FORM 10-K/A
Amendment #1
Securities and Exchange Commission
Washington, DC 20549
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Fiscal Year Ended December 31, 1995
[ ] 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 of (IRS Employer
incorporation and organization) Identification No.)
126 East 56th Street
New York, NY 10022
(Address of principal
executive offices)
(212) 605-7100
(Registrant's telephone number,
including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
(Title of Class)
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
- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendments to this Form 10-K. [X]
The registrant hereby amends Item 7 and Item 14 of its Form 10-K, dated March
27, 1996, as set forth in the pages attached hereto.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
Interest Rate Swap Agreements
Each of the interest rate swaps referenced in Note 16 is accounted for using the
following 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 the Company 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 years ended December 31, 1995, 1994 and 1993, interest expense of the
Company included approximately $2.25 million, $8.4 million and $11.9 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.
21
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LIQUIDITY AND CAPITAL RESOURCES
Cash Flow
Cash flow
provided by For the year ended December 31,
(used in): 1995 1994 1993
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Operating activities $ 20,036 $ 28,968 $ 20,077
Investing activities (135,527) (1,762) 13,240
Financing activities 110,725 (33,141) (24,137)
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
In the year ended December 31, 1995, the Company generated net cash of $20.0
million from operating activities compared to $29.0 million in 1994, a decrease
of $9.0 million or 31%. The Company's net loss in the year ended December 31,
1995 increased to $13.6 million from a loss of $7.0 million in 1994 primarily
due to unrealized losses on its interest rate hedge agreements and an
extraordinary loss related to its prepayment of debt on Washington Mutual Tower
and Norwest Center. Adjustments to the Company's net loss in 1995 included $7.6
million to reflect the Company's unrealized loss on an interest rate swap
described above and a reduction of $8.1 million in the Company's increase in
accounts payable, accrued expenses and other liabilities from 1994 due to the
prepayment of the rentals relating to the priority distributions in 1994 on
Washington Mutual Tower and a major prepayment of a rent at Washington Mutual
Tower in the amount of $3.3 million. In addition, the Company's decrease in
accrued interest payable rose to $3.1 million in the year ended December 31,
1995 compared to $0.7 million in 1994 due the change in the timing of debt
service payments at Norwest Center, and its change in tenant and other
receivables outstanding increased by $1.8 million due to increases in notes
receivable and advisory fees receivable in 1995.
Cash used by the Company in investing activities rose to $135.5 million in the
year ended December 31, 1995 compared to $1.8 million in 1994. Investing
activities in 1995 included the purchase of 125 Summer Street for $105.0 million
and the acquisition of Tower 56 for $30.5 million. Additionally, the Company
received prepayment of the $1 million note receivable from Wright Runstad &
Company.
Cash provided by financing activities amounted to $110.7 million in the year
ended December 31, 1995 compared to $33.1 million which was used in financing
activities in 1994, for a total increase of $143.8 million. On August 4, 1995,
the Company received $90.4 million gross proceeds from the placement of
6,325,000 new shares of Common Stock at a price of $14.30 per share with retail
investors in Germany through underwriters led by Deutsche Bank. The net proceeds
were used for the purchase of 125 Summer Street and the Tower 56 mortgage note.
Also on August 4, 1995, 3,030,303 shares of the Company's 7% Cumulative
Convertible Preferred Stock were issued to Deutsche Bank for gross proceeds of
$50.0 million. The net proceeds from the preferred share issuance were used to
retire indebtedness existing at the time. On December 27, 1995, the Company also
received proceeds through a dividend reinvestment plan available to all
shareholders of approximately $2.8 million for 207,302 shares of Common Stock.
23
<PAGE>
For the years ended December 31, 1995 and 1994, the Company's earnings were
insufficient to cover its fixed charges by approximately $13.6 million and $7.0
million, respectively.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
- ---------------------------------------------------------------------------
Cash provided by operating activities increased from $20.1 million for the year
ended December 31, 1993 to $29.0 million at December 31, 1994. The increase was
mainly due to the large prepayment of rental income by two large tenants at
Washington Mutual Tower.
Cash provided by investing activities for the year ended December 31, 1993 was
$13.2 million due to the sale of the Atrium adjacent to One Norwest Center. For
the year ended December 31, 1994, the Company used cash in investing activities
of $1.8 million. The majority of this amount was used for tenant improvements
and leasing commissions at the properties which was partially offset by the
principal repayment of $1.0 million under the $10 million rent notes receivable
from Hines.
Cash used in financing activities increased from $24.1 million to $33.1 million
as a result of increased distributions and the repayment of the zero coupon
notes in 1994. The amount is partially offset by a large decrease in restricted
cash in 1994. In addition, distributions to minority partners increased from
$3.4 million to $11.9 million due to the prepayment of the priority distribution
at Washington Mutual Tower.
For the year ended December 31, 1993 the Company's earnings were insufficient to
cover its fixed charges by approximately $5.7 million.
23-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 unrealized
loss on interest rate swap previously discussed due to the unrealized, non-cash
nature of this charge.
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 1993 and 1994 differ
from those previously reported to adjust for the revisions to the FFO
calculation recently adopted 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
1995, 1994 and 1993 are $2,058,000, $2,439,000 and $2,813,000, respectively, of
free and deferred rents.
24
<PAGE>
The table below sets forth the adjustments which were made to the net loss of
the Company for the last three years in the calculation of FFO (in thousands):
Funds From Operations (A)
1995 1994 1993
---- ---- ----
Net loss ................................ ($ 13,574) ($ 6,990) ($ 5,748)
NAREIT Adjustments:
Depreciation and amortization ........ 22,572 22,321 23,417
Unrealized losses .................... 7,672 -- --
Extraordinary losses ................. 4,445 581 --
Minority interest adjustments ........ (1,617) (1,358) (748)
Other Adjustments:
Amortization on rent notes ........... 1,119 1,008 907
Real estate tax adjustment ........... 807 -- --
Capital loss (reserves) .............. -- -- 2,697
-------- -------- --------
Funds From Operations ................... 21,424 15,562 20,525
-------- -------- --------
Accrued Preferred Dividend .............. (1,449) -- --
--------- --------- --------
Funds From Operations
Available For Common Shares $19,975 $15,562 $20,525
======== ======= =======
(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.
The increase in FFO from 1994 to 1995 was primarily due to the completion in
1994 of the Denver garage repair (approximately $1.3 million), increased rental
revenue in 1995 from existing properties net of minority interest (approximately
$1.8 million), earnings arising from the purchase of 125 Summer Street in 1995
(approximately $1.4 million), interest savings as a result of the repayment of
the zero coupon debt in 1994, the reduction of the outstanding debt at
Washington Mutual Tower, and the restructuring of the term loan, which in total
reduced interest expense by approximately $1.3 million, and additional interest
income of approximately $0.8 million from investment earnings on the proceeds of
the equity offering and increased advisory income of $0.9 million in 1995. These
increases are partially offset by the increase in corporate overhead expenses in
1995 of $1.7 million.
24-a
<PAGE>
The FFO for 1994 and 1993 represents an exceptional low and high, respectively.
This was anticipated by management and arose from certain non-recurring events.
The non-recurring events were the following: (i) the receipt of certain
non-recurring income in 1993 of approximately $2.7 million, (ii) the elimination
of the Atrium rental payments in 1994 of approximately $1.3 million and (iii)
the one-time expense for the repair of the Denver parking structure in 1994 of
approximately $1.3 million. Additionally there was a reduction of rental income
of $0.5 million at One Norwest Center, which was offset by interest expense
savings of $0.9 million. The non-recurring income received in 1993 related to
(i) the final guarantee period contribution in 1993 by Cornerstone's partner in
Third and University Limited Partnership which was triggered upon successfully
attaining 98 percent leasing levels at Washington Mutual Tower, and (ii) the
reallocation of partnership income triggered at NWC Limited Partnership due to
the achievement of increased property cash flow. The sale of the Atrium in
September 1993 was consummated in order to reduce leverage. The elimination of
income from the Atrium resulted in an offsetting elimination of interest expense
as the zero coupon notes collateralized by One Norwest Center in Denver were
retired. The one-time costs related to the repair of the Denver parking
structure are consistent with first-class portfolio management. These one-time
events had no impact on the underlying operations or tenancy of the Company's
properties. After adjusting for these one-time events, FFO for 1994 is
substantially consistent with the 1993 amount.
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.
24-b
<PAGE>
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K.
CORNERSTONE PROPERTIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
1. NATURE OF THE COMPANY'S BUSINESS
AND SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying financial statements include the accounts of Cornerstone, its
wholly-owned qualified REIT subsidiaries and controlled partnerships. As of
December 31, 1993, NWC has been consolidated since Cornerstone has a majority
interest in the economic benefits and has the right to become managing general
partner at its sole discretion; the results of operations of NWC are
consolidated for 1994 and reflected on the equity method of accounting prior to
January 1, 1994. Lincoln and Third Partnership balance sheet accounts were
consolidated as of December 31, 1992; the results of operations of such
partnerships have been consolidated since 1993. Third Partnership has been
consolidated since Cornerstone has a majority interest in the economic benefits
and has the right to become managing general partner at its sole discretion. All
significant intercompany balances and transactions have been eliminated in
consolidation.
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
9, 13 and 16). 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.
F-7
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Minority Interest
Minority Interest represents the Company's partner's capital account balance in
Lincoln, NWC and Third Partnerships. Debit balances in certain of these capital
accounts originated through special income allocations in accordance with
certain provisions of the respective partnership agreement. Realizability of the
debit balances is continually monitored by analyzing pro forma sales proceeds
calculations, whose terms are specified in the respective partnership
agreements.
F-7-a
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13. UNREALIZED LOSS ON INTEREST RATE SWAP
The Company does not trade in derivative instruments but rather uses interest
rate swap agreements to hedge the interest rate risk on its financings with the
intention of obtaining the lowest effective interest cost on its indebtedness.
The unrealized loss of $7,672,000, which is included as a liability in the
balance sheet caption "Unearned revenue and other liabilities", represents the
estimated amount, at December 31, 1995, that the Company would pay to terminate
the $98,000,000 notional amount forward interest rate swap with a maturity date
of February 17, 2007. The Company has not terminated this swap agreement and
intends to structure its future financings in accordance with the policy stated
above. The future unrealized mark to market adjustment on this swap agreement
will fluctuate with market interest rates.
F-20
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Pursuant to the requirements of Section 13 or 15(d) 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)
/s/ John S. Moody
John S. Moody, President & CEO
DATED: February 21, 1997
