<PAGE> 1
EXHIBIT 99.1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of Cornerstone
Properties Limited Partnership
In our opinion, the accompanying consolidated balance sheet and the statements
of income, comprehensive income, partners' capital and cash flows present
fairly, in all material respects, the financial position of Cornerstone
Properties Limited Partnership and subsidiaries ("Cornerstone Partnership") at
December 31, 1999, and the results of their operations and their cash flows for
the year then ended, in conformity with accounting principles generally accepted
in the United States. In addition, in our opinion, the financial statement
schedule listed in the accompanying index presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Partnership's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audit. We conducted our
audit of these statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
As discussed in Note 1 of the consolidated financial statements, on February 11,
2000, Cornerstone Partnership announced a definitive plan of merger with Equity
Office Properties Operating Limited Partnership.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
New York, New York
April 12, 2000
<PAGE> 2
CORNERSTONE PROPERTIES LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
---------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Developments in progress:
Land...................................................... $ 46,132 $ 10,437
Development costs......................................... 17,000 2,519
Rental Property at cost:
Land...................................................... 646,852 702,840
Buildings, leasehold interests and improvements........... 3,084,466 3,403,152
Deferred lease costs...................................... 157,015 143,188
---------- ----------
3,951,465 4,262,136
Less: Accumulated depreciation and amortization........... 290,998 286,664
---------- ----------
Total Development and Rental Property.................. 3,660,467 3,975,472
Assets held for sale........................................ 62,185 77,568
Cash and cash equivalents................................... 19,679 61,612
Restricted cash............................................. 222,043 9,114
Investment in unconsolidated joint ventures................. 31,725 31,500
Other deferred costs, net of accumulated amortization of
$7,092 and $999........................................... 42,655 47,807
Deferred tenant receivables................................. 77,243 53,489
Tenant and other receivables, net........................... 14,725 10,257
Other assets................................................ 39,506 14,839
---------- ----------
TOTAL ASSETS................................................ $4,170,228 $4,281,658
========== ==========
LIABILITIES
Long-term debt, inclusive of $16,149 and $25,031 of
unamortized premium....................................... $1,435,405 $1,519,548
Credit facility............................................. 329,000 465,000
Accrued interest............................................ 10,896 10,873
Accrued real estate taxes................................... 16,457 16,395
Accounts payable and accrued expenses....................... 45,006 51,454
Distributions payable....................................... -- 38,163
Unearned revenue and other liabilities...................... 40,881 23,890
---------- ----------
TOTAL LIABILITIES........................................... 1,877,645 2,125,323
---------- ----------
MINORITY INTEREST IN JOINT VENTURES......................... 22,532 23,420
---------- ----------
Commitments and contingencies
PARTNERS' CAPITAL
Redeemable preferred units; 344,828 units authorized; 0
issued and outstanding.................................... -- --
7% Cumulative convertible preferred units, $16.50 stated
value; 65,000,000 units authorized; 3,030,303 issued and
outstanding............................................... 50,000 50,000
General Partners' Capital................................... 22,125 20,846
Limited Partners Capital.................................... 2,190,514 2,063,769
Accumulated other comprehensive income...................... 9,424 --
Deferred compensation....................................... (2,012) (1,700)
---------- ----------
TOTAL PARTNERS' CAPITAL..................................... 2,270,051 2,132,915
---------- ----------
TOTAL LIABILITIES AND PARTNERS' CAPITAL..................... $4,170,228 $4,281,658
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 3
CORNERSTONE PROPERTIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
REVENUES
Office and parking rentals................................ $ 607,409 $ 321,097
Earnings in joint ventures................................ 898 11,615
Interest and other income................................. 8,009 6,625
------------ ------------
TOTAL REVENUES......................................... 616,316 339,337
------------ ------------
EXPENSES
Building operating expenses............................... 132,630 71,404
Real estate taxes......................................... 71,554 44,184
Interest expense.......................................... 137,013 63,426
Depreciation and amortization............................. 96,726 57,031
General and administrative................................ 27,006 12,393
------------ ------------
TOTAL EXPENSES......................................... 464,929 248,438
------------ ------------
151,387 90,899
------------ ------------
OTHER INCOME (EXPENSES)
Gain (loss) on sale of real estate assets................. 131,034 (173)
------------ ------------
TOTAL OTHER INCOME (EXPENSES).......................... 131,034 (173)
------------ ------------
MINORITY INTEREST IN JOINT VENTURES......................... (5,755) (4,399)
------------ ------------
INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE AND EXTRAORDINARY LOSS.......................... 276,666 86,327
Cumulative effect of a change in accounting principle....... (630) --
Extraordinary loss.......................................... (10,787) (4,303)
------------ ------------
NET INCOME.................................................. $ 265,249 $ 82,024
============ ============
INCOME APPLICABLE TO PREFERRED UNITS........................ $ (3,500) $ (3,500)
------------ ------------
INCOME AVAILABLE FOR UNITS.................................. $ 261,749 $ 78,524
============ ============
INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE AND EXTRAORDINARY LOSS PER UNIT................. $ 1.84 $ 0.80
============ ============
EXTRAORDINARY LOSS PER UNIT................................. $ (0.08) $ (0.04)
============ ============
BASIC INCOME PER UNIT....................................... $ 1.76 $ 0.76
============ ============
BASIC WEIGHTED AVERAGE UNITS OUTSTANDING.................... 148,654,779 103,881,682
============ ============
DILUTED INCOME PER UNIT..................................... $ 1.75 $ 0.75
============ ============
DILUTED WEIGHTED AVERAGE UNITS OUTSTANDING.................. 151,830,347 104,252,294
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 4
CORNERSTONE PROPERTIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
-------- -----------
(UNAUDITED)
<S> <C> <C>
Net income.................................................. $265,249 $82,024
======== =======
OTHER COMPREHENSIVE INCOME:
Unrealized gain on investments............................ 3,911 --
Unrealized gain on interest rate swaps during the
period................................................. 5,513 --
-------- -------
OTHER COMPREHENSIVE INCOME................................ 9,424 --
-------- -------
COMPREHENSIVE INCOME........................................ $274,673 $82,024
======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 5
CORNERSTONE PROPERTIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
GENERAL LIMITED 7% CUMULATIVE OTHER
PARTNERS PARTNERS CONVERTIBLE COMPREHENSIVE DEFERRED
CAPITAL CAPITAL PREFERRED UNITS INCOME COMPENSATION TOTAL
-------- ---------- --------------- ------------- ------------ ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1998......... -- $ -- $ -- $ -- $ -- $ --
Contributed capital -- REIT.... 10,706 1,059,933 50,000 -- (2,188) 1,118,451
Contributed
capital -- others............ 6,383 631,915 -- -- -- 638,298
Proceeds from issuance of
units, net of $14,463 in
issuance costs............... 4,479 443,402 -- -- -- 447,881
Distribution reinvestment, net
of $410 in issuance costs.... 63 6,231 -- -- -- 6,294
Restricted share awards........ 6 571 -- -- (577) --
Restricted share awards
vesting...................... -- -- -- -- 1,065 1,065
Net income..................... 820 81,204 -- -- -- 82,024
Preferred unit distributions... (35) (3,465) -- -- -- (3,500)
Distributions -- REIT.......... (1,509) (149,419) -- -- -- (150,928)
Distributions -- others........ (67) (6,603) -- -- -- (6,670)
------- ---------- ------- ------ ------- ----------
BALANCE, DECEMBER 31, 1998....... $20,846 $2,063,769 $50,000 $ -- $(1,700) $2,132,915
Unit issuance costs............ (4) (374) -- -- -- (378)
Restricted share awards........ 18 1,742 -- -- (1,760) --
Restricted share awards
vesting...................... -- -- -- -- 1,448 1,448
Net income..................... 2,652 262,597 -- -- -- 265,249
Unrealized gain on
investments.................. -- -- -- 3,911 -- 3,911
Unrealized gain on swaps....... -- -- -- 5,513 -- 5,513
Distribution reinvestment...... 23 2,295 -- -- -- 2,318
Share awards exercised......... 18 1,809 -- -- -- 1,827
Partner redemptions............ (12) (1,157) -- -- -- (1,169)
Contributed capital -- REIT.... 7 695 -- -- -- 702
Repurchase of units for
treasury..................... (50) (4,961) -- -- -- (5,011)
Preferred unit distributions... (35) (3,465) -- -- -- (3,500)
Distributions -- REIT.......... (1,160) (114,843) -- -- -- (116,003)
Distributions -- Others........ (178) (17,593) -- -- -- (17,771)
------- ---------- ------- ------ ------- ----------
BALANCE, DECEMBER 31, 1999....... $22,125 $2,190,514 $50,000 $9,424 $(2,012) $2,270,051
======= ========== ======= ====== ======= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 6
CORNERSTONE PROPERTIES LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
-------- -----------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $265,249 $ 82,024
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 90,790 56,733
Deferred compensation amortization...................... 1,312 1,016
Net change in real estate joint ventures................ (225) 5,670
Cumulative effect of a change in accounting principle... 630 --
Net gain on interest rate swap.......................... -- --
Extraordinary loss...................................... 10,787 4,303
Unbilled rental revenue................................. (25,858) (13,712)
Increase in accrued interest............................ 23 6,739
Minority interest share of income....................... 5,755 4,399
(Gain) loss on sale of real estate assets............... (131,034) 173
Increase in tenant and other receivables and other
assets................................................. (15,745) (6,902)
Increase in accounts payable, accrued expenses and other
liabilities............................................ 21,431 33,515
-------- ---------
Total adjustments..................................... (42,134) 91,934
-------- ---------
Net cash provided by operating activities............. 223,115 173,958
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to investment property.......................... (79,359) (797,181)
Repayment of notes receivable............................. 134 1,518
Other investments......................................... (5,000) (41,893)
Investments in real estate joint ventures................. -- (31,391)
Proceeds from sale of real estate assets net of amounts in
escrow.................................................. 136,713 19,117
-------- ---------
Net cash provided by (used in) investing activities... 52,488 (849,830)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Units issued................................ -- 462,344
Contributed capital -- REIT............................... 647 60,060
Repurchase of units for treasury shares................... (4,889) --
Borrowings under mortgage loans........................... 455,000 92,377
Borrowings under credit facility.......................... 130,000 567,500
Repayments under credit facility.......................... (266,000) (289,500)
Repayments under mortgage loans........................... (432,958) (3,426)
Proceeds from distribution reinvestment plan.............. 2,318 6,704
Debt prepayment costs..................................... (14,898) (1,762)
Increase in restricted cash............................... (2,542) (7,211)
Unit issuance costs....................................... (2,758) (20,813)
Option exercise........................................... 1,827 --
Unitholder redemptions.................................... (1,169) --
Distributions to minority interest in joint ventures...... (6,643) (5,855)
Distributions to preferred unitholders.................... (3,500) (3,500)
Distributions to unitholders.............................. (171,971) (119,434)
-------- ---------
Net cash (used in) provided by financing activities... (317,536) 737,484
-------- ---------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS............ (41,933) 61,612
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ 61,612 --
-------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 19,679 $ 61,612
======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 7
CORNERSTONE PROPERTIES LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
1. NATURE OF COMPANY'S BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF THE COMPANY'S BUSINESS
As used herein, "Company" refers to Cornerstone Properties Limited
Partnership, a Delaware limited partnership, individually or together with its
subsidiaries. The Company is a subsidiary of Cornerstone Properties Inc. (the
"Trust"), a self-administered equity real estate investment trust ("REIT"). The
Company owns, through subsidiaries, interests in 83 Class A office buildings
comprising approximately 17 million rentable square feet, a shopping center, a
hotel and developable land (collectively, the "Properties," and each interest, a
"Property"). The Properties are primarily located in nine major metropolitan
areas throughout the United States: Atlanta, Boston, suburban Chicago,
Minneapolis, New York City, San Francisco Bay Area, Seattle, Southern California
and Washington, D.C. and surrounding suburbs. The Company's strategy is to own
and develop Class A office properties in prime Central Business District
locations and major suburban office markets in U.S. metropolitan areas. Class A
office properties are generally considered to be those that have the most
favorable locations and physical attributes, command premium rents and
experience the highest tenant retention rates within their markets. The Company
also provides property management, leasing, development and tenant improvement
services to third parties on a fee basis through WCP Services, Inc., a taxable
corporate subsidiary in which the Company owns 95% of the equity, but only 1% of
the voting common stock. Substantially all of the Trust's operations are
conducted through the Company. The Trust is the managing general partner of the
Company.
On February 11, 2000, the Trust announced that it had entered into an
agreement and plan of merger with Equity Office Properties Trust ("EOP") (the
"EOP Merger"). The merger agreement provides for a merger of the Trust with and
into EOP and a merger of the Company with and into EOP Operating Limited
Partnership. In the mergers, holders of common stock of the Trust and holders of
Units in the Company shall be entitled to elect to receive, for each share or
unit, as the case may be, either 0.7009 of a share of beneficial interest of EOP
(or, in the case of the Company Units, 0.7009 of a Class A Unit of EOP Operating
Limited Partnership), or $18.00 per share (or per Unit, as the case may be) in
cash, subject to pro ration as provided in the merger agreement. Each share of
the Trust's 7% Cumulative Convertible Preferred Stock, liquidation preference
$16.50 per share, shall be converted into the right to receive $18.00, plus
accrued and unpaid dividends, in cash. For U.S. federal income tax purposes, the
merger is expected to be tax-free to the Trust's stockholders who are U.S.
persons and who receive EOP shares in the merger, except that any such
stockholder who receives cash in addition to EOP shares generally will recognize
gain (but not loss) in an amount equal to the amount of cash received in the
merger, or, if less, the excess of the fair market value of the EOP shares and
cash received in the merger over the stockholder's basis in the common stock
exchanged in the merger. The merger is also expected in most cases to be
tax-free to stockholders who are non-U.S. persons, although certain non-U.S.
stockholders may be subject to U.S. tax under the provisions of the Foreign
Investment in Real Property Tax Act. The mergers are subject to customary
closing conditions, including the approval of the merger by the shareholders of
EOP and the stockholders of the Trust and the approval of the partnership
merger, to the extent necessary, by the partners of EOP Operating Limited
Partnership and the Company.
PRINCIPLES OF CONSOLIDATION
The Company has consolidated the following partnerships because it has a
majority interest in the economic benefits and is or has the right to become the
managing general partner at its sole discretion: NWC Limited Partnership
("NWC"); Third and University Limited Partnership ("Third Partnership"); Two
Twenty Two Berkeley Venture ("222 Berkeley"); Five Hundred Boylston West Venture
("500
<PAGE> 8
Boylston"); One Ninety One Peachtree Associates ("191 Peachtree"); 191 Finance
Associates, L.P. ("191 Finance"); Avenue Associates Limited Partnership ("Market
Square"); and 120 Montgomery Associates, LLC ("120 Montgomery"). The Company's
investments in the One Post Property and WCP Services, Inc. are accounted for as
equity investments (see Note 4). All significant intercompany balances and
transactions have been eliminated in consolidation.
INVESTMENT PROPERTY
The costs of the buildings, garages, leasehold interests and improvements
are being depreciated using the straight-line method over their estimated useful
lives, ranging from 20 years for electrical and mechanical installations to 40
years for structural components. Tenant improvements are being amortized over
the terms of the related leases.
Investment properties are carried at cost less accumulated depreciation.
Whenever events or changes in circumstances indicate that the carrying value of
an asset may not be recoverable (such as a significant adverse action by a
regulator, a significant physical change in the property or significant changes
in market conditions), the Company's policy is to assess any impairment in value
by making a comparison of the current and projected cash flows of each property
over its remaining useful life (undiscounted and without interest charges) to
the carrying amount of each property. Such carrying amount would be adjusted, if
necessary, to estimated fair value to reflect the impairment in value of the
property. No significant adjustments have been made in the accompanying
financial statements.
Costs directly related to the acquisition and development of rental
properties are capitalized. Capitalized development costs include interest,
property taxes, insurance and other project costs incurred during the period of
construction. Ordinary repairs and maintenance are expensed as incurred; major
replacements and betterments, which improve or extend the life of the asset, are
capitalized and depreciated over their estimated useful lives.
ASSETS HELD FOR SALE
Included in Assets Held for Sale at December 31, 1999 are four properties,
which are expected to be sold by the Company within the next year. The
Properties are valued at approximately $62.2 million, the lower of the carrying
amount or the fair value less estimated costs to sell. For the year ended
December 31, 1999, the fair value less estimated costs to sell exceeds the
carrying amount for each of these properties and therefore, the Company has not
recorded a write down on these assets. The Company discontinues the recognition
of depreciation on the assets when the property is considered held for sale.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include
investments with original maturities of three months or less from the date of
purchase. At December 31, 1999 and 1998, the Company had on deposit with major
financial institutions substantially all of its cash and cash equivalents which
balances at times exceed federally insurable limits. The Company believes it
mitigates its risk by investing in or through major financial institutions.
Recoverability of investments is dependent upon the performance of the issuer.
DEFERRED LEASE COSTS
As an inducement to execute a lease, incentives are sometimes offered which
may include cash and/or other allowances. These incentives and other lease
costs, such as commissions, which are directly related to specific leases, are
deferred and amortized over the terms of the related leases.
OTHER DEFERRED COSTS
Costs incurred in the underwriting and issuance of long-term debt and
revolving lines of credit are being amortized over the term of the debt. As part
of the acquisition of the DIHC Portfolio (see Note 2),
<PAGE> 9
the Trust purchased several management contracts to which Stichting
Pensioenfonds Voor de Gezondheid Geestelijke en Maatschappelijke Belangen
("PGGM") was a party, which were subsequently contributed to the Company. The
price paid for these contracts is being amortized over four years. Included in
Other Deferred Costs is the purchase price for the intangible management and
development company assets that were acquired as part of the Wilson Acquisition
which are being amortized over a term of ten years (see Note 2).
OTHER ASSETS
The Company records costs incurred for potential investments as Other
Assets. Upon consummation of an investment, the Company capitalizes all such
costs as an adjustment to the purchase price and depreciates these costs over
the useful life of the asset. All such costs are expensed at the time it is
determined that a potential investment will not be consummated. In addition, the
Company adopted EITF 97-11 and in accordance therewith, the Company expenses all
internal acquisition costs.
Included in Other Assets is the Company's $1.5 million equity investment in
Allied Riser Communications Corp. ("ARC") and its $3.5 million equity investment
in Cypress Communications, Inc. ("Cypress"). ARC and Cypress are providers of
voice, video and data telecommunications services. As part of the terms of the
agreements with both ARC and Cypress, the Company received warrants for shares
of common stock by providing ARC and Cypress access to certain of the Company's
buildings. As such, the value of the warrants received from ARC and Cypress of
$5.1 million and $2.1 million, respectively, is included in Other Assets. Per
the applicable requirements of Statement of Financial Accounting Standards No.
115 ("SFAS 115"), the Company recorded an unrealized gain on its total
investment in ARC as of December 31, 1999 of $3.9 million. A corresponding
adjustment was posted to a separate component of partner's capital through Other
Comprehensive Income. As of December 31, 1999, Cypress was not publicly traded
and did not fall within the scope of SFAS 115.
MINORITY INTEREST
Minority interest in joint ventures represents the minority partner's or
venture's capital account balances in NWC, Third Partnership, 222 Berkeley, 500
Boylston, 191 Peachtree, 191 Finance, Market Square and 120 Montgomery. Debit
balances in certain of these capital accounts originated through special cash
distributions in excess of the partner's share of income in accordance with
certain provisions of the respective partnership and joint venture agreements.
Reliability of the debit balances is continually monitored by calculating pro
forma sales proceeds under the respective agreements.
REVENUE RECOGNITION
Rental revenue is recognized ratably as earned over the terms of the
leases. Deferred tenant receivables result from rental revenues, which have been
earned but will be received in future periods as a result of rent concessions
provided to tenants and scheduled future rent increases. Deferred tenant
receivables were approximately $77,243,000 and $53,489,000 at December 31, 1999
and 1998, respectively. Expense reimbursement and escalation income for the
years ended December 31, 1999 and 1998 was approximately $101,595,000 and
$74,590,000, respectively.
An allowance for doubtful accounts of approximately $3,803,000 and $253,000
has been recorded at December 31, 1999 and 1998, respectively, relating to
tenant and other receivables. Bad debt expense totaled approximately $3,694,000
and $232,000 during 1999 and 1998 respectively. The Company's policy is to
reserve against all trade receivables greater than 90 days past due.
INTEREST RATE SWAP AGREEMENTS
The Company uses interest rate swaps to effectively fix the interest rates
on certain floating-rate debt. Specific types of loans and amounts that are
hedged are determined based on prevailing market conditions and the current
shape of the yield curve. The specific terms and notional amount of the swaps
are
<PAGE> 10
determined based on management's assessment of future interest rates, as well as
short-term strategic initiatives.
During 1999, the Company entered into and subsequently amended swap
agreements that effectively fixed the rate on $250.0 million of the amount
outstanding on the Company's Revolving Credit Facility at 6.47% for 1999 and
5.41% through the maturity of the swaps in December 2000. The swaps have been
designated as "cash flow hedges" within the meaning defined in SFAS 133 (as
defined hereinafter). At December 31, 1999, the Company recorded an unrealized
gain of $5,513,000 in Other Assets with a corresponding adjustment posted to a
separate component of partners' capital through Other Comprehensive Income as
defined in Statement of Financial Accounting Standards No. 130. Based on the
expiration of these instruments, the unrealized gain is expected to be
reclassified to earnings during the next twelve months. These swaps are
considered hedges for federal income tax purposes.
FEDERAL INCOME TAXES
The Company is not liable for federal taxes as the partners recognize their
proportionate share of the Company's income or loss in their tax returns. The
Trust has elected to be taxed as a REIT under Sections 856-859 of the United
States Internal Revenue Code (the "Code"). Under these sections of the Code, the
Trust is permitted to deduct dividends paid to stockholders in computing its
taxable income. All taxable earnings and profits of the Trust since inception
have been distributed to the stockholders.
RECENTLY ISSUED ACCOUNTING STANDARDS
During the first quarter of 1999, the Company adopted Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives are recorded each period in current earnings or in
other comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and, if it is, the type of hedge transaction.
During the first quarter of 1999, the Company also adopted Statement of
Position 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"). SOP
98-5 requires that certain costs incurred in conjunction with start-up and
organizational activities be expensed. Pursuant to the requirements of SOP 98-5,
the Company has written off all unamortized organizational costs and has
recorded a cumulative effect of a change in accounting principle of $630,044.
In addition, during the first quarter of 1999, the Company adopted
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides guidance
on whether the costs of computer software developed or obtained for internal use
should be capitalized or expensed. The adoption of SOP 98-1 did not have a
significant effect on the Company's financial statements.
ESTIMATES AND RISKS
The preparation of financial statements in conformity with generally
accepted accounting principles ("GAAP") requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The most significant risks, estimates and assumptions are
related to the recoverability and depreciable lives of investment property, and
the recoverability of deferred tenant receivables and the qualification of the
Trust as a REIT. Actual results could differ from those estimates.
<PAGE> 11
2. PROPERTIES
The following table summarizes the Company's interest in real estate
investments at December 31, 1999:
<TABLE>
<CAPTION>
MARKET NAME TOTAL RENTABLE COMPANY YEAR
PROPERTY SQUARE FEET INTEREST(A) CONSTRUCTED LEASED NOTES
----------- -------------- ----------- ----------- ------ -----
<S> <C> <C> <C> <C> <C>
BOSTON, MASSACHUSETTS
Sixty State Street........................ 823,014 100.0% 1979 100% B
500 Boylston Street....................... 714,513 91.5% 1988 100% C
222 Berkeley Street....................... 530,844 91.5% 1991 100% C
125 Summer Street......................... 463,691 100.0% 1989 74%
One Memorial Drive........................ 352,764 100.0% 1985 100% D
---------- ---
MARKET TOTAL.............................. 2,884,826 96%
SAN MATEO COUNTY, CALIFORNIA
Bayhill (4 buildings)..................... 514,255 100.0% 1982-1987 96% E
Peninsula Office Park (7 buildings)....... 492,044 100.0% 1971-1998 100% E
Seaport Centre............................ 463,418 100.0% 1988 100% E
Bay Park Plaza (2 buildings).............. 257,058 100.0% 1985-1998 100% E
One Bay Plaza............................. 176,533 100.0% 1979 99% E
---------- ---
MARKET TOTAL.............................. 1,903,308 99%
ATLANTA, GEORGIA
191 Peachtree Street...................... 1,215,288 80.0% 1991 98% C,F
200 Galleria.............................. 432,698 100.0% 1985 98% C
---------- ---
MARKET TOTAL.............................. 1,647,986 98%
EAST BAY, CALIFORNIA
Corporate Centre (2 buildings)............ 329,348 100.0% 1985-1987 96% E
ADP Plaza (2 buildings)................... 300,308 100.0% 1987-1989 95% E
PeopleSoft Plaza.......................... 277,562 100.0% 1984 100% E
Norris Tech Center (3 buildings).......... 260,513 100.0% 1984-1990 100% E
Golden Bear Center........................ 160,587 100.0% 1986 99% E
2700 Ygnacio Valley Road.................. 103,214 100.0% 1984 99% E
Park Plaza................................ 87,040 100.0% 1986 100% E
1600 South Main........................... 83,277 100.0% 1983 98% E
---------- ---
MARKET TOTAL.............................. 1,601,849 98%
SEATTLE, WASHINGTON
Washington Mutual Tower (3 buildings)..... 1,154,560 50.0% 1988 98% G
110 Atrium Place.......................... 215,172 100.0% 1981 100% E
Island Corporate Center................... 100,009 100.0% 1987 97% E
---------- ---
MARKET TOTAL.............................. 1,469,741 98%
SANTA CLARA COUNTY, CALIFORNIA
Pruneyard Office (3 buildings)............ 354,629 100.0% 1971-1999 99% E,H
10 Almaden................................ 294,809 100.0% 1989 100% E
Pruneyard Shopping Center................. 252,210 100.0% 1970s 90% E
Embarcadero Place (4 buildings)........... 192,081 100.0% 1984 100% E
Pruneyard Inn............................. 94,500 100.0% 1989 N/A E,I
---------- ---
MARKET TOTAL.............................. 1,188,229 98%
</TABLE>
<PAGE> 12
<TABLE>
<CAPTION>
MARKET NAME TOTAL RENTABLE COMPANY YEAR
PROPERTY SQUARE FEET INTEREST(A) CONSTRUCTED LEASED NOTES
----------- -------------- ----------- ----------- ------ -----
<S> <C> <C> <C> <C> <C>
SAN FRANCISCO, CALIFORNIA
120 Montgomery Street..................... 420,310 66.7% 1955 95% E
One Post.................................. 391,450 50.0% 1969 99% E
201 California Street..................... 240,230 100.0% 1980 96% J
188 Embarcadero........................... 85,183 100.0% 1985 99% E
---------- ---
MARKET TOTAL.............................. 1,137,173 97%
MINNEAPOLIS, MINNESOTA
Norwest Center............................ 1,117,439 50.0% 1988 100% K
---------- ---
MARKET TOTAL.............................. 1,117,439 100%
WASHINGTON, D.C./ALEXANDRIA, VIRGINIA
Market Square (2 buildings)............... 688,709 70.0% 1990 99% C,L
99 Canal Center........................... 137,945 100.0% 1986 100% C
TransPotomac Plaza 5...................... 96,392 100.0% 1983 100% C
11 Canal Center........................... 70,365 100.0% 1986 98% C
---------- ---
MARKET TOTAL.............................. 993,411 99%
SUBURBAN CHICAGO, ILLINOIS
Corporate 500 Centre (4 buildings)........ 679,039 100.0% 1986/1990 99% M
One Lincoln Centre........................ 297,040 100.0% 1986 89%
---------- ---
MARKET TOTAL.............................. 976,079 96%
SANTA MONICA/WEST LOS ANGELES, CALIFORNIA
West Wilshire (2 buildings)............... 235,787 100.0% 1960-1976 94% E
Wilshire Palisades........................ 186,714 100.0% 1981 100% J
Janss Court............................... 125,709 100.0% 1989 100% E,N
Searise Office Tower...................... 122,292 100.0% 1975 100% E
Commerce Park............................. 94,367 100.0% 1977 79% E,O
429 Santa Monica.......................... 83,243 100.0% 1982 88% E
---------- ---
MARKET TOTAL.............................. 848,112 95%
ORANGE COUNTY, CALIFORNIA
Bixby Ranch............................... 277,289 100.0% 1987 98% E
18301 Von Karman.......................... 219,508 100.0% 1991 88% E
2677 North Main........................... 213,318 100.0% 1987 94% E
---------- ---
MARKET TOTAL.............................. 710,115 94%
SAN DIEGO, CALIFORNIA
Centerside II............................. 286,949 100.0% 1987 93% E
Crossroads................................ 133,553 100.0% 1983 100% E
---------- ---
MARKET TOTAL.............................. 420,502 95%
NEW YORK CITY, NEW YORK
527 Madison Avenue........................ 215,332 100.0% 1986 100%
Tower 56.................................. 163,633 100.0% 1983 99% P
---------- ---
MARKET TOTAL.............................. 378,965 99%
LOS ANGELES, CALIFORNIA
700 North Brand........................... 202,531 100.0% 1981 94% E
Warner Park Center........................ 57,366 100.0% 1986 100% E
---------- ---
MARKET TOTAL.............................. 259,897 95%
</TABLE>
<PAGE> 13
<TABLE>
<CAPTION>
MARKET NAME TOTAL RENTABLE COMPANY YEAR
PROPERTY SQUARE FEET INTEREST(A) CONSTRUCTED LEASED NOTES
----------- -------------- ----------- ----------- ------ -----
<S> <C> <C> <C> <C> <C>
CONEJO VALLEY (VENTURA), CALIFORNIA
Westlake Spectrum (2 buildings)........... 118,990 100.0% 1990 97% E
Agoura Hills.............................. 115,208 100.0% 1987 100% E
---------- ---
MARKET TOTAL.............................. 234,198 99%
OTHER REGIONS
U.S. West (Murray, Utah).................. 136,608 100.0% 1985 76% E
Exposition Centre (Sacramento,
California)............................ 72,971 100.0% 1984 70% E
---------- ---
MARKET TOTAL.............................. 209,579 74%
TOTAL PORTFOLIO........................... 17,981,409 97%
Minority Interest Adjustment(Q)........... (728,307)
----------
CORNERSTONE PORTFOLIO..................... 17,253,102 96%
===
Adjustment For Pruneyard Inn.............. (94,500)
----------
CORNERSTONE OFFICE PORTFOLIO.............. 17,158,602
==========
</TABLE>
---------------
(A) Unless noted below, cash flow and residual proceeds will be distributed to
the Company according to its percentage interest.
(B) On December 31, 1997, the Trust purchased the second mortgage on Sixty
State Street. The mortgage is a cash flow mortgage through which all the
economic benefits/risks (subject to the first mortgage) inure to the
Company. The Company controls all major decisions regarding management and
leasing. The total purchase price for the second mortgage was $131.5
million and is consolidated in buildings due to the above factors. The
$78.4 million first mortgage on the Property was originally recorded by the
Trust as an $89.6 million liability due to its above-market interest rate.
As of January 20, 1998 all of the interest stated above were contributed to
the Company in exchange for units.
The second mortgage, which the Company holds, is collateralized only by the
improvements on Sixty State Street. Title to the improvements is owned by
Sixty State Street Trust, the ground lessee under a ground lease that
expires on December 28, 2067. The lease payments on the ground lease are
$398,896 per annum throughout the term.
(C) On October 27, 1997, the Trust acquired interests in nine Class A office
properties comprising approximately 4.5 million rentable square feet in
Alexandria, Virginia (3 properties), Atlanta (2 properties), Boston (2
properties), Charlotte and Washington, D.C., as well as an undeveloped
parcel of land in Chicago (collectively, "the DIHC Portfolio"). The Trust
acquired the DIHC Portfolio for a purchase price of approximately $1.06
billion, consisting of approximately 34.2 million shares of Common Stock
valued and recorded at $16.00 per share, approximately $260.0 million in
cash and $250.0 million in promissory notes. The cash portion of the
acquisition was financed with proceeds from the Trust's initial public
offering in April 1997 and $54.0 million from its Revolving Credit
Facility. As of January 20, 1998 all of the interest stated above were
contributed to the Company in exchange for units. The Company has since
sold the asset in Charlotte as well as the undeveloped parcel of land in
Chicago.
(D) On April 28, 1998, the Company purchased One Memorial Drive in Cambridge,
Massachusetts. The total purchase price for the Property was approximately
$112.5 million, approximately $23.5 million of which was paid in cash,
approximately $29.0 million of which was paid in Units valued at $17.50 per
unit and approximately $60.0 million of which was paid in the Trust's
Common Stock valued at $17.50 per share.
(E) Property was acquired as a result of the Wilson Acquisition in December
1998. After receiving stockholder approval on December 14, 1998, the
Company acquired substantially all of the properties and real estate
operations of William Wilson & Associates and related entities ("WW&A")
(the "Wilson Acquisition"). As part of the Wilson Acquisition, the Company
acquired interests in 69
<PAGE> 14
Class A office Properties, comprising approximately 9.2 million rentable
square feet primarily in the San Francisco Bay Area and in Southern
California, a shopping center consisting of approximately 252,000 rentable
square feet in Santa Clara, California, a hotel consisting of 94,500 square
feet in Santa Clara, California and 12.8 acres of developable land in the
San Francisco Bay Area. The Company has since sold eleven assets comprising
approximately 1.2 million square feet.
The Company acquired WW&A for a purchase price of approximately $1.8
billion, consisting of approximately 14.9 million shares of the Trust's
Common Stock valued at $17.25 per share (recorded at $16.25 per share for
GAAP purposes), approximately 16.2 million Units valued at $17.25 per unit
(recorded at $16.25 per unit for GAAP purposes), approximately $465.0
million in cash and the assumption of approximately $760.0 million of
property and construction related debt (recorded at $773.7 million for
GAAP purposes). The cash portion of the transaction was financed primarily
from the Company's Revolving Credit Facility and the sale of $200.0
million of Common Stock to PGGM, an approximate 33.6% stockholder prior to
the Wilson Acquisition, priced at $17.25 per share.
(F) While the Company's stated interest in the partnership that owns 191
Peachtree Street is 80.0%, its economic interest is significantly larger
since it has acquired the first mortgage note on the Property in the amount
of $145.0 million, which earns interest at 9.375% and will receive a
priority distribution on its acquired capital base. In 1999, the partner in
the transaction, CH Associates, Ltd., received an annual Incentive
Distribution (as defined) of $250,000, with the Company receiving the
remainder of the cash flow of the Property.
The partnership that owns 191 Peachtree Street leases a portion of the land
upon which the project is located pursuant to a ground lease agreement. The
agreement requires annual payments of $45,000 through January 31, 2002 and
$75,000 through January 31, 2008. Thereafter, the annual rent increases
$2,500 per year until the expiration date of January 31, 2087. The
partnership records ground rental expense relating to this agreement on a
straight-line basis. The ground lease is renewable for an additional 99
years.
(G) While the Company's stated interest in the partnership that owns Washington
Mutual Tower is 50.0%, its economic interest in the Property is
significantly larger due to priority distributions it receives on its
invested capital base. For the year ended December 31, 1999, the Company
received 100% of the cash distributions from the partnership that owns
Washington Mutual Tower.
(H) Pruneyard Place construction was completed and occupied on April 1, 1999.
The building was entirely pre-leased.
(I) The Pruneyard Inn is a three-story hotel. An expansion was completed in May
1999, increasing the number of rooms from 118 to 172.
(J) On June 3, 1998, the Company purchased 201 California Street and Wilshire
Palisades. The total purchase price for the Properties was approximately
$121.5 million, approximately $29.5 million of which was paid in cash,
approximately $29.1 million of which was paid in Units valued at $17.50 per
unit and approximately $62.9 million of assumed debt (recorded at $64.6
million for GAAP purposes).
(K) While the Company's stated interest in the partnership that owns Norwest
Center is 50.0%, its economic interest in the Property is significantly
larger due to priority distributions it receives on its invested capital
base. For the year ended December 31, 1999, the Company's share of earnings
and cash distributions from the partnership that owns Norwest Center was
74.4%.
(L) During 1998, through a series of transactions, the Company acquired
partnership interests with a stated interest of approximately 70.0% in the
partnerships that own Market Square. The Company's economic interest is
significantly larger since it has acquired the first mortgage note on the
Property in the amount of $181.0 million which earns interest at 9.75% and
will receive a priority distribution on its acquired capital base. In
addition, the Company acquired a "buffer loan", with accrued principal and
interest of $49.0 million at purchase, which accrues interest at a rate of
Prime plus 1.25% and is payable from cash flow, refinancing or sales
proceeds in excess of the first mortgage.
<PAGE> 15
During the year ended December 31, 1999, the Company received 100% of the
cash flow from the Property. On November 14, 1998, the Company purchased an
additional interest in the partnerships that own Market Square which
enabled it to gain sufficient control in order to consolidate the
investment.
(M) On January 28, 1998, the Company purchased Corporate 500 Centre in
Deerfield, Illinois. This Property consists of four Class A office
buildings with approximately 679,000 rentable square feet. The
consideration paid for this Property was approximately $135.0 million in
cash and approximately $15.0 million in Units valued at $18.50 per unit,
for a total purchase price of approximately $150.0 million. The Company
financed a portion of the purchase price with an $80.0 million mortgage
loan from Bankers Trust Company; this mortgage was subsequently refinanced
in October 1998.
(N) Janss Court is a seven-story, 126,000-square foot Class A mixed-use
building. In addition to 93,000 square feet of retail and office space,
Janss Court offers 32 apartments for a total of 33,000 rentable square feet
of residential space.
(O) The Property is subject to a ground lease agreement. The agreement requires
annual payments of $115,000 through March 31, 2002 and $121,000 from April
1, 2002 through March 31, 2007. The lease payment increases every ten years
thereafter according to a formula based on the Consumer Price Index. The
ground lease expires on March 31, 2041.
(P) On January 5, 1998, the Trust purchased for approximately $5.5 million, the
remaining participation rights in the cash flow and residual value of Tower
56 from the former participants for 307,692 shares of Common Stock. As a
result, all of the cash flow and the residual value of Tower 56 inured to
the Trust. As of January 20, 1998 all of the interest stated above were
contributed to the Company in exchange for units.
(Q) Rentable square feet includes an adjustment for the interest of a joint
venture or minority partner. Calculations are based on the partners'
percentage interest in the cash flows of the Property.
On March 31, 1998, the Company sold the Dearborn Land (an undeveloped
parcel of land in Chicago that was acquired as part of the acquisition of the
DIHC Portfolio in October 1997) for gross proceeds of approximately $19,000,000,
resulting in a loss of approximately $0.3 million.
On April 29, 1998, the Trust sold the Frick Building, located in
Pittsburgh, Pennsylvania, for net proceeds of approximately $26,748. The net
proceeds were contributed to the Company.
On December 29, 1998, Avenue Associates Limited Partnership sold a
condominium unit in Market Square, located in Washington D.C., for gross
proceeds of $326,154, resulting in a gain of approximately $0.1 million.
During 1999, the Company sold thirteen properties for gross proceeds of
$496,530,000 resulting in a net gain of $131,033,847.
The future minimum lease payments to be received by the Company under
noncancellable operating leases as of December 31, 1999 are as follows (Dollar
amounts in thousands):
<TABLE>
<S> <C>
2000........................................................ $ 396,159
2001........................................................ 373,079
2002........................................................ 327,096
2003........................................................ 269,223
2004........................................................ 211,497
Thereafter.................................................. 737,345
----------
Total....................................................... $2,314,399
==========
</TABLE>
<PAGE> 16
3. RESTRICTED CASH
Restricted cash includes security deposits for some of the Company's office
properties and escrow and reserve funds for real estate taxes, property
insurance, capital improvements, tenant improvements and leasing costs. These
funds were established pursuant to certain mortgage and construction financing
arrangements.
The proceeds from the sales of certain properties during 1999 totaling
approximately $211.5 million, are included in restricted cash pursuant to the
terms of Section 1031 of the Internal Revenue Code of 1986, as amended,
"Exchange of property held for productive use or investment."
4. INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
Investment in unconsolidated joint ventures represents the Company's two
investments that are accounted for using the equity method of accounting. The
first investment is the Company's 50.0% interest in a co-tenancy with Crocker
Plaza Company for One Post, a 38-story, Class A office tower in San Francisco,
California. The Company and Crocker co-manage and lease the Property. The second
equity investment is the Company's interest in WCP Services, Inc. The Company
owns 1% of the voting common stock and 100% of the non-voting common stock of
WCP Services, Inc. The remaining shares of voting common stock of WCP Services,
Inc. are owned by certain executive officers of the Company. The Company's
ownership of voting and nonvoting common stock together represents a 95%
economic interest in the earnings of WCP Services, Inc. WCP Services, Inc.
provides property management, development and tenant construction supervision
services to third parties. WCP Services, Inc. also provides tenant construction
supervision services to tenants in Properties owned by the Company.
5. LONG-TERM DEBT
The following table sets forth certain information regarding the
consolidated debt obligations of the Company as of December 31, 1999 and 1998,
including mortgage obligations relating to the Properties. All of this debt, is
nonrecourse to the Company. However, notwithstanding the nonrecourse
indebtedness, the lender may have the right to recover deficiencies from the
Company in certain circumstances, including fraud, misappropriation of funds and
environmental liabilities (Dollar amounts in thousands).
<TABLE>
<CAPTION>
INTEREST MATURITY
PROPERTY AMORTIZATION RATE(A) DATE 12/31/99 12/31/98
-------- ------------- ---------------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
FIXED RATE
----------
TransPotomac Plaza(B)........... Interest Only 7.28% Oct-2000 $ 65,000 $ 65,000
West Wilshire Office and 25 year
Medical....................... 6.90% Jan-2002 16,926 17,301
Searise Office Tower............ 25 year 6.90% Jan-2002 11,607 11,864
Exposition Centre............... 25 year 6.90% May-2002 5,081 5,200
Wilshire Palisades.............. 22 year 6.70% Jul-2002 29,047 29,902
110 Atrium Place................ 30 year 6.90% Mar-2004 21,517 21,838
527 Madison Avenue and
One Lincoln Centre(B)......... Interest only 7.47% Oct-2004 65,000 65,000
Sixty State Street.............. 30 year 6.84% Jan-2005 85,420 87,627
Island Corporate Center......... 30 year 6.90% Apr-2005 13,170 13,294
Washington Mutual Tower......... Interest only 7.53% Nov-2005 79,100 79,100
Norwest Center.................. Interest only 8.74% Dec-2005 110,000 110,000
Agoura Hills.................... 25 year 6.90% Dec-2005 12,003 12,328
Janss Court..................... 30 year 6.90% Dec-2005 18,357 18,723
Bayhill 4, 5, 6 & 7............. 25 year 6.90% Dec-2006 57,764 59,071
Market Square(C) and 200
Galleria(B)................... Interest only 7.54% Oct-2007 120,000 120,000
Corporate 500 Centre............ 25 year 6.66% Nov-2008 88,424 89,765
188 Embarcadero(D).............. 25 year 7.26% Aug-2009 15,606 9,135
Centerside II(D)................ 25 year 7.26% Aug-2009 24,254 13,818
</TABLE>
<PAGE> 17
<TABLE>
<CAPTION>
INTEREST MATURITY
PROPERTY AMORTIZATION RATE(A) DATE 12/31/99 12/31/98
-------- ------------- ---------------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
FIXED RATE
----------
700 North Brand(D).............. 25 year 7.26% Aug-2009 $ 26,938 $ 18,108
Golden Bear Center(D)........... 25 year 7.26% Aug-2009 20,477 15,753
Bixby Ranch(D).................. 25 year 7.26% Aug-2009 28,528 20,243
One Memorial Drive(D)........... 25 year 7.26% Aug-2009 63,119 --
125 Summer Street(E)............ 25 year 7.23% Nov-2009 78,844 50,000
Tower 56(E)..................... 25 year 7.23% Nov-2009 25,024 17,548
Peninsula Office Park 1, 3, 4,
5, 6, 8
& 9(E)........................ 25 year 7.23% Nov-2009 88,128 60,242
Embarcadero Place(E)............ 25 year 7.23% Nov-2009 38,149 26,061
201 California Street (E)....... 25 year 7.23% Nov-2009 44,504 33,071
---------- ----------
Total Fixed Rate Debt........... 7.31%(F) 7.1 yrs(F) $1,251,987 $1,069,992
---------- ----------
VARIABLE RATE
-------------
Seaport Centre(G)............... Interest only LIBOR plus 1.50% Dec-2000 58,000 58,000
The Pruneyard................... 24 year LIBOR plus 1.50% Jul-2000 60,947 49,384
120 Montgomery Street........... 24 year LIBOR plus 1.40% Nov-2002 48,160 46,930
Norris Tech Center.............. 25 year LIBOR plus 1.65% Dec-2003 16,066 16,392
Other loans..................... Various Various Various 245 597
---------- ----------
Total Variable Rate Debt........ 7.48%(F) 1.5 yrs(F) $ 183,418 $ 171,303
---------- ----------
REPAID DEBT
-----------
18301 Von Karman(H)............. -- -- -- -- 10,647
1600 South Main(H).............. -- -- -- -- 5,038
Biltmore Lakes(H)............... -- -- -- -- 11,468
Belmont Shores(H)............... -- -- -- -- 9,839
2677 North Main(H).............. -- -- -- -- 10,774
2700 Ygnacio Valley Road(H)..... -- -- -- -- 5,035
Westlake Spectrum(H)............ -- -- -- -- 3,993
Park Plaza(H)................... -- -- -- -- 4,940
Warner Park Center(H)........... -- -- -- -- 5,213
429 Santa Monica(H)............. -- -- -- -- 10,176
Crossroads(H)................... -- -- -- -- 7,339
Westlake Spectrum II(H)......... -- -- -- -- 5,284
Two ADP Plaza(I)................ -- -- -- -- 13,400
Two Corporate Centre(I)......... -- -- -- -- 18,600
One & Two Gateway(J)............ -- -- -- -- 8,679
Scottsdale Centre(J)............ -- -- -- -- 7,745
66 Bovet(J)..................... -- -- -- -- 3,939
One Norwest Center(K)........... -- -- -- -- 98,252
1300 South El Camino(J)......... -- -- -- -- 4,007
10 Almaden(L)................... -- -- -- -- 33,885
------------- ---------------- -------- ---------- ----------
Total Repaid Debt............... $ -- $ 278,253
---------- ----------
Total Debt...................... 7.33%(F) 6.4yrs(F) $1,435,405 $1,519,548
========== ==========
</TABLE>
---------------
(A) The interest rate is the stated interest rate (for Company originated debt)
or the mark to market rate at the time of acquisition (for debt assumed as
part of an acquisition).
(B) The three notes arising from the acquisition of several properties in the
DIHC Portfolio are cross-collateralized, having the effect of forming a
"collateral pool" for the underlying notes.
(C) The collateral for this loan is a pledge of the $181.0 million first
mortgage loan on Market Square that the Company purchased from PGGM.
<PAGE> 18
(D) The six notes arising from the restructuring of certain debt with Prudential
Insurance Company of America and Northwestern Mutual Life Insurance Company
are cross-collateralized, having the effect of forming a "collateral pool"
for the underlying notes.
(E) During October 1999 the Company restructured approximately $219.9 million of
individual property related debt with Northwestern Mutual Life Insurance
Company. The restructuring involved retiring the individual property related
debt and creating a single $275.0 million loan which is cross-
collateralized by six of the original seven properties. The loan has a ten
year term and bears interest at 7.23%. Upon closing the loan, the lien on 10
Almaden was released and the property was added to Cornerstone's
unencumbered pool.
(F) Weighted-average interest rate and maturity of the Company's long-term
debt.
(G) On December 15, 1999, through an extension and modification agreement, the
maturity date of the $58.0 million variable rate debt held on Seaport Centre
was extended from December 31, 1999 to December 31, 2000. All other terms of
the note remain unchanged.
(H) These 12 notes were prepaid as part of the Prudential Insurance Company of
America and Northwestern Mutual Life Insurance Company restructuring, see
note (D) above. All the notes had a mark to market interest rate of 6.9% and
maturity dates ranging from April 2000 to March 2003.
(I) On January 4, 1999, in connection with the Wilson Acquisition, the Company
prepaid the notes on Two ADP Plaza and Two Corporate Centre.
(J) These notes were prepaid in conjunction with the sale of these properties.
(K) The note was assumed by the purchaser as of the date of closing, in
conjunction with the sale of this property during the fourth quarter.
(L) This note was prepaid as part of the Northwestern Mutual Life Insurance
Company restructuring, see note (E) above. This note had a mark to market
interest rate of 6.9% and a maturity of April 2004.
The combined aggregate amount of maturities for all long-term borrowings
for 2000 through 2004 are $183,947,000, $0, $110,821,000, $16,066,000 and
$86,517,000, respectively.
Since most of the long-term debt is property related, there are restrictive
covenants that limit the total amount of indebtedness that can be placed on
individual properties.
6. CREDIT FACILITY
The Company has a $550.0 million Revolving Credit Facility with a syndicate
of 17 banks led by DB Alex Brown, The Chase Manhattan Bank and Bank of America
for acquisitions and general working capital purposes as well as the issuance of
letters of credit (the "Revolving Credit Facility"). The interest rate on the
facility depends on the Company's ratio of total debt to asset value (as
defined) at the time of borrowing and will be at a spread of 1.10% to 1.40% over
the applicable LIBOR or the Prime Rate at the borrower's option. The letters of
credit will be priced at the applicable Eurodollar credit spread. The Revolving
Credit Facility expires on November 3, 2001. As of December 31, 1999, $329.0
million of the facility was outstanding at a rate of approximately 8.0%. Of this
amount, approximately $250.0 million is fixed with interest rate swaps, which
effectively fix the rate at 6.47%. Beginning January 2000, the rate will be
reduced to 5.41 through the expiration of the swaps in December 2000. The
Revolving Credit Facility contains certain restrictive covenants including: (i)
a limitation on the Company's dividend to 90.0% of funds from operations and
110.0% of funds available for distribution, both as defined in the agreement;
(ii) the percentage of total liabilities to total property asset value (as
defined) cannot exceed 55.0%; (iii) the ratio of adjusted EBITDA to interest
expense may not be less than 2.00 to 1.00 through July 1, 1999 and 2.25 to 1.00
thereafter; (iv) the fixed charge coverage ratio may not be less than 1.75 to
1.00; and (v) the ratio of total property asset value (as defined) to secured
indebtedness may not be less than 2.22 to 1.00. The above terms reflect an
amendment to the Revolving Credit Facility that occurred during 1999. The
amendment allowed the Company to increase its leverage from 55.0% to 60.0% in
(ii) above for a short period, which has since expired. The Company also
increased its ability to enter into mortgage debt under (v) above by decreasing
the ratio from 2.5 to 1.00 to 2.22 to 1.00.
<PAGE> 19
7. COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company is subject to tenant and
property related claims and other litigation. It is the opinion of management,
after consultation with outside counsel, that the resolution of these claims
will not have a material adverse effect on the financial position, results of
operations or cash flows of the Company.
In April 1998, the Company entered into a contract to acquire from the
developer the 928,857 square-foot Piper Jaffray building under construction in
Minneapolis. In November 1999, this contract was amended in connection with a
350,000 square-foot expansion lease with a major tenant of the building. The
contract was amended to provide for a purchase price equal to the costs incurred
in construction and development plus a fixed amount to the developer plus an
additional amount based on the leasing of the building. In addition, at the
Company's election, the closing of the acquisition may occur prior to the
completion of the building, but the developer will remain obligated to complete
the project. Through December 31, 1999, approximately $109.4 million has been
spent on the construction. The project is scheduled to be completed in the year
2000 and is approximately 75.0% pre-leased.
8. PARTNERS' CAPITAL
As of December 31, 1999, the Trust and its subsidiaries had a 1% general
partnership interest and an approximate 86.1% limited partnership interest in
the Company. The remaining limited partners had an approximate 12.9% interest in
the Company and consist of various individuals and entities that contributed
their properties to the Company in exchange for partnership interest and are
represented by 19,131,785 Units which are exchangeable on a one-for-one basis
into the Trust's Common Shares.
The 7% Cumulative Convertible Preferred Units are convertible into Common
Stock at $16.50 per share at any time after August 4, 2000.
On February 6, 1998, the Trust completed a secondary public offering of
14,375,000 shares of Common Stock at a price of $18.25 per share. The shares
were placed in the U.S. through a syndicate of seven investment banks led by
Merrill Lynch & Co. Net proceeds to the Company were approximately $247.9
million (approximately $262.3 million gross proceeds less an underwriting
discount of approximately $13.7 million and expenses of approximately $0.7
million), which were contributed to the Company in exchange for a corresponding
number of Units. The net proceeds were used to repay outstanding borrowings
under the Revolving Credit Facility and for working capital purposes.
9. UNITHOLDERS' DISTRIBUTIONS
On December 7, 1998, in connection with the Wilson Acquisition, the Company
declared a distribution of $0.15 per unit to Unitholders of record as of
December 15, 1998 and a distribution of $0.15 per unit to Unitholders of record
as of January 29, 1999. Both distributions were paid on February 26, 1999. A
distribution of $0.30 per unit was declared for the second quarter of 1999 and
paid on May 28, 1999, to Unitholders of record as of April 30, 1999. A
distribution of $0.30 per unit was declared for the third quarter of 1999 and
paid on August 31, 1999, to Unitholders of record as of July 30, 1999. A
distribution of $0.30 per unit was declared on September 28, 1999 for the fourth
quarter of 1999 and paid on November 30, 1999, to Unitholders of record as of
October 29, 1999.
On August 4, 1999, the Company paid a dividend of $1.155 per share to all
preferred unitholders of record as of July 30, 1999.
10. EXTRAORDINARY LOSS
For the year ended December 31, 1999, the Company recorded extraordinary
loss of approximately $10.8 million. This amount represents the prepayment fees
paid in connection with the property debt restructurings that were completed
during June 1999 and October 1999, as well as the write off of any remaining
unamortized premium/discount recorded by the Company related to the retired
debt. See Notes 5 and 16 for more information about the two restructurings.
<PAGE> 20
11. NET INCOME PER UNIT
The table below sets forth the calculation of income per Unit for 1999 and
1998 (Dollar amounts in thousands, except per unit amounts):
<TABLE>
<CAPTION>
1999 1998
--------------------------- ---------------------------
BASIC DILUTED BASIC DILUTED
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Units issuable upon exercise of Trust
share options....................... -- 3,175,570 -- 370,612
Weighted average Units................ 148,654,779 148,654,779 103,881,682 103,881,682
------------ ------------ ------------ ------------
Adjusted weighted average Units....... 148,654,779 151,830,349 103,881,682 104,252,294
------------ ------------ ------------ ------------
Net income available to Units before
cumulative effect of a change in
accounting principle and
extraordinary loss.................. $ 276,666 $ 276,666 $ 86,327 $ 86,327
Income applicable to preferred
units............................... (3,500) -- (3,500) --
Cumulative effect of a change in
accounting principle................ (630) (630) -- --
Extraordinary loss.................... (10,787) (10,787) (4,303) (4,303)
------------ ------------ ------------ ------------
Income available to units............. $ 261,749 $ 265,249 $ 78,524 $ 82,024
------------ ------------ ------------ ------------
Net income available to Units before
extraordinary items................. $ 1.84 $ 1.82 $ 0.80 $ 0.79
Cumulative effect of a change in
accounting principle................ -- -- -- --
Extraordinary loss.................... (0.08) (0.07) (0.04) (0.04)
------------ ------------ ------------ ------------
Income available to units............. $ 1.76 $ 1.75 $ 0.76 $ 0.75
------------ ------------ ------------ ------------
</TABLE>
The options issued in February 1998, March 1998, December 1998, January
1999, February 1999 and June 1999 were not included in the calculation of
diluted earnings per Unit as such options were anti-dilutive during the period.
As of December 31, 1999, 1,125,175 Units have been redeemed for shares of the
Trust's Common Stock on a one-for-one basis and 76,647 Units have been redeemed
for approximately $1.2 million in cash.
12. RETIREMENT AND SHARE OPTION PLANS
Eligible employees of the Company participate in a noncontributory
age-weighted profit sharing plan. The Company's cash contribution to such plan
was approximately $134,000, and $100,000, for the years ended December 31, 1999
and 1998, respectively.
Eligible employees of the Company also participate in a 401(k) contributory
savings plan. Under the plan, the Company matches contributions made by eligible
employees based on a percentage of the employee's salary. The Company will match
100% of contributions up to 5.0% of such employee's salary with an annual
maximum matching contribution of $4,000 per employee. The Company's matching
contribution was approximately $654,000, and $69,600, for the years ended
December 31, 1999, and 1998, respectively.
The Company has adopted the Cornerstone Properties Inc. 1998 Long-Term
Incentive Plan (the "Incentive Plan") to provide incentives to attract and
retain officers and key employees. Under the Incentive Plan as amended and
restated on December 14, 1998, the number of shares available for option grant
are approximately 7,400,000. During 1999, options on approximately 40,000 shares
of Common Stock at an exercise price of $17.25 per share have been granted under
the plan. As of December 31, 1999, 10,000 of these shares have been forfeited.
<PAGE> 21
The following tables summarize the Trust's stock options and restricted
stock grants for certain officers of the Company as of December 31, 1999, which
is included in the financial statements because any Common Shares issued
pursuant to the officer plan will result in the Company issuing Units to the
Trust on a one-for-one basis:
STOCK OPTIONS
<TABLE>
<CAPTION>
OPTIONS GRANTED EXERCISE PRICE OPTIONS OPTIONS OPTIONS
DATE OF GRANT (NO. OF SHARES) (PER SHARE) VESTING EXERCISED FORFEITED EXERCISABLE
------------- --------------- -------------- ------------------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
August, 1995.......... 637,500 $14.30 33.3%/yr, 10yr term 75,000 0 562,500
October, 1995......... 150,000 $14.30 33.3%/yr, 10yr term 10,500 0 139,500
March, 1997........... 880,000 $14.50 33.3%/yr, 10yr term 52,000 0 534,666
November, 1997........ 70,000 $18.44 33.3%/yr, 10yr term 0 0 46,667
February, 1998........ 70,000 $18.13 33.3%/yr, 10yr term 0 46,667 23,333
February, 1998........ 595,000 $18.25 33.3%/yr, 10yr term 0 26,668 198,333
March, 1998........... 200,000 $18.25 33.3%/yr, 10yr term 0 133,334 66,666
December, 1998........ 3,000,000 $17.25 33.3%/yr, 10yr term 0 34,533 978,800
January, 1999......... 20,000 $17.25 33.3%/yr, 10yr term 0 0 0
February, 1999........ 10,000 $17.25 33.3%/yr, 10yr term 0 10,000 0
June, 1999............ 10,000 $17.25 33.3%/yr, 10yr term 0 0 0
</TABLE>
The weighted average fair value of options granted during 1999 and 1998 was
$0.33 per share and $0.28 per share, respectively. The weighted average life of
options outstanding at December 31, 1999 was approximately 7.6 years.
RESTRICTED STOCK GRANTS
<TABLE>
<CAPTION>
VALUE OF GRANT SHARES INITIALLY SHARES
DATE GRANTED SHARES FORFEITED OUTSTANDING SHARES VESTED VESTING(A)
DATE OF GRANT (PER SHARES) (NO. OF SHARES) (NO. OF SHARE) (NO. OF SHARES) (NO. OF SHARES) SEE NOTES
------------- -------------- ---------------- ---------------- --------------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C>
August, 1995......... $14.30 186,713 19,091 167,622 89,396 (B)
March, 1997.......... $16.40 100,000 0 100,000 26,666 (C)
November, 1997....... $18.44 12,500 0 12,500 3,333 (D)
March, 1998.......... $18.13 12,500 10,833 1,667 1,667 (E)
March, 1998.......... $18.25 19,178 0 19,178 19,178 (F)
February, 1999....... $15.50 113,500 1,700 111,800 1,400 (G)
</TABLE>
---------------
(A) Deferred compensation of approximately $5,600,000 is being amortized
according to the respective amortization schedule for each vesting period
noted below, with the unamortized balance shown as a deduction from
stockholders' equity. Regular distributions are paid on restricted stock.
(B) The grant will fully vest with respect to 13.333% on June 30, 1996, 1997,
1998, 1999 and with respect to 46.668% on June 30, 2000.
(C) The grant will fully vest with respect to 13.333% on June 30, 1998, 1999,
2000, 2001 and with respect to 46.668% on June 30, 2002.
(D) The grant will fully vest with respect to 13.333% on June 30, 1998, 1999,
2000, 2001 and with respect to 46.668% on June 30, 2002.
(E) The grant will fully vest with respect to 13.333% on March 15, 1999, 2000,
2001, 2002 and with respect to 46.668% on March 15, 2003.
(F) The initial grant was to vest with respect to 13.333% on March 15, 1999,
2000, 2001, 2002 and with respect to 46.668% on March 15, 2003. Pursuant to
the terms of a separation agreement, the vesting with respect to 16,621
shares was accelerated to fully vest on December 31, 1999.
(G) The grant will fully vest on February 1, 2004. Pursuant to the terms of
certain separation agreements, the vesting with respect to 1,400 shares was
accelerated to fully vest on July 1, 1999.
<PAGE> 22
The Trust has adopted the disclosure-only provision of Statement of
Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"). Accordingly, no compensation cost has been recognized for the
options described above since the exercise price equaled the fair value at the
grant date. Had compensation cost for these options been determined based on the
fair value at the grant date consistent with the provisions of SFAS 123, the
Trust's net income and net income per common share would have been reduced to
the following pro forma amounts (Dollar amounts in thousands, except per share
amounts):
<TABLE>
<CAPTION>
BASIC DILUTED
NET INCOME PER NET INCOME PER
NET INCOME COMMON SHARE COMMON SHARE
---------- -------------- --------------
<S> <C> <C> <C>
Year ended December 31, 1999........ $229,622 $1.76 $1.73
Year ended December 31, 1998........ $ 81,561 $0.73 $0.73
</TABLE>
The Company has computed the value of all stock options using the
Black-Scholes option pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
ASSUMPTIONS 1999 1998
----------- ------- -------
<S> <C> <C>
Risk-free interest rate.................................... 5.31% 5.31%
Assumed dividend yield..................................... 7.50% 7.50%
Expected term.............................................. 6 years 6 years
Assumed volatility......................................... 10.00% 10.00%
</TABLE>
13. CONCENTRATION OF RISK
Approximately 5.8 million of the Company's 17 million rentable square feet
is located in the San Francisco metropolitan market, accounting for
approximately 29% of the Company's total assets at December 31, 1999. In
addition, five of the Company's 83 office Properties are located in the Downtown
Boston market, accounting for approximately 19.4% of the Company's office and
parking revenues for the year ended December 31, 1999. This concentration of
assets makes the Company particularly vulnerable to adverse changes in economic
conditions in the San Francisco and Boston metropolitan areas. A significant
decline in these economic conditions could have a material adverse effect on the
Company.
Norwest Corporation and its subsidiary, Norwest Bank Denver N.A., tenants
of the Company, provided approximately 6.2%, and 9.5% of office and parking
rental income for the years ended December 31, 1999 and 1998, respectively.
Included in deferred tenant receivables is approximately $34.8 million and $33.9
million due from Norwest Corporation at December 31, 1998 and 1997,
respectively. As a result of the sale of the Company's property located in
Denver during the fourth quarter of 1999, the concentration of revenue received
from this tenant will be significantly reduced.
14. RELATED PARTY TRANSACTIONS
The Company has entered into $250.0 million of mortgage debt with one of
the Trust's major stockholders, PGGM, as further described in Note 5.
In connection with the Wilson Acquisition, certain third-party services
business of WW&A was acquired by WCP Services, Inc., a Delaware corporation
("WCP Services"). The Company owns 100% of the non-voting common stock and 1% of
the voting common stock of WCP Services. Mr. Wilson and Mr. Moody each own 49.5%
of the voting common stock of WCP Services. To fund the purchase of such shares
of voting common stock, the Company loaned $178,750 to each of Mr. Wilson and
Mr. Moody, all of which remained outstanding as of December 31, 1999. The notes
accrue interest at a rate equal to 140 basis points plus the one-year London
Interbank Offered Rate, which rate is adjusted annually. The notes are due and
payable on or before December 16, 2008. In connection with the EOP Merger
Agreement, Messrs. Wilson and Moody entered into an agreement to sell their
voting common stock of WCP Services to EOP at a purchase price of $200,000 each.
<PAGE> 23
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company is required to disclose the fair value of financial instruments
for which it is practicable to estimate that value. The Company determines the
fair value based on discounting future cash flows at a rate that approximates
the Company's effective current borrowing rate (see also Note 5). For the year
ended December 31, 1999 and 1998, the fair value of the Company's long term debt
was approximately $1,367,000 million and $1,542,000 million, respectively.
16. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest was approximately $138,375 million and $60,992
million for the years ended December 31, 1999 and 1998, respectively.
NON-CASH INVESTING AND FINANCING ACTIVITIES
On January 20, 1998, the Trust converted its corporate structure into an
umbrella limited partnership REIT ("UPREIT"). Under the UPREIT structure, the
Trust assigned substantially all of its interest in its properties and
substantially all of its operations to the Company.
On January 28, 1998, the Company purchased Corporate 500 Centre. As part of
the total purchase price of approximately $150.0 million, the Company issued
822,794 Units valued at $18.50 per unit.
On April 28, 1998, the Company purchased One Memorial Drive. As part of the
total purchase price of approximately $112.5 million, the Trust issued 3,428,571
shares of common stock and the Company issued 1,657,426 Units, both valued at
$17.50.
On June 3, 1998, the Company purchased 201 California Street and Wilshire
Palisades. As part of the total purchase price for the Properties of
approximately $121.5 million, the Company assumed $64.6 million in debt and
issued 1,665,663 Units valued at $17.50 per unit.
On September 25, 1998, in conjunction with the refinancing of the One
Norwest Center mortgage, the Company incurred an extraordinary loss of
approximately $2,269,000, which represents the unamortized deferred financing
costs and prepayment fees on the previous One Norwest Center mortgage at the
time of the refinancing.
On October 9, 1998, in conjunction with the refinancing of the Corporate
500 Centre mortgage, the Company incurred an extraordinary loss of $354,717,
which represents the unamortized deferred financing costs on the previous
Corporate 500 Centre mortgage at the time of the refinancing.
On November 3, 1998, the Company obtained a $550.0 million Revolving Credit
Facility from a syndicate of 17 banks led by Bankers Trust Company, The Chase
Manhattan Bank and NationsBank. In conjunction with obtaining this new Revolving
Credit Facility, the Company incurred an extraordinary loss of $1,680,016, which
represents the unamortized deferred financing costs related to the previous
$350.0 million facility, which was extinguished at the time that the new
Revolving Credit Facility was obtained.
On December 16, 1998, the Company consummated the Wilson Acquisition for a
purchase price of approximately $1.8 billion, consisting of approximately 14.9
million shares of the Trust's Common Stock valued at $17.25 per share (recorded
at $16.25 per share for GAAP purposes), approximately 16.2 million Units valued
at $17.25 per unit (recorded at $16.25 for GAAP purposes), approximately $465.0
million in cash and the assumption of approximately $760.0 million of property
and construction related debt (recorded at $773.7 million for GAAP purposes).
The Company also recorded a minority interest of $241.0 million in connection
with this acquisition.
During the first quarter of 1999, pursuant to the requirements of SOP 98-5
(as defined in Note 1), the Company wrote off all unamortized organizational
costs and recorded a cumulative effect of a change in accounting principle of
$630,044.
On February 1, 1999, the Trust issued 113,500 shares of restricted stock
valued at $15.50 per share to certain employees of the Company. Units were also
issued to the Trust on a one-for-one basis.
<PAGE> 24
On June 23, 1999, in conjunction with the restructuring of property-related
debt with Prudential Insurance Company of America and Northwestern Mutual Life
Insurance Company, the Company incurred an extraordinary loss of approximately
$3,355,000, of which approximately $1,560,000 represents the unamortized
premium/discounts associated with various debt instruments that were assumed as
part of the Wilson Acquisition. See Note 5 for more information about this
restructuring.
During 1999, 1,700 shares of the Trust's restricted Common Stock issued to
certain employees of the Company were forfeited as a result of their separation
from the Company.
On July 30, 1999, 562,588 Units were redeemed for shares of the Trust's
Common Stock on a one-for-one basis.
On August 3, 1999, 562,587 Units were redeemed for shares of the Trust's
Common Stock on a one-for-one basis.
On August 17, 1999, the Trust reacquired 10,833 shares of restricted Common
Stock as a result of the forfeiture of these shares by a certain employee of the
Company.
On October 6, 1999, in conjunction with the restructuring of
property-related debt with Northwestern Mutual Life Insurance Company, the
Company incurred an extraordinary loss of approximately $7,432,000, of which
approximately $2,551,000 represents the unamortized premium/discounts associated
with various debt instruments. See Note 5 for more information about this
restructuring.
On December 10, 1999, in conjunction with the sale of One Norwest Center in
Denver, Colorado, $97.3 million of outstanding debt was assumed by the
purchaser.
On December 31, 1999 an affiliate of the Trust, Corpro Real Estate
Management Company, Inc., was dissolved. The remaining assets were contributed
to the Company.
17. SEGMENT REPORTING
The Company has one reportable segment - real estate. The Company does not
have any foreign operations. The accounting policies of the segment are the same
as those described in Note 1. See Note 13 for information regarding
concentration of risk.
The Company evaluates performance based on net operating income from the
individual properties in the segment. (Dollar amounts in thousands)
<TABLE>
<CAPTION>
CORPORATE & COMPANY
TOTAL SEGMENT OTHER(A) TOTAL
------------- ----------- ----------
<S> <C> <C> <C>
Total revenues(B):
1999........................................... $ 611,657 $ 4,659 $ 616,316
1998........................................... 336,922 2,415 339,337
Total operating and Interest expenses(C):
1999........................................... $ 212,686 $ 155,517 $ 368,203
1998........................................... 112,271 79,136 191,407
Net operating income(D):
1999........................................... $ 398,971 $(150,858) $ 248,113
1998........................................... 224,651 (76,721) 147,930
Total long-lived assets(E):
1999........................................... $3,770,924 $ 66,064 $3,836,988
1998........................................... 4,137,302 54,782 4,192,084
Total assets:
1999........................................... $3,776,765 $ 393,463 $4,170,228
1998........................................... 4,198,099 83,559 4,281,658
</TABLE>
---------------
(A) Corporate and Other represents all corporate-level items (including
interest income, interest expense and general and administrative expenses)
as well as intercompany eliminations necessary to reconcile to consolidated
Company totals.
<PAGE> 25
(B) Total revenues represents all revenues during the period (including the
Company's earnings in real estate joint ventures). All interest income is
excluded from the segment amounts and is classified in Corporate and Other
for all periods.
(C) Total operating and interest expenses represents the sum of building
operating expenses, real estate taxes, interest expense and general and
administrative expenses. All interest expense (including property level
mortgages) is excluded from the segment amounts and is classified in
Corporate and Other for all periods. Amounts presented exclude depreciation
and amortization of $96,726,000 and $57,031,000 in 1999 and 1998,
respectively.
(D) Net operating income represents total revenues (as defined in note (B)
above) less total operating and interest expense (as defined in note (C)
above) for the period.
(E) Long-lived assets is composed of total rentals property, investments in
joint ventures, other deferred costs, deferred tenant receivables and
certain other assets.
18. SUBSEQUENT EVENTS
On January 20, 2000, the Company declared a distribution of $0.31 per unit
paid on February 29, 2000, Unitholders of record as of January 31, 2000.
On January 21, 2000, the Company purchased Wells Fargo Center in
Sacramento, California. This property contains approximately 502,000 rentable
square feet. The total purchase price for the Property was approximately $130.0
million, consisting of approximately $128.0 million in cash of which $104.8
million was 1031 exchange funds (see Note 3) and approximately $2.0 million of
which was paid in Units valued at $17.25 per unit.
On March 8, 2000, the Company declared a distribution of $0.20 per unit
paid to all unitholders on April 14, 2000.
On March 15, 2000, the Company sold it interests in a property for gross
proceeds of $14,425,000 located in East Bay, California. The property was
acquired as part of the Wilson Acquisition in December 1998.
On March 23, 2000, the Company sold its interest in a Property located in
East Bay, California for gross proceeds of $12,800,000. The Property had been
acquired as part of the Wilson Acquisition in December 1998.
On March 30, 2000, 101,050 Units were redeemed for shares of the Trust's
Common Stock on a one-for-one basis.
<PAGE> 26
CORNERSTONE PROPERTIES LIMITED PARTNERSHIP
REAL ESTATE AND ACCUMULATED DEPRECIATION
SCHEDULE III
DECEMBER 31, 1999
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
----------------------- ------------ ----------------------- ---------------- ------------------------------------
COST CAPITALIZED
SUBSEQUENT TO GROSS AMOUNT AT WHICH CARRIED
INITIAL COST TO COMPANY ACQUISITION AT CLOSE OF PERIOD
----------------------- ---------------- ------------------------------------
BUILDING & LAND & BUILDING &
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS TOTAL
----------- ------------ -------- ------------ ---------------- -------- ------------ ----------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Boston, Massachusetts
Sixty State Street.... $85,420 $ -- $ 221,568 $ 6,813 $ -- $ 228,381 $ 228,381
500 Boylston Street... 45,132 181,574 (112) 45,132 181,462 226,594
222 Berkeley Street... 29,262 118,180 284 29,262 118,464 147,726
125 Summer Street..... 78,844 15,750 89,250 7,867 15,750 97,117 112,867
One Memorial Drive.... 63,119 22,500 90,873 (6) 22,500 90,867 113,367
San Mateo County,
California
Bayhill (4
buildings).......... 57,764 26,353 105,412 2,166 26,353 107,578 133,931
Peninsula Office Park
(7 buildings)....... 88,128 25,426 101,705 2,885 25,426 104,590 130,016
Seaport Centre........ 58,000 23,530 94,119 5,259 23,530 99,378 122,908
Bay Park Plaza (2
buildings).......... 13,139 52,556 244 13,139 52,800 65,939
One Bay Plaza......... 9,125 36,499 1,165 9,125 37,664 46,789
East Bay, California
Corporate Centre (2
buildings).......... 9,808 39,233 637 9,808 39,870 49,678
ADP Plaza (2
buildings).......... 10,278 41,110 502 10,278 41,612 51,890
PeopleSoft Plaza...... 10,025 40,100 644 10,025 40,744 50,769
Norris Tech Center (3
buildings).......... 16,066 7,223 28,893 379 7,223 29,272 36,495
Golden Bear Center.... 20,477 6,426 25,705 250 6,426 25,955 32,381
2700 Ygnacio Valley
Road................ 2,375 9,498 192 2,375 9,690 12,065
Park Plaza............ 2,673 10,693 323 2,673 11,016 13,689
1600 South Main....... 2,501 10,003 175 2,501 10,178 12,679
Atlanta, Georgia
191 Peachtree
Street.............. 40,110 228,962 4,575 40,110 233,537 273,647
200 Galleria.......... 120,000(B) 11,994 48,443 3,621 12,726 51,332 64,058
Seattle, Washington
Washington Mutual
Tower (3
buildings).......... 79,100 21,167 43,153 150,354 21,173 193,501 214,674
110 Atrium Place...... 21,517 7,810 31,242 357 7,810 31,599 39,409
Island Corporate
Center.............. 13,170 3,751 15,004 325 3,751 15,329 19,080
Santa Clara, California
Pruneyard Office (3
buildings).......... 60,947 11,896 47,583 13,162 11,896 60,745 72,641
10 Almaden............ 14,306 57,223 314 14,306 57,537 71,843
Pruneyard Shopping
Center.............. 8,491 33,966 1,053 8,491 35,019 43,510
Embarcadero Place (4
buildings).......... 38,149 11,728 46,913 (63) 11,728 46,850 58,578
Pruneyard Inn (C)..... 3,057 12,228 3,126 3,057 15,354 18,411
<CAPTION>
COLUMN A COLUMN F COLUMN G COLUMN H COLUMN I
----------------------- ------------ ----------- ----------- ---------------
LIFE ON WHICH
DEPRECIATION IN
(UNAUDITED) (UNAUDITED) LATEST INCOME
ACCUMULATED YEAR DATE STATEMENTS IS
DESCRIPTION DEPRECIATION CONSTRUCTED ACQUIRED COMPUTED(A)
----------- ------------ ----------- ----------- ---------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Boston, Massachusetts
Sixty State Street.... $ (11,312) 1979 12/31/97 40
500 Boylston Street... (9,949) 1988 10/27/97 40
222 Berkeley Street... (6,515) 1991 10/27/97 40
125 Summer Street..... (12,611) 1989 11/1/95 40
One Memorial Drive.... (3,812) 1985 4/28/98 40
San Mateo County,
California
Bayhill (4
buildings).......... (2,836) 1982-1987 12/16/98 40
Peninsula Office Park
(7 buildings)....... (2,759) 1971-1998 12/16/98 40
Seaport Centre........ (2,772) 1988 12/16/98 40
Bay Park Plaza (2
buildings).......... (1,403) 1985-1998 12/16/98 40
One Bay Plaza......... (997) 1979 12/16/98 40
East Bay, California
Corporate Centre (2
buildings).......... (1,066) 1985-1987 12/16/98 40
ADP Plaza (2
buildings).......... (1,110) 1987-1989 12/16/98 40
PeopleSoft Plaza...... (1,069) 1984 12/16/98 40
Norris Tech Center (3
buildings).......... (761) 1984-1998 12/16/98 40
Golden Bear Center.... (702) 1986 12/16/98 40
2700 Ygnacio Valley
Road................ (155) 1984 12/16/98 40
Park Plaza............ (321) 1986 12/16/98 40
1600 South Main....... (271) 1983 12/16/98 40
Atlanta, Georgia
191 Peachtree
Street.............. (13,469) 1991 10/27/97 40
200 Galleria.......... (3,146) 1985 10/27/97 40
Seattle, Washington
Washington Mutual
Tower (3
buildings).......... (82,749) 1988 5/1/88 40
110 Atrium Place...... (839) 1981 12/16/98 40
Island Corporate
Center.............. (404) 1987 12/16/98 40
Santa Clara, California
Pruneyard Office (3
buildings).......... (1,517) 1971-1999 12/16/98 40
10 Almaden............ (1,510) 1989 12/16/98 40
Pruneyard Shopping
Center.............. (922) 1970s 12/16/98 40
Embarcadero Place (4
buildings).......... (1,221) 1984 12/16/98 40
Pruneyard Inn (C)..... (339) 1989 12/16/98 40
</TABLE>
<PAGE> 27
CORNERSTONE PROPERTIES LIMITED PARTNERSHIP
REAL ESTATE AND ACCUMULATED DEPRECIATION
SCHEDULE III -- (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
----------------------- ------------ ----------------------- ---------------- ------------------------------------
COST CAPITALIZED
SUBSEQUENT TO GROSS AMOUNT AT WHICH CARRIED
INITIAL COST TO COMPANY ACQUISITION AT CLOSE OF PERIOD
----------------------- ---------------- ------------------------------------
BUILDING & LAND & BUILDING &
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS TOTAL
----------- ------------ -------- ------------ ---------------- -------- ------------ ----------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
San Francisco,
California
120 Montgomery
Street.............. 48,160 16,427 65,709 2,958 16,427 68,667 85,094
201 California
Street.............. 44,504 11,350 46,040 2,007 11,350 48,047 59,397
188 Embarcadero....... 15,606 4,718 18,871 399 4,718 19,270 23,988
Minneapolis, Minnesota
Norwest Center........ 110,000 18,000 33,613 152,888 18,000 186,501 204,501
Washington, D.C./
Alexandria, Virginia
Market Square (2
buildings).......... (B) 50,199 201,084 2,964 50,199 204,048 254,247
99 Canal Center....... 4,551 18,380 1,574 4,551 19,954 24,505
TransPotomac Plaza
5................... 65,000(B) 2,124 8,577 1,000 2,124 9,577 11,701
11 Canal Center....... 2,326 9,394 500 2,326 9,894 12,220
Suburban Chicago,
Illinois
Corporate 500 Centre
(4 buildings)....... 88,424 30,000 120,163 3,456 30,000 123,619 153,619
One Lincoln Centre.... 65,000(B) 2,192 47,758 4,302 2,192 52,060 54,252
Santa Monica/West Los
Angeles, California
West Wilshire (2
buildings).......... 16,926 7,492 29,970 629 7,492 30,599 38,091
Wilshire Palisades.... 29,047 12,650 52,247 1,291 12,650 53,538 66,188
Janss Court (D)....... 18,357 7,274 29,098 147 7,274 29,245 36,519
Searise Office
Tower............... 11,607 6,043 24,172 347 6,043 24,519 30,562
Commerce Park......... 2,653 10,613 149 -- 13,415 13,415
429 Santa Monica...... 3,899 15,595 317 3,899 15,912 19,811
Orange County,
California
Bixby Ranch........... 28,528 9,681 38,723 300 9,681 39,023 48,704
18301 Von Karman...... 8,052 32,206 2,224 8,052 34,430 42,482
2677 South Main....... 5,696 22,786 1,571 5,696 24,357 30,053
San Diego, California
Centerside II......... 24,254 7,524 30,094 609 7,523 30,703 38,226
Crossroads............ 3,207 12,828 222 3,207 13,050 16,257
Los Angeles, California
700 North Brand....... 26,938 8,112 32,450 145 8,112 32,595 40,707
Warner Park Center.... 1,746 6,986 123 1,746 7,109 8,855
New York City, New York
527 Madison Avenue.... (B) 21,440 46,643 2,627 21,440 49,270 70,710
Tower 56.............. 25,024 5,528 25,203 9,434 5,528 34,637 40,165
Conejo Valley
(Ventura), California
Westlake Spectrum (2
buildings).......... 3,510 14,038 177 3,510 14,215 17,725
Agoura Hills.......... 12,003 3,821 15,284 241 3,821 15,525 19,346
<CAPTION>
COLUMN A COLUMN F COLUMN G COLUMN H COLUMN I
----------------------- ------------ ----------- ----------- ---------------
LIFE ON WHICH
DEPRECIATION IN
(UNAUDITED) (UNAUDITED) LATEST INCOME
ACCUMULATED YEAR DATE STATEMENTS IS
DESCRIPTION DEPRECIATION CONSTRUCTED ACQUIRED COMPUTED(A)
----------- ------------ ----------- ----------- ---------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
San Francisco,
California
120 Montgomery
Street.............. (1,846) 1955 12/16/98 40
201 California
Street.............. (1,845) 1969 6/3/98 40
188 Embarcadero....... (504) 1980 12/16/98 40
Minneapolis, Minnesota
Norwest Center........ (84,164) 1988 7/1/88 40
Washington, D.C./
Alexandria, Virginia
Market Square (2
buildings).......... (6,142) 1990 11/1/98 40
99 Canal Center....... (1,089) 1986 10/27/97 40
TransPotomac Plaza
5................... (544) 1983 10/27/97 40
11 Canal Center....... (573) 1986 10/27/97 40
Suburban Chicago,
Illinois
Corporate 500 Centre
(4 buildings)....... (5,958) 1986/1990 1/28/98 40
One Lincoln Centre.... (4,361) 1986 11/8/96 40
Santa Monica/West Los
Angeles, California
West Wilshire (2
buildings).......... (411) 1960-1976 12/16/98 40
Wilshire Palisades.... (2,155) 1981 6/3/98 40
Janss Court (D)....... (772) 1989 12/16/98 40
Searise Office
Tower............... (657) 1975 12/16/98 40
Commerce Park......... (349) 1977 12/16/98 40
429 Santa Monica...... (411) 1982 12/16/98 40
Orange County,
California
Bixby Ranch........... (1,024) 1987 12/16/98 40
18301 Von Karman...... (971) 1991 12/16/98 40
2677 South Main....... (681) 1987 12/16/98 40
San Diego, California
Centerside II......... (803) 1987 12/16/98 40
Crossroads............ (358) 1983 12/16/98 40
Los Angeles, California
700 North Brand....... (852) 1981 12/16/98 40
Warner Park Center.... (183) 1986 12/16/98 40
New York City, New York
527 Madison Avenue.... (3,762) 1986 2/14/97 40
Tower 56.............. (3,501) 1983 4/24/96 40
Conejo Valley
(Ventura), California
Westlake Spectrum (2
buildings).......... (367) 1990 12/16/98 40
Agoura Hills.......... (417) 1987 12/16/98 40
</TABLE>
<PAGE> 28
CORNERSTONE PROPERTIES LIMITED PARTNERSHIP
REAL ESTATE AND ACCUMULATED DEPRECIATION
SCHEDULE III -- (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
----------------------- ------------ ----------------------- ---------------- ------------------------------------
COST CAPITALIZED
SUBSEQUENT TO GROSS AMOUNT AT WHICH CARRIED
INITIAL COST TO COMPANY ACQUISITION AT CLOSE OF PERIOD
----------------------- ---------------- ------------------------------------
BUILDING & LAND & BUILDING &
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS TOTAL
----------- ------------ -------- ------------ ---------------- -------- ------------ ----------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Other
U.S. West (Murray,
Utah)............... 3,311 13,245 185 3,311 13,430 16,741
Exposition Centre
(Sacramento, CA).... 5,081 1,772 7,089 209 1,772 7,298 9,070
Projects under
development........... -- 46,720 10,103 6,309 46,132 17,000 63,132
----------- -------- ---------- -------- -------- ---------- ----------
Grand Total............ $1,435,160 $707,854 $2,900,650 $405,795 $705,350 $3,308,948 $4,014,298
=========== ======== ========== ======== ======== ========== ==========
<CAPTION>
COLUMN A COLUMN F COLUMN G COLUMN H COLUMN I
----------------------- ------------ ----------- ----------- ---------------
LIFE ON WHICH
DEPRECIATION IN
(UNAUDITED) (UNAUDITED) LATEST INCOME
ACCUMULATED YEAR DATE STATEMENTS IS
DESCRIPTION DEPRECIATION CONSTRUCTED ACQUIRED COMPUTED(A)
----------- ------------ ----------- ----------- ---------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Other
U.S. West (Murray,
Utah)............... (375) 1985 12/16/98 40
Exposition Centre
(Sacramento, CA).... (222) 1984 12/16/98 40
Projects under
development........... -- N/A -- N/A
--------- ----------- -------- ---
Grand Total............ $(291,834)
=========
</TABLE>
---------------
(A) The life to compute depreciation on Buildings is 40 years. The life to
compute depreciation on Building Improvements is 3 to 40 years.
(B) The three notes arising from the acquisition of several properties from PGGM
(a major stockholder and related party) are cross-collateralized, having the
effect of forming a "collateral pool" for the underlying notes. In addition,
the $181.0 million first mortgage loan on Market Square, which the Company
purchased from PGGM in 1997, has been pledged as collateral for the $120.0
million 200 Galleria loan.
(C) The Pruneyard Inn is a 172-room hotel.
(D) In addition to 92,000 square feet of retail and office space, Janss Court
contains 32 apartments comprising 33,000 rentable square feet of residential
space.
<PAGE> 29
CORNERSTONE PROPERTIES LIMITED PARTNERSHIP
REAL ESTATE AND ACCUMULATED DEPRECIATION
SCHEDULE III
DECEMBER 31, 1999
(CONTINUED)
RECONCILIATION OF "REAL ESTATE AND ACCUMULATED DEPRECIATION"
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
INVESTMENT IN REAL ESTATE AND ASSETS HELD FOR SALE
Balance, beginning of period................................ $4,340,449 $1,918,746
Additions during period:
Acquisitions........................................... 38,437 2,410,427
Improvements........................................... 14,904 30,690
Deductions during period:
Properties disposed of................................. (358,670) (19,414)
Retirements and writeoffs.............................. (20,822) --
---------- ----------
Balance, end of period...................................... $4,014,298 $4,340,449
========== ==========
ACCUMULATED DEPRECIATION
Balance, beginning of period................................ $ 288,448 $ 231,421
Additions during period:
Depreciation........................................... 96,726 57,031
Deductions during period:
Properties disposed of................................. (73,131)
Retirements and writeoffs.............................. (20,209) (4)
---------- ----------
$ 291,834 $ 288,448
========== ==========
</TABLE>
