<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): JUNE 19, 2000
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EOP OPERATING LIMITED PARTNERSHIP
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(Exact name of registrant as specified in its
charter)
<TABLE>
<CAPTION>
DELAWARE 1-13625 36-4156801
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<S> <C> <C>
(State or other jurisdiction of (Commission File (I.R.S. Employer
incorporation or organization) Number) Identification No.)
TWO NORTH RIVERSIDE PLAZA
SUITE 2100, CHICAGO, ILLINOIS 60606
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(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (312) 466-3300
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NOT APPLICABLE
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(Former name or former address, if changed since last report)
Exhibit Index is on page 27.
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<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On June 19, 2000, EOP Operating Limited Partnership completed its
acquisition of the assets of Cornerstone Properties Limited Partnership when
Cornerstone Partnership was merged with and into EOP Partnership. Upon
completion of the partnership merger, EOP Partnership owned and operated a
portfolio of 378 buildings representing 96.8 million square feet of office space
in 24 states and the District of Columbia.
Under the terms of the merger agreement, each outstanding Cornerstone
Partnership unit was converted into 0.7009 of a class A unit of EOP Partnership
in the merger of Cornerstone Partnership with and into EOP Partnership. EOP
Partnership issued a total of 104,713,067 class A units in the partnership
merger, including 92,314,264 class A units that were issued to Cornerstone
Properties Inc., the general partner of Cornerstone Partnership. In addition,
EOP Partnership issued to Cornerstone 3,030,303 series D convertible preferred
units, convertible into 2,123,939 class A units of EOP Partnership, in exchange
for 3,030,303 convertible preferred units of Cornerstone Partnership held by
Cornerstone.
Following the partnership merger, Cornerstone was merged with and into
Equity Office Properties Trust, the general partner of EOP Partnership. In the
merger of Cornerstone with and into Equity Office, Equity Office acquired the
92,314,264 class A units and 3,030,303 series D convertible units of EOP
Partnership owned by Cornerstone following the partnership merger, and each
outstanding share of Cornerstone common stock was exchangeable either for
$18.00 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 was
oversubscribed, and the outstanding Cornerstone 7% cumulative convertible
preferred stock was converted into the right to receive $18.00 per share in
cash plus accrued dividends to the closing date. The aggregate consideration
paid by Equity Office in the merger of Cornerstone with and into Equity Office
consisted of approximately $1.1 billion in cash and 51,274,811 Equity Office
common shares. Equity Office obtained the cash portion of the merger
consideration from EOP Partnership in exchange for 43,163,392 class A units
previously owned by Equity Office prior to the partnership merger. Following
the merger of Cornerstone into Equity Office, Equity Office converted the
3,030,303 Series D convertible units into 2,123,939 class A units of EOP
Partnership.
After giving effect to all of the foregoing transactions, EOP Partnership
had a total of 345,335,596 issued and outstanding class A units, of which
300,165,470 were owned by Equity Office and the remainder were held by third
parties, and 7,994,000 issued and outstanding series A preferred units,
6,000,000 issued and outstanding series B preferred units and 4,562,900 issued
and outstanding series C preferred units, all of which were owned by Equity
Office.
-2-
<PAGE> 3
After giving effect to the foregoing transactions, Equity Office had a
total of 300,165,470 issued and outstanding common shares, 7,994,000 issued and
outstanding series A preferred shares, 6,000,000 series B convertible,
cumulative preferred shares and 4,562,900 issued and outstanding series C
preferred shares.
In connection with these transactions, EOP Partnership and its
subsidiaries assumed approximately $1.8 billion of debt of Cornerstone
Partnership and its subsidiaries. In addition, EOP Partnership recently closed a
new $1 billion unsecured credit facility which matures in May 2003, with a
one-year extension option. Approximately 97% of amounts drawn under the new
credit facility will be guaranteed by Equity Office. EOP Partnership's existing
$1 billion revolver was fully drawn upon at the closing of the above described
mergers and matures in May 2001.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial statements of business acquired.
Consolidated Financial Statements of Cornerstone Partnership as of
December 31, 1999 and 1998 and for the years then ended (incorporated by
reference to pages F-19 to F-47 of EOP Partnership's Registration Statement on
Form S-4, as amended, as filed with the SEC (File No. 333-35590), and attached
hereto as Exhibit 99.1).
The Condensed Consolidated Financial Statements of Cornerstone as of
March 31, 2000 and December 31, 1999 and for the three months ended March 31,
2000 and 1999, which are set forth below.
CORNERSTONE PROPERTIES LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
-------
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
(Unaudited)
MARCH 31, DECEMBER 31,
2000 1999
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<S> <C> <C>
ASSETS
Developments in progress:
Land $ 46,132 $ 46,132
Development costs 26,198 17,000
Rental Property at cost:
Land 657,890 646,852
Buildings, leasehold interests and improvements 3,111,138 3,084,466
Deferred lease costs 157,747 157,015
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3,999,105 3,951,465
Less: Accumulated depreciation and amortization 310,851 290,998
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Total Development and Rental Property 3,688,254 3,660,467
Assets held for sale 131,052 62,185
Cash and cash equivalents 27,199 19,679
Restricted cash 71,844 222,043
Investment in unconsolidated joint ventures 31,827 31,725
Other deferred costs, net of accumulated amortization of $8,813 and $7,092 40,944 42,655
Deferred tenant receivables 84,203 77,243
Tenant and other receivables, net 18,608 14,725
Other assets 60,167 39,506
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TOTAL ASSETS $ 4,154,098 $ 4,170,228
============= ============
LIABILITIES
Long-term debt, inclusive of $15,423 and $16,149 of unamortized premium $ 1,370,185 $ 1,435,405
Credit facility 355,100 329,000
Accrued interest 11,315 10,896
Accrued real estate taxes 25,405 16,457
Accounts payable and accrued expenses 39,006 45,006
Distributions payable 29,714 -
Unearned revenue and other liabilities 41,295 40,881
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TOTAL LIABILITIES 1,872,020 1,877,645
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MINORITY INTEREST IN JOINT VENTURES 22,977 22,532
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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 21,819 22,125
Limited Partners Capital 2,160,105 2,190,514
Accumulated other comprehensive income 29,362 9,424
Deferred compensation (2,185) (2,012)
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TOTAL PARTNERS' CAPITAL 2,259,101 2,270,051
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TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 4,154,098 $ 4,170,228
============= ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 4
CORNERSTONE PROPERTIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER UNIT AMOUNTS)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2000 1999
--------------- --------------
REVENUES
<S> <C> <C>
Office and parking rentals $ 147,826 $ 149,476
Earnings in joint ventures 110 305
Interest and other income 3,020 1,634
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TOTAL REVENUES 150,956 151,415
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EXPENSES
Building operating expenses 27,339 31,077
Real estate taxes 18,137 19,524
Interest expense 30,847 34,158
Depreciation and amortization 24,390 25,085
General and administrative 7,023 6,136
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TOTAL EXPENSES 107,736 115,980
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43,220 35,435
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OTHER INCOME (EXPENSES)
Carrying value in excess of market value of assets
held for sale (803)
Gain (loss) on sale of real estate assets 2,260 -
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TOTAL OTHER INCOME (EXPENSES) 1,457 -
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MINORITY INTEREST IN JOINT VENTURES (1,474) (1,450)
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Income before cumulative effect of a change in accounting 43,203 33,985
principle
Cumulative effect of a change in accounting principle - (630)
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NET INCOME $ 43,203 $ 33,355
=============== ==============
INCOME APPLICABLE TO PREFERRED UNITS $ (875) $ (875)
--------------- --------------
INCOME AVAILABLE FOR UNITS $ 42,328 $ 32,480
=============== ==============
INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE PER UNIT $ 0.29 $ 0.22
=============== ==============
BASIC INCOME PER UNIT $ 0.29 $ 0.22
=============== ==============
BASIC WEIGHTED AVERAGE UNITS OUTSTANDING 148,408,296 148,544,391
=============== ==============
DILUTED INCOME PER UNIT $ 0.28 $ 0.22
=============== ==============
DILUTED WEIGHTED AVERAGE UNITS OUTSTANDING 151,664,715 148,635,046
=============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 5
CORNERSTONE PROPERTIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(DOLLAR AMOUNTS IN THOUSANDS)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 43,203 $ 33,355
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 26,035 24,533
Deferred compensation amortization 281 478
Net change in real estate joint ventures (102) (305)
Cumulative effect of a change in accounting principle - 630
Unbilled rental revenue (7,059) (6,980)
Increase in accrued interest 355 1,104
Minority interest share of income 1,474 1,450
Gain on sale of real estate assets (2,260) -
Carrying value in excess of market value of assets
held for sale 803 -
Increase in tenant and other receivables and other assets (5,057) (9,664)
Increase in accounts payable, accrued expenses
and other liabilities 2,154 17,748
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Total adjustments 16,624 28,994
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Net cash provided by operating activities 59,827 62,349
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CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to investment property (38,006) (22,022)
Repayment of notes receivable - 134
Other investments 26,176 -
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Net cash provided by (used in) investing activities (11,830) (21,888)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under credit facility 87,500 29,000
Repayments under credit facility (61,400) (15,000)
Repayments under mortgage loans (64,493) (27,137)
Decrease (increase) in restricted cash 45,425 (4,892)
Debt refinancing deposits - (450)
Unit issuance costs (11) (170)
Contribution from joint venture partner 367 -
Unitholder redemptions (513) -
Distributions to minority interest in joint ventures (7,316) (5,034)
Distributions to preferred unitholders - -
Distributions to unitholders (40,036) (34,491)
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Net cash (used in) provided by financing activities (40,477) (58,174)
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(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS 7,520 (17,713)
CASH AND CASH EQUIVALENTS, beginning of year 19,679 61,612
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CASH AND CASH EQUIVALENTS, end of year $ 27,199 $ 43,899
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
5
<PAGE> 6
CORNERSTONE PROPERTIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(DOLLAR AMOUNTS IN THOUSANDS)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2000 1999
---------- -----------
<S> <C> <C>
NET INCOME $ 43,203 $ 33,355
========== ===========
OTHER COMPREHENSIVE INCOME:
Unrealized gain on investments 20,487 -
Unrealized gain on interest rate swaps
during the period (549) 2,085
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OTHER COMPREHENSIVE INCOME 19,938 2,085
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COMPREHENSIVE INCOME $ 63,141 $ 35,440
========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE> 7
CORNERSTONE PROPERTIES LIMITED PARTNERSHIP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
1. NATURE OF COMPANY'S BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF THE COMPANY'S BUSINESS
As used herin, "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 82 Class A office buildings
comprising approximately 17 million rentable square feet, a shopping center, a
hotel and developable land (collectively, the "Properties," and each interest, a
"Property"). The Properties are primarily located in nine major metropolitan
areas throughout the United States: Atlanta, Boston, suburban Chicago,
Minneapolis, New York City, San Francisco Bay Area, Seattle, Southern California
and Washington, D.C. and surrounding suburbs. The Company's strategy is to own
and develop Class A office properties in prime Central Business District
locations and major suburban office markets in U.S. metropolitan areas. Class A
office properties are generally considered to be those that have the most
favorable locations and physical attributes, command premium rents and
experience the highest tenant retention rates within their markets. The Company
also provides property management, leasing, development and tenant improvement
services to third parties on a fee basis through WCP Services, Inc., a taxable
corporate subsidiary in which the Company owns 95% of the equity, but only 1% of
the voting common stock. Substantially all of the Trust's operations are
conducted through 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 Trust's common
stock exchanged in the merger. The merger is also expected in most cases to be
tax-free to the Trust's 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.
GENERAL
The unaudited condensed consolidated financial statements included herein
have been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in consolidated financial statements prepared in accordance
with generally accepted accounting principles ("GAAP") have been omitted
pursuant to such rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not misleading. In
the opinion of management of the Company, all adjustments, consisting only of
normal recurring accruals, necessary to summarize fairly the unaudited results
of operations for the three month periods presented have been included. Results
for the three months ended March 31, 2000 are not necessarily indicative of
results which may be expected for any other interim periods or for the year as a
whole. These condensed consolidated financial statements should be read in
conjunction with the audited financial statements and notes thereto included in
the Company's Registration Statement on Form S-4, as amended, as filed with the
SEC (File No. 333-35590).
PRINCIPLES OF CONSOLIDATION
7
<PAGE> 8
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 Boylston"); One Ninety One Peachtree Associates ("191 Peachtree"); 191
Finance Associates, L.P. ("191 Finance"); Avenue Associates Limited Partnership
("Market Square"); and 120 Montgomery Associates, LLC ("120 Montgomery"). The
Company's investments in the One Post Property and WCP Services, Inc. are
accounted for as equity investments (see Note 4). All significant intercompany
balances and transactions have been eliminated in consolidation.
ASSETS HELD FOR SALE
Included in Assets Held for Sale at March 31, 2000 are ten properties,
which are expected to be sold by the Company within the next year. The
Properties are valued at approximately $131.0 million, the lower of the carrying
amount or the fair value less estimated costs to sell. The Company has recorded
a $0.8 million write down on two of these assets which represents the difference
between the carrying value of these assets and the expected selling price less
costs to sell. The Company discontinues the recognition of depreciation on the
assets when the property is considered held for sale.
OTHER ASSETS
The Company records costs incurred for potential investments as Other
Assets. Upon consummation of an investment, the Company capitalizes all such
costs as an adjustment to the purchase price and depreciates these costs over
the useful life of the asset. All such costs are expensed at the time it is
determined that a potential investment will not be consummated. In addition, the
Company adopted EITF 97-11 and in accordance therewith, the Company expenses all
internal acquisition costs.
Included in Other Assets is the Company's $1.5 million equity investment
in Allied Riser Communications Corp. ("ARCC") and its $3.5 million equity
investment in Cypress Communications, Inc. ("CYCO"). ARCC and CYCO are providers
of voice, video and data telecommunications services. As part of the terms of
the agreements with both ARCC and CYCO, the Company received warrants for shares
of common stock by providing ARCC and CYCO access to certain of the Company's
buildings. As such, the value of the warrants received from ARCC and CYCO of
$5.1 million and $2.1 million, respectively, is included in Other Assets. Per
the applicable requirements of Statement of Financial Accounting Standards No.
115 "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS
115"), the Company recorded an unrealized gain on its total investment in ARCC
and CYCO of $20.5 million for the three months ended March 31, 2000. A
corresponding adjustment was posted to a separate component of stockholder's
equity through Other Comprehensive Income.
MINORITY INTEREST
Minority interest in joint ventures represents the minority partner's or
venturer's capital account balances in NWC, Third Partnership, 222 Berkeley, 500
Boylston, 191 Peachtree, 191 Finance, Market Square and 120 Montgomery. Debit
balances in certain of these capital accounts originated through special cash
distributions in excess of the partner's share of income in accordance with
certain provisions of the respective partnership and joint venture agreements.
Realizability of the debit balances is continually monitored by calculating pro
forma sales proceeds under the respective agreements.
INTEREST RATE SWAP AGREEMENTS
The Company uses interest rate swaps to effectively fix the interest rates
on certain floating-rate debt. Specific types of loans and amounts that are
hedged are determined based on prevailing market conditions and the current
shape of the yield curve. The specific terms and notional amount of the swaps
are determined based on management's assessment of future interest rates, as
well as short-term strategic initiatives.
During 1999, the Company entered into and subsequently amended swap
agreements that effectively fixed the rate on $250.0 million of the amount
outstanding on the Company's Revolving Credit Facility at 5.41% through the
maturity of the swaps in December 2000. The swaps have been designated as "cash
flow hedges" within the meaning defined in SFAS 133 (as defined hereinafter). At
March 31, 2000 and December 31, 1999, the Company recorded an unrealized loss of
$549,000 and an unrealized gain of $5,513,000, respectively in Other Assets with
a corresponding adjustment posted to a separate component of stockholder's
equity through Other Comprehensive Income as defined in Statement of Financial
Accounting Standards No. 130. Based on the expiration of these instruments, the
unrealized gain is expected to be reclassified to earnings during the next
twelve months. These swaps are considered hedges for federal income tax
purposes.
ESTIMATES AND RISKS
8
<PAGE> 9
The preparation of financial statements in conformity with generally
accepted accounting principles ("GAAP") requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The most significant risks, estimates and assumptions are
related to the recoverability and depreciable lives of investment property, the
recoverability of deferred tenant receivables and the qualification of the Trust
as a REIT. Actual results could differ from those estimates.
9
<PAGE> 10
2. PROPERTIES
The following table summarizes the Company's interest in real estate
investments at March 31, 2000:
<TABLE>
<CAPTION>
MARKET NAME TOTAL RENTABLE COMPANY
Property SQUARE FEET INTEREST (A) YEAR CONSTRUCTED LEASED NOTES
------------------------------------------- ---------------- -------------- ---------------- -------------------- ---------
<S> <C> <C> <C> <C> <C>
BOSTON, MASSACHUSETTS
Sixty State Street 823,014 100.0% 1979 100% B
500 Boylston Street 714,513 91.5% 1988 100% C
222 Berkeley Street 530,844 91.5% 1991 100% C
125 Summer Street 463,691 100.0% 1989 79%
One Memorial Drive 352,764 100.0% 1985 100% D
--------- ---
MARKET TOTAL 2,884,826 97%
SAN MATEO COUNTY, CALIFORNIA
Bayhill (4 buildings) 514,255 100.0% 1982-1987 98% E
Peninsula Office Park (7 buildings) 492,044 100.0% 1971-1998 100% E
Seaport Centre 463,418 100.0% 1988 100% E
Bay Park Plaza (2 buildings) 257,058 100.0% 1985-1998 100% E
One Bay Plaza 176,533 100.0% 1979 100% E
--------- ---
MARKET TOTAL 1,903,308 99%
ATLANTA, GEORGIA
191 Peachtree Street 1,215,288 80.0% 1991 98% C,F
200 Galleria 432,698 100.0% 1985 99% C
--------- ---
MARKET TOTAL 1,647,986 98%
EAST BAY, CALIFORNIA
Corporate Centre (2 buildings) 329,348 100.0% 1985-1987 95% E
ADP Plaza (2 buildings) 300,308 100.0% 1987-1989 99% E
PeopleSoft Plaza 277,562 100.0% 1984 100% E
Norris Tech Center (3 buildings) 260,513 100.0% 1984-1990 100% E
Golden Bear Center 160,587 100.0% 1986 99% E
Park Plaza 87,040 100.0% 1986 92% E
--------- ---
MARKET TOTAL 1,415,358 98%
SEATTLE, WASHINGTON
Washington Mutual Tower (3 buildings) 1,154,560 50.0% 1988 99% G
110 Atrium Place 215,172 100.0% 1981 100% E
Island Corporate Center 100,009 100.0% 1987 96% E
--------- ---
MARKET TOTAL 1,469,741 99%
SANTA CLARA COUNTY, CALIFORNIA
Pruneyard Office (3 buildings) 354,629 100.0% 1971-1999 100% E,H
10 Almaden 294,809 100.0% 1989 100% E
Pruneyard Shopping Center 252,210 100.0% 1970s 91% E
Embarcadero Place (4 buildings) 192,081 100.0% 1984 100% E
Pruneyard Inn 94,500 100.0% 1989 N/A E,I
--------- ---
MARKET TOTAL 1,188,229 98%
SAN FRANCISCO, CALIFORNIA
120 Montgomery Street 420,310 66.7% 1955 98% E
One Post 391,450 50.0% 1969 100% E
201 California Street 240,230 100.0% 1980 91% J
188 Embarcadero 85,183 100.0% 1985 99% E
--------- ---
MARKET TOTAL 1,137,173 97%
MINNEAPOLIS, MINNESOTA
Norwest Center 1,117,439 50.0% 1988 100% K
--------- ---
MARKET TOTAL 1,117,439 100%
</TABLE>
10
<PAGE> 11
<TABLE>
<CAPTION>
MARKET NAME TOTAL RENTABLE COMPANY
Property SQUARE FEET INTEREST (A) YEAR CONSTRUCTED LEASED NOTES
---------------------------------------------------- --------------------- ------------------- -------------------- ---------
<S> <C> <C> <C> <C> <C>
WASHINGTON, D.C./ALEXANDRIA, VIRGINIA
Market Square (2 buildings) 688,709 70.0% 1990 99% C,L
99 Canal Center 137,945 100.0% 1986 98% C
TransPotomac Plaza 5 96,392 100.0% 1983 94% C
11 Canal Center 70,365 100.0% 1986 96% C
------- ---
MARKET TOTAL 993,411 98%
SUBURBAN CHICAGO, ILLINOIS
Corporate 500 Centre (4 buildings) 679,039 100.0% 1986/1990 98% M
One Lincoln Centre 297,040 100.0% 1986 88%
------- ---
MARKET TOTAL 976,079 95%
SANTA MONICA/WEST LOS ANGELES, CALIFORNIA
West Wilshire (2 buildings) 235,787 100.0% 1960-1976 92% E
Wilshire Palisades 186,714 100.0% 1981 100% J
Janss Court 125,709 100.0% 1989 100% E,N
Searise Office Tower 122,292 100.0% 1975 100% E
Commerce Park 94,367 100.0% 1977 100% E,O
429 Santa Monica 83,243 100.0% 1982 88% E
------- ---
MARKET TOTAL 848,112 96%
ORANGE COUNTY, CALIFORNIA
Bixby Ranch 277,289 100.0% 1987 93% E
18301 Von Karman 219,508 100.0% 1991 89% E
2677 North Main 213,318 100.0% 1987 96% E
------- ---
MARKET TOTAL 710,115 93%
SAN DIEGO, CALIFORNIA
Centerside II 286,949 100.0% 1987 93% E
Crossroads 133,553 100.0% 1983 100% E
------- ---
MARKET TOTAL 420,502 95%
NEW YORK CITY, NEW YORK
527 Madison Avenue 215,332 100.0% 1986 100%
Tower 56 163,633 100.0% 1983 98% P
------- ---
MARKET TOTAL 378,965 99%
LOS ANGELES, CALIFORNIA
700 North Brand 202,531 100.0% 1981 96% E
Warner Park Center 57,366 100.0% 1986 100% E
------- ---
MARKET TOTAL 259,897 97%
CONEJO VALLEY (VENTURA), CALIFORNIA
Westlake Spectrum (2 buildings) 118,990 100.0% 1990 100% E
Agoura Hills 115,208 100.0% 1987 100% E
------- ---
MARKET TOTAL 234,198 100%
OTHER REGIONS
U.S. West (Murray, Utah) 136,608 100.0% 1985 81% E
400 Capitol Mall (Sacramento, California) 502,365 100.0% 1992 100% Q
Exposition Centre (Sacramento, California) 72,971 100.0% 1984 97% E
------- ---
MARKET TOTAL 711,944 96%
----------- ---
TOTAL PORTFOLIO 18,297,283 97%
Minority Interest Adjustment (R) (738,364)
------- ---
CORNERSTONE PORTFOLIO 17,558,919 97%
===
Adjustment For Pruneyard Inn (94,500)
-------
CORNERSTONE OFFICE PORTFOLIO 17,464,419
==========
</TABLE>
--------------------
(A) Unless noted below, cash flow and residual proceeds will be distributed
to the Company according to its percentage interest.
11
<PAGE> 12
(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 Class A office Properties, comprising
approximately 9.2 million rentable square feet primarily in the San
Francisco Bay Area and in Southern California, a shopping center
consisting of approximately 252,000 rentable square feet in Santa Clara,
California, a hotel consisting of 94,500 square feet in Santa Clara,
California and 12.8 acres of developable land in the San Francisco Bay
Area. The Company has since sold thirteen assets comprising approximately
1.4 million square feet.
The Company acquired WW&A for a purchase price of approximately $1.8
billion, consisting of approximately 14.9 million shares of 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. CH Associates,
Ltd. received this distribution through February 28, 2000.
The partnership that owns 191 Peachtree Street leases a portion of the
land upon which the project is located pursuant to a ground lease
agreement. The agreement requires annual payments of $45,000 through
January 31, 2002 and $75,000 through January 31, 2008. Thereafter, the
annual rent increases $2,500 per year until the expiration date of
January 31, 2087. The partnership records ground rental expense relating
to this agreement on a straight-line basis. The ground lease is renewable
for an additional 99 years.
(G) While the Company's stated interest in the partnership that owns
Washington Mutual Tower is 50.0%, its economic interest in the Property
is significantly larger due to priority distributions it receives on its
invested capital base. For the three months ended March 31, 2000, the
Company received 100% of the cash distributions from the partnership that
owns Washington Mutual Tower.
12
<PAGE> 13
(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 three months ended March 31, 2000, the Company's share of
earnings and cash distributions from the partnership that owns Norwest
Center was 73.5%.
(L) During 1998, through a series of transactions, the Company acquired
partnership interests with a stated interest of approximately 70.0% in
the partnerships that own Market Square. The Company's economic interest
is significantly larger since it has acquired the first mortgage note on
the Property in the amount of $181.0 million which earns interest at
9.75% and will receive a priority distribution on its acquired capital
base. In addition, the Company acquired a "buffer loan", with accrued
principal and interest of $49.0 million at purchase, which accrues
interest at a rate of Prime plus 1.25% and is payable from cash flow,
refinancing or sales proceeds in excess of the first mortgage. During the
three months ended March 31, 2000, the Company received 100% of the cash
flow from the Property. On November 14, 1998, the Company purchased an
additional interest in the partnerships that own Market Square which
enabled it to gain sufficient control in order to consolidate the
investment.
(M) On January 28, 1998, the Company purchased Corporate 500 Centre in
Deerfield, Illinois. This Property consists of four Class A office
buildings with approximately 679,000 rentable square feet. The
consideration paid for this Property was approximately $135.0 million in
cash and approximately $15.0 million in Units valued at $18.50 per unit,
for a total purchase price of approximately $150.0 million. The Company
financed a portion of the purchase price with an $80.0 million mortgage
loan from Bankers Trust Company; this mortgage was subsequently
refinanced in October 1998.
(N) Janss Court is a seven-story Class A mixed-use building containing
approximately 126,000 square feet. In addition to approximately 93,000
square feet of retail and office space, Janss Court offers 32 apartments
for a total of 33,000 rentable square feet of residential space.
(O) The Property is subject to a ground lease agreement. The agreement
requires annual payments of $115,000 through March 31, 2002 and $121,000
from April 1, 2002 through March 31, 2007. The lease payment increases
every ten years thereafter according to a formula based on the Consumer
Price Index. The ground lease expires on March 31, 2041.
(P) On January 5, 1998, the Company purchased for approximately $5.5 million,
the remaining participation rights in the cash flow and residual value of
Tower 56 from the former participants for 307,692 shares of Common Stock.
As a result, all of the cash flow and the residual value of Tower 56
inures to the Trust. As of January 20, 1998, all of the interests stated
above were contributed to the Company in exchange for units.
(Q) On January 21, 2000, the Company purchased 400 Capitol Mall in Sacramento,
California. This Property contains approximately 502,000 rentable square
feet. The total purchase price for the Property was approximately $130.0
million, consisting of approximately $128.0 million in cash and
approximately $2.0 million of which was paid in Units valued at $17.25 per
unit. Of the cash paid, $104.8 million was Section 1031 exchange funds
from the sale of One Norwest Center in Denver, Colorado during 1999.
(R) Rentable square feet includes an adjustment for the interest of a joint
venture or minority partner. Calculations are based on the partners'
percentage interest in the cash flows of the Property.
During the first three months of 2000, the Company sold two properties for
gross proceeds of $27,225,000 resulting in a net gain of $2,026,306.
During 1999, the Company sold 13 properties for gross proceeds of
$496,530,000 resulting in a net gain of $131,033,847.
3. RESTRICTED CASH
13
<PAGE> 14
Restricted cash includes security deposits for some of the Company's
office properties and escrow and reserve funds for real estate taxes, property
insurance, capital improvements, tenant improvements and leasing costs. These
funds were established pursuant to certain mortgage and construction financing
arrangements.
The proceeds from the sales of certain properties during 1999 totaling
approximately $61.4 million, are included in restricted cash pursuant to the
terms of Section 1031 of the Internal Revenue Code of 1986, as amended,
"Exchange of property held for productive use or investment."
4. INVESTMENT IN 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 March 31, 2000, 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>
PROPERTY AMORTIZATION INTEREST RATE (A) MATURITY DATE 3/31/00 12/31/99
-------- ------------ ----------------- ------------- ------- --------
FIXED RATE
----------
<S> <C> <C> <C> <C> <C>
TransPotomac Plaza (B) ...... Interest Only 7.28% Oct-2000 65,000 65,000
West Wilshire Office and
Medical ................... 25 year 6.90% Jan-2002 16,829 16,926
Searise Office Tower ........ 25 year 6.90% Jan-2002 11,540 11,607
Exposition Centre ........... 25 year 6.90% May-2002 5,049 5,081
Wilshire Palisades .......... 22 year 6.70% Jul-2002 28,826 29,047
110 Atrium Place ............ 30 year 6.90% Mar-2004 21,429 21,517
527 Madison Avenue and
One Lincoln Centre (B) .... Interest only 7.47% Oct-2004 65,000 65,000
Sixty State Street .......... 30 year 6.84% Jan-2005 84,924 85,420
Island Corporate Center ..... 30 year 6.90% Apr-2005 13,134 13,170
Washington Mutual Tower ..... Interest only 7.53% Nov-2005 79,100 79,100
Norwest Center .............. Interest only 8.74% Dec-2005 110,000 110,000
Agoura Hills ................ 25 year 6.90% Dec-2005 11,918 12,003
Janss Court ................. 30 year 6.90% Dec-2005 18,261 18,357
Bayhill 4,5,6 & 7 ........... 25 year 6.90% Dec-2006 57,423 57,764
Market Square (C) and 200
Galleria (B) .............. Interest only 7.54% Oct-2007 120,000 120,000
Corporate 500 Centre ........ 25 year 6.66% Nov-2008 88,044 88,424
188 Embarcadero (D) ......... 25 year 7.26% Aug-2009 15,548 15,606
Centerside II (D) ........... 25 year 7.26% Aug-2009 24,164 24,254
700 North Brand (D) ......... 25 year 7.26% Aug-2009 26,838 26,938
Golden Bear Center (D) ...... 25 year 7.26% Aug-2009 20,401 20,477
Bixby Ranch (D) ............. 25 year 7.26% Aug-2009 28,422 28,528
One Memorial Drive (D) ...... 25 year 7.26% Aug-2009 62,885 63,119
125 Summer Street (E) ....... 25 year 7.23% Nov-2009 78,553 78,844
Tower 56 (E) ................ 25 year 7.23% Nov-2009 24,932 25,024
Peninsula Office Park
1,3,4,5,6,8 & 9
(E) ......................... 25 year 7.23% Nov-2009 87,802 88,128
Embarcadero Place (E) ....... 25 year 7.23% Nov-2009 38,007 38,149
201 California Street (E) ... 25 year 7.23% Nov-2009 44,340 44,504
---------- ----------
TOTAL FIXED RATE DEBT .. 7.31% (F) 6.9 yrs (F) 1,248,369 1,251,987
---------- ----------
VARIABLE RATE
-------------
</TABLE>
14
<PAGE> 15
<TABLE>
<S> <C> <C> <C> <C> <C>
Seaport Centre (G) .......... 25 year LIBOR plus 1.50% Dec-2000 57,819 58,000
120 Montgomery Street ....... 24 year LIBOR plus 1.40% Nov-2002 48,002 48,160
Norris Tech Center .......... 25 year LIBOR plus 1.65% Dec-2003 15,995 16,066
Other loans ................. Various Various Various - 245
------------ ----------
TOTAL VARIABLE RATE DEBT 7.61% (F) 1.8 yrs (F) 121,816 122,471
------------- -----------
REPAID DEBT
-----------
The Pruneyard (H) ........... - - - - 60,947
------------- ----------
TOTAL REPAID DEBT ....... - 60,947
------------- ----------
TOTAL DEBT .................. 7.34% (F) 6.4 yrs (F) $1,370,185 $1,435,405
============== ============
</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.
(D) The six notes arising from the restructuring of certain debt with
Prudential Insurance Company of America and Northwestern Mutual Life
Insurance Company are cross-collateralized, having the effect of forming
a "collateral pool" for the underlying notes.
(E) During October 1999 the Company restructured approximately $219.9 million
of individual property-related debt with Northwestern Mutual Life
Insurance Company. The restructuring involved retiring the individual
property-related debt and creating a single $275.0 million term loan
which is cross-collateralized by six of the original seven properties.
The loan has a ten year term and bears interest at 7.23%. Upon closing
the loan, the lien on 10 Almaden was released and the property was added
to the Company's unencumbered pool.
(F) Weighted-average interest rate and maturity of the Company's long-term
debt.
(G) On December 15, 1999, through an extension and modification agreement,
the maturity date of the $58.0 million variable rate debt held on Seaport
Centre was extended from December 31, 1999 to December 31, 2000. At this
time, the note changed from interest only to a 25 year amortizing loan.
(H) On February 8, 2000, this note was prepaid with proceeds from the
Revolving Credit Facility. This note had an interest rate of LIBOR plus
1.50% and a maturity of July 2000.
The combined aggregate amount of maturities for all long-term borrowings
for 2000 through 2004 are $122,819,000, $0, $110,246,000, $15,995,000 and
$86,429,000, respectively.
Since most of the long-term debt is property-related, there are
restrictive covenants that limit the total amount of indebtedness that can be
placed on individual properties.
6. CREDIT FACILITY
The Company has a $550.0 million Revolving Credit Facility with a
syndicate of 17 banks led by Deutsche Bank, The Chase Manhattan Bank and Bank of
America for acquisitions and general working capital purposes as well as the
issuance of letters of credit (the "Revolving Credit Facility"). The interest
rate on the facility depends on the Company's ratio of total debt to asset value
(as defined) at the time of borrowing and will be at a spread of 1.10% to 1.40%
over the applicable LIBOR or Prime Rate at the borrower's option. The letters of
credit will be priced at the applicable Eurodollar credit spread. The Revolving
Credit Facility expires on November 3, 2001. As of March 31, 2000, $355.1
million of the facility was outstanding at a rate of approximately 7.5%. Of this
amount, approximately $250.0 million is fixed with interest rate swaps, which
effectively fix the rate at 5.41% through the expiration of the swaps in
December 2000. The Revolving Credit Facility contains certain restrictive
covenants including: (i) a limitation on the Trust's dividend to 90.0% of funds
from operations and 110.0% of funds available for distribution, both as defined
in the agreement; (ii) the percentage of total liabilities to total property
asset value (as defined) cannot exceed 55.0%; (iii) the ratio of adjusted EBITDA
to interest expense may not be less than 2.25 to
15
<PAGE> 16
1.00; (iv) the fixed charge coverage ratio may not be less than 1.75 to 1.00;
and (v) the ratio of total property asset value (as defined) to secured
indebtedness may not be less than 2.22 to 1.00. The above terms reflect an
amendment to the Revolving Credit Facility that occurred during 1999. The
amendment allowed the Company to temporarily increase its leverage from 55.0% to
60.0% in (ii) above for a short period, which has since expired. The Company
also increased its ability to enter into mortgage debt under (v) above by
decreasing the required ratio from 2.5 to 1.00 to 2.22 to 1.00.
7. COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company is subject to tenant and
property related claims and other litigation. It is the opinion of management,
after consultation with outside counsel, that the resolution of these claims
will not have a material adverse effect on the financial position, results of
operations or cash flows of the Company.
In April 1998, the Company entered into a contract to acquire from the
developer the 928,857 square-foot Piper Jaffray building under construction in
Minneapolis. In November 1999, this contract was amended in connection with a
350,000 square-foot expansion lease with a major tenant of the building. The
contract was amended to provide for a purchase price equal to the costs incurred
in construction and development plus a fixed amount to the developer plus an
additional amount based on the leasing of the building. In addition, at the
Company's election, the closing of the acquisition may occur prior to the
completion of the building, but the developer will remain obligated to complete
the project. Through March 31, 2000, approximately $121.1 million has been spent
on the construction. The project is scheduled to be completed in the year 2000
and is approximately 84.0% pre-leased.
8. PARTNERS' CAPITAL
As of March 31, 2000, the Trust and its subsidiaries had a 1% general
partnership interest and an approximate 87.1% limited partnership interest in
the Company. The remaining limited partners had an approximate 11.9% 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 19,103,202 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 the
Trust's 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). The net proceeds were used to repay outstanding borrowings under the
Revolving Credit Facility and for working capital purposes.
The following tables summarizes the Trust's stock options and restricted
stock grants for certain officers of the Company as of March 31, 2000, 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 0 828,000
November, 1997 ........... 70,000 $ 18.44 33.3%/yr, 10yr term 0 0 46,667
February, 1998 ........... 70,000 $ 18.13 33.3%/yr, 10yr term 0 46,667 23,333
February, 1998 ........... 595,000 $ 18.25 33.3%/yr, 10yr term 0 26,668 382,962
March, 1998 .............. 200,000 $ 18.25 33.3%/yr, 10yr term 0 133,334 66,666
December, 1998 ........... 3,000,000 $ 17.25 33.3%/yr, 10yr term 0 34,733 991,874
January, 1999 ............ 20,000 $ 17.25 33.3%/yr, 10yr term 0 0 0
February, 1999 ........... 10,000 $ 17.25 33.3%/yr, 10yr term 0 10,000 0
June, 1999 ............... 10,000 $ 17.25 33.3%/yr, 10yr term 0 0 0
January, 2000 ............ 1,500,166 $ 15.19 33.3%/yr, 10yr term 0 2,000 0
</TABLE>
16
<PAGE> 17
RESTRICTED STOCK GRANTS
<TABLE>
<CAPTION>
Value at Grant Shares Initially Shares Forfeited Shares Outstanding Shares Vested Vesting (A)
Date of Grant Date (per share) Granted (No. of Shares) (No. of shares) (No. of shares) (No. of shares) See Notes
------------- --------------- ----------------------- ---------------- ------------------ --------------- ---------
<S> <C> <C> <C> <C> <C> <C>
August, 1995 .... $ 14.30 186,713 19,091 167,622 95,858 (B)
March, 1997 ..... $ 16.40 100,000 0 100,000 34,112 (C)
November, 1997 .. $ 18.44 12,500 0 12,500 3,333 (D)
March, 1998 ..... $ 18.13 12,500 10,833 1,667 1,667
March, 1998 ..... $ 18.25 19,178 0 19,178 19,178 (E)
February, 1999 .. $ 15.50 113,500 1,900 111,800 7,400 (F)
February, 2000 .. $ 16.81 27,708 0 27,708 0 (G)
</TABLE>
--------------------
(A) Deferred compensation of approximately $6,100,000 is being amortized
according to the respective amortization schedule for each vesting period
noted below, with the unamortized balance shown as a deduction from
stockholders' equity. Regular distributions are paid on restricted stock.
(B) The grant will fully vest with respect to 13.333% on June 30, 1996, 1997,
1998, 1999 and with respect to 46.668% on June 30, 2000. Pursuant to the
terms of a separation agreement, the vesting with respect to 6,462 shares
will be accelerated to fully vest on April 14, 2000.
(C) The grant will fully vest with respect to 13.333% on June 30, 1998, 1999,
2000, 2001 and with respect to 46.668% on June 30, 2002. Pursuant to the
terms of a separation agreement, the vesting with respect to 7,446 shares
will be accelerated to fully vest on April 14, 2000.
(D) The grant will fully vest with respect to 13.333% on June 30, 1998, 1999,
2000, 2001 and with respect to 46.668% on June 30, 2002.
(E) The initial grant was to vest with respect to 13.333% on March 15, 1999,
2000, 2001, 2002 and with respect to 46.668% on March 15, 2003. Pursuant
to the terms of a separation agreement, the vesting with respect to
16,621 shares was accelerated to fully vest on December 31, 1999.
(F) The grant will fully vest on February 1, 2004. Pursuant to the terms of
certain separation agreements, the vesting with respect to 1,400 shares
was accelerated to fully vest on July 1, 1999.
(G) The grant will fully vest on February 15, 2005.
9. UNITHOLDERS' DISTRIBUTIONS
A distribution of $0.31 per unit was declared for the first quarter of
2000 and paid on February 29, 2000, to Unitholders of record as of January 31,
2000.
On March 8, 2000, as provided in the merger agreement with EOP, the Board
of Directors declared a distribution of $0.20 per unit, payable on April 14,
2000, to Unitholders of record as of March 31, 2000. This distribution was
declared to make the Company's distribution schedule consistent with that of EOP
pending the merger (see Note 1).
10. NET INCOME PER UNIT
The table below sets forth the calculation of income per unit for the
three months ended March 31, 2000 and 1999 (Dollar amounts in thousands, except
per unit amounts):
17
<PAGE> 18
<TABLE>
<CAPTION>
MARCH 31, 2000 MARCH 31, 1999
----------------------------------- ---------------------------------
BASIC DILUTED BASIC DILUTED
----------------- ----------------- --------------- -----------------
<S> <C> <C> <C> <C>
Units issuable upon exercise of Trust share options - 3,256,419 - 90,655
Weighted average Units 148,408,296 148,408,296 148,544,391 148,544,391
----------------- ----------------- --------------- -----------------
Adjusted weighted average Units 148,408,296 151,664,715 148,544,391 148,635,046
----------------- ----------------- --------------- -----------------
Net income available to Units before cumulative effect
of a change in accounting principle 43,203 43,203 33,985 33,985
Income applicable to preferred units (875) - (875) -
Cumulative effect of a change in accounting principle - - (630) (630)
----------------- ----------------- --------------- -----------------
Income available to units 42,328 43,203 32,480 33,355
----------------- ----------------- --------------- -----------------
Net income available to Units before cumulative effect
of a change in accounting principle .29 .28 .22 .22
Cumulative effect of a change in accounting principle - - - -
--------------- -----------------
----------------- -----------------
Income available to units .29 .28 .22 .22
----------------- ----------------- --------------- -----------------
</TABLE>
The stock options issued in November 1997, February 1998, March 1998,
December 1998, January 1999, February 1999 and June 1999 were not included in
the calculation of diluted earnings per share as such options were anti-dilutive
during the period. As of March 31, 2000, 1,235,425 Units have been redeemed for
shares of the Trust's Common Stock on a one-for-one basis and 110,848 Units have
been redeemed for approximately $1.7 million in cash.
11. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest was approximately $30,246,000 and $34,063,000 for
the three months ended March 31, 2000 and 1999, respectively.
NON-CASH INVESTING AND FINANCING ACTIVITIES
During the first quarter of 1999, pursuant to the requirements of SOP 98-5
(as defined in Note 1), the Company wrote off all unamortized organizational
costs and recorded a cumulative effect of a change in accounting principle of
$630,044.
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. Refer to Note 8
for the vesting of this grant. Units were also issued to the Trust on a
one-for-one basis.
On January 21, 2000, the Company acquired 400 Capitol Mall in Sacramento,
California. The total purchase price for the Property was approximately $130.0
million, consisting of approximately $128.0 million in cash which were Section
1031 exchange funds from the sale of One Norwest Center in Denver, Colorado
during 1999, and approximately $2.0 million of which was paid in Units valued at
$17.25 per unit.
On February 15, 2000, the Trust issued 27,708 shares of restricted stock
valued at $16.81 per share to certain employees of the Company. Refer to Note 8
for the vesting of this grant.
On March 8, 2000, 9,200 Units were redeemed for shares of the Trust's
Common Stock on a one-for-one basis.
On March 30, 2000, 101,050 Units were redeemed for shares of the Trust's
Common Stock on a one-for-one basis.
12. 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.
18
<PAGE> 19
The Company evaluates performance based on net operating income from the
individual properties in the segment. Selected results of operations for the
three months ended March 31, 2000 and 1999 and selected asset information as of
March 31, 2000 and December 31, 1999 regarding the Company's operating segment
are as follows (Dollar amounts in thousands):
<TABLE>
<CAPTION>
COMPANY
TOTAL SEGMENT CORPORATE & OTHER(A) TOTAL
------------------- --------------------- ----------------
<S> <C> <C> <C>
Total revenues (B):
Three months ended:
March 31, 2000 $148,813 $2,143 $150,956
March 31, 1999 150,786 629 151,415
Total operating and Interest expenses (C):
Three months ended:
March 31, 2000 $48,266 $35,080 $83,346
March 31, 1999 51,858 39,037 90,895
Net operating income (D):
Three months ended:
March 31, 2000 $100,547 $(32,937) $67,610
March 31, 1999 98,928 (38,408) 60,520
Total long-lived assets (E):
March 31, 2000 $3,805,678 $85,329 $3,891,007
December 31, 1999 3,770,924 66,064 3,836,988
Total assets:
March 31, 2000 $3,883,939 $270,159 $4,154,098
December 31, 1999 3,776,765 393,463 4,170,228
</TABLE>
--------------------
(A) Corporate and Other represents all corporate-level items (including
interest income, interest expense and general and administrative
expenses) as well as intercompany eliminations necessary to reconcile to
consolidated Company totals.
(B) Total revenues represents all revenues during the period (including the
Company's earnings in joint ventures). All interest income is excluded
from the segment amounts and is classified in Corporate and Other for all
periods.
(C) Total operating and interest expenses represents the sum of building
operating expenses, real estate taxes, interest expense and general and
administrative expenses. All interest expense (including property level
mortgages) is excluded from the segment amounts and is classified in
Corporate and Other for all periods. Amounts presented exclude
depreciation and amortization of approximately $24,390,000 and
$25,085,000 for March 31, 2000 and 1999, respectively.
(D) Net operating income represents total revenues (as defined in note (B)
above) less total operating and interest expense (as defined in note (C)
above) for the period.
(E) Long-lived assets is composed of total rental property, investments in
joint ventures, other deferred costs, deferred tenant receivables and
certain other assets.
19
<PAGE> 20
(b) Pro forma financial information.
The required pro forma financial information is set forth below.
EOP OPERATING LIMITED PARTNERSHIP
PRO FORMA CONDENSED COMBINED BALANCE SHEET
March 31, 2000 (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
EOP OPERATING CORNERSTONE PROPERTIES
LIMITED PARTNERSHIP LIMITED PARTNERSHIP MERGER AND OTHER
HISTORICAL HISTORICAL ADJUSTMENTS (A)
-------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS:
Investment in real estate, net $ 12,497,425 $ 3,814,740 $ 568,749 (B)
Cash and cash equivalents 16,376 27,199 - (C)
Rent and other receivables 193,622 102,811 (84,203) (D)
Escrow deposits and restricted cash 68,258 71,844 -
Investment in unconsolidated joint ventures 875,459 31,827 8,275 (B)
Prepaid expenses and other assets 438,693 105,677 (49,897) (E)
-------------------------------------------------------------------
TOTAL ASSETS $ 14,089,833 $ 4,154,098 $ 442,924
===================================================================
LIABILITIES AND PARTNERS' CAPITAL:
Mortgage debt $ 1,576,367 $ 1,370,185 $ (36,127) (F)
Unsecured notes 4,154,417 - -
Lines of credit 232,000 355,100 1,186,472 (G)
Distribution payable 121,478 29,714 -
Other liabilities 403,090 117,021 69 (H)
-------------------------------------------------------------------
TOTAL LIABILITIES 6,487,352 1,872,020 1,150,414
-------------------------------------------------------------------
Minority interests in partially owned properties 40,006 22,977 -
-------------------------------------------------------------------
Preferred Units 613,923 50,000 (50,000) (I)
Partners' Capital 6,948,552 2,209,101 (657,490) (J)
-------------------------------------------------------------------
TOTAL PARTNERS' CAPITAL 7,562,475 2,259,101 (707,490)
-------------------------------------------------------------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 14,089,833 $ 4,154,098 $ 442,924
===================================================================
</TABLE>
<TABLE>
<CAPTION>
EOP OPERATING
LIMITED PARTNERSHIP
PRO FORMA
-----------------------
<S> <C>
ASSETS:
Investment in real estate, net $ 16,880,914
Cash and cash equivalents 43,575
Rent and other receivables 212,230
Escrow deposits and restricted cash 140,102
Investment in unconsolidated joint ventures 915,561
Prepaid expenses and other assets 494,473
-----------------------
TOTAL ASSETS $ 18,686,855
=======================
LIABILITIES AND PARTNERS' CAPITAL:
Mortgage debt $ 2,910,425
Unsecured notes 4,154,417
Lines of credit 1,773,572
Distribution payable 151,192
Other liabilities 520,180
-----------------------
TOTAL LIABILITIES 9,509,786
-----------------------
Minority interests in partially owned properties 62,983
-----------------------
Preferred Units 613,923
Partners' Capital 8,500,163
-----------------------
TOTAL PARTNERS' CAPITAL 9,114,086
-----------------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 18,686,855
=======================
</TABLE>
20
<PAGE> 21
EOP OPERATING LIMITED PARTNERSHIP
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 (Unaudited)
(Dollars in thousands, except per unit data)
<TABLE>
<CAPTION>
EOP CORNERSTONE MERGER
OPERATING PROPERTIES AND OTHER
LIMITED PARTNERSHIP LIMITED PARTNERSHIP ADJUSTMENTS (A)
HISTORICAL HISTORICAL
-----------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Rental ................................................... $ 358,366 $ 113,585 $ 1,594 (K)
Tenant reimbursements .................................... 62,983 26,592 -
Parking .................................................. 26,731 6,748 -
Other .................................................... 12,856 1,791 -
Fee income ............................................... 2,235 - -
Interest/dividends ....................................... 5,704 2,240 -
-------------------------------------------------------
Total revenues ........................................... 468,875 150,956 1,594
-------------------------------------------------------
EXPENSES:
Interest:
Expense incurred ..................................... 100,532 30,324 21,640 (L)
Amortization of deferred financing costs ............. 1,377 523 1,752 (M)
Depreciation ............................................. 83,889 21,879 3,021 (N)
Amortization ............................................. 4,386 2,470 (2,470) (O)
Real estate taxes ........................................ 57,910 18,137 -
Insurance ................................................ 2,740 753 -
Repairs and maintenance .................................. 47,899 11,942 -
Property operating ....................................... 46,788 14,340 -
Ground rent .............................................. 2,024 345 -
General and administrative ............................... 19,651 7,023 - (P)
-------------------------------------------------------
Total expenses ........................................... 367,196 107,736 23,943
-------------------------------------------------------
Income before allocation to minority interests,
income from investment in unconsolidated
joint ventures and net gain on sales of real estate ...... 101,679 43,220 (22,349)
Minority Interests:
Partially owned properties ............................... (553) (1,474) -
Income from investment in unconsolidated joint ventures ........ 11,374 110 (44) (Q)
Carrying value in excess of market value of assets held for sale - (803) -
Net gain on sales of real estate ............................... 3,862 2,260 -
-------------------------------------------------------
Net income from continuing operations .......................... 116,362 43,313 (22,393)
Put option settlement .......................................... (1,030) - -
Preferred distributions ........................................ (10,697) (875) 875 (R)
-------------------------------------------------------
Net income from continuing operations before extraordinary
items available for units ........................ $ 104,635 $ 42,438 $ (21,518)
=======================================================
Net income from continuing operations before extraordinary
items per weighted average unit
outstanding - basic ...................................... $ 0.37 (S)
============
Weighted average units outstanding - basic ............. 281,380,638
============
Net income from continuing operations before extraordinary
items per weighted average unit
outstanding - diluted .................................... $ 0.37 (S)
============
Weighted average units outstanding - diluted ............ 283,568,648
===========
</TABLE>
<TABLE>
<CAPTION>
EOP OPERATING
LIMITED PARTNERSHIP
PRO FORMA
-------------------
<S> <C>
REVENUES:
Rental ................................................... $ 473,545
Tenant reimbursements .................................... 89,575
Parking .................................................. 33,479
Other .................................................... 14,647
Fee income ............................................... 2,235
Interest/dividends ....................................... 7,944
-------------
Total revenues ........................................... 621,425
-------------
EXPENSES:
Interest:
Expense incurred ..................................... 152,496
Amortization of deferred financing costs ............. 3,652
Depreciation ............................................. 108,789
Amortization ............................................. 4,386
Real estate taxes ........................................ 76,047
Insurance ................................................ 3,493
Repairs and maintenance .................................. 59,841
Property operating ....................................... 61,128
Ground rent .............................................. 2,369
General and administrative ............................... 26,674
-------------
Total expenses ........................................... 498,875
-------------
Income before allocation to minority interests,
income from investment in unconsolidated
joint ventures and net gain on sales of real estate ...... 122,550
Minority Interests:
Partially owned properties ............................... (2,027)
Income from investment in unconsolidated joint ventures ........ 11,440
Carrying value in excess of market value of assets held for sale (803)
Net gain on sales of real estate ............................... 6,122
-------------
Net income from continuing operations .......................... 137,282
Put option settlement .......................................... (1,030)
Preferred distributions ........................................ (10,697)
-------------
Net income from continuing operations before extraordinary
items available for units ......................... $ 125,555
=============
Net income from continuing operations before extraordinary
items per weighted average unit
outstanding - basic ...................................... $ 0.36 (S)
=============
Weighted average units outstanding - basic ............. 344,245,226
=============
Net income from continuing operations before extraordinary
items per weighted average unit
outstanding - diluted .................................... $ 0.36 (S)
=============
Weighted average units outstanding - diluted ........... 347,379,891
=============
</TABLE>
21
<PAGE> 22
EOP OPERATING LIMITED PARTNERSHIP
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
CORNERSTONE
EOP PROPERTIES
OPERATING LIMITED LIMITED MERGER
PARTNERSHIP PARTNERSHIP AND OTHER
(Dollars in thousands, except per unit data) HISTORICAL HISTORICAL ADJUSTMENTS
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues: ............................................................. (A)
Rental .......................................................... $ 1,493,196 $ 455,204 $ 6,181 (K)
Tenant reimbursements ........................................... 281,358 121,385 -
Parking ......................................................... 112,204 27,343 -
Other............................................................ 32,298 4,598 -
Fee income ...................................................... 8,939 2,677 -
Interest/dividends .............................................. 14,248 4,211 -
-----------------------------------------------------
Total revenues .............................................. 1,942,243 615,418 6,181
-----------------------------------------------------
Expenses:
Interest:
Expense incurred ............................................ 413,995 135,009 90,562 (L)
Amortization of deferred financing costs .................... 4,693 2,004 3,669 (M)
Depreciation .................................................... 339,751 87,971 12,086 (N)
Amortization .................................................... 14,545 8,755 (8,755) (O)
Real estate taxes ............................................... 243,778 71,554 -
Insurance ....................................................... 9,589 3,548 -
Repairs and maintenance ......................................... 209,630 74,728 -
Property operating .............................................. 199,879 52,947 -
Ground rent ..................................................... 6,887 1,407 -
General and administrative ...................................... 80,927 27,006 - (P)
-----------------------------------------------------
1,523,674 464,929 97,562
-----------------------------------------------------
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 (91,381)
Minority interests - partially owned properties ....................... (1,981) (5,755) -
Income from investment in unconsolidated joint ventures ............... 13,824 898 (176) (Q)
Net gain on sales of real estate ...................................... 59,661 131,034 -
-----------------------------------------------------
Net income from continuing operations ................................. 490,073 276,666 (91,557)
Put option settlement ................................................. (5,658) - -
Preferred distributions ............................................... (43,603) (3,500) 3,500 (R)
-----------------------------------------------------
Net income from continuing operations before extraordinary items and
cumulative effect of a change in accounting
principle available for units ................................... $ 440,812 $ 273,166 $ (88,057)
=====================================================
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 (S)
================
Weighted average units outstanding - basic ............................ 288,326,547
================
Net income from continuing operations before extraordinary items and
cumulative effect of a change in accounting
principle per weighted average unit oustanding - diluted ........ $ 1.51 (S)
================
Weighted average units outstanding - diluted .......................... 291,157,204
================
<CAPTION>
EOP
OPERATING LIMITED
PARTNERSHIP
(Dollars in thousands, except per unit data) PRO FORMA
------------------------------------------------------------------------- -----------------
<S> <C>
Revenues: .............................................................
Rental .......................................................... 1,954,581
Tenant reimbursements ........................................... 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 ............................................ 639,566
Amortization of deferred financing costs .................... 10,366
Depreciation .................................................... 439,808
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
----------------
2,086,165
----------------
Income before allocation to minority interests,
income from investment in unconsolidated
joint ventures and net gain on sales of real estate ............. 477,677
Minority interests - 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 ................................. 675,182
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 ................................... $ 625,921
================
Net income from continuing operations before extraordinary items and
cumulative effect of a change in accounting
principle per weighted average unit outstanding - basic ......... $ 1.78 (S)
===============
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 oustanding - diluted ........ $ 1.77 (S)
===============
Weighted average units outstanding - diluted .......................... 354,965,413
===============
</TABLE>
22
<PAGE> 23
EOP OPERATING LIMITED PARTNERSHIP
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
MARCH 31, 2000 (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 market value of $24.6818 per unit of EOP Partnership.
The calculation of the merger acquisition cost is as follows:
<TABLE>
<S> <C> <C>
Issuance of 62.9 million EOP Partnership units based on a .7009 exchange
rate in exchange for 89.7 million Cornerstone Partnership units
(see calculation below) $ 1,551,611
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 4,387
Assumption of Cornerstone Partnership's total liabilities 1,872,020
Assumption of the convertible promissory note and related accrued
interest payable owned by Cornerstone Properties Inc. to
be assumed by EOP Partnership in the merger (see Note F and H) 12,995
Adjustment to Cornerstone Partnership's mortgage debt to reflect market
value (see Note F) (49,053)
Cornerstone Partnership's minority interest allocation for partially owned properties 22,977
Merger costs (see calculation below) 78,000
--------------
Total merger acquisition cost $ 4,601,409
==============
The following is a calculation of the EOP Partnership units to be
issued in the merger: Units
--------------
Cornerstone Partnership units outstanding at March 31, 2000 148,493,463
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 89,691,238
==============
EOP Partnership units to be issued in the merger 62,864,588
EOP Partnership units outstanding at March 31, 2000 281,492,538
--------------
EOP Partnership units outstanding after the merger 344,357,126
==============
The following is a calculation of estimated merger costs:
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 acquisition cost $ 78,000
==============
(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 being acquired:
Meger acquisition cost (see Note A) $ 4,601,409
--------------
Less basis of Cornerstone Partnership's net assets acquired:
Investment in real estate, net 3,814,740
Cash and cash equivalents 27,199
Rent and other receivables (excluding $84.2 million of deferred
rents receivable) 18,608
Escrow deposits and restricted cash 71,844
Investment in unconsolidated joint ventures 31,827
Prepaid expenses and other assets (excluding $45.5 million of
deferred leasing, financing and other costs (see Note E)) 60,167
--------------
Subtotal 4,024,385
--------------
Adjustment to record fair value of Cornerstone Partnership's investment in
real estate and investment in unconsolidated joint
ventures, net 577,024
Less adjustment allocated to investment in unconsolidated joint ventures (8,275)
--------------
Adjustment allocated to investment in real estate $ 568,749
==============
(C) There was no change in cash and cash equivalents as a result of the following
transactions:
Anticipated borrowings on additional credit facilities to finance
the cash portion of the merger (see Note G) $ 1,186,472
Less cash portion of merger consideration (see Note A) (1,108,472)
Less merger costs (see Note A) (78,000)
--------------
Net adjustment to cash and cash equivalents $ -
==============
(D) Represents the elimination of Cornerstone Partnership's deferred rents receivable which arose
from the historical straight-lining of rental revenue.
(E) Represents an adjustment for the following:
Cornerstone Partnership's deferred leasing, financing and other costs which were
not assigned any value in the allocation of the merger acquisition
cost $ (45,510)
Transfer of EOP Partnership's current ownership of 250,700 shares of
Cornerstone common stock to merger acquisition cost (see Note A) (4,387)
--------------
Total $ (49,897)
==============
(F) To adjust Cornerstone Partnership's mortage debt to market value:
Adjustment to Cornerstone Partnership's mortgage debt to reflect market value (49,053)
Assumption of the convertible promissory note from Cornerstone Properties Inc.
to be assumed by EOP Partnership in the merger 12,926
--------------
(36,127)
==============
(G) To reflect borrowings on additional credit facilities to finance the cash
portion of the merger as follows:
Cash portion of merger consideration (See Note A) $ 1,108,472
Merger costs (See Note A) 78,000
--------------
Borrowings on additional credit facilities $ 1,186,472
==============
(H) To reflect the assumption of the accrued interest payable related to the
convertible promissory note owned by Cornerstone Properties Inc.
to be assumed by EOP Partnership in the merger.
(I) To record the redemption of Cornerstone Partnership's preferred units into cash (see Note A).
(J) To reflect the net decrease in partners' capital associated with the
merger as follows:
Issuance of 62.9 million EOP Partnership units based on the exchange
rate, in exchange for 89.7 million Cornerstone Partnership units $ 1,551,611
Less total pre-merger pro forma partners' capital of
Cornerstone Partnership (2,209,101)
--------------
Net decrease to partners' capital $ (657,490)
==============
</TABLE>
23
<PAGE> 24
(K) To reflect the adjustment for the straight-line effect of scheduled rent
increases.
(L) To reflect the additional interest expense incurred from the
additional credit facilities to finance the cash portion of the merger:
<TABLE>
<CAPTION>
For the three
months ended For the year ended
March 31, 2000 December 31, 1999
--------------------------------------------
<S> <C> <C>
Additional borrowings from
credit facilities (see Note G) $ 1,186,472 $1,186,472
Weighted average interest rate on
the line of credit during the period 7.23% 7.57%
--------------------------------------------
Additional annual interest expense $ 85,790 $ 89,816
--------------------------------------------
Additional interest expense for the period $ 21,448 $ 89,816
Interest expense on the convertible
promissory note from Cornerstone Properties
Inc. that will be assumed by EOP Partnership
in the merger 192 746
--------------------------------------------
Total additional interest expense $ 21,640 $ 90,562
============================================
</TABLE>
(M) To reflect additional amortization of the adjustment to Cornerstone
Partnership's mortgage debt to market value.
(N) 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)..................................................... $ 568,749
Portion allocated to building and improvements........................................................... 85%
------------
Adjustment to the depreciable basis of Cornerstone Partnership's investment in real estate, net.......... $ 483,436
============
Additional depreciation expense based on an estimated useful life of 40 years
for the year ended December 31, 1999..................................................................... $ 12,086
============
Additional depreciation expense based on an estimated useful life of 40 years
for the three months ended March 31, 2000................................................................ $ 3,021
============
</TABLE>
(O) 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).
(P) Management has estimated that there will be a reduction of annual general
and administrative expenses as a result of the merger of approximately $18.0
million on a pro forma basis. 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.
(Q) 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 for the year ended December 31, 1999................................. $176
===================
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 for the three months ended March 31, 2000....... $ 44
===================
</TABLE>
(R) To adjust Cornerstone Partnership's preferred distributions assuming
Cornerstone Partnership's preferred units were converted into cash on
January 1, 2000 and 1999, respectively.
(S) The following table sets forth the computation of basic and diluted earnings
per unit:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31, 2000
--------------------------------------------------
NUMERATOR HISTORICAL PRO FORMA
-----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income from continuing operations before
extraordinary items and net gain on sales of real estate
available for units.................................... $ 100,773 $ 120,236
Net gain on sales of real estate ....................... 3,862 5,319
---------------------------------------
Numerator for basic earnings per unit - net income from
continuing operations before extraordinary items
available for units.................................... 104,635 125,555
Interest expense on convertible promissory note ........ - 192
---------------------------------------
Numerator for diluted earnings per unit - net income from
continuing operations before extraordinary items
available for units.................................... $ 104,635 $ 125,747
---------------------------------------
DENOMINATOR
-------------------------------------------------------------
Denominator for basic earnings per unit - weighted
average units.......................................... 281,380,638 344,245,226
---------------------------------------
Denominator for diluted earnings per unit - weighted
average units.......................................... 283,568,648 347,379,891
---------------------------------------
BASIC
-------------------------------------------------------------
Net income from continuing operations before
extraordinary items and net gain on sales of real estate
available for units ................................... $ 0.36 $ 0.35
Net gain on sales of real estate ....................... 0.01 0.01
---------------------------------------
Net income from continuing operations before extraordinary
items available for units ............................. $ 0.37 $ 0.36
=======================================
DILUTED
-------------------------------------------------------------
Net income from continuing operations before extraordinary
items and net gain on sales of real estate available
for units ............................................. $ 0.36 $ 0.34
Net gain on sales of real estate ....................... 0.01 0.02
---------------------------------------
Net income from continuing operations before extraordinary
items available for units ............................. $ 0.37 $ 0.36
=======================================
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1999
------------------------------------------------
NUMERATOR HISTORICAL PRO FORMA
---------------------------------------------------------------------------------------------------------
<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 units ................................... $ 381,151 $ 435,226
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 ................................... 440,812 625,921
Interest expense on convertible promissory note ........ - 746
---------------------------------------
Numerator for 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 $ 626,667
---------------------------------------
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 $ 1.24
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 $ 1.78
=======================================
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 $ 1.23
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 $ 1.77
=======================================
</TABLE>
<PAGE> 25
(c) Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------ -------------------
<S> <C>
2.1 Agreement and Plan of Merger, dated as of February 11, 2000, as
amended on May 11, 2000, among Equity Office, EOP Partnership,
Cornerstone and Cornerstone Partnership (incorporated by reference
to Annex A to the consent solicitation/information
statement/prospectus included in EOP Partnership's Registration
Statement on Form S-4, as amended, as filed with the SEC (File No.
333-35590)).
23.1 Consent of PricewaterhouseCoopers LLP.
99.1 Consolidated Financial Statements of Cornerstone Partnership as of
December 31, 1999 and 1998 and for the years then ended (pages
F-19 to F-47 of EOP Partnership's Registration Statement on Form
S-4, as amended, as filed with the SEC (File No. 333-35590)).
99.2 Second Amended and Restated Agreement of Limited Partnership of
EOP Partnership.
99.3.1 Revolving Credit Agreement for $1,000,000,000 Revolving Credit
Facility dated as of May 12, 2000 among EOP Operating Limited
Partnership and the Banks listed therein.
99.3.2 Guaranty of Payment -- No. 1, made as of May 12, 2000, between
Equity Office Properties Trust and Bank of America, N.A.
99.3.3 Guaranty of Payment -- No. 2, made as of May 12, 2000, between
Equity Office Properties Trust and Bank of America, N.A.
99.4.1 Third Amended and Restated Credit Agreement for $1,000,000,000
Credit Facility dated as of May 12, 2000 among EOP Operating
Limited Partnership and the Banks listed therein.
99.4.2 Second Amended and Restated Guaranty of Payment, made as of May
12, 2000, between Equity Office Properties Trust and Bank of
America, N.A.
</TABLE>
25
<PAGE> 26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
EOP OPERATING LIMITED
PARTNERSHIP
By: EQUITY OFFICE
PROPERTIES TRUST, its
general partner
Date: June 30, 2000 By: /s/ Stanley M. Stevens
--------------------------
Stanley M. Stevens
Executive Vice President, Chief
Legal Counsel and Secretary
26
<PAGE> 27
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT DESCRIPTION PAGE
------ ------------------- ----
2.1 Agreement and Plan of Merger, dated as of February 11, 2000, as
amended on May 11, 2000, among Equity Office, EOP Partnership,
Cornerstone and Cornerstone Partnership (incorporated by reference
to Annex A to the consent solicitation/information
statement/prospectus included in EOP Partnership's Registration
Statement on Form S-4, as amended, as filed with the SEC (File No.
333-35590)).
23.1 Consent of PricewaterhouseCoopers LLP.
99.1 Consolidated Financial Statements of Cornerstone Partnership as of
December 31, 1999 and 1998 and for the years then ended (pages
F-19 to F-47 of EOP Partnership's Registration Statement on Form
S-4, as amended, as filed with the SEC (File No. 333-35590)).
99.2 Second Amended and Restated Agreement of Limited Partnership of
EOP Partnership.
99.3.1 Revolving Credit Agreement for $1,000,000,000 Revolving Credit
Facility dated as of May 12, 2000 among EOP Operating Limited
Partnership and the Banks listed therein.
99.3.2 Guaranty of Payment -- No. 1, made as of May 12, 2000, between Equity
Office Properties Trust and Bank of America, N.A.
99.3.3 Guaranty of Payment -- No. 2, made as of May 12, 2000, between Equity
Office Properties Trust and Bank of America, N.A.
99.4.1 Third Amended and Restated Credit Agreement for $1,000,000,000 Credit
Facility dated as of May 12, 2000 among EOP Operating Limited
Partnership and the Banks listed therein.
99.4.2 Second Amended and Restated Guaranty of Payment, made as of May 12,
2000, between Equity Office Properties Trust and Bank of America,
N.A.
27
