FORM 10-Q/A
Amendment #1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For quarterly period ended June 30, 1996
[ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from _____to_____
Commission File Number 0-10421
CORNERSTONE PROPERTIES INC.
(Exact name of registrant as specified in its charter)
Nevada 74-2170858
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
126 East 56th Street
New York, New York 10022
(Address of principal executive offices)
(212) 605-7100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Number of shares of Common Stock outstanding as of August 14, 1996: 20,309,165
The registrant hereby amends Item 1 and Item 2 of its Form 10-Q, dated August
14, 1996, as set forth in the pages attached hereto.
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Item 1. Financial Statements (continued)
CORNERSTONE PROPERTIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(1) NATURE OF THE COMPANY'S BUSINESS
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AND SIGNIFICANT ACCOUNTING POLICIES
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Interest Rate Swap Agreements: The Company accounts for its interest rate
swap agreements as hedges in accordance with SFAS No. 80 "Accounting for Futures
Contracts" if the swap is designated as a hedge and effectively reduces the
exposure to the Company of market interest rate changes. Changes in the market
value of these interest rate swap agreements are deferred and recognized in
income at the expiration or termination of the underlying debt. Forward interest
rate swap agreements that do not meet hedge criteria are accounted for using
mark-to-market accounting, recognizing any unrealized gain or loss on the
instrument in the period in which it is outstanding. When swaps are extinguished
at the same time as the underlying debt instrument, the cost to extinguish the
swap is treated as extraordinary gain or loss. When a swap remains in place
after the underlying instrument matures, it is accounted for on a mark-to-market
basis. The swap termination is accounted for as ordinary gain or loss when it is
extinguished with no underlying debt instrument in place.
Cornerstone and/or its subsidiaries are parties to several interest rate swap
agreements used to hedge its interest rate exposure on floating rate debt (Notes
2 and 3). The differential to be paid or received is recognized in the period
incurred and included net in interest expense. Cornerstone and/or its
subsidiaries may be exposed to loss in the event of non-performance by the other
party to the interest rate swap agreements. However, Cornerstone does not
anticipate non-performance by the counterparty.
5
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Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1996
RESULTS OF OPERATIONS
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Interest Rate Swaps
During the period analyzed the Company had the following interest rate swaps
outstanding which it accounted for using the accrual method:
The $107 million interest rate swap agreement with a maturity date of July 30,
1998, was accounted for on the accrual method since it was comprised of two
offsetting swaps, resulting in a fixed payment from Cornerstone to its
counterparties through the term of the swaps.
The $21 million interest rate swap agreement was put in place to hedge the
interest rate risk on Cornerstone's $33 million dollar credit facility with
Deutsche Bank. Since this was a floating rate facility, the Company used accrual
accounting when accounting for its swap payments. Upon the refinancing of the
facility into a fixed rate facility in August 1995, this swap was terminated and
the loss recognized as an extraordinary loss.
The $120 million interest rate swap agreement maturing December 31, 2003 was put
in place to hedge the interest rate risk on the $130 million letter of credit
facility with Deutsche Bank. Since this was a floating rate facility, the
Company used accrual accounting when accounting for its swap payments. Upon the
refinancing of the facility into a fixed rate facility in September 1995, this
swap was terminated and the loss recognized as an extraordinary loss.
The $110 million interest rate swap agreement maturing December 31, 2003 was put
in place to hedge the interest rate risk on the $115 million letter of credit
facility with Deutsche Bank. Since this was a floating rate facility, the
Company used accrual accounting when accounting for its swap payments. Upon the
refinancing of the facility into a fixed rate facility in April 1995, this swap
was terminated and the loss recognized as an extraordinary loss.
For the six month periods ended June 30, 1996 and June 30, 1995, interest
expense of the Company included approximately $402,000 and $1.7 million,
respectively, of expense related to interest rate swap agreements. Since the $98
million swap is a forward swap and accounted for on a mark to market basis, it
had no effect on the reported interest expense of the Company.
8
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LIQUIDITY AND CAPITAL RESOURCES
Cash Flow
For the six months For the six months
Cash flow provided by ended June 30, 1996 ended June 30, 1995
(used in):
- --------------------------------------------------------------------------
Operating activities $5,748 $9,277
Investing activities (3,101) (253)
Financing activities 13,612 (7,982)
Earnings to fixed charges 1.56 *
ratio
*For the six months ended June 30, 1995, the Company's earnings were
insufficient to cover its fixed charges by approximately $5.4 million.
Cash provided by operating activities increased from $3.8 million for the six
months ended June 30, 1995 to $14.6 million for the six months ended June 30,
1996. This increase was mainly due to the increase in net rental revenues from
the properties of $5.7 million, the increase in interest and other income of
$1.3 million and the decrease in the minority interest share of income of $1.1
million due to the Company's purchase of the 10% minority interest in One
Norwest Center from Hines and the timing of interest payments during 1995 due to
the restructuring of the Norwest Center debt. The large amount of prepaid rental
income as of December 31, 1994, reduced operating cash flow during 1995.
Cash used in investing activities increased to $3.1 million for the six months
ended June 30, 1996 from $0.3 million for the six months ended June 30, 1995 due
to the acquisition of Tower 56.
Cash provided by financing activities increased to $13.6 million for the six
months ended June 30, 1996 from a use of cash of $7.9 million as of June 30,
1995. The increase was mainly due to the financing of Tower 56 for $18.0 million
during 1996. The deficit in 1995 was due to the repayment of the Norwest Center
loan and associated interest rate swap agreement termination, and shareholder
and minority interest partner distributions in 1995.
Earnings to fixed charges increased to 1.56 times at June 30, 1996 from 0.65
times at June 30, 1995 due to the increased equity investment in the Company of
over $140 million during the third quarter of 1995 which allowed the Company to
purchase assets at a lower level of leverage than had occurred in the past.
Also, the refinancing of the $32.5 million term loan and the refinancing of the
mortgage debt on Washington Mutual Tower has reduced the Company's overall cost
of debt.
8-a
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Funds From Operations
The Company calculates Funds from Operations (FFO) based upon guidance from the
National Association of Real Estate Investment Trusts (NAREIT). FFO is defined
as net income, excluding gains or losses from debt restructuring and sales of
property, plus depreciation and amortization, and after adjustments for
unconsolidated joint ventures. The Company has adjusted FFO by the realized gain
on interest rate swap previously discussed in accordance with its mark-to-market
accounting policy.
Industry analysts generally consider FFO to be an appropriate measure of
performance of an equity Real Estate Investment Trust (REIT) such as
Cornerstone. FFO does not represent cash generated from operating activities in
accordance with generally accepted accounting principles and, therefore, should
not be considered a substitute for net income as a measure of performance or for
cash flow from operations as a measure of liquidity calculated in accordance
with generally accepted accounting principles.
The Company believes that FFO is helpful to investors as a measure of the
performance of an equity REIT because, along with cash flows from operating
activities, financing activities and investing activities, it provides investors
an understanding of the ability of the Company to incur and service debt and to
make capital expenditures. For cash flows from operating, financing and
investing activities, see the Consolidated Statements of Cash Flows included in
the Consolidated Financial Statements which are part of this report.
For comparability purposes, the amounts reported in FFO for 1995 differ from
those previously reported to adjust for the changes to the FFO calculation
recently released by the Board of Governors of NAREIT. Additionally, the Company
no longer reports free and deferred rents as an adjustment to FFO since this is
not part of the industry standard. Therefore, included in FFO for the six months
ended June 30, 1996 and 1995, is approximately $666,000 and $609,000,
respectively, of free and deferred rents.
9
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The table below sets forth the adjustments which were made to the net income
(loss) of the Company in the calculation of FFO for the six months ended June
30, 1996 and 1995, respectively (in thousands):
Funds From Operations (A)
---------------------
Six Months Six Months
Ended Ended
June 30, June 30,
1996 1995
---- ----
Net income (loss) ........................ $ 8,857 ($ 5,438)
NAREIT Adjustments:
Depreciation and amortization (B) ..... 11,801 10,686
Net gain on swap termination .......... (5,465) --
Minority adjustments .................. (1,021) (704)
Extraordinary loss .................... -- 3,881
Other Adjustments:
Amortization on rent notes ............ 502 453
Real estate tax adjustment ............ 1,412 --
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Funds From Operations .................... 16,086 8,878
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Accrued Preferred Dividend ............... (1,750) --
-------- --------
Funds From Operations
Available For Common Shares .............. $ 14,336 $ 8,878
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(A) Although the Company believes that this table is a full and
fair presentation of the Company's FFO, similarly captioned items
may be defined differently by other REITs, in which case direct
comparisons may not be possible.
(B) The depreciation and amortization adjustment does not include
amortization of deferred financing costs and depreciation of
non-real estate assets in accordance with guidance from NAREIT.
The increase in FFO is primarily attributable to net earnings after interest
expense on the associated debt from 125 Summer Street of approximately $3.9
million and net earnings after interest expense on the associated debt from
Tower 56 of approximately $1.5 million, both of which were acquired in the
fourth quarter of 1995; an increased share of net earnings after interest
expense on the associated debt from One Norwest Center in the amount of
approximately $424,000 due to the 10 percent partnership interest purchase on
January 1, 1996, and debt refinancing at Washington Mutual Tower which served to
reduce interest expense by approximately $1.4 million.
The Company will seek to continue increasing FFO and the value of its property
portfolio by acquiring additional properties that the Company believes will
produce favorable returns. As part of its ongoing business, the Company
periodically engages in discussions with public and private real estate entities
regarding possible portfolio or asset acquisitions or business combinations.
9-a
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CORNERSTONE PROPERTIES INC.
(Registrant)
By: /s/ John S. Moody
John S. Moody, President and CEO
Date: February 21, 1997
By: /s/ Thomas P. Loftus
Thomas P. Loftus, Vice President and Controller
(Principal Financial Officer)
Date: February 21, 1997
