposes of making the allocation of Available
Cash for such Distribution Period among the holders of Partnership Units (and
the formula for making such allocation, and the definitions of variables used
therein, shall be modified accordingly). Thus, for example, if two series of
Class B Units are outstanding on the Partnership Record Date for any
Distribution Period, the allocation formula for each series, "Series B(1)" and
"Series B(2)" would be as follows:
(1) Series B(1) shall receive that portion of the Available Cash
determined by multiplying the amount of Available Cash by the following
fraction:
B(1) X X(1)
------------------------------------------
(A X Y) + (B(1) X X(1)) + (B(2) X X(2))
(2) Series B(2) shall receive that portion of the Available Cash
determined by multiplying the amount of Available Cash by the following
fraction:
B(2) X X(2)
------------------------------------------
(A X Y) + (B(1) X X(1)) + (B(2) X X(2))
(3) For purposes of the foregoing formulas the definitions set forth
in Section 5.1.C.3 remain the same except that (i) "B(1)" equals the number
of Partnership Units in Series B(1) outstanding on the Partnership Record
Date for such Distribution Period; (ii) "B(2)" equals the number of
Partnership Units in Series B(2) outstanding on the Partnership Record Date
for such Distribution Period; (iii) "X(1)" equals the number of days in the
Distribution Period for which the Partnership Units in Units in Series B(2)
outstanding on the Partnership Record Date for such Distribution Period;
(iii) "X(2)" equals the number of days in the Distribution Period for which
the Partnership Units in Series B(1) were issued and outstanding; and (iv)
"X(2)" equals the number of days in the Distribution Period for which the
Partnership Units in Series B(2) were issued and outstanding.
E. Minimum Distributions if Shares Not Publicly Traded. In addition (and
without regard to the amount of Available Cash), if the Shares of the General
Partner Entity are not Publicly Traded, the General Partner shall make cash
distributions with respect to the Class A Units at least annually for each
taxable year of the Partnership beginning prior to the fifteenth (15th)
anniversary of the Effective Date in an aggregate amount with respect to each
such taxable year at least equal to 95% of the Partnership's taxable income for
such year allocable to the Class A Units, with such distributions to be made not
later than 60 days after the end of such year.
SECTION 5.2 AMOUNTS WITHHELD
All amounts withheld pursuant to the Code or any provisions of any state or
local tax law and Section 10.5 with respect to any allocation, payment or
distribution to the General Partner, the Limited Partners or Assignees shall be
treated as amounts distributed to the General Partner, Limited Partners or
Assignees pursuant to Section 5.1 for all purposes under this Agreement.
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SECTION 5.3 DISTRIBUTIONS UPON LIQUIDATION
Proceeds from a Terminating Capital Transaction shall be distributed to the
Partners in accordance with Section 13.2.
SECTION 5.4 REVISIONS TO REFLECT ISSUANCE OF PARTNERSHIP INTERESTS
If the Partnership issues Partnership Interests to the General Partner or
any Additional Limited Partner pursuant to Article IV hereof, the General
Partner shall make such revisions to this Article V and Exhibit A as it deems
necessary to reflect the issuance of such additional Partnership Interests
without the requirements for any other consents or approvals.
ARTICLE VI
ALLOCATIONS
SECTION 6.1 ALLOCATIONS FOR CAPITAL ACCOUNT PURPOSES
For purposes of maintaining the Capital Accounts and in determining the
rights of the Partners among themselves, the Partnership's items of income,
gain, loss and deduction (computed in accordance with Exhibit B) shall be
allocated among the Partners in each taxable year (or portion thereof) as
provided herein below.
A. Net Income. After giving effect to the special allocations set forth in
Section 1 of Exhibit C of the Partnership Agreement, Net Income shall be
allocated:
(1) first, to the General Partner to the extent that cumulative Net
Losses previously allocated the General Partner pursuant to Section
6.1.B(6) exceed cumulative Net Income previously allocated to the General
Partner pursuant to this clause (1);
(2) second, to each Protected Partner until the cumulative Net Income
allocated such Protected Partner under this clause (2) equals the
cumulative Net Losses allocated such Protected Partner under Section
6.1.B(5) (and, within the class of Protected Partners, pro rata in
proportion to their respective percentages of the cumulative Net Losses
allocated all Protected Partners pursuant to Section 6.1.B(5) hereof);
(3) third, to the General Partner until the cumulative Net Income
allocated under this clause (3) equals the cumulative Net Losses allocated
the General Partner under Section 6.1.B(4);
(4) fourth, to the holders of any Partnership Interests that are
entitled to any preference upon liquidation until the cumulative Net income
allocated under this clause (4) equals the cumulative Net Losses allocated
to such Partners under Section 6.1.B(3);
(5) fourth, to the holders of any Partnership Interests that are
entitled to any preference in distribution in accordance with the rights of
any such class of Partnership Interests until each such Partnership
Interest has been allocated, on a cumulative basis pursuant to this clause
(5), Net Income equal to the amount of distributions received which are
attributable to the preference of such class of Partnership Interests (and,
within such class, pro rata in proportion to the respective Percentage
Interests as of the last day of the period for which such allocation is
being made); and
(6) finally, with respect to Partnership Interests that are not
entitled to any preference in the allocation of Net Income, pro rata to
each such class in accordance with the terms of such class (and, within
such class, pro rata in proportion to the respective Percentage Interests
as of the last day of the period for which such allocation is being made).
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B. Net Losses. After giving effect to the special allocations set forth in
Section 1 of Exhibit C, Net Losses shall be allocated:
(1) first, to the holders of Partnership Interests, in proportion to
their share of the Net Income previously allocated pursuant to Section
6.1.A(6), to the extent that any prior allocations of Net Income to such
Partners pursuant to Section 6.1.A(6) exceed, on a cumulative basis,
distributions with respect to such Partnership Interests pursuant to clause
(ii) of Section 5.1.B;
(2) second, with respect to classes of Partnership Interests that are
not entitled to any preference in distribution upon distribution, pro rata
to each such class in accordance with the terms of such class (and, within
such class, pro rata in proportion to the respective Percentage Interests
as of the last day of the period for which such allocation is being made);
provided that Net Losses shall not be allocated to any Partner pursuant to
this Section 6.1.B(2) to the extent that such allocation would cause such
Partner to have an Adjusted Capital Account Deficit (or increase any
existing Adjusted Capital Account Deficit) (determined in each case (i) by
not including in the Partners' Adjusted Capital Accounts any amount that a
Partner is obligated to contribute to the Partnership with respect to any
deficit in its Capital Account pursuant to Section 13.3 and (ii) in the
case of a Partner who also holds classes of Partnership Interests that are
entitled to any preferences in distribution upon liquidation, by
subtracting from such Partners' Adjusted Capital Account the amount of such
preferred distribution to be made upon liquidation) at the end of such
taxable year (or portion thereof);
(3) third, with respect to classes of Partnership Interests that are
entitled to any preference in distribution upon liquidation, in reverse
order of the priorities of each such class (and within each such class, pro
rata in proportion to their respective Percentage Interests as of the last
day of the period for which such allocation is being made); provided that
Net Losses shall not be allocated to any Partner pursuant to this Section
6.1.B(3) to the extent that such allocation would cause such Partner to
have an Adjusted Capital Account Deficit (or increase any existing Adjusted
Capital Account Deficit) (determined in each case by not including in the
Partners' Adjusted Capital Accounts any amount that a Partner is obligated
to contribute to the Partnership with respect to any deficit in its Capital
Account pursuant to Section 13.3) at the end of such taxable year (or
portion thereof);
(4) fourth, to the General Partner in an amount equal to the excess of
(a) the amount of the Partnership Recourse Liabilities over (b) the
Aggregate Protected Amount;
(5) fifth, to and among the Protected Partners, in proportion to their
respective Protected Amounts, until such time as the Protected Partners as
a group have been allocated cumulative Net Losses pursuant to this clause
(5) equal to the Aggregate Protected Amount; and
(6) thereafter, to the General Partner.
C. Allocation of Nonrecourse Debt. For purposes of Regulation Section
1.752-3(a), the Partners agree that Nonrecourse Liabilities of the Partnership
in excess of the sum of (i) the amount of Partnership Minimum Gain and (ii) the
total amount of Nonrecourse Built-in Gain shall be allocated by the General
Partner by taking into account facts and circumstances relating to each
Partner's respective interest in the profits of the Partnership. For this
purpose, the General Partner will have discretion in any fiscal year to allocate
such excess Nonrecourse Liabilities among the Partners in any manner permitted
under Code Section 752 and the Regulations thereunder.
D. Recapture Income. Any gain allocated to the Partners upon the sale or
other taxable disposition of any Partnership asset shall, to the extent possible
after taking into account other required allocations of gain pursuant to Exhibit
C, be characterized as Recapture Income in the same proportions and to the same
extent as such Partners have been allocated any deductions directly or
indirectly giving rise to the treatment of such gains as Recapture Income.
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SECTION 6.2 REVISIONS TO ALLOCATIONS TO REFLECT ISSUANCE OF PARTNERSHIP
INTERESTS
If the Partnership issues Partnership Interests to the General Partner or
any Additional Limited Partner pursuant to Article IV hereof, the General
Partner shall make such revisions to this Article VI and Exhibit A as it deems
necessary to reflect the terms of the issuance of such Partnership Interests,
including making preferential allocations to classes of Partnership Interests
that are entitled thereto. Such revisions shall not require the consent or
approval of any other Partner.
ARTICLE VII
MANAGEMENT AND OPERATIONS OF BUSINESS
SECTION 7.1 MANAGEMENT
A. Powers of General Partner. Except as otherwise expressly provided in
this Agreement, all management powers over the business and affairs of the
Partnership are and shall be exclusively vested in the General Partner, and no
Limited Partner shall have any right to participate in or exercise control or
management power over the business and affairs of the Partnership. The General
Partner may not be removed by the Limited Partners with or without cause. In
addition to the powers now or hereafter granted a general partner of a limited
partnership under applicable law or which are granted to the General Partner
under any other provision of this Agreement, the General Partner, subject to
Section 7.11, shall have full power and authority to do all things deemed
necessary or desirable by it to conduct the business of the Partnership, to
exercise all powers set forth in Section 3.2 and to effectuate the purposes set
forth in Section 3.1, including, without limitation:
(1) the making of any expenditures, the lending or borrowing of money
(including, without limitation, making prepayments on loans and borrowing
money to permit the Partnership to make distributions to its Partners in
such amounts as are required under Section 5.1.E or will permit the General
Partner Entity (so long as the General Partner Entity qualifies as REIT) to
avoid the payment of any federal income tax (including, for this purpose,
any excise tax pursuant to Section 4981 of the Code) and to make
distributions to its shareholders sufficient to permit the General Partner
Entity to maintain REIT status), the assumption or guarantee of, or other
contracting for, indebtedness and other liabilities, the issuance of
evidences of indebtedness (including the securing of same by mortgage, deed
of trust or other lien or encumbrance on the Partnership's assets) and the
incurring of any obligations the General Partner deems necessary for the
conduct of the activities of the Partnership;
(2) the making of tax, regulatory and other filings, or rendering of
periodic or other reports to governmental or other agencies having
jurisdiction over the business or assets of the Partnership;
(3) the acquisition, disposition, mortgage, pledge, encumbrance,
hypothecation or exchange of any or all of the assets of the Partnership
(including the exercise or grant of any conversion, option, privilege or
subscription right or other right available in connection with any assets
at any time held by the Partnership) or the merger or other combination of
the Partnership with or into another entity on such terms as the General
Partner deems proper;
(4) the use of the assets of the Partnership (including, without
limitation, cash on hand) for any purpose consistent with the terms of this
Agreement and on any terms it sees fit, including, without limitation, the
financing of the conduct of the operations of the General Partner, the
Partnership or any of the Partnership's Subsidiaries, the lending of funds
to other Persons (including, without limitation, the General Partner, its
Subsidiaries and the Partnership's Subsidiaries) and the repayment of
obligations of the Partnership and its Subsidiaries and any other Person in
which the Partnership has an equity investment and the making of capital
contributions to its Subsidiaries;
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(5) the management, operation, leasing, landscaping, repair,
alteration, demolition or improvement of any real property or improvements
owned by the Partnership or any Subsidiary of the Partnership or any Person
in which the Partnership has made a direct or indirect equity investment;
(6) the negotiation, execution, and performance of any contracts,
conveyances or other instruments that the General Partner considers useful
or necessary to the conduct of the Partnership's operations or the
implementation of the General Partner's powers under this Agreement,
including contracting with contractors, developers, consultants,
accountants, legal counsel, other professional advisors and other agents
and the payment of their expenses and compensation out of the Partnership's
assets;
(7) the mortgage, pledge, encumbrance or hypothecation of any assets
of the Partnership, and the use of the assets of the Partnership
(including, without limitation, cash on hand) for any purpose consistent
with the terms of this Agreement and on any terms it sees fit, including,
without limitation, the financing of the conduct or the operations of the
General Partner or the Partnership, the lending of funds to other Persons
(including, without limitation, any Subsidiaries of the Partnership) and
the repayment of obligations of the Partnership, any of its Subsidiaries
and any other Person in which it has an equity investment;
(8) the distribution of Partnership cash or other Partnership assets
in accordance with this Agreement;
(9) the holding, managing, investing and reinvesting of cash and other
assets of the Partnership;
(10) the collection and receipt of revenues and income of the
Partnership;
(11) the selection, designation of powers, authority and duties and
the dismissal of employees of the Partnership (including, without
limitation, employees having titles such as "president," "vice president,"
"secretary" and "treasurer") and agents, outside attorneys, accountants,
consultants and contractors of the Partnership and the determination of
their compensation and other terms of employment or hiring;
(12) the maintenance of such insurance for the benefit of the
Partnership and the Partners as it deems necessary or appropriate;
(13) the formation of, or acquisition of an interest (including
non-voting interests in entities controlled by Affiliates of the
Partnership or third parties) in, and the contribution of property to, any
further limited or general partnerships, joint ventures, limited liability
companies or other relationships that it deems desirable (including,
without limitation, the acquisition of interests in, and the contributions
of funds or property to, or making of loans to, its Subsidiaries and any
other Person in which it has an equity investment from time to time, or the
incurrence of indebtedness on behalf of such Persons or the guarantee of
the obligations of such Persons); provided that, as long as the General
Partner has determined to continue to qualify as a REIT, the Partnership
may not engage in any such formation, acquisition or contribution that
would cause the General Partner to fail to qualify as a REIT;
(14) the control of any matters affecting the rights and obligations
of the Partnership, including the settlement, compromise, submission to
arbitration or any other form of dispute resolution or abandonment of any
claim, cause of action, liability, debt or damages due or owing to or from
the Partnership, the commencement or defense of suits, legal proceedings,
administrative proceedings, arbitrations or other forms of dispute
resolution, the representation of the Partnership in all suits or legal
proceedings, administrative proceedings, arbitrations or other forms of
dispute resolution, the incurring of legal expense and the indemnification
of any Person against liabilities and contingencies to the extent permitted
by law;
(15) the determination of the fair market value of any Partnership
property distributed in kind, using such reasonable method of valuation as
the General Partner may adopt;
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(16) the exercise, directly or indirectly, through any
attorney-in-fact acting under a general or limited power of attorney, of
any right, including the right to vote, appurtenant to any assets or
investment held by the Partnership;
(17) the exercise of any of the powers of the General Partner
enumerated in this Agreement on behalf of or in connection with any
Subsidiary of the Partnership or any other Person in which the Partnership
has a direct or indirect interest, individually or jointly with any such
Subsidiary or other Person;
(18) the exercise of any of the powers of the General Partner
enumerated in this Agreement on behalf of any Person in which the
Partnership does not have any interest pursuant to contractual or other
arrangements with such Person;
(19) the making, executing and delivering of any and all deeds,
leases, notes, deeds to secure debt, mortgages, deeds of trust, security
agreements, conveyances, contracts, guarantees, warranties, indemnities,
waivers, releases or other legal instruments or agreements in writing
necessary or appropriate in the judgment of the General Partner for the
accomplishment of any of the powers of the General Partner enumerated in
this Agreement; and
(20) the distribution of cash to acquire Partnership Units held by a
Limited Partner in connection with a Limited Partner's exercise of its
Redemption Right under Section 8.6; and
(21) the amendment and restatement of Exhibit A to reflect accurately
at all times the Capital Contributions and Percentage Interests of the
Partners as the same are adjusted from time to time to the extent necessary
to reflect redemptions, Capital Contributions, the issuance of Partnership
Units, the admission of any Additional Limited Partner or any Substituted
Limited Partner or otherwise, which amendment and restatement,
notwithstanding anything in this Agreement to the contrary, shall not be
deemed an amendment of this Agreement, as long as the matter or event being
reflected in Exhibit A otherwise is authorized by this Agreement.
B. No Approval by Limited Partners. Except as provided in Section 7.11,
each of the Limited Partners agrees that the General Partner is authorized to
execute, deliver and perform the above-mentioned agreements and transactions on
behalf of the Partnership without any further act, approval or vote of the
Partners, notwithstanding any other provision of this Agreement, the Act or any
applicable law, rule or regulation, to the full extent permitted under the Act
or other applicable law. The execution, delivery or performance by the General
Partner or the Partnership of any agreement authorized or permitted under this
Agreement shall not constitute a breach by the General Partner of any duty that
the General Partner may owe the Partnership or the Limited Partners or any other
Persons under this Agreement or of any duty stated or implied by law or equity.
C. Insurance. At all times from and after the date hereof, the General
Partner may cause the Partnership to obtain and maintain (i) casualty, liability
and other insurance on the properties of the Partnership and (ii) liability
insurance for the Indemnitees hereunder and (iii) such other insurance as the
General Partner, in its sole and absolute discretion, determines to be
necessary.
D. Working Capital and Other Reserves. At all times from and after the
date hereof, the General Partner may cause the Partnership to establish and
maintain working capital reserves in such amounts as the General Partner, in its
sole and absolute discretion, deems appropriate and reasonable from time to
time, including upon liquidation of the Partnership under Section 13.
E. No Obligations to Consider Tax Consequences of Limited Partners. In
exercising their authority under this Agreement, the General Partner may, but
shall be under no obligation to, take into account the tax consequences to any
Partner (including the General Partner) of any action taken (or not taken) by
any of them. The General Partner and the Partnership shall not have liability to
a Limited Partner for monetary damages or otherwise for losses sustained,
liabilities incurred or benefits not derived by such Limited Partner in
connection with such decisions, provided that the General Partner has acted in
good faith and pursuant to its authority under this Agreement.
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SECTION 7.2 CERTIFICATE OF LIMITED PARTNERSHIP
The General Partner has previously filed the Certificate with the Secretary
of State of Delaware. To the extent that such action is determined by the
General Partner to be reasonable and necessary or appropriate, the General
Partner shall file amendments to and restatements of the Certificate and do all
the things to maintain the Partnership as a limited partnership (or a
partnership in which the limited partners have limited liability) under the laws
of the State of Delaware and each other state, the District of Columbia or other
jurisdiction in which the Partnership may elect to do business or own property.
Subject to the terms of Section 8.5.A(4), the General Partner shall not be
required, before or after filing, to deliver or mail a copy of the Certificate
or any amendment thereto to any Limited Partner. The General Partner shall use
all reasonable efforts to cause to be filed such other certificates or documents
as may be reasonable and necessary or appropriate for the formation,
continuation, qualification and operation of a limited partnership (or a
partnership in which the limited partners have limited liability) in the State
of Delaware and any other state, the District of Columbia or other jurisdiction
in which the Partnership may elect to do business or own property.
SECTION 7.3 TITLE TO PARTNERSHIP ASSETS
Title to Partnership assets, whether real, personal or mixed and whether
tangible or intangible, shall be deemed to be owned by the Partnership as an
entity, and no Partners, individually or collectively, shall have any ownership
interest in such Partnership assets or any portion thereof. Title to any or all
of the Partnership assets may be held in the name of the Partnership, the
General Partner or one or more nominees, as the General Partner may determine,
including Affiliates of the General Partner. The General Partner hereby declares
and warrants that any Partnership assets for which legal title is held in the
name of the General Partner or any nominee or Affiliate of the General Partner
shall be held by the General Partner for the use and benefit of the Partnership
in accordance with the provisions of this Agreement. All Partnership assets
shall be recorded as the property of the Partnership in its books and records,
irrespective of the name in which legal title to such Partnership assets is
held.
SECTION 7.4 REIMBURSEMENT OF THE GENERAL PARTNER
A. No Compensation. Except as provided in this Section 7.4 and elsewhere
in this Agreement (including the provisions of Articles V and VI regarding
distributions, payments and allocations to which it may be entitled), the
General Partner shall not be compensated for its services as the general partner
of the Partnership.
B. Responsibility for Partnership Expenses. The Partnership shall be
responsible for and shall pay all expenses relating to the Partnership's
organization, the ownership of its assets and its operations. The General
Partner shall be reimbursed on a monthly basis, or such other basis as the
General Partner may determine in its sole and absolute discretion, for all
expenses it incurs relating to the ownership and operation of, or for the
benefit of, the Partnership (including, without limitation, expenses related to
the operations of the General Partner and to the management and administration
of any Subsidiaries of the General Partner or the Partnership or Affiliates of
the Partnership, such as auditing expenses and filing fees); provided that the
amount of any such reimbursement shall be reduced by (i) any interest earned by
the General Partner with respect to bank accounts or other instruments or
accounts held by it on behalf of the Partnership as permitted in Section 7.5.A
(which interest is considered to belong to the Partnership and shall be paid
over to the Partnership to the extent not applied to reimburse the General
Partner for expenses hereunder); and (ii) any amount derived by the General
Partner from any investments permitted in Section 7.5.A. The General Partner
shall determine in good faith the amount of expenses incurred by it related to
the ownership and operation of, or for the benefit of, the Partnership. If
certain expenses are incurred for the benefit of the Partnership and other
entities (including the General Partner), such expenses will be allocated to the
Partnership and such other entities in such a manner as the General Partner in
its sole and absolute discretion deems fair and reasonable. Such reimbursements
shall be in addition to any reimbursement to the General Partner pursuant to
Section 10.3.C and as a result of indemnification pursuant to Section 7.7. All
payments and reimbursements hereunder shall be
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characterized for federal income tax purposes as expenses of the Partnership
incurred on its behalf, and not as expenses of the General Partner.
C. Partnership Interest Issuance Expenses. The General Partner shall also
be reimbursed for all expenses it incurs relating to any issuance of Partnership
Interests, Shares, Debt of the Partnership or the General Partner or rights,
options, warrants or convertible or exchangeable securities pursuant to Article
IV (including, without limitation, all costs, expenses, damages and other
payments resulting from or arising in connection with litigation related to any
of the foregoing), all of which expenses are considered by the Partners to
constitute expenses of, and for the benefit of, the Partnership.
D. Purchases of Shares by the General Partner. If the General Partner
exercises its rights under the Declaration of Trust to purchase Shares or
otherwise elects to purchase from its shareholders Shares in connection with a
share repurchase or similar program or for the purpose of delivering such Shares
to satisfy an obligation under any dividend reinvestment or equity purchase
program adopted by the General Partner, any employee equity purchase plan
adopted by the General Partner or any similar obligation or arrangement
undertaken by the General Partner in the future, the purchase price paid by the
General Partner for those Shares and any other expenses incurred by the General
Partner in connection with such purchase shall be considered expenses of the
Partnership and shall be reimbursable to the General Partner, subject to the
conditions that: (i) if those Shares subsequently are to be sold by the General
Partner, the General Partner shall pay to the Partnership any proceeds received
by the General Partner for those Shares (provided that a transfer of Shares for
Partnership Units pursuant to Section 8.6 would not be considered a sale for
such purposes); and (ii) if such Shares are not retransferred by the General
Partner within thirty (30) days after the purchase thereof, the General Partner
shall cause the Partnership to cancel a number of Partnership Units (rounded to
the nearest whole Partnership Unit) held by the General Partner equal to the
product attained by multiplying the number of those Shares by a fraction, the
numerator of which is one and the denominator of which is the Conversion Factor.
E. Reimbursement not a Distribution. If and to the extent any
reimbursement made pursuant to this Section 7.4 is determined for federal income
tax purposes not to constitute a payment of expenses of the Partnership, the
amount so determined shall constitute a guaranteed payment with respect to
capital within the meaning of Section 707(c) of the Code, shall be treated
consistently therewith by the Partnership and all Partners and shall not be
treated as a distribution for purposes of computing the Partners' Capital
Accounts.
F. Funding for Certain Capital Transactions. In the event that the General
Partner shall undertake to acquire (whether by merger, consolidation, purchase,
or otherwise) the assets or equity interests of another Person and such
acquisition shall require the payment of cash by the General Partner (whether to
such Person or to any other selling party or parties in such transaction or to
one or more creditors, if any, of such Person or such selling party or parties),
(i) the Partnership shall advance to the General Partner the cash required to
consummate such acquisition if, and to the extent that, such cash is not to be
obtained by the General Partner through an issuance of Shares described in
Section 4.2 or pursuant to a transaction described in Section 7.5.B, (ii) the
General Partner shall immediately, upon consummation of such acquisition,
transfer to the Partnership (or cause to be transferred to the Partnership), in
full and complete satisfaction of such advance and as required by Section 7.5,
the assets or equity interests of such Person acquired by the General Partner in
such acquisition, and (iii) pursuant to and in accordance with Section 4.2 and
Section 7.5.B, the Partnership shall issue to the General Partner Partnership
Interests and/or rights, options, warrants or convertible or exchangeable
securities of the Partnership having designations, preferences and other rights
that are substantially the same as those of any additional Shares, other equity
securities, New Securities and/or Convertible Funding Debt, as the case may be,
issued by the General Partner in connection with such acquisition (whether
issued directly to participants in the acquisition transaction or to third
parties in order to obtain cash to complete the acquisition). In addition to,
and without limiting the foregoing, in the event that the General Partner
engages in a transaction in which (x) the General Partner (or a wholly owned
direct or indirect Subsidiary of the General Partner) merges with another entity
(referred to as the "Parent Entity") that is organized in the "UPREIT format"
(i.e., where the Parent Entity holds substantially all of its assets and
conducts substantially all of its
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operations through a partnership, limited liability company or other entity
(referred to as an "Operating Entity")) and the General Partner survives such
merger, (y) such Operating Entity merges with or is otherwise acquired by the
Partnership in exchange in whole or in part for Partnership Interests, and (z)
the General Partner is required or elects to pay part of the consideration in
connection with such merger involving the Parent Entity in the form of cash and
part of the consideration in the form of Shares, the Partnership shall
distribute to the General Partner with respect to its existing Partnership
Interest an amount of cash sufficient to complete such transaction and the
General Partner shall cause the Partnership to cancel a number of Partnership
Units (rounded to the nearest whole number) held by the General Partner equal to
the product attained by multiplying the number of additional Shares of the
General Partner that the General Partner would have issued to the Parent Entity
or the owners of the Parent Entity in such transaction if the entire
consideration therefor were to have been paid in Shares by a fraction, the
numerator of which is one and the denominator of which is the Conversion Factor.
SECTION 7.5 OUTSIDE ACTIVITIES OF THE GENERAL PARTNER; RELATIONSHIP OF SHARES
TO PARTNERSHIP UNITS; FUNDING DEBT
A. General. Without the Consent of the Outside Limited Partners, the
General Partner shall not, directly or indirectly, enter into or conduct any
business other than in connection with the ownership, acquisition and
disposition of Partnership Interests as General Partner or Limited Partner and
the management of the business of the Partnership and such activities as are
incidental thereto. Without the Consent of the Outside Limited Partners, the
assets of the General Partner shall be limited to Partnership Interests and
permitted debt obligations of the Partnership (as contemplated by Section
7.5.F), so that Shares and Partnership Units are completely fungible except as
otherwise specifically provided herein; provided that the General Partner shall
be permitted to hold such bank accounts or similar instruments or accounts in
its name as it deems necessary to carry out its responsibilities and purposes as
contemplated under this Agreement and its organizational documents (provided
that accounts held on behalf of the Partnership to permit the General Partner to
carry out its responsibilities under this Agreement shall be considered to
belong to the Partnership and the interest earned thereon shall, subject to
Section 7.4.B, be applied for the benefit of the Partnership); and, provided
further that, the General Partner shall be permitted to acquire, directly or
through a Qualified REIT Subsidiary or limited liability company, up to a one
percent (1%) interest in any partnership or limited liability company at least
ninety-nine percent (99%) of the equity of which is owned, directly or
indirectly, by the Partnership. The General Partner and any of its Affiliates
may acquire Limited Partnership Interests and shall be entitled to exercise all
rights of a Limited Partner relating to such Limited Partnership Interests.
B. Repurchase of Shares. If the General Partner exercises its rights under
the Declaration of Trust to purchase Shares or otherwise elects to purchase from
its shareholders Shares in connection with a share repurchase or similar program
or for the purpose of delivering such shares to satisfy an obligation under any
dividend reinvestment or share purchase program adopted by the General Partner,
any employee share purchase plan adopted by the General Partner or any similar
obligation or arrangement undertaken by the General Partner in the future, then
the General Partner shall cause the Partnership to purchase from the General
Partner that number of Partnership Units of the appropriate class equal to the
product obtained by multiplying the number of Shares purchased by the General
Partner times a fraction, the numerator of which is one and the denominator of
which is the Conversion Factor, on the same terms and for the same aggregate
price that the General Partner purchased such Shares.
C. Forfeiture of Shares. If the Partnership or the General Partner
acquires Shares as a result of the forfeiture of such Shares under a restricted
or similar share plan, then the General Partner shall cause the Partnership to
cancel that number of Partnership Units equal to the number of Shares so
acquired, and, if the Partnership acquired such Shares, it shall transfer such
Shares to the General Partner for cancellation.
D. Issuances of Shares. After the Effective Date, the General Partner
shall not grant, award, or issue any additional Shares (other than Shares issued
pursuant to Section 8.6 hereof, pursuant to a dividend or distribution
(including any share split) of Shares to all of its shareholders), or in
connection with any acquisition permitted by Section 7.5.A hereof of up to a one
percent (1%) interest in any
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partnership or limited liability company at least ninety-nine percent (99%) of
the equity of which is owned, directly or indirectly, by the Partnership), other
equity securities of the General Partner, New Securities or Convertible Funding
Debt unless (i) the General Partner shall cause, pursuant to Section 4.2.A
hereof, the Partnership to issue to the General Partner Partnership Interests or
rights, options, warrants or convertible or exchangeable securities of the
Partnership having designations, preferences and other rights, all such that the
economic interests are substantially the same as those of such additional
Shares, other equity securities, New Securities or Convertible Funding Debt, as
the case may be, and (ii) the General Partner transfers to the Partnership, as
an additional Capital Contribution, the proceeds from the grant, award, or
issuance of such additional Shares, other equity securities, New Securities or
Convertible Funding Debt, as the case may be, or from the exercise of rights
contained in such additional Shares, other equity securities, New Securities or
Convertible Funding Debt, as the case may be. Without limiting the foregoing,
the General Partner is expressly authorized to issue additional Shares, other
equity securities, New Securities or Convertible Funding Debt, as the case may
be, for less than fair market value, and the General Partner is expressly
authorized, pursuant to Section 4.2.A hereof, to cause the Partnership to issue
to the General Partner corresponding Partnership Interests, as long as (a) the
General Partner concludes in good faith that such issuance is in the interests
of the General Partner and the Partnership (for example, and not by way of
limitation, the issuance of Shares and corresponding Partnership Units pursuant
to a share purchase plan providing for purchases of Shares, either by employees
or shareholders, at a discount from fair market value or pursuant to employee
share options that have an exercise price that is less than the fair market
value of the Shares, either at the time of issuance or at the time of exercise)
and (b) the General Partner transfers all proceeds from any such issuance or
exercise to the Partnership as an additional Capital Contribution.
E. Share Option Plan. If at any time or from time to time, the General
Partner sells Shares pursuant to any Share Option Plan, the General Partner
shall transfer the net proceeds of the sale of such Shares to the Partnership as
an additional Capital Contribution in exchange for an amount of additional
Partnership Units equal to the number of Shares so sold divided by the
Conversion Factor.
F. Funding Debt. The General Partner may incur a Funding Debt, including,
without limitation, a Funding Debt that is convertible into Shares or otherwise
constitutes a class of New Securities ("Convertible Funding Debt"), subject to
the condition that the General Partner lend to the Partnership the net proceeds
of such Funding Debt; provided that Convertible Funding Debt shall be issued
pursuant to Section 7.5.D above; and, provided further that, the General Partner
shall not be obligated to lend the net proceeds of any Funding Debt to the
Partnership in a manner that would be inconsistent with the General Partner's
ability to remain qualified as a REIT. If the General Partner enters into any
Funding Debt, the loan to the Partnership shall be on comparable terms and
conditions, including interest rate, repayment schedule and costs and expenses,
as are applicable with respect to or incurred in connection with such Funding
Debt.
SECTION 7.6 TRANSACTIONS WITH AFFILIATES
A. Transactions with Certain Affiliates. Except as expressly permitted by
this Agreement, the Partnership shall not, directly or indirectly, sell,
transfer or convey any property to, or purchase any property from, or borrow
funds from, or lend funds to, any Partner or any Affiliate of the Partnership
that is not also a Subsidiary of the Partnership, except pursuant to
transactions that are on terms that are fair and reasonable and no less
favorable to the Partnership than would be obtained from an unaffiliated third
party.
B. Conflict Avoidance. The General Partner is expressly authorized to
enter into, in the name and on behalf of the Partnership, a right of first
opportunity arrangement and other conflict avoidance agreements with various
Affiliates of the Partnership and General Partner on such terms as the General
Partner, in its sole and absolute discretion, believes are advisable.
C. Benefit Plans Sponsored by the Partnership. The General Partner in its
sole and absolute discretion and without the approval of the Limited Partners,
may propose and adopt on behalf of the
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Partnership employee benefit plans funded by the Partnership for the benefit of
employees of the General Partner, the Partnership, Subsidiaries of the
Partnership or any Affiliate of any of them.
SECTION 7.7 INDEMNIFICATION
A. General. The Partnership shall indemnify each Indemnitee to the fullest
extent provided by the Act from and against any and all losses, claims, damages,
liabilities, joint or several, expenses (including, without limitation,
attorneys fees and other legal fees and expenses), judgments, fines, settlements
and other amounts arising from or in connection with any and all claims,
demands, actions, suits or proceedings, civil, criminal, administrative or
investigative, incurred by the Indemnitee and relating to the Partnership or the
General Partner or the operation of, or the ownership of property by, the
Partnership or the General Partner as set forth in this Agreement in which any
such Indemnitee may be involved, or is threatened to be involved, as a party or
otherwise, unless it is established by a final determination of a court of
competent jurisdiction that: (i) the act or omission of the Indemnitee was
material to the matter giving rise to the proceeding and either was committed in
bad faith or was the result of active and deliberate dishonesty, (ii) the
Indemnitee actually received an improper personal benefit in money, property or
services or (iii) in the case of any criminal proceeding, the Indemnitee had
reasonable cause to believe that the act or omission was unlawful. Without
limitation, the foregoing indemnity shall extend to any liability of any
Indemnitee, pursuant to a loan guarantee, contractual obligation for any
indebtedness or other obligation or otherwise, for any indebtedness of the
Partnership or any Subsidiary of the Partnership (including, without limitation,
any indebtedness which the Partnership or any Subsidiary of the Partnership has
assumed or taken subject to), and the General Partner is hereby authorized and
empowered, on behalf of the Partnership, to enter into one or more indemnity
agreements consistent with the provisions of this Section 7.7 in favor of any
Indemnitee having or potentially having liability for any such indebtedness. The
termination of any proceeding by judgment, order or settlement does not create a
presumption that the Indemnitee did not meet the requisite standard of conduct
set forth in this Section 7.7.A. The termination of any proceeding by conviction
or upon a plea of nolo contendere or its equivalent, or an entry of an order of
probation prior to judgment, creates a rebuttable presumption that the
Indemnitee acted in a manner contrary to that specified in this Section 7.7.A
with respect to the subject matter of such proceeding. Any indemnification
pursuant to this Section 7.7 shall be made only out of the assets of the
Partnership, and any insurance proceeds from the liability policy covering the
General Partner and any Indemnitee, and neither the General Partner nor any
Limited Partner shall have any obligation to contribute to the capital of the
Partnership or otherwise provide funds to enable the Partnership to fund its
obligations under this Section 7.7.
B. Advancement of Expenses. Reasonable expenses expected to be incurred by
an Indemnitee shall be paid or reimbursed by the Partnership in advance of the
final disposition of any and all claims, demands, actions, suits or proceedings,
civil, criminal, administrative or investigative made or threatened against an
Indemnitee upon receipt by the Partnership of (i) a written affirmation by the
Indemnitee of the Indemnitee's good faith belief that the standard of conduct
necessary for indemnification by the Partnership as authorized in this Section
7.7.A has been met and (ii) a written undertaking by or on behalf of the
Indemnitee to repay the amount if it shall ultimately be determined that the
standard of conduct has not been met.
C. No Limitation of Rights. The indemnification provided by this Section
7.7 shall be in addition to any other rights to which an Indemnitee or any other
Person may be entitled under any agreement, pursuant to any vote of the
Partners, as a matter of law or otherwise, and shall continue as to an
Indemnitee who has ceased to serve in such capacity unless otherwise provided in
a written agreement pursuant to which such Indemnitee is indemnified.
D. Insurance. The Partnership may purchase and maintain insurance on
behalf of the Indemnitees and such other Persons as the General Partner shall
determine against any liability that may be asserted against or expenses that
may be incurred by such Person in connection with the Partnership's activities,
regardless of whether the Partnership would have the power to indemnify such
Person against such liability under the provisions of this Agreement.
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E. Benefit Plan Fiduciary. For purposes of this Section 7.7, (i) excise
taxes assessed on an Indemnitee, of for which the Indemnitee is otherwise found
liable, with respect to an ERISA Plan pursuant to applicable law shall
constitute fines within the meaning of this Section 7.7, and (iii) actions taken
or omitted by the Indemnitee with respect to an ERISA Plan in the performance of
its duties for a purpose reasonably believed by it to be in the interest of the
participants and beneficiaries of such ERISA Plan shall be deemed to be for a
purpose which is not opposed to the best interests of the Partnership.
F. No Personal Liability for Limited Partners. In no event may an
Indemnitee subject any of the Partners to personal liability by reason of the
indemnification provisions set forth in this Agreement.
G. Interested Transactions. An Indemnitee shall not be denied
indemnification in whole or in part under this Section 7.7 because the
Indemnitee had an interest in the transaction with respect to which the
indemnification applies if the transaction was otherwise permitted by the terms
of this Agreement.
H. Benefit. The provisions of this Section 7.7 are for the benefit of the
Indemnitees, their employees, officers, directors, trustees, heirs, successors,
assigns and administrators and shall not be deemed to create any rights for the
benefit of any other Persons. Any amendment, modification or repeal of this
Section 7.7, or any provision hereof, shall be prospective only and shall not in
any way affect the limitation on the Partnership's liability to any Indemnitee
under this Section 7.7 as in effect immediately prior to such amendment,
modification or repeal with respect to claims arising from or related to matters
occurring, in whole or in part, prior to such amendment, modification or repeal,
regardless of when such claims may arise or be asserted.
I. Indemnification Payments Not Distributions. If and to the extent any
payments to the General Partner pursuant to this Section 7.7 constitute gross
income to the General Partner (as opposed to the repayment of advances made on
behalf of the Partnership), such amounts shall constitute guaranteed payments
within the meaning of Section 707(c) of the Code, shall be treated consistently
therewith by the Partnership and all Partners, and shall not be treated as
distributions for purposes of computing the Partners' Capital Accounts.
J. Exception to Indemnification. Notwithstanding anything to the contrary
in this Agreement, the General Partner shall not be entitled to indemnification
hereunder for any loss, claim, damage, liability or expense for which the
General Partner is obligated to indemnify the Partnership under any other
agreement between the General Partner and the Partnership.
SECTION 7.8 LIABILITY OF THE GENERAL PARTNER
A. General. Notwithstanding anything to the contrary set forth in this
Agreement, the General Partner shall not be liable for monetary damages to the
Partnership, any Partners or any Assignees for losses sustained, liabilities
incurred or benefits not derived as a result of errors in judgment or mistakes
of fact or law or of any act or omission unless the General Partner acted in bad
faith and the act or omission was material to the matter giving rise to the
loss, liability or benefit not derived.
B. No Obligation to Consider Separate Interests of Limited Partners or
Shareholders. The Limited Partners expressly acknowledge that the General
Partner is acting on behalf of the Partnership, that the General Partner is
under no obligation to consider the separate interests of the Limited Partners
(including, without limitation, the tax consequences to Limited Partners or
Assignees) in deciding whether to cause the Partnership to take (or decline to
take) any actions, and that the General Partner shall not be liable for monetary
damages for losses sustained, liabilities incurred or benefits not derived by
Limited Partners in connection with such decisions, provided that the General
Partner has acted in good faith.
C. Actions of Agents. Subject to its obligations and duties as General
Partner set forth in Section 7.1.A, the General Partner may exercise any of the
powers granted to it by this Agreement and perform any of the duties imposed
upon it hereunder either directly or by or through its agents. The General
Partner shall not be responsible for any misconduct or negligence on the part of
any such agent appointed by the General Partner in good faith.
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D. Effect of Amendment. Notwithstanding any other provision contained
herein, any amendment, modification or repeal of this Section 7.8 or any
provision hereof shall be prospective only and shall not in any way affect the
limitations on the General Partner's liability to the Partnership and the
Limited Partners under this Section 7.8 as in effect immediately prior to such
amendment, modification or repeal with respect to claims arising from or
relating to matters occurring, in whole or in part, prior to such amendment,
modification or repeal, regardless of when such claims may arise or be asserted.
SECTION 7.9 OTHER MATTERS CONCERNING THE GENERAL PARTNER
A. Reliance on Documents. The General Partner may rely and shall be
protected in acting or refraining from acting upon any resolution, certificate,
statement, instrument, opinion, report, notice, request, consent, order, bond,
debenture or other paper or document believed by it in good faith to be genuine
and to have been signed or presented by the proper party or parties.
B. Reliance on Advisors. The General Partner may consult with legal
counsel, accountants, appraisers, management consultants, investment bankers and
other consultants and advisers selected by it, and any act taken or omitted to
be taken in reliance upon the opinion of such Persons as to matters which the
General Partner reasonably believes to be within such Person's professional or
expert competence shall be conclusively presumed to have been done or omitted in
good faith and in accordance with such opinion.
C. Action Through Agents. The General Partner shall have the right, in
respect of any of its powers or obligations hereunder, to act through any of its
duly authorized officers and a duly appointed attorney or attorneys-in-fact.
Each such attorney shall, to the extent provided by the General Partner in the
power of attorney, have full power and authority to do and perform all and every
act and duty which is permitted or required to be done by the General Partner
hereunder.
D. Actions to Maintain REIT Status or Avoid Taxation of the General Partner
Entity. Notwithstanding any other provisions of this Agreement or the Act, any
action of the General Partner on behalf of the Partnership or any decision of
the General Partner to refrain from acting on behalf of the Partnership
undertaken in the good faith belief that such action or omission is necessary or
advisable in order (i) to protect the ability of the General Partner Entity to
qualify as a REIT or (ii) to allow the General Partner Entity to avoid incurring
any liability for taxes under Section 857 or 4981 of the Code, is expressly
authorized under this Agreement and is deemed approved by all of the Limited
Partners.
E. Actions to Maintain REOC Status. If and so long as the Partnership
Interests of "benefit plan investors" is "significant" (as such terms, or terms
succeeding thereto with the same objective, are used in 29 C.F.R. Section
2510.3-101(f) (such regulation or successor regulation being known as the "Plan
Assets Regulation")), or if necessary so that the underlying assets of the
General Partner will not be "plan assets" (as such term is defined in the Plan
Assets Regulations) of any ERISA Partner, then the General Partner shall conduct
the affairs of the Partnership in such manner so that the Partnership shall
qualify as a "real estate operating company" (REOC"), as that term is used in
the Plan Assets Regulations, and so that the assets of the Partnership will not
be plan assets of any ERISA Partner.
(i) If the General Partner, pursuant to this Section 7.09.E, intends
to conduct the affairs of the Partnership as a REOC, the General Partner
shall deliver to each ERISA Partner an opinion of counsel reasonably
acceptable to each ERISA Partner and upon which such ERISA Partner may rely
with respect to the Partnership's REOC status as of the "initial valuation
date" and, if requested in writing by an ERISA Partner, as of each "annual
valuation period" (as those terms, or terms succeeding thereto with the
same objective, are defined in the Plan Assets Regulation). Such opinion of
counsel shall state, (A) as to the opinion respecting the "initial
valuation date," that the Partnership shall qualify as a REOC for the
period beginning on such "initial valuation date" and ending on the last
day of the first "annual valuation period," and (B) as to each annual
opinion respecting each "annual valuation period," that the Partnership
shall qualify as a REOC for the 12-month period following the last day of
such "annual valuation period." Such opinion of counsel may rely upon,
among other things, a certificate of the General Partner as to the exercise
of management rights with respect to one or more investments (other than
short-term investments pending long-term
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commitment or distribution to investors) during the appropriate period and
as to a description of such investments, and also shall state whether the
Partnership has included in a certification to the opinion a statement to
the effect that on such "initial valuation date" or during such "annual
valuation period" at least 50 percent of Partnership assets (other than
short-term investments pending long-term commitment or distribution to
investors), valued at cost, were invested in real estate investments as
described in the Plan Assets Regulation.
(ii) If the opinion described in this subsection is not provided in
the affirmative, or if any ERISA Partner shall obtain and deliver to the
General Partner an opinion of counsel to such ERISA Partner (which opinion
shall be reasonably satisfactory to the General Partner) that there is a
reasonable probability that either the Partnership was not or will not be a
REOC for a period in which either (i) participation by benefit plan
investors in the Partnership is significant or (ii) REOC status is
necessary so that the underlying assets of the General Partner will not be
plan assets and the General Partner does not obtain an opinion to the
contrary reasonably acceptable to each such ERISA Partner within fifteen
(15) days of its receipt of the opinion delivered by the ERISA Partner (it
being understood that the existence or reaffirmation of the opinion
delivered by the ERISA Partner to the General Partner shall not constitute
the sole basis of any ERISA Partner's determination that the opinion
delivered within fifteen days by the General Partner is not reasonably
satisfactory), then the General Partner is hereby authorized and empowered
to take such actions as it deems necessary and appropriate to mitigate,
prevent, or cure such adverse consequences as might result to an ERISA
Partner from the underlying assets of the Partnership being assets of an
ERISA Partner or the underlying assets of the General Partner being assets
of any ERISA Partner.
SECTION 7.10 RELIANCE BY THIRD PARTIES
Notwithstanding anything to the contrary in this Agreement, any Person
dealing with the Partnership shall be entitled to assume that the General
Partner has full power and authority, without consent or approval of any other
Partner or Person, to encumber, sell or otherwise use in any manner any and all
assets of the Partnership, to enter into any contracts on behalf of the
Partnership and to take any and all actions on behalf of the Partnership, and
such Person shall be entitled to deal with the General Partner as if the General
Partner were the Partnership's sole party in interest, both legally and
beneficially. Each Limited Partner hereby waives any and all defenses or other
remedies which may be available against such Person to contest, negate or
disaffirm any action of the General Partner in connection with any such dealing.
In no event shall any Person dealing with the General Partner or its
representatives be obligated to ascertain that the terms of this Agreement have
been complied with or to inquire into the necessity or expedience of any act or
action of the General Partner or its representatives. Each and every
certificate, document or other instrument executed on behalf of the Partnership
by the General Partner or its representatives shall be conclusive evidence in
favor of any and every Person relying thereon or claiming thereunder that (i) at
the time of the execution and delivery of such certificate, document or
instrument, this Agreement was in full force and effect, (ii) the Person
executing and delivering such certificate, document or instrument was duly
authorized and empowered to do so for and on behalf of the Partnership, and
(iii) such certificate, document or instrument was duly executed and delivered
in accordance with the terms and provisions of this Agreement and is binding
upon the Partnership.
SECTION 7.11 RESTRICTIONS ON GENERAL PARTNER'S AUTHORITY
A. Consent Required. The General Partner may not take any action in
contravention of an express prohibition or limitation of this Agreement without
the written Consent of (i) all Partners adversely affected or (ii) such lower
percentage of the Limited Partnership Interests as may be specifically provided
for under a provision of this Agreement or the Act.
B. Sale of All Assets of the Partnership. Except as provided in Article
XIII, the General Partner may not, directly or indirectly, cause the Partnership
to sell, exchange, transfer or otherwise dispose of all or substantially all of
the Partnership's assets in a single transaction or a series of related
transactions (including by way of merger (including a triangular merger),
consolidation or other combination with any
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other Persons) (i) if such merger, sale or other transaction is in connection
with a Termination Transaction permitted under Section 11.2.B hereof, without
the Consent of the Partners holding at least a majority of the then outstanding
Partnership Units (including any Partnership Units held by the General Partner),
or (ii) otherwise, without the Consent of the Outside Limited Partners.
C. Communications Act Investors. Unless otherwise approved in writing by
each affected Communications Act Investor (hereinafter defined), the General
Partner may not, directly or indirectly, cause the Partnership to invest in any
Property or otherwise take any action that (i) would result in the
Communications Act Investor being placed in a position whereby it would have or
be deemed to have the right to act for any third party in selecting or dealing
with any interexchange carrier (which, for purposes hereof, shall include
satellite telecommunication service) in providing long distance service between
local access and transport areas which originates in any State within the region
in which the affected Communications Act Investor (or the operating company
affiliate thereof) provides wireline telephone local exchange service, (but in
no event shall the foregoing be deemed to prohibit the Partnership from
contracting with a third party to perform such functions on a discretionary
basis as part of its property management duties where such activity is a
necessary adjunct to an investment and such activities, in the aggregate, are
not significant in relation to the Partnership's business activities taken as a
whole), or (ii) would cause a significant percentage of the Partnership's gross
income from any Property to be attributable to either the provision or resale of
long distance service between local access and transport areas which originates
in any State within the region in which the affected Communications Act Investor
(or the operating company affiliate thereof) provides wireline telephone local
exchange service, or the manufacture of telecommunications, customer premises or
related equipment. In addition, the Partnership will not engage in any
telecommunications activities other than those that may be ancillary to the
ownership or operation of its investments or make an investment in a cable
television system that would violate the cable-telephone cross-ownership
restriction in the Communications Act of 1934, as amended, with regard to the
local exchange service area of a Communications Act Investor (or the operating
company affiliate thereof). Notwithstanding the foregoing, the Partnership is
not precluded from engaging in any telecommunications business or cable business
unless such business is found to place the Communications Act Investor in
violation of law. The General Partner shall have a period of 120 days following
a finding by a court or regulatory body that such a violation exists to use its
reasonable best efforts to prevent or eliminate such violation, including, but
not limited to, correction of the condition giving rise to the violation,
amendment to this Agreement or sale of the relevant property or the interest of
the Communications Act Investor therein. A "Communications Act Investor" is a
Partner or shareholder of the General Partner that has notified the General
Partner that it is subject to the Communications Act of 1934, as amended.
SECTION 7.12 LOANS BY THIRD PARTIES
The Partnership may incur Debt, or enter into similar credit, guarantee,
financing or refinancing arrangements for any purpose (including, without
limitation, in connection with any acquisition of property) with any Person upon
such terms as the General Partner determines appropriate.
ARTICLE VIII
RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS
SECTION 8.1 LIMITATION OF LIABILITY
The Limited Partners shall have no liability under this Agreement except as
expressly provided in this Agreement, including Section 10.5, or under the Act.
SECTION 8.2 MANAGEMENT OF BUSINESS
No Limited Partner or Assignee (other than the General Partner, any of its
Affiliates, or any officer, director, employee, partner, agent or trustee of the
General Partner, the Partnership or any of their
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Affiliates, in their capacity as such) shall take part in the operation,
management or control (within the meaning of the Act) of the Partnership's
business, transact any business in the Partnership's name or have the power to
sign documents for or otherwise bind the Partnership. The transaction of any
such business by the General Partner, any of its Affiliates or any officer,
director, employee, partner, agent or trustee of the General Partner, the
Partnership or any of their Affiliates, in their capacity as such, shall not
affect, impair or eliminate the limitations on the liability of the Limited
Partners or Assignees under this Agreement.
SECTION 8.3 OUTSIDE ACTIVITIES OF LIMITED PARTNERS
Subject to Section 7.5 hereof, and subject to any agreements entered into
pursuant to Section 7.6.C hereof and to any other agreements entered into by a
Limited Partner or its Affiliates with the Partnership or a Subsidiary, any
Limited Partner (other than the General Partner) and any officer, director,
employee, agent, trustee, Affiliate or shareholder of any Limited Partner shall
be entitled to and may have business interests and engage in business activities
in addition to those relating to the Partnership, including business interests
and activities in direct or indirect competition with the Partnership. Neither
the Partnership nor any Partners shall have any rights by virtue of this
Agreement in any business ventures of any Limited Partner or Assignee. None of
the Limited Partners (other than the General Partner) or any other Person shall
have any rights by virtue of this Agreement or the partnership relationship
established hereby in any business ventures of any other Person (other than the
General Partner to the extent expressly provided herein), and such Person shall
have no obligation pursuant to this Agreement to offer any interest in any such
business ventures to the Partnership, any Limited Partner or any such other
Person, even if such opportunity is of a character which, if presented to the
Partnership, any Limited Partner or such other Person, could be taken by such
Person.
SECTION 8.4 RETURN OF CAPITAL
Except pursuant to the right of redemption set forth in Section 8.6, no
Limited Partner shall be entitled to the withdrawal or return of its Capital
Contribution, except to the extent of distributions made pursuant to this
Agreement or upon termination of the Partnership as provided herein. No Limited
Partner or Assignee shall have priority over any other Limited Partner or
Assignee either as to the return of Capital Contributions (except as permitted
by Section 4.2.A) or, except to the extent provided by Exhibit C or as permitted
by Sections 4.2.A, 5.1.B(i), 6.1.A(ii) and 6.1.B(i), or otherwise expressly
provided in this Agreement, as to profits, losses, distributions or credits.
SECTION 8.5 RIGHTS OF LIMITED PARTNERS RELATING TO THE PARTNERSHIP
A. General. In addition to other rights provided by this Agreement or by
the Act, and except as limited by Section 8.5.D, each Limited Partner shall have
the right, for a purpose reasonably related to such Limited Partner's interest
as a limited partner in the Partnership, upon written demand with a statement of
the purpose of such demand and at such Limited Partner's own expense:
(1) to obtain a copy of the most recent annual and quarterly reports
filed with the Securities and Exchange Commission by either the General
Partner Entity or the Partnership pursuant to the Exchange Act;
(2) to obtain a copy of the Partnership's federal, state and local
income tax returns for each Partnership Year;
(3) to obtain a current list of the name and last known business,
residence or mailing address of each Partner;
(4) to obtain a copy of this Agreement and the Certificate and all
amendments thereto, together with executed copies of all powers of attorney
pursuant to which this Agreement, the Certificate and all amendments
thereto have been executed; and
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(5) to obtain true and full information regarding the amount of cash
and a description and statement of any other property or services
contributed by each Partner and which each Partner has agreed to contribute
in the future, and the date on which each became a Partner.
B. Notice of Conversion Factor. The Partnership shall notify each Limited
Partner upon request of the then current Conversion Factor and any changes that
have been made thereto.
C. Notice of Extraordinary Transaction of the General Partner Entity. The
General Partner Entity shall not make any extraordinary distributions of cash or
property to its shareholders or effect a merger (including, without limitation,
a triangular merger), a sale of all or substantially all of its assets or any
other similar extraordinary transaction without notifying the Limited Partners
of its intention to make such distribution or effect such merger, sale or other
extraordinary transaction at least twenty (20) Business Days prior to the record
date to determine shareholders eligible to receive such distribution or to vote
upon the approval of such merger, sale or other extraordinary transaction (or,
if no such record date is applicable, at least twenty (20) business days before
consummation of such merger, sale or other extraordinary transaction); provided,
however, that the General Partner, in its sole discretion, may shorten the
required notice period of not less than twenty (20) business days prior to the
record date to determine the shareholders eligible to vote upon a merger
transaction (but not any of the other transactions covered by this Section
8.5.C.) by up to ten (10) business days (thereby continuing to afford the
holders of Units the opportunity to redeem Units under Section 8.6 on or prior
to the record date for the shareholder vote on the merger transaction) so long
as (i) the General Partner Entity will be the surviving entity in such merger
transaction, (ii) immediately following the merger transaction, Persons who held
voting securities of the General Partner Entity immediately prior to such merger
transaction will hold, solely by reason of the ownership of voting securities of
the General Partner Entity immediately prior to the merger transaction, voting
securities of the General Partner Entity representing not less than fifty one
percent (51%) of the total combined voting power of all outstanding voting
securities of the General Partner Entity after such merger, and (iii) in the
event that in connection with such merger transaction the Partnership will merge
with another entity, the Partnership will be the surviving entity in such
merger. This provision for such notice shall not be deemed (i) to permit any
transaction that otherwise is prohibited by this Agreement or requires a Consent
of the Partners or (ii) to require a Consent of the Limited Partners to a
transaction that does not otherwise require Consent under this Agreement. Each
Limited Partner agrees, as a condition to the receipt of the notice pursuant
hereto, to keep confidential the information set forth therein until such time
as the General Partner Entity has made public disclosure thereof and to use such
information during such period of confidentiality solely for purposes of
determining whether to exercise the Redemption Right; provided, however, that a
Limited Partner may disclose such information to its attorney, accountant and/or
financial advisor for purposes of obtaining advice with respect to such exercise
so long as such attorney, accountant and/or financial advisor agrees to receive
and hold such information subject to this confidentiality requirement; ;
provided, however, that the General Partner, in its sole discretion, may shorten
the required notice period of not less than twenty (20) business days prior to
the record date to determine the shareholders eligible to vote upon a merger
transaction (but not any of the other transactions covered by this Section
8.5.C.) to a period of not less than ten (10) calendar days (thereby continuing
to afford the holders of Units the opportunity to redeem Units under Section 8.6
on or prior to the record date for the shareholder vote on the merger
transaction) so long as (i) the General Partner Entity will be the surviving
entity in such merger transaction, (ii) immediately following the merger
transaction, Persons who held voting securities of the General Partner Entity
immediately prior to such merger transaction will hold, solely by reason of the
ownership of voting securities of the General Partner Entity immediately prior
to the merger transaction, voting securities of the General Partner Entity
representing not less than fifty-one percent (51%) of the total combined voting
power of all outstanding voting securities of the General Partner Entity after
such merger, and (iii) in the event that in connection with such merger
transaction the Partnership will merge with another entity, the Partnership will
be the surviving entity in such merger.
D. Confidentiality. Notwithstanding any other provision of this Section
8.5, the General Partner may keep confidential from the Limited Partners, for
such period of time as the General Partner determine in
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its sole and absolute discretion to be reasonable, any information that (i) the
General Partner reasonably believes to be in the nature of trade secrets or
other information the disclosure of which the General Partner in good faith
believes is not in the best interests of the Partnership or could damage the
Partnership or its business or (ii) the Partnership is required by law or by
agreements with unaffiliated third parties to keep confidential.
SECTION 8.6 REDEMPTION RIGHT
A. General. (i) Subject to Section 8.6.C, at any time on or after the
first anniversary date of the issuance of a Partnership Unit to a Limited
Partner pursuant to Article IV hereof (which one-year period shall commence upon
the issuance of such Partnership Unit regardless of whether such Partnership
Unit is designated upon issuance as a Class A Unit, a Class B Unit or otherwise
and shall include the period of time from the date such Partnership Unit is
issued to such Limited Partner as other than a Class A Unit until the date such
Partnership Unit is converted automatically to a Class A Unit pursuant to
Section 4.2.C hereof), or on or after such date prior to the expiration of such
one-year period as the General Partner, in its sole and absolute discretion,
designates with respect to any or all Class A Units then outstanding, the holder
of a Partnership Unit (if other than the General Partner or the General Partner
Entity or any Subsidiary of either the General Partner or the General Partner
Entity) shall have the right (the "Redemption Right") to require the Partnership
to redeem such Partnership Unit, with such redemption to occur on the Specified
Redemption Date and at a redemption price equal to and in the form of the Cash
Amount to be paid by the Partnership. Any such Redemption Right shall be
exercised pursuant to a Notice of Redemption delivered to the Partnership (with
a copy to the General Partner) by the Limited Partner who is exercising the
Redemption Right (the "Redeeming Partner"). A Limited Partner may exercise the
Redemption Right from time to time, without limitation as to frequency, with
respect to part or all of the Units that it owns, as selected by the Limited
Partner, provided that a Limited Partner may not exercise the Redemption Right
for less than one thousand (1,000) Partnership Units unless such Redeeming
Partner then holds less than one thousand (1,000) Partnership Units, in which
event such Redeeming Partner must exercise the Redemption Right for all of the
Partnership Units held by such Redeeming Partner.
(ii) The Redeeming Partner shall have no right with respect to any
Partnership Units so redeemed to receive any distributions paid after the
Specified Redemption Date with respect to such Partnership Units.
(iii) The Assignee of any Limited Partner may exercise the rights of
such Limited Partner pursuant to this Section 8.6, and such Limited Partner
shall be deemed to have assigned such rights to such Assignee and shall be
bound by the exercise of such rights by such Limited Partner's Assignee. In
connection with any exercise of such rights by such Assignee on behalf of
such Limited Partner, the Cash Amount shall be paid by the Partnership
directly to such Assignee and not to such Limited Partner.
(iv) If the General Partner Entity provides notice to the Limited
Partners, pursuant to Section 8.5.C hereof, the Redemption Right shall be
exercisable, without regard to whether the Partnership Units have been
outstanding for any specified period, during the period commencing on the
date on which the General Partner Entity provides such notice and ending on
the record date to determine shareholders eligible to receive such
distribution or to vote upon the approval of such merger, sale or other
extraordinary transaction (or, if no such record date is applicable, at
least twenty (20) business days before the consummation of such merger,
sale or other extraordinary transaction). If this subparagraph (iv)
applies, the Specified Redemption Date is the date on which the Partnership
and the General Partner receive notice of exercise of the Redemption Right,
rather than ten (10) Business Days after receipt of the notice of
redemption.
B. General Partner Assumption of Right. (i) If a Limited Partner has
delivered a Notice of Redemption, the General Partner may, in its sole and
absolute discretion (subject to the limitations on ownership and transfer of
Shares set forth in the Declaration of Trust), elect to assume directly and
satisfy
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a Redemption Right by paying to the Redeeming Partner either the Cash Amount or
the Shares Amount, as the General Partner determines in its sole and absolute
discretion (provided that payment of the Redemption Amount in the form of Shares
shall be in Shares registered for resale under Section 12 of the Exchange Act
and listed for trading on the exchange or national market on which the Shares
are Publicly Traded and, provided further that, if the Shares are not Publicly
Traded at the time a Redeeming Partner exercises its Redemption Right, the
Redemption Amount shall be paid only in the form of the Cash Amount unless the
Redeeming Partner, in its sole and absolute discretion, consents to payment of
the Redemption Amount in the form of the Shares Amount), on the Specified
Redemption Date, whereupon the General Partner shall acquire the Partnership
Units offered for redemption by the Redeeming Partner and shall be treated for
all purposes of this Agreement as the owner of such Partnership Units. Unless
the General Partner, in its sole and absolute discretion, shall exercise its
right to assume directly and satisfy the Redemption Right, the General Partner
shall not have any obligation to the Redeeming Partner or to the Partnership
with respect to the Redeeming Partner's exercise of the Redemption Right. If the
General Partner shall exercise its right to satisfy the Redemption Right in the
manner described in the first sentence of this Section 8.6B and shall fully
perform its obligations in connection therewith, the Partnership shall have no
right or obligation to pay any amount to the Redeeming Partner with respect to
such Redeeming Partner's exercise of the Redemption Right, and each of the
Redeeming Partner, the Partnership and the General Partner shall, for federal
income tax purposes, treat the transaction between the General Partner and the
Redeeming Partner as a sale of the Redeeming Partner's Partnership Units to the
General Partner. Nothing contained in this Section 8.6.B shall imply any right
of the General Partner to require any Limited Partner to exercise the Redemption
Right afforded to such Limited Partner pursuant to Section 8.6.A.
(ii) If the General Partner determines to pay the Redeeming Partner
the Redemption Amount in the form of Shares, the total number of Shares to
be paid to the Redeeming Partner in exchange for the Redeeming Partner's
Partnership Units shall be the applicable Shares Amount. If this amount is
not a whole number of Shares, the Redeeming Partner shall be paid (i) that
number of Shares which equals the nearest whole number less than such
amount plus (ii) an amount of cash which the General Partner determines, in
its reasonable discretion, to represent the fair value of the remaining
fractional Share which would otherwise be payable to the Redeeming Partner.
(iii) Each Redeeming Partner agrees to execute such documents as the
General Partner may reasonably require in connection with the issuance of
Shares upon exercise of the Redemption Right.
C. Exceptions to Exercise of Redemption Right. Notwithstanding the
provisions of Sections 8.6.A and 8.6.B, a Partner shall not be entitled to
exercise the Redemption Right pursuant to Section 8.6.A if (but only as long as)
the delivery of Shares to such Partner on the Specified Redemption Date (i)
would be prohibited under the Declaration of Trust or (ii) would be prohibited
under applicable federal or state securities laws or regulations (in each case
regardless of whether the General Partner would in fact assume and satisfy the
Redemption Right).
D. No Liens on Partnership Units Delivered for Redemption. Each Limited
Partner covenants and agrees with the General Partner that all Partnership Units
delivered for redemption shall be delivered to the Partnership or the General
Partner, as the case may be, free and clear of all liens; and, notwithstanding
anything contained herein to the contrary, neither the General Partner nor the
Partnership shall be under any obligation to acquire Partnership Units which are
or may be subject to any liens. Each Limited Partner further agrees that, if any
state or local property transfer tax is payable as a result of the transfer of
its Partnership Units to the Partnership or the General Partner, such Limited
Partner shall assume and pay such transfer tax.
E. Additional Partnership Interests. If the Partnership issues Partnership
Interests to any Additional Limited Partner pursuant to Article IV, the General
Partner shall make such revisions to this Section 8.6 as it determines are
necessary to reflect the issuance of such Partnership Interests (including
setting forth any restrictions on the exercise of the Redemption Right with
respect to such Partnership Interests).
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ARTICLE IX
BOOKS, RECORDS, ACCOUNTING AND REPORTS
SECTION 9.1 RECORDS AND ACCOUNTING
The General Partner shall keep or cause to be kept at the principal office
of the Partnership appropriate books and records with respect to the
Partnership's business, including, without limitation, all books and records
necessary to provide to the Limited Partners any information, lists and copies
of documents required to be provided pursuant to Section 9.3. Any records
maintained by or on behalf of the Partnership in the regular course of its
business may be kept on, or be in the form of, punch cards, magnetic tape,
photographs, micrographics or any other information storage device, provided
that the records so maintained are convertible into clearly legible written form
within a reasonable period of time. The books of the Partnership shall be
maintained, for financial and tax reporting purposes, on an accrual basis in
accordance with generally accepted accounting principles.
SECTION 9.2 FISCAL YEAR
The fiscal year of the Partnership shall be the calendar year.
SECTION 9.3 REPORTS
A. Annual Reports. As soon as practicable, but in no event later than the
date on which the General Partner Entity mails its annual report to its
shareholders, the General Partner Entity shall cause to be mailed to each
Limited Partner an annual report, as of the close of the most recently ended
Partnership Year, containing financial statements of the Partnership, or of the
General Partner Entity if such statements are prepared solely on a consolidated
basis with the Partnership, for such Partnership Year, presented in accordance
with generally accepted accounting principles, such statements to be audited by
a nationally recognized firm of independent public accountants selected by the
General Partner Entity.
B. Quarterly Reports. If and to the extent that the General Partner Entity
mails quarterly reports to its shareholders, as soon as practicable, but in no
event later than the date on such reports are mailed, the General Partner Entity
shall cause to be mailed to each Limited Partner a report containing unaudited
financial statements, as of the last day of such calendar quarter, of the
Partnership, or of the General Partner Entity if such statements are prepared
solely on a consolidated basis with the Partnership, and such other information
as may be required by applicable law or regulation, or as the General Partner
determines to be appropriate.
ARTICLE X
TAX MATTERS
SECTION 10.1 PREPARATION OF TAX RETURNS
The General Partner shall arrange for the preparation and timely filing of
all returns of Partnership income, gains, deductions, losses and other items
required of the Partnership for federal and state income tax purposes and shall
use all reasonable efforts to furnish, within ninety (90) days of the close of
each taxable year, the tax information reasonably required by Limited Partners
for federal and state income tax reporting purposes.
SECTION 10.2 TAX ELECTIONS
Except as otherwise provided herein, the General Partner shall, in its sole
and absolute discretion, determine whether to make any available election
pursuant to the Code; provided, however, that the General Partner shall make the
election under Section 754 of the Code in accordance with applicable regulations
thereunder. The General Partner shall have the right to seek to revoke any such
election
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(including, without limitation, the election under Section 754 of the Code) upon
the General Partner's determination in its sole and absolute discretion that
such revocation is in the best interests of the Partners.
SECTION 10.3 TAX MATTERS PARTNER
A. General. The General Partner shall be the "tax matters partner" of the
Partnership for federal income tax purposes. Pursuant to Section 6223(c)(3) of
the Code, upon receipt of notice from the IRS of the beginning of an
administrative proceeding with respect to the Partnership, the tax matters
partner shall furnish the IRS with the name, address, taxpayer identification
number and profit interest of each of the Limited Partners and any Assignees;
provided, however, that such information is provided to the Partnership by the
Limited Partners.
B. Powers. The tax matters partner is authorized, but not required:
(1) to enter into any settlement with the IRS with respect to any
administrative or judicial proceedings for the adjustment of Partnership
items required to be taken into account by a Partner for income tax
purposes (such administrative proceedings being referred to as a "tax
audit" and such judicial proceedings being referred to as "judicial
review"), and in the settlement agreement the tax matters partner may
expressly state that such agreement shall bind all Partners, except that
such settlement agreement shall not bind any Partner (i) who (within the
time prescribed pursuant to the Code and Regulations) files a statement
with the IRS providing that the tax matters partner shall not have the
authority to enter into a settlement agreement on behalf of such Partner or
(ii) who is a "notice partner" (as defined in Section 6231(a)(8) of the
Code) or a member of a "notice group" (as defined in Section 6223(b)(2) of
the Code);
(2) if a notice of a final administrative adjustment at the
Partnership level of any item required to be taken into account by a
Partner for tax purposes (a "final adjustment") is mailed to the tax
matters partner, to seek judicial review of such final adjustment,
including the filing of a petition for readjustment with the Tax Court or
the filing of a complaint for refund with the United States Claims Court or
the District Court of the United States for the district in which the
Partnership's principal place of business is located;
(3) to intervene in any action brought by any other Partner for
judicial review of a final adjustment;
(4) to file a request for an administrative adjustment with the IRS at
any time and, if any part of such request is not allowed by the IRS, to
file an appropriate pleading (petition or complaint) for judicial review
with respect to such request;
(5) to enter into an agreement with the IRS to extend the period for
assessing any tax which is attributable to any item required to be taken
into account by a Partner for tax purposes, or an item affected by such
item; and
(6) to take any other action on behalf of the Partners of the
Partnership in connection with any tax audit or judicial review proceeding
to the extent permitted by applicable law or regulations.
The taking of any action and the incurring of any expense by the tax
matters partner in connection with any such proceeding, except to the extent
required by law, is a matter in the sole and absolute discretion of the tax
matters partner and the provisions relating to indemnification of the General
Partner set forth in Section 7.7 shall be fully applicable to the tax matters
partner in its capacity as such.
C. Reimbursement. The tax matters partner shall receive no compensation
for its services. All third party costs and expenses incurred by the tax matters
partner in performing its duties as such (including legal and accounting fees
and expenses) shall be borne by the Partnership. Nothing herein shall be
construed to restrict the Partnership from engaging an accounting firm and/or
law firm to assist the tax matters partner in discharging its duties hereunder,
so long as the compensation paid by the Partnership for such services is
reasonable.
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SECTION 10.4 ORGANIZATIONAL EXPENSES
The Partnership shall elect to deduct expenses, if any, incurred by it in
organizing the Partnership ratably over a sixty (60) month period as provided in
Section 709 of the Code.
SECTION 10.5 WITHHOLDING
Each Limited Partner hereby authorizes the Partnership to withhold from or
pay on behalf of or with respect to such Limited Partner any amount of federal,
state, local, or foreign taxes that the General Partner determines that the
Partnership is required to withhold or pay with respect to any amount
distributable or allocable to such Limited Partner pursuant to this Agreement,
including, without limitation, any taxes required to be withheld or paid by the
Partnership pursuant to Section 1441, 1442, 1445, or 1446 of the Code. Any
amount paid on behalf of or with respect to a Limited Partner shall constitute a
loan by the Partnership to such Limited Partner, which loan shall be repaid by
such Limited Partner within fifteen (15) days after notice from the General
Partner that such payment must be made unless (i) the Partnership withholds such
payment from a distribution which would otherwise be made to the Limited Partner
or (ii) the General Partner determines, in its sole and absolute discretion,
that such payment may be satisfied out of the available funds of the Partnership
which would, but for such payment, be distributed to the Limited Partner. Any
amounts withheld pursuant to the foregoing clauses (i) or (ii) shall be treated
as having been distributed to such Limited Partner. Each Limited Partner hereby
unconditionally and irrevocably grants to the Partnership a security interest in
such Limited Partner's Partnership Interest to secure such Limited Partner's
obligation to pay to the Partnership any amounts required to be paid pursuant to
this Section 10.5. If a Limited Partner fails to pay any amounts owed to the
Partnership pursuant to this Section 10.5 when due, the General Partner may, in
its sole and absolute discretion, elect to make the payment to the Partnership
on behalf of such defaulting Limited Partner, and in such event shall be deemed
to have loaned such amount to such defaulting Limited Partner and shall succeed
to all rights and remedies of the Partnership as against such defaulting Limited
Partner (including, without limitation, the right to receive distributions). Any
amounts payable by a Limited Partner hereunder shall bear interest at the base
rate on corporate loans at large United States money center commercial banks, as
published from time to time in the Wall Street Journal, plus four (4) percentage
points (but not higher than the maximum lawful rate under the laws of the State
of Illinois) from the date such amount is due (i.e., fifteen (15) days after
demand) until such amount is paid in full. Each Limited Partner shall take such
actions as the Partnership or the General Partner shall request to perfect or
enforce the security interest created hereunder.
ARTICLE XI
TRANSFERS AND WITHDRAWALS
SECTION 11.1 TRANSFER
A. Definition. The term "transfer," when used in this Article XI with
respect to a Partnership Interest or a Partnership Unit, shall be deemed to
refer to a transaction by which the General Partner purports to assign all or
any part of its General Partnership Interest to another Person or by which a
Limited Partner purports to assign all or any part of its Limited Partnership
Interest to another Person, and includes a sale, assignment, gift, pledge,
encumbrance, hypothecation, mortgage, exchange or any other disposition by law
or otherwise. The term "transfer" when used in this Article XI does not include
any redemption or repurchase of Partnership Units by the Partnership from a
Partner or acquisition of Partnership Units from a Limited Partner by the
General Partner pursuant to Section 8.6 or otherwise. No part of the interest of
a Limited Partner shall be subject to the claims of any creditor, any spouse for
alimony or support, or to legal process, and may not be voluntarily or
involuntarily alienated or encumbered except as may be specifically provided for
in this Agreement.
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B. General. No Partnership Interest shall be transferred, in whole or in
part, except in accordance with the terms and conditions set forth in this
Article XI. Any transfer or purported transfer of a Partnership Interest not
made in accordance with this Article XI shall be null and void.
SECTION 11.2 TRANSFERS OF PARTNERSHIP INTERESTS OF GENERAL PARTNER
A. Except for transfers of Partnership Units to the Partnership as provided
in Section 7.5 or Section 8.6, the General Partner may not transfer any of its
Partnership Interest (including both its General Partnership Interest and its
Limited Partnership Interest) except in connection with a transaction described
in Section 11.2.B or as otherwise expressly permitted under this Agreement, nor
shall the General Partner withdraw as the General Partner except in connection
with a transaction described in Section 11.2.B.
B. The General Partner shall not engage in any merger (including a
triangular merger), consolidation or other combination with or into another
person, sale of all or substantially all of its assets or any reclassification,
recapitalization or change of outstanding Shares (other than a change in par
value, or from par value to no par value, or as a result of a subdivision or
combination as described in the definition of "Conversion Factor") ("Termination
Transaction"), unless the Termination Transaction has been approved by the
Consent of the Partners holding at least a majority of the then outstanding
Partnership Units (including any Partnership Units held by the General Partner)
and in connection with which all Limited Partners either will receive, or will
have the right to elect to receive, for each Partnership Unit an amount of cash,
securities, or other property equal to the product of the Conversion Factor
multiplied by the greatest amount of cash, securities or other property paid to
a holder of Shares corresponding to such Partnership Unit in consideration of
one such Share at any time during the period from and after the date on which
the Termination Transaction is consummated; provided that if, in connection with
the Termination Transaction, a purchase, tender or exchange offer shall have
been made to and accepted by the holders of more than fifty percent (50%) of the
outstanding Shares, each holder of Partnership Units shall receive, or shall
have the right to elect to receive without any right of Consent set forth above
in this subsection B, the greatest amount of cash, securities, or other property
which such holder would have received had it exercised the Redemption Right and
received Shares in exchange for its Partnership Units immediately prior to the
expiration of such purchase, tender or exchange offer and had thereupon accepted
such purchase, tender or exchange offer.
SECTION 11.3 LIMITED PARTNERS' RIGHTS TO TRANSFER
A. General. Subject to the provisions of Sections 11.3.C, 11.3.D, 11.3.E,
11.4 and 11.6, a Limited Partner (other than the General Partner) may transfer
with or without the consent of the General Partner, all or any portion of its
Partnership Interest, or any of such Limited Partner's rights as a Limited
Partner, provided that prior written notice of such proposed transfer is
delivered to the General Partner. Notwithstanding the foregoing, any Limited
Partner may, at any time, without the consent of the General Partner, (i)
transfer all or any portion of its Partnership Interest to the General Partner,
(ii) transfer all or any portion of its Partnership Interest to an Affiliate,
another original Limited Partner or to an Immediate Family member, subject to
the provisions of Section 11.6, (iii) transfer all or any portion of its
Partnership Interest to a trust for the benefit of a charitable beneficiary or
to a charitable foundation, subject to the provisions of Section 11.6, and (iv)
subject to the provisions of Section 11.6, pledge (a "Pledge") all or any
portion of its Partnership Interest to a lending institution, which is not an
Affiliate of such Limited Partner, as collateral or security for a bona fide
loan or other extension of credit, and transfer such pledged Partnership
Interest to such lending institution in connection with the exercise of remedies
under such loan or extension or credit. Each Limited Partner or Assignee
(resulting from a transfer made pursuant to clauses (i)-(iv) of the proviso of
the preceding sentence) shall have the right to transfer all or any portion of
its Partnership Interest, subject to the provisions of Section 11.6 and the
satisfaction of each of the following conditions (in addition to the right of
each such Limited Partner or Assignee to continue to
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make any such transfer permitted by clauses (i)-(iv) of such proviso without
satisfying either of the following conditions):
(a) GENERAL PARTNER RIGHT OF FIRST REFUSAL. The transferring Partner
shall give written notice of the proposed transfer to the General Partner,
which notice shall state (i) the identity of the proposed transferee, and
(ii) the amount and type of consideration proposed to be received for the
transferred Partnership Units. The General Partner shall have ten (10) days
upon which to give the transferring Partner notice of its election to
acquire the Partnership Units on the proposed terms. If it so elects, it
shall purchase the Partnership Units on such terms within ten (10) days
after giving notice of such election. If it does not so elect, the
transferring Partner may transfer such Partnership Units to a third party,
on economic terms no more favorable to the transferee than the proposed
terms, subject to the other conditions of this Section 11.3.
(b) QUALIFIED TRANSFEREE. Any transfer of a Partnership Interest
shall be made only to Qualified Transferees.
It is a condition to any transfer otherwise permitted hereunder (excluding
Pledges of a Partnership Interest, but including any transfer of the pledged
Partnership Interest, whether to the secured party or otherwise, pursuant to the
secured party's exercise of its remedies under such Pledge or the related loan
or extension of credit) that the transferee assumes by operation of law or
express agreement all of the obligations of the transferor Limited Partner under
this Agreement with respect to such transferred Partnership Interest and no such
transfer (other than pursuant to a statutory merger or consolidation wherein all
obligations and liabilities of the transferor Partner are assumed by a successor
corporation by operation of law) shall relieve the transferor Partner of its
obligations under this Agreement without the approval of the General Partner, in
its reasonable discretion. Notwithstanding the foregoing, any transferee of any
transferred Partnership Interest shall be subject to any and all ownership
limitations contained in the Declaration of Trust. Any transferee, whether or
not admitted as a Substituted Limited Partner, shall take subject to the
obligations of the transferor hereunder. Unless admitted as a Substitute Limited
Partner, no transferee, whether by a voluntary transfer, by operation of law or
otherwise, shall have rights hereunder, other than the rights of an Assignee as
provided in Section 11.5.
B. Incapacitated Limited Partners. If a Limited Partner is subject to
Incapacity, the executor, administrator, trustee, committee, guardian,
conservator or receiver of such Limited Partner's estate shall have all the
rights of a Limited Partner, but not more rights than those enjoyed by other
Limited Partners for the purpose of settling or managing the estate and such
power as the Incapacitated Limited Partner possessed to transfer all or any part
of its interest in the Partnership. The Incapacity of a Limited Partner, in and
of itself, shall not dissolve or terminate the Partnership.
C. No Transfers Violating Securities Laws. The General Partner may
prohibit any transfer of Partnership Units by a Limited Partner unless it
receives a written opinion of legal counsel (which opinion and counsel shall be
reasonably satisfactory to the Partnership) to such Limited Partner that such
transfer would not require filing of a registration statement under the
Securities Act or would not otherwise violate any federal, or state securities
laws or regulations applicable to the Partnership or the Partnership Unit or, at
the option of the Partnership, an opinion of legal counsel to the Partnership to
the same effect.
D. No Transfers Affecting Tax Status of Partnership. No transfer of
Partnership Units by a Limited Partner (including a redemption or exchange
pursuant to Section 8.6) may be made to any Person if (i) in the opinion of
legal counsel for the Partnership, it would result in the Partnership being
treated as an association taxable as a corporation for federal income tax
purposes or would result in a termination of the Partnership for federal income
tax purposes (except as a result of the redemption or exchange for Shares of all
Partnership Units held by all Limited Partners other than the General Partner or
the General Partner Entity or any Subsidiary of the General Partner or the
General Partner Entity or pursuant to a transaction expressly permitted under
Section 7.11.B or Section 11.2), (ii) in the opinion of legal counsel for the
Partnership, it would adversely affect the ability of the General Partner Entity
to continue to qualify as a REIT or would subject the General Partner Entity to
any additional taxes under Section 857 or Section 4981 of the Code or (iii) such
transfer is effectuated through an "established securities market"
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or a "secondary market (or the substantial equivalent thereof)" within the
meaning of Section 7704 of the Code (provided that this clause (iii) shall not
be the basis for limiting or restricting in any manner the exercise of the
Redemption Right under Section 8.6 unless, and only to the extent that, outside
tax counsel provides to the General Partner an opinion to the effect that, in
the absence of such limitation or restriction, there is a significant risk that
the Partnership will be treated as a "publicly traded partnership" and, by
reason thereof, taxable as a corporation).
E. No Transfers to Holders of Nonrecourse Liabilities. No Pledge or
transfer of any Partnership Units may be made to a lender to the Partnership or
any Person who is related (within the meaning of Section 1.752-4(b) of the
Regulations) to any lender to the Partnership whose loan constitutes a
Nonrecourse Liability unless (i) the General Partner is provided notice thereof
and (ii) the lender enters into an arrangement with the Partnership and the
General Partner to exchange or redeem for the Redemption Amount any Partnership
Units in which a security interest is held simultaneously with the time at which
such lender would be deemed to be a partner in the Partnership for purposes of
allocating liabilities to such lender under Section 752 of the Code.
SECTION 11.4 SUBSTITUTED LIMITED PARTNERS
A. Consent of General Partner. No Limited Partner shall have the right to
substitute a transferee as a Limited Partner in its place. The General Partner
shall, however, have the right to consent to the admission of a transferee of
the interest of a Limited Partner pursuant to this Section 11.4 as a Substituted
Limited Partner, which consent may be given or withheld by the General Partner
in its sole and absolute discretion. The General Partner's failure or refusal to
permit a transferee of any such interests to become a Substituted Limited
Partner shall not give rise to any cause of action against the Partnership or
any Partner. The General Partner hereby grants its consent to the admission as a
Substituted Limited Partner to any bona fide financial institution that loans
money or otherwise extends credit to a holder of Units and thereafter becomes
the owner of such Units pursuant to the exercise by such financial institution
of its rights under a Pledge of such Units granted in connection with such loan
or extension of credit.
B. Rights of Substituted Limited Partner. A transferee who has been
admitted as a Substituted Limited Partner in accordance with this Article XI
shall have all the rights and powers and be subject to all the restrictions and
liabilities of a Limited Partner under this Agreement. The admission of any
transferee as a Substituted Limited Partner shall be conditioned upon the
transferee executing and delivering to the Partnership an acceptance of all the
terms and conditions of this Agreement (including, without limitation, the
provisions of Section 15.11) and such other documents or instruments as may be
required to effect the admission.
C. Amendment of Exhibit A. Upon the admission of a Substituted Limited
Partner, the General Partner shall amend Exhibit A to reflect the name, address,
Capital Account, number of Partnership Units, and Percentage Interest of such
Substituted Limited Partner and to eliminate or adjust, if necessary, the name,
address, Capital Account and Percentage Interest and interest of the predecessor
of such Substituted Limited Partner.
SECTION 11.5 ASSIGNEES
If the General Partner, in its sole and absolute discretion, does not
consent to the admission of any permitted transferee under Section 11.3 as a
Substituted Limited Partner, as described in Section 11.4, such transferee shall
be considered an Assignee for purposes of this Agreement. An Assignee shall be
entitled to all the rights of an assignee of a limited partnership interest
under the Act, including the right to receive distributions from the Partnership
and the share of Net Income, Net Losses, gain, loss and Recapture Income
attributable to the Partnership Units assigned to such transferee, and shall
have the rights granted to the Limited Partners under Section 8.6, but shall not
be deemed to be a holder of Partnership Units for any other purpose under this
Agreement, and shall not be entitled to vote such Partnership Units in any
matter presented to the Limited Partners for a vote (such Partnership Units
being deemed to have been voted on such matter in the same proportion as all
other Partnership Units
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held by Limited Partners are voted). If any such transferee desires to make a
further assignment of any such Partnership Units, such transferee shall be
subject to all the provisions of this Article XI to the same extent and in the
same manner as any Limited Partner desiring to make an assignment of Partnership
Units.
SECTION 11.6 GENERAL PROVISIONS
A. Withdrawal of Limited Partner. No Limited Partner may withdraw from the
Partnership other than as a result of a permitted transfer of all of such
Limited Partner's Partnership Units in accordance with this Article XI or
pursuant to redemption of all of its Partnership Units under Section 8.6.
B. Termination of Status as Limited Partner. Any Limited Partner who shall
transfer all of its Partnership Units in a transfer permitted pursuant to this
Article XI or pursuant to redemption of all of its Partnership Units under
Section 8.6 shall cease to be a Limited Partner.
C. Timing of Transfers. Transfers pursuant to this Article XI may only be
made upon three business days prior notice, unless the General Partner otherwise
agrees.
D. Allocations. If any Partnership Interest is transferred during any
quarterly segment of the Partnership's fiscal year in compliance with the
provisions of this Article XI or redeemed or transferred pursuant to Section
8.6, Net Income, Net Losses, each item thereof and all other items attributable
to such interest for such fiscal year shall be divided and allocated between the
transferor Partner and the transferee Partner by taking into account their
varying interests during the fiscal year in accordance with Section 706(d) of
the Code, using the interim closing of the books method (unless the General
Partner, in its sole and absolute discretion, elects to adopt a daily, weekly,
or a monthly proration period, in which event Net Income, Net Losses, each item
thereof and all other items attributable to such interest for such fiscal year
shall be prorated based upon the applicable method selected by the General
Partner). Solely for purposes of making such allocations, each of such items for
the calendar month in which the transfer or redemption occurs shall be allocated
to the Person who is a Partner as of midnight on the last day of said month. All
distributions of Available Cash attributable to any Partnership Unit with
respect to which the Partnership Record Date is before the date of such
transfer, assignment or redemption shall be made to the transferor Partner or
the Redeeming Partner, as the case may be, and, in the case of a transfer or
assignment other than a redemption, all distributions of Available Cash
thereafter attributable to such Partnership Unit shall be made to the transferee
Partner.
E. Additional Restrictions. In addition to any other restrictions on
transfer herein contained, including without limitation the provisions of this
Article XI, in no event may any transfer or assignment of a Partnership Interest
by any Partner (including pursuant to Section 8.6) be made without the express
consent of the General Partner, in its sole and absolute discretion, (i) to any
person or entity who lacks the legal right, power or capacity to own a
Partnership Interest; (ii) in violation of applicable law; (iii) of any
component portion of a Partnership Interest, such as the Capital Account, or
rights to distributions, separate and apart from all other components of a
Partnership Interest; (iv) if in the opinion of legal counsel to the Partnership
such transfer would cause a termination of the Partnership for federal or state
income tax purposes (except as a result of the redemption or exchange for Shares
of all Partnership Units held by all Limited Partners or pursuant to a
transaction expressly permitted under Section 7.11.B or Section 11.2); (v) if in
the opinion of counsel to the Partnership, such transfer would cause the
Partnership to cease to be classified as a partnership for federal income tax
purposes (except as a result of the redemption or exchange for Shares of all
Partnership Units held by all Limited Partners or pursuant to a transaction
expressly permitted under Section 7.11.B or Section 11.2); (vi) if such transfer
would cause the Partnership Interests of "benefit plan investors" to become
"significant," as those terms are used in Section 7.9.E., or would cause the
Partnership to become, with respect to any employee benefit plan subject to
Title I of ERISA, a "party-in-interest" (as defined in Section 3(14) of ERISA)
or a "disqualified person" (as defined in Section 4975(c) of the Code); (vii) if
such transfer would, in the opinion of counsel to the Partnership, cause any
portion of the assets of the Partnership to constitute assets of any employee
benefit plan pursuant to Department of Labor Regulations Section 2510.1-101;
(viii) if
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such transfer requires the registration of such Partnership Interest pursuant to
any applicable federal or state securities laws; (ix) if such transfer is
effectuated through an "established securities market" or a "secondary market"
(or the substantial equivalent thereof) within the meaning of Section 7704 of
the Code or such transfer causes the Partnership to become a "publicly traded
partnership," as such term is defined in Section 469(k)(2) or Section 7704(b) of
the Code (provided that this clause (ix) shall not be the basis for limiting or
restricting in any manner the exercise of the Redemption Right under Section 8.6
unless, and only to the extent that, outside tax counsel provides to the General
Partner an opinion to the effect that, in the absence of such limitation or
restriction, there is a significant risk that the Partnership will be treated as
a "publicly traded partnership" and, by reason thereof, taxable as a
corporation); (x) if such transfer subjects the Partnership to regulation under
the Investment Company Act of 1940, the Investment Advisors Act of 1940 or
ERISA, each as amended; (xi) such transfer could adversely affect the ability of
the General Partner Entity to remain qualified as a REIT; or (xii) if in the
opinion of legal counsel for the transferring Partner (which opinion and counsel
shall be reasonably satisfactory to the Partnership) or legal counsel for the
Partnership, such transfer would adversely affect the ability of the General
Partner Entity to qualify as a REIT or subject the General Partner Entity to any
taxes under Section 857 or Section 4981 of the Code.
F. Avoidance of "Publicly Traded Partnership" Status. The General Partner
shall monitor the transfers of interests in the Partnership to determine (i) if
such interests are being traded on an "established securities market" or a
"secondary market (or the substantial equivalent thereof)" within the meaning of
Section 7704 of the Code and (ii) whether additional transfers of interests
would result in the Partnership being unable to qualify for at least one of the
"safe harbors" set forth in Regulations Section 1.7704-1 (or such other guidance
subsequently published by the IRS setting forth safe harbors under which
interests will not be treated as "readily tradable on a secondary market (or the
substantial equivalent thereof)" within the meaning of Section 7704 of the Code)
(the "Safe Harbors"). The General Partner shall take all steps reasonably
necessary or appropriate to prevent any trading of interests or any recognition
by the Partnership of transfers made on such markets and, except as otherwise
provided herein, to insure that at least one of the Safe Harbors is met;
provided, however, that the foregoing shall not authorize the General Partner to
limit or restrict in any manner the right of any holder of a Partnership Unit to
exercise the Redemption Right in accordance with the terms of Section 8.6
unless, and only to the extent that, outside tax counsel provides to the General
Partner an opinion to the effect that, in the absence of such limitation or
restriction, there is a significant risk that the Partnership will be treated as
a "publicly traded partnership" and, by reason thereof, taxable as a
corporation.
ARTICLE XII
ADMISSION OF PARTNERS
SECTION 12.1 ADMISSION OF A SUCCESSOR GENERAL PARTNER
A successor to all of the General Partner's General Partnership Interest
pursuant to Section 11.2 who is proposed to be admitted as a successor General
Partner shall be admitted to the Partnership as the General Partner, effective
upon such transfer. Any such successor shall carry on the business of the
Partnership without dissolution. In such case, the admission shall be subject to
such successor General Partner executing and delivering to the Partnership an
acceptance of all of the terms and conditions of this Agreement and such other
documents or instruments as may be required to effect the admission.
SECTION 12.2 ADMISSION OF ADDITIONAL LIMITED PARTNERS
A. General. No Person shall be admitted as an Additional Limited Partner
without the consent of the General Partner, which consent shall be given or
withheld in the General Partner's sole and absolute discretion. A Person who
makes a Capital Contribution to the Partnership in accordance with this
Agreement, including without limitation, under Section 4.1.C, or who exercises
an option to receive Partnership Units shall be admitted to the Partnership as
an Additional Limited Partner only with the
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consent of the General Partner and only upon furnishing to the General Partner
(i) evidence of acceptance in form satisfactory to the General Partner of all of
the terms and conditions of this Agreement, including, without limitation, the
power of attorney granted in Section 15.11 and (ii) such other documents or
instruments as may be required in the discretion of the General Partner to
effect such Person's admission as an Additional Limited Partner. The admission
of any Person as an Additional Limited Partner shall become effective on the
date upon which the name of such Person is recorded on the books and records of
the Partnership, following the consent of the General Partner to such admission.
B. Allocations to Additional Limited Partners. If any Additional Limited
Partner is admitted to the Partnership on any day other than the first day of a
Partnership Year, then Net Income, Net Losses, each item thereof and all other
items allocable among Partners and Assignees for such Partnership Year shall be
allocated among such Additional Limited Partner and all other Partners and
Assignees by taking into account their varying interests during the Partnership
Year in accordance with Section 706(d) of the Code, using the interim closing of
the books method (unless the General Partner, in its sole and absolute
discretion, elects to adopt a daily, weekly or monthly proration method, in
which event Net Income, Net Losses, and each item thereof would be prorated
based upon the applicable period selected by the General Partner). Solely for
purposes of making such allocations, each of such items for the calendar month
in which an admission of any Additional Limited Partner occurs shall be
allocated among all the Partners and Assignees including such Additional Limited
Partner. All distributions of Available Cash with respect to which the
Partnership Record Date is before the date of such admission shall be made
solely to Partners and Assignees other than the Additional Limited Partner, and
all distributions of Available Cash thereafter shall be made to all the Partners
and Assignees including such Additional Limited Partner.
SECTION 12.3 AMENDMENT OF AGREEMENT AND CERTIFICATE OF LIMITED PARTNERSHIP
For the admission to the Partnership of any Partner, the General Partner
shall take all steps necessary and appropriate under the Act to amend the
records of the Partnership and, if necessary, to prepare as soon as practical an
amendment of this Agreement (including an amendment of Exhibit A) and, if
required by law, shall prepare and file an amendment to the Certificate and may
for this purpose exercise the power of attorney granted pursuant to Section
15.11 hereof.
ARTICLE XIII
DISSOLUTION AND LIQUIDATION
SECTION 13.1 DISSOLUTION
The Partnership shall not be dissolved by the admission of Substituted
Limited Partners or Additional Limited Partners or by the admission of a
successor General Partner in accordance with the terms of this Agreement. Upon
the withdrawal of the General Partner, any successor General Partner shall
continue the business of the Partnership. The Partnership shall dissolve, and
its affairs shall be wound up, upon the first to occur of any of the following
("Liquidating Events"):
(i) the expiration of its term as provided in Section 2.4 hereof;
(ii) an event of withdrawal of the General Partner, as defined in the
Act (other than an event of bankruptcy), unless within ninety (90) days
after the withdrawal a "majority in interest" (as defined below) of the
remaining Partners Consent in writing to continue the business of the
Partnership and to the appointment, effective as of the date of withdrawal,
of a substitute General Partner;
(iii) through December 31, 2046, an election to dissolve the
Partnership made by the General Partner with the consent of Limited
Partners who hold ninety percent (90%) of the outstanding Units held by
Limited Partners (including Units held by the General Partner);
(iv) an election to dissolve the Partnership made by the General
Partner, in its sole and absolute discretion after December 31, 2046;
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(v) entry of a decree of judicial dissolution of the Partnership
pursuant to the provisions of the Act;
(vi) the sale of all or substantially all of the assets and properties
of the Partnership for cash or for marketable securities; or
(vii) a final and non-appealable judgment is entered by a court of
competent jurisdiction ruling that the General Partner is bankrupt or
insolvent, or a final and non-appealable order for relief is entered by a
court with appropriate jurisdiction against the General Partner, in each
case under any federal or state bankruptcy or insolvency laws as now or
hereafter in effect, unless prior to or at the time of the entry of such
order or judgment a "majority in interest" (as defined below) of the
remaining Partners Consent in writing to continue the business of the
Partnership and to the appointment, effective as of a date prior to the
date of such order or judgment, of a substitute General Partner.
As used herein, a "majority in interest" shall refer to Partners (excluding
the General Partner) who hold more than fifty percent (50%) of the outstanding
Percentage Interests not held by the General Partner.
SECTION 13.2 WINDING UP
A. General. Upon the occurrence of a Liquidating Event, the Partnership
shall continue solely for the purposes of winding up its affairs in an orderly
manner, liquidating its assets, and satisfying the claims of its creditors and
Partners. No Partner shall take any action that is inconsistent with, or not
necessary to or appropriate for, the winding up of the Partnership's business
and affairs. The General Partner (or, if there is no remaining General Partner,
any Person elected by a majority in interest of the Limited Partners (the
"Liquidator")) shall be responsible for overseeing the winding up and
dissolution of the Partnership and shall take full account of the Partnership's
liabilities and property and the Partnership property shall be liquidated as
promptly as is consistent with obtaining the fair value thereof, and the
proceeds therefrom (which may, to the extent determined by the General Partner,
include equity or other securities of the General Partner or any other entity)
shall be applied and distributed in the following order:
(1) First, to the payment and discharge of all of the Partnership's
debts and liabilities to creditors other than the Partners;
(2) Second, to the payment and discharge of all of the Partnership's
debts and liabilities to the General Partner;
(3) Third, to the payment and discharge of all of the Partnership's
debts and liabilities to the Limited Partners;
(4) Fourth, to the holders of Partnership Interests that are entitled
to any preference in distribution upon liquidation in accordance with the
rights of any such class or series of Partnership Interests, including
without limitation, Series A Preferred Units, Series B Preferred Units, and
Series C Preferred Units (and, within each such class or series, to each
holder thereof pro rata based on the proportion of the total number of
outstanding units of such class or series represented by such holder's
units of such series or class); and
(5) The balance, if any, to the Partners in accordance with their
Capital Accounts, after giving effect to all contributions, distributions,
and allocations for all periods.
The General Partner shall not receive any additional compensation for any
services performed pursuant to this Article XIII.
B. Deferred Liquidation. Notwithstanding the provisions of Section 13.2.A
which require liquidation of the assets of the Partnership, but subject to the
order of priorities set forth therein, if prior to or upon dissolution of the
Partnership the Liquidator determines that an immediate sale of part or all of
the Partnership's assets would be impractical or would cause undue loss to the
Partners, the Liquidator may,
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in its sole and absolute discretion, defer for a reasonable time the liquidation
of any assets except those necessary to satisfy liabilities of the Partnership
(including to those Partners as creditors) or distribute to the Partners, in
lieu of cash, as tenants in common and in accordance with the provisions of
Section 13.2.A, undivided interests in such Partnership assets as the Liquidator
deems not suitable for liquidation. Any such distributions in kind shall be made
only if, in the good faith judgment of the Liquidator, such distributions in
kind are in the best interest of the Partners, and shall be subject to such
conditions relating to the disposition and management of such properties as the
Liquidator deems reasonable and equitable and to any agreements governing the
operation of such properties at such time. The Liquidator shall determine the
fair market value of any property distributed in kind using such reasonable
method of valuation as it may adopt.
SECTION 13.3 COMPLIANCE WITH TIMING REQUIREMENTS OF REGULATIONS; RESTORATION OF
DEFICIT CAPITAL ACCOUNTS
A. Timing of Distributions. If the Partnership is "liquidated" within the
meaning of Regulations Section 1.704-1(b)(2)(ii)(g), distributions shall be made
under this Article XIII to the General Partner and Limited Partners who have
positive Capital Accounts in compliance with Regulations Section
1.704-1(b)(2)(ii)(b)(2). In the discretion of the General Partner, a pro rata
portion of the distributions that would otherwise be made to the General Partner
and Limited Partners pursuant to this Article XIII may be: (A) distributed to a
trust established for the benefit of the General Partner and Limited Partners
for the purposes of liquidating Partnership assets, collecting amounts owed to
the Partnership and paying any contingent or unforeseen liabilities or
obligations of the Partnership or of the General Partner arising out of or in
connection with the Partnership (in which case the assets of any such trust
shall be distributed to the General Partner and Limited Partners from time to
time, in the reasonable discretion of the General Partner, in the same
proportions as the amount distributed to such trust by the Partnership would
otherwise have been distributed to the General Partner and Limited Partners
pursuant to this Agreement); or (B) withheld to provide a reasonable reserve for
Partnership liabilities (contingent or otherwise) and to reflect the unrealized
portion of any installment obligations owed to the Partnership, provided that
such withheld amounts shall be distributed to the General Partner and Limited
Partners as soon as practicable.
B. Restoration of Deficit Capital Accounts Upon Liquidation of the
Partnership. If any Partner has a deficit balance in its Capital Account (after
giving effect to all contributions, distributions and allocations for all
taxable years, including the year during which such liquidation occurs), such
Partner shall have no obligation to make any contribution to the capital of the
Partnership with respect to such deficit, and such deficit shall not be
considered a debt owed to the Partnership or to any other Person for any purpose
whatsoever, except as otherwise set forth in this Section 13.3.B, or as
otherwise expressly agreed in writing by the affected Partner and the
Partnership after the date hereof. Notwithstanding the foregoing, (i) if the
General Partner has a deficit balance in its Capital Account (after giving
effect to all contributions, distributions, and allocations for all Partnership
Years or portions thereof, including the year during which such liquidation
occurs), the General Partner shall contribute to the capital of the Partnership
the amount necessary to restore such deficit balance to zero in compliance with
Regulations Section 1.704-1(b)(2)(ii)(b)(3); (ii) if a Protected Partner has a
deficit balance in its Capital Account (after giving effect to all
contributions, distributions, and allocations for all Partnership Years or
portions thereof, including the year during which such liquidation occurs), such
Protected Partner shall be obligated to make a contribution to the Partnership
with respect to any such deficit balance in such Protected Partner's Capital
Account upon a liquidation of the Partnership in an amount equal to the lesser
of such deficit balance or such Protected Partner's Protected Amount; and (iii)
the first sentence of this Section 13.3.B shall not apply with respect to any
other Partner to the extent, but only to such extent, that such Partner
previously has agreed in writing, with the consent of the General Partner, to
undertake an express obligation to restore all or any portion of a deficit that
may exist in its Capital Account upon a liquidation of the Partnership
(including, without limitations, those Partners who have undertaken "deficit
restoration obligations" as defined in Exhibit E). No Limited Partner shall have
any right to become a Protected Partner, to increase its Protected Amount, or
otherwise agree to restore any portion of any
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deficit that may exist in its Capital Account, except, and only to the extent,
provided in Exhibits E-1 through E-6 (or the agreements described therein),
without the express written consent of the General Partners, in its sole and
absolute discretion. Any contribution required of a Partner under this Section
13.3.B. shall be made on or before the later of (i) the end of the Partnership
Year in which the interest is liquidated or (ii) the ninetieth (90th) day
following the date of such liquidation. The proceeds of any contribution to the
Partnership made by a Protected Partner with respect to a deficit in such
Protected Partner's Capital Account balance shall be treated as a Capital
Contribution by such Protected Partner and the proceeds thereof shall be treated
as assets of the Partnership to be applied as set forth in Section 13.2.A.
C. Restoration of Deficit Capital Accounts Upon a Liquidation of a
Partner's Interest by Transfer. If a Protected Partner's interest in the
Partnership is "liquidated" within the meaning of Regulations Section
1.704-1(b)(2)(ii)(g) (other than in connection with a liquidation of the
Partnership) which term shall include a redemption by the Partnership of such
Protected Partner's interest upon exercise of the Redemption Right, and such
Protected Partner is designated on Exhibit E as Part II Protected Partner, such
Protected Partner shall be required to contribute cash to the Partnership equal
to the lesser of (i) the amount required to increase its Capital Account balance
as of such date to zero, or (ii) such Protected Partner's Protected Amount. For
this purpose, (i) the Protected Partner's deficit Capital Account balance shall
be determined by taking into account all contributions, distributions, and
allocations for the portion of the Partnership Year ending on the date of the
liquidation or redemption, and (ii) solely for purposes of determining such
Protected Partner's Capital Account balance, the General Partner shall
redetermine the Carrying Value of the Partnership's assets on such date based
upon the principles set forth in Sections 1.D.(3) and (4) of Exhibit B hereto,
and shall take into account the Protected Partner's allocable share of any
Unrealized Gain or Unrealized Loss resulting from such redetermination in
determining the balance of its Capital Account. The amount of any payment
required hereunder shall be due and payable within the time period specified in
the second to last sentence of Section 13.3.B.
D. Effect of the Death of a Protected Partner. After the death of a
Protected Partner who is an individual, the executor of the estate of such
Protected Partner may elect to reduce (or eliminate) the Protected Amount of
such Protected Partner. Such elections may be made by such executor by
delivering to the General Partner within two hundred and seventy (270) days of
the death of such Limited Partner, a written notice setting forth the maximum
deficit balance in its Capital Account that such executor agrees to restore
under this Section 13.3, if any. If such executor does not make a timely
election pursuant to this Section 13.3 (whether or not the balance in the
applicable Capital Account is negative at such time), then the Protected
Partner's estate (and the beneficiaries thereof who receive distributions of
Partnership Interests therefrom) shall be deemed a Protected Partner with a
Protected Amount in the same amount as the deceased Protected Partner. Any
Protected Partner which itself is a partnership may likewise elect, after the
date of its partner's death to reduce (or eliminate) its Protected Amount by
delivering a similar notice to the General Partner within the time period
specified above, and in the absence of any such notice the Protected Amount of
such Protected Partner shall not be reduced to reflect the death of any of its
partners.
SECTION 13.4 RIGHTS OF LIMITED PARTNERS
Except as otherwise provided in this Agreement, each Limited Partner shall
look solely to the assets of the Partnership for the return of its Capital
Contributions and shall have no right or power to demand or receive property
other than cash from the Partnership. Except as otherwise expressly provided in
this Agreement, no Limited Partner shall have priority over any other Limited
Partner as to the return of its Capital Contributions, distributions, or
allocations.
SECTION 13.5 NOTICE OF DISSOLUTION
If a Liquidating Event occurs or an event occurs that would, but for
provisions of an election or objection by one or more Partners pursuant to
Section 13.1, result in a dissolution of the Partnership, the General Partner
shall, within thirty (30) days thereafter, provide written notice thereof to
each of the
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Partners and to all other parties with whom the Partnership regularly conducts
business (as determined in the discretion of the General Partner).
SECTION 13.6 CANCELLATION OF CERTIFICATE OF LIMITED PARTNERSHIP
Upon the completion of the liquidation of the Partnership cash and property
as provided in Section 13.2, the Partnership shall be terminated and the
Certificate and all qualifications of the Partnership as a foreign limited
partnership in jurisdictions other than the State of Delaware shall be canceled
and such other actions as may be necessary to terminate the Partnership shall be
taken.
SECTION 13.7 REASONABLE TIME FOR WINDING UP
A reasonable time shall be allowed for the orderly winding up of the
business and affairs of the Partnership and the liquidation of its assets
pursuant to Section 13.2, to minimize any losses otherwise attendant upon such
winding-up, and the provisions of this Agreement shall remain in effect among
the Partners during the period of liquidation.
SECTION 13.8 WAIVER OF PARTITION
Each Partner hereby waives any right to partition of the Partnership
property.
SECTION 13.9 LIABILITY OF LIQUIDATOR
The Liquidator shall be indemnified and held harmless by the Partnership in
the same manner and to the same degree as an Indemnitee may be indemnified
pursuant to Section 7.7.
ARTICLE XIV
AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS
SECTION 14.1 AMENDMENTS
A. General. Amendments to this Agreement may be proposed by the General
Partner or by any Limited Partners holding twenty-five percent (25%) or more of
the Partnership Interests. Following such proposal (except an amendment pursuant
to Section 14.1.B), the General Partner shall submit any proposed amendment to
the Limited Partners. The General Partner shall seek the written vote of the
Partners on the proposed amendment or shall call a meeting to vote thereon and
to transact any other business that it may deem appropriate. For purposes of
obtaining a written vote, the General Partner may require a response within a
reasonable specified time, but not less than fifteen (15) days, and failure to
respond in such time period shall constitute a vote which is consistent with the
General Partner's recommendation with respect to the proposal. Except as
provided in Section 14.1.B, 14.1.C or 14.1.D, a proposed amendment shall be
adopted and be effective as an amendment hereto if it is approved by the General
Partner and it receives the Consent of Partners holding a majority of the
Percentage Interests of the Limited Partners (including Limited Partnership
Interests held by the General Partner).
B. Amendments Not Requiring Limited Partner Approval. Notwithstanding
Section 14.1.A or 14.1.C, the General Partner shall have the power, without the
consent of the Limited Partners, to amend this Agreement as may be required to
facilitate or implement any of the following purposes:
(1) to add to the obligations of the General Partner or surrender any
right or power granted to the General Partner or any Affiliate of the
General Partner for the benefit of the Limited Partners;
(2) to reflect the admission, substitution, termination, or withdrawal
of Partners in accordance with this Agreement (which may be effected
through the replacement of Exhibit A with an amended Exhibit A);
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(3) to set forth the designations, rights, powers, duties, and
preferences of the holders of any additional Partnership Interests issued
pursuant to Article IV;
(4) to reflect a change that does not adversely affect the Limited
Partners in any material respect, or to cure any ambiguity, correct or
supplement any provision in this Agreement not inconsistent with law or
with other provisions of this Agreement, or make other changes with respect
to matters arising under this Agreement that will not be inconsistent with
law or with the provisions of this Agreement; and
(5) to satisfy any requirements, conditions, or guidelines contained
in any order, directive, opinion, ruling or regulation of a federal, state
or local agency or contained in federal, state or local law.
The General Partner shall notify the Limited Partners when any action under
this Section 14.1.B is taken in the next regular communication to the Limited
Partners; provided, however, that no notice need be given of any amendment of
this Agreement to reflect the admission, substitution, termination, or
withdrawal of Partners in accordance with this Agreement (whether or not
effected through the replacement of Exhibit A with an amended Exhibit A). For
purposes of the immediately preceding sentence, notwithstanding any other means
by which the General Partner may provide any such notice to the Limited
Partners, such notice requirement shall be deemed to have been satisfied upon
the filing with the Securities and Exchange Commission by the Partnership of any
amendment to this Agreement permitted under this Section 14.1.B as an exhibit to
(i) a registration statement filed by the Partnership under the Securities Act
or (ii) any report or other document filed by the Partnership under the Exchange
Act.
C. Amendments Requiring Limited Partner Approval (Excluding the General
Partner). Notwithstanding Section 14.1.A, without the Consent of the Outside
Limited Partners, the General Partner shall not amend Section 4.2.A, Section
5.1.E, Section 7.1.A (second sentence only), Section 7.5, Section 7.6, Section
7.8, Section 7.11.B, Section 11.2, Section 13.1 (other than Section 13.1(iii)
which can be amended only with a Consent of 90% of the Partnership Units
(including Partnership Units held by the General Partner)), the last sentence of
Section 11.4.A (provided that no such amendment shall in any event adversely
affect the rights of any lender who made a loan or who extended credit and
received in connection therewith a Pledge of Units prior to the date such
amendment is adopted unless, and only to the extent such lender consents
thereto), this Section 14.1.C or Section 14.2.
D. Other Amendments Requiring Certain Limited Partner
Approval. Notwithstanding anything in this Section 14.1 to the contrary, this
Agreement shall not be amended with respect to any Partner adversely affected
without the Consent of such Partner, or any Assignee who is a bona fide
financial institution that loans money or otherwise extends credit to a holder
of Units, adversely affected if such amendment would (i) convert a Limited
Partner's interest in the Partnership into a general partner's interest, (ii)
modify the limited liability of a Limited Partner, (iii) amend Section 7.11.A,
(iv) amend Article V or Article VI (except as permitted pursuant to Sections
4.2, 5.1.E, 5.4, 6.2 and 14.1(B)(3)), (v) amend Section 8.6 or any defined terms
set forth in Article I that relate to the Redemption Right (except as permitted
in Section 8.6.E), or (vi) amend Sections 11.3 or 11.5, or any additional
restrictions from Section 11.6.E or amend Sections 14.1.B(4) or 14.1.D. This
Section 14.1.D does not require unanimous consent of all Partners adversely
affected unless the amendment is to be effective against all Partners adversely
affected.
SECTION 14.2 MEETINGS OF THE PARTNERS
A. General. Meetings of the Partners may be called by the General Partner
and shall be called upon the receipt by the General Partner of a written request
by Limited Partners holding twenty-five percent (25%) or more of the Partnership
Interests. The call shall state the nature of the business to be transacted.
Notice of any such meeting shall be given to all Partners not less than seven
(7) days nor more than thirty (30) days prior to the date of such meeting.
Partners may vote in person or by proxy at such meeting. Whenever the vote or
Consent of Partners is permitted or required under this Agreement,
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such vote or Consent may be given at a meeting of Partners or may be given in
accordance with the procedure prescribed in Section 14.1.A. Except as otherwise
expressly provided in this Agreement, the Consent of holders of a majority of
the Percentage Interests held by Limited Partners (including Limited Partnership
Interests held by the General Partner) shall control.
B. Actions Without a Meeting. Any action required or permitted to be taken
at a meeting of the Partners may be taken without a meeting if a written consent
setting forth the action so taken is signed by a majority of the Percentage
Interests of the Partners (or such other percentage as is expressly required by
this Agreement). Such consent may be in one instrument or in several
instruments, and shall have the same force and effect as a vote of a majority of
the Percentage Interests of the Partners (or such other percentage as is
expressly required by this Agreement). Such consent shall be filed with the
General Partner. An action so taken shall be deemed to have been taken at a
meeting held on the effective date so certified.
C. Proxy. Each Limited Partner may authorize any Person or Persons to act
for him by proxy on all matters in which a Limited Partner is entitled to
participate, including waiving notice of any meeting, or voting or participating
at a meeting. Every proxy must be signed by the Limited Partner or its
attorney-in-fact. No proxy shall be valid after the expiration of eleven (11)
months from the date thereof unless otherwise provided in the proxy. Every proxy
shall be revocable at the pleasure of the Limited Partner executing it, such
revocation to be effective upon the Partnership's receipt of written notice
thereof.
D. Conduct of Meeting. Each meeting of Partners shall be conducted by the
General Partner or such other Person as the General Partner may appoint pursuant
to such rules for the conduct of the meeting as the General Partner or such
other Person deem appropriate.
ARTICLE XV
GENERAL PROVISIONS
SECTION 15.1 ADDRESSES AND NOTICE
Any notice, demand, request or report required or permitted to be given or
made to a Partner or Assignee under this Agreement shall be in writing and shall
be deemed given or made when delivered in person or when sent by first class
United States mail or by other means of written communication to the Partner or
Assignee at the address set forth in Exhibit A or such other address as the
Partners shall notify the General Partner in writing.
SECTION 15.2 TITLES AND CAPTIONS
All article or section titles or captions in this Agreement are for
convenience only. They shall not be deemed part of this Agreement and in no way
define, limit, extend or describe the scope or intent of any provisions hereof.
Except as specifically provided otherwise, references to "Articles" "Sections"
and "Exhibits" are to Articles, Sections and Exhibits of this Agreement.
SECTION 15.3 PRONOUNS AND PLURALS
Whenever the context may require, any pronoun used in this Agreement shall
include the corresponding masculine, feminine or neuter forms, and the singular
form of nouns, pronouns and verbs shall include the plural and vice versa.
SECTION 15.4 FURTHER ACTION
The parties shall execute and deliver all documents, provide all
information and take or refrain from taking action as may be necessary or
appropriate to achieve the purposes of this Agreement.
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<PAGE> 381
SECTION 15.5 BINDING EFFECT
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their heirs, executors, administrators, successors, legal
representatives and permitted assigns.
SECTION 15.6 CREDITORS
Other than as expressly set forth herein with regard to any Indemnitee,
none of the provisions of this Agreement shall be for the benefit of, or shall
be enforceable by, any creditor of the Partnership.
SECTION 15.7 WAIVER
No failure by any party to insist upon the strict performance of any
covenant, duty, agreement or condition of this Agreement or to exercise any
right or remedy consequent upon a breach thereof shall constitute waiver of any
such breach or any other covenant, duty, agreement or condition.
SECTION 15.8 COUNTERPARTS
This Agreement may be executed in counterparts, all of which together shall
constitute one agreement binding on all the parties hereto, notwithstanding that
all such parties are not signatories to the original or the same counterpart.
Each party shall become bound by this Agreement immediately upon affixing its
signature hereto.
SECTION 15.9 APPLICABLE LAW
This Agreement shall be construed and enforced in accordance with and
governed by the laws of the State of Delaware, without regard to the principles
of conflicts of law.
SECTION 15.10 INVALIDITY OF PROVISIONS
If any provision of this Agreement is or becomes invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein shall not be affected thereby.
SECTION 15.11 POWER OF ATTORNEY
A. General. Each Limited Partner and each Assignee who accepts Partnership
Units (or any rights, benefits or privileges associated therewith) is deemed to
irrevocably constitute and appoint the General Partner, any Liquidator and
authorized officers and attorneys-in-fact of each, and each of those acting
singly, in each case with full power of substitution, as its true and lawful
agent and attorney-in-fact, with full power and authority in its name, place and
stead to:
(1) execute, swear to, acknowledge, deliver, file and record in the
appropriate public offices (a) all certificates, documents and other
instruments (including, without limitation, this Agreement and the
Certificate and all amendments or restatements thereof) that the General
Partner or any Liquidator deems appropriate or necessary to form, qualify
or continue the existence or qualification of the Partnership as a limited
partnership (or a partnership in which the limited partners have limited
liability) in the State of Delaware and in all other jurisdictions in which
the Partnership may conduct business or own property, (b) all instruments
that the General Partner or any Liquidator deem appropriate or necessary to
reflect any amendment, change, modification or restatement of this
Agreement in accordance with its terms, (c) all conveyances and other
instruments or documents that the General Partner or any Liquidator deems
appropriate or necessary to reflect the dissolution and liquidation of the
Partnership pursuant to the terms of this Agreement, including, without
limitation, a certificate of cancellation, (d) all instruments relating to
the admission, withdrawal, removal or substitution of any Partner pursuant
to, or other events described in, Article XI, XII or XIII hereof or the
Capital Contribution of any Partner and (e) all certificates, documents and
other instruments relating to the determination of the rights, preferences
and privileges of Partnership Interests; and
E-51
<PAGE> 382
(2) execute, swear to, acknowledge and file all ballots, consents,
approvals, waivers, certificates and other instruments appropriate or
necessary, in the sole and absolute discretion of the General Partner or
any Liquidator, to make, evidence, give, confirm or ratify any vote,
consent, approval, agreement or other action which is made or given by the
Partners hereunder or is consistent with the terms of this Agreement or
appropriate or necessary, in the sole discretion of the General Partner or
any Liquidator, to effectuate the terms or intent of this Agreement.
Nothing contained in this Section 15.11 shall be construed as authorizing
the General Partner or any Liquidator to amend this Agreement except in
accordance with Article XIV hereof or as may be otherwise expressly provided for
in this Agreement.
B. Irrevocable Nature. The foregoing power of attorney is hereby declared
to be irrevocable and a power coupled with an interest, in recognition of the
fact that each of the Partners will be relying upon the power of the General
Partner or any Liquidator to act as contemplated by this Agreement in any filing
or other action by it on behalf of the Partnership, and it shall survive and not
be affected by the subsequent Incapacity of any Limited Partner or Assignee and
the transfer of all or any portion of such Limited Partner's or Assignee's
Partnership Units and shall extend to such Limited Partner's or Assignee's
heirs, successors, assigns and personal representatives. Each such Limited
Partner or Assignee hereby agrees to be bound by any representation made by the
General Partner or any Liquidator, acting in good faith pursuant to such power
of attorney; and each such Limited Partner or Assignee hereby waives any and all
defenses which may be available to contest, negate or disaffirm the action of
the General Partner or any Liquidator, taken in good faith under such power of
attorney. Each Limited Partner or Assignee shall execute and deliver to the
General Partner or the Liquidator, within fifteen (15) days after receipt of the
General Partner's or Liquidator's request therefor, such further designation,
powers of attorney and other instruments as the General Partner or the
Liquidator, as the case may be, deems necessary to effectuate this Agreement and
the purposes of the Partnership.
SECTION 15.12 ENTIRE AGREEMENT
This Agreement contains the entire understanding and agreement among the
Partners with respect to the subject matter hereof and supersedes any prior
written oral understandings or agreements among them with respect thereto.
SECTION 15.13 NO RIGHTS AS SHAREHOLDERS
Nothing contained in this Agreement shall be construed as conferring upon
the holders of the Partnership Units any rights whatsoever as shareholders of
the General Partner, including, without limitation, any right to receive
dividends or other distributions made to shareholders of the General Partner or
to vote or to consent or receive notice as shareholders in respect to any
meeting of shareholders for the election of trustees of the General Partner or
any other matter.
SECTION 15.14 LIMITATION TO PRESERVE REIT STATUS
To the extent that any amount paid or credited to the General Partner or
any of its officers, trustees, employees or agents pursuant to Section 7.4 or
Section 7.7 would constitute gross income to the General Partner for purposes of
Section 856(c)(2) or 856(c)(3) of the Code (a "General Partner Payment") then,
notwithstanding any other provision of this Agreement, the amount of such
General Partner Payment for any fiscal year shall not exceed the lesser of:
(i) an amount equal to the excess, if any, of (a) 4.20% of the General
Partner's total gross income (but not including the amount of any General
Partner Payments) for the fiscal year which is described in subsections (A)
though (H) of Section 856(c)(2) of the Code over (b) the amount of gross
income (within the meaning of Section 856(c)(2) of the Code) derived by the
General Partner from sources other than those described in subsections (A)
through (H) of Section 856(c)(2) of the Code (but not including the amount
of any General Partner Payments); or
E-52
<PAGE> 383
(ii) an amount equal to the excess, if any of (a) 25% of the General
Partner's total gross income (but not including the amount of any General
Partner Payments) for the fiscal year which is described in subsections (A)
through (I) of Section 856(c)(3) of the Code over (b) the amount of gross
income (within the meaning of Section 856(c)(3) of the Code) derived by the
General Partner from sources other than those described in subsections (A)
through (I) of Section 856(c)(3) of the Code (but not including the amount
of any General Partner Payments); provided, however, that General Partner
Payments in excess of the amounts set forth in subparagraphs (i) and (ii)
above may be made if the General Partner, as a condition precedent, obtains
an opinion of tax counsel that the receipt of such excess amounts would not
adversely affect the General Partner's ability to qualify as a REIT. To the
extent General Partner Payments may not be made in a year due to the
foregoing limitations, such General Partner Payments shall carry over and
be treated as arising in the following year, provided, however, that such
amounts shall not carry over for more than five years, and if not paid
within such five year period, shall expire; provided further, that (i) as
General Partner Payments are made, such payments shall be applied first to
carry over amounts outstanding, if any, and (ii) with respect to carry over
amounts for more than one Partnership Year, such payments shall be applied
to the earliest Partnership Year first.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
GENERAL PARTNER:
EQUITY OFFICE PROPERTIES TRUST
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
LIMITED PARTNERS:
By: Equity Office Properties Trust,
as Attorney-in-Fact for the
Limited Partners
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
For purposes of Section 8.6 hereof:
EQUITY OFFICE PROPERTIES TRUST
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
E-53
<PAGE> 384
EXHIBIT A
PARTNERS AND PARTNERSHIP INTERESTS
<TABLE>
<CAPTION>
CLASS A AND CLASS B UNITS
-------------------------------------
INITIAL
PARTNERSHIP CAPITAL PERCENTAGE
NAME AND ADDRESS OF PARTNER UNITS ACCOUNT INTEREST (4)
--------------------------- ----------- -------- ------------
<S> <C> <C> <C>
GENERAL PARTNER:
Equity Office Properties Trust
Two North Riverside Plaza
Suite 2200
Chicago, Illinois 60606
LIMITED PARTNERS:
TOTAL CLASS A AND CLASS B UNITS............................. 100.00000%
=========
</TABLE>
<TABLE>
<CAPTION>
SERIES A PREFERRED UNITS
------------------------------------
INITIAL
PARTNERSHIP CAPITAL PERCENTAGE
NAME AND ADDRESS OF PARTNER UNITS ACCOUNT INTEREST(4)
--------------------------- ----------- -------- -----------
<S> <C> <C> <C>
TOTAL SERIES A PREFERRED UNITS.............................. 100.00000%
=========
</TABLE>
<TABLE>
<CAPTION>
SERIES B PREFERRED UNITS
------------------------------------
INITIAL
PARTNERSHIP CAPITAL PERCENTAGE
NAME AND ADDRESS OF PARTNER UNITS ACCOUNT INTEREST(4)
--------------------------- ----------- -------- -----------
<S> <C> <C> <C>
TOTAL SERIES B PREFERRED UNITS.............................. 100.00000%
=========
</TABLE>
<TABLE>
<CAPTION>
SERIES C PREFERRED UNITS
------------------------------------
INITIAL
PARTNERSHIP CAPITAL PERCENTAGE
NAME AND ADDRESS OF PARTNER UNITS ACCOUNT INTEREST(4)
--------------------------- ----------- -------- -----------
<S> <C> <C> <C>
TOTAL SERIES C PREFERRED UNITS.............................. 100.00000%
=========
</TABLE>
NOTES:
(1) 194 Class A Units were cancelled to provide cash for fractional share
amounts in connection with the merger of Beacon Properties Corporation into
Equity Office Properties Trust on December 19, 1997.
(2) Beacon Partner
(3) Class B Units.
(4) For purposes of this calculation, the Class A Units and Class B Units are
treated as one class. Of the aggregate Partnership Interests currently
outstanding, the percentage of each class and series are as follows:
<TABLE>
<S> <C>
Class A and B Units (collectively).......................... %
Series A Preferred Units.................................... %
Series B Preferred Units.................................... %
Series C Preferred Units.................................... %
100.00%
</TABLE>
(5) Acquired in connection with acquisition of Palo Alto.
<PAGE> 385
EXHIBIT B
CAPITAL ACCOUNT MAINTENANCE
1. Capital Accounts of the Partners
A. The Partnership shall maintain for each Partner a separate Capital
Account in accordance with the rules of Regulations Section l.704-l(b)(2)(iv).
Such Capital Account shall be increased by (i) the amount of all Capital
Contributions and any other deemed contributions made by such Partner to the
Partnership pursuant to this Agreement and (ii) all items of Partnership income
and gain (including income and gain exempt from tax) computed in accordance with
Section 1.B hereof and allocated to such Partner pursuant to Section 6.1 of the
Agreement and Exhibit C thereof, and decreased by (x) the amount of cash or
Agreed Value of all actual and deemed distributions of cash or property made to
such Partner pursuant to this Agreement and (y) all items of Partnership
deduction and loss computed in accordance with Section 1.B hereof and allocated
to such Partner pursuant to Section 6.1 of the Agreement and Exhibit C thereof.
B. For purposes of computing the amount of any item of income, gain,
deduction or loss to be reflected in the Partners' Capital Accounts, unless
otherwise specified in this Agreement, the determination, recognition and
classification of any such item shall be the same as its determination,
recognition and classification for federal income tax purposes determined in
accordance with Section 703(a) of the Code (for this purpose all items of
income, gain, loss or deduction required to be stated separately pursuant to
Section 703(a) (1) of the Code shall be included in taxable income or loss),
with the following adjustments:
(1) Except as otherwise provided in Regulations Section
1.704-1(b)(2)(iv)(m), the computation of all items of income, gain, loss
and deduction shall be made without regard to any election under Section
754 of the Code which may be made by the Partnership, provided that the
amounts of any adjustments to the adjusted bases of the assets of the
Partnership made pursuant to Section 734 of the Code as a result of the
distribution of property by the Partnership to a Partner (to the extent
that such adjustments have not previously been reflected in the Partners'
Capital Accounts) shall be reflected in the Capital Accounts of the
Partners in the manner and subject to the limitations prescribed in
Regulations Section l.704-1(b)(2)(iv)(m)(4).
(2) The computation of all items of income, gain, and deduction shall
be made without regard to the fact that items described in Sections
705(a)(l)(B) or 705(a)(2)(B) of the Code are not includible in gross income
or are neither currently deductible nor capitalized for federal income tax
purposes.
(3) Any income, gain or loss attributable to the taxable disposition
of any Partnership property shall be determined as if the adjusted basis of
such property as of such date of disposition were equal in amount to the
Partnership's Carrying Value with respect to such property as of such date.
(4) In lieu of the depreciation, amortization, and other cost recovery
deductions taken into account in computing such taxable income or loss,
there shall be taken into account Depreciation for such fiscal year.
(5) In the event the Carrying Value of any Partnership Asset is
adjusted pursuant to Section 1.D hereof, the amount of any such adjustment
shall be taken into account as gain or loss from the disposition of such
asset.
(6) Any items specially allocated under Section 2 of Exhibit C to the
Agreement hereof shall not be taken into account.
C. A transferee (including any Assignee) of a Partnership Unit shall
succeed to a pro rata portion of the Capital Account of the transferor.
D. (1) Consistent with the provisions of Regulations Section
1.704-1(b)(2)(iv)(f), and as provided in Section 1.D(2), the Carrying Values of
all Partnership assets shall be adjusted upward or downward to reflect any
Unrealized Gain or Unrealized Loss attributable to such Partnership property, as
of the times
<PAGE> 386
of the adjustments provided in Section 1.D(2) hereof, as if such Unrealized Gain
or Unrealized Loss had been recognized on an actual sale of each such property
and allocated pursuant to Section 6.1 of the Agreement.
(2) Such adjustments shall be made as of the following times: (a)
immediately prior to the acquisition of an additional interest in the
Partnership by any new or existing Partner in exchange for more than a de
minimis Capital Contribution; (b) immediately prior to the distribution by
the Partnership to a Partner of more than a de minimis amount of property
as consideration for an interest in the Partnership; and (c) immediately
prior to the liquidation of the Partnership within the meaning of
Regulations Section 1.704-l(b)(2)(ii)(g), provided, however, that
adjustments pursuant to clauses (a) and (b) above shall be made only if the
General Partner determines that such adjustments are necessary or
appropriate to reflect the relative economic interests of the Partners in
the Partnership.
(3) In accordance with Regulations Section 1.704-l(b)(2)(iv)(e), the
Carrying Value of Partnership assets distributed in kind shall be adjusted
upward or downward to reflect any Unrealized Gain or Unrealized Loss
attributable to such Partnership property, as of the time any such asset is
distributed.
(4) In determining Unrealized Gain or Unrealized Loss for purposes of
this Exhibit B, the aggregate cash amount and fair market value of all
Partnership assets (including cash or cash equivalents) shall be determined
by the General Partner using such reasonable method of valuation as it may
adopt, or in the case of a liquidating distribution pursuant to Article
XIII of the Agreement, shall be determined and allocated by the Liquidator
using such reasonable methods of valuation as it may adopt. The General
Partner, or the Liquidator, as the case may be, shall allocate such
aggregate fair market value among the assets of the Partnership in such
manner as it determines in its sole and absolute discretion to arrive at a
fair market value for individual properties.
E. The provisions of the Agreement (including this Exhibit B and the other
Exhibits to the Agreement) relating to the maintenance of Capital Accounts are
intended to comply with Regulations Section 1.704-1(b), and shall be interpreted
and applied in a manner consistent with such Regulations. In the event the
General Partner shall determine that it is prudent to modify the manner in which
the Capital Accounts, or any debits or credits thereto (including, without
limitation, debits or credits relating to liabilities which are secured by
contributed or distributed property or which are assumed by the Partnership, the
General Partner, or the Limited Partners) are computed in order to comply with
such Regulations, the General Partner may make such modification without regard
to Article XIV of the Agreement, provided that it is not likely to have a
material effect on the amounts distributable to any Person pursuant to Article
XIII of the Agreement upon the dissolution of the Partnership. The General
Partner also shall (i) make any adjustments that are necessary or appropriate to
maintain equality between the Capital Accounts of the Partners and the amount of
Partnership capital reflected on the Partnership's balance sheet, as computed
for book purposes, in accordance with Regulations Section l.704-l(b)(2)(iv)(q),
and (ii) make any appropriate modifications in the event unanticipated events
might otherwise cause this Agreement not to comply with Regulations Section
l.704-1(b).
2. No Interest
No interest shall be paid by the Partnership on Capital Contributions or on
balances in Partners' Capital Accounts.
3. No Withdrawal
No Partner shall be entitled to withdraw any part of its Capital
Contribution or Capital Account or to receive any distribution from the
Partnership, except as provided in Articles IV, V, VII and XIII of the
Agreement.
B-2
<PAGE> 387
EXHIBIT C
SPECIAL ALLOCATION RULES
1. Special Allocation Rules.
Notwithstanding any other provision of the Agreement or this Exhibit C, the
following special allocations shall be made in the following order:
A. Minimum Gain Chargeback. Notwithstanding the provisions of Section 6.1
of the Agreement or any other provisions of this Exhibit C, if there is a net
decrease in Partnership Minimum Gain during any Partnership Year, each Partner
shall be specially allocated items of Partnership income and gain for such year
(and, if necessary, subsequent years) in an amount equal to such Partner's share
of the net decrease in Partnership Minimum Gain, as determined under Regulations
Section 1.704-2(g). Allocations pursuant to the previous sentence shall be made
in proportion to the respective amounts required to be allocated to each Partner
pursuant thereto. The items to be so allocated shall be determined in accordance
with Regulations Section 1.704-2(f)(6). This Section 1.A is intended to comply
with the minimum gain chargeback requirements in Regulations Section 1.704-2(f)
and for purposes of this Section 1.A only, each Partner's Adjusted Capital
Account Deficit shall be determined prior to any other allocations pursuant to
Section 6.1 of this Agreement with respect to such Partnership Year and without
regard to any decrease in Partner Minimum Gain during such Partnership Year.
B. Partner Minimum Gain Chargeback. Notwithstanding any other provision of
Section 6.1 of this Agreement or any other provisions of this Exhibit C (except
Section 1.A hereof), if there is a net decrease in Partner Minimum Gain
attributable to a Partner Nonrecourse Debt during any Partnership Year, each
Partner who has a share of the Partner Minimum Gain attributable to such Partner
Nonrecourse Debt, determined in accordance with Regulations Section
1.704-2(i)(5), shall be specially allocated items of Partnership income and gain
for such year (and, if necessary, subsequent years) in an amount equal to such
Partner's share of the net decrease in Partner Minimum Gain attributable to such
Partner Nonrecourse Debt, determined in accordance with Regulations Section
1.704-2(i)(5). Allocations pursuant to the previous sentence shall be made in
proportion to the respective amounts required to be allocated to each General
Partner and Limited Partner pursuant thereto. The items to be so allocated shall
be determined in accordance with Regulations Section 1.704-2(i)(4). This Section
1.B is intended to comply with the minimum gain chargeback requirement in such
Section of the Regulations and shall be interpreted consistently therewith.
Solely for purposes of this Section 1.B, each Partner's Adjusted Capital Account
Deficit shall be determined prior to any other allocations pursuant to Section
6.1 of the Agreement or this Exhibit with respect to such Partnership Year,
other than allocations pursuant to Section 1.A hereof.
C. Qualified Income Offset. In the event any Partner unexpectedly receives
any adjustments, allocations or distributions described in Regulations Sections
1.704-l(b)(2)(ii)(d)(4), l.704-1(b)(2)(ii)(d)(5), or 1.704-l(b)(2)(ii)(d)(6),
and after giving effect to the allocations required under Sections 1.A and 1.B
hereof with respect to such Partnership Year, such Partner has an Adjusted
Capital Account Deficit, items of Partnership income and gain (consisting of a
pro rata portion of each item of Partnership income, including gross income and
gain for the Partnership Year) shall be specifically allocated to such Partner
in an amount and manner sufficient to eliminate, to the extent required by the
Regulations, its Adjusted Capital Account Deficit created by such adjustments,
allocations or distributions as quickly as possible. This Section 1.C is
intended to constitute a "qualified income offset" under Regulations Section
1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith.
D. Gross Income Allocation. In the event that any Partner has an Adjusted
Capital Account Deficit at the end of any Partnership Year (after taking into
account allocations to be made under the preceding paragraphs hereof with
respect to such Partnership Year), each such Partner shall be specially
allocated items of Partnership income and gain (consisting of a pro rata portion
of each item of Partnership income, including gross income and gain for the
Partnership Year) in an amount and manner sufficient to eliminate, to the extent
required by the Regulations, its Adjusted Capital Account Deficit.
<PAGE> 388
E. Nonrecourse Deductions. Nonrecourse Deductions for any Partnership Year
shall be allocated to the Partners in accordance with their respective
Percentage Interests. If the General Partner determines in its good faith
discretion that the Partnership's Nonrecourse Deductions must be allocated in a
different ratio to satisfy the safe harbor requirements of the Regulations
promulgated under Section 704(b) of the Code, the General Partner is authorized,
upon notice to the Limited Partners, to revise the prescribed ratio for such
Partnership Year to the numerically closest ratio which would satisfy such
requirements.
F. Partner Nonrecourse Deductions. Any Partner Nonrecourse Deductions for
any Partnership Year shall be specially allocated to the Partner who bears the
economic risk of loss with respect to the Partner Nonrecourse Debt to which such
Partner Nonrecourse Deductions are attributable in accordance with Regulations
Sections 1.704-2(b)(4) and 1.704-2(i).
G. Code Section 754 Adjustments. To the extent an adjustment to the
adjusted tax basis of any Partnership asset pursuant to Section 734(b) or 743(b)
of the Code is required, pursuant to Regulations Section 1.704-l(b)(2)(iv)(m),
to be taken into account in determining Capital Accounts, the amount of such
adjustment to the Capital Accounts shall be treated as an item of gain (if the
adjustment increases the basis of the asset) or loss (if the adjustment
decreases such basis), and such item of gain or loss shall be specially
allocated to the Partners in a manner consistent Exhibit E-1 with the manner in
which their Capital Accounts are required to be adjusted pursuant to such
Section of the Regulations.
2. Allocations for Tax Purposes
A. Except as otherwise provided in this Section 2, for federal income tax
purposes, each item of income, gain, loss and deduction shall be allocated among
the Partners in the same manner as its correlative item of "book" income, gain,
loss or deduction is allocated pursuant to Section 6.1 of the Agreement and
Section 1 of this Exhibit C.
B. In an attempt to eliminate Book-Tax Disparities attributable to a
Contributed Property or Adjusted Property, items of income, gain, loss, and
deduction shall be allocated for federal income tax purposes among the Partners
as follows:
(1) (a) In the case of a Contributed Property, such items attributable
thereto shall be allocated among the Partners consistent with the
principles of Section 704(c) of the Code to take into account the variation
between the 704(c) Value of such property and its adjusted basis at the
time of contribution (taking into account Section 2.C of this Exhibit C);
and
(b) any item of Residual Gain or Residual Loss attributable to a
Contributed Property shall be allocated among the Partners in the same
manner as its correlative item of "book" gain or loss is allocated pursuant
to Section 6.1 of the Agreement and Section 1 of this Exhibit C.
(2) (a) In the case of an Adjusted Property, such items shall
(i) first, be allocated among the Partners in a manner consistent
with the principles of Section 704(c) of the Code to take into account
the Unrealized Gain or Unrealized Loss attributable to such property and
the allocations thereof pursuant to Exhibit B;
(ii) second, in the event such property was originally a
Contributed Property, be allocated among the Partners in a manner
consistent with Section 2.B(1) of this Exhibit C; and
(b) any item of Residual Gain or Residual Loss attributable to an
Adjusted Property shall be allocated among the Partners in the same manner
its correlative item of "book" gain or loss is allocated pursuant to
Section 6.1 of the Agreement and Section 1 of this Exhibit C.
(3) all other items of income, gain, loss and deduction shall be
allocated among the Partners the same manner as their correlative item of
"book" gain or loss is allocated pursuant to Section 6.1 of the Agreement
and Section 1 of this Exhibit C.
C. To the extent Regulations promulgated pursuant to Section 704(c) of the
Code permit a Partnership to utilize alternative methods to eliminate the
disparities between the Carrying Value of property and its adjusted basis, the
General Partner shall, subject to the following, have the authority to elect the
method to be used by the Partnership and such election shall be binding on all
Partners; provided
C-2
<PAGE> 389
that, to the extent that the General Partner has agreed to use a particular
method with respect to a Contributed Property, the General Partner shall be
bound by such agreement (including, without limitation, the agreements set forth
in Exhibit E hereto) pursuant to the terms thereof. With respect to the
Contributed Property transferred to the Partnership in connection with the
Consolidation and the BRE/ Worldwide L.L.C. purchase, the Partnership shall
elect to use the "traditional method" set forth in Treasury Regulation Section
1.704-3(b).
C-3
<PAGE> 390
EXHIBIT D
NOTICE OF REDEMPTION
The undersigned hereby irrevocably (i) redeems ________ Partnership Units
in EOP Operating Limited Partnership in accordance with the terms of the
Agreement of Limited Partnership of EOP Operating Limited Partnership, as
amended, and the Redemption Right referred to therein, (ii) surrenders such
Partnership Units and all right, title and interest therein and (iii) directs
that the Cash Amount or Shares Amount (as determined by the General Partner)
deliverable upon exercise of the Redemption Right be delivered to the address
specified below, and if Shares are to be delivered, such Shares be registered or
placed in the name(s) and at the address(es) specified below. The undersigned
hereby represents, warrants, and certifies that the undersigned (a) has
marketable and unencumbered title to such Partnership Units, free and clear of
the rights of or interests of any other person or entity, (b) has the full
right, power and authority to redeem and surrender such Partnership Units as
provided herein and (c) has obtained the consent or approval of all persons or
entities, if any, having the right to consult or approve such redemption and
surrender.
Dated: Name of Limited Partner:
--------------------------------------
--------------------------------------
(Signature of Limited Partner)
--------------------------------------
(Street Address)
--------------------------------------
(City) (State) (Zip Code)
Signature Guaranteed by:
--------------------------------------
IF SHARES ARE TO BE ISSUED, ISSUE TO:
Name:
---------------------------------------------------------------------------
Social Security or tax identifying number:
--------------------------------------
<PAGE> 391
EXHIBIT E
PROTECTED PARTNERS AND PROTECTED AMOUNTS
PART I PROTECTED PARTNERS PROTECTED AMOUNT
PART II PROTECTED PARTNERS
(1) Protected Amount is the Deficit Obligation or Indemnity Obligation, as
applicable, as provided in the First Prior Amendment to the Original Partnership
Agreement, as set forth in Exhibit E-1.
(2) Protected Amount is the Deficit Obligation or Indemnity Obligation, as
applicable, as provided in the Second Prior Amendment to the Original
Partnership Agreement, as set forth in Exhibit E-2.
(3) Protected Amount is the DRO Amount or any applicable Partner
Contribution Amount, as defined in the Third Prior Amendment to the Original
Partnership Agreement, as set forth in Exhibit E-3.
(4) Protected Amount is the Deficit Obligation as defined in the Prior
Addendum, dated April 21, 1998, to the Original Partnership Agreement, as set
forth in Exhibit E-4.
(5) Protected Amount is as defined in the Tenth Prior Amendment to the
Original Partnership Agreement, as set forth in Exhibit E-5.
<PAGE> 392
EXHIBIT E-1
(CAP AGREEMENT)
BACKGROUND
On September 2, 1997, pursuant to a closing under that certain Agreement
for Contribution of Real Estate and Related Property dated as of August 1, 1997,
by and among the Partnership, the General Partner, Columbus America Properties,
L.L.C. ("CAP"), and certain members of CAP (the "Contribution Agreement"), CAP
received 1,690,000 Class A Units, subject to adjustment as provided in the
Contribution Agreement, (referred to as the "CAP Units"), in exchange for the
office properties known as Texaco Center, LL&E Tower and 601 Tchoupitoulas
Garage (collectively, the "CAP Properties"). In connection with the issuance of
the CAP Units, the First Prior Amendment to the Original Partnership Agreement
was executed, which set forth specific agreements regarding certain additional
rights and obligations of CAP and which was later amended by the Sixth Prior
Amendment to the Original Partnership Agreement. Such specific agreements are
described below.
All capitalized terms used in this Exhibit E-1 and not otherwise defined
have the meanings assigned in the Agreement.
SPECIFIC AGREEMENTS
1. Notwithstanding any other provision in the Agreement to the contrary and
in addition to (and not in lieu thereof) any and all other rights of CAP under
the Agreement:
(i) The holders of the CAP Units shall have the right at any time and
from time to time, to exchange all or any number of such CAP Units at the
request of such holder for Shares in the form required in Section 8.6.B(i)
of the Agreement, but subject in all respects to the terms of a certain
Registration Rights Agreement dated as of September 2, 1997, by and among
the General Partner, CAP and the other signatories thereto; and
(ii) CAP shall have the right, exercisable upon written notice to
Partnership at any time and from time to time before the earlier to occur
of (a) September 3, 2000, or (b) the date that CAP shall have either
transferred or converted all of its CAP Units into Shares, to require the
Partnership or the General Partner to acquire all, or any portion or
portions, of the CAP Units at $29.00 per CAP Unit. The price for such CAP
Units shall be paid by the Partnership or the General Partner in
immediately available funds not less than five (5) days after receipt of
such notice from CAP. The CAP Units shall be conveyed to the Partnership or
the General Partner, as applicable, free and clear of all liens and
encumbrances, other than those liens and encumbrances, if any, in favor of
General Partner or Partnership. At the closing of the acquisition of the
CAP Units by the Partnership or the General Partner, the parties shall
execute instruments of assignment and conveyance in the form attached to
the First Prior Amendment at "Exhibit B" and an amendment to the Agreement
evidencing the assignment of the CAP Units to the Partnership, or the
General Partner, as applicable, and the withdrawal of CAP as a Limited
Partner of the Partnership.
2. Notwithstanding any other provision of the First Prior Amendment (as
amended by the Sixth Prior Amendment) or the Agreement to the contrary, upon
liquidation of the Partnership, CAP shall be required to contribute to the
Partnership the deficit balance in its Capital Account computed in accordance
with Section 1.752-2(b)(1) and (2) of the Regulations, provided, however, that
such contribution obligation shall not exceed $84,350,000 (the "Deficit
Obligation"). CAP specifically waives any right of contribution or subrogation
with respect to such Deficit Obligation and neither the General Partner nor any
other Partner or other Person shall be required to reimburse CAP for such
contribution. Irrespective of the balance in the Capital Account of CAP, CAP
agrees to indemnify the Partnership and the General Partner to the extent that
the recourse obligations of the Partnership exceed the assets of the Partnership
available to satisfy such recourse obligations. This indemnity obligation is
intended to protect and hold the Partnership and the General Partner harmless
for such recourse obligations without regard to
<PAGE> 393
obligations imposed on the General Partner under applicable state law or other
contract provisions. This indemnity obligation shall be limited to $84,350,000
(the "Indemnity Obligation"). CAP hereby specifically waives any right of
contribution from or subrogation against the General Partner or any other
Partner and neither the Partnership nor any other Partner shall be required to
contribute to or otherwise reimburse CAP with respect to such indemnity. Upon
payment of such indemnity, CAP's Capital Account shall be credited with such
payment only to the extent of any deficit in such Capital Account. Amounts paid
to the Partnership pursuant to the Deficit Obligation or the Indemnity
Obligation shall be used to satisfy the recourse obligations of the Partnership.
CAP's Deficit Obligation and Indemnity Obligation shall not in the
aggregate exceed $84,350,000 (subject to reduction as provided herein). In
addition, the Deficit Obligation and the Indemnity Obligation shall be forever
reduced to $6,350,000 immediately upon the first placing, after acquisition of
the CAP Properties by the Partnership, of a non-recourse third party mortgage on
the CAP Properties securing a third party non-recourse loan to the Partnership
in an amount not less than $78,000,000.
Upon the sale, redemption, conversion or other disposition of the CAP
Units, the Deficit Obligation and the Indemnity Obligation of CAP under this
provision shall terminate proportionately with the number of CAP Units sold,
redeemed, converted or otherwise disposed of; provided, however, that a
transferee of CAP may, in its sole discretion, assume the Deficit Obligation
and/or the Indemnity Obligation of CAP and, in such event, the Deficit
Obligation and the Indemnity Obligation shall be the obligations solely of such
transferee (but CAP's obligation shall in all events be proportionately
terminated as of the date of any such disposition of its interest in the
Partnership). Nothing in this paragraph 2 shall in any way affect the sale,
exchange, or conversion rights of CAP under the Agreement or under the First and
Sixth Prior Amendments.
E-1-2
<PAGE> 394
EXHIBIT E-2
(1120 AGREEMENT)
BACKGROUND
On October 16, 1997, pursuant to a closing under that certain Contribution
Agreement dated September 4, 1997, as amended, by and between the Partnership
and 1120 20th Street Associates ("1120") (the "Contribution Agreement"), 1120
received 1,645,885 Class A Units, subject to adjustment as provided in the
Contribution Agreement, (referred to as the "1120 Units") in exchange for the
office property known as One Lafayette Centre, 1120 20th Street, N.W.,
Washington, D.C. (the "1120 Property"). In connection with the issuance of the
1120 Units, the Second Prior Amendment to the Original Partnership Agreement,
which set forth specific agreements regarding certain additional rights and
obligations of 1120, was executed. Such specific agreements are described below.
All capitalized terms used in this Exhibit E-2 and not otherwise defined
herein have the meanings assigned in the Agreement.
SPECIFIC AGREEMENTS
Notwithstanding any other provision of the Agreement to the contrary, upon
liquidation of the Partnership, 1120 shall be required to contribute to the
Partnership the deficit balance in its Capital Account computed in accordance
with Sections 1.752-2(b)(1) and (2) of the Regulations; provided, however, that
such contribution obligation shall not exceed $14,000,000 (the "Deficit
Obligation"). 1120 specifically waives any right of contribution or subrogation
with respect to such Deficit Obligation and neither the General Partner nor any
other Partner or other Person shall be required to reimburse 1120 for such
contribution. Irrespective of the balance in the Capital Account of 1120, 1120
agrees to indemnify the Partnership and the General Partner to the extent that
the recourse obligations of the Partnership exceed the assets of the Partnership
available to satisfy such recourse obligations. This indemnity obligation is
intended to protect and hold the Partnership and the General Partner harmless
for such recourse obligations without regard to obligations imposed on the
General Partner under applicable state law or other contract provisions. This
indemnity obligation shall be limited to $14,000,000 (the "Indemnity
Obligation"). 1120 specifically waives any right of contribution from or
subrogation against the General Partner or any other Partner and neither the
Partnership nor any other Partner shall be required to contribute to or
otherwise reimburse 1120 with respect to such indemnity. Upon payment of such
indemnity, 1120's Capital Amount shall be credited with such payment only to the
extent of any deficit in such Capital Account. Amounts paid to the Partnership
pursuant to the Deficit Obligation or the Indemnity Obligation shall be used to
satisfy the recourse obligations of the Partnership.
Upon the sale, redemption, conversion or other disposition of the 1120
Units, the Deficit Obligation and the Indemnity Obligation of 1120 under this
provision shall terminate; provided, however, a transferee of 1120 may, in its
sole discretion, assume the Deficit Obligation and/or the Indemnity Obligation
of 1120 and, in such event, the Deficit Obligation and the Indemnity Obligation
shall be the obligation solely of such transferee (but 1120's obligation shall
in all events be terminated as of the date of any disposition of its interest in
the Partnership). Nothing herein shall in any way effect the sale, exchange or
conversion rights of 1120 under the Agreement or under the Second Prior
Amendment.
<PAGE> 395
EXHIBIT E-3
(WRIGHT RUNSTAD AGREEMENT)
BACKGROUND
On December 16, 1997, (i) pursuant to a closing under that certain
Contribution Agreement dated December 16, 1997, by and between the Partnership,
WRAM (as defined below), WRH (as defined below) and certain other parties (the
"Contribution Agreement") (a) Wright Runstad Asset Management L.P., a Washington
limited partnership ("WRAM"), received 446,890 Class B Units in exchange for
certain partnership interests ("Titleholder Interests") in Wright Runstad
Properties L.P., a Delaware limited partnership (the "Titleholder") and (b)
Wright Runstad Holdings L.P., a Washington limited partnership ("WRH"), received
2,168,810 Class B Units in exchange for certain Titleholder Interests; and (ii)
pursuant to a closing under that certain Investment Agreement dated December 16,
1997, by and among the Partnership, Wright Runstad Associates Limited
Partnership, a Washington limited partnership, ("WRALP"), H. Jon Runstad
("Runstad"), Douglas E. Norberg ("Norberg"), John F. Nordby ("Nordby"), and
certain other parties (the "Investment Agreement"), Runstad, Norberg, and Nordby
received, in the aggregate, 137,427 Class B Units in exchange for certain
limited partnership interests in WRALP ("WRALP Interests"). WRAM and WRH are
collectively referred to herein as the "Contributors." Runstad, Norberg, Nordby
are collectively referred to herein as the "Principals." The Class B Units
issued as described above are referred to herein as the WRP Units. Certain
property owned by the Titleholder as described in the Contribution Agreement is
referred to herein as the "WRP Property." In connection with the issuance of the
WRP Units, the Third Prior Amendment to the Original Partnership Agreement,
which set forth specific agreements regarding certain additional rights and
obligations of the Contributors and the Principals, was executed. Such specific
agreements are described below.
All capitalized terms used in this Exhibit E-3 and not otherwise defined
shall have the meanings assigned to them in the Agreement.
SPECIFIC AGREEMENTS
1. Right to Assign. Notwithstanding any other provision of this Agreement
or of the Third Prior Amendment, each Contributor shall have the right to assign
all or any portion of its WRP Units, together with any and all other rights of
such Contributor pursuant to the Third Prior Amendment and the Agreement, to one
or more of the constituent partners or shareholders, members, partners, or
beneficiaries of constituent partners of such Contributor on December 16, 1997,
without the need for the consent of the General Partner or any Limited Partner
and without being subject to the right of first refusal set forth in Section
11.3.A(a) of the Agreement, but in each case subject to the restrictions and
conditions set forth in Sections 11.3.C, 11.3.D, 11.3.E, 11.6.E and 11.6.F of
the Agreement. Upon the delivery of written notice of such an assignment to the
General Partner, each assignee of WRP Units pursuant to the immediately
preceding sentence shall be admitted to the Partnership as a Substituted Limited
Partner owning the WRP Units so assigned and having all of the rights of a
Limited Partner under the Agreement and the Third Prior Amendment, subject only
to such assignee executing and delivering to the Partnership an acceptance of
all of the terms and conditions of the Agreement and such other documents or
instruments as the General Partner may reasonably require to effect such
admission, in accordance with Section 11.4.B of the Agreement. Each permitted
assignee of any of the WRP Units issued to a Contributor pursuant to the
Contribution Agreement that is admitted as a Substituted Limited Partner in
accordance with this Section 1 or Article XI of the Agreement, for so long as
such Person owns any such WRP Units, is referred to herein as a "Contributor
Limited Partner." Upon satisfaction of the condition described in the second
sentence of this Section 1, the General Partner shall amend Exhibit A to the
Agreement in the manner described in Section 11.4.C of the Agreement. For
purposes of Section 8.6 of the Agreement, each Contributor Limited Partner which
is a permitted assignee of a Contributor shall be entitled to exercise its right
to require the Partnership to redeem all or any portion of the WRP Units
assigned to it by such Contributor at any time.
<PAGE> 396
2. Adjustments to Carrying Values.
(a) Upon the admission of the Contributors and the Principals to the
Partnership and upon the distribution by the Partnership of the Cash Amount
to either Contributor or to any Principal or any Contributor Limited
Partner pursuant to the exercise of the Redemption Right with respect to
the WRP Units held by such Contributor, Principal or Contributor Limited
Partner, the Carrying Values of the Assets of the Partnership shall be
adjusted in accordance with the procedures described in Section 1.D of
Exhibit B to the Agreement; provided, however, that in order to minimize
the administrative burden associated with the adjustments required by this
Section 2(a) in connection with the distribution of the Cash Amount to a
Contributor, a Principal or a Contributor Limited Partner, the Partnership
shall make the adjustments to the Carrying Values of the Partnership's
Assets (and the resulting adjustments to the Capital Accounts of the
Partners) only upon the happening of the most material event during the
calendar year that is described in Section 1.D(2) of Exhibit B to the
Agreement (the "Annual Adjustment"); and provided, further, that upon the
distribution of the Cash Amount to a Contributor, a Principal or a
Contributor Limited Partner or, at the option of the General Partner, upon
the occurrence of any other event described in Section 1.D(2) of Exhibit B
to the Agreement, that occurs during any year other than as of the date of
the Annual Adjustment, the Partnership shall, at the time of such
distribution, make adjustments to the Carrying Values of the Partnership's
Assets in accordance with the procedures described in Section 1.D of
Exhibit B to the Agreement for purposes of adjusting the Capital Account of
such Contributor, such Principal or such Contributor Limited Partner who
has exercised his Redemption Right or such other affected Partner, but no
such adjustments shall be necessary at such time with respect to the
Capital Account balances of Partners who remain Partners through the date
of the Annual Adjustment or are otherwise not directly affected by any such
other event.
(b) Any determination of the fair market value of Partnership assets
pursuant to Section 1.D of Exhibit B to the Agreement (for purposes of
calculating Unrealized Gain or Unrealized Loss), with respect to adjusting
the Carrying Values of Partnership assets in connection with the exercise
of Redemption Rights by a Contributor, any Principal or any Contributor
Limited Partner shall be made by assuming that the aggregate fair market
value of all Partnership assets is equal to the aggregate Cash Amount that
would be distributed by the Partnership if all Partnership Units held by
all Partners (including the General Partner) were redeemed in exchange for
the Cash Amount with respect to each such Partnership Unit at such time,
provided, however, such valuation methodology shall not be utilized for
purposes of determining the fair market value of the Partnership's assets
with respect to any such exercise of Redemption Rights in contemplation of
an assignment by or reorganization of the Partnership for the benefit of
creditors and any liquidation of the Partnership related thereto or
following the filing by (or in contemplation of a filing) by the
Partnership of a case under Title 11 of the U.S. Code.
3. Allocations. Notwithstanding the provisions of Section 2.C of Exhibit C
to the Agreement, for purposes of allocating items of income, gain, loss and
deduction with respect to the WRP Property in the manner required by Section
704(c) of the Code, the Partnership shall employ, and shall cause any entity
controlled by the Partnership which holds title to any of the WRP Property to
employ, the "traditional method" as set forth in Regulation Section 1.704-3(b).
4. Obligation to Restore Deficit Capital Account.
(a) For purposes of this Section 4, the following terms shall have the
meanings set forth below:
(i) "DRO Amount" means (A) with respect to WRAM, $10,873,678, (B)
with respect to WRH, $63,014,285 and (C) with respect to each Scheduled
Assignee, the amount set forth opposite such Scheduled Assignee's name
on Schedule 1 hereto.
(ii) "Partner Contribution Agreement" means one or more agreements
in favor of that certain partnership or those certain partnerships that
are partners in WRH, which were executed concurrently with the Third
Prior Amendment and have been assigned by such partnerships to
E-3-2
<PAGE> 397
WRH, pursuant to which a Second-Tier Partner has agreed to make certain
capital contributions to WRH on the terms and subject to the conditions
set forth in such Partner Contribution Agreement.
(iii) "Partner Contribution Amount" means, with respect to each
Second-Tier Partner, the amount set forth opposite such Second-Tier
Partner's name on Schedule 1 hereto, which amount is the amount of
capital contributions agreed to be made by such Second-Tier Partner
pursuant to the Partner Contribution Agreement to which he is a party.
(iv) "Scheduled Assignee" means each permitted assignee of any of
the WRP Units of either WRAM or WRH listed on Schedule 1 hereto and the
successors and assigns of such Scheduled Assignee.
(v) "Second-Tier Partners" means those persons listed on Schedule 1
to the Third Prior Amendment who are partners in certain general
partnerships that are partners in WRH and who have executed and
delivered one or more Partner Contribution Agreements.
(b) Notwithstanding any other provisions of the Agreement, upon
liquidation of the Partnership or upon the liquidation of the Partnership
Interest of a Contributor or a Scheduled Assignee, each Contributor or
Scheduled Assignee whose interest is being liquidated shall contribute to
the Partnership, in accordance with Section 1.704-1(b)(2)(ii)(b)(2) of the
Regulations, the deficit balance, if any, in its Capital Account,
calculated after the allocation for such year of all items of Net Income,
Net Losses, Gross Income and Unrealized Gain or Unrealized Loss allocated
in accordance with Section 1.D of Exhibit B to the Agreement; provided,
however, that in no event shall such contribution obligation for any
Contributor or Scheduled Assignee exceed such Contributor's or Scheduled
Assignee's DRO Amount. In addition, WRH assigned and conveyed to the
Partnership, effective upon distribution of the WRP Units by WRH, all of
WRH's rights under each Partner Contribution Agreement provided by a
Second-Tier Partner; provided that in no event shall the contribution
obligation pursuant to such Partner Contribution Agreement exceed such
Second-Tier Partner's Partner Contribution Amount. The obligation pursuant
to this Section 4(b) shall be for the benefit of the Partnership, the
General Partner, the creditors of the Partnership or any other person to
whom any debts, liabilities or obligations are owed by (or who otherwise
has any claim against) the Partnership or the General Partner in its
capacity as the general partner of the Partnership and shall be enforceable
by such parties. Each Contributor and Scheduled Assignee unconditionally
and irrevocably waives any subrogation, reimbursement or similar rights to
which it might otherwise be entitled as the result of its performance with
respect to the obligation created pursuant to Section 4(b), whether such
rights arise with respect to the Partnership, another Partner, or a third
party; provided, however, that the General Partner shall in all events be
entitled to enforce the contribution obligation of a Contributor or
Scheduled Assignee undertaken pursuant to Section 4(b).
(c) Notwithstanding the foregoing, in the event that the General
Partner, pursuant to Section 8.6.B of the Agreement, elects to assume
directly and satisfy a Redemption Right exercised by a Contributor or a
Scheduled Assignee (a "Tendering Limited Partner"), the General Partner
shall assume the obligation of the Tendering Limited Partner pursuant to
Section 4(b) above with respect to the WRP Units transferred to the General
Partner by such Tendering Limited Partner; provided, however, that if the
adjustment to the Carrying Values of Partnership Assets and the related
adjustments to the Capital Accounts of the Partners pursuant to Section 2
hereof and Section 1.D of Exhibit B to the Agreement that would have been
undertaken pursuant to Section 2 hereof had the Partnership satisfied the
Redemption Right exercised by such Tendering Limited Partner would have
resulted in the Capital Account of the Tendering Limited Partner having a
zero or positive balance, then, with respect to such WRP Units acquired
from the Tendering Limited Partner, the General Partner shall have no
obligation pursuant to Section 4(b) hereof with respect to a liquidation of
the Partnership or a liquidation of the Partnership Interest reflected by
such WRP Units that occurs more than twelve months following the
acquisition of such WRP Units by the General Partner.
E-3-3
<PAGE> 398
(d) In the event that the liquidation of the Partnership Interest of a
Tendering Limited Partner, other than in connection with the liquidation of
the Partnership, would trigger an obligation pursuant to Section 4(b)
hereof to contribute an amount to the Partnership, then the Net Income of
the Partnership for the portion of such year ending on the Specified
Redemption Date with respect to such Tendering Limited Partner shall be
specially allocated to such Tendering Limited Partner in the amount
necessary to eliminate the deficit balance in its Capital Account remaining
after all other adjustments for such year (including any adjustments made
pursuant to Section 1.D of Exhibit B to the Agreement).
5. Maintenance of Recourse Debt. The Partnership shall maintain unsecured
liabilities as to which the creditor has recourse to the General Partner,
including any such unsecured recourse liabilities (as to which the creditor has
recourse to the General Partner in its capacity as General Partner) of any other
entity that is allocable to the Partnership, in an aggregate amount not less
than the amount necessary such that: (a) prior to the distribution by WRAM and
WRH of WRP Units issued to them pursuant to the Contribution Agreement, the
amount of Partnership recourse liabilities allocated to each of WRAM and WRH
shall be not less than its DRO Amount; and (b) following the distribution by
WRAM and WRH of WRP Units issued to them pursuant to the Contribution Agreement,
the amount of Partnership recourse liabilities allocated directly or indirectly
to all Scheduled Assignees and Second-Tier Partners shall be not less than the
sum of their respective DRO Amounts and Partner Contribution Amounts. In making
such determination, the Partnership shall take into account any and all
allocations of Partnership recourse liabilities to other Partners by reason of
any guarantees, indemnities, restoration obligations or other, similar
arrangements with respect to any such Partners, and the liability by reason of
any such Partner's status as a general partner of the Partnership.
6. Amendments. Notwithstanding any provision in the Agreement to the
contrary, the provisions hereof and of the Third Prior Amendment may be waived
or amended or otherwise modified with the prior written consent of holders of
more than fifty percent (50%) of the WRP Units at the time outstanding and
without the consent of any other Limited Partner.
E-3-4
<PAGE> 399
SCHEDULE 1
SCHEDULED ASSIGNEES AND SECOND-TIER PARTNERS
<TABLE>
<CAPTION>
DRO AMOUNT/
SCHEDULED ASSIGNEES/ PARTNER CONTRIBUTION
SECOND-TIER PARTNERS AMOUNT
-------------------- --------------------
<S> <C>
Runstad, H. Jon............................................. (4,254,441)
Grousemount Associates...................................... (1,770,549)
Norberg, Douglas E.......................................... (1,551,346)
Nordby, Jon F............................................... (593,282)
WRAM Inc.................................................... (2,704,060)
Allsop Inc.................................................. (2,608,769)
Atkin, Jeffrey.............................................. (65,221)
Bacon, David L.............................................. (50,842)
Blumenthal, Herman.......................................... (130,441)
Brinsley, John L............................................ (50,843)
Carr, Nancy................................................. (64,912)
Cleveland T.E............................................... (65,222)
Crowl, John S............................................... (130,445)
Danz, Fredric A............................................. (608,394)
Dingfield, Brabara J........................................ (1,329,940)
Fischer, Robert W........................................... (50,845)
Flynn, Frank................................................ (260,876)
Flynn, Michael T............................................ (2,420,379)
Foster, Thomas B............................................ (801,449)
Ganahl, Timothy H........................................... (130,446)
Green, Mark S............................................... (130,443)
Griffin, J. Michael......................................... (130,444)
Grousemount Associates...................................... (7,372,126)
Hanson, Peter C............................................. (65,220)
Heeseman, Tex............................................... (50,845)
Helsell Partnership......................................... (108,388)
Helsell, Robert M........................................... (280,007)
Isham, Martha E............................................. (183,943)
Kosmos, George C. Jr........................................ (282,280)
Leendersten, Howard V....................................... (738,833)
Margulis, Valerie L......................................... (426,318)
Morbeck, John P............................................. (130,445)
Newell, Christopher A....................................... (295,017)
Nolan, James L.............................................. (50,845)
Norberg, Douglas E.......................................... (3,518,589)
Nordby, Jon F............................................... (2,720,052)
Pappas, Theodore R.......................................... (130,445)
Parker, Victor E............................................ (738,834)
Penny, John D. Jr........................................... (130,442)
Phelps, Margaret P.......................................... (256,141)
Pigott, James C. Family PS.................................. (608,393)
Rozner, Evelyne and Griffin, Matthew J...................... (2,084,177)
Runstad, H. Jon............................................. (10,800,978)
Scheumann, Theiline P....................................... (2,401,958)
Schuchart Partnership....................................... (9,286,144)
Schuchart, George S......................................... (453,335)
Skinner, Jean Enerson....................................... (130,443)
</TABLE>
E-3-5
<PAGE> 400
<TABLE>
<CAPTION>
DRO AMOUNT/
SCHEDULED ASSIGNEES/ PARTNER CONTRIBUTION
SECOND-TIER PARTNERS AMOUNT
-------------------- --------------------
<S> <C>
Stansbury, M.E.............................................. (65,220)
Stearns, Kathlyn............................................ (295,017)
Stroum, Cynthia............................................. (565,070)
Stuart, E. Hadley Jr........................................ (1,825,169)
Stuart, Marian B............................................ (1,216,770)
Taber, Andrew J............................................. (225,585)
Taylor, William C........................................... (496,317)
Trainer, Stevens U.......................................... (1,033,889)
Wayte, Alan................................................. (50,845)
Whalen, Jerome D............................................ (190,605)
Windhover Associates........................................ (125,384)
Wright Runstad & Company.................................... (729,314)
Wyckoff, Ann P.............................................. (1,192,385)
Wyckoff, Paul............................................... (54,446)
Wyckoff-Dickey, Sheila...................................... (43,181)
Wyman, David C.............................................. (738,833)
Wyman, Polly R.............................................. (434,094)
Ackerman G.N................................................ (3,723)
Ahearne T................................................... (2,241)
Aherne P.L.................................................. (5,247)
Anderson D.................................................. (2,685)
Alston C.................................................... (618)
Berg B.J.................................................... (4,744)
Blanchard J.T............................................... (54,556)
Bohannon M.................................................. (2,051)
Brandeberry M.E............................................. (17,141)
Bristol J.B................................................. (750)
Butler D.V.................................................. (4,920)
Chapman F.L................................................. (41,845)
Clark B..................................................... (2,716)
Coffey B.................................................... (1,069)
Coulson E.R................................................. (4,464)
Cullen J.J.................................................. (4,830)
Dean R...................................................... (758)
Diercks R.J................................................. (63,006)
DIiJulio P.S................................................ (3,598)
Dixon T.E................................................... (1,736)
Ehrlichman P.S.............................................. (21,820)
Ellis W.H................................................... (3,525)
Erxleben W.C................................................ (1,755)
Filer T.J................................................... (2,006)
Fluhrer G.E................................................. (49,462)
Foreman L.L................................................. (2,914)
Foster T.B.................................................. (139,362)
Gaffiney J.M................................................ (62,317)
Galloway J.................................................. (1,129)
Gleaves C................................................... (3,066)
Graybeal L.E................................................ (2,638)
Hall, C.M................................................... (93,138)
Hendrickson J............................................... (3,209)
</TABLE>
E-3-6
<PAGE> 401
<TABLE>
<CAPTION>
DRO AMOUNT/
SCHEDULED ASSIGNEES/ PARTNER CONTRIBUTION
SECOND-TIER PARTNERS AMOUNT
-------------------- --------------------
<S> <C>
Hill G.R.................................................... (4,135)
Howorth D.B................................................. (2,613)
Israel A.D.................................................. (13,854)
Jackson D.E................................................. (3,120)
Keefe R.E................................................... (92,690)
Keehnel S.K................................................. (5,979)
Kennedy P.F................................................. (22,914)
Koslow A.................................................... (759)
Lee L.N..................................................... (2,365)
Loacker L.J................................................. (5,671)
Mack G...................................................... (5,530)
Macleod J.W................................................. (2,749)
Magnano M.J................................................. (43,651)
Marcy D.E................................................... (2,531)
Martin L.C.................................................. (3,080)
Matson D.D.................................................. (116,291)
Mcconaughy B.A.............................................. (4,758)
Mc Cullough J.C............................................. (267)
Mellem R.................................................... (2,569)
Morrow A.J.................................................. (3,440)
Murray M.K.................................................. (14,101)
Myklebust R.A............................................... (1,123)
Nielsen M.J................................................. (180)
Noll J.B.................................................... (25,934)
Nomellini C.P............................................... (57,947)
Palmer D.S.................................................. (50,680)
Pepper L.H.................................................. (42,303)
Prince D.R.................................................. (4,289)
Redman A.M.................................................. (41,769)
Rheaume W.J................................................. (2,778)
Rieke P.V................................................... (2,881)
Roberts K.E................................................. (6,033)
Runstad J.M................................................. (31,986)
Russell B.L................................................. (5,855)
Sandler M.D................................................. (6,704)
Schweet L.S................................................. (1,200)
Seidel R.................................................... (1,262)
Serkin B.P.................................................. (1,794)
Silvey M.................................................... (3,025)
Spitzer H................................................... (5,318)
Stansbury M.E............................................... (9,304)
Stone V.R................................................... (44,495)
Sweeney D.B................................................. (3,833)
Thieme D.................................................... (2,631)
Tonkin W.G.................................................. (4,370)
Utevsky D................................................... (5,089)
Vaska M..................................................... (2,240)
Voorhees L.R................................................ (5,427)
Washburn J.T................................................ (2,868)
Whalen J.D.................................................. (80,770)
</TABLE>
E-3-7
<PAGE> 402
<TABLE>
<CAPTION>
DRO AMOUNT/
SCHEDULED ASSIGNEES/ PARTNER CONTRIBUTION
SECOND-TIER PARTNERS AMOUNT
-------------------- --------------------
<S> <C>
Whiteley K.................................................. (8,925)
Whitford J.P................................................ (15,963)
Wilson D.R.................................................. (6,527)
Winberry P.B................................................ (2,609)
Winter D.S.................................................. (3,114)
Wolfe C.R................................................... (1,417)
Wright C.W.................................................. (3,295)
-----------
Total....................................................... (73,887,963)
===========
</TABLE>
E-3-8
<PAGE> 403
EXHIBIT E-4
(GALBREATH AGREEMENT)
BACKGROUND
On April 21, 1998, Galbreath-Denver Limited Partnership, an Ohio limited
partnership ("Galbreath") and 1560 Broadway Partnership, a Colorado general
partnership ("Broadway") (collectively the "Additional Limited Partners") each
was issued 1,684 Class B Units (referred to as the "Galbreath and Broadway
Units"). In connection with the issuance of the Galbreath and Broadway Units, a
Prior Addendum dated as of April 21, 1998, to the Original Partnership
Agreement, which set forth specific agreements regarding certain additional
rights and obligations of the Additional Limited Partners, was executed. Such
specific agreements are described below.
All capitalized terms used in this Exhibit E-4 and not otherwise defined
shall have the meanings assigned in the Agreement.
SPECIFIC AGREEMENTS
Notwithstanding any other provision of the Agreement to the contrary, upon
liquidation of the Partnership, each of the Additional Partners shall be
required to contribute to the Partnership the deficit balance in such party's
Capital Account computed in accordance with Sections 1.752-2(b)(1) and (2) of
the Regulations; provided, however, that such contribution obligation shall not
exceed the amount by which the recourse obligations of the Partnership exceed
the assets of the Partnership available to satisfy such recourse obligations and
shall not exceed $4,154,000 with respect to Galbreath and the lesser of the
deficit balance in Broadway's Capital Account in "owner" at the date of
"closing" reduced by any income allocated to Broadway after the date of Closing
or $10,500,000 with respect to Broadway (collectively, the "Deficit
Obligation"). Each of the Additional Limited Partners specifically waives any
right of contribution or subrogation with respect to such Deficit Obligation and
neither the General Partner nor any other Partner or other Person shall be
required to reimburse the Additional Limited Partners for such contributions.
Upon payment of such Deficit Obligation, each Additional Limited Partner's
Capital Account shall be credited with such payment. Amounts paid to the
Partnership pursuant to the Deficit Obligation shall be used to satisfy the
recourse obligations of the Partnership.
Upon the sale, redemption, conversion or other disposition of the Galbreath
and Broadway Units received by any Additional Limited Partner, the Deficit
Obligation of such Additional Limited Partner shall be reduced in an amount
equal to the percentage of the Galbreath and Broadway Units owned by such
Additional Limited Partner which were sold, redeemed, converted or otherwise
disposed of by such Additional Limited Partner, and upon the sale, redemption,
conversion or other disposition of all the Galbreath and Broadway Units received
by any Additional Limited Partner, the Deficit Obligation shall be terminated
with respect to such Additional Limited Partner. Nothing in this Exhibit E-4
shall in any way effect the sale, exchange or conversion rights of the
Additional Limited Partners under the Agreement or this Exhibit E-4.
In the case of Galbreath only, certain partners of Galbreath shall execute
and deliver to the Partnership, and the Partnership shall accept, a Guarantee in
the form agreed to by such Galbreath partners and the Partnership.
<PAGE> 404
EXHIBIT E-5
(PALO ALTO SQUARE AGREEMENT)
BACKGROUND
Pursuant to a closing under that certain Contribution Agreement dated
September 28, 1999, by and between Palo Alto Square Limited Partnership, an
Illinois limited partnership, ("Contributor") and the General Partner (the
"Contribution Agreement"), Contributor was issued 1,012,623 Class B Units
(referred to as the "Contributor Units") in exchange for certain real property
interests described in the Contribution Agreement (the "Property"). Contributor
has assigned the Contributor Units to the Equity Holders (as defined below). In
connection with the issuance of Contributor Units, the Tenth Prior Amendment to
the Original Partnership Agreement, which set forth specific agreements
regarding certain additional rights and obligations of the Contributor and its
constituent partners as set forth on Schedule 1 to such Tenth Prior Amendment
(the "Equity Holders"), was executed. Such specific agreements are described
below.
All capitalized terms used in this Exhibit E-5 and not otherwise defined
shall have the meanings assigned in the Agreement.
SPECIFIC AGREEMENTS
1. Right to Assign. Notwithstanding any other provision of this Exhibit
E-5 or of the Agreement, the Equity Holders shall have the right to assign all
or any portion of their Contributor Units, together with any and all other
rights of the Equity Holders pursuant to this Exhibit E-5 or the Agreement, to
one or more of the constituent partners or shareholders, members, partners or
beneficiaries of constituent partners of the Equity Holders as of October 1,
1999, whether direct or indirect, without the need for the consent of the
General Partner or Limited Partners and without being subject to the right of
first refusal set forth in Section 11.3.A(a) of the Agreement, but in each case
subject to the restrictions and conditions set forth in Sections 11.3.C, 11.3.D,
11.3.E, 11.6.E and 11.6.F of the Agreement. Upon the delivery of written notice
of such an assignment to the General Partner, each assignee of Contributor Units
pursuant to the immediately preceding sentence shall be admitted to the
Partnership as a Substituted Limited Partner owning the Contributor Units so
assigned and having all of the rights of a Limited Partner under the Agreement
and this Exhibit E-5, subject only to such assignee executing and delivering to
the Partnership an acceptance of all of the terms and conditions of the
Agreement and such other documents or instruments as the General Partner may
reasonably require to effect such admission, in accordance with Section 11.4.B
of the Agreement. Each permitted assignee of any of the Contributor Units,
issued to the Contributor pursuant to the Contribution Agreement and
subsequently transferred to the Equity Holders, that is admitted as a
Substituted Limited Partner in accordance with this Section 1 or Article XI of
the Agreement, for so long as such Person owns any such Contributor Units, is
referred to in this Exhibit E-5 as an "Indirect Equity Holder." Upon
satisfaction of the condition described in the second sentence of this Section
1, the General Partner shall amend Exhibit A to the Agreement in the manner
described in Section 11.4.C of the Agreement. For purposes of Section 8.6 of the
Agreement, each Equity Holder and Indirect Equity Holder shall be entitled to
exercise its right to require the Partnership to redeem all or any portion of
the Contributor Units assigned to it by an Equity Holder at any time on or after
October 1, 1999.
2. Adjustments to Carrying Values. (a) The Carrying Values of the Assets
of the Partnership shall be adjusted in accordance with the procedures described
in Section 1.D of Exhibit B to the Agreement; provided, however, that in order
to minimize the administrative burden associated with the adjustments required
by this Section 2(a) in connection with the distribution of the Cash Amount to
an Equity Holder or an Indirect Equity Holder, the Partnership shall make the
adjustments to the Carrying Values of the Partnership's assets (and the
resulting adjustments to the Capital Accounts of the Partners) only upon the
happening of the most material event during the calendar year that is described
in Section 1.D(2) of Exhibit B to the Agreement (the "Annual Adjustment") and;
provided further that upon the distribution
<PAGE> 405
of the Cash Amount to an Equity Holder or an Indirect Equity Holder or, at the
option of the General Partner, upon the occurrence of any other event described
in Section 1.D(2) of Exhibit B to the Agreement, that occurs during any year
other than as of the date of the Annual Adjustment, the Partnership shall, at
the time of such distribution, make adjustments to the Carrying Values of the
Partnership's assets in accordance with the procedures described in Section 1.D
of Exhibit B to the Agreement for purposes of adjusting the Capital Account of
an Equity Holder, or such Indirect Equity Holder who has exercised his
Redemption Right or such other affected Partner, but no such adjustments shall
be necessary at such time with respect to the Capital Account balances of
Partners who remain Partners through the date of the Annual Adjustment or are
otherwise not directly affected by any such other event.
(b) Any determination of the fair market value of Partnership assets
pursuant to Section 1.D of Exhibit B to the Agreement (for purposes of
calculating Unrealized Gain or, Unrealized Loss), with respect to adjusting
the Carrying Values of Partnership assets in connection with the exercise
of Redemption Rights by an Equity Holder or any Indirect Equity Holder
shall be made by assuming that the aggregate fair market value of all
Partnership assets is equal to the aggregate Cash Amount that would be
distributed by the Partnership if all Partnership Units held by all
Partners (including the General Partner) were redeemed in exchange for the
Cash Amount with respect to each such Partnership Unit at such time,
provided, however, such valuation methodology shall not be utilized for
purposes of determining the fair market value of the Partnership's assets
with respect to any such exercise of Redemption Rights in contemplation of
an assignment by or reorganization of the Partnership for the benefit of
creditors and any liquidation of the Partnership related thereto or
following the filing by (or in contemplation of a filing) by the
Partnership of a case under Title 11 of the U.S. Code.
3. Allocations. Notwithstanding the provisions of Section 2.C of Exhibit C
to the Agreement, for purposes of allocating, items of income, gain, loss and
deduction with respect to the Property in the manner required by Section 704(c)
of the Code, the Partnership shall employ, and shall cause any entity controlled
by the Partnership which holds title to any of the Property to employ the
"traditional method" as set forth in Regulation Section 1.704-3(b).
4. Obligation to Restore Deficit Capital Accounts. (a) For purposes of
this Section 4, the following terms shall have the meanings set forth below:
(i) "Protected Amount" means, with respect to any Protected
Partner, an amount equal to (i) the taxable gain, if any, that would be
realized by such Protected Partner if such Partner were to dispose of
its Partnership Interests for no consideration other than the release or
deemed release of liabilities of the Partnership assumed by or otherwise
allocable to such Partner under Code Section 752, as such hypothetical
gain is determined from time to time, less (ii) such Partner's share of
"qualified nonrecourse financing" as defined in Code Section 465(b)(6)
and the Regulations thereunder, as such share is determined from time to
time in accordance with Regulations Section 1.752-3(a). The Protected
Amount allocable to any Protected Partner may be modified from time to
time by an amendment to the Agreement or by execution of a written
instrument by and between such Protected Partner and the General
Partner, acting on behalf of the Partnership and without the prior
written consent of any other Partner (whether or not Protected
Partners).
(ii) "Protected Partner(s)" means that or those Limited Partner(s)
designated as Protected Partner(s) on Exhibit A attached to the Tenth
Prior Amendment, as such designation may be modified from time to time
by the General Partner, whether by express amendment to the Agreement or
by execution of a written instrument by and between any Protected
Partner(s) and the General Partner, acting on behalf of the Partnership
and without the prior consent of other Limited Partners (whether or not
Protected Partners). For purposes hereof, any successor, assignee, or
transferee of Partnership Interests from a Protected Partner, which
successor,
E-5-2
<PAGE> 406
assignee or transferee determines its basis in such Units by reference
to the basis of the predecessor, assignor or transferor Protected
Partner, shall be considered a Protected Partner.
(b) Notwithstanding any provision of the Partnership Agreement to the
contrary (including, without limitation, the second sentence of Section
13.3 of the Partnership Agreement), upon liquidation of the Partnership or
upon the liquidation of the Partnership Interest of a Protected Partner,
such Protected Partner whose interest is being liquidated shall contribute
to the Partnership in accordance with Treasury Regulation Section
1.704-1(b)(2)(ii)(b)(2), the deficit balance, if any, in its Capital
Account, calculated after the allocation for such year of all items of Net
Income, Net Losses, Gross Income and Unrealized Gain or Unrealized Loss
allocated in accordance with Section 6.1 of the Agreement, Section 1.D of
Exhibit B to the Agreement, provided, however, that in no event shall such
contribution obligation for any Protected Partner exceed such Protected
Partner's Protected Amount. The obligation created pursuant to this Section
4(b) shall be for the benefit of the Partnership, the General Partner, the
creditors of the Partnership or any other person to whom any debts,
liabilities or obligations are owed by (or who otherwise has any claim
against) the Partnership or the General Partner in its capacity as general
partner of the Partnership and shall be enforceable by such parties. Each
Protected Partner unconditionally and irrevocably waives any subrogation,
reimbursement or similar rights to which it might otherwise be entitled as
the result of its performance with respect to the obligation pursuant to
this Section 4(b), whether such rights arise with respect to the
Partnership, another Partner of the Partnership or a third party; provided,
however, that the General Partner shall in all events be entitled to
enforce the contribution obligation of a Protected Partner undertaken
pursuant to Section 4(b). Notwithstanding anything herein to the contrary,
the obligation of a Protected Partner to contribute amounts pursuant to
this paragraph shall continue in full force and effect in accordance with
the terms hereof until one year following the transfer or other disposition
by such Protected Partner of its Partnership Interests unless the
Partnership and such Protected Partner agree otherwise. Unless expressly
agreed by the Partnership and the affected holders of Contributor Units to
the contrary in this or any other agreement, no holder of Contributor Units
who is not a Protected Partner shall have any obligation to contribute
amounts to the Partnership.
5. Amendments. Notwithstanding any provision in the Agreement to the
contrary, the provisions of the Tenth Prior Amendment may be waived or amended
or otherwise modified with the prior written consent of holders (being either
the Equity Holders and/or the Indirect Equity Holders) of more than seventy-five
percent (75%) of the Contributor Units at the time outstanding and without the
consent of any other Limited Partner.
E-5-3
<PAGE> 407
EXHIBIT E-6
(CORNERSTONE AGREEMENT)
BACKGROUND
In connection with the closing of the merger of Cornerstone Properties
Limited Partnership ("Cornerstone Partnership") with and into the Partnership on
, 2000, (the "Cornerstone Merger") pursuant to the Agreement and Plan
of Merger, dated as of February 11, 2000, as amended, among the General Partner,
the Partnership, Cornerstone Properties Inc. and Cornerstone Partnership (the
"Merger Agreement"), certain former limited partners of Cornerstone Partnership
who became Limited Partners as a result of the Cornerstone Merger (referred to
as "Former Cornerstone Limited Partners") have elected to become Protected
Partners and, as a group, the Former Cornerstone Limited Partners have been
given the right to increase their Protected Amount after the closing of the
Cornerstone Merger, subject to a specified aggregate dollar limitation. In
addition, the Partnership and Cornerstone Partnership entered into certain other
agreements with respect to tax matters that affect the Former Cornerstone
Limited Partners. The specific agreements between the Partnership and
Cornerstone Partnership with respect to these various matters are described
below.
All capitalized terms used and not otherwise defined in this Exhibit E-6
shall have the meanings assigned in the Agreement.
SPECIFIC AGREEMENTS
1. Election by Certain Former Cornerstone Limited Partners to Undertake
Deficit Restoration Obligation. Each Former Cornerstone Limited Partner who,
prior to the closing of the Cornerstone Merger, had entered into an agreement
with Cornerstone Partnership to bear the economic risk of loss as to a portion
of Cornerstone Partnership's recourse indebtedness by undertaking the obligation
to restore a portion of its negative capital account balance upon liquidation of
such Former Cornerstone Limited Partner's interest in Cornerstone Partnership
was given the opportunity to become a Protected Partner with a Protected Amount
in an amount equal to the maximum amount such Former Cornerstone Limited Partner
was obligated to restore to Cornerstone Partnership immediately prior to the
closing of the Cornerstone Merger; provided, however, that except as set forth
in Paragraphs 2 and 3, below, no Former Cornerstone Limited Partner has the
right to increase its Protected Amount following the Cornerstone Merger. The
Former Cornerstone Limited Partners who have elected to become Protected
Partners under such provision of the Merger Agreement, along with their
specified Protected Amounts as of the closing of the Cornerstone Merger, are set
forth on Schedule 1 to this Exhibit E-6.
2. Election by Former Cornerstone Limited Partners to Increase Protected
Amount. Notwithstanding the proviso in Paragraph 1, above, Former Cornerstone
Limited Partners may, at any time following the Cornerstone Merger, elect to
become Protected Partners and/or increase their Protected Amounts (as determined
immediately prior to the Cornerstone Merger), as a group, by an aggregate amount
of up to [$50 million, reduced by the amount of any increases to the amounts
that such former limited partners of Cornerstone Partnership were obligated to
restore to Cornerstone Partnership that occurred during the period commencing on
February 11, 2000, and ending at the closing of the Cornerstone Merger/verify
any increases and insert fixed sum at the time of the Merger].
3. Effect of Other Agreements With Former Cornerstone Limited
Partners. Pursuant to the Merger Agreement, the Partnership assumed certain
obligations of Cornerstone Partnership made pursuant to agreements that were
listed as "tax protection agreements" on Schedule 2.18(j) to the Cornerstone
Disclosure Letter, as defined in the Merger Agreement, a copy of which is
attached as Schedule 2 to this Exhibit E-6 (the "Cornerstone Tax Protection
Agreements"). To the extent that the Cornerstone Tax Protection Agreements
included a right to enter into deficit restoration obligations with respect to
Cornerstone Partnership, such Former Cornerstone Limited Partners who are
beneficiaries of such Cornerstone Tax Protection Agreements are Protected
Partners and have Protected Amounts as provided in the Cornerstone Tax
Protection Agreements. Notwithstanding the limitations in Paragraphs 1 and 2
<PAGE> 408
above, the Protected Partners who are beneficiaries of the Cornerstone Tax
Protection Agreements shall have the right to increase their Protected Amounts
if and to the extent provided in the applicable Cornerstone Tax Protection
Agreement and the amount of any such increase shall not be taken into account in
applying the limitation in Paragraph 2. The Former Cornerstone Limited Partners
who are or have the right to become Protected Partners pursuant to the
Cornerstone Tax Protection Agreements, along with their specified Protected
Amounts (or the maximum Protected Amount that they are entitled to elect, as
noted therein) are set forth on Schedule 3 to this Exhibit E-6.
4. Request to Increase Amount of Deficit Restoration Obligation. The
Partnership shall consider in good faith a request from a Former Cornerstone
Limited Partner to become a Protected Partner and/or to increase its Protected
Amount, as applicable, from time to time after the Cornerstone Merger if such
Former Cornerstone Limited Partner shall provide information from its
professional tax advisor satisfactory to the Partnership showing that, in the
absence of such increased Protected Amount, such Limited Partner likely would
not be allocated from the Partnership sufficient indebtedness under Section 752
of the Code and the at-risk provisions under Section 465 of the Code to avoid
the recognition of gain (other than gain required to be recognized by reason of
actual cash distributions from the Partnership). The Partnership and its
professional tax advisors shall cooperate in good faith with such Former
Cornerstone Limited Partner and its professional tax advisor to provide such
information regarding the allocation of the Partnership liabilities and the
nature of such liabilities as is reasonably necessary in order to determine the
Former Cornerstone Limited Partner's adjusted tax basis in its Partnership
Interest and at-risk amount. In deciding whether or not to grant such a request,
the Partnership shall be entitled to take into account all factors related to
the Partnership, including, without limitation, the existing and anticipated
debt structure of the Partnership, the tax situations of all other Partners,
including the General Partner (individually and as a group), and the effect that
granting such a request might have on their tax situation, and the anticipated
long-term business needs of the Partnership. The Partnership's only obligation
with respect to any such request from a Former Cornerstone Limited Partner
pursuant to this Paragraph 4 shall be to act in good faith. In the event the
Partnership fails to act in good faith with respect to any such request, the
exclusive remedy of the Former Cornerstone Limited Partner who made such request
shall be an action for specific performance, with no entitlement to monetary
damages.
5. Manner of Electing to Become a Protected Partner or To Increase
Protected Amount. A Former Cornerstone Limited Partner who pursuant to the
rights set forth under the other Paragraphs of this Exhibit E-6, wishes to
become a Protected Partner or, if already a Protected Partner, to increase its
Protected Amount, shall provide a written notice to the General Partner
specifying the desired Protected Amount. If such election is made pursuant to
Paragraph 2, such election shall become effective upon the receipt thereof by
the General Partner unless (i) the General Partner determines that the
limitation set forth in Paragraph 2 would be exceeded by reason of such
election, or (ii) the General Partner reasonably determines, based on the advice
of its tax advisors and after consulting with the Former Cornerstone Limited
Partner and its tax advisors, that the amount specified in such Former
Cornerstone Limited Partner's election substantially exceeds the amount
necessary to cause such Former Cornerstone Limited Partner to be allocated
sufficient Partnership liabilities under Section 752 of the Code (taking into
account the effect of anticipated reductions in Partnership debt on such Former
Cornerstone Limited Partner's allocable share of Partnership liabilities) to
cover such Former Cornerstone Limited Partner's "negative tax capital account"
and reasonably projected changes therein. If such election is pursuant to a
Cornerstone Tax Protection Agreement, such election shall become effective upon
the receipt thereof by the General Partner unless the General Partner reasonably
determines, based on the advice of its tax advisors and after consulting with
the Former Cornerstone Limited Partner and its tax advisor, that such Former
Cornerstone Limited Partner does not have the right to undertake such election
without the consent of the General Partner. If such election is not pursuant to
Paragraph 2 or a Cornerstone Tax Protection Agreement (or such election does not
become effective pursuant to the provisions of one of the two preceding
sentences), such election shall be deemed to be a request pursuant to Paragraph
4 of this Exhibit E-6 and shall become effective only upon approval by the
General Partner in accordance with the provisions of the Paragraph 4. Upon
becoming effective, such election shall be irrevocable, cannot be
E-6-2
<PAGE> 409
reduced, and shall be binding upon successive transferees of the Former
Cornerstone Limited Partner except as provided in Section 13.3 of the Agreement.
6. No Obligation of the Partnership to Maintain Recourse
Debt. Notwithstanding any obligations of the Partnership referred to in this
Exhibit E-6, the Partnership shall not be obligated to maintain any level of
indebtedness that qualifies as a Recourse Liability or Partner Nonrecourse Debt
in excess of the amounts otherwise specifically required to be maintained under
the Cornerstone Tax Protection Agreements assumed by the Partnership pursuant to
the Merger Agreement.
7. Amendments of Exhibit E; Designation as Part II Protected Partners. All
Protected Partners and their respective Protected Amounts as provided in this
Exhibit E-6 shall be reflected on Exhibit E, which shall be amended from time to
time as necessary to reflect any additional Protected Partners and/or increases
in Protected Amounts made pursuant to paragraphs 2, 3, or 4, above. Former
Cornerstone Partnership Limited Partners who are or become Protected Partners
pursuant to the provisions of this Exhibit E-6 shall be designated on Exhibit E
as Part II Protected Partners; provided, however, that any Former Cornerstone
Limited Partner who is only obligated to restore a deficit in its capital
account upon liquidation of the Partnership pursuant to a Cornerstone Tax
Protection Agreement shall be designated on Exhibit E as a Part I Protected
Partner.
8. Section 704(c) Method. Notwithstanding Paragraph 2.C. of Exhibit C, the
Partnership shall use the "traditional method" under Regulations Section
1.704-3(b) for purposes of making allocations under Section 704(c) of the Code
with respect to each property in which Cornerstone Partnership owns a direct or
indirect interest at the time of the Cornerstone Merger (the "Cornerstone
Properties") to take into account the Book-Tax Disparities as of the effective
time of the Cornerstone Merger with respect to the Cornerstone Properties, with
no "curative allocations" to offset the effect of the "ceiling rule," except to
the extent that the Partnership expressly would be required to use a different
method under a Cornerstone Tax Protection Agreement assumed by the Partnership
pursuant to the Merger Agreement. The 704(c) Values of the Cornerstone
Properties shall be as determined by agreement between Cornerstone Partnership
and the Partnership prior to the effective time of the Cornerstone Merger, or in
the absence of such agreement, as determined by the General Partner using such
reasonable method of valuation as it shall adopt.
9. Allocations of "Tier 3" Nonrecourse Liabilities Pursuant to Regulations
Section 1.752-3(a)(3). Unless, and only to the extent, expressly provided
otherwise in the Cornerstone Tax Protection Agreements assumed by the
Partnership pursuant to the Merger Agreement, and notwithstanding Section 6.1.C.
of the Agreement, the Partnership shall determine in its reasonable discretion
the method to be used for allocating "excess nonrecourse liabilities" of the
Partnership pursuant to Regulations Section 1.752-3(a)(3) following the
Cornerstone Merger, provided that (i) the Partnership shall not use with respect
to the Former Cornerstone Limited Partners a method that is less favorable than
the method used by the Partnership with respect to the other Limited Partners of
the Partnership who are not parties to an express agreement specifying a
particular method to be used for such purposes, and (ii) in the case of a Former
Cornerstone Limited Partner who, prior to the Cornerstone Merger, had been
specially allocated a portion of a Cornerstone Partnership nonrecourse liability
secured by a property with respect to which such Cornerstone Partner has a
built-in gain under Section 704(c) of the Code to take into account such Former
Cornerstone Limited Partner's share of such built-in gain that was not taken
into account in making the allocation of such liability by Cornerstone
Partnership under Regulations Section 1.752-3(a)(2), the Partnership shall
continue such method of allocating such liability following the Cornerstone
Merger.
E-6-3
<PAGE> 410
ATTACHMENT A
(SERIES A PREFERRED UNITS)
In accordance with Sections 4.2.A and 4.2.D of the Partnership Agreement,
set forth below are the terms and conditions of the Series A Preferred Units
established and issued by the Partnership to the General Partner on December 19,
1997, in connection with the merger of Beacon Properties L.P. ("Beacon
Partnership") with and into the Partnership (the "Beacon Partnership Merger"),
in exchange for the then outstanding Series A Preferred Units of Beacon
Partnership (all of which had been acquired by the General Partner as a result
of the merger of Beacon Properties Corporation with and into the General
Partner). All capitalized terms used in this Attachment and not otherwise
defined shall have the meanings assigned in the Partnership Agreement.
A. Designation and Number. A series of Partnership Units, designated as
Series A Preferred Units, was established on December 19, 1997, on which date
8,000,0000 Series A Preferred Units were issued to the General Partner in the
Beacon Partnership Merger.
B. Rank. The Series A Preferred Units shall, with respect to distribution
rights and rights upon liquidation, dissolution or winding up of the
Partnership, rank (a) senior to the Class A Units, Class B Units and all
Partnership Interests ranking junior to the Series A Preferred Units; (b) on a
parity with the Series B Preferred Units, the Series C Preferred Units, the
Series D Preferred Units and all Partnership Interests issued by the Partnership
the terms of which specifically provide that such Partnership Interests rank on
a parity with the Series A Preferred Units; and (c) junior to all Partnership
Interests issued by the Partnership the terms of which specifically provide that
such Partnership Interests rank senior to the Series A Preferred Units.
C. Distributions.
(i) Pursuant to Section 5.1 of the Partnership Agreement, holders of Series
A Preferred Units shall be entitled to receive, out of Available Cash,
cumulative preferential distributions of Available Cash at the rate of 8.98% of
the $25.00 liquidation preference per annum (equivalent to a fixed annual amount
of $2.245 per unit). Such distributions shall be cumulative from the last date
on which any distributions were paid with respect to the Series A Preferred
Units of Beacon Partnership for which the Series A Preferred Units were
exchanged in connection with the Beacon Partnership Merger and shall be payable
quarterly in arrears on or before March 15, June 15, September 15 and December
15 of each year or, if not a business day, the next succeeding business day
(each a "Series A Preferred Unit Distribution Payment Date"). Any distribution
payable on the Series A Preferred Units for any partial distribution period
shall be computed on the basis of a 360-day year consisting of twelve 30-day
months.
(ii) No distributions on Series A Preferred Units shall be authorized or
paid or set apart for payment at such time as the terms and provisions of any
agreement of the Partnership, including any agreement relating to its
indebtedness, prohibits such authorization, payment or setting apart for payment
or provides that such authorization, payment or setting apart for payment would
constitute a breach thereof, or a default thereunder, or if such authorization
or payment shall be restricted or prohibited by law.
(iii) Notwithstanding the foregoing, distributions with respect to the
Series A Preferred Units will accrue whether or not the terms and provisions set
forth in Section C.(ii) of this Attachment A at any time prohibit the current
payment of distributions, whether or not there is sufficient Available Cash for
such distributions and whether or not such distributions are authorized. Accrued
but unpaid distributions on the Series A Preferred Units will accumulate as of
the Series A Preferred Unit Distribution Payment Date on which they first become
payable.
(iv) When distributions are not paid in full (or a sum sufficient for such
full payment is not so set apart) upon the Series A Preferred Units and any
other Partnership Interests ranking on a parity as to distributions with the
Series A Preferred Units, all distributions authorized upon the Series A
Preferred Units and any other Partnership Interests ranking on a parity as to
distributions with the Series A Preferred Units shall be authorized pro rata so
that the amount of distributions authorized per Partnership
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Unit of Series A Preferred Units and such other Partnership Interests shall in
all cases bear to each other the same ratio that accrued distributions per
Partnership Unit on the Series A Preferred Units and such other Partnership
Interests (which shall not include any accrual in respect of unpaid
distributions for prior distribution periods if such other Partnership Interests
do not have a cumulative distribution) bear to each other. No interest, or sum
of money in lieu of interest, shall be payable in respect of any distribution
payment or payments on Series A Preferred Units which may be in arrears.
(v) Except as provided in Section C.(iv) of this Attachment A, unless full
cumulative distributions on the Series A Preferred Units have been or
contemporaneously are authorized and paid or authorized and a sum sufficient for
the payment thereof is set apart for payment for all past distribution periods
and the then current distribution period, no distributions (other than in
Partnership Interests ranking junior to the Series A Preferred Units as to
distributions and upon liquidation) shall be authorized or paid or set aside for
payment nor shall any other distribution be authorized or made upon the Class A
Units, the Class B Units, or any other Partnership Interests ranking junior to
or on a parity with the Series A Preferred Units as to distributions or upon
liquidation, nor shall any Class A Units, Class B Units, or any other
Partnership Interests ranking junior to or on a parity with the Series A
Preferred Units as to distributions or upon liquidation be redeemed, purchased
or otherwise acquired for any consideration (or any moneys be paid to or made
available for a sinking fund for the redemption of any such units or other
Partnership Interests) by the Partnership (except by conversion into or exchange
for Partnership Interests ranking junior to the Series A Preferred Units as to
distributions and upon liquidation).
(vi) Holders of the Series A Preferred Units shall not be entitled to any
distribution, whether payable in cash, property or Partnership Units in excess
of full cumulative distributions on the Series A Preferred Units as described
above. Any distribution payment made on the Series A Preferred Units shall first
be credited against the earliest accrued but unpaid distribution due with
respect to such Series A Preferred Units which remains payable.
D. Allocations. Allocations of the Partnership's items of income, gain,
loss and deduction shall be allocated among holders of Series A Preferred Units
in accordance with Article VI of the Agreement.
E. Liquidation Preference.
(i) Upon any voluntary or involuntary liquidation, dissolution or winding
up of the affairs of the Partnership, the holders of Series A Preferred Units
then outstanding are entitled to be paid out of the assets of the Partnership
available for distribution to the Partners pursuant to Section 13.2.A of the
Agreement a liquidation preference of $25.00 per Series A Preferred Unit, plus
an amount equal to any accrued and unpaid distributions to the date of payment,
before any distribution of assets is made to holders of Class A Units, Class B
Units or any other Partnership Interests that rank junior to the Series A
Preferred Units as to liquidation rights.
(ii) In the event that, upon any such voluntary or involuntary liquidation,
dissolution or winding up, the available assets of the Partnership are
insufficient to pay the amount of the liquidating distributions on all
outstanding Series A Preferred Units and the corresponding amounts payable on
all other Partnership Interests ranking on a parity with the Series A Preferred
Units in the distribution of assets, then such assets shall be allocated among
the Series A Preferred Units, as a class, and each class or series of such other
such Partnership Interests, as a class, in proportion to the full liquidating
distributions to which they would otherwise be respectively entitled.
(iii) After payment of the full amount of the liquidating distributions to
which they are entitled, the holders of Series A Preferred Units will have no
right or claim to any of the remaining assets of the Partnership.
(iv) The consolidation or merger of the Partnership with or into any other
partnership, corporation, trust or entity or of any other partnership,
corporation, trust or other entity with or into the Partnership or the sale,
lease or conveyance of all or substantially all of, the property or business of
the Partnership, shall not be deemed to constitute a liquidation, dissolution or
winding up of the Partnership for purposes of this Section E.
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F. Redemption. In connection with a redemption by the General Partner of
any or all of the Series A Preferred Shares of the General Partner, the
Partnership shall provide cash to the General Partner for such purpose which
shall be equal to redemption price of the Series A Preferred Shares to be
redeemed and one Series A Preferred Unit shall be canceled with respect to each
Series A Preferred Share so redeemed. From and after the date in which the
Series A Preferred Shares are redeemed, any Series A Preferred Units so canceled
shall no longer be outstanding and all rights hereunder, to distributions or
otherwise, with respect to such Series A Preferred Units shall cease.
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ATTACHMENT B
(SERIES B PREFERRED UNITS)
In accordance with Sections 4.2.A and 4.2.D of the Agreement, set forth
below are the terms and conditions of the Series B Preferred Units established
and issued by the Partnership on February 19, 1998, in connection with the
issuance of Series B Preferred Shares by the General Partner. Capitalized terms
used herein and not otherwise defined shall have the meanings given to them in
the Agreement.
A. Designation and Number. A series of Partnership Units, designated as
Series B Preferred Units was established on February 19, 1998, on which date
6,000,000 Series B Preferred Units were issued to the General Partner.
B. Rank. The Series B Preferred Units shall, with respect to distribution
rights and rights upon voluntary or involuntary liquidation, dissolution or
winding up of the affairs of the Partnership, rank (a) senior to the Class A
Units, Class B Units and all Partnership Interests ranking junior to the Series
B Preferred Units; (b) on a parity with the Series A Preferred Units, the Series
C Preferred Units, the Series D Preferred Units, and all other Partnership
Interests issued by the Partnership the terms of which specifically provide that
such Partnership Interests rank on a parity with the Series B Preferred Units;
and (c) junior to all Partnership Interests issued by the Partnership the terms
of which specifically provide that such Partnership Interests rank senior to the
Series B Preferred Units.
C. Distributions.
(i) Pursuant to Section 5.1 of the Agreement, holders of Series B Preferred
Units shall be entitled to receive, out of Available Cash, cumulative
preferential cash distributions at the rate of 5.25% of the $50.00 liquidation
preference per annum (equivalent to a fixed annual amount of $2.625 per unit).
Distributions (which term as used herein shall include liquidated damages, if
any, payable pursuant to Section C.(vi) of this Attachment B) on the Series B
Preferred Units shall be payable quarterly and be cumulative from the fifteenth
day of each February, May, August and November or, if not a business day, the
next succeeding business day (each, a "Series B Preferred Unit Distribution
Payment Date"). Any distribution (including the initial distribution) payable on
the Series B Preferred Units for any partial distribution period shall be
prorated and computed on the basis of a 360-day year consisting of twelve 30-day
months.
(ii) No distribution on the Series B Preferred Units shall be authorized by
the General Partner or paid or set apart for payment by the Partnership at such
time as the terms and provisions of any agreement of the Partnership, including
any agreement relating to its indebtedness, prohibits such authorization,
payment or setting apart for payment or provides that such authorization,
payment or setting apart for payment would constitute a breach thereof, or a
default thereunder, or if such authorization or payment shall be restricted or
prohibited by law. No interest, or sum of money in lieu of interest, shall be
payable in respect of any distribution payment or payments on the Series B
Preferred Units which may be in arrears.
Notwithstanding the foregoing, distributions with respect to the Series B
Preferred Units shall accumulate whether or not any of the foregoing
restrictions exist, whether or not there is sufficient Available Cash for the
payment thereof and whether or not such distributions are authorized.
Accumulated but unpaid distributions on the Series B Preferred Units shall not
bear interest, and holders of the Series B Preferred Units shall not be entitled
to any distributions in excess of full cumulative distributions. Any
distribution payment made on the Series B Preferred Units shall first be
credited against the earliest accumulated but unpaid distribution due with
respect to such units which remains payable.
(iii) Except as provided in Section C.(iv) of this Attachment B, if any
Series B Preferred Units are outstanding, no distributions (other than in
Partnership Interests ranking junior to the Series B Preferred Units as to
distributions and upon liquidation, dissolution or winding up of the affairs of
the Partnership) shall be declared or paid or set apart for payment nor shall
any other distribution be declared or made upon the Class A Units, the Class B
Units, or any other Partnership Interests ranking junior to or on a parity with
the Series B Preferred Units as to distributions or upon liquidation,
dissolution or winding up of
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the affairs of the Partnership for any period unless full cumulative
distributions have been or contemporaneously are declared and paid or declared
and a sum sufficient for the payment thereof set apart for such payment on the
Series B Preferred Units for all past distribution periods and the then current
distribution period, nor shall any Class A Units, Class B Units, or any other
Partnership Interests ranking junior to or on a parity with the Series B
Preferred Units as to distributions or upon liquidation, dissolution or winding
up of the affairs of the Partnership, be redeemed, purchased or otherwise
acquired for any consideration (or any moneys be paid to or made available for a
sinking fund for the redemption of any such Partnership Interests) by the
Partnership (except by conversion into or exchange for Partnership Interests
ranking junior to the Series B Preferred Units as to distributions and upon
liquidation, dissolution or winding up of the affairs of the Partnership).
(iv) When distributions are not paid in full (or a sum sufficient for such
full payment is not so set apart) upon the Series B Preferred Units and any
other Partnership Interests ranking on a parity as to distributions with the
Series B Preferred Units, all distributions declared upon the Series B Preferred
Units and any other Partnership Interests ranking on a parity as to
distributions with the Series B Preferred Units shall be declared pro rata so
that the amount of distributions declared per unit of Series B Preferred Units
and such other Partnership Interests shall in all cases bear to each other the
same ratio that accumulated distributions per unit on the Series B Preferred
Units and such other Partnership Interests (which shall not include any
accumulation in respect of unpaid distributions for prior distribution periods
if such other Partnership Interests do not have a cumulative distribution) bear
to each other.
(v) Holders of Series B Preferred Units shall not be entitled to any
distribution, whether payable in cash, property or Partnership Interests, in
excess of full cumulative distributions on the Series B Preferred Units as
described above. Accumulated but unpaid distributions on the Series B Preferred
Units will accumulate as of the Series B Preferred Unit Distribution Payment
Date on which they first become payable.
(vi) If the General Partner fails to maintain the effectiveness of the
registration statement as required by the Registration Rights Agreement dated
February 19, 1998 between the General Partner and Lehman Brothers Inc. (the
"Registration Rights Agreement"), liquidated damages shall accumulate on the
$50.00 liquidation preference of the Series B Preferred Units at a rate of 0.25%
per annum (equivalent to a fixed annual amount of $0.125 per unit) with respect
to the first quarter immediately following such failure and at a rate of 0.50%
per annum (equivalent to a fixed annual amount of $0.25 per unit) with respect
to the second quarter and all subsequent quarters following such failure
("Liquidated Damages").
D. Allocations. Allocations of the Partnership's items of income, gain,
loss and deduction shall be allocated among holders of Series B Preferred Units
in accordance with Article VI of the Agreement.
E. Liquidation Preference.
(i) In the event of any voluntary or involuntary liquidation, dissolution
or winding up of the affairs of the Partnership, the holders of the Series B
Preferred Units shall be entitled to receive out of the assets of the
Partnership available for distribution to the Partners pursuant to Section
13.2.A of the Agreement a liquidation preference of $50.00 per Series B
Preferred Unit, plus an amount equal to any accumulated and unpaid distributions
to the date of payment, before any distribution of assets is made to holders of
Class A Units, Class B Units or any other Partnership Interests that rank junior
to the Series B Preferred Units as to liquidation rights.
(ii) If upon any such voluntary or involuntary liquidation, dissolution or
winding up of the affairs of the Partnership, the assets of the Partnership are
insufficient to make such full payment to holders of the Series B Preferred
Units and the corresponding amounts payable on all other Partnership Interests
ranking on a parity with the Series B Preferred Units in the distribution of
assets, then the holders of such Partnership Interests shall share ratably in
any such distribution of assets in proportion to the full liquidating
distributions to which they would otherwise be respectively entitled.
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(iii) After payment of the full amount of the liquidating distributions to
which they are entitled, the holders of Series B Preferred Units shall have no
right or claim to any of the remaining assets of the Partnership.
(iv) None of a consolidation or merger of the Partnership with or into
another entity, merger of another entity with or into the Partnership, a
statutory unit exchange by the Partnership or a sale, lease or conveyance of all
or substantially all of the Partnership's property or business shall be
considered a liquidation, dissolution or winding up of the affairs of the
Partnership.
F. Redemption. In connection with redemption by the General Partner of any
of its Series B Preferred Shares in accordance with the provisions of the
Articles Supplementary to the Declaration of Trust filed with the State
Department of Assessments and Taxation of Maryland on February 19, 1998,
establishing the Series B Preferred Shares (the "Articles Supplementary"), the
Partnership shall provide cash to the General Partner for such purpose which
shall be equal to the redemption price (as set forth in the Articles
Supplementary) and one Series B Preferred Unit shall be canceled with respect to
each Series B Preferred Share so redeemed by the General Partner. From and after
the Series B Preferred Share Redemption Date (as defined in the Articles
Supplementary), any Series B Preferred Units so canceled shall no longer be
outstanding and all rights hereunder, to distributions or otherwise, with
respect to such Series B Preferred Units shall cease.
G. Conversion.
In connection with conversion into Shares of any Series B Preferred Shares
in accordance with the provisions of the Articles Supplementary, the Partnership
shall (i) issue to the General Partner a number of Class A Units equal to the
number of Shares issued by the General Partner upon such conversion; and (ii)
provide cash to the General Partner, if necessary, in an amount equal to the
amount of cash paid by the General Partner upon conversion of any Series B
Preferred Shares which would otherwise result in the issuance of fractional
Shares. One Series B Preferred Unit, or any fraction thereof, shall be canceled
with respect to each Series B Preferred Share, or any fraction thereof, so
converted, and from and after such conversion, any Series B Preferred Units so
canceled shall no longer be outstanding and all rights hereunder, to
distributions or otherwise, with respect to such Series B Preferred Units shall
cease.
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ATTACHMENT C
(SERIES C PREFERRED UNITS)
In accordance with Sections 4.2.A and 4.2.D of the Agreement, set forth
below are the terms and conditions of the Series C Preferred Units established
and issued by the Partnership on December 14, 1998, in connection with issuance
of Series C Preferred Shares by the General Partner. Capitalized terms used
herein and not otherwise defined shall have the meanings given to them in the
Agreement.
A. Designation and Number. A series of Partnership Units, designated as
Series C Preferred Units was established on December 14, 1998, on which date
4,600,000 Series C Preferred Units were issued to the General Partner.
B. Rank. The Series C Preferred Units shall, with respect to distribution
rights and rights upon liquidation, dissolution or winding up of the
Partnership, rank (a) senior to the Class A Units, Class B Units and all
Partnership Interests ranking junior to the Series C Preferred Units; (b) on a
parity with the Series A Preferred Units, the Series B Preferred Units, the
Series D Preferred Units, and all other Partnership Interests issued by the
Partnership the terms of which specifically provide that such Partnership
Interests rank on a parity with the Series C Preferred Units; and (c) junior to
all Partnership Interests issued by the Partnership the terms of which
specifically provide that such Partnership Interests rank senior to the Series C
Preferred Units.
C. Distributions.
(i) Pursuant to Section 5.1 of the Agreement, holders of Series C Preferred
Units shall be entitled to receive, out of Available Cash, cumulative
preferential distributions of Available Cash at the rate of 8 5/8% of the $25.00
liquidation preference per annum (equivalent to a fixed annual amount of
$2.15625 per unit). Such distributions shall accumulate on a daily basis and be
cumulative from the date of original issuance (December 8, 1998) and shall be
payable quarterly in arrears on March 15, June 15, September 15 and December 15
of each year or, if not a business day, the next succeeding business day (each a
"Series C Preferred Unit Distribution Payment Date"), commencing March 15, 1999.
Any distribution payable on the Series C Preferred Units for any partial
distribution period shall be computed on the basis of a 360-day year consisting
of twelve 30-day months.
(ii) No distributions on Series C Preferred Units shall be authorized or
paid or set apart for payment at such time as the terms and provisions of any
agreement of the Partnership, including any agreement relating to its
indebtedness, prohibits such authorization, payment or setting apart for payment
or provides that such authorization, payment or setting apart for payment would
constitute a breach thereof, or a default thereunder, or if such authorization
or payment shall be restricted or prohibited by law.
(iii) Notwithstanding the foregoing, distributions with respect to the
Series C Preferred Units will accumulate whether or not the terms and provisions
set forth in Section C.(ii) of this Attachment C at any time prohibit the
current payment of distributions, whether or not there is sufficient Available
Cash for such distributions and whether or not such distributions are
authorized. Accumulated but unpaid distributions on the Series C Preferred Units
will accumulate as of the Series C Preferred Unit Distribution Payment Date on
which they first become payable.
(iv) When distributions are not paid in full (or a sum sufficient for such
full payment is not so set apart) upon the Series C Preferred Units and any
other Partnership Interests ranking on a parity as to distributions with the
Series C Preferred Units, all distributions authorized upon the Series C
Preferred Units and any other Partnership Interests ranking on a parity as to
distributions with the Series C Preferred Units shall be authorized pro rata so
that the amount of distributions authorized per Partnership Unit of Series C
Preferred Units and such other Partnership Interests shall in all cases bear to
each other the same ratio that accumulated distributions per Partnership Unit on
the Series C Preferred Units and such other Partnership Interests (which shall
not include any accumulation in respect of unpaid distributions for prior
distribution periods if such other Partnership Interests do not have a
cumulative
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distribution) bear to each other. No interest, or sum of money in lieu of
interest, shall be payable in respect of any distribution payment or payments on
Series C Preferred Units which may be in arrears.
(v) Except as provided in Section C.(iv) of this Attachment C, unless full
cumulative distributions on the Series C Preferred Units have been or
contemporaneously are authorized and paid or authorized and a sum sufficient for
the payment thereof is set apart for payment for all past distribution periods
and the then current distribution period, no distributions (other than in
Partnership Interests ranking junior to the Series C Preferred Units as to
distributions and upon liquidation) shall be authorized or paid or set aside for
payment nor shall any other distribution be authorized or made upon the Class A
Units, the Class B Units, or any other Partnership Interests ranking junior to
or on a parity with the Series C Preferred Units as to distributions or upon
liquidation, nor shall any Class A Units, Class B Units, or any other
Partnership Interests ranking junior to or on a parity with the Series C
Preferred Shares as to distributions or upon liquidation be redeemed, purchased
or otherwise acquired for any consideration (or any moneys be paid to or made
available for a sinking fund for the redemption of any such units or other
Partnership Interests) by the Partnership (except by conversion into or exchange
for Partnership Interests ranking junior to the Series C Preferred Units as to
distributions and upon liquidation).
(vi) Holders of the Series C Preferred Units shall not be entitled to any
distribution, whether payable in cash, property or Partnership Units in excess
of full cumulative distributions on the Series C Preferred Units as described
above. Any distribution payment made on the Series C Preferred Units shall first
be credited against the earliest accumulated but unpaid distribution due with
respect to such Series C Preferred Units which remains payable.
D. Allocations. Allocations of the Partnership's items of income, gain,
loss and deduction shall be allocated among holders of Series C Preferred Units
in accordance with Article VI of the Agreement.
E. Liquidation Preference.
(i) Upon any voluntary or involuntary liquidation, dissolution or winding
up of the affairs of the Partnership, the holders of Series C Preferred Units
then outstanding are entitled to be paid out of the assets of the Partnership
available for distribution to the Partners pursuant to Section 13.2.A of the
Agreement a liquidation preference of $25.00 per Series C Preferred Unit, plus
an amount equal to any accumulated and unpaid distributions to the date of
payment, before any distribution of assets is made to holders of Class A Units,
Class B Units or any other Partnership Interests that rank junior to the Series
C Preferred Units as to liquidation rights.
(ii) In the event that, upon any such voluntary or involuntary liquidation,
dissolution or winding up, the available assets of the Partnership are
insufficient to pay the amount of the liquidating distributions on all
outstanding Series C Preferred Units and the corresponding amounts payable on
all other Partnership Interests ranking on a parity with the Series C Preferred
Units in the distribution of assets, then such assets shall be allocated among
the Series C Preferred Units, as a class, and each class or series of such other
such Partnership Interests, as a class, in proportion to the full liquidating
distributions to which they would otherwise be respectively entitled.
(iii) After payment of the full amount of the liquidating distributions to
which they are entitled, the holders of Series C Preferred Units will have no
right or claim to any of the remaining assets of the Partnership.
(iv) The consolidation or merger of the Partnership with or into any other
partnership, corporation, trust or entity or of any other partnership,
corporation, trust or other entity with or into the Partnership or the sale,
lease or conveyance of all or substantially all of, the property or business of
the Partnership, shall not be deemed to constitute a liquidation, dissolution or
winding up of the Partnership for purposes of this Section E.
F. Redemption. In connection with a redemption by the General Partner of
any or all of the Series C Preferred Shares, the Partnership shall provide cash
to the General Partner for such purpose which shall be equal to redemption price
of the Series C Preferred Shares to be redeemed and one
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Series C Preferred Unit shall be canceled with respect to each Series C
Preferred Share so redeemed. From and after the date in which the Series C
Preferred Shares are redeemed, the Series C Preferred Units so canceled shall no
longer be outstanding and all rights hereunder, to distributions or otherwise,
with respect to such Series C Preferred Units shall cease.
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ATTACHMENT D
(SERIES D PREFERRED UNITS)
In accordance with Sections 4.2.A and 4.2.D of the Partnership Agreement,
set forth below are the terms and conditions of the Series D Preferred Units
hereby established that will be issued by the Partnership to Cornerstone
Properties Inc. on , 2000, in connection with the merger of
Cornerstone Properties Limited Partnership ("Cornerstone Partnership") with and
into the Partnership (the "Cornerstone Partnership Merger"), in exchange for the
then outstanding Series A Cumulative Convertible Preferred Units of Cornerstone
Partnership (all of which will be acquired by the General Partner in the merger
of Cornerstone Properties Inc. with and into General Partner (the "REIT Merger")
immediately following the Cornerstone Partnership Merger). All capitalized terms
used in this Attachment and not otherwise defined shall have the meanings
assigned in the Partnership Agreement.
A. Designation and Number. A series of Partnership Units, designated as
Series D 7.0% cumulative Convertible Preferred Units (the "Series D Preferred
Units") is hereby established. The number of Series D Partnership Units shall be
3,030,303.
B. Rank. The Series D Preferred Units shall, with respect to distribution
rights and rights upon liquidation, dissolution or winding up of the
Partnership, rank (a) senior to the Class A Units, Class B Units and all
Partnership Interests ranking junior to the Series D Preferred Units; (b) on a
parity with the Series A Preferred Units, the Series B Preferred Units, the
Series C Preferred Units, and all Partnership Interests issued by the
Partnership the terms of which specifically provide that such Partnership
Interests rank on a parity with the Series D Preferred Units (each referred to
as "Parity Preferred Units"); and (c) junior to all Partnership Interests issued
by the Partnership the terms of which specifically provide that such Partnership
Interests rank senior to the Series D Preferred Units.
C. Distributions.
Pursuant to Section 5.1 of the Partnership Agreement, holders of Series D
Preferred Units will be entitled to receive, out of Available Cash, cash
distributions at the rate of 7% per annum on the $16.50 liquidation preference.
Such distributions shall be cumulative from June , 2000, and will be payable
annually on August 4 of each year (the "Series D Preferred Unit Distribution
Payment Date"). Distributions will be payable, in arrears, to holders of record
of Series D Preferred Units as they appear on the books of the Partnership on
such record dates, not more than 60 days nor less than 10 days preceding the
payment dates thereof, as shall be fixed by the General Partner. The amount of
distributions payable for the initial distribution period or any period shorter
or longer than a full distribution period shall be calculated on the basis of a
360-day year of twelve 30-day months. No distributions may be declared or paid
or set apart for payment on any Parity Partnership Preferred Units with regard
to the payment of distributions unless there shall also be or have been declared
and paid or set apart for payment on the Series D Preferred Units like
distributions for all distribution payment periods of the Series D Preferred
Units ending on or before the distribution payment date of such Parity
Partnership Preferred Units, ratably in proportion to the respective amounts of
distributions (x) accumulated and unpaid or payable on such Series D Preferred
Units on the one hand, and (y) accumulated and unpaid through the distribution
payment period or periods of the Series D Preferred Units next preceding such
distribution payment date, on the other hand.
Except as set forth in the preceding sentence, unless full cumulative
distributions on the Series D Preferred Units have been paid, no distributions
may be paid or declared and set aside for payment or other distribution made
upon the Class A Units, Class B Units or on any other Partnership Units ranking
junior to or on a parity with the Series D Preferred Units as to distributions,
nor any Class A Units, Class B Units, or any other Partnership Units ranking
junior to or on a parity with the Series D Preferred Units as to distributions,
may be redeemed, purchased or otherwise acquired for any consideration (or any
payment be made to or available for a sinking fund for the redemption of any
Units or other Partnership Interests); provided, however, that any moneys
therefore deposited in any sinking fund with respect to any Partnership Unit in
compliance with the provisions of such sinking fund may thereafter be applied to
the
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purchase or redemption of such Partnership Unit in accordance with the terms of
such sinking fund, regardless of whether, at the time of such application full
cumulative distributions upon Series D Preferred Units outstanding to the last
distribution payment date shall have been paid or declared and set apart for
payment) by the Partnership; provided that any such junior Partnership Units may
be converted into or exchanged for Partnership Units ranking junior to the
Series D Preferred Units as to distributions, and, provided, further, that any
such Partnership Units or Parity Partnership Preferred Units or Partnership
Units may be issued by the Partnership to the General Partner in connection with
a purchase of any corresponding share of beneficial interest issued by the
General Partner to preserve the General Partner Entity's status as a real estate
trust.
D. Allocations.
Allocations of the Partnership's items of income, gain, loss and deduction
shall be allocated among the holders of Series D Preferred Units in accordance
with Article VI of the Partnership Agreement.
E. Liquidation Preference.
The Series D Preferred Units shall rank, as to liquidation, dissolution or
winding up of the Partnership, prior to Class A Units and Class B Units and any
other class of Partnership Units of the Partnership ranking junior to Series D
Preferred Units as to rights upon liquidation, dissolution or winding up of the
Partnership, so that in the event of any liquidation, dissolution or winding up
of the Partnership, whether voluntary or involuntary, the holders of the Series
D Preferred Units shall be entitled to receive out of the assets of the
Partnership available for distribution to holders of Partnership Units, whether
from capital, surplus or earnings, before any distribution is made to holders of
Class A Units, Class B Units or any other such junior Partnership Units, an
amount equal to $16.50 per unit (the "Liquidation Preference" of a Series D
Preferred Units) plus an amount equal to all distributions(whether or not earned
or declared) accrued and accumulated and unpaid on the Series D Preferred Units
to the date of final distribution. The holders of the Series D Preferred Units
will not be entitled to receive the Liquidation Preference until the liquidation
preference of any other class of Partnership Units of the Partnership ranking
senior to the Series D Preferred Units as to rights upon liquidation,
dissolution or winding up shall have been paid (or a sum set aside therefor
sufficient to provide for payment) in full. After payment of the full amount of
the Liquidation Preference and such distributions, the holders of Series D
Preferred Units will not be entitled to any further participation in any
distribution of assets by the Partnership. If, upon any liquidation, dissolution
or winding up of the Partnership, the assets of the Partnership, or proceeds
thereof, distributable among the holders of Parity Partnership Preferred Units
shall be insufficient to pay in full the preferential amount aforesaid, then
such assets, or the Proceeds thereof, shall be distributable among such holders
ratably in accordance with the respective amounts which would be payable on such
units if all amounts payable thereon were paid in full. For the purposes hereof,
neither a consolidation or merger of the Partnership with or into any other
partnership, limited liability company, corporation or any other entity, nor a
merger of any other partnership, limited liability company, corporation or any
other entity with or into the Partnership, nor a sale or transfer of all or any
part of the Partnership assets for cash or securities shall be considered a
liquidation, dissolution or winding up of the Partnership.
F. Conversion.
Each Series D Preferred Unit shall be convertible at any time, at the
election of the holders thereof, into a Class A Unit. In the event that the REIT
Merger is consummated and the Series A Cumulative Convertible Preferred Stock of
Cornerstone Properties Inc. is extinguished in connection therewith, the Series
D Preferred Units shall automatically be converted into a number of Class A
Units equal to the product of (i) the number of Series D Preferred Units
outstanding at such time, multiplied by (ii) 0.7009.
G. Value.
For purposes of the definition of Deemed value of Partnership Interest, the
Value on any date of the Series D Preferred Units shall be the greater of (i)
the Value of a Common Share of the General Partner on such date or (ii) the
Liquidation Preference of such Series D Preferred Unit.
D-2
<PAGE> 421
H. Voting Rights.
The holders of Series D Preferred Units shall have no voting rights
whatsoever, except for (i) any voting rights to which they may be entitled under
the laws of the State of Delaware and (ii) as follows:
So long as any Series D Partnership Preferred Units remain
outstanding, the consent of the holders of at least two-thirds of the
Series D Preferred Units outstanding at the time and all other classes or
series of Partnership Preferred Units upon which like voting rights have
been conferred and are exercisable (voting together as a class) given in
person or by proxy, either in writing or at any meeting called for the
purpose, shall be necessary to permit, effect or validate any one or more
of the following:
(i) the issuance or increase of any class or series of Partnership
Units ranking senior to the Series D Preferred Units; or
(ii) the amendment, alteration or repeal, whether by merger,
consolidation or otherwise, of any of the provisions of this Agreement,
(including this Attachment or any provision hereof) that would
materially and adversely affect any power, preference, or special right
of the Series D Preferred Units or of the holders thereof;
provided, however, that any increase in the number of any class or series of
Partnership Units or the creation and issuance of other classes or series of
Partnership Units, in each case ranking on a parity with or junior to the
Series D Preferred Units with respect to the payment of dividends and the
distribution of assets upon liquidation, dissolution or winding up, shall
not be deemed to materially and adversely affect such powers, preferences or
special rights.
D-3
<PAGE> 422
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
EQUITY OFFICE PROPERTIES TRUST:
Title 8 of the Corporations and Associations Article of the Annotated Code
of Maryland, as amended from time to time (the "Maryland REIT Law"), permits a
Maryland REIT to include in its declaration of trust a provision limiting the
liability of its trustees and officers to the trust and its shareholders for
money damages except for liability resulting from (a) actual receipt of an
improper benefit or profit in money, property or services or (b) active and
deliberate dishonesty established by a final judgment as being material to the
cause of action. The Equity Office declaration of trust contains such a
provision which eliminates such liability to the maximum extent permitted by the
Maryland REIT law.
The Equity Office declaration of trust authorizes Equity Office, to the
maximum extent permitted by Maryland law, to obligate itself to indemnify and to
pay or reimburse reasonable expenses in advance of final disposition of a
proceeding to (a) any present or former trustee or officer or (b) any individual
who, while a trustee of Equity Office and at the request of Equity Office,
serves or has served as a director, officer, partner, trustee, employee or agent
of another corporation, partnership, joint venture, trust, employee benefit plan
or any other enterprise from and against any claim or liability to which such
person may become subject or which such person may incur by reason of his or her
status as a present or former trustee or officer of Equity Office. The Equity
Office bylaws obligate Equity Office, to the maximum extent permitted by
Maryland law, to indemnify and to pay or reimburse reasonable expenses in
advance of final disposition of a proceeding to (a) any present or former
trustee or officer who is made party to the proceeding by reason of his service
in that capacity or (b) any individual who, while a trustee or officer of Equity
Office and at the request of Equity Office, serves or has served another
corporation, partnership, joint venture, trust, employee benefit plan or any
other enterprise as a trustee, director, officer or partner of such corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise and
who is made a party to the proceeding by reason of his service in that capacity,
against any claim or liability to which he or she may become subject by reason
of such status. The Equity Office declaration of trust and bylaws also permit
Equity Office to indemnify and advance expenses to any person who served a
predecessor of Equity Office in any of the capacities described above and to any
employee or agent of or a predecessor of Equity Office. The Equity Office bylaws
require Equity Office to indemnify a trustee or officer, or any former trustee
or officer, who has been successful, on the merits or otherwise, in the defense
of any proceeding to which he or she is made a party by reason of his service in
that capacity against reasonable expenses incurred in connection with the
proceeding.
The Maryland REIT Law permits a Maryland REIT to indemnify and advance
expenses to its trustees, officers, employees and agents to the same extent as
permitted by the Maryland General Corporation Law, as amended from time to time
(the "MGCL"), for directors and officers of Maryland corporations. The MGCL
permits a corporation to indemnify its present and former directors and
officers, among others, against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by them in connection with any proceeding
to which they may be made a party by reason of their service in those or other
capacities unless it is established that (a) the act or omission of the director
or officer was material to the matter giving rise to the proceeding and (x) was
committed in bad faith or (y) was the result of active and deliberate
dishonesty, (b) the director or officer actually received an improper personal
benefit in money, property or services or (c) in the case of any criminal
proceeding, the director or officer had reasonable cause to believe that the act
or omission was unlawful. The foregoing limitations on indemnification are
expressly set forth in the Equity Office bylaws. However, under the MGCL, a
Maryland corporation may not indemnify for any adverse judgment in a suit by or
in the right of the corporation or for a judgment of liability on the basis that
a personal benefit was improperly received, unless, in either case, a court
orders indemnification and then only for expenses. Under the MGCL, as a
condition to advancing expenses, as required by the Equity Office bylaws, Equity
Office must first receive
II-1
<PAGE> 423
(a) a written affirmation by the trustee or officer of his good faith belief
that he or she has met the standard of conduct necessary for indemnification by
Equity Office and (b) a written undertaking by or on his behalf to repay the
amount paid or reimbursed by Equity Office if it shall ultimately be determined
that the standard of conduct was not met. In addition, Mr. Dobrowski, a trustee
of Equity Office, is indemnified by General Motors Investment Management
Corporation and will be covered by an insurance policy maintained by General
Motors Corporation, of which General Motors Investment Management Corporation is
a subsidiary, in connection with serving on the Equity Office board of trustees.
The limited partnership agreement of EOP Operating Limited Partnership also
provides for indemnification of Equity Office and its officers and trustees to
the same extent that indemnification is provided to officers and trustees of
Equity Office in its declaration of trust, and limits the liability of Equity
Office and its officers and trustees to EOP Partnership and its respective
partners to the same extent that the Equity Office declaration of trust limits
the liability of the officers and trustees of Equity Office to Equity Office and
its shareholders.
EOP OPERATING LIMITED PARTNERSHIP:
Pursuant to its Agreement of Limited Partnership, EOP Partnership is
obligated to indemnify, to the fullest extent provided by law, any person or
entity made a party to a proceeding by reason of its status as a general partner
or a limited partner of EOP Partnership or a trustee, director or officer of any
general partner and such other persons or entities as the Trust may designate
from time to time in its sole discretion (an "Indemnitee") from and against any
and all losses, claims, damages, liabilities, joint or several, expenses
(including without limitation, attorneys fees and other legal fees and
expenses), judgments, fines, settlements and other amounts arising from or in
connection with any and all claims, demands, actions, suits or proceedings,
civil, criminal, administrative or investigative, incurred by the Indemnitee and
relating to EOP Partnership or the general partners or the operation of, or the
ownership of property by, any of them as set forth in the Partnership Agreement
in which any such Indemnitee may be involved, or is threatened to be involved,
as a party or otherwise, unless it is established by a final determination of a
court of competent jurisdiction that: (a) the act or omission of the Indemnitee
was material to the matter giving rise to the proceeding and either was
committed in bad faith or was the result of active and deliberate dishonesty,
(b) the Indemnitee actually received an improper personal benefit in money,
property or services or (c) in the case of any criminal proceeding, the
Indemnitee had reasonable cause to believe that the act or omission was
unlawful. Any indemnification shall be made only out of the assets of EOP
Partnership, and any insurance proceeds from the liability policy covering the
general partners and any Indemnitee, and neither a general partner nor any
limited partner shall have any obligation to contribute to the capital of EOP
Partnership or otherwise provide funds to enable EOP Partnership to fund its
indemnity obligations. EOP Partnership is obligated to advance amounts to an
Indemnitee for expenses upon receipt of (a) a written affirmation of the
Indemnitee that it believes it has met the standard of conduct necessary to
entitle it to indemnification and (b) a written undertaking of the Indemnitee
that it will repay any such advances if it shall be ultimately determined that
it did not meet such standard of conduct. The foregoing indemnification rights
are in addition to any other rights afforded to an Indemnitee under any other
agreement, by vote of the partners, under applicable law or otherwise, and shall
continue as to an Indemnitee who has ceased to serve in such capacity unless
otherwise provided in a written agreement pursuant to which such Indemnitees are
indemnified. EOP Partnership is authorized to purchase and maintain insurance on
behalf of the Indemnitees with respect to the foregoing matters. EOP Partnership
shall be deemed to have requested an Indemnitee to serve as fiduciary of an
employee benefit plan whenever the performance by it of its duties to EOP
Partnership also imposes duties on, or otherwise involves services by, it to the
plan or participants or beneficiaries of the plan; excise taxes assessed on an
Indemnitee with respect to an employee benefit plan pursuant to applicable law
shall constitute fines; and actions taken or omitted by the Indemnitee with
respect to an employee benefit plan in the performance of its duties for a
purpose reasonably believed by it to be in the interest of the participants and
beneficiaries of the plan shall be deemed to be for a purpose which is not
opposed to the best interests of EOP Partnership. An Indemnitee shall not be
denied indemnification in whole or in part
II-2
<PAGE> 424
because the Indemnitee had an interest in the transaction with respect to which
the indemnification applies if the transaction was otherwise permitted by the
terms of the Partnership Agreement.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to trustees, officers, partners, or persons controlling Equity
Office or EOP Partnership under the foregoing provisions, Equity Office and EOP
Partnership have been informed that in the opinion of the SEC such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
CORNERSTONE PROPERTIES INC.:
Section 78.7502 of Chapter 78 of the Nevada Revised Statutes (the "NRS")
empowers a corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the corporation
or is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation, and with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement or conviction or upon a plea of NOLO CONTENDERE or
its equivalent does not, of itself, create a presumption that the person did not
act in good faith or in a manner which he reasonably believed to be in or not
opposed to the best interests of the corporation or that, with respect to any
criminal action or proceeding, he had reasonable cause to believe his actions
were unlawful.
Section 78.7502 of the NRS empowers a corporation to indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action or suit by or in the right of the corporation to
procure a judgment in its favor by reason of the fact that such person acted in
any of the capacities set forth above against expenses, including attorneys'
fees, actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted under similar standards to those
described above expect that no indemnification may be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation or for amounts paid in settlement to the corporation
unless and only to the extent that the court in which such action or suit was
brought determines that, despite the adjudication of liability, such person is
fairly and reasonably entitled to indemnity for such expenses as the court deems
proper.
Section 78.7502 of the NRS further provides that to the extent a director
or officer of a corporation has been successful in the defense of any action,
suitor proceeding referred to in subsections (1) and (2) or in the defense of
any claim, issue or matter therein, he shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith. Section 78.751 of the NRS provides that any
indemnification provided for by section 78.7502 of the NRS (by court order or
otherwise) shall not be deemed exclusive of any other rights to which the
indemnified party may be entitled and that the scope of indemnification shall
continue as to directors, officers, employees or agents who have ceased to hold
such positions, and to their heirs, executors and administrators. Section 78.752
empowers the corporation to purchase and maintain insurance on behalf of a
director, officer, employee or agent of the corporation against any liability
asserted against him or incurred by him in any such capacity or arising out of
his status as such whether or not the corporation would have the power to
indemnify him against such liabilities under section 78.7502.
Article IX of Cornerstone's bylaws provides for indemnification of its
officers and directors, substantially identical in scope to that permitted under
section 78.7502 of the NRS. The Cornerstone bylaws provide, pursuant to
Subsection 2 of section 78.7502 of the NRS, that the expenses of officers and
directors incurred in defending any action, suit or proceeding, whether civil,
criminal, administrative or investigative, must be paid by Cornerstone as they
are incurred and in advance of the final disposition of
II-3
<PAGE> 425
the action, suit or proceeding, upon receipt of any undertaking by or on behalf
of the director or officer to repay such amounts unless it shall ultimately be
determined that he is entitled to be indemnified by Cornerstone pursuant to
Article IX of the bylaws.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO EXHIBIT DESCRIPTION
- ---------- -------------------
<C> <S>
2.1 Agreement and Plan of Merger, dated as of February 11, 2000,
as amended, by and among Equity Office, EOP Partnership,
Cornerstone and Cornerstone Partnership (included in this
Registration Statement as Annex A to the Consent
Solicitation/Information Statement/Prospectus)
3.1 Form of Second Amended and Restated Partnership Agreement of
EOP Partnership (included in this Registration Statement as
Annex E to the Consent Solicitation/Information Statement/
Prospectus)
5.1 Opinion of Hogan & Hartson L.L.P. regarding the legality of
the securities being registered on behalf of Equity Office
and EOP Partnership
5.2 Opinion of Lionel, Sawyer & Collins regarding the legality
of the securities being registered on behalf of Cornerstone
8.1 Opinion of Hogan & Hartson L.L.P. regarding the
qualification of the REIT merger as a reorganization for
federal income tax purposes and related federal income tax
consequences
8.2 Opinion of King & Spalding regarding the qualification of
the REIT merger as a reorganization for federal income tax
purposes and related federal income tax consequences
8.3 Opinion of Hogan & Hartson L.L.P. regarding the
qualification of Equity Office as a real estate investment
trust and EOP Partnership as a partnership for federal
income tax purposes
8.4 Opinion of King & Spalding regarding the qualification of
Cornerstone as a real estate investment trust and
Cornerstone Partnership as a partnership for federal income
tax purposes
23.1 Consent of Ernst & Young LLP (Equity Office and EOP
Partnership)
23.2 Consent of PricewaterhouseCoopers LLP (Cornerstone and
Cornerstone Partnership)
23.3 Consent of Hogan & Hartson L.L.P. (included in Exhibit 5.1)
23.4 Consent of Lionel, Sawyer & Collins (included in Exhibit
5.2)
23.5 Consent of Hogan & Hartson L.L.P. (included in Exhibits 8.1
and 8.3)
23.6 Consent of King & Spalding (included in Exhibits 8.2 and
8.4)
23.7 * Consent of J.P. Morgan Securities Inc.
23.8 * Consent of Lazard Freres & Co. LLC
23.9 * Consent of William Wilson III to be named as a trustee
23.10* Consent of John S. Moody to be named as a trustee
23.11* Consent of Jan H.W.R van der Vlist to be named as a trustee
24.1 * Equity Office power of attorney (included on Equity Office
signature page)
24.2 * EOP Partnership power of attorney (included on EOP
Partnership signature page)
24.3 * Cornerstone power of attorney (included on Cornerstone
signature page)
99.1 Stock Option Agreement, dated February 11, 2000, by and
among Cornerstone, Equity Office, Deutsche Bank AG and
Deutscher Herold Lebensversicherungs-AG (incorporated by
reference to Exhibit 10.1 of Equity Office's Form 8-K dated
February 16, 2000)
</TABLE>
II-4
<PAGE> 426
<TABLE>
<CAPTION>
EXHIBIT NO EXHIBIT DESCRIPTION
- ---------- -------------------
<C> <S>
99.2 Voting Agreement, dated February 11, 2000, by and among
Equity Office, EOP Partnership, WCP Services, Inc. and
Stichting Pensioenfonds voor de Gezondheid, Geotelijke en
Maatschappelijke Belagen (incorporated by reference to
Exhibit 10.2 of Equity Office's Form 8-K dated February 16,
2000)
99.3 Cornerstone Partnership -- Form of Consent
99.4 Form of Redemption/Notice of Election
</TABLE>
- ---------------
* Previously filed.
(b) Financial Statement Schedules
The following financial statement schedule was filed with the EOP
Partnership Annual Report on Form 10-K for the year ended December 31, 1999
(File no. 1-13625), filed with the SEC on March 29, 2000, and is incorporated
herein by reference:
Schedule III -- Real Estate and Accumulated Depreciation
Schedules not listed above have been omitted because they are inapplicable
or the information required to be set forth therein is contained, or
incorporated by reference, in the consolidated final statements of Equity Office
or notes thereto.
ITEM 22. UNDERTAKINGS
Equity Office Properties Trust, EOP Operating Limited Partnership and
Cornerstone Properties Inc., as applicable, hereby undertake:
1. To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) to include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to rule 424(b) if, in the aggregate, such
changes in volume and price represent no more than a 20% change in the
maximum aggregated offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
2. That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
3. To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
4. That, for the purpose of determining any liability under the
Securities Act of 1933, each filing of the respective registrant's annual
reports pursuant to section 13(a) or section 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee
benefit plan's annual report pursuant to section 15(d) of the Securities
Exchange Act of 1934) that is incorporated
II-5
<PAGE> 427
by reference in the registration statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
5. That before any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of rule 145(c), the applicable issuer undertakes that such
reoffering prospectus will contain the information called for by the
applicable registration form with respect to reofferings by persons who may
be deemed underwriters, in addition to the information called for by the
other items of the applicable form.
6. That every prospectus: (i) that is filed pursuant to paragraph (5)
immediately preceding, or (ii) that purports to meet the requirements of
section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to rule 415, will be filed as a part of an amendment to
the registration statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
7. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to trustees, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities, other than
the payment by the registrant of expenses incurred or paid by a trustee,
officer or controlling person of the registrant in the successful defense
of any action, suit or proceeding, is asserted by such trustee, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
8. To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this
form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding
to the request.
9. To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
II-6
<PAGE> 428
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Chicago, State of
Illinois on May 12, 2000.
EQUITY OFFICE PROPERTIES TRUST
By: /s/ STANLEY M. STEVENS
------------------------------------
STANLEY M. STEVENS
EXECUTIVE VICE PRESIDENT,
CHIEF LEGAL COUNSEL AND SECRETARY
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated as of the 12th day of May, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
* President, Chief Executive Officer and
- ----------------------------------------------------- Trustee (principal executive officer)
TIMOTHY H. CALLAHAN
/s/ RICHARD D. KINCAID Chief Financial Officer (principal financial
- ----------------------------------------------------- officer and principal accounting officer)
RICHARD D. KINCAID
* Chairman of the Board of Trustees
- -----------------------------------------------------
SAMUEL ZELL
* Trustee
- -----------------------------------------------------
SHELI Z. ROSENBERG
* Trustee
- -----------------------------------------------------
THOMAS E. DOBROWSKI
* Trustee
- -----------------------------------------------------
JAMES D. HARPER, JR.
* Trustee
- -----------------------------------------------------
JERRY M. REINSDORF
* Trustee
- -----------------------------------------------------
WILLIAM M. GOODYEAR
* Trustee
- -----------------------------------------------------
DAVID K. MCKOWN
* Trustee
- -----------------------------------------------------
H. JON RUNSTAD
</TABLE>
II-7
<PAGE> 429
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
* Trustee
- -----------------------------------------------------
EDWIN N. SIDMAN
* Trustee
- -----------------------------------------------------
D. J. ANDRE DE BOCK
* Pursuant to Power of Attorney
By: /s/ STANLEY M. STEVENS
-------------------------------------------------
Stanley M. Stevens
Attorney-in-Fact
</TABLE>
II-8
<PAGE> 430
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Chicago, State of
Illinois on May 12, 2000.
EOP OPERATING LIMITED PARTNERSHIP
By: Equity Office Properties Trust,
as General Partner
By: /s/ STANLEY M. STEVENS
---------------------------------
STANLEY M. STEVENS
EXECUTIVE VICE PRESIDENT,
CHIEF LEGAL COUNSEL AND SECRETARY
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated as of the 12th day of May, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
* Chairman of the Board of Trustees
- -----------------------------------------------------
SAMUEL ZELL
* Trustee
- -----------------------------------------------------
TIMOTHY H. CALLAHAN
* Trustee
- -----------------------------------------------------
SHELI Z. ROSENBERG
* Trustee
- -----------------------------------------------------
THOMAS E. DOBROWSKI
* Trustee
- -----------------------------------------------------
JAMES D. HARPER, JR.
* Trustee
- -----------------------------------------------------
JERRY M. REINSDORF
* Trustee
- -----------------------------------------------------
WILLIAM M. GOODYEAR
* Trustee
- -----------------------------------------------------
DAVID K. MCKOWN
* Trustee
- -----------------------------------------------------
H. JON RUNSTAD
</TABLE>
II-9
<PAGE> 431
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
* Trustee
- -----------------------------------------------------
EDWIN N. SIDMAN
* Trustee
- -----------------------------------------------------
D. J. ANDRE DE BOCK
* Pursuant to Power of Attorney
By: /s/ STANLEY M. STEVENS
-------------------------------------------------
Stanley M. Stevens
Attorney-in-Fact
</TABLE>
II-10
<PAGE> 432
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York on May 12, 2000.
CORNERSTONE PROPERTIES INC.
By: /s/ JOHN S. MOODY
------------------------------------
JOHN S. MOODY
CHIEF EXECUTIVE OFFICER AND
PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated as of the 12th day of May, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
Chairman of the Board and Director
- ----------------------------------------------------- (principal executive officer)
WILLIAM WILSON III
/s/ JOHN S. MOODY Chief Executive Officer, President and
- ----------------------------------------------------- Director (principal executive officer)
JOHN S. MOODY
* Executive Vice President and Director
- -----------------------------------------------------
RODNEY C. DIMOCK
* Chief Financial Officer (principal financial
- ----------------------------------------------------- and principal accounting officer)
KEVIN P. MAHONEY
Director
- -----------------------------------------------------
CECIL D. CONLEE
* Director
- -----------------------------------------------------
BLAKE EAGLE
* Director
- -----------------------------------------------------
DR. KARL-LUDWIG HERMANN
* Director
- -----------------------------------------------------
HANS C. MAUTNER
Director
- -----------------------------------------------------
DR. LUTZ MELLINGER
* Director
- -----------------------------------------------------
CRAIG R. STAPLETON
</TABLE>
II-11
<PAGE> 433
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
* Director
- -----------------------------------------------------
MICHAEL J. G. TOPHAM
* Director
- -----------------------------------------------------
DICK VAN DEN BOS
Director
- -----------------------------------------------------
JAN H.W.R VAN DER VLIST
* Director
- -----------------------------------------------------
DONALD G. FISHER
* Director
- -----------------------------------------------------
RANDALL A. HACK
* Pursuant to Power of Attorney
By: /s/ JOHN S. MOODY
- ----------------------------------------------------
JOHN S. MOODY
ATTORNEY-IN-FACT
</TABLE>
II-12
<PAGE> 434
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO EXHIBIT DESCRIPTION
- ---------- -------------------
<C> <S>
2.1 Agreement and Plan of Merger, dated as of February 11, 2000,
as amended, by and among Equity Office, EOP Partnership,
Cornerstone and Cornerstone Partnership (included in this
Registration Statement as Annex A to the Consent
Solicitation/Information Statement/Prospectus)
3.1 Form of Second Amended and Restated Partnership Agreement of
EOP Partnership (included in this Registration Statement as
Annex E to the Consent Solicitation/Information Statement/
Prospectus)
5.1 Opinion of Hogan & Hartson L.L.P. regarding the legality of
the securities being registered on behalf of Equity Office
and EOP Partnership
5.2 Opinion of Lionel, Sawyer & Collins regarding the legality
of the securities being registered on behalf of Cornerstone
8.1 Opinion of Hogan & Hartson L.L.P. regarding the
qualification of the REIT merger as a reorganization for
federal income tax purposes and related federal income tax
consequences
8.2 Opinion of King & Spalding regarding the qualification of
the REIT merger as a reorganization for federal income tax
purposes and related federal income tax consequences
8.3 Opinion of Hogan & Hartson L.L.P. regarding the
qualification of Equity Office as a real estate investment
trust and EOP Partnership as a partnership for federal
income tax purposes
8.4 Opinion of King & Spalding regarding the qualification of
Cornerstone as a real estate investment trust and
Cornerstone Partnership as a partnership for federal income
tax purposes
23.1 Consent of Ernst & Young LLP (Equity Office and EOP
Partnership)
23.2 Consent of PricewaterhouseCoopers LLP (Cornerstone and
Cornerstone Partnership)
23.3 Consent of Hogan & Hartson L.L.P. (included in Exhibit 5.1)
23.4 Consent of Lionel, Sawyer & Collins (included in Exhibit
5.2)
23.5 Consent of Hogan & Hartson L.L.P. (included in Exhibits 8.1
and 8.3)
23.6 Consent of King & Spalding (included in Exhibits 8.2 and
8.4)
23.7 * Consent of J.P. Morgan Securities Inc.
23.8 * Consent of Lazard Freres & Co. LLC
23.9 * Consent of William Wilson III to be named as a trustee
23.10* Consent of John S. Moody to be named as a trustee
23.11* Consent of Jan H.W.R van der Vlist to be named as a trustee
24.1 * Equity Office power of attorney (included on Equity Office
signature page)
24.2 * EOP Partnership power of attorney (included on EOP
Partnership signature page)
24.3 * Cornerstone power of attorney (included on Cornerstone
signature page)
99.1 Stock Option Agreement, dated February 11, 2000, by and
among Cornerstone, Equity Office, Deutsche Bank AG and
Deutscher Herold Lebensversicherungs-AG (incorporated by
reference to Exhibit 10.1 of Equity Office's Form 8-K dated
February 16, 2000)
99.2 Voting Agreement, dated February 11, 2000, by and among
Equity Office, EOP Partnership, WCP Services, Inc. and
Stichting Pensioenfonds voor de Gezondheid, Geotelijke en
Maatschappelijke Belagen (incorporated by reference to
Exhibit 10.2 of Equity Office's Form 8-K dated February 16,
2000)
99.3 Cornerstone Partnership -- Form of Consent
99.4 Form of Redemption/Notice of Election
</TABLE>
- ---------------
* Previously filed.
<PAGE> 435
(b) Financial Statement Schedules
The following financial statement schedule was filed with the EOP
Partnership Annual Report on Form 10-K for the year ended December 31, 1999
(File no. 1-13625), filed with the SEC on March 29, 2000, and is incorporated
herein by reference:
Schedule III -- Real Estate and Accumulated Depreciation
Schedules not listed above have been omitted because they are inapplicable
or the information required to be set forth therein is contained, or
incorporated by reference, in the consolidated final statements of Equity Office
or notes thereto.
<PAGE> 1
EXHIBIT 5.1
[Hogan & Hartson L.L.P. Letterhead]
May 11, 2000
Board of Trustees
Equity Office Properties Trust
EOP Operating Limited Partnership
Two North Riverside Plaza
Suite 2100
Chicago, Illinois 60606
Ladies and Gentlemen:
We are acting as counsel to Equity Office Properties Trust, a Maryland
real estate investment trust (the "Company"), and EOP Operating Limited
Partnership, a Delaware limited partnership, of which the Company is the sole
general partner (the "Partnership"), in connection with their registration
statement on Form S-4, as amended (the "Registration Statement"), filed with the
Securities and Exchange Commission relating to the proposed public offering of
up to: (a) 13,467,154 common shares of beneficial interest, $.01 par value per
share, all of which shares (the "Shares") may issued by the Company as described
in the Registration Statement; and (b) 13,467,154 class A units of limited
partnership interest, all of which units (the "Units") may be issued by the
Partnership as described in the Registration Statement. This opinion letter is
furnished to you at your request to enable you to fulfill the requirements of
Item 601(b)(5) of Regulation S-K, 17 C.F.R. Section 229.601(b)(5), in connection
with the Registration Statement.
For purposes of this opinion letter, we have examined copies of the
following documents:
1. An executed copy of the Registration Statement.
2. Agreement and Plan of Merger dated as of February 11, 2000 by
and among the Company, the Partnership, Cornerstone Properties
Inc. and Cornerstone Properties Limited Partnership, as
amended on May 11, 2000 by the First Amendment of Agreement
and Plan of Merger (as so amended, the "Merger Agreement").
<PAGE> 2
Board of Trustees
Equity Office Properties Trust
EOP Operating Limited Partnership
May 11, 2000
Page 2
3. The Declaration of Trust of the Company, as amended, as
certified by the Secretary of the Company on the date hereof
as being complete, accurate, and in effect (the "Declaration
of Trust").
4. The Bylaws of the Company, as amended, as certified by the
Secretary of the Company on the date hereof as being complete,
accurate, and in effect.
5. The First Amended and Restated Agreement of Limited
Partnership of the Partnership and the Certificate of Limited
Partnership of the Partnership, each as certified by the
Secretary of the Company, as general partner of the
Partnership, on the date hereof as then being complete,
accurate and in effect.
6. Resolutions of the Board of Trustees of the Company adopted at
meetings held on February 10, 2000 and May 4, 2000, and
resolutions of the Executive Committee of the Board of
Trustees of the Company, adopted at a meeting held on February
11, 2000 and by unanimous written consent dated May 2, 2000,
in each case as certified by the Secretary of the Company on
the date hereof as being complete, accurate, and in effect,
relating to the issuance and sale of the Shares and the
Units and arrangements in connection therewith.
In our examination of the aforesaid documents, we have assumed the
genuineness of all signatures, the legal capacity of all natural persons, the
accuracy and completeness of all documents submitted to us, the authenticity of
all original documents, and the conformity to authentic original documents of
all documents submitted to us as copies (including telecopies). We also have
assumed that the Shares will not be issued in violation of the ownership limit
contained in the Company's Declaration of Trust. This opinion letter is given,
and all statements herein are made, in the context of the foregoing.
With respect to the Shares, this opinion letter is based as to matters
of law solely on Title 8 of the Corporations and Associations Article of the
Annotated Code of Maryland, as amended (the "Maryland REIT Statute"). With
respect to the Units, this opinion letter is based as to matters of law solely
on the Delaware Revised Uniform Limited Partnership Act. We express no opinion
<PAGE> 3
Board of Trustees
Equity Office Properties Trust
EOP Operating Limited Partnership
May 11, 2000
Page 3
herein as to any other laws, statutes, ordinances, rules, or regulations. As
used herein, the terms "Title 8 of the Corporations and Associations Article of
the Annotated Code of Maryland, as amended" and "Delaware Revised Uniform
Limited Partnership Act" include the statutory provisions contained therein, all
applicable provisions of the Maryland and Delaware Constitutions, as applicable,
and reported judicial decisions interpreting these laws.
Based upon, subject to and limited by the foregoing, we are of the
opinion that:
(a) following effectiveness of the Registration Statement,
effectiveness of the partnership merger (as described in the Registration
Statement) under Delaware law and issuance of the Units in accordance with the
terms of the Merger Agreement, the Units will be validly issued, fully paid, and
nonassessable; and
(b) following effectiveness of the Registration Statement ,
effectiveness of the partnership merger (as described in the Registration
Statement) under Delaware law and the merger (as described in the Registration
Statement) under Maryland and Nevada law, as applicable, and issuance of the
Shares in accordance with the terms of the Merger Agreement, the Shares will be
validly issued, fully paid, and nonassessable.
This opinion letter has been prepared for your use in connection with
the Registration Statement and speaks as of the date hereof. We assume no
obligation to advise you of any changes in the foregoing subsequent to the
delivery of this opinion letter.
We hereby consent to the filing of this opinion letter as Exhibit 5.1
to the Registration Statement and to the reference to this firm under the
caption "Legal Matters" in the prospectus constituting a part of the
Registration Statement. In giving this consent, we do not thereby admit that we
are an "expert" within the meaning of the Securities Act of 1933, as amended.
Very truly yours,
/s/ HOGAN & HARTSON L.L.P
HOGAN & HARTSON L.L.P.
<PAGE> 1
Exhibit 5.2
May 11, 2000
Cornerstone Properties Inc.
126 East 56th Street
New York, New York 10022
RE: Registration of Shares
Ladies and Gentlemen:
We have acted as special Nevada counsel for Cornerstone Properties
Inc., a Nevada corporation (the "Company"), in connection with the preparation
of a Registration Statement on Form S-4 ("Registration Statement"), being filed
by the Company with the Securities and Exchange Commission (the "Commission")
under the Securities Act of 1933, as amended (the "Act"), with respect to the
registration by the Company of 19,214,088 shares ("Shares") of Common Stock, no
par value per share (the "Common Stock").
This Opinion Letter is governed by, and shall be interpreted in
accordance with, the Legal Opinion Accord (the "Accord") of the American Bar
Association Section of Business Law (1991). As a consequence, it is subject to
a number of qualifications, exceptions, definitions, limitations on coverage
and other limitations, all as more particularly described in the Accord, and
this Opinion Letter should be read in conjunction therewith. The Law (as
defined in the Accord) covered by the Opinions (as defined in the Accord)
expressed herein is limited to the Law of the State of Nevada.
In connection with the Opinions hereinafter given, we have examined
copies of the documents listed below:
(i) Amended and Restated Bylaws of the Company, dated as of
December 16, 1998, as amended on April 12, 1999, certified as
of the date hereof by the Secretary of
<PAGE> 2
Cornerstone Properties
May 11, 2000
Page 2
the Company (as amended, the "Bylaws");
(ii) Restated Articles of Incorporation of the Company, as
amended, certified by the Nevada Secretary of State as of
April 12, 2000, and certified as of the date hereof by the
Secretary of the Company (the "Articles");
(iii) resolutions of the board of directors of the Company, dated
July 26, 1999, certified as of the date hereof by the
Secretary of the Company;
(iv) certificate of corporate existence for the Company, dated May
10, 2000, issued by the Secretary of State of Nevada; and
(v) the Registration Statement.
We have examined originals or copies of such corporate records and
certificates of public officials as we have deemed necessary or advisable for
the purposes of this Opinion Letter. We have relied upon the certificates of
all public officials and corporate officers with respect to the accuracy of all
matters contained therein, including without limitation, the certificate of the
Company's Secretary, a copy of which is attached hereto as Exhibit A and
incorporated herein by reference.
Based upon and subject to the foregoing, and subject to the
qualifications, limitations, restrictions and assumptions set forth below, we
are of the opinion that:
1. The Company is a corporation duly incorporated, validly
existing, and in good standing under the laws of the State of Nevada.
2. The Company has the authority to issue up to Two Hundred
Fifty Million (250,000,000) shares of Common Stock.
3. The Shares have been duly authorized and, upon issuance in
accordance with resolutions of the Company's board of directors adopted June
26, 1999, including receipt of the consideration required thereby, will be
validly issued, fully paid and nonassessable.
Nothing herein shall be deemed an opinion as to the laws of any other
jurisdiction other than the State of Nevada.
This Opinion Letter is intended solely for the use of the Company in
connection with the Registration Statement. It may not be relied upon by any
other person or for any other purpose, or reproduced or filed publicly by any
person without the written consent of this firm; provided,
<PAGE> 3
Cornerstone Properties
May 11, 2000
Page 3
we hereby consent to the filing of this Opinion Letter as an exhibit to the
Registration Statement and to the reference to our firm under the caption
"Legal Matters" in the Prospectus included therein. In giving consent, we do
not hereby admit that we are in a category of persons whose consent is required
pursuant to Section 7 of the Act or the rules and regulations of the Commission
promulgated thereunder, and we disclaim liability as an expert under the
securities laws of the United States or any other jurisdiction.
Very truly yours,
/s/ LIONEL SAWYER & COLLINS
LIONEL SAWYER & COLLINS
<PAGE> 4
Cornerstone Properties
May 11, 2000
Page 4
Exhibit A
SECRETARY'S CERTIFICATE
<PAGE> 5
CORNERSTONE PROPERTIES
SECRETARY'S CERTIFICATE
The undersigned, Thomas P. Loftus, Secretary of Cornerstone Properties
Inc., a Nevada corporation (the "Company"), does hereby certify as of the date
hereof as follows:
1. I am the duly elected and presently acting Secretary of the
Company and as such have had access to the corporate records of the Company and
am familiar with the matters therein contained and herein certified.
2. Attached hereto as Exhibit 1 is a copy of the Company's Amended
and Restated Bylaws, dated December 16, 1998 ("Restated Bylaws"). Other than the
amendment adopted by the Company's Board of Directors on April 12, 1999, a true,
correct and complete copy of which amendment is attached hereto as Exhibit 2,
the Restated Bylaws have not been amended, modified, annulled or revoked and are
in full force and effect.
3. Attached hereto as Exhibit 3 are copies of resolutions of the
Company's Board of Directors, dated as of July 26, 1999. Such resolutions are
the only resolutions or actions of the Company's Board of Directors dealing with
the stock described therein and such resolutions have not been amended,
modified, annulled or revoked and are in full force and effect.
4. Attached hereto as Exhibit 4 is a copy of the Company's Articles
of Incorporation (the "Articles") as certified by Nevada's Secretary of State on
April 12, 2000. The Articles have not been amended, modified, annulled or
revoked and are in full force and effect.
5. The number of shares of the Company's common stock issued and
outstanding does not exceed 131,000,000.
6. Attached hereto as Exhibit 5 is a specimen stock certificate
identical in all material respects to the stock certificate to be issued in
connection with the stock issuance referenced in paragraph 3 hereof.
In witness whereof, I have hereunto set my hand this 11th day of May,
2000.
/s/ THOMAS P. LOFTUS
--------------------------
Thomas P. Loftus
Secretary
<PAGE> 6
Exhibit 1
Bylaws
[deleted but on file with Lionel Sawyer & Collins]
Exhibit 2
Amendment to Bylaws
[deleted but on file with Lionel Sawyer & Collins]
Exhibit 3
Resolutions
[deleted but on file with Lionel Sawyer & Collins]
Exhibit 4
Articles of Incorporation
[deleted but on file with Lionel Sawyer & Collins]
Exhibit 5
Specimen Stock Certificate
[deleted but on file with Lionel Sawyer & Collins]
<PAGE> 1
HOGAN & HARTSON L.L.P.
EXHIBIT 8.1
May 11, 2000
Equity Office Properties Trust
Two North Riverside Plaza
Chicago, IL 60606
Ladies and Gentlemen:
We have acted as counsel to Equity Office Properties Trust
("Equity Office"), a Maryland real estate investment trust, in connection with
the execution and delivery of the Agreement and Plan of Merger dated as of
February 11, 2000, as amended, (the "Agreement") among Equity Office, EOP
Operating Limited Partnership ("EOP Partnership"), a Delaware limited
partnership, Cornerstone Properties Inc. ("Cornerstone"), a Nevada corporation,
and Cornerstone Properties Limited Partnership ("Cornerstone Partnership"), a
Delaware limited partnership, pursuant to which Cornerstone will merge with and
into Equity Office (the "Merger") and Cornerstone Partnership will merge with
and into Equity Office (the "Partnership Merger"). This opinion letter is being
furnished to you in connection with (i) the Registration Statement on Form S-4,
containing the Joint Proxy Statement/Prospectus of Equity Office and Cornerstone
addressed to holders of Common Stock of Cornerstone and holders of Common Shares
of Equity Office (the "REIT Registration Statement"), filed with the Securities
and Exchange Commission on March 30, 2000, as amended through the date hereof,
and (ii) the Registration Statement on Form S-4, containing the Consent
Solicitation of Cornerstone Partnership, the Information Statement of EOP
Partnership, and the Prospectus of Equity Office, EOP Partnership and
Cornerstone (the "Partnership Registration Statement"), filed with the
Securities and Exchange Commission on April 26, 2000, as amended through the
date hereof (the REIT Registration Statement, together with the Partnership
Registration Statement, the "Registration Statements"). Unless otherwise defined
herein or the context hereof otherwise requires, each term used herein with
initial capitalized letters has the meaning given to such term in the Agreement.
In connection with the preparation of these opinions, we have
examined and with your consent relied upon (without any independent
investigation or review thereof) the following documents (including all exhibits
and schedules thereto): (1) the Agreement; (2) the Registration Statements, as
amended through the date hereof; (3) representations and certifications made by
Equity Office to us and to King & Spalding, counsel to Cornerstone, in a letter
dated May
<PAGE> 2
Equity Office Properties Trust
May 11, 2000
Page 2
10, 2000 (the "Equity Office Letter"); (4) representations and certifications
made by Cornerstone to us and to King and Spalding, counsel to Cornerstone, in a
letter dated May 10, 2000 (the "Cornerstone Letter"); (5) the Articles of
Amendment and Restatement of Declaration of Trust of Equity Office dated as of
July 9, 1997, as amended through the date hereof; (6) the Cornerstone Restated
Articles of Incorporation, as amended through the date hereof; (7) the First
Amended and Restated Agreement of Limited Partnership of EOP Partnership dated
as of May 1, 2000, as amended through the date hereof; (8) the Amended and
Restated Agreement of Limited Partnership of Cornerstone Partnership; (9) the
PGGM Voting Agreement; and (10) such other instruments and documents related to
the formation, organization and operation of Equity Office and Cornerstone or to
the consummation of the Merger and the transactions contemplated thereby as we
have deemed necessary or appropriate. In addition, we have reviewed the form of
opinion from King & Spalding, counsel to Cornerstone, with respect to the tax
consequences of the proposed transaction (the "King & Spalding Tax Opinion").
Assumptions and Representations
In connection with rendering this opinion, we have assumed or
obtained representations (and, with your consent, are relying thereon, without
any independent investigation or review thereof, although we are not aware of
any material facts or circumstances contrary to or inconsistent therewith) that:
1. The aggregate fair market value of the Equity Office Common
Shares, determined as of the Effective Time of the Merger, to be received in the
Merger by the Cornerstone Common Stockholders (excluding any fractional shares
of Equity Office Common Shares for which a Cornerstone Common Stockholder will
receive cash) will not be less than 40% of the aggregate fair market value
(determined immediately prior to the Effective Time of the Merger) of all of the
shares of Cornerstone stock (including the Cornerstone 7% Cumulative Convertible
Preferred Stock) outstanding immediately prior to the Effective Time. For
purposes of this assumption, shares of Cornerstone stock exchanged for cash, or
exchanged for cash in lieu of fractional Equity Office Common Shares will be
treated as outstanding Cornerstone stock, and the aggregate fair market value of
the outstanding Cornerstone stock will be deemed to be equal to the sum of the
aggregate Merger Consideration paid in the Merger.
2. All information contained in each of the documents we have
examined and relied upon in connection with the preparation of this opinion
letter is accurate and completely describes all material facts relevant to our
opinion, all
<PAGE> 3
Equity Office Properties Trust
May 11, 2000
Page 3
copies are accurate and all signatures are genuine. We have also assumed that
there has been (or will be by the Effective Time of the Merger) due execution
and delivery of all documents where due execution and delivery are prerequisites
to the effectiveness thereof.
3. The Merger will be consummated in accordance with the
applicable laws of Maryland and Nevada and will qualify as a statutory merger
under the applicable laws of Maryland and Nevada.
4. All representations made in the Equity Office Letter and
the Cornerstone Letter are true, correct, and complete in all material respects.
Any representation or statement made "to the best of knowledge," "to the
knowledge," or "to the actual knowledge" of any person(s) or party(ies) or
similarly qualified is true, correct and complete as if made without such
qualification.
5. Pursuant to its election to be taxed as a real estate
investment trust commencing with its taxable year ended December 31, 1983,
Cornerstone has qualified, and through the Effective Time of the Merger, will
continue to qualify, as a real estate investment trust pursuant to Sections 856
through 860 of the Code.
6. The Merger will be consummated in accordance with the
Agreement and as described in the Registration Statements (including
satisfaction of all covenants and conditions to the obligations of the parties
without amendment or waiver thereof); each of Equity Office and Cornerstone will
comply with all reporting obligations with respect to the Merger required under
the Code and the Treasury Regulations thereunder; and the Agreement is valid and
binding in accordance with its terms.
7. The King & Spalding Tax Opinion, to be provided to
Cornerstone, substantially identical in form and substance to this opinion, has
been concurrently delivered to Cornerstone and not withdrawn (provided that our
opinions are not conditioned upon, or limited by any assumption regarding, the
accuracy of the conclusions reached in the King & Spalding Tax Opinion).
Opinions - Federal Income Tax Consequences
Based upon and subject to the assumptions and qualifications
set forth herein, it is our opinion that:
1. for federal income tax purposes, the Merger will qualify as
a reorganization within the meaning of Section 368(a) of the Code;
<PAGE> 4
Equity Office Properties Trust
May 11, 2000
Page 4
2. the portions of the discussion in the REIT Registration
Statement under the caption "MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES
RELATING TO THE MERGER" that purport to describe provisions of the Internal
Revenue Code and the Treasury Regulations thereunder as they apply to the Merger
are correct in all material respects; and
3. the portions of the discussion in the REIT Registration
Statement under the caption "MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF AN
INVESTMENT IN EQUITY OFFICE" that purport to describe provisions of the Internal
Revenue Code and the Treasury Regulations thereunder are correct in all material
respects;
4. the portions of the discussion in the Partnership
Registration Statement under the caption "MATERIAL FEDERAL INCOME TAX
CONSEQUENCES - Tax Consequences of the REIT Merger" that purport to describe
provisions of the Internal Revenue Code and the Treasury Regulations thereunder
as they apply to the Merger are correct in all material respects.
5. the portions of the discussion in the Partnership
Registration Statement under the captions "MATERIAL FEDERAL INCOME TAX
CONSEQUENCES - Material Federal Income Tax Consequences of the Partnership
Merger to Cornerstone Partnership Unitholders That Receive EOP Partnership
Units," "- Effect of Subsequent Events" and "- Material Federal Income Tax
Consequences of Ownership of EOP Partnership Units After the Partnership Merger"
that purport to describe provisions of the Internal Revenue Code and the
Treasury Regulations thereunder are correct in all material respects. No opinion
is offered hereby as to the tax consequences of the partnership merger to any
particular Cornerstone Partnership unitholder or as to information that may be
applicable or relevant to any particular Cornerstone Partnership unitholder in
determining the tax consequences to it of the partnership merger; and
6. the portions of the discussion in the Partnership
Registration Statement under the caption "MATERIAL FEDERAL INCOME TAX
CONSEQUENCES - Taxation of Equity Office as a REIT" that purport to describe
provisions of the Internal Revenue Code and the Treasury Regulations thereunder
are correct in all material respects.
In addition to the assumptions set forth above, this opinion
is subject to the exceptions, limitations and qualifications set forth below:
1. These opinions represent and are based upon our best
judgment regarding the application of relevant current provisions of the Code
and interpretations of the foregoing as expressed in existing court decisions,
administrative determinations (including the practices and procedures of the
Internal Revenue Service (the "IRS") in issuing private letter rulings, which
are not binding on the IRS except with respect to the taxpayer that receives
such a ruling) and published rulings and procedures all as of the date hereof.
An opinion of counsel merely represents counsel's best judgment with respect to
the probable outcome on the merits and is not binding on the Internal Revenue
Service or the courts. There can be no assurance that positions contrary to our
opinions will not be taken by the IRS, or that a court considering the issues
would not hold contrary to such opinions. Neither Equity Office nor Cornerstone
has requested a ruling from the IRS (and no ruling will be sought) as to any of
the federal income tax consequences addressed in this opinion. Furthermore, no
assurance can be given that future legislative, judicial or administrative
changes, on either a prospective or retroactive basis, would not adversely
affect the accuracy of the opinions expressed herein. Nevertheless, we undertake
no responsibility to advise you of any new developments in the law or in the
application or interpretation of the federal income tax laws.
2. This letter addresses only the specific tax opinions set
forth above. This letter does not address any other federal, state, local or
foreign tax consequences that may result from the Merger or any other
transaction (including the Partnership Merger or any other transaction
undertaken in connection with the Merger or the Partnership Merger).
<PAGE> 5
Equity Office Properties Trust
May 11, 2000
Page 5
3. Our opinions are intended to address only the tax
consequences to Equity Office, and are not intended to address (nor may it be
relied upon for) the tax consequences to stockholders of Cornerstone. We express
no opinion regarding, among other things, the tax consequences of the Merger
(including the opinions set forth above) as applied to specific stockholders of
Cornerstone that may be relevant to particular Cornerstone stockholders, such as
dealers in securities, corporate stockholders subject to the alternative minimum
tax, foreign persons, and holders of stock acquired upon exercise of stock
options or in other compensatory transactions.
4. Our opinions are set forth herein are based upon the
description of the contemplated transactions as set forth in the Agreement and
the sections of the REIT Registration Statement captioned "THE MERGER" and "THE
MERGER AGREEMENT" and the section of the Partnership Registration Statement
captioned and "THE MERGER AGREEMENT." If the actual facts relating to any aspect
of the transactions differ from this description in any material respect, our
opinions may become inapplicable. No opinion is expressed as to the Merger if
the transactions described in the Agreement and the sections of the REIT
Registration Statement captioned "THE MERGER" and "THE MERGER AGREEMENT" and the
section of the Partnership Registration Statement captioned and "THE MERGER
AGREEMENT" are not consummated in accordance therewith and without waiver or
breach of any material provision thereof or if all of the representations,
warranties, statements and assumptions upon which we relied are not true and
accurate at all relevant times. In the event any one of the statements,
representations, warranties or assumptions upon which we have relied to issue
this opinion is incorrect, our opinion might be adversely affected and may not
be relied upon.
5. In particular, and without limiting the preceding
paragraph, our opinions cannot be relied upon, and will not be reconfirmed prior
to Closing of the Merger (thereby preventing the Closing condition in Section
6.2(e) of the Agreement from being satisfied) if the assumption set forth herein
that the aggregate value of the Equity Office Common Shares issued in the Merger
will represent at least 40% of the aggregate consideration received by the
Cornerstone Stockholders is not valid at the time of Closing.
This opinion letter is provided to Equity Office only, and
without our prior consent, may not be relied upon, used, circulated, quoted or
otherwise referred to in any manner by any person, firm, governmental authority
or entity whatsoever other than reliance thereon by the Equity Office.
Notwithstanding the prior sentence, we hereby consent to the filing of this
opinion letter as Exhibit 8.1 to each
<PAGE> 6
Equity Office Properties Trust
May 11, 2000
Page 6
of the Registration Statements and to the use of our name in the REIT
Registration Statement under the captions "LEGAL MATTERS," "MATERIAL U.S.
FEDERAL INCOME TAX CONSEQUENCES RELATED TO THE MERGER," and "MATERIAL FEDERAL
INCOME TAX CONSEQUENCES OF AN INVESTMENT IN EQUITY OFFICE" and in the
Partnership Registration Statement under the captions "LEGAL MATTERS" and
"MATERIAL FEDERAL INCOME TAX CONSEQUENCES." In giving such consent, however, we
do not thereby admit that we are an "expert" within the meaning of the
Securities Act of 1933, as amended.
Sincerely yours,
/s/ HOGAN & HARTSON L.L.P.
HOGAN & HARTSON L.L.P.
<PAGE> 1
KING & SPALDING Exhibit 8.2
May 11, 2000
Cornerstone Properties Inc.
Tower 56
126 East 56th Street
New York, New York 10022
Re: Certain U.S. Federal Income Tax Consequences of the Proposed
Merger of Cornerstone Properties Inc. With and Into Equity Office
Properties Trust
Ladies and Gentlemen:
We have acted as counsel to Cornerstone Properties Inc., a Nevada
corporation ("Cornerstone"), and Cornerstone Properties Limited Partnership, a
Delaware limited partnership ("Cornerstone Partnership"), in connection with the
Agreement and Plan of Merger, dated as of February 11, 2000, as amended (the
"Merger Agreement"), by and among Equity Office Properties Trust, a Maryland
real estate investment trust ("Equity Office"), EOP Limited Partnership, a
Delaware limited partnership ("EOP Partnership"), Cornerstone, and Cornerstone
Partnership, pursuant to which Cornerstone Partnership will merge with and into
EOP Partnership (the "Partnership Merger") and Cornerstone will merge with and
into Equity Office (the "REIT Merger," and, together with the Partnership
Merger, the "Mergers"). Cornerstone has requested the opinion of King & Spalding
as to the qualification of the REIT Merger as a reorganization under the
provisions of section 368(a) of the Internal Revenue Code of 1986, as amended
(the "Code").
This opinion letter is being furnished to you in connection with (1) the
Registration Statement on Form S-4, which includes the Joint Proxy Statement /
Prospectus of Equity Office and Cornerstone addressed to holders of Cornerstone
common stock and Equity Office common shares, as filed with the Securities and
Exchange Commission on March 30, 2000, as amended through the date hereof (the
"REIT Merger S-4") and (2) the Registration Statement on Form S-4, which
includes the Consent Solicitation of Cornerstone Partnership, the Information
Statement of EOP Partnership, and the Prospectus of Equity Office, EOP
Partnership, and Cornerstone, as filed with the Securities and Exchange
Commission on April 26, 2000, as amended through the date hereof (the
"Partnership Merger S-4," and, together with the REIT Merger S-4, the
"Registration Statements").
Capitalized terms used herein without definition have the respective
meanings specified in the Merger Agreement.
<PAGE> 2
Cornerstone Properties Inc.
May 11, 2000
Page 2
INFORMATION AND ASSUMPTIONS RELIED ON
In rendering the opinion expressed herein, we have examined such
documents as we have deemed appropriate, including without limitation the Merger
Agreement and the Registration Statements. In our examination of documents, we
have assumed, with your consent, that all documents submitted to us as
photocopies or facsimile copies faithfully reproduce the originals thereof, that
such originals are authentic, that all such documents have been or will be duly
executed to the extent required, that all statements of fact set forth in such
documents are accurate, and that all obligations imposed by any such documents
on the parties thereto have been or will be performed or satisfied in accordance
with their terms. We also have obtained such additional information and
representations as we have deemed relevant and necessary through consultation
with various representatives of Cornerstone and Equity Office, including written
representation letters (the "Representation Letters") from officers of Equity
Office and Cornerstone verifying certain relevant facts that have been
represented to us.
We have assumed, with your consent, that the statements contained in the
Representation Letters are true and correct on the date hereof and that any
representation made in any of the documents referred to herein "to the best of
the knowledge and belief" of any person (or with similar qualification) is true
and correct without such qualification. We have not attempted to verify such
representations independently.
In addition, we have assumed, with your consent, that the aggregate fair
market value of the Equity Office common shares to be received in the REIT
Merger by the Cornerstone common and preferred stockholders, determined as of
the Effective Time of the REIT Merger, will not be less than 40% of the
aggregate fair market value of all of the shares of Cornerstone common and
preferred stock outstanding immediately prior to the Effective Time. For
purposes of this assumption, shares of Cornerstone stock exchanged for cash or
other property, including cash paid in lieu of issuing fractional interests in
Equity Office common shares, will be treated as outstanding Cornerstone stock,
and the aggregate fair market value of the outstanding Cornerstone stock will be
deemed to be equal to the sum of the aggregate Merger Consideration paid in the
REIT Merger.
OPINION
Based upon and subject to the foregoing, we are of the following opinion:
1. The REIT Merger will qualify as a reorganization within the
meaning of section 368(a) of the Code.
2. The portions of the discussion in the REIT Merger S-4 under the
heading "MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES RELATING TO THE MERGER"
and in the Partnership Merger S-4 under the heading "MATERIAL FEDERAL
<PAGE> 3
Cornerstone Properties Inc.
May 11, 2000
Page 3
INCOME TAX CONSEQUENCES -- Tax Consequences of the REIT Merger" that purport to
describe provisions of the Internal Revenue Code and the Treasury Regulations
thereunder, as they apply to the REIT Merger, are correct in all material
respects. We express no opinion, however, regarding the tax consequences of the
REIT Merger to Cornerstone stockholders that are subject to special tax rules
(including without limitation the tax treatment of Cornerstone stockholders who
or that are not "United States persons" within the meaning of section
7701(a)(30) of the Code or the treatment of persons who acquired shares of
Cornerstone stock pursuant to the exercise of employee stock options or
otherwise as compensation).
3. The portions of the discussion in the Partnership Merger S-4 under
the headings "MATERIAL FEDERAL INCOME TAX CONSEQUENCES -- Tax Consequences of
the Partnership Merger to Cornerstone Partnership Unitholders That Receive EOP
Partnership Units," and "--Tax Consequences of the Redemption of Cornerstone
Partnership Units for Cornerstone Common Stock" that purport to describe
provisions of the Internal Revenue Code and the Treasury Regulations thereunder
are correct in all material respects. We express no opinion, however, as to the
tax consequences of the Partnership Merger to any particular Cornerstone
Partnership unitholder or as to information that may be applicable or relevant
to any particular Cornerstone Partnership unitholder in determining the tax
consequences to it of the Partnership Merger, nor do we express any opinion as
to tax consequences that may be relevant to former Cornerstone Partnership
unitholders with respect to their ownership of EOP Partnership units following
the Partnership Merger.
The opinion expressed herein is based upon existing statutory,
regulatory, and judicial authority, any of which may be changed at any time with
retroactive effect. In addition, our opinion is based solely on the documents
that we have examined, the additional information that we have obtained, the
assumptions we have made as described herein, and the facts set out in the
Representation Letters that we have assumed, with your consent, to be true and
correct. Our opinion cannot be relied upon if any of the facts contained in such
documents (including, without limitation, the Representation Letters) or in any
such additional information is, or later becomes, inaccurate or if any of the
factual assumptions upon which we have relied is, or later becomes, inaccurate.
In particular, and without limiting the preceding sentence, our opinion as to
the status of the REIT Merger as a reorganization cannot be relied upon, and
will not be reconfirmed prior to the closing of the Mergers (thereby preventing
the closing condition in Section 6.3(e) of the Merger Agreement from being
satisfied), if the assumption set forth herein that the aggregate value of the
Equity Office common shares issued in the REIT Merger will represent at least
40% of the aggregate consideration received by the Cornerstone stockholders is
not valid at the time of the proposed closing.
Our opinion is limited to the United States federal income tax matters
specifically covered thereby, and we have not been asked to address, nor have we
addressed, any other federal, state, local, or foreign income, estate, gift,
transfer, sales, use, or other tax consequences that may result from the Mergers
or any other transaction, including any transaction undertaken in connection
with the Mergers.
<PAGE> 4
Cornerstone Properties Inc.
May 11, 2000
Page 4
We hereby consent to the filing of this opinion letter as an Exhibit to
each of the Registration Statements and to the references to our firm in the
REIT Merger S-4 under the headings "MATERIAL U.S. FEDERAL INCOME TAX
CONSEQUENCES RELATING TO THE MERGER," "MATERIAL FEDERAL INCOME TAX CONSEQUENCES
OF AN INVESTMENT IN EQUITY OFFICE," and "LEGAL MATTERS" and in the Partnership
Merger S-4 under the headings "MATERIAL FEDERAL INCOME TAX CONSEQUENCES" and
"LEGAL MATTERS." In giving such consent, however, we do not thereby admit that
we are an "expert" within the meaning of the Securities Act of 1933, as amended.
Except as stated in this paragraph, this opinion letter may not be furnished to
or relied upon by any person or any entity for any purpose without our prior
written consent and may not be quoted in whole or in part or otherwise referred
to (other than in connection with the transactions contemplated by the Merger
Agreement).
Very truly yours,
/s/ KING & SPALDING
King & Spalding
<PAGE> 1
HOGAN & HARTSON L.L.P.
EXHIBIT 8.3
May 11, 2000
Equity Office Properties Trust
Two North Riverside Plaza
Chicago, Illinois 60606
Cornerstone Properties Inc.
Tower 56
126 East 56th Street
New York, NY 10022
Ladies and Gentlemen:
We have acted as counsel to Equity Office Properties Trust ("Equity
Office"), a Maryland real estate investment trust, in connection with the
execution and delivery of the Agreement and Plan of Merger dated as of February
11, 2000, as amended (the "Agreement"), among Equity Office, EOP Operating
Limited Partnership ("EOP Partnership"), a Delaware limited partnership,
Cornerstone Properties Inc. ("Cornerstone"), a Nevada corporation, and
Cornerstone Properties Limited Partnership ("Cornerstone Partnership"), a
Delaware limited partnership, pursuant to which Cornerstone will merge with and
into Equity Office (the "REIT Merger") and Cornerstone Partnership will merge
with and into EOP Partnership (the "Partnership Merger" and, together with the
REIT Merger, the "Mergers"). This opinion letter is being furnished to you in
connection with the Registration Statement on Form S-4, which includes the
Consent Solicitation of Cornerstone Partnership, the Information Statement of
EOP Partnership, and the Prospectus of Equity Office, EOP Partnership and
Cornerstone (the "Registration Statement"), as filed with the Securities and
Exchange Commission on April 26, 2000, as amended through the date hereof.
Unless otherwise defined herein or the context hereof otherwise requires, each
term used herein with initial capitalized letters has the meaning given to such
terms in the Agreement.
BASIS FOR OPINIONS
The opinions set forth in this letter are based on relevant current
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
Treasury Regulations thereunder (including proposed and temporary Treasury
Regulations), and interpretations of the foregoing as expressed in court
decisions, legislative history, and administrative determinations of the
Internal Revenue Service (the "IRS") (including its practices and policies in
issuing private letter rulings, which are not binding on the IRS, except with
respect to a taxpayer that receives such a
<PAGE> 2
Equity Office Properties Trust
May 11, 2000
Page 2
ruling), all as of the date hereof. These provisions and interpretations are
subject to changes, which may or may not be retroactive in effect, that might
result in material modifications of our opinions. Our opinions do not foreclose
the possibility of a contrary determination by the IRS or a court of competent
jurisdiction, or of a contrary position by the IRS or the Treasury Department in
regulations or rulings issued in the future. In this regard, although we believe
that our opinions set forth herein will be sustained if challenged, an opinion
of counsel with respect to an issue is not binding on the IRS or the courts, and
is not a guarantee that the IRS will not assert a contrary position with respect
to such issue or that a court will not sustain such a position asserted by the
IRS.
In rendering the following opinions, we have examined such statutes,
regulations, records, certificates and other documents as we have considered
necessary or appropriate as a basis for such opinions, including the following:
(1) the Agreement; (2) the Registration Statement, as amended through the date
hereof; (3) the First Amended and Restated Agreement of Limited Partnership of
EOP Partnership, dated as of May 1, 2000, as amended through the date hereof;
(4) the Articles of Amendment and Restatement of Declaration of Trust of Equity
Office dated as of July 9, 1997, as amended through the date hereof (the
"Declaration of Trust of EOP") and, with respect to each series of Equity Office
Preferred Shares, the Articles Supplementary establishing and fixing the rights
and preferences of such series of preferred shares; (5) the form of partnership
agreement or limited liability company operating agreement, as applicable, used
by EOP Partnership to organize and operate the partnerships and limited
liability companies in which EOP Partnership owns an interest (collectively, the
"Partnership Subsidiaries"); (6) the articles of organization and stock
ownership records of the following corporations in which EOP Partnership owns
stock, directly or indirectly, including BeaMetFed, Inc., Equity Office
Properties Management Corp., EOP Office Company, Beacon Property Management
Corporation, Beacon Design Corp., Beacon Construction Company, Inc., Real State
Insurance Corporation and Equity Business Centers Corp. (collectively, the
"Corporate Entities"); (7) stock ownership information for Tenant Services
Corp.; (8) the articles of incorporation, bylaws and stock ownership information
for WCP Services, Inc.; (9) the opinion of counsel received by Cornerstone from
King & Spalding, dated on the date hereof, to the effect that commencing with
its taxable year ended December 31, 1997, Cornerstone has been organized and has
operated in conformity with the requirements for qualification as a "real estate
investment trust" under the Code and that Cornerstone Partnership has been
during and since December 23, 1997, and continues to be, treated for federal
income tax purposes as a partnership and not as a corporation or an association
taxable as a corporation (the "King &
<PAGE> 3
Equity Office Properties Trust
May 11, 2000
Page 3
Spalding Tax Opinion"); and (10) other necessary documents as we have deemed
necessary in order to render the opinions set forth in this letter. The opinions
set forth in this letter also are premised on certain written representations of
(i) each of the ZML REITs contained in a letter to us dated July 7, 1997, which
letter was reconfirmed to us by Equity Office, as the successor to the ZML
REITs, on or about the date hereof, regarding the assets, operations and
activities of each of the ZML REITs prior to July 11, 1997; (ii) Equity Office
and EOP Partnership contained in a letter to us dated on or about the date
hereof, regarding the assets, operations and activities of Equity Office and EOP
Partnership in the past and as to the contemplated assets, operations and
activities of Equity Office in the future; (iii) BeaMetFed, Inc. ("BeaMetFed")
contained in a letter to us dated on or about the date hereof, regarding the
assets, operations and activities of BeaMetFed in the past and as to
contemplated assets, operations and activities of BeaMetFed in the future; and
(iv) Cornerstone and Cornerstone Partnership contained in a letter to us, dated
on or about the date hereof, regarding the assets, operations, and activities of
Cornerstone and Cornerstone Partnership (collectively, the "Management
Representation Letters").
For purposes of rendering our opinions, we have not made an independent
investigation or audit of the facts set forth in any of the above-referenced
documents, including the Management Representation Letters. We consequently have
relied upon representations in the Management Representation Letters that the
information presented in such documents or otherwise furnished to us is accurate
and complete in all material respects. After reasonable inquiry, we are not,
however, aware of any material facts or circumstances contrary to, or
inconsistent with, the representations we have relied upon as described herein
or other assumptions set forth herein. To the extent that such representations
and information set forth legal conclusions with respect to factual matters
relevant to the qualification of Equity Office as a REIT or the treatment of
EOP Partnership as a partnership, we have previously reviewed with the
individual making such representations, the Chief Legal Counsel of Equity
Office, the relevant provisions of the Code, applicable Treasury Regulations,
and published administrative interpretations thereof, and he has had such
statements reviewed internally within Equity Office by the individuals with
direct primary responsibility for federal income tax matters and Equity
Office's compliance with the federal income tax rules applicable to real estate
investment trusts. Finally, our opinion is limited to the tax matters
specifically covered herein, and we have not been asked to address, nor have we
addressed, any other tax consequences to Cornerstone, Cornerstone Partnership,
Equity Office, EOP Partnership, or any other person.
Moreover, we have assumed that, insofar as relevant to the opinions set
forth herein:
(1) each of Equity Office, EOP Partnership, the Partnership Subsidiaries,
and the Corporate Entities has been and will be operated in the manner described
in the Registration Statement and in the relevant partnership agreement, limited
liability company operating agreement, articles (or certificate) of
incorporation, declaration of trust, or other organizational documents;
(2) as represented by Equity Office, there are no agreements or
understandings between (a) Equity Office or EOP Partnership and (b) either (i)
the entity that owns 100% of the voting stock of Equity Office Properties
Management Corp. and EOP Office Company, or with such
<PAGE> 4
Equity Office Properties Trust
May 11, 2000
Page 4
corporations themselves, that are inconsistent, or will be inconsistent, with
such entity being considered to be both the record and beneficial owner of 100%
of the outstanding voting stock of Equity Office Properties Management Corp.
and EOP Office Company; (ii) Equity Office Properties Management Corp., the
entity that owns in excess of 90% of the voting stock of Beacon Property
Management Corporation, Beacon Design Corporation, and Beacon Construction
Company, Inc., or with such corporations themselves that are inconsistent or
will be inconsistent, with Equity Office Properties Management Corp. being
considered to be both the record and beneficial owner of in excess of 90% of the
outstanding voting stock of each of Beacon Property Management Corporation,
Beacon Design Corporation, and Beacon Construction Company, Inc.; (iii) Tim
Callahan, Michael Steele, Richard Kincaid, Stanley Stevens and David Helfand,
the individuals who own 100% of the voting stock of Real State Insurance
Corporation, or with the corporation itself that are inconsistent or will be
inconsistent, with Tim Callahan, Michael Steele, Richard Kincaid, Stanley
Stevens and David Helfand being considered to be both the record and beneficial
owners of 100% of the voting stock of Real State Insurance Corporation; or (iv)
Tim Callahan, Michael Steele, Richard Kincaid and Stanley Stevens, the
individuals who own 100% of the outstanding voting stock of Equity Business
Centers Corp., or with such corporation itself that are inconsistent or will be
inconsistent, with Tim Callahan, Michael Steele, Richard Kincaid, and Stanley
Stevens being considered to be both the record and beneficial owners of 100% of
the outstanding voting stock of Equity Business Centers Corp.;
(3) as represented by Equity Office, Equity Office takes measures to
ensure, and will continue to take measures to ensure, that any services provided
to tenants of the Properties by Tenant Services Corp. either (a) are considered
"usually or customarily rendered" or (b) satisfy the de minimis limit under
Section 856(d)(7) of the Code taking into account all other "impermissible
services" provided to a particular property;
(4) as represented by Equity Office, Equity Office takes measures to
ensure, and will take measures to ensure, that any other services provided to
the tenants of the Properties are either (a) "usually or customarily rendered"
or (b) provided by an entity that qualifies as an "independent contractor," as
defined in Section 856 of the Code and the Treasury Regulations thereunder, from
which Equity Office receives no income, and the following conditions are
satisfied: the tenants are separately charged by the independent contractor, the
relationship between the independent contractor and Equity Office is arm's
length, and, for noncustomary services, the costs of the services are borne by
the independent
<PAGE> 5
Equity Office Properties Trust
May 11, 2000
Page 5
contractor (or for taxable years beginning after December 31, 2000, provided by
a "taxable REIT subsidiary" within the meaning of Section 856(l) of the Code);
(5) commencing with its taxable year ended December 31, 1997, Cornerstone
has been organized and has operated in conformity with the requirements for
qualification as a "real estate investment trust" under the Code, and
Cornerstone Partnership has been during and since December 23, 1997, and
continues to be, treated for federal income tax purposes as a partnership and
not as a corporation or an association taxable as a corporation, as described in
the King & Spalding Tax Opinion; and
(6) Equity Office is a duly organized and validly existing real estate
investment trust under the laws of the State of Maryland, Cornerstone is duly
organized and validly incorporated under the laws of the State of Nevada, each
of the Corporate Entities is a duly organized and validly incorporated
corporation under the laws of the state in which it is purported to be
organized, EOP Partnership is a duly organized and validly existing limited
partnership under the laws of the State of Delaware, Cornerstone Partnership is
a duly organized and validly existing limited partnership under the laws of the
State of Delaware, and each of the Partnership Subsidiaries is a duly organized
and validly existing partnership or limited liability company, as the case may
be, under the applicable laws of the state in which it is purported to be
organized.
In our review, we have assumed, with your consent, that all of the
representations and statements set forth in the documents that we reviewed
(including the Management Representation Letters) are true and correct and all
of the obligations imposed by any such documents on the parties thereto,
including obligations imposed under the Declaration of Trust of EOP, have been
and will continue to be performed or satisfied in accordance with their terms.
We also have assumed the genuineness of all signatures, the proper execution of
all documents, the authenticity of all documents submitted to us as originals,
the conformity to originals of documents submitted to us as copies, and the
authenticity of the originals from which any copies were made.
<PAGE> 6
Equity Office Properties Trust
May 11, 2000
Page 6
OPINIONS
Based upon, subject to, and limited by the assumptions and qualifications
set forth herein, we are of the opinion that:
(a) commencing with its taxable year ended December 31, 1997, Equity
Office was organized and has operated in conformity with the requirements for
qualification as a real estate investment trust ("REIT") under the Code, and
after giving effect to the Mergers, Equity Office's proposed method of operation
(as described in the Registration Statement and the Management Representation
Letters) will enable Equity Office to continue to meet the requirements for
qualification and taxation as a REIT under the Code; and
(b) EOP Partnership has been during and since 1997, and continues to be,
treated for federal income tax purposes as a partnership and not as a
corporation or an association taxable as a corporation.
We assume no obligation to advise you of any changes in our opinions or
of any new developments in the application or interpretation of the federal
income tax laws subsequent to the date of this letter. Equity Office's
qualification and taxation as a REIT depend upon (i) the satisfaction in the
past by the ZML REITs of the requirements for qualification and taxation as a
REIT; (ii) Equity Office's ability to meet on a continuing basis, through actual
annual operating and other results, the various requirements under the Code, as
described in the Prospectus with regard to, among other things, the sources of
its gross income, the composition of its assets, the level of its distributions
to shareholders, and the diversity of its stock ownership; and (iii) the
satisfaction by BeaMetFed at all time since its taxable year ended December 31,
1995, and on a continuing basis, of the requirements for qualification and
taxation as a REIT. Hogan & Hartson L.L.P. will not review Equity Office's
compliance with these requirements on a continuing basis. Accordingly, no
assurance can be given that the actual results of Equity Office's operations,
the sources of its income, the nature of its assets, the level of its
distributions to shareholders and the diversity of its share ownership for any
given taxable year will satisfy the requirements under the Code for
qualification and taxation as a REIT.
<PAGE> 7
Equity Office Properties Trust
May 11, 2000
Page 7
In rendering the opinions herein, Hogan & Hartson L.L.P. has relied upon
representations of Equity Office and EOP Partnership with respect to REIT
qualification matters, including those set forth in the Management
Representation Letters. Hogan & Hartson L.L.P. also has relied upon the
representations of BeaMetFed regarding its qualification as a REIT. In addition,
Hogan & Hartson L.L.P. has relied on the King & Spalding Tax Opinion for
purposes of its opinion to the effect that Equity Office's proposed method of
operation, after giving effect to the Mergers, will enable Equity Office to
continue to meet the requirements for qualification and taxation as a REIT under
the Code.
We hereby consent to the filing of this opinion letter as Exhibit 8.3 to
the Registration Statement and to the reference to Hogan & Hartson L.L.P. under
the captions "LEGAL MATTERS" and "MATERIAL FEDERAL INCOME TAX CONSEQUENCES" in
the Registration Statement. In giving this consent, however, we do not thereby
admit that we are an "expert" within the meaning of the Securities Act of 1933,
as amended.
Very truly yours,
/s/ Hogan & Hartson L.L.P.
HOGAN & HARTSON L.L.P.
<PAGE> 1
KING & SPALDING Exhibit 8.4
May 11, 2000
Equity Office Properties Trust
Two North Riverside Plaza
Suite 2200
Chicago, Illinois 60606
Cornerstone Properties Inc.
Tower 56
126 East 56th Street
New York, New York 10022
Re: Tax Status of Cornerstone Properties Inc. and Cornerstone
Properties Limited Partnership
Ladies and Gentlemen:
We have acted as counsel to Cornerstone Properties Inc., a Nevada
corporation ("Cornerstone"), and Cornerstone Properties Limited Partnership, a
Delaware limited partnership ("Cornerstone Partnership"), in connection with the
Agreement and Plan of Merger, dated as of February 11, 2000, as amended (the
"Merger Agreement"), by and among Equity Office Properties Trust, a Maryland
real estate investment trust ("Equity Office"), EOP Limited Partnership, a
Delaware limited partnership ("EOP Partnership"), Cornerstone, and Cornerstone
Partnership, pursuant to which Cornerstone Partnership will merge with and into
EOP Partnership (the "Partnership Merger") and Cornerstone will merge with and
into Equity Office (the "REIT Merger," and, together with the Partnership
Merger, the "Mergers"). Cornerstone has requested the opinion of King & Spalding
as to (i) the qualification of Cornerstone as a real estate investment trust
("REIT") under the Internal Revenue Code of 1986, as amended (the "Code") and
(ii) the treatment of Cornerstone Partnership as a partnership, and not as a
corporation or an association taxable as a corporation, for federal income tax
purposes.
This opinion letter is being furnished to you in connection with (1) the
Registration Statement on Form S-4, which includes the Joint Proxy Statement /
Prospectus of Equity Office and Cornerstone addressed to holders of Cornerstone
common stock and Equity Office common shares, as filed with the Securities and
Exchange Commission on March 30, 2000, as amended through the date hereof (the
"REIT Merger S-4") and (2) the Registration Statement on Form S-4, which
includes the Consent Solicitation of Cornerstone Partnership, the Information
Statement of EOP Partnership, and the Prospectus of Equity Office, EOP
Partnership, and Cornerstone, as filed with the Securities and Exchange
Commission on April 26, 2000, as amended through the date hereof (the
"Partnership Merger S-4," and, together with the REIT Merger S-4, the
"Registration Statements").
<PAGE> 2
Equity Office Properties Trust
Cornerstone Properties Inc.
May 11, 2000
Page 2
Unless otherwise indicated, all terms used herein with initial capital
letters shall have the same meaning as in the Merger Agreement.
INFORMATION RELIED ON
In rendering the opinion expressed herein, we have examined such
documents as we have deemed appropriate, including (but not limited to) the
Registration Statement, Cornerstone's Articles of Incorporation, as amended,
Cornerstone Partnership's agreement of limited partnership, as amended, and the
analyses of qualifying income prepared by Cornerstone. In our examination of
documents, we have assumed, with your consent, that all documents submitted to
us are authentic originals, or if submitted as photocopies or facsimile copies,
that they faithfully reproduce the originals thereof, that all such documents
have been or will be duly executed to the extent required, that all
representations and statements set forth in such documents are true and correct,
and that all obligations imposed by any such documents on the parties thereto
have been or will be performed or satisfied in accordance with their terms.
We also have obtained such additional information and representations as
we have deemed relevant and necessary through consultation with officers of
Cornerstone, including representations to us in an officer's certificate (the
"Officer's Certificate"). We have assumed, with your consent, that the
representations set forth in the Officer's Certificate are true, accurate, and
complete as of the date hereof, and we have not attempted to verify such
representations independently.
OPINION
Based upon and subject to the foregoing, we are of the following opinion:
1. Commencing with its taxable year ended December 31, 1997,
Cornerstone was organized and has operated in conformity with the requirements
for qualification as a REIT under the Code.
2. Cornerstone Partnership has been during and since December 23,
1997, and continues to be, treated for federal income tax purposes as a
partnership and not as a corporation or association taxable as a corporation.
The opinion expressed herein is given as of the date hereof and is based
upon the Code, the U.S. Treasury regulations promulgated thereunder, current
administrative positions of the U.S. Internal Revenue Service, and existing
judicial decisions, any of which could be changed at any time, possibly on a
retroactive basis. Any such changes could adversely affect the opinion rendered
herein. In addition, as noted above, our opinion is based solely on the
documents that we have examined, the additional information that we have
obtained, and the representations that have been made to us, and cannot be
relied upon if any of the facts contained in such documents
<PAGE> 3
Equity Office Properties Trust
Cornerstone Properties Inc.
May 11, 2000
Page 3
or in such additional information is, or later becomes, inaccurate or if any of
the representations made to us is, or later becomes, inaccurate. After
reasonable inquiry, however, we are not aware of any facts or circumstances
contrary to or inconsistent with the information, assumptions, and
representations upon which we have relied for purposes of this opinion. To the
extent that such representations and information set forth legal conclusions
with respect to factual matters relevant to the qualification of Cornerstone as
a REIT or the treatment of Cornerstone Partnership as a partnership, we have
reviewed with the individuals making such representations or providing such
information the relevant provisions of the Code, applicable Treasury
Regulations, and published administrative interpretations thereof. Finally, our
opinion is limited to the tax matters specifically covered herein, and we have
not been asked to address, nor have we addressed, any other tax consequences to
Cornerstone, Cornerstone Partnership, Equity Office, EOP Partnership, or any
other person.
We hereby consent to the reliance on this opinion letter by Hogan &
Hartson, L.L.P., solely for the purpose of its opinion, to be delivered in
connection with the filing of the Registration Statements, to the effect that
the organization and proposed method of operation of Equity Office following the
Mergers will enable it to continue to meet the requirements for qualification
and taxation as a REIT under the Code; provided, however, that such reliance is
authorized only to the extent that such opinion of Hogan & Hartson, L.L.P. is
affected by the assets and operations acquired by Equity Office and EOP
Partnership in the Mergers or by Cornerstone's qualification as a REIT through
the Effective Time of the REIT Merger. We also consent to the filing of this
opinion as an Exhibit to each of the Registration Statements and to the
references to our firm in the REIT Merger S-4 under the headings "MATERIAL U.S.
FEDERAL INCOME TAX CONSEQUENCES RELATING TO THE MERGER," "MATERIAL FEDERAL
INCOME TAX CONSEQUENCES OF AN INVESTMENT IN EQUITY OFFICE," and "LEGAL MATTERS"
and in the Partnership Merger under the headings "MATERIAL FEDERAL INCOME TAX
CONSEQUENCES" and "LEGAL MATTERS." In giving such consent, however, we do not
thereby admit that we are in the category of persons whose consent is required
under the Securities Act.
Except as stated in the preceding paragraph, this opinion letter may not
be furnished to or relied upon by any person or any entity for any purpose
without our prior written consent and may not be quoted in whole or in part or
otherwise referred to (other than in connection with the transactions
contemplated by the Merger Agreement).
Very truly yours,
/s/ KING & SPALDING
King & Spalding
<PAGE> 1
Exhibit 23.1
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-4) and related Prospectus of Equity Office
Properties Trust and EOP Operating Limited Partnership for the registration of
common shares of beneficial interest and units of limited partnership interest
related to the merger with Cornerstone Properties Limited Partnership and to the
incorporation by reference therein of our reports, both dated February 8, 2000,
except for Note 24, as to which the date is February 15, 2000, on the
consolidated financial statements and schedule of Equity Office Properties Trust
and of EOP Operating Limited Partnership included in their respective Annual
Reports (Form 10-K) for the year ended December 31, 1999, both filed with the
Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
Ernst & Young LLP
Chicago, Illinois
May 11, 2000
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Registration
Statement on Form S-4 of Equity Office Properties Trust, EOP Operating Limited
Partnership and Cornerstone Properties Inc. of our report dated March 3, 2000
relating to the consolidated financial statements of Cornerstone Properties
Inc, which appears in Cornerstone Properties Inc.'s Annual Report on Form
10-K/A for the year ended December 31, 1999. We also hereby consent to the use
in this Registration Statement on Form S-4 of our report dated April 12, 2000
relating to the financial statements and the financial statement schedule of
Cornerstone Properties Limited Partnership, which appears in such Registration
Statement. We also consent to the references to us under the headings
"Experts", "Partnership Merger Selected Historical Financial Data" and "REIT
Merger Selected Historical Consolidated Financial Data" in such Registration
Statement.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
New York, New York
May 11, 2000
<PAGE> 1
EXHIBIT 99.3
CORNERSTONE PROPERTIES LIMITED PARTNERSHIP
CONSENT FORM
The undersigned, a holder of common units ("UNITS") of limited
partnership interests in Cornerstone Properties Limited Partnership (the
"Partnership"), hereby votes in the following manner with respect to the matter
set forth below:
TO APPROVE THE MERGERS
- --------------------------------------------------------------------------------
[ ] CONSENTS [ ] DOES NOT CONSENT [ ] ABSTAINS
- --------------------------------------------------------------------------------
The above proposal is described more fully in the accompanying
Solicitation Statement. The Units represented by this Consent will be deemed to
have been voted in accordance with the election specified by the holder named
below. IF NO ELECTION IS SPECIFIED, ANY OTHERWISE PROPERLY COMPLETED AND SIGNED
CONSENT FORM WILL BE DEEMED TO BE A CONSENT TO THE MERGERS. BY EXECUTION HEREOF,
THE UNDERSIGNED ACKNOWLEDGES RECEIPT OF THE SOLICITATION STATEMENT.
THIS CONSENT IS SOLICITED BY THE GENERAL PARTNER ON BEHALF OF THE
PARTNERSHIP.
The Partnership reserves the right to waive any conditions to, or modify
the terms of, the Solicitation (as defined in the Solicitation Statement).
A Consent Form given, if effective, will be binding upon the holder of
the Units who gives such Consent Form and upon any subsequent transferees of
such Units, subject only to revocation by the delivery of a written notice of
revocation by the Unitholder, executed and filed in the manner and within the
time period described in the Solicitation Statement.
IN ORDER TO COUNT, THIS CONSENT FORM MUST BE RECEIVED BY THE PARTNERSHIP
PRIOR TO 5:00 P.M., EASTERN DAYLIGHT TIME, ON FRIDAY, JUNE 16, 2000.
This fully completed and executed Consent Form should be sent by mail in
the self-addressed, postage-paid envelope enclosed For that purpose, or by
overnight courier, or by facsimile, to the Partnership, as follows:
<TABLE>
<CAPTION>
IF DELIVERED BY MAIL OR BY COURIER, TO: IF DELIVERED BY FACSIMILE, TO:
<S> <C>
Cornerstone Properties Limited Partnership Cornerstone Properties Limited Partnership
Attn: Thomas P. Loftus Attn: Thomas P. Loftus
126 East 56th Street Facsimile Number: (212) 605-7199
New York, NY 10022 Telephone Number: (212) 605-7100
</TABLE>
Please sign your name below exactly in the same manner as the name(s) in
which ownership of the Units is registered. When Units are held by two or more
joint holders, all such holders must sign. When signing as attorney-in-fact,
executor, administrator, trustee or guardian, please give full title as such. If
a corporation, please sign in full corporate name by the President or other
authorized officer. If a partnership, please sign in partnership name by an
authorized person.
<TABLE>
<S> <C>
Signature if
Signature: held jointly:
-------------------------------- -------------------------------
Name: ________________________________ Name: ______________________________
(Please Print) (Please Print)
Date: _________________________, 2000
</TABLE>
Note: Please complete and return the applicable attached Certificate on
Non-Foreign Status.
<PAGE> 2
EOP OPERATING LIMITED PARTNERSHIP
EQUITY OFFICE PROPERTIES TRUST
CERTIFICATE OF NON-FOREIGN STATUS
FOR INDIVIDUALS
To inform you that withholding of tax is not required under Section 1445
of the Internal Revenue Code upon amounts received by me in connection with
the merger of Cornerstone Properties Limited Partnership with and into EOP
Operating Limited Partnership (the "Partnership Merger") and the exchange of
my units of limited partnership interest in Cornerstone Properties Limited
Partnership ("Cornerstone Partnership Units") for units of limited partnership
interest in EOP Operating Limited Partnership ("EOP Partnership Units"), I, the
undersigned, hereby certify the following:
1. I am not a nonresident alien for purposes of U.S. income taxation;
2. My U.S. taxpayer identification number (Social Security Number)
is: ; and
3. My current home address is as follows:
I hereby agree that if I become a nonresident alien prior to the date of
any issuance to me of EOP Partnership Units pursuant to the Partnership Merger,
(i) I will notify EOP Operating Limited Partnership c/o Equity Office
Properties Trust at Two North Riverside Plaza, Suite 2100, Chicago, Illinois
60606 (Attention: Diane Morefield), and (ii) I hereby authorize EOP Operating
Limited Partnership to withhold ten percent (10%) of the "amount realized" (as
such term is defined in Section 1001 of the Internal Revenue Code) by me in
connection with the Partnership Merger. I understand that this certification may
be disclosed to the Internal Revenue Service and that any false statement I have
made herein could be punishable by fine, imprisonment, or both.
Under penalties of perjury, I declare that I have examined this
certification and to the best of my knowledge and belief it is true, correct,
and complete.
<TABLE>
<S> <C>
SIGNATURE DATE
------------------------------------------- -----------------------------------------------
PRINT NAME
------------------------------------------
</TABLE>
NOTE: To comply with the Foreign Investment in Real Property Tax Act of
1980 ("FIRPTA"), EOP Operating Limited Partnership may be required to
withhold ten percent (10%) of the amount realized by you with respect to
the Partnership Merger, unless you complete, execute, and return to EOP
Operating Limited Partnership this Certificate of Non-Foreign Status. You
may submit this Certificate of Non-Foreign Status by either (1) delivering
it directly to EOP Operating Limited Partnership c/o Equity Office
Properties Trust at Two North Riverside Plaza, Suite 2100, Chicago,
Illinois 60606 (Attention: Diane Morefield) or (2) by submitting it
together with your Consent Form to Cornerstone Properties Limited
Partnership, which will forward this Certificate to EOP Operating Limited
Partnership.
<PAGE> 3
EOP OPERATING LIMITED PARTNERSHIP
EQUITY OFFICE PROPERTIES TRUST
CERTIFICATE OF NON-FOREIGN STATUS
FOR ENTITIES
To inform you that withholding of tax is not required under Section 1445 of
the Internal Revenue Code upon amounts received by ______________________ in
connection with the merger of Cornerstone Properties Limited Partnership with
and into EOP Operating Limited Partnership (the "Partnership Merger") and the
exchange of units of limited partnership interest in Cornerstone Properties
Limited Partnership ("Cornerstone Parnership Units") for units of limited
partnership interest in EOP Operating Limited Partnership ("EOP Partnership
Units"), the undersigned hereby certifies the following on behalf of _________ .
1. ______________________ is not a foreign corporation, foreign
partnership, foreign trust, or foreign estate (as those terms are
defined in the Internal Revenue Code and Income Tax Regulations);
2. ______________________'s U.S. employer identification number is
______________________; and
3. ______________________'s office address is:_________________________
______________________ hereby agrees that if ______________________ becomes a
foreign person prior to the date of any issuance of EOP Partnership Units
pursuant to the Partnership Merger to ______________________, (i)
______________________ will notify EOP Operating Limited Partnership c/o Equity
Office Properties Trust at Two North Riverside Plaza, Suite 2100,
Chicago, Illinois 60606 (Attention: Diane Morefield), and (ii)
______________________ hereby authorizes EOP Operating Limited Partnership to
withhold ten percent (10%) of the "amount realized" (as such term is defined in
Section 1001 of the Internal Revenue Code) by ______________________ in
connection with the Partnership Merger. ______________________ understands that
this certification may be disclosed to the Internal Revenue Service and that any
false statement made herein could be punishable by fine, imprisonment, or both.
Under penalties of perjury, I declare that I have examined this
certification and to the best of my knowledge and belief it is true, correct,
and complete, and I further declare that I have authority to sign this document
on behalf of ______________________.
<TABLE>
<S> <C>
SIGNATURE DATE
------------------------------------------- -----------------------------------------------
PRINT NAME
------------------------------------------
TITLE
-----------------------------------------------
</TABLE>
NOTE: To comply with the Foreign Investment in Real Property Tax Act of
1980 ("FIRPTA"), EOP Operating Limited Partnership may be required to withhold
ten percent (10%) of the amount realized by you with respect to the Partnership
Merger, unless you complete, execute, and return to EOP Operating Limited
Partnership this Certificate of Non-Foreign Status. You may submit this
Certificate of Non-Foreign Status by either (1) delivering it directly to EOP
Operating Limited Partnership c/o Equity Office Properties Trust at Two North
Riverside Plaza, Suite 2100, Chicago, Illinois 60606 (Attention: Diane
Morefield) or (2) by submitting it together with your Consent Form to
Cornerstone Properties Limited Partnership, which will forward this Certificate
to EOP Operating Limited Partnership.
<PAGE> 1
EXHIBIT 99.4
NOTICE OF REDEMPTION/FORM OF ELECTION
CORNERSTONE PROPERTIES LIMITED PARTNERSHIP
CORNERSTONE PROPERTIES INC.
SUBMIT THIS NOTICE OF REDEMPTION/FORM OF ELECTION ONLY IF YOU WISH TO
CONVERT YOUR CORNERSTONE PARTNERSHIP UNITS TO CASH OR STOCK, WHICH WILL BE A
TAXABLE TRANSACTION. DO NOT SUBMIT THIS FORM IF YOU WISH TO RECEIVE ONLY EOP
PARTNERSHIP UNITS.
As described in the accompanying consent solicitation/information
statement/prospectus dated as of May , 2000, this Notice of Redemption/Form of
Election must be submitted in order for you to redeem your Cornerstone
Partnership units for Cornerstone common stock before the proposed merger of
Cornerstone Partnership with and into EOP Partnership, which we refer to as the
partnership merger, and to make an election with respect to consideration that
will be received by you, as a Cornerstone common stockholder, in connection with
the proposed merger of Cornerstone with and into Equity Office, which we refer
to as the REIT merger.
A PROPERLY EXECUTED NOTICE OF REDEMPTION/FORM OF ELECTION MUST BE RECEIVED
BY CORNERSTONE PARTNERSHIP BY 5:00 P.M., EASTERN TIME, ON THURSDAY, JUNE 15,
2000. IF A PROPERLY EXECUTED NOTICE OF REDEMPTION/FORM OF ELECTION IS NOT SO
RECEIVED, YOUR CORNERSTONE PARTNERSHIP UNITS WILL NOT BE REDEEMED; YOU WILL
RECEIVE EOP PARTNERSHIP UNITS IN THE PARTNERSHIP MERGER BASED ON THE 0.7009
EXCHANGE RATIO; AND YOU WILL NOT PARTICIPATE AS A CORNERSTONE STOCKHOLDER IN THE
REIT MERGER. IF YOU SUBMIT A NOTICE OF REDEMPTION PURSUANT TO WHICH YOU MAKE AN
EFFECTIVE REDEMPTION, BUT NOT AN EFFECTIVE ELECTION, YOUR CORNERSTONE
PARTNERSHIP UNITS WILL BE REDEEMED; YOU WILL PARTICIPATE IN THE REIT MERGER;
AND, IN THE REIT MERGER, YOU WILL RECEIVE EITHER CASH, EQUITY OFFICE COMMON
SHARES, OR A COMBINATION OF CASH AND EQUITY OFFICE COMMON SHARES, BASED ON THE
ELECTIONS MADE BY OTHER CORNERSTONE COMMON STOCKHOLDERS. BY FOLLOWING THE
INSTRUCTIONS CONTAINED IN THIS NOTICE OF REDEMPTION/FORM OF ELECTION, YOU MAY
CHANGE OR REVOKE YOUR NOTICE OF REDEMPTION OR ELECTION AT ANY TIME BEFORE 5:00
P.M., EASTERN TIME, ON THURSDAY, JUNE 15, 2000.
------------------------
This Notice of Redemption/Form of Election is delivered in connection with
the merger of Cornerstone Properties Limited Partnership ("Cornerstone
Partnership"), a Delaware limited partnership, with and into EOP Operating
Limited Partnership ("EOP Partnership"), a Delaware limited partnership, and the
subsequent merger of Cornerstone Properties Inc. ("Cornerstone"), a Nevada
corporation, with and into Equity Office Properties Trust ("Equity Office"), a
Maryland real estate investment trust.
By completing Part II hereof, titled "Notice of Redemption," the
undersigned hereby notifies Cornerstone Partnership of the undersigned's
exercise of its Redemption Right pursuant to Section 8.6 of the Agreement of
Limited Partnership of Cornerstone Partnership, as modified by Section 1.1(a) of
the Agreement and Plan of Merger, dated as of February 11, 2000, as amended, by
and among Equity Office, EOP Partnership, Cornerstone and Cornerstone
Partnership (the "Merger Agreement"). The undersigned further indicates hereby
whether its exercise of such Redemption Right is made conditional, pursuant to
Section 1.1(a)(v) of the Merger Agreement, upon the receipt by the undersigned
of solely cash as consideration in the REIT merger in exchange for some or all
of the shares of Cornerstone common stock that would be issued in the redemption
(the "Redemption Shares") if the redemption were effective. The undersigned
Limited Partner of Cornerstone Partnership hereby indicates the name in which
the Redemption Shares are to be issued by completing the box titled "Payment
Instructions for Redemption Shares" in Part II.
The undersigned understands that the undersigned is not required to submit
this Notice of Redemption/Form of Election in connection with the partnership
merger and that each Cornerstone Partnership unit that is not redeemed (whether
because a conditional notice of redemption does not become effective pursuant to
Sections 1.1(a)(v) and 1.12 of the Merger Agreement or because this Notice of
Redemption/Form of Election is not properly completed and submitted in
accordance with the accompanying Instructions, or because no Notice of
Redemption/Form of Election
<PAGE> 2
is submitted) will be converted in the partnership merger into 0.7009 of an EOP
Partnership unit and that no fractional units of EOP Partnership will be issued
and that cash will not be paid in lieu of any fractional units. A holder of
Cornerstone Partnership units who, based on the 0.7009 exchange ratio, would be
entitled to receive a number of EOP Partnership units that is not a whole
number, will receive a number of EOP Partnership units that is rounded to the
nearest whole number.
By completing Part III hereof, titled "Form of Election," the undersigned
indicates a preference to have each share of Cornerstone common stock that is
received by the undersigned pursuant to this Notice of Redemption/Form of
Election converted into either (a) the right to receive 0.7009 of an Equity
Office common share, with cash paid instead of any fractional share or (b) the
right to receive $18.00 in cash, without interest, in accordance with, and
subject to, Sections 1.10, 1.11 and 1.12 of the Merger Agreement. The
undersigned further understands that no fractional Equity Office common shares
will be issued, but instead, each holder of Cornerstone common stock, who
otherwise would have been entitled to a fractional Equity Office common share,
will receive an amount in cash (without interest), rounded to the nearest cent,
determined by multiplying (a) the average closing price of one Equity Office
common share as reported on the New York Stock Exchange on the five trading days
immediately preceding the date of the closing of the merger, by (b) 0.7009. Any
check and any certificates for Equity Office common shares will be issued in the
name and delivered to the address set forth in the box titled "Payment
Instructions for Redemption Shares" in Part II, unless otherwise indicated in
the boxes titled "Special Payment Instructions" and "Special Delivery
Instructions" in Part III.
Part IV hereof constitutes an "Irrevocable Special Power of Attorney,"
pursuant to which EquiServe L.P. is authorized to receive the Redemption Shares
on behalf of the person to whom the Redemption Shares are issued as specified in
Part II and to transfer such Redemption Shares in connection with the REIT
merger.
Part V hereof, titled "Signatures," must be completed in order for this
Notice of Redemption/Form of Election to be effective. The signature of the
Limited Partner submitting this Notice of Redemption/Form of Election must be
provided where indicated under the caption "Limited Partner Sign Here." In
addition, if the Redemption Shares are issued under a name other than that of
the Limited Partner submitting this Notice of Redemption/Form of Election, the
signature of the person to whom the Redemption Shares are issued must also be
provided in the space indicated. The signature(s) provided in Part V will serve
to execute all three of the Notice of Redemption, the Form of Election and the
Irrevocable Power of Attorney.
Part VI hereof, titled "Withholding Certificates," contains certifications
that should be completed by the person submitting this Notice of Redemption/Form
of Election in order to avoid withholding of U.S. federal income tax with
respect to the issuance of Redemption Shares and the subsequent payment of
consideration in the REIT merger in exchange for those Redemption Shares. If
these certifications are not completed and returned with this Notice of
Redemption/Form of Election, withholding may be required.
The following Notice of Redemption/Form of Election is subject to the
terms, conditions and limitations set forth in (a) the consent
solicitation/information statement/prospectus dated May , 2000, relating to
the partnership merger and the REIT merger, receipt of which is acknowledged by
the undersigned, (b) the Merger Agreement attached as Annex A to the consent
solicitation/information statement/prospectus, and (iii) the accompanying
Instructions contained in Part VII hereof. Capitalized terms used but not
defined herein shall have the same meaning given them in the consent
solicitation/prospectus.
PLEASE READ THIS ENTIRE NOTICE OF REDEMPTION/FORM OF ELECTION AND THE
CONSENT SOLICITATION/INFORMATION STATEMENT/PROSPECTUS CAREFULLY BEFORE
COMPLETING ANY SECTION BELOW. YOU MUST FOLLOW THE INSTRUCTIONS CONTAINED HEREIN.
YOU MAY DIRECT QUESTIONS AND REQUESTS FOR ASSISTANCE OR FOR ADDITIONAL COPIES OF
THE CONSENT SOLICITATION/INFORMATION STATEMENT/PROSPECTUS AND THIS NOTICE OF
REDEMPTION/FORM OF ELECTION TO CORNERSTONE PARTNERSHIP.
YOU ARE REMINDED THAT YOU DO NOT NEED TO COMPLETE THIS NOTICE OF
REDEMPTION/FORM OF ELECTION IF YOU DESIRE TO RECEIVE ONLY EOP PARTNERSHIP UNITS
IN CONNECTION WITH THE PARTNERSHIP MERGER.
2
<PAGE> 3
PART I
DUE DATE AND DELIVERY ADDRESS
A properly executed Notice of Redemption/Form of Election must be
Cornerstone Partnership by 5:00 p.m., Eastern Time, on Thursday, June 15, 2000.
You may change or revoke your election at any time before 5:00 p.m., Eastern
Time, on Thursday, June 15, 2000, by following Instruction A(2), set forth in
Part VII, below.
This Notice of Redemption/Form of Election must be delivered to Cornerstone
Partnership at the address set forth below.
<TABLE>
<S> <C>
By Overnight Delivery, Hand Delivery or Mail: By Facsimile Transmission:
Cornerstone Properties (212)605-7199
Limited Partnership
c/o Cornerstone Properties Inc. Confirm by Telephone:
Tower 56 (212)605-7100
126 East 56th Street, 6th Floor
New York, New York 10022
Attention: Thomas P. Loftus
</TABLE>
THIS NOTICE OF REDEMPTION/FORM OF ELECTION WILL NOT BE VALIDLY DELIVERED
AND WILL BE OF NO FORCE AND EFFECT IF:
- IT IS DELIVERED TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE;
- IT IS TRANSMITTED VIA FACSIMILE TO A NUMBER OTHER THAN AS SET FORTH
ABOVE;
- IT IS NOT RECEIVED BY THE DATE AND TIME SPECIFIED ABOVE; OR
- IT IS NOT PROPERLY SIGNED AND EXECUTED.
3
<PAGE> 4
PART II
NOTICE OF REDEMPTION
(See Instruction B(1))
The undersigned Limited Partner of Cornerstone Partnership hereby submits
this notice of redemption, which is conditioned on the completion of the
partnership merger and hereby acknowledges that this Notice of Redemption shall
have no effect unless the partnership merger is completed and that a redemption
of Cornerstone Partnership units pursuant to this notice of redemption will not
be effective until the date of the partnership merger immediately before the
partnership merger is completed.
In accordance with the terms of the Agreement of Limited Partnership of
Cornerstone Partnership and the Merger Agreement, and the Redemption Right
referred to in each of those agreements, the undersigned Limited Partner hereby:
1. redeems class A common units of limited partnership interest in
Cornerstone Partnership;
2. surrenders such units and all right, title, and interest therein;
3. represents, warrants, and certifies that the undersigned has marketable
and unencumbered title to the units subject to this Notice of
Redemption/Form of Election, free and clear of the rights or interests
of any other person or entity and has the full right, power, and
authority to redeem and surrender such units as provided herein and, in
that regard, has obtained the consent or approval of all persons or
entities, if any, having the right to consent to or approve such
redemption and surrender;
4. directs that the shares of Cornerstone common stock (equal in number to
the REIT Shares Amount (as defined in the partnership agreement of
Cornerstone Partnership determined by Cornerstone in its capacity as
General Partner)) deliverable upon exercise of the Redemption Right (the
"Redemption Shares") be issued in the name of, and at the address, as
specified below in the box labeled "Payment Instructions for Redemption
Shares;" and
5. pursuant to the Irrevocable Special Power of Attorney made part of this
Notice of Redemption/Form of Election, directs that the Redemption
Shares received pursuant to this notice of redemption be held on behalf
of such person specified below in the box labeled "Payment Instructions
for Redemption Shares" by EquiServe L.P. until the time of the REIT
merger, at which time such Redemption Shares will be converted in the
REIT merger into the right to receive for each such Redemption Share,
either 0.7009 of an Equity Office common share or $18.00 in cash,
without interest, subject to all terms and conditions, including
proration, of the Merger Agreement.
-----------------------------
NOTE: A redemption of your Cornerstone Partnership units will be treated as a
fully-taxable sale of those units for U.S. federal income tax purposes. For
certain information as to the federal income tax consequences of each type of
election, see "Material Federal Income Tax Consequences -- Tax Consequences of
The Redemption of Cornerstone Partnership Units for Cornerstone Common Stock" in
the consent solicitation/information statement/prospectus. You are urged to
consult with your own tax advisor in order to determine the tax consequences to
you of such a redemption prior to completing and returning this Notice of
Redemption/Form of Election.
4
<PAGE> 5
REDEMPTION CONDITIONED UPON RECEIPT OF CASH IN THE REIT MERGER
(See Instruction B(2))
If the box following this sentence is checked, the undersigned Limited
Partner hereby makes this Notice of Redemption/Form of Election conditional upon
the receipt of solely cash in the REIT merger in exchange for some or all of the
Redemption Shares that would be received pursuant hereto if this Notice of
Redemption/Form of Election becomes effective. [ ]
The undersigned Limited Partner hereby makes this Notice of Redemption
conditional upon the receipt of solely cash in the REIT merger for ________ of
the Redemption Shares that would be received if this Notice of Redemption
becomes effective.
------------------------
PAYMENT INSTRUCTIONS FOR REDEMPTION SHARES
- --------------------------------------------------------------------------------
You must indicate the name and address of the person to whom the Redemption
Shares should be issued. This box must be completed even if the Redemption
Shares are to be issued in the name of the Limited Partner of Cornerstone
Partnership who is submitting this Notice of Redemption.
------------------------------------------------------------
Name (Please Print)
------------------------------------------------------------
Address (Please Print)
------------------------------------------------------------
ZIP Code
------------------------------------------------------------
Telephone number with Area Code
------------------------------------------------------------
Tax ID Number
5
<PAGE> 6
PART III
FORM OF ELECTION
(See Instruction C)
In the boxes below, the undersigned specifies the number of the Redemption
Shares for which an election is made hereby to receive cash and an election is
made hereby to receive Equity Office common shares based on the Exchange Ratio.
If the sum of the numbers of Redemption Shares provided in the boxes below is
more than the total number of Redemption Shares to be received pursuant to the
Notice of Redemption in Part II, this Form of Election will not be valid, and
the Redemption Shares received pursuant to the Notice of Redemption will be
considered Non-Electing Shares under the Merger Agreement. The sum of the
numbers provided in the boxes below can be less than the total number of
Redemption Shares to be received pursuant to the Notice of Redemption in Part
II, in which case only the percentage of Redemption Shares for which neither
cash nor Equity Office share consideration is elected will be considered
Non-Electing Shares under the Merger Agreement. The numbers specified below must
be whole numbers.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
NUMBER OF REDEMPTION SHARES NUMBER OF REDEMPTION SHARES
SUBJECT TO CASH ELECTION SUBJECT TO 0.7009 EQUITY OFFICE
($18.00 PER SHARE)* COMMON SHARE ELECTION
- -------------------------------------------------------------------------------------------------------
<S> <C>
- -------------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
* This number of Redemption Shares subject to the cash election as entered in
this column cannot be less than the number, if any, of Redemption Shares
specified in Part II above under the caption "Redemption Conditioned Upon
Receipt of Cash in the REIT Merger." (See Instruction B(2))
In the event that elections to receive either cash or Equity Office common
shares exceed the limitations set forth in the Merger Agreement and described in
the consent solicitation/information statement/prospectus, the shares of your
Cornerstone common stock as to which elections have been made to receive the
form of consideration which is over-subscribed will be reduced pursuant to
specified procedures. For a description of these procedures, see Section 1.12 of
the Merger Agreement attached as Annex A to the consent solicitation/information
statement/prospectus and "The Merger Agreement -- The REIT Merger" in the
consent solicitation/information statement/prospectus.
The tax consequences to you of the REIT merger vary depending upon, among
other things, which of the above alternatives you choose. For certain
information as to the federal income tax consequences of each type of election,
see "Material Federal Income Tax Consequences -- Tax Consequences of the REIT
Merger" in the consent solicitation/information statement/prospectus.
6
<PAGE> 7
SPECIAL PAYMENT INSTRUCTIONS
(see Instructions F(7) and F(9))
To be completed ONLY if the checks are to be made payable to, or the
certificates for common shares of Equity Office are to be registered in the name
of, someone other than the person specified in "Payment Instructions for
Redemption Shares" in Part II above.
Name(s)
-----------------------------------------------
(PLEASE PRINT)
Address:
----------------------------------------------
(PLEASE PRINT)
------------------------------------------------------
(PLEASE INCLUDE ZIP CODE)
------------------------------------------------------
(TELEPHONE NUMBER WITH AREA CODE)
------------------------------------------------------
TAX ID NUMBER
SPECIAL DELIVERY INSTRUCTIONS
(see Instruction F(8))
To be completed ONLY if the checks are to be made payable to, or the
certificates for common shares of Equity Office are to be issued in the name of,
the person specified in "Payment Instructions for Redemption Shares" in Part II
above, but are to be sent to someone other than such person or sent to an
address other than the address provided for such person.
Name(s)
-----------------------------------------------
(PLEASE PRINT)
Address:
----------------------------------------------
(PLEASE PRINT)
------------------------------------------------------
(PLEASE INCLUDE ZIP CODE)
------------------------------------------------------
(TELEPHONE NUMBER WITH AREA CODE)
------------------------------------------------------
TAX ID NUMBER
7
<PAGE> 8
PART IV
IRREVOCABLE SPECIAL POWER OF ATTORNEY
(SEE INSTRUCTION F(10))
KNOW ALL MEN BY THESE PRESENTS that the undersigned hereby makes,
constitutes, and appoints EquiServe L.P. as its true and lawful
Attorney-in-Fact, with full power and authority in its name and on its behalf,
as applicable, (A) to receive the shares of Cornerstone common stock payable to
the undersigned upon the redemption of the undersigned's Cornerstone Partnership
units, pursuant to this Notice of Redemption/Form of Election of which this
Irrevocable Special Power of Attorney forms a part; (B) to hold on behalf of the
undersigned such shares of Cornerstone common stock until the Effective Time of
the REIT merger; and (C) to deliver on behalf of the undersigned such shares of
Cornerstone common stock.
The undersigned grants to said attorney-in-fact full power and authority to
do, take, and perform all and every act and thing whatsoever requisite, proper,
or necessary to be done, in the exercise of any of the rights and powers herein
granted, personally present, with full power of substitution or revocation,
hereby ratifying and confirming all that said attorney-in-fact, or its
substitute, shall lawfully do or cause to be done by virtue of this power of
attorney and the rights and powers herein granted.
The rights, powers and authority granted herein are coupled with an
interest, and such rights powers and authority shall remain irrevocable and in
full force and effect.
8
<PAGE> 9
PART V
SIGNATURES
LIMITED PARTNER SIGN HERE
(SEE INSTRUCTIONS A(1), B, C, F(3) AND F(7))
(NOTE: SIGNATURES MUST BE GUARANTEED IF REQUIRED BY INSTRUCTION F(3))
This form of election must be signed by the Limited Partner exactly as the
Limited Partner's name appears on Schedule A to the Agreement of Limited
Partnership of Cornerstone Partnership, as amended through the date hereof, and
by any persons authorized hereby to become the registered holder of the
Cornerstone common stock issued pursuant to this Notice of Redemption/Form of
Election. If signature is by an attorney-in-fact, executor, administrator,
trustee, guardian, officer of a corporation or any other representative acting
in a fiduciary capacity, please set forth the signer's full title and see
Instruction F(3).
Signature of Limited Partner of Cornerstone Partnership Submitting this Notice
of Redemption/Form of Election
X
- --------------------------------------------------------------------------------
(SIGNATURE OF LIMITED PARTNER)
Date:
- --------------------------------------------------------------------------------
Name:
- --------------------------------------------------------------------------------
Capacity:
- --------------------------------------------------------------------------------
Address:
- --------------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Telephone Number: ( )
-----------------------------------------------------------------
Tax Identification Number:
- --------------------------------------------------------------------------------
9
<PAGE> 10
IF PERSON NAMED IN "PAYMENT INSTRUCTIONS FOR REDEMPTION SHARES" IN PART II ABOVE
IS DIFFERENT FROM PERSON NAMED IN "LIMITED PARTNER SIGN HERE" ABOVE, THE PERSON
NAMED IN "PAYMENT INSTRUCTIONS FOR REDEMPTION SHARES" MUST SIGN BELOW.
Signature of Person To Whom Redemption Shares Are To Be Issued
X
- --------------------------------------------------------------------------------
(SIGNATURE OF AUTHORIZED RECIPIENT OR SIGNATORY)
Date:
- --------------------------------------------------------------------------------
Name:
- --------------------------------------------------------------------------------
Capacity:
- --------------------------------------------------------------------------------
Address:
- --------------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Telephone Number: ( )
-----------------------------------------------------------------
Tax Identification Number:
- --------------------------------------------------------------------------------
10
<PAGE> 11
PART VI
WITHHOLDING CERTIFICATES
(See Instruction G)
<TABLE>
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
SUBSTITUTE PART 1 -- PLEASE PROVIDE YOUR TIN IN THE BOX AT Social Security Number or
FORM W-9 RIGHT AND CERTIFY BY SIGNING AND DATING BELOW. Employer Identification
Number
---------------------------------
-------------------------------------------------------------------------------------------
PAYER'S REQUEST FOR TAXPAYER PART 2 -- CERTIFICATION -- Under Penalties of
IDENTIFICATION NUMBER (TIN) Perjury, I Certify that: PART 3 --
(1) the number shown on this form is my correct Exempt from
Taxpayer Identification Number (or I am waiting Backup Withholding
for a number to be issued to me) and
[ ]
(2) I am not subject to backup withholding because
(a) I am exempt from backup withholding, (b) I
have not been notified by the Internal Revenue
Service ("IRS") that I am subject to backup
withholding as a result of failure to report
all interest or dividends, or (c) the IRS has
notified me that I am no longer subject to
backup withholding.
- -----------------------------------------------------------------------------------------------------------------------------------
CERTIFICATION INSTRUCTIONS -- You must cross out item (2) in Part 2 above if you have
been notified by the IRS that you are subject to backup withholding because of
underreporting interest or dividends on your tax return. However, if after being notified
by the IRS that you are subject to backup withholding you received another notification
from the IRS stating that you are no longer subject to backup withholding, do not cross
out item (2).
- -----------------------------------------------------------------------------------------------------------------------------------
SIGNATURE --------------------------------------------------------------------- DATE: ------------------------ , 2000
Name (please print) ------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING
OF 31% OF ANY PAYMENTS MADE TO YOU. PLEASE REVIEW THE ENCLOSED GUIDELINES
FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9
FOR ADDITIONAL DETAILS.
11
<PAGE> 12
IF YOU HAVE WRITTEN "APPLIED FOR" IN THE BOX PROVIDED FOR THE TIN, YOU ARE
INDICATING THAT YOU HAVE APPLIED FOR A TIN OR INTEND TO APPLY FOR A TIN IN THE
NEAR FUTURE, AND YOU MUST COMPLETE THE FOLLOWING CERTIFICATE
- --------------------------------------------------------------------------------
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification
number has not been issued to me, and either (1) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office or
(2) I intend to mail or deliver an application in the near future. I
understand that if I do not provide a taxpayer identification number by the
time of payment, 31% of all payments made to me on account of my Cornerstone
common stock shall be retained until I provide a taxpayer identification
number to EquiServe L.P. and that, if I do not provide my taxpayer
identification number within 60 days, such retained amounts shall be remitted
to the Internal Revenue Service as backup withholding and 31% of all
reportable payments made to me thereafter will be withheld and remitted to the
Internal Revenue Service until I provide a taxpayer identification number.
Signature: Date: , 2000
---------------------------- -----------------------
Name (please print):
----------------------------------------------------------
12
<PAGE> 13
CORNERSTONE PROPERTIES LIMITED PARTNERSHIP
CORNERSTONE PROPERTIES INC.
CERTIFICATE OF NON-FOREIGN STATUS
FOR INDIVIDUALS
To inform you that withholding of tax is not required under Section 1445 of
the Internal Revenue Code upon amounts received by me in connection with the
redemption of my units of limited partnership interest ("Units") in Cornerstone
Properties Limited Partnership, I, the undersigned, hereby certify the
following:
1. I am not a nonresident alien for purposes of U.S. income taxation;
2. My U.S. taxpayer identification number (Social Security Number)
is: ; and
3. My current home address is as follows:
I hereby agree that if I become a nonresident alien prior to the date that
I receive any payment in respect of the redemption of my Units, (i) I will
notify Cornerstone Properties Limited Partnership and Cornerstone Properties
Inc. at Tower 56, 126 East 56th Street, 6th Floor, New York, New York 10022
(Attention: Thomas P. Loftus), and (ii) I hereby authorize Cornerstone
Properties Inc. to withhold ten percent (10%) of the "amount realized" (as such
term is defined in Section 1001 of the Internal Revenue Code) by me in
connection with the redemption. I understand that this certification may be
disclosed to the Internal Revenue Service and that any false statement I have
made here could be punished by fine, imprisonment, or both.
Under penalties of perjury, I declare that I have examined this
certification and to the best of my knowledge and belief it is true, correct,
and complete.
<TABLE>
<S> <C>
SIGNATURE ------------------------------------------- DATE -----------------------------------------------
PRINT NAME ------------------------------------------
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN WITHHOLDING OF
10 PERCENT OF THE AMOUNT REALIZED BY YOU IN CONNECTION WITH THE REDEMPTION.
13
<PAGE> 14
CORNERSTONE PROPERTIES LIMITED PARTNERSHIP
CORNERSTONE PROPERTIES INC.
CERTIFICATE OF NON-FOREIGN STATUS
FOR ENTITIES
To inform you that withholding of tax is not required under Section 1445 of
the Internal Revenue Code upon amounts received by ______________________ in
connection with the redemption of its units of limited partnership interest
("Units") in Cornerstone Properties Limited Partnership, the undersigned hereby
certifies the following on behalf of ______________________.
1. ______________________ is not a foreign corporation, foreign
partnership, foreign trust, or foreign estate (as those terms are
defined in the Internal Revenue Code and Income Tax Regulations);
2. ______________________'s U.S. employer identification number is
______________________; and
3. ______________________'s office address is:
--------------------------------------------------------------
______________________ hereby agrees that if ______________________ becomes a
foreign person prior to the date any payment in respect of this notice of
redemption is received by ______________________, (i) ______________________
will notify Cornerstone Properties Limited Partnership and Cornerstone
Properties Inc. at Tower 56, 126 East 56th Street, 6th Floor, New York, New York
10022 (Attention: Thomas P. Loftus), and (ii) ______________________ hereby
authorizes Cornerstone Properties Inc. to withhold ten percent (10%) of the
"amount realized" (as such term is defined in Section 1001 of the Internal
Revenue Code) by ______________________ in connection with the redemption.
______________________ understands that this certification may be disclosed to
the Internal Revenue Service and that any false statement made here could be
punished by fine, imprisonment, or both.
Under penalties of perjury, I declare that I have examined this
certification and to the best of my knowledge and belief it is true, correct,
and complete, and I further declare that I have authority to sign this document
on behalf of ______________________.
<TABLE>
<S> <C>
SIGNATURE DATE
----------------------------------------------- -----------------------------------------------
PRINT NAME
----------------------------------------------
TITLE
---------------------------------------------------
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN WITHHOLDING OF
10 PERCENT OF THE AMOUNT REALIZED BY YOU IN CONNECTION WITH THE REDEMPTION.
14
<PAGE> 15
PART VII
INSTRUCTIONS
A. SPECIAL CONDITIONS.
1. Time in which to Provide Notice and Elect. To be effective, Cornerstone
Partnership must receive your properly completed and signed (and not revoked)
notice of redemption and election on this Notice of Redemption/Form of Election
or a facsimile hereof, at the address set forth in Part I of this Notice of
Redemption/Form of Election, no later than 5:00 p.m., Eastern Time, on Thursday,
June 15, 2000 (which time and day we refer to as the "election date"). If your
Notice of Redemption/Form of Election is not so received, your Cornerstone
Partnership units will not be redeemed for Cornerstone common stock and
converted into cash and/or Equity Office common shares in the REIT merger, but
they will be exchanged in the partnership merger for EOP Partnership units based
on the 0.7009 exchange ratio. If your notice of redemption is properly
completed, but your election is not, your Cornerstone Partnership units will be
redeemed for Cornerstone common stock, but you will not be entitled to specify
your preference and may receive either Equity Office common shares, cash or a
combination of Equity Office common shares and cash in the REIT merger,
determined in accordance with Section 1.12 of the Merger Agreement. See
Instruction D.
2. Change or Revocation of Notice of Redemption or Election. You may
change your notice of redemption or election at any time prior to the election
date. Cornerstone Partnership must receive your written notice, together with a
completed and signed Notice of Redemption/Form of Election, at or before that
time. You also may revoke your notice of redemption or election by providing
written notice to Cornerstone Partnership at any time prior to the election
date. If you wish to withdraw a revocation, you must deliver written notice of
the withdrawal to Cornerstone Partnership at any time before the election date.
If the mergers are not consummated before the end of the 60-day period following
the election date, you may withdraw your Notice of Redemption/Form of Election
as of the election date by providing written notice of withdrawal to Cornerstone
Partnership at any time after the end of the 60-day period.
3. Nullification of Election. All notices of redemption/forms of election
will be void and of no effect if the mergers are not consummated.
B. TYPES OF NOTICES OF REDEMPTION.
Subject to the provisions of Section 1.1(a) of the Merger Agreement, each
Limited Partner of Cornerstone Partnership may elect to redeem its Cornerstone
Partnership units for Cornerstone common stock in accordance with Section 8.6 of
the Partnership Agreement of Cornerstone Partnership. Any redemption of
Cornerstone Partnership units pursuant to this notice of redemption will not be
effective until the date of the partnership merger immediately before the
partnership merger is completed.
1. Notice of Redemption That Is Not Conditional On the Receipt of Cash in
the REIT Merger. You may exercise your Redemption Right by specifying the
number of Cornerstone Partnership units that you are redeeming pursuant to this
Notice of Redemption/Form of Election and properly signing this Notice of
Redemption/Form of Election under the caption "Limited Partner Sign Here." If
you do not check the box following the sentence under the caption "Redemption
Conditioned Upon Receipt of Cash in the REIT Merger," your notice of redemption
will not be conditional upon the receipt of cash, in any amount, in the REIT
merger. However, your notice of redemption will be conditioned upon the
completion of the partnership merger and will have no effect unless the
partnership merger is completed.
2. Notice of Redemption That Is Conditional On the Receipt of Cash in the
REIT Merger. You may exercise your Redemption Right by specifying the number of
Cornerstone Partnership units that you are redeeming pursuant to this Notice of
Redemption/Form of Election and properly signing this Notice of Redemption/Form
of Election under the caption "Limited Partner Sign Here." If you (a) check the
box following the sentence under the caption "Redemption Conditioned Upon
Receipt of Cash in the REIT Merger," (b) specify in the blank provided the whole
number of Redemption Shares for which you wish to receive cash in the REIT
merger in order for your notice of redemption to be effective, and (c) elect to
receive cash in the REIT merger for at least the same number of Redemption
Shares specified pursuant to (b) by properly completing the boxes marked "Form
of Election," your notice of redemption as to the specified percentage of your
Cornerstone Partnership units will be conditional upon the receipt of cash, as
specified by you, in the REIT merger. A redemption of those specified
Cornerstone Partnership units subject to such a conditional
15
<PAGE> 16
notice of redemption will not be effective if the specified amount of cash will
not be paid to you in the REIT merger due to the applicable proration provisions
pursuant to Section 1.12 of the Merger Agreement.
See Instruction F(4) for information concerning the right to submit
multiple Notices of Redemption.
C. TYPES OF ELECTIONS.
Subject to the provisions of Section 1.11 of the Merger Agreement, each
share of Cornerstone common stock issued and outstanding immediately prior to
the effective time of the REIT merger (including the Redemption Shares) will be
converted into (a) the right to receive 0.7009 of an Equity Office common share,
(b) the right to receive $18.00 in cash, without interest, or (c) if the cash
election is oversubscribed or undersubscribed, the right to receive a
combination of Equity Office common shares and cash.
By properly completing the boxes marked "Form of Election," you may
indicate the whole number of your Redemption Shares which you desire to have
converted into:
(a) the right to receive in the merger $18.00 cash per share of
Cornerstone common stock, without interest; or
(b) the right to receive in the merger 0.7009 of an Equity Office
common share, per share of Cornerstone common stock, with cash paid instead
of any fractional share.
See Instruction F(5) for information concerning the right to make multiple
elections.
D. REDEMPTION, ELECTION AND PRORATION PROCEDURES.
You will find a description of the redemption, election and proration
procedures set forth in the consent solicitation/ information statement/
prospectus under "The Merger Agreement -- The Partnership Merger" and "The
Merger Agreement -- The REIT Merger." A full statement of the redemption,
election and proration procedures is contained in Article I of the Merger
Agreement. All elections are subject to compliance with the election procedures
and to the proration procedures set forth in the Merger Agreement. IN CONNECTION
WITH MAKING ANY NOTICE OF REDEMPTION OR ELECTION, YOU SHOULD READ CAREFULLY,
AMONG OTHER MATTERS, THE AFORESAID DESCRIPTION AND STATEMENT AND THE INFORMATION
CONTAINED IN THE CONSENT SOLICITATION/INFORMATION STATEMENT/PROSPECTUS UNDER
"MATERIAL FEDERAL INCOME TAX CONSEQUENCES -- TAX CONSEQUENCES OF THE REDEMPTION
OF CORNERSTONE PARTNERSHIP UNITS FOR CORNERSTONE COMMON STOCK" AND "MATERIAL
FEDERAL INCOME TAX CONSEQUENCES -- TAX CONSEQUENCES OF THE REIT MERGER."
E. RECEIPT OF CHECKS AND EQUITY OFFICE COMMON SHARES.
As soon as practicable after the effective time of the REIT merger, checks
and/or certificates representing common shares of Equity Office will be
distributed to those former Limited Partners of Cornerstone Partnership who
redeemed their Cornerstone Partnership units for Cornerstone common stock and
surrendered their Cornerstone common stock to EquiServe L.P. for cancellation in
connection with the REIT merger, and, accordingly, who are entitled to such
checks and/or certificates. In no event shall any such former Limited Partner of
Cornerstone Partnership be entitled to receive any interest on any cash to be
received in the REIT merger.
F. GENERAL.
1. Execution and Delivery. This Notice of Redemption/Form of Election or a
facsimile hereof must be properly filled in, dated and signed, and must be
delivered to Cornerstone Partnership at the address set forth in Part I of this
Notice of Redemption/Form of Election.
THE METHOD OF DELIVERY OF THIS DOCUMENT IS AT YOUR OPTION AND RISK, BUT, IF
SENT BY MAIL, REGISTERED MAIL, RETURN RECEIPT REQUESTED, IS SUGGESTED.
2. Inadequate Space. If there is insufficient space for any material
required by this form of election, please attach a separate sheet.
16
<PAGE> 17
3. Signatures. If the notice of redemption/form of election is signed by a
trustee, executor, administrator, guardian, officer of a corporation,
attorney-in-fact, or any other representative acting in a fiduciary capacity,
the person signing must give such person's full title in such capacity, and
appropriate evidence of authority to act in such capacity must be forwarded with
the notice of redemption/form of election.
4. Multiple Notices of Redemption/Forms of Election Allowed. You may
submit a single Notice of Redemption/ Form of Election for some or all of your
Cornerstone Partnership units or, alternatively, different Notices of Redemption
may be submitted for specified portions of your Cornerstone Partnership units.
5. Multiple Elections Allowed. You may make a single election for all of
your shares of Cornerstone common stock or, alternatively, different elections
may be made for different portions of your shares.
6. Checks and New Certificates in Same Name. If checks or certificates
representing Equity Office common shares are to be payable to the order of, or
registered in, exactly the same name in which the shares of Cornerstone common
stock are issued pursuant to this Notice of Redemption/Form of Election, it will
not be necessary to pay for transfer taxes.
7. Checks and New Certificates in Different Name. If checks or stock
certificates are to be payable to the order of, or registered in, other than
exactly the same name in which the shares of Cornerstone common stock are issued
pursuant to this notice of redemption, this Notice of Redemption/Form of
Election must be accompanied by appropriate, signed stock powers. Pursuant to
the Irrevocable Special Power of Attorney made part hereof, EquiServe L.P. will
have the authority to execute such stock powers on your behalf.
8. Special Delivery Instructions. If either a check or a certificate for
the Equity Office common shares, or both, are to be issued in your name, as the
registered holder of shares of Cornerstone common stock, but are to be sent to
someone other than you or to an address other than your address, it will be
necessary to indicate the other person or address in the space provided.
9. Stock Transfer Taxes. Equity Office will bear the liability for any
state stock transfer taxes that apply to the delivery to you of checks and/or
certificates for the Equity Office common shares pursuant to the REIT merger.
However, if any check or certificate is to be issued to any person other than
the person to whom the Redemption Shares are issued as indicated under "Payment
Instructions for Redemption Shares" in Part II above, as the registered holder
of the shares of Cornerstone common stock, it shall be a condition of the
issuance and delivery of the check or certificate that EquiServe L.P. receive
(a) the amount of any stock transfer taxes (whether imposed on the person to
whom the Redemption Shares are issued, as the registered holder, or the other
person) that are to be paid because of the transfer to such person, or (b)
satisfactory evidence that the stock transfer taxes have been paid or that an
exemption applies before the check or certificate will be issued.
10. Irrevocable Special Power of Attorney. Pursuant to the Irrevocable
Special Power of Attorney made part hereof, EquiServe L.P. will have the
authority to do all things necessary to exchange your Redemption Shares for the
merger consideration that you will receive in the REIT merger. This Irrevocable
Power of Attorney must be completed by the person named in the box marked
"Payment Instructions for Redemption Shares" in Part II and the signature of
such person in Part V will serve to execute the Irrevocable Special Power of
Attorney.
11. Miscellaneous. Insofar as possible, the merger consideration payable
to you will be issued in a single check and/or a single stock certificate.
Equity Office and Cornerstone will determine all questions with respect to
this Notice of Redemption/Form of Election (including, without limitation,
questions relating to the timeliness or effectiveness of any redemption or
election and computations as to proration) and their determinations shall be
conclusive and binding.
You may obtain additional copies of this Notice of Redemption/Form of
Election from Cornerstone Partnership (whose telephone number is
1-212-605-7100).
G. IMPORTANT TAX INFORMATION.
BACKUP WITHHOLDING.
To prevent the application of federal income tax backup withholding, you
must provide EquiServe L.P. with your correct Taxpayer Identification Number
("TIN") and certify that you are not subject to backup withholding. If you are
17
<PAGE> 18
an individual, your social security number is your TIN. The TIN should be
provided in the box in Substitute Form W-9. If you do not return a form of
election, you should still provide your TIN to EquiServe L.P. on Internal
Revenue Service Form W-9. As a result of the allocation procedures described in
the consent solicitation/information statement/ prospectus and the payment of
cash in lieu of fractional shares of Equity Office common shares, even if you
elect to receive only Equity Office common shares, you may receive cash in the
REIT merger and, accordingly, should complete the Substitute Form W-9.
Under federal income tax law, any person who is required to furnish such
person's correct TIN to another person, and who fails to comply with such
requirements, may be subject to a $50 penalty imposed by the Internal Revenue
Service.
If backup withholding applies to you, EquiServe L.P. is required to
withhold 31% on payments for Cornerstone common stock made to you pursuant to
the REIT merger. Backup withholding is not an additional tax. Rather, your tax
liability, if you are subject to backup withholding, will be reduced by the
amount of tax withheld. If backup withholding results in an overpayment of
taxes, you may obtain a refund from the Internal Revenue Service. Certain
holders, including, among others, corporations and certain foreign holders, are
generally not subject to these backup withholding and reporting requirements. If
you believe you qualify as an exempt recipient on the basis of foreign status,
you must submit a Certificate of Foreign Status on Internal Revenue Service Form
W-8BEN or an appropriate substitute Form (which EquiServe L.P. will provide upon
request), signed under penalties of perjury, to EquiServe L.P. attesting to your
exempt status.
If you have not been issued a TIN and have applied for a TIN or if you
intend to apply for a TIN in the near future, you should write "Applied For" in
the box provided for the TIN on the Substitute Form W-9 included in this form of
election. If this is the case, and you do not provide EquiServe L.P. with a TIN
within 60 days, EquiServe L.P. will withhold 31% on payments for any Cornerstone
common stock thereafter made to you pursuant to the REIT merger until you
provide a TIN to EquiServe L.P.
See the enclosed Guidelines for Certification of Taxpayer Identification
Number for additional information.
FIRPTA WITHHOLDING.
To comply with the Foreign Investment in U.S. Real Property Tax Act of 1980
("FIRPTA") Cornerstone may be required to withhold ten percent (10%) of the
amount realized by you with regard to the redemption of your Cornerstone
Partnership units unless you complete, execute and return to Cornerstone
Partnership the appropriate Certificate of Non-Foreign Status included in this
Notice of Redemption/Form of Election. For these purposes, Cornerstone
Partnership will treat the "amount realized" by you as the sum of (1) the fair
market value of the Cornerstone common stock you receive pursuant to the
redemption plus (2) your share of Cornerstone Partnership's nonrecourse
liabilities immediately prior to the redemption of your units.
18
<PAGE> 19
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE
PAYER. -- Social Security numbers have nine digits separated by two hyphens:
i.e., 000-00-0000. Employer identification numbers have nine digits separated by
one hyphen: i.e., 00-0000000. The table below will help determine the number to
give the payer.
- ---------------------------------------------------------
---------------------------------------------------------
<TABLE>
<CAPTION>
FOR THIS TYPE OF ACCOUNT: GIVE THE NAME AND
SOCIAL
SECURITY
NUMBER OF --
- ---------------------------------------------------------
FOR THIS TYPE OF ACCOUNT: GIVE THE EMPLOYER
IDENTIFICATION
NUMBER OF --
- ---------------------------------------------------------
<C> <S> <C>
1. An individual's account The individual
2. Two or more individuals The actual owner of
(joint account) the account or, if
combined funds, the
first individual on
the account(1)
3. Custodian account of a minor The minor(2)
(Uniform Gift to Minors Act)
4. a. The usual revocable The grantor-
savings trust account trustee(1)
(grantor is also trustee)
b. So-called trust account The actual owner(1)
that is not a legal or
valid trust under State
law
5. Sole proprietorship account The owner(3)
6. A valid trust, estate, or The legal entity (Do
pension trust not furnish the
identifying number of
the personal
representative or
trustee unless the
legal entity itself is
not designated in the
account title)(4)
7. Corporate account The corporation
8. Religious, charitable, or The organization
educational organization
account
9. Partnership account held in The partnership
the name of the business
10. Association, club, or other The organization
tax-exempt organization
11. A broker or registered The broker or nominee
nominee
</TABLE>
- ---------------------------------------------------------
---------------------------------------------------------
(1) List first and circle the name of the person whose number you furnish. If
only one person on a joint account has a SSN, that person's number must be
furnished.
(2) Circle the minor's name and furnish the minor's SSN.
(3) You must show your individual name, but you may also enter your business or
"doing business as" name. You may use either your SSN or EIN (if you have
one).
(4) List first and circle the name of the legal trust, estate, or pension trust.
NOTE:If no name is circled when there is more than one name, the number will be
considered to be that of the first name listed.
19
<PAGE> 20
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
PAGE 2
OBTAINING A NUMBER
If you do not have a taxpayer identification number or you do not know your
number, obtain Form SS-5 -- Application for a Social Security Number Card, or
Form SS-4 -- Application for Employer Identification Number, at the local office
of the Social Security Administration or the Internal Revenue Service and apply
for a number. You can get Forms SS-4 and SS-5 from the IRS by calling
1-800-TAX-FORM (1-800-829-3676).
PAYEES EXEMPT FROM BACKUP WITHHOLDING
If you are an exempt payee, you should still file Form W-9 to avoid possible
erroneous backup withholding. You should furnish your taxpayer identification
number, check the box marked "exempt" on the form, and return it to EquiServe
L.P.
PRIVACY ACT NOTICE -- Section 6109 of the Internal Revenue Code requires most
recipients of dividend, interest, or other payments to give taxpayer
identification numbers to payers who must report the payments to IRS. The IRS
uses the numbers for identification purposes. The IRS may also provide this
information to the Department of Justice for civil and criminal litigation, and
to cities, states, and the District of Columbia to carry out their tax laws.
Payers must be given the numbers whether or not recipients are required to file
tax returns. Payers must generally withhold 31% of taxable interest, dividend,
and certain other payments to a payee who does not furnish a taxpayer
identification number to a payer. Certain penalties may also apply.
PENALTIES
(1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER. -- If you
fail to furnish your correct taxpayer identification number to a payer such as
EquiServe L.P., you are subject to a penalty of $50 for each failure unless your
failure is due to reasonable cause and not to willful neglect.
(2) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING. -- If you
make a false statement with no reasonable basis which results in no imposition
of backup withholding, you are subject to a penalty of $500.
(3) CRIMINAL PENALTY FOR FALSIFYING INFORMATION. -- Willfully falsifying
certifications or affirmations may subject you to criminal penalties, including
fines and/or imprisonment.
FOR ADDITIONAL INFORMATION, PLEASE CONTACT YOUR TAX CONSULTANT OR THE INTERNAL
REVENUE SERVICE.
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