<PAGE>
SCHEDULE 14A
(RULE 14A-101)
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement / / Confidential, for Use of
the Commission Only (as
permitted by
Rule 14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
CORNERSTONE PROPERTIES INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
-----------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-----------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
-----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-----------------------------------------------------------------------
(5) Total fee paid:
-----------------------------------------------------------------------
/X/ Fee paid previously with preliminary materials: $86,474
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-----------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-----------------------------------------------------------------------
(3) Filing Party:
-----------------------------------------------------------------------
(4) Date Filed:
-----------------------------------------------------------------------
<PAGE>
CORNERSTONE PROPERTIES INC.
126 EAST 56TH STREET
NEW YORK, NY 10022
Dear Cornerstone Stockholder: November 13, 1998
We cordially invite you to attend a Special Meeting of Stockholders of
Cornerstone Properties Inc. ("Cornerstone") to be held on December 14, 1998, at
the offices of King & Spalding, 34th Floor, 1185 Avenue of the Americas, New
York, New York, commencing at 10:00 A.M.
On June 22, 1998, Cornerstone and Cornerstone Properties Limited Partnership
entered into a Contribution Agreement and Agreement and Plan of Merger, as
amended (the "Contribution Agreement"), with William Wilson & Associates
("WW&A") and the entities identified on Schedule I to the Contribution
Agreement, which provides for the acquisition by Cornerstone of substantially
all of the properties and real estate operations of WW&A and its affiliates (the
"Wilson Acquisition"). WW&A and its affiliates are engaged in the business of
acquiring, investing in, financing, developing, leasing and managing urban and
suburban office properties in the Western United States, with a primary focus in
the San Francisco Bay area. WW&A and its affiliates own 58 office projects, and
WW&A provides development, construction management, property management and
leasing and tenant improvement services to its affiliates and unaffiliated third
parties. In order to fund part of the cash portion of the consideration for the
Wilson Acquisition, Cornerstone will also issue and sell 11,594,203 shares of
Cornerstone Common Stock to Stichting Pensioenfonds Voor de Gezondheid,
Geestelijke en Maatschappelijke Belangen ("PGGM") for an aggregate purchase
price of approximately $200,000,000 (the "PGGM Investment").
The purpose of our Special Meeting is to consider and vote on (i) the
issuance of Cornerstone Common Stock pursuant to the Wilson Acquisition (the
"Wilson Issuance"), (ii) the issuance of Cornerstone Common Stock pursuant to
the PGGM Investment and (iii) an amendment and restatement of the Cornerstone
Properties Inc. 1998 Long-Term Incentive Plan to increase the number of shares
of Cornerstone Common Stock reserved for the issuance thereunder and to permit
the granting of stock options and other awards to non-employee directors of
Cornerstone (the "Amendment").
The Proxy Statement that accompanies this letter contains information about
Cornerstone, Cornerstone Properties Limited Partnership and WW&A and its
affiliates and properties and describes in detail the terms of the Wilson
Acquisition, the PGGM Investment and the Amendment. Attached to the Proxy
Statement is a copy of the Contribution Agreement. Please review the
Contribution Agreement carefully.
THE BOARD OF DIRECTORS OF CORNERSTONE UNANIMOUSLY RECOMMENDS THAT
STOCKHOLDERS VOTE TO APPROVE THE WILSON ISSUANCE, THE PGGM INVESTMENT AND THE
AMENDMENT.
Because of the significance of the matters to be voted on at the Special
Meeting, your participation, in person or by proxy, is especially important. I
hope you will be able to attend the Special Meeting. However, if you are unable
to attend in person, we urge you to complete, sign, date and return the enclosed
proxy card promptly in the enclosed postage-paid envelope to ensure that your
shares of Cornerstone Common Stock will be represented at the Special Meeting.
If you do attend the Special Meeting, you will be entitled to revoke your proxy
and vote your shares in person.
Thank you, and I look forward to seeing you at the Special Meeting.
Sincerely,
/s/ John S. Moody
JOHN S. MOODY
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
YOUR VOTE IS IMPORTANT.
PLEASE COMPLETE, SIGN, DATE AND RETURN YOUR PROXY.
<PAGE>
CORNERSTONE PROPERTIES INC.
126 EAST 56TH STREET
NEW YORK, NY 10022
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
DECEMBER 14, 1998
To the Stockholders of
Cornerstone Properties Inc.:
A Special Meeting of Stockholders of Cornerstone Properties Inc., a Nevada
corporation ("Cornerstone"), will be held on December 14, 1998, at 10:00 A.M.,
at the offices of King & Spalding, 34th Floor, 1185 Avenue of the Americas, New
York, New York (the "Special Meeting"). Cornerstone has entered into a
Contribution Agreement and Agreement and Plan of Merger, dated as of June 22,
1998, as amended (the "Contribution Agreement"), by and among William Wilson &
Associates, a California corporation ("WW&A"), the entities listed on Schedule I
to the Contribution Agreement, Cornerstone and Cornerstone Properties Limited
Partnership, a Delaware limited partnership (the "Operating Partnership"),
pursuant to which (A) Cornerstone and the Operating Partnership will acquire
substantially all of the properties of WW&A and its affiliates (the "Wilson
Acquisition") in exchange for consideration consisting of: (i) shares of common
stock of Cornerstone ("Cornerstone Common Stock"); (ii) units of limited partner
interest ("Units") in the Operating Partnership, which are redeemable by the
holders thereof for cash or, at the election of Cornerstone, shares of
Cornerstone Common Stock; and (iii) cash, and (B) WW&A will be merged with and
into Cornerstone (the "Merger"), with all of the outstanding shares of WW&A
common stock being converted into shares of Cornerstone Common Stock. A copy of
the Contribution Agreement is included as Annex A to the accompanying Proxy
Statement.
In order to fund part of the cash portion of the consideration for the
Wilson Acquisition, Cornerstone will also issue and sell 11,594,203 shares of
Cornerstone Common Stock to Stichting Pensioenfonds Voor de Gezondheid,
Geestelijke en Maatschappelijke Belangen ("PGGM") for an aggregate purchase
price of approximately $200,000,000 (the "PGGM Investment"). At the Special
Meeting Cornerstone stockholders will be asked:
1. To consider and vote upon a proposal to approve the issuance of up
to 39,000,000 shares of Cornerstone Common Stock (directly and upon
redemption of Units) pursuant to the terms of the Contribution Agreement
(the "Wilson Issuance").
2. To consider and vote upon a proposal to approve the issuance of
11,594,203 shares of Cornerstone Common Stock pursuant to the PGGM
Investment.
3. To consider and vote upon a proposal to approve the amendment and
restatement of the Cornerstone Properties Inc. 1998 Long-Term Incentive Plan
to increase the number of shares of Cornerstone Common Stock reserved for
issuance thereunder and to permit the granting of stock options and other
awards to non-employee directors of Cornerstone (the "Amendment").
4. To consider and transact such other business as may properly come
before the Special Meeting or any adjournments or postponements thereof.
CORNERSTONE'S OBLIGATION TO COMPLETE THE WILSON ACQUISITION IS NOT
CONDITIONED UPON STOCKHOLDER APPROVAL OF THE AMENDMENT. THE BOARD OF DIRECTORS
OF CORNERSTONE, HOWEVER, WILL NOT EFFECT THE AMENDMENT IF THE WILSON ACQUISITION
IS NOT COMPLETED. CORNERSTONE'S OBLIGATION TO COMPLETE THE PGGM INVESTMENT IS
CONDITIONED UPON STOCKHOLDER APPROVAL OF THE WILSON ISSUANCE AND CORNERSTONE
WILL NOT COMPLETE THE PGGM INVESTMENT WITHOUT SUCH APPROVAL.
Holders of record of Cornerstone Common Stock at the close of business on
November 9, 1998 (the "Record Date"), are entitled to notice of and will be
entitled to vote at the Special Meeting or any adjournments or postponements
thereof. On the Record Date, there were 101,636,864 shares of Cornerstone Common
Stock outstanding, each of which is entitled to one vote with respect to each
matter to be
<PAGE>
voted on at the Special Meeting. Cornerstone's transfer books will not be
closed. The affirmative vote of a majority of the votes cast at the Special
Meeting is required to approve each of the Wilson Issuance, the PGGM Investment
and the Amendment; PROVIDED, that, in the case of the Wilson Issuance and the
PGGM Investment, the total number of votes cast at the Special Meeting
represents more than 50% of the outstanding shares of Cornerstone Common Stock
on the Record Date.
THE BOARD OF DIRECTORS OF CORNERSTONE UNANIMOUSLY RECOMMENDS THAT
STOCKHOLDERS VOTE TO APPROVE THE WILSON ISSUANCE, THE PGGM INVESTMENT AND THE
AMENDMENT.
Detailed information concerning the Wilson Acquisition and the proposals to
be voted on at the Special Meeting is contained in the attached Proxy Statement,
which you are urged to read carefully.
WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING IN PERSON, PLEASE
COMPLETE, SIGN, DATE AND RETURN THE PROXY CARD IN THE ENCLOSED POSTAGE-PAID
ENVELOPE. A STOCKHOLDER WHO EXECUTES A PROXY MAY REVOKE IT AT ANY TIME BEFORE IT
IS EXERCISED AT THE SPECIAL MEETING BY GIVING WRITTEN NOTICE OF REVOCATION TO
THE SECRETARY OF CORNERSTONE, BY SUBSEQUENTLY RETURNING ANOTHER PROXY OR BY
ATTENDING THE SPECIAL MEETING AND VOTING IN PERSON.
By Order of the Board of Directors,
/s/ Thomas P. Loftus
THOMAS P. LOFTUS
SECRETARY
New York, NY
November 13, 1998
YOUR VOTE IS IMPORTANT.
PLEASE COMPLETE, SIGN, DATE AND RETURN YOUR PROXY.
<PAGE>
CORNERSTONE PROPERTIES INC.
------------------------
PROXY STATEMENT
------------------------
This Proxy Statement is being furnished to the holders of outstanding shares
of common stock, no par value (the "Cornerstone Common Stock"), of Cornerstone
Properties Inc., a Nevada corporation ("Cornerstone"), in connection with the
solicitation of proxies by the Board of Directors of Cornerstone (the
"Cornerstone Board") for use at the Special Meeting of stockholders of
Cornerstone to be held on December 14, 1998, at the offices of King & Spalding,
34th Floor, 1185 Avenue of the Americas, New York, NY, commencing at 10:00 A.M.
local time, and at any adjournment or postponement thereof (the "Special
Meeting").
The purpose of the Special Meeting is to consider and vote upon (i) the
issuance (the "Wilson Issuance") of up to 39,000,000 shares of Cornerstone
Common Stock, pursuant to the transactions contemplated by the Contribution
Agreement and Agreement and Plan of Merger, dated as of June 22, 1998, as
amended by the First Amendment to Contribution Agreement and Agreement and Plan
of Merger, dated as of July 10, 1998, and the Second Amendment to Contribution
Agreement and Agreement and Plan of Merger, dated as of September 12, 1998 (the
"Contribution Agreement"), by and among Cornerstone, Cornerstone Properties
Limited Partnership, a Delaware limited partnership (the "Operating Partnership"
and, together with Cornerstone, the "Cornerstone Parties"), William Wilson &
Associates, a California corporation ("WW&A"), and the affiliates of WW&A listed
on Schedule I thereto (together with WW&A, the "Wilson Parties"), (ii) the
issuance (the "PGGM Investment") of 11,594,203 shares of Cornerstone Common
Stock pursuant to the Stock Purchase Agreement, dated as of June 22, 1998,
between Cornerstone and Stichting Pensioenfonds Voor de Gezondheid, Geestelijke
en Maatschappelijke Belangen ("PGGM") and (iii) the amendment and restatement of
the Cornerstone Properties Inc. 1998 Long-Term Incentive Plan (the "Amendment").
FOR MATERIAL RISKS WHICH YOU SHOULD CONSIDER IN DETERMINING WHETHER TO VOTE
FOR THE PROPOSALS PRESENTED AT THE SPECIAL MEETING, SEE "RISK FACTORS" BEGINNING
ON PAGE 13.
The Contribution Agreement provides for the acquisition by the Cornerstone
Parties of substantially all of the properties and real estate operations of the
Wilson Parties (the "Wilson Acquisition"). Pursuant to the terms of the
Contribution Agreement (A) the Cornerstone Parties will acquire substantially
all of the properties of the Wilson Parties in exchange for consideration
consisting of up to (i) approximately 10,347,000 shares of Cornerstone Common
Stock, (ii) approximately 17,666,000 common units of limited partner interest in
the Operating Partnership ("Units"), which are redeemable by the holders thereof
for cash or, at the election of Cornerstone, shares of Cornerstone Common Stock
and (iii) approximately $523,003,000 in cash, with an aggregate value of
approximately $1,006,231,000, based on a fixed value of $17.25 for each share
and each Unit, and (B) WW&A will be merged with and into Cornerstone (the
"Merger") and all of the outstanding shares of WW&A common stock will be
converted into an aggregate of approximately 3,136,000 shares of Cornerstone
Common Stock with an aggregate value of approximately $54,100,000, based upon
the fixed value of $17.25 per share. The aggregate value of all shares of
Cornerstone Common Stock, Units and cash to be issued in the Wilson Acquisition,
based on a fixed value of $17.25 per share and per Unit, is $1,060,331,000. The
Wilson Acquisition and the PGGM Investment are collectively referred to
hereinafter as the "Transaction." The number of shares of Cornerstone Common
Stock and Units issuable and the amount of cash payable in the Wilson
Acquisition are subject to certain adjustments and holdbacks set forth in the
Contribution Agreement, which is more fully described under "The Wilson
Acquisition--Terms of the Contribution Agreement." A copy of the Contribution
Agreement is included as Annex A to this Proxy Statement. For a description of
the PGGM Investment, see "Proposal Two: The PGGM Investment."
Based on the number of shares of Cornerstone Common Stock and Units
outstanding on November 9, 1998, approximately 10.7% of the shares of
Cornerstone Common Stock and 11.9% of the Units expected to be outstanding after
the Transaction would be issued to WW&A and its affiliates and other investors
in the Wilson Acquisition. Following the Transaction, assuming the redemption of
all Units into shares of Cornerstone Common Stock, an aggregate of approximately
28.8% of the outstanding shares of Cornerstone Common Stock will have been
issued to the Wilson Investors, shareholders of WW&A and PGGM in connection with
the Transaction. If the Transaction is completed, PGGM will own 36.1% of the
outstanding shares of Cornerstone Common Stock and the Wilson Investors and
shareholders of WW&A will own an aggregate of 10.7% of the outstanding shares of
Cornerstone Common Stock (21.0% assuming the redemption of all outstanding Units
for shares of Cornerstone Common Stock). See "Cornerstone and the Operating
Partnership Post-Transaction." Members of WW&A senior management, all of whom
will become executive officers of Cornerstone upon completion of the Wilson
Acquisition, together with PGGM will beneficially own approximately 34.3% of the
outstanding shares of Cornerstone Common Stock (assuming the redemption of all
outstanding Units for shares of Cornerstone Common Stock) and therefore could be
expected to exercise significant control over the management of Cornerstone
after the Transaction.
THE DATE OF THIS PROXY STATEMENT IS NOVEMBER 13, 1998 AND IT IS FIRST BEING
MAILED TO STOCKHOLDERS ON OR ABOUT NOVEMBER 13, 1998.
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE WILSON ACQUISITION
Q: WHY IS CORNERSTONE PROPOSING TO ACQUIRE THE WILSON PROPERTIES AND BUSINESS?
HOW WILL I BENEFIT?
A: The Wilson Acquisition will enhance Cornerstone's position as a leading owner
and operator of Class A office properties and furthers Cornerstone's
objective of growing its earnings and asset base by acquiring high-profile
Class A office properties in major real estate markets in the United States.
The addition of the Wilson properties to Cornerstone's portfolio will give
Cornerstone a significant presence in California markets. The property
management, construction management, tenant improvement, leasing,
acquisition and development expertise of Wilson will provide Cornerstone
with an integrated management capability.
From a financial perspective, the Wilson Acquisition is expected to:
- increase Cornerstone's funds from operations per share in 1999;
- enhance Cornerstone's internal growth rate, because the growth rates for
the Wilson properties exceed the growth rate of Cornerstone's existing
portfolio; and
- substantially increase Cornerstone's market capitalization and base of
equity investors.
Q: WHAT DO I NEED TO DO NOW?
A: Just indicate on your proxy card how you want to vote, and sign, date and
mail it in the enclosed return envelope as soon as possible so that your
shares may be represented at the Special Meeting. If you sign and send in
your proxy and do not indicate how you want to vote, your proxy will be
counted as a vote in favor of the Wilson Issuance, the PGGM Investment and
the Amendment. The Special Meeting will take place on December 14, 1998. You
may attend the Special Meeting and vote your shares in person, rather than
signing and mailing your proxy card. In addition, you may revoke your proxy
at any time up to and including the day of the Special Meeting by following
the directions on page 23 of this Proxy Statement. If you do not sign and
send in your proxy or you abstain, your shares will not be counted as having
voted at the Special Meeting.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: Your broker will vote your shares only if you provide instructions on how to
vote by returning the proxy accompanying this Proxy Statement. Without
instructions, your broker will not vote your shares. If you do not sign and
send in your proxy or you abstain, your shares will not be counted as having
voted at the Special Meeting.
Q: WHAT WILL HAPPEN IF THE PGGM INVESTMENT OR THE WILSON ISSUANCE IS APPROVED
AND THE OTHER PROPOSAL IS NOT APPROVED?
A: The PGGM Investment is conditioned upon stockholder approval of the Wilson
Issuance. If the Wilson Issuance is not approved by the stockholders, then
Cornerstone will not complete the PGGM Investment. In addition, if either of
the PGGM Investment or the Wilson Issuance is not approved by the
stockholders, then Cornerstone will not effect the Amendment.
Q: AS A CORNERSTONE STOCKHOLDER, HOW WILL THE TRANSACTION AFFECT ME?
A: Following the Wilson Acquisition and the PGGM Investment, shares of
Cornerstone Common Stock that were outstanding prior to the Transaction will
remain outstanding. Former owners of WW&A and the Wilson properties will own
in the aggregate approximately 10.7% of the shares of Cornerstone Common
Stock outstanding after completion of the Transaction (21.0% assuming the
redemption of all outstanding Units for shares of Cornerstone Common Stock).
PGGM will beneficially own approximately 36.1% of the shares of Cornerstone
Common Stock outstanding after completion of the Transaction.
ii
<PAGE>
Q: HOW WILL CORNERSTONE BE OPERATED AFTER COMPLETION OF THE WILSON ACQUISITION?
A: Cornerstone will continue to be a Nevada corporation, an equity real estate
investment trust and the general partner of the Operating Partnership.
Cornerstone will own a substantially larger and more diversified portfolio
of properties and will have additional property management, construction
management, tenant improvement, leasing, acquisition and development
expertise from Wilson officers and employees who will become employees of
Cornerstone. The Contribution Agreement provides that the Bylaws of
Cornerstone will be amended at the closing of the Wilson Acquisition to
increase the size of the Cornerstone Board from 11 to 14 directors. William
Wilson III, the President and founder of WW&A, will become the Chairman of
the Cornerstone Board and will have the right to designate two individuals
to be nominated by the Cornerstone Board for election as directors. PGGM
will continue to have the right to designate two individuals for nomination
by the Cornerstone Board for election as directors.
Q: WHAT HAPPENS TO MY FUTURE DISTRIBUTIONS?
A: The Transaction will not result in any immediate change in Cornerstone's
current dividend rate, which Cornerstone expects initially to remain at a
quarterly dividend of $0.30 per share. However, Cornerstone will
periodically evaluate and consider increases in its dividend to reflect
growth in its earnings and funds from operations.
Q: WHEN DO YOU EXPECT THE WILSON ACQUISITION TO BE COMPLETED?
A: We are working toward completing the Wilson Acquisition as quickly as
possible. We expect the Wilson Acquisition to be completed shortly after the
Special Meeting.
WHO CAN HELP ANSWER YOUR QUESTIONS
If you have more questions about the Wilson Acquisition or any other matters
described in this Proxy Statement, including the Wilson Issuance, the PGGM
Investment and the Amendment, you should contact:
CORNERSTONE PROPERTIES INC.
Tower 56
126 East 56th Street
New York, NY 10022
Attention: Kevin P. Mahoney, Senior Vice President and Chief Financial Officer
or
Thomas P. Loftus, Chief Administrative Officer and Secretary
Phone Number: (212) 605-7100
web site: http://www.cstoneprop.com
iii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE WILSON
ACQUISITION.................................. ii
SUMMARY........................................ 1
RISK FACTORS................................... 13
THE SPECIAL MEETING............................ 22
PROPOSAL ONE: THE WILSON ISSUANCE.............. 24
PROPOSAL TWO: THE PGGM INVESTMENT.............. 25
THE WILSON ACQUISITION......................... 27
General...................................... 27
WW&A and the Wilson Projects................. 27
Consideration for the Wilson Acquisition..... 28
Background of the Wilson Acquisition......... 28
Reasons for the Wilson Acquisition........... 29
Board Recommendation......................... 30
Opinion of Cornerstone's Financial
Advisor.................................... 30
Terms of the Contribution Agreement.......... 34
Rockwood Transaction......................... 48
Resale of Cornerstone Common Stock;
Registration Rights Agreement.............. 49
Regulatory Approvals Required................ 51
Accounting Treatment of the Wilson
Acquisition................................ 52
Approval of Limited Partners of the Operating
Partnership................................ 52
Material Federal Income Tax
Consequences............................... 52
CORNERSTONE AND THE OPERATING PARTNERSHIP...... 54
WW&A AND THE WILSON PROJECTS................... 54
SELECTED FINANCIAL AND OPERATING DATA.......... 55
<CAPTION>
PAGE
-----
<S> <C>
WW&A MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................... 60
THE PRUNEYARD HOTEL MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS................................ 65
PROPERTIES..................................... 68
PROPOSAL THREE: AMENDMENT AND RESTATEMENT OF
THE INCENTIVE PLAN........................... 72
OWNERSHIP OF CORNERSTONE COMMON STOCK BY
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..... 76
DIRECTORS AND OFFICERS OF CORNERSTONE FOLLOWING
THE WILSON ACQUISITION....................... 78
EXECUTIVE COMPENSATION......................... 81
EXPERTS........................................ 84
WHERE YOU CAN FIND MORE INFORMATION............ 84
STOCKHOLDER PROPOSALS.......................... 85
GLOSSARY....................................... 86
INDEX TO FINANCIAL STATEMENTS.................. F-1
ANNEX A -- Contribution Agreement and Agreement
and Plan of Merger........................... A-1
ANNEX B -- Form of Registration Rights
and Lock-Up Agreement........................ B-1
ANNEX C -- Morgan Stanley Fairness Opinion..... C-1
ANNEX D -- Amended and Restated Cornerstone
Properties Inc. 1998 Long
Term Incentive Plan.......................... D-1
</TABLE>
iv
<PAGE>
SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROXY STATEMENT AND
DOES NOT CONTAIN ALL THE INFORMATION THAT IS IMPORTANT TO YOU. TO UNDERSTAND THE
WILSON ACQUISITION, THE PGGM INVESTMENT AND THE AMENDMENT FULLY AND FOR A MORE
COMPLETE DESCRIPTION OF THE FINANCIAL AND LEGAL TERMS OF THE WILSON ACQUISITION,
YOU SHOULD READ CAREFULLY THIS ENTIRE PROXY STATEMENT AND THE DOCUMENTS TO WHICH
WE HAVE REFERRED YOU UNDER THE CAPTION "WHERE YOU CAN FIND MORE INFORMATION."
FOR YOUR CONVENIENCE, WE HAVE INCLUDED A GLOSSARY OF FREQUENTLY USED CAPITALIZED
TERMS IN THIS PROXY STATEMENT UNDER THE CAPTION "GLOSSARY" ON PAGE 86.
THE PARTIES
CORNERSTONE
Cornerstone is a self-advised real estate investment trust ("REIT") that
owns interests in 21 Class A office properties comprising approximately
11,400,000 rentable square feet, located in 11 major metropolitan areas
throughout the United States. Cornerstone's strategy has been to own interests
in 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. Cornerstone owns all of its
properties and conducts all of its property business through the Operating
Partnership, of which Cornerstone is the sole general partner. As of November 9,
1998, Cornerstone owned directly or indirectly approximately 96.1% of the Units
in the Operating Partnership.
WW&A AND THE WILSON PROJECTS
WW&A and its affiliates are engaged in the business of acquiring, investing
in, financing, developing, leasing and managing urban and suburban office and
other projects in the Western United States, with a primary focus in the San
Francisco Bay area. WW&A also provides development, construction management,
property management and leasing and tenant improvement services to its
affiliates and unaffiliated third parties. The projects to be acquired by
Cornerstone as part of the Wilson Acquisition (the "Wilson Projects") consist of
68 properties, comprising 52 of the 58 office projects currently owned by
affiliates of WW&A, totaling approximately 9,600,000 rentable square feet. The
Wilson Projects are owned through four WW&A-sponsored real estate investment
funds (the "Funds"), through WW&A affiliates and through three joint ventures in
which WW&A affiliates are partners with outside investors (the "Joint
Ventures").
WW&A's executive offices are located at 2929 Campus Drive, Suite 450, San
Mateo, California 94403. WW&A's telephone number is (650) 341-5300.
THE SPECIAL MEETING
TIME, DATE, PLACE AND PURPOSE
The Special Meeting will be held at the offices of King & Spalding, 34th
Floor, 1185 Avenue of the Americas, New York, NY, at 10:00 A.M. on December 14,
1998. At the Special Meeting, stockholders of Cornerstone will be asked to
consider and vote upon: (i) the Wilson Issuance; (ii) the PGGM Investment; (iii)
the Amendment; and (iv) such other matters as may properly come before the
Special Meeting.
RECORD DATE; SHARES ENTITLED TO VOTE; QUORUM
The Cornerstone Board has fixed the close of business on November 9, 1998,
as the record date for the Special Meeting (the "Record Date"). Only holders of
record of shares of Cornerstone Common Stock on the Record Date are entitled to
notice of, and to vote at, the Special Meeting. On the Record Date, there were
101,636,864 shares of Cornerstone Common Stock outstanding and entitled to vote
at the
1
<PAGE>
Special Meeting. Each holder of record of Cornerstone Common Stock on the Record
Date is entitled to cast one vote per share. The presence, in person or by
proxy, of holders of 20% of the outstanding shares of Cornerstone Common Stock
entitled to vote is necessary to constitute a quorum at the Special Meeting.
VOTE REQUIRED; SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN STOCKHOLDERS
The affirmative vote of a majority of the votes cast at the Special Meeting
is required to approve each of the Wilson Issuance, the PGGM Investment and the
Amendment; PROVIDED, that, in the case of the Wilson Issuance and the PGGM
Investment, the total vote cast at the Special Meeting (either for or against)
represents more than 50% of the outstanding shares of Cornerstone Common Stock
on the Record Date.
As of the Record Date, all executive officers and directors of Cornerstone
owned beneficially in the aggregate approximately 1.6% of the outstanding shares
of Cornerstone Common Stock. In addition, Cornerstone and WW&A have entered into
voting agreements with each of PGGM, the New York State Teachers' Retirement
System ("NYSTRS") and the entity holding shares on behalf of Rodamco N.V.
("Rodamco"), under which each such stockholder has agreed to vote in favor of
the Wilson Issuance and the PGGM Investment at the Special Meeting. These
stockholders beneficially owned an aggregate of 44.9% of the outstanding shares
of Cornerstone Common Stock as of the Record Date.
Under Nevada law, stockholders are not entitled to appraisal rights or
preemptive rights in connection with any of the proposals to approve the Wilson
Issuance, the PGGM Investment or the Amendment.
SOLICITATION AND REVOCATION OF PROXIES
A form of proxy for the Special Meeting is enclosed with this Proxy
Statement. All shares of Cornerstone Common Stock held as of the Record Date
represented by properly executed proxies will, unless such proxies have been
previously revoked, be voted in accordance with the instructions indicated on
such proxies. If no instructions are indicated, such shares will be voted "FOR"
the proposals to approve the Wilson Issuance, the PGGM Investment and the
Amendment and, in the discretion of the proxy holder, as to any other matter
which may properly come before the Special Meeting. Any shares of Cornerstone
Common Stock for which properly executed proxies are not returned will not be
counted as having voted at the Special Meeting.
The Cornerstone Board is unaware of any matters to be presented for action
at the Special Meeting other than the proposals to approve the Wilson Issuance,
the PGGM Investment and the Amendment, but if other matters do come properly
before the Special Meeting it is intended that shares represented by proxies in
the accompanying form will be voted by the persons named in the proxy in
accordance with their best judgment. Any proxy given pursuant to this
solicitation may be revoked in writing by the person giving it at any time
before the proxy is exercised at the Special Meeting by giving notice to the
Secretary of Cornerstone or by submitting a proxy having a later date or by such
person appearing at the Special Meeting and electing to vote in person.
PROPOSAL ONE: THE WILSON ISSUANCE
The Contribution Agreement provides that investors (the"Wilson Investors"),
owning interests (the "Interests"), either directly or indirectly, in the Wilson
Projects will contribute their Interests to Cornerstone or the Operating
Partnership in exchange for consideration consisting of approximately 10,347,000
shares of Cornerstone Common Stock, 17,666,000 Units in the Operating
Partnership and $523,003,000 in cash (collectively, the "Consideration") with an
aggregate value of approximately $1,006,231,000, based upon a fixed value of
$17.25 for each share and each Unit (the "Effective Price"). The Effective Price
is fixed and will not increase or decrease as a result of fluctuations in the
trading price of Cornerstone Common Stock. The Wilson Investors have irrevocably
elected to allocate the Consideration payable in exchange for their Interests
among shares, Units and cash. Also under the terms of the Contribution
Agreement, WW&A will be merged with and into Cornerstone, with Cornerstone as
the surviving
2
<PAGE>
corporation. In the Merger, the outstanding shares of WW&A common stock will be
converted into an aggregate of approximately 3,136,000 shares of Cornerstone
Common Stock with an aggregate value of approximately $54,100,000, based on the
Effective Price (excluding Consideration payable to WW&A in respect of its
interests in the Wilson Projects). In addition, the amount of Consideration to
be paid to the Wilson Investors and the number of shares of Cornerstone Common
Stock to be issued to shareholders of WW&A in the Merger are subject to certain
adjustments and holdbacks. See "The Wilson Acquisition-- Terms of the
Contribution Agreement."
Stockholders of Cornerstone are being asked to vote upon the Wilson Issuance
pursuant to the rules of the New York Stock Exchange ("NYSE"), on which the
shares of Cornerstone Common Stock are listed. The NYSE requires stockholder
approval of the Wilson Issuance because the number of shares of Cornerstone
Common Stock and Units to be issued in the Wilson Acquisition pursuant to the
Contribution Agreement is expected to exceed 20% of the shares of Cornerstone
Common Stock outstanding immediately prior to the completion of the Wilson
Acquisition.
The Cornerstone Board believes the Wilson Acquisition is fair to you and in
your best interests and unanimously recommends that you vote "FOR" the proposal
to approve the Wilson Issuance. The Cornerstone Board considered a number of
prospective benefits to Cornerstone expected to result from the Wilson
Acquisition in recommending that stockholders vote in favor of the Wilson
Issuance. These benefits are described under "--Reasons for the Wilson
Acquisition" and "The Wilson Acquisition-- Reasons for the Wilson Acquisition."
The Wilson Acquisition also involves potential risks that these benefits will
not be realized or that the Wilson Acquisition will have adverse consequences
for Cornerstone. Material risks are disclosed herein under "Risk Factors."
Stockholders are urged to consider both the potential benefit and the potential
disadvantages of the Wilson Acquisition in considering whether to vote in favor
of the proposal to approve the Wilson Issuance.
PROPOSAL TWO: THE PGGM INVESTMENT
In order to fund part of the cash portion of the Consideration, Cornerstone
proposes to issue and sell 11,594,203 shares of Cornerstone Common Stock to PGGM
at $17.25 per share for an aggregate purchase price of approximately
$200,000,000. The Wilson Acquisition and the PGGM Investment will be consummated
simultaneously and the PGGM Investment is conditioned upon stockholder approval
of the Wilson Issuance. If the Wilson Issuance is not approved by the
stockholders, then Cornerstone will not complete the PGGM Investment. See
"Proposal Two: The PGGM Investment." The NYSE requires stockholder approval of
the PGGM Investment because the sale of shares of Cornerstone Common Stock to
PGGM is a sale to a significant stockholder of Cornerstone for purposes of the
rules of the NYSE. In addition, completion of the PGGM Investment is a condition
to the obligations of the Wilson Parties to effect the Wilson Acquisition.
The Cornerstone Board believes the PGGM Investment is fair to you and in
your best interests and unanimously recommends that you vote "FOR" the proposal
to approve the PGGM Investment. The Cornerstone Board believes that the PGGM
Investment provides an attractive opportunity to fund a substantial portion of
the cash consideration to be paid in the Wilson Acquisition. The purchase price
of $17.25 per share in the Wilson Acquisition is higher than the recent trading
prices of Cornerstone Common Stock. On November 12, 1998, the last trading day
prior to the mailing of this Proxy Statement, the closing sale price of
Cornerstone Common Stock on the NYSE was $14.94. Stockholders are urged to
obtain current trading prices for Cornerstone Common Stock. The issuance of
additional shares of Cornerstone Common Stock to PGGM will also serve to
increase the percentage of outstanding shares of Cornerstone Common Stock held
by PGGM from 33.6% to 36.1%, which will enhance the influence that PGGM
exercises over matters submitted to a vote of Cornerstone stockholders. In
addition, the PGGM Investment is conditioned upon the adoption by Cornerstone of
Amended and Restated Bylaws, which will incorporate PGGM's existing right to
have two persons designated by PGGM nominated by the Cornerstone Board for
election as directors of Cornerstone. See "The Wilson Acquisition--Terms of the
Contribution Agreement--Cornerstone Board." The additional shares of
Cornserstone Common Stock
3
<PAGE>
issued to PGGM in the PGGM Investment, together with its rights under the
Amended and Restated Bylaws of Cornerstone, will permit PGGM to continue to
exercise a significant degree of influence over the management and affairs of
Cornerstone. Stockholders should be aware that, in exercising such influence,
PGGM may have interests that differ from those of other stockholders.
Stockholders should consider both this favorable pricing and the enhanced
control by PGGM in considering whether to vote in favor of the proposal to
approve the PGGM Investment.
THE WILSON ACQUISITION
GENERAL
Cornerstone and WW&A entered into the Contribution Agreement to combine
substantially all of the real estate properties and businesses of WW&A and its
affiliates with those of Cornerstone and the Operating Partnership. Upon
completion of the Wilson Acquisition, all of the employees of WW&A will become
full-time employees of the Operating Partnership or its subsidiaries, and the
businesses currently operated by WW&A will be operated by the Operating
Partnership or one of its subsidiaries. The current WW&A businesses which will
be operated by the Operating Partnership will be operated as a division within
the Operating Partnership's existing organizational structure under the name
"Wilson Cornerstone Properties."
On June 19, 1998, the last trading day preceding public announcement of the
Wilson Acquisition, the high and low sales prices of Cornerstone Common Stock on
the NYSE were $16.31 and $16.13, respectively.
BACKGROUND OF THE WILSON ACQUISITION
In February 1997, WW&A and Cornerstone began discussions regarding a
possible business combination. These discussions were preliminary in nature and
did not result in any agreement between the parties. In March 1998,
representatives of WW&A again approached Cornerstone regarding a potential
transaction. During a series of meetings held between March 18 and March 24,
1998, representatives of WW&A delivered financial information regarding WW&A and
the Wilson Projects to Cornerstone. On April 6, 1998, Cornerstone made a
proposal to WW&A for a business combination transaction. Substantive discussions
ensued and definitive documents were negotiated from that date through June 22,
1998. The definitive Contribution Agreement was executed on June 22, 1998.
TERMS OF THE CONTRIBUTION AGREEMENT
CORNERSTONE BOARD. The Contribution Agreement provides that upon completion
of the Wilson Acquisition, the Cornerstone Bylaws will be amended and restated
to provide for certain corporate governance rights to William Wilson III and
PGGM. The Cornerstone Board will be expanded from 11 to 14 directors, and Mr.
Wilson, who will become Chairman of the Cornerstone Board, will have the right
to designate two individuals (subject to unanimous approval of the Board Affairs
Committee) to be nominated by the Cornerstone Board for election as directors
(together with Mr. Wilson, the "Wilson Directors"). The Amended and Restated
Bylaws will also incorporate PGGM's existing right to designate two individuals
to be nominated by the Cornerstone Board for election as directors (the "PGGM
Directors"). The Wilson Directors and the PGGM Directors will also have certain
rights to representation on committees of the Cornerstone Board. See "The Wilson
Acquisition--Terms of the Contribution Agreement--Corporate Governance."
WITHDRAWAL OF WILSON PROJECTS. A Wilson Project generally may be withdrawn
from the Wilson Acquisition by Cornerstone: (i) upon the occurrence of a major
casualty or condemnation (involving certain Wilson Projects); (ii) if a required
consent of a lender for prepayment or assumption of indebtedness encumbering the
project is not obtained; or (iii) upon the breach of a representation or
warranty of the Wilson Parties or the discovery of certain environmental
contamination or legal encumbrances with respect to a project that would result
in a loss or liability to Cornerstone of 15% or more of the value
4
<PAGE>
assigned to the project in the Contribution Agreement. WW&A and certain Wilson
Investors also have the right to withdraw certain projects from the Wilson
Acquisition under limited circumstances. See "The Wilson Acquisition--Terms of
the Contribution Agreement--Withdrawal of Wilson Projects."
CONDITIONS TO THE WILSON ACQUISITION. Consummation of the Wilson
Acquisition is subject to the satisfaction or waiver of, among others, the
following conditions: (i) the Cornerstone stockholders shall have approved the
Issuance at the Special Meeting; (ii) the closing shall occur on or before
January 1, 1999; (iii) the Wilson Parties shall have received an opinion of King
& Spalding as to the tax status of Cornerstone and the Operating Partnership;
(iv) the outstanding principal balance of indebtedness on the Wilson Projects to
be assumed at closing shall not be less than $496,000,000; (v) no injunction or
other legal order shall have been issued to the effect that the transactions
contemplated by the Contribution Agreement may not be consummated; (vi)
Cornerstone shall have received a "comfort" letter from PricewaterhouseCoopers
LLP relating to this Proxy Statement and (vii) the PGGM Investment shall have
been consummated or shall be consummated simultaneously with the closing of the
Wilson Acquisition.
NO SOLICITATION. The Contribution Agreement provides that Cornerstone and
WW&A will not, directly or indirectly, solicit or participate in any discussions
or negotiations with any third parties regarding mergers, sales of significant
assets or similar business combination transactions prior to the closing of the
Wilson Acquisition. See "The Wilson Acquisition--Terms of the Contribution
Agreement-- No Solicitation."
INDEMNIFICATION AND HOLDBACKS. The Contribution Agreement includes
customary representations and warranties on the part of the Wilson Parties and
the Cornerstone Parties relating to, among other things: (i) the financial
statements of WW&A and the Funds; (ii) the reports filed by Cornerstone with the
Securities and Exchange Commission (the "Commission"); (iii) the conduct of
business of the Wilson Projects and WW&A in the ordinary course; (iv) title and
environmental matters; and (v) taxes. The parties will indemnify one another
from liabilities resulting from breach of these representations and warranties.
A portion of the Consideration with a value presently estimated to be
approximately $36,000,000 will be placed in escrow at the closing of the Wilson
Acquisition to secure the indemnification obligations of WW&A and the Wilson
Investors plus, in the case of WW&A, an additional amount of $5,000,000 will be
placed in escrow to secure additional indemnification obligations of WW&A. The
shares of Cornerstone Common Stock, Units and cash so held back in escrow will
be Cornerstone's sole recourse for any indemnification claims. See "The Wilson
Acquisition--Terms of the Contribution Agreement-- Indemnification and
Holdbacks."
CONDUCT OF BUSINESS PRIOR TO CLOSING. The Contribution Agreement provides
that each party must continue to operate its business in the ordinary course.
The entities owning the Wilson Projects (the "Project Entities") will,
immediately prior to closing, distribute to the Wilson Investors all operating
cash on hand, subject to certain costs and adjustments. Cornerstone will declare
a special dividend to its stockholders and the Operating Partnership will
declare a special distribution to its Unitholders immediately prior to closing
so that the shares of Cornerstone Common Stock and Units issued in the Wilson
Acquisition will accrue the right to dividends and distributions beginning on
the closing date. See "The Wilson Acquisition--Terms of the Contribution
Agreement--Pre-Closing Covenants" and "--Closing Adjustments."
AMENDMENT. The Contribution Agreement may be amended only by the written
agreement of the Wilson Parties and the Cornerstone Parties.
TERMINATION. The Contribution Agreement may be terminated: (i) by mutual
written consent of the Wilson Parties and the Cornerstone Parties; (ii) by
either WW&A or the Cornerstone Parties if the other party shall have materially
breached any covenant, agreement or obligation under the Contribution Agreement;
(iii) by either the Wilson Parties or the Cornerstone Parties if the approval of
Cornerstone's stockholders is not forthcoming; (iv) by either the Wilson Parties
or the Cornerstone Parties if any governmental action would prevent or have a
material adverse effect on the Wilson Acquisition; (v) by
5
<PAGE>
either the Wilson Parties or the Cornerstone Parties if the conditions to such
parties' obligations are not satisfied prior to the date designated as the
closing date pursuant to the Contribution Agreement; or (vi) automatically if
the closing has not occurred prior to January 1, 1999, or, if such date falls
during a cure period for any default under the Contribution Agreement, the end
of such cure period.
REGISTRATION RIGHTS AND LOCKUP AGREEMENT
Wilson Investors receiving shares and Units in the Wilson Acquisition will
have certain rights to have shares of Cornerstone Common Stock registered under
the Securities Act of 1933, as amended (the "Securities Act"), pursuant to the
Registration Rights and Lockup Agreement to be entered into at the closing of
the Wilson Acquisition (the "Registration Rights Agreement"). The Registration
Rights Agreement will also prohibit the sale of shares and Units by the Wilson
Investors, with limited exceptions, for a period of one year after closing for
Wilson Investors generally, two years after closing for certain members of
management of WW&A and three years after closing for Mr. Wilson. See "The Wilson
Acquisition--Resale of Cornerstone Common Stock; Registration Rights Agreement."
REASONS FOR THE WILSON ACQUISITION
Management of Cornerstone and the Cornerstone Board believe that the Wilson
Acquisition will enhance Cornerstone's position as a leading owner and operator
of Class A office properties in major United States markets and will advance its
objective of increasing its earnings and asset base through the acquisition,
development and leasing of office properties in these markets. In approving the
Contribution Agreement and the Wilson Acquisition and recommending that the
stockholders of Cornerstone approve the Wilson Issuance, the Cornerstone Board
considered a number of prospective benefits to Cornerstone resulting from the
Wilson Acquisition, including, but not limited to, the following: (i) accretion
to per share funds from operations ("FFO") for 1999; (ii) an expanded presence
in attractive California markets that have limited available space, escalating
demand and significant barriers to entry; (iii) a higher internal growth rate
for the combined portfolio than in Cornerstone's existing portfolio; (iv)
expanded acquisition, and new property management, construction management,
leasing and development expertise resulting from the addition of WW&A personnel
to Cornerstone's management team; (v) the diversification of Cornerstone's
tenant base with a greater emphasis on technology and other growing,
entrepreneurial businesses; (vi) an expanded base of equity investors and
increased market capitalization which should result in additional future sources
of capital; (vii) increased depth of management giving Cornerstone a greater
ability to internalize property management functions at its existing properties;
and (viii) access to a network of relationships in the Western United States
which should result in increased business opportunities.
FAIRNESS OPINION OF CORNERSTONE'S FINANCIAL ADVISOR
In determining to approve the Contribution Agreement and the Wilson
Acquisition, the Cornerstone Board considered the opinion of its financial
advisor, Morgan Stanley & Co. Incorporated ("Morgan Stanley"), dated as of June
17, 1998, as to the fairness to Cornerstone, from a financial point of view, of
the Consideration to be paid to the Wilson Investors and the shareholders of
WW&A pursuant to the Contribution Agreement. Morgan Stanley subsequently
confirmed its June 17, 1998 opinion and delivered to the Cornerstone Board a
written opinion dated as of November 13, 1998. A copy of this opinion is
attached as Annex C to this Proxy Statement. You should read the Morgan Stanley
opinion to understand the assumptions made, matters considered and limitations
on the review undertaken by Morgan Stanley in providing such opinion.
CONSENT OF WILSON INVESTORS AND WW&A SHAREHOLDERS
The irrevocable consents of the requisite number of Wilson Investors to
complete the Wilson Acquisition have been obtained prior to the date of this
Proxy Statement. The Board of Directors and shareholders of WW&A have
unanimously consented to the Contribution Agreement and the Merger in
6
<PAGE>
accordance with California law. The shareholders of WW&A have entered into an
agreement with Cornerstone pursuant to which they have, among other things,
agreed that they will not take any action to amend, alter, revoke, rescind or
otherwise change their approval of the Contribution Agreement and the Merger.
REGULATORY APPROVALS REQUIRED
Under the Contribution Agreement, the obligations of both the Wilson Parties
and the Cornerstone Parties to complete the Wilson Acquisition are conditioned
upon the receipt of all required regulatory approvals. Under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), and the rules promulgated thereunder by the Federal Trade Commission (the
"FTC"), the Merger may not be completed unless notification has been given and
certain information has been furnished to the FTC and the Antitrust Division of
the U.S. Department of Justice (the "Antitrust Division") and the prescribed
waiting period has expired or been terminated early. Pursuant to the HSR Act, on
September 28, 1998, and October 5, 1998, Cornerstone and WW&A, respectively,
filed a Notification and Report Form with the FTC and the Antitrust Division for
review in connection with the Merger. The 30-day waiting period under the HSR
Act applicable to the Merger was terminated early by the FTC on October 19,
1998. Notwithstanding the termination of the waiting period, there can be no
assurance that the Merger will not be investigated or opposed by the FTC or the
Antitrust Division.
ACCOUNTING TREATMENT OF THE WILSON ACQUISITION
The Wilson Acquisition will be accounted for under the "purchase" method of
accounting, pursuant to which the assets and liabilities of WW&A and the other
entities acquired by Cornerstone will be adjusted to their respective fair
values and included with those of Cornerstone as of the completion of the Wilson
Acquisition. Consolidated financial statements of Cornerstone issued after the
closing date will reflect such values and will not be restated retroactively to
reflect the historical financial position or results of operations of WW&A or
any of the Wilson Projects. Certain third-party fee businesses of WW&A and the
WW&A division which supervises construction of tenant build-out work will be
owned by Cornerstone through a subsidiary that will be accounted for under the
equity method.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The Wilson Acquisition has been structured so that Wilson Investors
receiving Units in exchange for their Interests generally should not recognize
gain or loss for federal income tax purposes as a result of such receipt, except
to the extent that (A) the "disguised sale" rules of the Internal Revenue Code
of 1986, as amended (the "Code"), may apply or (B) a Wilson Investor is
considered to receive an actual or deemed distribution of money from a net
reduction in such Wilson Investor's share of liabilities as a result of the
exchange that exceeds such Wilson Investor's tax basis in his Interest. Wilson
Investors receiving shares of Cornerstone Common Stock or cash in the Wilson
Acquisition will immediately recognize gain or, subject to certain limitations,
loss in the Wilson Acquisition. The Merger is expected to qualify as a
reorganization for federal income tax purposes so that no gain or loss will be
recognized by Cornerstone stockholders as a result of the Merger. See "The
Wilson Acquisition--Material Federal Income Tax Consequences."
The Wilson Acquision is not expected to have any adverse effect on
Cornerstone's ability to continue to qualify for taxation as a REIT under the
Code.
PROPOSAL THREE: AMENDMENT AND RESTATEMENT OF THE INCENTIVE PLAN
In the event of the completion of the Wilson Acquisition, the number of key
employees of Cornerstone will be significantly increased. As a result, the
Cornerstone Board has determined that the provision for the number of shares of
Cornerstone Common Stock reserved for issuance under the Cornerstone Properties
Inc. 1998 Long Term Incentive Plan (the "Incentive Plan") should be
correspondingly increased. The Cornerstone Board has therefore approved, subject
to stockholder approval and completion of the Wilson Acquisition, an amendment
and restatement of the Incentive Plan that would increase
7
<PAGE>
the number of shares of Cornerstone Common Stock otherwise available for
issuance for grants under the Incentive Plan and permit the granting of stock
options and other awards to non-employee directors of Cornerstone. The Amendment
will not be effected by Cornerstone in the event that the stockholders do not
approve both of the Wilson Issuance and the PGGM Investment. See "Proposal
Three: Amendment and Restatement of the Incentive Plan."
The Cornerstone Board believes that the Amendment is fair to you and in your
best interests and unanimously recommends that you vote "FOR" the proposal to
approve the Amendment. The Cornerstone Board believes that adoption of the
Amendment will help Cornerstone and the Operating Partnership attract and retain
talented employees and thereby increase Cornerstone's performance. At the same
time, the issuance of additional shares of Cornerstone Common Stock pursuant to
stock options and other awards under the Incentive Plan will have a dilutive
effect on existing Cornerstone stockholders. The Cornerstone Board believes that
benefits to stockholders of adopting the Amendment will outweigh these effects
over the long term. Stockholders should consider both the advantages and
disadvantages of adoption of the Amendment in considering whether to vote in
favor of the proposal to approve the Amendment.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Proxy Statement and the documents incorporated herein by reference
contain statements which constitute "forward-looking statements" within the
meaning of the Securities Act and the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), as amended by the Private Securities Litigation
Reform Act of 1995. "Forward-looking statements" contained herein include the
intent, belief or current expectations of WW&A and Cornerstone and members of
their respective management teams with respect to future operating results of
Cornerstone, WW&A and the Wilson Projects, certain synergies expected to be
realized in connection with the Wilson Acquisition, the integration of WW&A's
management into Cornerstone, possible fluctuation in operating results and the
ability to manage growth, as well as the assumptions upon which such statements
are based. Stockholders are cautioned that any such forward-looking statements
are not guarantees of future performance and involve risks and uncertainties and
that actual results may differ materially from those contemplated by such
forward-looking statements. Important factors known to management of WW&A and
Cornerstone that could cause actual results to differ materially from those
contemplated by the forward-looking statements include, but are not limited to,
difficulties related to acquisitions of real estate companies or portfolios,
including the Wilson Acquisition, adverse changes in real estate markets,
increases in interest rates and deterioration in general economic conditions.
RISK FACTORS
Additional material risks that would cause actual results to differ
materially from those contemplated in this Proxy Statement can be found herein
under the caption "Risk Factors" and in the reports filed with the Commission by
Cornerstone.
8
<PAGE>
CORNERSTONE AND THE OPERATING PARTNERSHIP
POST-TRANSACTION
[ORGANIZATIONAL CHART]
- ------------------------
(1) Includes shares held by Dutch Institutional Holding Company, Inc. ("DIHC").
(2) Includes all holders of Cornerstone Common Stock immediately prior to
completion of the Transaction, other than PGGM and DIHC.
(3) Includes all holders of Units immediately prior to completion of the
Transaction, other than Cornerstone.
9
<PAGE>
SUMMARY SELECTED FINANCIAL AND OPERATING DATA
The following tables set forth selected historical and unaudited pro forma
consolidated financial data for Cornerstone for the periods and as of the dates
indicated. The selected and pro forma financial data of Cornerstone should be
read in conjunction with and is qualified in its entirety by the consolidated
financial statements and the related notes thereto of Cornerstone included in
the documents described under "Where You Can Find More Information" and the
historical and pro forma financial statements and related notes thereto included
elsewhere in this Proxy Statement. The following data should also be read in
conjunction with the information set forth under the captions "Selected
Financial and Operating Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The selected consolidated
operating and balance sheet data of Cornerstone as of and for the years ended
December 31, 1995 through 1997 have been derived from Cornerstone's audited
financial statements incorporated by reference herein. The selected financial
data of Cornerstone as of and for the six months ended June 30, 1998 and 1997
are derived from unaudited financial statements of Cornerstone incorporated by
reference herein and include all adjustments consisting of only normal recurring
adjustments that Cornerstone management considers necessary for a fair
presentation of the financial position and results of operations for these
periods. Operating results for the six months ended June 30, 1998, are not
necessarily indicative of the results of operations expected for the entire year
ending December 31, 1998.
The unaudited selected pro forma operating data are presented as if the
following transactions had occurred on January 1, 1997: (i) the Transaction;
(ii) the public offerings of Cornerstone Common Stock in April 1997 and February
1998; (iii) the conversion of Cornerstone's 8% Cumulative Convertible Preferred
Stock and 8% Cumulative Convertible Preferred Stock, Series A (the "8% Preferred
Stock"); (iv) Cornerstone's repayment of a $32,500,000 term loan from Deutsche
Bank AG; (v) the acquisition of nine properties and an undeveloped parcel of
land from PGGM and DIHC in October 1997 (the "DIHC Acquisition"); and (vi) the
acquisition of six properties and the sale of one property in 1997 and 1998. The
unaudited selected pro forma balance sheet data are presented as if the
Transaction had occurred on June 30, 1998. The pro forma data are not
necessarily indicative of the results of operations or the consolidated
financial position that would have resulted had the Transaction and the other
aforementioned transactions been consummated at the dates indicated, nor are
they intended to project Cornerstone's results of operations or consolidated
financial position for any future period or date.
The pro forma data has been derived from and should be read in conjunction
with the unaudited condensed consolidated pro forma financial statements
included elsewhere in the Proxy Statement.
10
<PAGE>
CORNERSTONE--HISTORICAL AND PRO FORMA
(UNAUDITED)
<TABLE>
<CAPTION>
AS OF AND FOR THE AS OF AND FOR THE
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
------------------------------------- --------------------------------------------
HISTORICAL HISTORICAL
PRO FORMA ------------------------ PRO FORMA -------------------------------
1998 1998 1997 1997 1997 1996 1995
----------- ----------- ----------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
OPERATING DATA:
Revenues:
Office and parking rentals............. $ 263,031 $ 156,540 $ 68,691 $ 510,448 $ 159,828 $ 111,494 $ 88,548
Equity in earnings of unconsolidated
entities............................. (149) (2,688) -- 15,977 -- -- --
Interest and other income.............. 17,421 14,194 4,564 18,328 14,083 5,414 3,839
----------- ----------- ----------- ----------- --------- --------- ---------
Total Revenues....................... 280,303 168,046 73,255 544,753 173,911 116,908 92,387
----------- ----------- ----------- ----------- --------- --------- ---------
Expenses:
Building operating expenses............ 91,636 56,917 26,653 186,192 61,522 44,188 31,530
Interest expense....................... 69,908 31,667 14,990 139,527 33,977 31,735 30,722
Depreciation and amortization.......... 49,761 26,859 13,808 98,559 30,978 24,316 22,572
General and administrative expense..... 13,985 5,544 3,265 20,588 7,564 6,407 5,603
Loss on sale of real estate assets..... 212 2,197 -- -- -- -- --
Unrealized (gain) loss on interest rate
swap................................. -- -- (99) (99) (99) (4,278) 7,672
----------- ----------- ----------- ----------- --------- --------- ---------
Total Expenses....................... 225,502 123,184 58,617 444,767 133,942 102,368 98,099
----------- ----------- ----------- ----------- --------- --------- ---------
Income (loss) from operations............ 54,801 44,862 14,638 99,986 39,969 14,540 (5,712)
Minority interest........................ 10,565 2,856 994 16,887 2,368 1,519 3,417
----------- ----------- ----------- ----------- --------- --------- ---------
Income (loss) before extraordinary
items.................................. 44,236 42,006 13,644 83,099 37,601 13,021 (9,129)
Extraordinary loss....................... -- -- (54) (54) (54) (3,925) (4,445)
----------- ----------- ----------- ----------- --------- --------- ---------
Net income (loss)........................ $ 44,236 $ 42,006 $ 13,590 $ 83,045 $ 37,547 $ 9,096 $ (13,574)
----------- ----------- ----------- ----------- --------- --------- ---------
----------- ----------- ----------- ----------- --------- --------- ---------
Net income (loss) per share............ $ 0.34 $ 0.42 $ 0.19 $ 0.63 $ 0.63 $ 0.19 $ (0.94)
----------- ----------- ----------- ----------- --------- --------- ---------
----------- ----------- ----------- ----------- --------- --------- ---------
Declared distributions to stockholders/
unitholders per share/unit........... $ 0.60 $ 0.60 $ 1.04 $ 1.20 $ 1.16
----------- ----------- ----------- ----------- --------- --------- ---------
----------- ----------- ----------- ----------- --------- --------- ---------
BALANCE SHEET DATA:
Real estate investment before accumulated
depreciation........................... 4,382,653 2,549,865 873,211 2,187,525 799,662 706,988
Total assets............................. 4,365,157 2,476,869 972,941 2,051,481 766,180 586,089
Long-term debt........................... 1,491,385 849,196 367,103 706,178 400,142 369,600
Credit facility debt..................... 534,473 75,000 -- 187,000 -- --
Total liabilities.................... 2,164,632 987,970 445,198 940,062 442,375 403,927
Minority interest........................ 343,669 70,949 (17,510) 15,420 (17,478) (7,194)
Redeemable preferred stock............... -- -- 162,517 -- 162,743 --
Preferred stock.......................... 50,000 50,000 50,000 50,000 50,000 50,000
Common stockholders' equity.............. 1,806,856 1,367,950 332,738 1,045,999 128,540 139,356
OTHER DATA:
Funds from operations ("FFO") available
for diluted shares of Common Stock and
Units outstanding (1).................. 104,686 74,024 27,566 197,604 69,100 35,487 21,424
Capital expenditures..................... 8,958 5,065 10,295 6,100 712
Preferred stock dividends (2)............ 1,750 1,750 8,410 3,500 10,160 5,153 1,449
Common stock distributions............... 55,483 18,653 39,418 24,551 18,485
Cash flow provided by (used in):
Operating activities................... 80,979 26,978 65,922 34,522 20,036
Investing activities................... (232,106) (72,224) (462,837) (57,259) (135,527)
Financing activities................... 155,115 153,017 306,842 129,800 110,725
Total rentable square footage of
properties............................. 20,940 11,387 4,941 20,940 10,270 4,725 4,087
Weighted average number of basic shares
of Common Stock outstanding............ 126,490 96,653 27,237 125,760 43,572 20,411 15,910
Weighted average number of diluted shares
of Common Stock outstanding for FFO.... 130,787 100,918 42,729 129,930 54,192 25,821 15,910
Weighted average number of diluted shares
of Common Stock and Units outstanding
for FFO................................ 152,599 102,458 NA 151,742 NA NA NA
</TABLE>
- ------------------------
(1) Cornerstone calculates 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 real estate depreciation and amortization, and after adjustments for
unconsolidated joint ventures. Cornerstone makes two adjustments to
11
<PAGE>
FFO which are not contemplated by NAREIT in its definition. The first
adjustment is for the principal payments of the rent notes receivable from
Hines which were put in place to compensate Cornerstone for its share of
cash flow from the partnership which owned One Norwest Center during the
period when Cornerstone owned 90% of the partnership but received 100% of
the cash flow. The notes were kept in place at the time of the acquisition
of Hines' 10% partnership interest to compensate Cornerstone for the future
value of the cash flow which Cornerstone would have received had the
partnership remained in place. These notes will be fully repaid as of
December 31, 1998. The second adjustment is made for the differential
between the real estate tax expense at Norwest Center and the accrual of the
recovery of such taxes due to the one year time lag between the assessment
of such taxes and actual payment. Cornerstone believes that, since the
building is 100% leased, these funds will be collected under any
circumstance as a pass-through to the tenants. Based on this fact,
Cornerstone eliminates the timing effects of these tax increases in its
calculation of FFO. The effect of the adjustment in 1996 and 1995 is
substantial due to a 29.4% and 13.8% increase in real estate taxes,
respectively.
The table below sets forth the adjustments which were made to the historical
net income (loss) of Cornerstone for the years ended December 31, 1997, 1996
and 1995 and the six months ended June 30, 1998 and 1997 and the pro forma
net income for the year ended December 31, 1997 and the six months ended
June 30, 1998, in the calculation of FFO.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
------------------------------------- --------------------------------------------
HISTORICAL HISTORICAL
PRO FORMA ------------------------ PRO FORMA -------------------------------
1998 1998 1997 1997 1997 1996 1995
----------- ----------- ----------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net income (loss)..................... $ 44,236 $ 42,006 $ 13,590 $ 83,045 $ 37,547 $ 9,096 $ (13,574)
NAREIT Adjustments:
Depreciation and amortization....... 49,761 26,859 13,808 98,559 30,978 24,317 22,572
Net (gain) loss on swap
transactions...................... -- -- (99) (99) (99) (4,278) 7,672
Loss on sale of real estate
assets............................ 212 2,197 -- -- --
Extraordinary losses................ -- -- 54 54 54 3,925 4,445
Unconsolidated joint venture
depreciation...................... 2,174 2,174 -- 3,506 -- -- --
Minority interest adjustments....... (1,689) (1,008) (737) (3,428) (1,551) (2,011) (1,617)
Other Adjustments:
Amortization on rent notes.......... 746 746 557 1,379 1,379 1,242 1,119
Real estate tax adjustments......... -- -- -- -- -- 2,428 807
----------- ----------- ----------- ----------- --------- --------- ---------
Funds from operations............... $ 95,440 $ 72,974 $ 27,173 $ 183,016 $ 68,308 $ 34,719 $ 21,424
----------- ----------- ----------- ----------- --------- --------- ---------
----------- ----------- ----------- ----------- --------- --------- ---------
Minority interest in operating
partnership....................... 8,842 646 -- 13,796 -- -- --
Interest expense on convertible
note.............................. 404 404 393 792 792 769 --
----------- ----------- ----------- ----------- --------- --------- ---------
Funds from operations available for
diluted shares of Common Stock and
Units outstanding................... $ 104,686 $ 74,024 $ 27,566 $ 197,604 $ 69,100 $ 35,488 $ 21,424
----------- ----------- ----------- ----------- --------- --------- ---------
----------- ----------- ----------- ----------- --------- --------- ---------
</TABLE>
Although Cornerstone believes that this table is a full and fair
presentation of Cornerstone's FFO, similarly captioned items may be defined
differently by other REITs, in which case direct comparisons may not be
possible.
Industry analysts generally consider FFO to be an appropriate measure of
performance of any equity REIT such as Cornerstone, and Cornerstone believes
that FFO is helpful to investors as a measure of the performance of an
equity REIT. FFO does not represent cash generated from operating activities
in accordance with generally accepted accounting principles ("GAAP") and
should not be considered a substitute for net income or cash flow from
operating activities calculated in accordance with GAAP as a measure of
performance or liquidity.
(2) Includes preferred stock dividends accrued but not declared. Pro forma
amounts reflect the conversion of the 8% Preferred Stock.
12
<PAGE>
RISK FACTORS
STOCKHOLDERS OF CORNERSTONE SHOULD CAREFULLY CONSIDER THE FOLLOWING MATERIAL
RISKS IN DETERMINING WHETHER TO VOTE IN FAVOR OF THE PROPOSALS PRESENTED AT THE
SPECIAL MEETING. THESE MATTERS SHOULD BE CONSIDERED IN CONJUNCTION WITH THE
OTHER INFORMATION INCLUDED AND INCORPORATED BY REFERENCE IN THIS PROXY
STATEMENT.
DIFFICULTIES IN INTEGRATING OPERATIONS; CORNERSTONE MAY FAIL TO REALIZE
SYNERGIES
The Wilson Acquisition involves the integration of two portfolios of
properties that have previously been operated independently. No assurance can be
given that Cornerstone will be able to integrate the Wilson Projects into its
operations without encountering difficulties or that the benefits expected from
such integration will be realized. In addition, all of WW&A's employees will
become full-time employees of Cornerstone following completion of the Wilson
Acquisition. There can be no assurance that Cornerstone will be able to
integrate WW&A personnel into its management structure successfully, or retain
such personnel, or that any or all of the benefits of such integration will be
realized on a timely basis or at all. There can be no assurance that Cornerstone
will realize any operating synergies from the Wilson Acquisition. The failure to
integrate the Wilson Projects and WW&A into Cornerstone and to realize operating
synergies could result in higher operating expenses and could have a material
adverse effect on Cornerstone's results of operations.
FIXED VALUE OF SHARES AND UNITS DESPITE POTENTIAL CHANGES IN CORNERSTONE STOCK
PRICE
Pursuant to the terms of the Contribution Agreement and the consideration
elections made by the Wilson Investors, approximately 13,483,000 shares of
Cornerstone Common Stock and approximately 17,666,000 Units will be issued to
the Wilson Investors and WW&A shareholders in the Wilson Acquisition. For
purposes of calculating the number of shares and Units to be delivered as part
of the Consideration, shares and Units have been assigned a fixed value at the
Effective Price of $17.25 per share or per Unit. On November 12, 1998, the last
trading day preceding the mailing of this Proxy Statement to Cornerstone
stockholders, the closing sales price for a share of Cornerstone Common Stock on
the NYSE was $14.94. The Contribution Agreement does not contain any provisions
for adjustment of the Effective Price to account for any variance from the
actual market price of the Cornerstone Common Stock which may exist at the time
of the closing of the Wilson Acquisition. As a result, Cornerstone and the
Operating Partnership could issue shares of Cornerstone Common Stock and Units
with a value on the closing date that is greater than the value assigned by
Cornerstone to the Interests acquired in exchange for such shares and Units. The
market price of Cornerstone Common Stock at the time of the completion of the
Wilson Acquisition may vary from its price at the date of this Proxy Statement
and at the date of the Special Meeting. Such variations may be the result of
changes in the business, operations or prospects of Cornerstone, market
assessments of the likelihood that the Wilson Acquisition will be consummated,
the timing thereof and the prospects of the Wilson Acquisition and
post-acquisition operations, general market and economic conditions and other
factors. Because the completion of the Wilson Acquisition may occur at a date
later than the Special Meeting, there can be no assurance that the price of
Cornerstone Common Stock on the date of the Special Meeting will be indicative
of its price at the time of the completion of the Wilson Acquisition. The
Contribution Agreement provides that the Wilson Acquisition will be closed as
soon as practicable following the Special Meeting and the satisfaction or waiver
of the other conditions set forth in the Contribution Agreement. Stockholders of
Cornerstone are urged to obtain current market quotations for the Cornerstone
Common Stock.
RISKS INVOLVED IN PROPERTY OWNERSHIP THROUGH PARTNERSHIPS, LIMITED LIABILITY
COMPANIES AND JOINT VENTURES
Interests in certain of the Wilson Projects will be held by the Cornerstone
Parties through partnerships or limited liability companies in which other
persons or entities own an interest. Partnership investments may, under certain
circumstances, involve risks not otherwise present in property ownership,
including the possibility that the other partners or members might become
bankrupt, that such partners or members might at any time have economic or other
business interests or goals which are inconsistent with the
13
<PAGE>
business interests or goals of Cornerstone, and that such partners or members
may be in a position to take action contrary to Cornerstone's instructions or
requests or contrary to Cornerstone's policies or objectives, including
Cornerstone's policy with respect to maintaining its qualification as a REIT.
RESALES OF CORNERSTONE COMMON STOCK MAY HAVE AN ADVERSE IMPACT ON MARKET PRICE
Cornerstone will grant registration rights to Wilson Investors receiving
shares of Cornerstone Common Stock or Units in the Wilson Acquisition. Such
rights to register shares of Cornerstone Common Stock and sell them in the
public market, together with registration rights granted to PGGM and other
stockholders of Cornerstone and Unitholders of the Operating Partnership, could
have a material adverse effect on both the market price for the Cornerstone
Common Stock and Cornerstone's ability to raise additional equity capital in the
future. See "The Wilson Aquisition--Resale of Cornerstone Common Stock;
Registration Rights Agreement."
DEVELOPMENT RISKS; FAILURE OF DEVELOPMENT PROJECTS TO ACHIEVE EXPECTED RESULTS
In addition to growing through acquisitions, Cornerstone intends, with the
addition of WW&A personnel to its management team, to develop additional
properties for its portfolio. Several of the Wilson Projects are at various
stages of the development process. Development involves substantial risks,
including the risk that development costs will exceed budgeted or contracted
amounts, the risk of delays in completion of construction, the risk of failing
to obtain all necessary zoning and construction permits, the risk that financing
might not be available on favorable terms, the risk that developed properties
will not achieve desired revenue or profitability levels once completed, the
risk of competition for suitable development sites, the risk of incurring
substantial costs in the event a development project must be abandoned prior to
completion, the risk of changes in governmental rules, regulations and
interpretations and in general economic and business conditions. There can be no
assurance that the Wilson Projects currently under development or future
development projects undertaken by Cornerstone will perform in accordance with
Cornerstone's expectations, and the failure to so perform may have a material
adverse effect on Cornerstone's results of operations.
CORNERSTONE'S PERFORMANCES AND VALUE ARE SUBJECT TO REAL ESTATE INVESTMENT RISKS
ADVERSE ECONOMIC AND MARKET CONDITIONS
Real property investments are subject to numerous risks. The yields
available from an equity investment in real estate depend on the amount of
income generated and costs incurred by the related properties. If the Wilson
Projects and Cornerstone's existing properties do not generate sufficient income
to meet costs, including debt service and capital expenditures, Cornerstone's
results of operations and ability to make distributions to its stockholders and
Unitholders of the Operating Partnership will be adversely affected. Revenues
and values of the Wilson Projects and Cornerstone's existing properties may be
adversely affected by a number of factors, including the national economic
climate, local economic conditions, local real estate conditions (such as an
oversupply of space caused by development activity or a reduction in demand for
office space caused by an economic downturn), the attractiveness of the
properties to tenants, competition from other available space, the ability of
Cornerstone to provide adequate maintenance and insurance and to cover other
operating costs, government regulations and changes in real estate, zoning or
tax laws, interest rate levels, the availability of financing and potential
liabilities under environmental and other laws. In addition, certain significant
expenditures associated with each property (such as debt service, real estate
taxes and maintenance costs) are generally not reduced when circumstances cause
a reduction in rental income from the investment. Should such events occur,
Cornerstone's results of operations and ability to make distributions to
stockholders and Unitholders could be materially impaired.
CORNERSTONE'S ASSETS ARE ILLIQUID INVESTMENTS
Equity real estate investments, especially assets of relatively large size,
are often illiquid. Such illiquidity will tend to limit the ability of
Cornerstone to vary its portfolio promptly in response to changes in economic or
other conditions. Further, Cornerstone has entered into several agreements
pursuant to
14
<PAGE>
which Cornerstone has subjected a number of its properties to restrictions that
may adversely impact Cornerstone's ability to sell or otherwise dispose of such
properties. In the Contribution Agreement, Cornerstone has agreed until after
December 31, 2009 not to sell certain Wilson Projects (and any properties
received in exchange therefor) (the "Part I Properties") in transactions with
adverse tax consequences to certain Wilson Investors, and with respect to
certain other Wilson Projects (and any properties received in exchange therefor)
(the "Part II Properties"), to defer such taxable sales until after December 31,
1999, and thereafter to limit such taxable sales so as to trigger recognition of
no more than 10% of all of such properties' aggregate "built-in gain" each year,
on a cumulative basis. The Part I Properties consist of seven Wilson Projects
(consisting of 16 properties) known as Crossroads, Exposition Centre, 188
Embarcadero, Bixby Ranch, 2677 North Main, Peninsula Office Park and Bayhill
4-7. The Part II Properties consist of the remaining 45 Wilson Projects
(consisting of 50 properties), excluding the two Approved Additional Projects
(as defined herein) known as PeopleSoft Plaza and Seaport Plaza which are not
subject to resale restrictions under the Contribution Agreement. The Part II
Properties consist of the 45 Wilson Projects (consisting of 50 properties) known
as The Pruneyard, Seaport Centre, 120 Montgomery, 10 Almaden, Embarcadero Place,
One & Two ADP Plaza, One & Two Corporate Centre, One Bay Plaza, Apple Building,
700 North Brand, One Post, Centerside II, 110 Atrium Place, West Wilshire,
Norris Tech Center, Janss Court, Bay Park Plaza I & II, Golden Bear Center,
Belmont Shores, Searise Office Tower, Scottsdale Centre, Gateway I & II,
Biltmore Lakes, 1300 South El Camino, Tri-Center Plaza, 429 Santa Monica, Island
Corporate Center, Agoura Hills, First American Plaza, U.S. West, Park Plaza,
Commerce Park, 1600 South Main, 2700 Ygnacio Valley Road, Foothill Corporate
Center, Westlake Spectrum, Warner Park Center, Westlake Spectrum II, 490
California, 66 Bovet and Concar. These resale restrictions may be waived by (A)
the representative of the Wilson Investors (the "Wilson Representative") for
transactions involving Part II Properties that are entered into prior to January
1, 2000, and (B) a majority-in-interest (based on the amount of built-in gain,
if any, that each affected Wilson Investor would recognize) of those Wilson
Investors which would recognize built-in gain as a result of such sale for
transactions involving Part II Properties entered into on and after January 1,
2000 and transactions involving Part I Properties at any time. The Operating
Partnership is also subject to a number of similar sale and merger restrictions
and debt maintenance obligations in connection with certain of its properties
under the terms of amendments to the partnership agreement of the Operating
Partnership entered into at the time of acquisition of such properties. In
addition to the foregoing restrictions, Cornerstone has agreed with PGGM that,
except in limited circumstances, so long as PGGM and its affiliates own in the
aggregate 2.5% or more of the outstanding shares of Cornerstone Common Stock,
unless PGGM's consent is obtained, none of the properties acquired in the Wilson
Acquisition will be disposed of in a transaction occurring at any time prior to
December 31, 2009, in which Cornerstone would recognize gain for federal income
tax purposes that would not have been allocated to Cornerstone if the property
had not had built-in gain. The foregoing restrictions may prevent Cornerstone
from selling properties on favorable terms and thereby could have a material
adverse effect on Cornerstone's financial position and results of operations.
LEASE EXPIRATIONS; FAILURE TO RENEW OR RELET ON FAVORABLE TERMS
Lease expirations present risks. Whenever a tenant decides not to renew its
lease upon expiration, the landlord is exposed to the risk that it may not be
able to relet the space. Even if a tenant does renew or the landlord can relet
the space, the terms of renewal or reletting (including the cost of any required
renovations) may be less favorable than the terms of the lease replaced thereby.
As a result of the completion of the Wilson Acquisition, the number of
Cornerstone leases will increase from approximately 670 to approximately 1,950,
resulting in more frequent expirations for the combined company's portfolio.
Over the next five years (through the end of 2003), assuming the successful
completion of the Wilson Acquisition, leases will expire on a total of 55.0% of
the "Full Service Straight-Line Rent" (the average of all actual rent required
to be paid through the term of the leases relating to the properties calculated
in accordance with GAAP, plus recoveries) to be received by the combined
company. Any inability of Cornerstone to renew promptly expired leases or relet
vacated space, or to obtain rental rates upon such renewals or relettings which
are comparable to or better than the rates of the replaced lease, could
15
<PAGE>
adversely affect Cornerstone's results of operations and financial condition,
with the result that Cornerstone's cash flow and ability to service debt and
make distributions to its stockholders and Unitholders of the Operating
Partnership could be adversely affected.
CONCENTRATION OF ASSETS IN SAN FRANCISCO BAY AREA
Upon completion of the Wilson Acquisition, 44 of the combined company's 89
properties will be located in the metropolitan San Francisco market, accounting
for approximately 27.5% of the combined company's Full Service Straight-Line
Rent on a pro forma consolidated basis. This concentration of assets will make
the combined company particularly vulnerable to adverse changes in economic
conditions in the San Francisco metropolitan area. A significant decline in
these economic conditions could have a material adverse effect on the combined
company.
CONCENTRATION OF ASSETS IN EARTHQUAKE-PRONE AREAS
After completion of the Wilson Acquisition, 63 of the properties owned by
the combined company will be located in California, an area of particular
earthquake risk. A major earthquake in California may cause damage or
destruction to the portions of the combined company's portfolio located in the
geographic area of such earthquake. Wilson has a $200,000,000 blanket earthquake
insurance policy and two property-specific earthquake insurance policies. The
blanket policy includes coverage for the properties which have been excluded
from the Transaction. Approximately 85%, or $170,000,000, of the blanket policy
relates to properties being acquired by Cornerstone. The annual premium from May
1, 1998 to May 1, 1999 for the blanket policy is $1,801,245, of which $1,523,568
relates to properties being acquired by Cornerstone. The One Post property is
insured under its own policy. The coverage is $109,800,000 with an annual cost
of $373,000 from December 1, 1997 to December 1, 1998. Cornerstone is acquiring
Wilson's 50% interest in One Post. The Pruneyard office development and hotel
addition are insured for up to $7,000,000 of earthquake-related damage at a cost
of $84,744 from June 25, 1998 to June 25, 1999. The Pruneyard Inn is insured
under a $4,472,000 policy purchased by its operator, Wyndham Hotels. Cornerstone
has two properties in California (San Francisco and Santa Monica) which are
covered by a $50,000,000 blanket policy for an annual cost of $270,000 from June
3, 1998 to June 8, 1999. There can be no assurance that commercially adequate
earthquake insurance will be available on acceptable terms in the future, or if
available, that such insurance will not be subject to significant deductibles or
coverage limitations.
CONFLICTS OF INTERESTS DUE TO WILSON MANAGEMENT'S CONTINUED INTERESTS IN
EXCLUDED ASSETS
Certain assets owned by WW&A and its affiliates will be excluded from the
Wilson Acquisition. Specified assets of WW&A which will be distributed to the
WW&A shareholders before the Merger include cash on hand, receivables, artwork
and office furniture, certain promissory notes, advances and other amounts
receivable from WW&A shareholders and employees, the rights to a development
project at First and Howard Streets in San Francisco, California, which
Cornerstone elected not to include in the Wilson Acquisition at this time,
rights to reimbursement for advances made to various Projects, and certain
miscellaneous intangible assets having DE MINIMIS value. Members of WW&A's
management own interests in various real estate ventures that Cornerstone
elected not to include in the Wilson Acquisition. After the closing, such
members will continue to hold interests in these ventures, and may continue to
exercise their rights, if any, as general partners or managers of these ventures
or provide asset management services to them. In addition, certain Wilson
Projects may be withdrawn from the Wilson Acquisition pursuant to the provisions
of the Contribution Agreement. Interests in such withdrawn Projects owned by the
Funds will be distributed to the Fund investors before the closing of the Wilson
Acquisition. Cornerstone may provide property management, leasing, development
and construction management services to some of these properties after the
closing on a third-party fee basis, and such arrangements could give rise to
conflicts of interest for those members of Cornerstone's management who own
interests in such properties. In addition, members of Cornerstone management
owning interests in such excluded properties could be distracted from the
performance of their duties to Cornerstone as a result of such interests. Such
conflicts
16
<PAGE>
and distractions could have a material adverse effect on the ability of
Cornerstone to integrate WW&A and the Wilson Projects into Cornerstone's
existing business and on the results of operations of Cornerstone.
LOSS OF REVENUE DUE TO TERMINATION OF THIRD-PARTY CONTRACTS
In addition to its management of the Wilson Projects, WW&A engages in
fee-based management, leasing, construction and development services for
unaffiliated third parties. Many of these services are provided under contracts
that may be terminated by such third parties upon short or no notice. Upon
completion of the Merger, there can be no assurance that such contracts will not
be terminated, and the termination of such contracts or the failure of WW&A's
third-party clients to renew such contracts could result in a significant loss
of revenue for the combined company.
LIABILITY FROM THIRD-PARTY SERVICES
Third-party services involve legal and business risks, including risks of
liability arising out of the provision of such services or out of the conduct of
personnel employed in connection with providing such service. Such risks include
liability for injuries suffered by persons in facilities managed by WW&A, either
during construction or as a result of ongoing maintenance and operation,
workers' compensation claims, claims of discrimination or harassment, employment
of illegal aliens, errors or omissions in construction and engineering, claims
under occupational safety and health regulations and liability arising out of
criminal or other wrongful activities by employees of WW&A. After completion of
the Merger, there can be no assurance that Cornerstone will not become exposed
to such liability or that such liability will not have a material adverse effect
on the financial position or results of operations of Cornerstone.
COMPETITION FROM THIRD-PARTY SERVICE PROPERTIES
Cornerstone may provide third-party services to non-Cornerstone properties
that are located in the same markets as and compete with properties in
Cornerstone's portfolio, including properties retained by members of WW&A
management as discussed above under "--Conflicts of Interests Due to Wilson
Management's Continued Interests in Excluded Assets." The providing of such
services to competing properties may result in lost revenue for Cornerstone, as
such properties compete for tenants with Cornerstone's properties.
POTENTIAL CONFLICT OF INTEREST OF CORNERSTONE'S FINANCIAL ADVISOR IN RENDERING
FAIRNESS OPINION
In considering whether to enter into the Contribution Agreement and effect
the Wilson Acquisition, the Cornerstone Board relied on, among other factors,
the written opinion of Morgan Stanley to the Cornerstone Board that, as of June
17, 1998 and subject to the considerations described in its letter, the
Consideration to be paid to the Wilson Investors and the shareholders of WW&A
pursuant to the Contribution Agreement is fair from a financial point of view to
Cornerstone. As is customary in transactions such as the Wilson Acquisition, all
but $100,000 of Morgan Stanley's financial advisory fee (estimated at
approximately $5.6 million, based upon an assumed aggregate value of the
Consideration to be paid to the Wilson Investors and shareholders of WW&A of
$1.8 billion) is contingent upon the completion of the Wilson Acquisition, which
may be viewed as a potential conflict of interest.
RISKS ASSOCIATED WITH MAINTAINING REIT STATUS; FAILURE TO MAINTAIN REIT STATUS
WOULD CAUSE CORNERSTONE TO BE TAXED AS A CORPORATION
ADVERSE CONSEQUENCES OF THE FAILURE TO MAINTAIN QUALIFICATION AS A REIT
Cornerstone believes that it has operated so as to qualify as a REIT under
the Code, commencing with its taxable year ended December 31, 1983. However, no
assurance can be given that Cornerstone will be able to continue to operate in a
manner enabling it to remain so qualified. Qualification as a REIT involves the
application of highly technical and complex Code provisions that have only a
limited number
17
<PAGE>
of judicial and administrative interpretations, and the determination of various
factual matters and circumstances not entirely within Cornerstone's control may
have an impact on its ability to maintain its qualification as a REIT. For
example, in order to qualify as a REIT, at least 95% of Cornerstone's gross
income in any year must be derived from qualifying sources, and Cornerstone must
make distributions to stockholders aggregating annually at least 95% of its REIT
taxable income (excluding net capital gains). In addition, no assurance can be
given that new legislation, regulations, administrative interpretations or court
decisions will not significantly change the tax laws with respect to
Cornerstone's qualification as a REIT or the federal income tax consequences of
such qualification. Except as noted below, Cornerstone is not aware of any
proposal to amend the tax laws that would significantly and adversely affect
Cornerstone's ability to continue to operate as a REIT.
As a condition to maintaining status as a REIT, the Code and the Treasury
Regulations promulgated thereunder contain a requirement (the "Five or Fewer
Requirement") that, during the second half of each taxable year, not more than
50% in value of the REIT's outstanding stock be owned, directly or indirectly,
by five or fewer individuals (defined in the Code to include certain specified
entities). For this purpose, stock that is held by most entities, such as a
corporation, partnership, limited liability company or pension plan, is treated
as held proportionately by its shareholders, partners, members or beneficiaries,
as the case may be, rather than by such entities. In addition, Cornerstone's
Articles of Incorporation contain restrictions on share ownership that are
designed to prevent violation of the Five or Fewer Requirement. Therefore,
Cornerstone believes that it is unlikely that five or fewer "individuals" would
be considered to own more than 50% of its outstanding shares.
If Cornerstone fails to maintain its qualification as a REIT, or is found
not to have qualified as a REIT for any prior year, it would be subject to
federal income tax (including any alternative minimum tax) on its taxable income
at regular corporate rates. Distributions to stockholders in any year in which
Cornerstone fails to qualify would not be deductible nor would they be required
to be made. In such event, to the extent of current and accumulated earnings and
profits, all distributions to stockholders would be taxable as ordinary income
and, subject to certain limitations of the Code, corporate distributees may be
eligible for the dividends received deduction. In addition, unless entitled to
relief under certain statutory provisions, Cornerstone would be disqualified
from treatment as a REIT for the four taxable years following the year during
which qualification is lost. The additional tax could significantly reduce the
cash flow available for distribution by Cornerstone.
EFFECT OF DISTRIBUTION REQUIREMENTS
To maintain its status as a REIT, Cornerstone is required each year to
distribute to its stockholders at least 95% of its REIT taxable income
(excluding net capital gains). In addition, Cornerstone is subject to a
nondeductible 4% excise tax on the amount, if any, by which certain
distributions paid by it with respect to any calendar year are less than the sum
of 85% of its ordinary income and 95% of its capital gain net income for the
calendar year plus any amount of such income not distributed in prior years.
Although Cornerstone anticipates that cash flow from operations will be
sufficient to enable it to pay its operating expenses and meet the distribution
requirements discussed above, there can be no assurance that this will be the
case, and it may be necessary for Cornerstone to incur borrowings or otherwise
obtain funds to satisfy the distribution requirements associated with
maintaining its qualification as a REIT. In addition, differences in timing
between the accrual of income and the deduction of expenses in arriving at the
taxable income of Cornerstone could require Cornerstone to incur borrowings or
otherwise obtain funds to meet the distribution requirements that are necessary
to maintain its qualification as a REIT. There can be no assurance that
Cornerstone will be able to borrow funds or otherwise obtain funds if and when
necessary to satisfy such requirements.
LEGISLATIVE CHANGES RELATING TO PROPOSED NON-VOTING STOCK SUBSIDIARY COULD
JEOPARDIZE REIT STATUS
To assist Cornerstone in complying with the REIT qualification requirements,
certain third-party service activities and tenant build-out construction
activities will be conducted by a taxable C corporation (the "Non-Voting Stock
Sub") as to which the Operating Partnership will own 95% of the non-voting
18
<PAGE>
common stock and none of the voting common stock. The taxable income of such
corporation will be subject to regular corporate-level income tax. In addition,
under the REIT asset tests, the combined value of the debt and equity securities
of the Non-Voting Stock Sub deemed to be owned by Cornerstone cannot exceed 5%
of the total gross assets of Cornerstone at the end of any calendar quarter, and
Cornerstone cannot be deemed to own more than 10% of the voting securities of
such corporation. Cornerstone believes that it will be able to satisfy those
tests, although no appraisals will be obtained for purposes of the 5% asset
test.
The Clinton Administration's 1998-99 budget proposal included a proposal to
amend the REIT asset tests by prohibiting a REIT from owning more than 10% of
the vote or value of the outstanding stock of any corporation other than a
qualified REIT subsidiary. As proposed, the measure would have taken effect on
the date of first congressional committee action. The stock of existing
non-qualified REIT subsidiaries would have been grandfathered, and therefore
subject only to the 5% asset test and 10% voting securities test of current law,
except that such grandfathering would have terminated if the subsidiary engaged
in a new trade or business or acquired substantial new assets. The proposal was
never formally introduced into Congress as legislation and has not been enacted
to date. However, no assurance can be given that such a proposal, or one similar
to it, might not be enacted in the future. Such legislation, if enacted, would
cause the Non-Voting Stock Sub to become subject to the new 10%-vote-and-value
limitation if it was organized after the specified effective date or if it
commenced new trade or business activities or acquired substantial new assets
after the specified effective date. Cornerstone could not satisfy the new test
because it would be considered to own more than 10% of the value of the stock of
the Non-Voting Stock Sub. Accordingly, the proposal, if enacted, would
materially impede the ability of the Non-Voting Stock Sub to engage in new
business activities or acquire substantial new assets without jeopardizing
Cornerstone's REIT status.
RISKS OF SIGNIFICANT EXPENSE AND BUSINESS DISRUPTION DUE TO YEAR 2000 COMPUTER
PROBLEMS
GENERAL
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define a specific year. Absent corrective
actions, a computer program that has date sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
prepare financial statements, send tenant invoices or engage in similar normal
business activities.
READINESS
Cornerstone's corporate business and technical information systems have been
assessed as to Year 2000 compliance and functionality. Presently these systems
are nearly complete with respect to required software or hardware changes.
Cornerstone anticipates that internal business and technical information Year
2000 compliance issues will be substantially remediated by the end of the second
quarter of 1999.
Cornerstone has completed the identification and review of computer hardware
and software suppliers and is in the process of verifying the Year 2000
preparedness of third party property managers, suppliers, tenants, vendors
and/or service providers that the Company has identified as critical.
COST
The total historical and anticipated remaining costs for the Year 2000
remediation are estimated to be immaterial to Cornerstone's financial condition.
The costs to date have been expensed as incurred and consist of immaterial
internal staff costs and other expenses such as telephone and mailing costs. In
addition, where the appropriate course of action includes replacement or upgrade
of certain systems or equipment, Cornerstone's review at this time indicates a
minor cost to Cornerstone. The "non-information technology building systems"
that have thus far been identified as non-compliant are at or approaching the
end of their useful lives and have been or will be replaced or upgraded in 1999
as a part of the normal operations and maintenance at Cornerstone's properties.
19
<PAGE>
Cornerstone does not anticipate delays in finalizing Year 2000 remediation
within remaining time schedules. However, third parties having a material
relationship with Cornerstone (e.g., property managers, utilities, financial
institutions, governmental agencies, municipalities and major tenants) may be a
potential risk based on their individual Year 2000 preparedness which may not be
within Cornerstone's reasonable control. Cornerstone is in the process of
identifying, reviewing and logging the Year 2000 preparedness of critical third
parties.
Anticipated completion of this review is December 31, 1998. Pending the
results of that review, Cornerstone will determine what course of action and
contingencies will need to be made. There can be no assurance that the external
Year 2000 issues will be resolved in 1999. If not resolved, such issues could
have a material adverse impact on Cornerstone's business, operating results and
financial condition.
YEAR 2000 COMPLIANCE DETAIL
The Company's program addresses the Year 2000 issue with respect to the
following: (i) Cornerstone's information technology and operating systems,
including its accounting and financial reporting systems; (ii) Cornerstone's
"non-information technology building systems," including building access, energy
management, elevator systems, equipment and other infrastructure systems that
may contain or use computer systems or embedded micro-controller technology; and
(iii) certain systems of Cornerstone's third party property managers, major
suppliers and material service providers (insofar as such systems relate to
Cornerstone's business activities such as billing, financial reporting, payroll,
health services, stock transfer services and alarm systems). As described below,
Cornerstone's Year 2000 program involves (a) an assessment of the Year 2000
problems that may affect Cornerstone, (b) the development of remedies to address
the problems discovered in the assessment phase, (c) the testing of such
remedies and (d) the preparation of contingency plans to deal with worst case
scenarios.
ASSESSMENT PHASE. As part of the internal assessment phase, the Company has
attempted to substantially identify all the major components of the systems
described above. In determining the extent to which such systems are vulnerable
to the Year 2000 issue, Cornerstone is evaluating either directly or through its
third party managers purchased software applications and property operational
control systems, e.g., heating ventilation and air conditioning (HVAC), lighting
timers, alarms, fire, sewage and access. In addition, in the second quarter of
1998, Cornerstone's third party managers began sending letters to the major
suppliers and service providers of the Company's buildings, requesting them to
provide assurance of existing or anticipated Year 2000 compliance by their
systems insofar as the systems relate to their activities with Cornerstone.
Cornerstone is requesting that all responses to the inquiries be returned to it
no later than December 21, 1998.
REMEDIATION AND TESTING PHASE. Based upon the assessment and remediation
efforts to date, Cornerstone has completed, tested and put on line the Year 2000
compliance modification in all the software for all corporate applications
including accounting and financial reporting. All of Cornerstone's personal
computers and associated applications and networking infrastructure are Year
2000 compliant.
Cornerstone purchases primarily "off-the-shelf" versions of the software
used for spreadsheet analysis, database applications, word processing systems
and accounting, all of which are Year 2000 compliant. Cornerstone's corporate
office phone, communication and data processing networks are Year 2000
compliant.
Seven third-party property managers manage Cornerstone's portfolio of 21
office properties. Cornerstone is working closely with these managers to assess
the Year 2000 impact on the operations of the buildings. For the most part, the
systems reviewed by Cornerstone have been found to be Year 2000 compliant. The
reviewed systems include but are not limited to HVAC equipment, building
management systems, elevators, security and life safety systems. Those systems
that have been found not to be compliant are nearing the end of their useful
lives and are being replaced or upgraded in the normal course of business.
20
<PAGE>
CONTINGENCY PLANS. Cornerstone intends to develop contingency plans to
handle its most reasonably likely worst case Year 2000 scenarios. These have not
yet been identified fully. Cornerstone intends to complete its determination of
worst case scenarios after it has received and analyzed responses to
substantially all of the inquiries it has made of third parties. Following its
analysis, Cornerstone intends to develop a timetable for completing its
contingency plans.
COSTS RELATED TO THE YEAR 2000 ISSUE. To date, Cornerstone has incurred no
material costs. Labor, mailing and phone costs attributed to the Year 2000
program are minimal. Cornerstone currently estimates that to have all systems
compliant will incur some additional costs which are not quantifiable but
believed to be not material to Cornerstone's business. The "non-information
technology building systems" that have thus far been identified as non-compliant
and at or approaching the end of their useful lives will be replaced or upgraded
as a part of the normal operations and maintenance at Cornerstone's properties.
RISKS RELATED TO THE YEAR 2000 ISSUE. Although Cornerstone's Year 2000
efforts are intended to minimize the adverse effects of the Year 2000 issue on
the Company's business and operations, the actual effects of the issue and the
success or failure of Cornerstone's efforts described above cannot be known
until the year 2000. Failure by Cornerstone's third party managers, major
suppliers and other service providers to address adequately their respective
Year 2000 issues in a timely manner (insofar as such issues relate to
Cornerstone's business) could have a material adverse effect on Cornerstone's
business, results of operations and financial condition.
SIGNIFICANT CONTROL BY PGGM AND WILSON MANAGEMENT OVER CORPORATE GOVERNANCE
MATTERS COULD BE DETRIMENTAL TO OTHER STOCKHOLDERS
Members of WW&A senior management (consisting of shareholders of WW&A), all
of whom will become executive officers of Cornerstone upon completion of the
Wilson Acquisition, together with PGGM will beneficially own approximately 34.3%
of the outstanding shares of Cornerstone Common Stock (assuming the redemption
of all outstanding Units for shares of Cornerstone Common Stock) and therefore
could be expected to exercise significant control over the management of
Cornerstone after the Transaction. If they act in concert, these stockholders
will be able to effectively control the outcome of matters submitted to a vote
of stockholders. In addition, the Amended and Restated Bylaws of Cornerstone to
be adopted pursuant to the Wilson Acquisition and the PGGM Investment will
provide for William Wilson III the right to designate himself and two other
individuals for nomination for election as directors. See "The Wilson
Acquisition--Terms of the Contribution Agreement--Cornerstone Board." As a
result, Mr. Wilson and PGGM, if they act in concert, can be expected to exercise
significant influence over the proceedings of the Cornerstone Board. The
percentage ownership of Cornerstone Common Stock by Mr. Wilson and other members
of WW&A senior management and PGGM and the governance rights of Mr. Wilson and
PGGM included in the Amended and Restated Bylaws could allow WW&A senior
management and PGGM to effectively control Cornerstone if they act in concert.
In exercising this control, WW&A senior management and PGGM may have interests
that differ from those of other Cornerstone stockholders with respect to the
desirability of making acquisitions or dispositions of particular properties,
pursuing development opportunities, determining compensation policy for
management, setting the appropriate amount of leverage for Cornerstone or other
matters. These stockholders may cause Cornerstone to effect transactions or
enact corporate policies which, while beneficial to PGGM and the Wilson
Investors, are less beneficial than alternatives or otherwise detrimental to
Cornerstone's existing stockholders.
21
<PAGE>
THE SPECIAL MEETING
This Proxy Statement is furnished in connection with the solicitation of
proxies from holders of Cornerstone Common Stock by the Cornerstone Board for
use at the Special Meeting. This Proxy Statement and accompanying form of proxy
are first being mailed to the stockholders of Cornerstone on or about November
13, 1998.
DATE, TIME, PLACE AND PURPOSE
The Special Meeting will be held at the offices of King & Spalding, 34th
Floor, 1185 Avenue of the Americas, New York, NY, at 10:00 A.M. on December 14,
1998. At the Special Meeting, stockholders of Cornerstone will be asked to
consider and vote upon: (i) the Wilson Issuance; (ii) the PGGM Investment; (iii)
the Amendment; and (iv) such other matters as may properly come before the
Special Meeting. Stockholders of Cornerstone are being asked to vote upon the
Wilson Issuance and the PGGM Investment pursuant to the rules of the NYSE, on
which shares of Cornerstone Common Stock are listed. The NYSE requires
stockholder approval of the Wilson Issuance because the number of shares of
Cornerstone Common Stock and Units to be issued in the Wilson Acquisition is
expected to exceed 20% of the shares of Cornerstone Common Stock outstanding
immediately prior to the completion of such transactions. The NYSE requires
stockholder approval of the PGGM Investment because the sale of shares of
Cornerstone Common Stock to PGGM is a sale to a significant stockholder of
Cornerstone for purposes of the rules of the NYSE.
THE CORNERSTONE BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE
APPROVAL OF THE WILSON ISSUANCE, THE PGGM INVESTMENT AND THE AMENDMENT.
RECORD DATE; SHARES ENTITLED TO VOTE; QUORUM
The Cornerstone Board has fixed the close of business on November 9, 1998 as
the Record Date for the Special Meeting. Only holders of record of shares of
Cornerstone Common Stock on the Record Date are entitled to notice of and to
vote at the Special Meeting. On the Record Date, there were 101,636,864 shares
of Cornerstone Common Stock outstanding and entitled to vote at the Special
Meeting, held by approximately 110 stockholders of record. Each holder of record
of Common Stock on the Record Date is entitled to cast one vote per share. The
presence, in person or by proxy, of holders of 20% of the outstanding shares of
Common Stock entitled to vote is necessary to constitute a quorum at the Special
Meeting.
VOTE REQUIRED; SHARE OWNERSHIP OF MANAGEMENT AND CERTAIN STOCKHOLDERS
The affirmative vote of a majority of the votes cast at the Special Meeting
is required to approve each of the Wilson Issuance, the PGGM Investment and the
Amendment; PROVIDED that, in the case of the Wilson Issuance and the PGGM
Investment, the total vote cast at the Special Meeting (either for or against)
represents more than 50% of the outstanding shares of Cornerstone Common Stock
on the Record Date. As of the Record Date, all executive officers and directors
of Cornerstone owned beneficially in the aggregate approximately 1.6% of the
outstanding shares of Cornerstone Common Stock. In addition, Cornerstone and
WW&A have entered into voting agreements with each of PGGM, NYSTRS and Rodamco,
under which such stockholders have agreed to vote in favor of the Wilson
Issuance and the PGGM Investment at the Special Meeting. These stockholders
beneficially owned an aggregate of 44.9% of the outstanding shares of
Cornerstone Common Stock as of the Record Date.
Under Nevada law, stockholders are not entitled to appraisal rights or
preemptive rights in connection with any of the proposals to approve the Wilson
Issuance, the PGGM Investment or the Amendment.
VOTING OF PROXIES
All shares represented by properly executed proxies received prior to the
Special Meeting will, unless such proxies have been previously revoked, be voted
in accordance with the instructions indicated on such proxies. Proxies which do
not contain voting instructions will be voted "FOR" approval of the proposals to
approve the Wilson Issuance, the PGGM Investment and the Amendment and, in the
discretion of the
22
<PAGE>
proxy holder, as to any other matter which may properly come before the Special
Meeting. Any shares of Cornerstone Common Stock for which properly executed
proxies are not returned will not be counted as having voted at the Special
Meeting. Stockholders of Cornerstone may also be asked to vote upon a proposal
to adjourn or postpone the Special Meeting, which adjournment or postponement
could be used for the purpose, among others, of allowing additional time for the
soliciting of additional votes to approve the Wilson Issuance, the PGGM
Investment and the Amendment.
The Cornerstone Board is unaware of any matters to be presented for action
at the Special Meeting other than the proposals to approve the Wilson Issuance,
the PGGM Investment and the Amendment, but if other matters do come properly
before the Special Meeting it is intended that shares represented by proxies in
the accompanying form will be voted by the persons named in the proxy in
accordance with their best judgment.
ABSTENTIONS AND BROKER NON-VOTES WILL BE INCLUDED IN THE CALCULATION OF THE
NUMBER OF SHARES REPRESENTED AT THE SPECIAL MEETING FOR PURPOSES OF DETERMINING
WHETHER A QUORUM HAS BEEN ACHIEVED AND WHETHER THE TOTAL VOTE CAST REPRESENTS
OVER 50% OF THE OUTSTANDING SHARES OF CORNERSTONE COMMON STOCK ON THE RECORD
DATE. AN ABSTENTION WILL BE RECORDED IF A STOCKHOLDER RETURNS A PROXY CARD WITH
INSTRUCTIONS TO ABSTAIN FROM VOTING ON THE PROPOSALS PUT BEFORE THE SPECIAL
MEETING OR IF A STOCKHOLDER ATTENDS THE SPECIAL MEETING IN PERSON AND DOES NOT
VOTE ON THE PROPOSALS PUT BEFORE THE SPECIAL MEETING. A BROKER NON-VOTE WILL BE
RECORDED IF A STOCKHOLDER WHO HOLDS HIS SHARES THROUGH A BROKER IN "STREET NAME"
DOES NOT RETURN A PROXY CARD. IN THAT CASE, WITHOUT INSTRUCTIONS FROM THE
STOCKHOLDER, THE BROKER WILL NOT VOTE SUCH SHARES ON THE PROPOSALS BEFORE THE
SPECIAL MEETING, BUT THE BROKER WILL RETURN A "PARTIAL PROXY," WHICH VOTES
SHARES HELD BY SUCH BROKER'S OTHER CUSTOMERS WHO DO RETURN PROXY CARDS. THE
SHARES NOT VOTED BY SUCH BROKER IN THAT SITUATION ARE REFERRED TO AS "BROKER
NON-VOTES," AND THEY ARE COUNTED AS PRESENT FOR PURPOSES OF DETERMINING WHETHER
A QUORUM IS PRESENT, BUT THEY ARE NOT COUNTED AS HAVING VOTED ON THE PROPOSALS
BEFORE THE SPECIAL MEETING. ACCORDINGLY, SHARES OWNED BY A STOCKHOLDER WHO IS A
RECORD HOLDER AND WHO FAILS TO RETURN A PROXY CARD WILL NOT BE COUNTED AS
PRESENT FOR PURPOSES OF A QUORUM AND WILL NOT BE COUNTED AS VOTING ON THE
PROPOSALS AT THE SPECIAL MEETING. ON THE OTHER HAND, SHARES OWNED BY A
STOCKHOLDER WHO HOLDS SUCH SHARES IN "STREET NAME" AND WHO FAILS TO RETURN A
PROXY CARD WILL BE COUNTED AS PRESENT FOR PURPOSES OF A QUORUM, BUT WILL NOT BE
COUNTED AS VOTING ON THE PROPOSALS AT THE SPECIAL MEETING. GIVEN THE LARGE
PERCENTAGE OF OUTSTANDING SHARES OF CORNERSTONE COMMON STOCK HELD IN "STREET
NAME" BY BROKERS, IT IS HIGHLY PROBABLE THAT A QUORUM WILL BE ACHIEVED.
ABSTENTIONS AND BROKER NON-VOTES WILL NOT BE COUNTED AS HAVING VOTED "FOR" THE
PROPOSALS IN DETERMINING WHETHER A PROPOSAL HAS BEEN APPROVED.
REVOCABILITY OF PROXIES
The grant of a proxy on the enclosed form of proxy does not preclude a
stockholder from voting in person. A Cornerstone stockholder may revoke a proxy
at any time prior to its exercise at the Special Meeting by delivering to the
Secretary of Cornerstone a duly executed proxy or revocation of proxy bearing a
later date or by attending and voting in person at the Special Meeting.
Attendance at the Special Meeting will not of itself constitute revocation of a
proxy.
SOLICITATION OF PROXIES
Cornerstone will bear the cost of the solicitation of proxies from its
stockholders, including the cost of printing this Proxy Statement and the
applicable fees associated with the filing of this Proxy Statement with the
Commission. In addition to solicitation by mail, the directors, officers and
employees of Cornerstone may solicit proxies from stockholders by telephone or
telegram or in person. Arrangements will also be made with brokerage houses and
other custodians, nominees and fiduciaries for the forwarding of solicitation
material to the beneficial owners of Cornerstone Common Stock, and Cornerstone
will reimburse such custodians, nominees and fiduciaries for their reasonable
out-of-pocket expenses in connection therewith.
23
<PAGE>
PROPOSAL ONE: THE WILSON ISSUANCE
Pursuant to the Contribution Agreement, upon completion of the Wilson
Acquisition, Cornerstone will be obligated to issue an aggregate of
approximately 10,347,000 shares of Cornerstone Common Stock, 17,666,000 Units in
the Operating Partnership and $523,003,000 in cash to the Wilson Investors and
an aggregate of approximately 3,136,000 shares of Cornerstone Common Stock to
the current shareholders of WW&A. Stockholder approval of the PGGM Investment is
a condition to the obligation of the Wilson Parties to complete the Wilson
Acquisition. Therefore, if the PGGM Investment is not approved by the
stockholders, then the Wilson Parties may elect not complete the Transaction.
Stockholders of Cornerstone are being asked to vote upon the Wilson Issuance
pursuant to the rules of the NYSE. The NYSE requires stockholder approval of the
Wilson Issuance because the number of shares of Cornerstone Common Stock and
Units to be issued in the Wilson Acquisition is expected to exceed 20% of the
shares of Cornerstone Common Stock outstanding immediately prior to the
completion of such transaction.
THE CORNERSTONE BOARD BELIEVES THAT THE WILSON ACQUISITION IS FAIR TO, AND
IN THE BEST INTERESTS OF, CORNERSTONE AND THE STOCKHOLDERS OF CORNERSTONE. THE
CORNERSTONE BOARD UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF CORNERSTONE
VOTE FOR APPROVAL OF THE WILSON ISSUANCE.
The Cornerstone Board considered a number of prospective benefits to
Cornerstone expected to result from the Wilson Acquisition in recommending that
stockholders vote in favor of the Wilson Issuance. These benefits are described
under "The Wilson Acquisition--Reasons for the Wilson Acquisition." The Wilson
Acquisition also involves potential risks that these benefits will not be
realized or that the Wilson Acquisition will have adverse consequences for
Cornerstone. Material risks are disclosed herein under "Risk Factors."
Stockholders are urged to consider both the potential benefit and the potential
disadvantages of the Wilson Acquisition in considering whether to vote in favor
of the proposal to approve the Wilson Issuance.
24
<PAGE>
PROPOSAL TWO: THE PGGM INVESTMENT
In order to fund part of the cash portion of the Consideration, Cornerstone
proposes to issue and sell 11,594,203 shares of Cornerstone Common Stock to PGGM
at $17.25 per share for an aggregate purchase price of approximately
$200,000,000. The Wilson Acquisition and the PGGM Investment will be consummated
simultaneously, and the PGGM Investment is conditioned upon stockholder approval
of the Wilson Issuance. If the Wilson Issuance is not approved by the
stockholders, then Cornerstone will not complete the PGGM Investment.
The stock purchase agreement between PGGM and Cornerstone relating to the
PGGM Investment also provides that, in the event that the $17.25 value per share
and per Unit in the Wilson Acquisition is reduced, the per share purchase price
of the PGGM Investment will be reduced by an equal amount, and the number of
shares shall equal $200,000,000 divided by such reduced purchase price. PGGM
will not be obligated to hold the shares of Cornerstone Common Stock issued to
it in the PGGM Investment for any length of time. In connection with the DIHC
Acquisition, PGGM and DIHC agreed that until the earlier to occur of October 31,
2000 or the date as of which PGGM and DIHC and their respective affiliates are
the owners of less than 25% of the issued and outstanding shares of Cornerstone
Common Stock, PGGM and DIHC will not transfer or sell any shares of Cornerstone
Common Stock to any person if as a result of such sale, such person and
affiliates of such person would own collectively more than 10% of the
Cornerstone Common Stock then outstanding. This limitation will not apply in the
case of any sale to (A) a mutual fund company, pension fund, insurance company,
investment company, any state, city or county, or any agency or instrumentality
of any state, city or county, or any state university or state college, and any
retirement system for the benefit of employees thereof, any religious or
educational organization or other passive institutional investor or (B) any
"Non-U.S. Person" (as defined below) that is not controlled by "U.S. Persons"
(as defined below).
As used herein, "Non-U.S. Person" means (i) a nonresident alien individual
(as defined in the Code), (ii) a foreign corporation, foreign partnership,
foreign trust, foreign estate, foreign government, and any other organization or
entity which is not organized under the laws of the United States or a State,
and (iii) any other person or entity treated as a "foreign person" under
regulations promulgated under the Code. "U.S. Person" means any person other
than a Non-U.S. Person.
The obligations of PGGM to effect the PGGM Investment are conditioned upon
the adoption of the Restated and Amended Bylaws of Cornerstone, a copy of which
is attached as Exhibit C to the Registration Rights Agreement included as Annex
B of this Proxy Statement. Upon adoption, the Restated and Amended Bylaws of
Cornerstone will confer certain rights on PGGM. The following is a summary
description of such rights (as they relate to PGGM) and is qualified in its
entirety by the full text of the proposed Amended and Restated Bylaws of
Cornerstone, a copy of which is attached as an exhibit to the Registration
Rights Agreement. See "The Wilson Acquisition--Terms of The Contribution
Agreement-- Cornerstone Board."
BOARD SEATS. So long as PGGM and its affiliates own at least 5% of the
outstanding shares of Cornerstone Common Stock, the Cornerstone Board will
nominate for election as directors two individuals designated by PGGM. Until
the expiration of the "PGGM Period" (as defined below), the number of
directors constituting the full Cornerstone Board may not be increased
without the approval of a majority of the entire board and the unanimous
approval of the Board Affairs Committee.
DIRECTOR NOMINATIONS. All nominees for election as directors of
Cornerstone (other than PGGM Directors who are affiliated with PGGM, Mr.
Wilson and the incumbent members of the Cornerstone Board, including
directors designated by NYSTRS, Rodamco and Deutsche Bank AG) must be
approved by a majority of the entire Cornerstone Board and the unanimous
vote of the Board Affairs Committee. During the period ending upon the
earlier of: (i) the date on which PGGM and its affiliates own less than 25%
of the outstanding Cornerstone Common Stock; or (ii) October 31, 2002
25
<PAGE>
(the "PGGM Period"), no nominee for election as a director, other than the
PGGM Directors, may be affiliated with PGGM.
COMMITTEES. The duties and responsibilities of the Board Affairs
Committee (which include approving all nominees for the Cornerstone Board)
shall not be changed by the Cornerstone Board without the approval of a
majority of the entire Cornerstone Board and the unanimous approval of the
Board Affairs Committee during the PGGM Period. In addition, during the PGGM
Period, each committee other than the Audit and Compensation Committees will
include at least one PGGM Director, and at least half of the members of the
Investment Committee must be independent. The Amended and Restated Bylaws
will also restrict the ability of the Cornerstone Board to amend the
foregoing provisions under certain circumstances without the unanimous
approval of the Board Affairs Committee. See "The Wilson Acquisition--Terms
of the Contribution Agreement--Cornerstone Board."
Stockholders of Cornerstone are being asked to vote upon the PGGM Investment
pursuant to the rules of the NYSE. The NYSE requires stockholder approval of the
PGGM Investment because the sale of shares of Cornerstone Common Stock to PGGM
is a sale to a significant stockholder of Cornerstone for purposes of the rules
of the NYSE. In addition, completion of the PGGM Investment is a condition to
the obligations of the Wilson Parties to effect the Wilson Acquisition.
THE CORNERSTONE BOARD BELIEVES THAT THE PGGM INVESTMENT IS FAIR TO, AND IN
THE BEST INTERESTS OF, CORNERSTONE AND THE STOCKHOLDERS OF CORNERSTONE. THE
CORNERSTONE BOARD UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF CORNERSTONE
VOTE FOR APPROVAL OF THE PGGM INVESTMENT.
The Cornerstone Board believes that the PGGM Investment provides an
attractive opportunity to fund a substantial portion of the cash consideration
to be paid in the Wilson Acquisition. The purchase price of $17.25 per share in
the Wilson Acquisition is higher than the recent trading prices of Cornerstone
Common Stock. On November 12, 1998, the last trading day prior to the mailing of
this Proxy Statement, the closing sale price of Cornerstone Common Stock on the
NYSE was $14.94. Stockholders are urged to obtain current trading prices for
Cornerstone Common Stock. The issuance of additional shares of Cornerstone
Common Stock to PGGM will also serve to increase the percentage of outstanding
shares of Cornerstone Common Stock held by PGGM from 33.6% to 36.1%, which will
enhance the influence that PGGM exercises over matters submitted to a vote of
Cornerstone stockholders. The additional shares of Cornerstone Common Stock
issued to PGGM in the PGGM Investment, together with its rights under the
Amended and Restated Bylaws of Cornerstone, will permit PGGM to continue to
exercise a significant degree of influence over the management and affairs of
Cornerstone. Stockholders should be aware that, in exercising such influence,
PGGM may have interests that differ from those of other stockholders.
Stockholders should consider both this favorable pricing and enhanced control by
PGGM in considering whether to vote in favor of the proposal to approve the PGGM
Investment.
26
<PAGE>
THE WILSON ACQUISITION
GENERAL
Cornerstone is furnishing this document to Cornerstone stockholders in
connection with the proposals to be voted upon at the Special Meeting to approve
the Wilson Issuance, the PGGM Investment and the Amendment. Cornerstone and WW&A
entered into the Contribution Agreement to combine substantially all of the real
estate properties and businesses of WW&A and its affiliates with those of
Cornerstone and the Operating Partnership. Upon completion of the Wilson
Acquisition, all of the employees of WW&A will become full-time employees of the
Operating Partnership or its subsidiaries, and the businesses currently operated
by WW&A will be operated by the Operating Partnership or one of its
subsidiaries. The current WW&A businesses which will be operated by the
Operating Partnership will be operated as a division within the Operating
Partnership's existing organizational structure under the name "Wilson
Cornerstone Properties."
The discussion in this document of the Wilson Acquisition and the principal
terms of the Contribution Agreement and the Registration Rights Agreement is
subject to, and qualified in its entirety by, reference to the Contribution
Agreement and the Registration Rights Agreement, copies of which are attached to
this Proxy Statement as Annex A and Annex B, respectively, and are incorporated
herein by reference.
WW&A AND THE WILSON PROJECTS
WW&A was founded by William Wilson III in 1978. Mr. Wilson is one of
California's leading office property developers, with 35 years of experience
developing and managing office properties for major corporate tenants. WW&A is a
fully integrated real estate company engaged in the business of acquiring,
investing in, financing, developing, leasing and managing urban and suburban
office and other projects in the Western United States, with a primary focus in
the San Francisco Bay area. WW&A also provides development, construction
management, property management and leasing and tenant improvement services to
unaffiliated third parties.
The Wilson Projects are owned through four WW&A sponsored Funds, through
WW&A affiliates and through three Joint Ventures. The Wilson Projects to be
acquired by Cornerstone as part of the Wilson Acquisition consist of 68
properties comprising 52 of the 58 office projects currently owned by WW&A
affiliates, totaling approximately 9,600,000 rentable square feet. The Wilson
Projects fall into the following four categories:
(i) "Fund Projects," which are Wilson Projects held by Project Entities
whose ownership is comprised entirely of the Funds, WW&A affiliates (acting
as the general partners or managers) and, in some cases, certain executive
officers of WW&A and/or certain Fund limited partners as co-investors;
(ii) "Other Projects," which are Wilson Projects held by Project
Entities whose ownership includes, in addition to Funds (and Fund
affiliates), certain outside owners ("Unaffiliated Investors") who are not
Funds, limited partners of Funds, WW&A affiliates or executive officers of
WW&A;
(iii) "Joint Venture Projects," which are Wilson Projects held by the
Joint Ventures, whose ownership includes WW&A affiliates and Unaffiliated
Investors, but which do not have a Fund as a partner or member; and
(iv) "Approved Additional Projects," which are Wilson Projects acquired
and held by WW&A affiliates.
Of the 68 properties comprising the Wilson Projects, 32 properties are
located on the San Francisco Peninsula, which the management of Cornerstone
believes is one of the most attractive office markets in the United States, with
significant barriers to entry. As of September 30, 1998, the Wilson Projects
were approximately 95% leased under approximately 1,280 leases. The Wilson
Projects are leased to a diverse mix of high-quality tenants. Through December
31, 2002, office leases for approximately 4,815,000 square feet of space in the
Wilson Projects, or approximately 51% of the total Wilson Projects, will expire.
These
27
<PAGE>
expiring leases have a weighted average effective rent of $23.37 per square
foot, compared to estimated asking market rents averaging $32.22.
CONSIDERATION FOR THE WILSON ACQUISITION
The Contribution Agreement provides that the Wilson Investors will
contribute their Interests in the Joint Ventures, the Funds and other
intermediate tier entities and the Project Entities to Cornerstone or the
Operating Partnership in exchange for consideration consisting of approximately
10,347,000 shares of Cornerstone Common Stock, 17,666,000 Units and $523,003,000
in cash with an aggregate value of approximately $1,006,231,000, based upon the
Effective Price of $17.25 per share or per Unit. The Effective Price is fixed
and will not increase or decrease as a result of fluctuations in the trading
price of Cornerstone Common Stock. The Wilson Investors have irrevocably elected
to allocate the Consideration payable in exchange for their Interests among
shares of Cornerstone Common Stock, Units and cash. Also under the terms of the
Contribution Agreement, WW&A will be merged with and into Cornerstone, with
Cornerstone as the surviving corporation. In the Merger, the outstanding shares
of WW&A common stock will be converted into an aggregate of approximately
3,136,000 shares of Cornerstone Common Stock with an aggregate value of
approximately $54,100,000 based upon the Effective Price of $17.25 per share.
Based on the number of shares of Cornerstone Common Stock and Units
outstanding on November 9, 1998, approximately 10.7% of the shares of
Cornerstone Common Stock and 11.9% of the Units expected to be outstanding after
the Transaction would be issued to WW&A and its affiliates and investors in the
Wilson Acquisition. Assuming the redemption of all Units into shares of
Cornerstone Common Stock, approximately 21.0% of the outstanding shares of
Cornerstone Common Stock after completion of the Transaction would have been
issued in connection with the Wilson Acquisition, either directly or upon
redemption of Units issued in the Wilson Acquisition.
In order to fund a portion of the cash portion of the Consideration,
Cornerstone will issue and sell 11,594,203 shares of Cornerstone Common Stock to
PGGM at a purchase price equal to the Effective Price of $17.25 per share, for
an aggregate purchase price of approximately $200,000,000. The PGGM Investment
and the Wilson Acquisition will be completed simultaneously and are conditioned
upon one another. Cornerstone expects to finance the remaining cash portion of
the Consideration, an estimated $20 million of closing costs and an estimated
$200 million for repayment of debt with approximately $10 million of available
cash and $520 million available under its credit facility.
BACKGROUND OF THE WILSON ACQUISITION
In February 1997, as WW&A began to identify potential partners for a
business combination transaction, representatives of WW&A met with Cornerstone
and other office REITs to discuss a possible transaction. In September 1997,
WW&A retained Lazard Freres & Co. LLC ("Lazard Freres") to advise WW&A as to
strategic alternatives available to WW&A and its portfolio and to assist WW&A in
preparing a valuation of the portfolio. On March 17, 1998, Cornerstone and WW&A
executed a confidentiality agreement, and during a series of meetings between
March 18 and March 24, 1998, Lazard Freres delivered financial information on
WW&A and the Wilson Projects to Cornerstone.
On April 1, 1998, with the assistance of its legal and financial advisors,
Cornerstone began a formal due diligence examination of WW&A and the Wilson
Projects. On April 6, 1998, Cornerstone proposed a business combination
transaction to WW&A. Beginning April 17, 1998, substantive negotiations ensued
on definitive agreements relating to a possible transaction.
On June 17, 1998, the Cornerstone Board met and approved the terms and
conditions of the proposed Wilson Acquisition, authorized the execution of the
definitive Contribution Agreement and determined to recommend approval of the
Wilson Issuance and the PGGM Investment to the Cornerstone stockholders. The
definitive Contribution Agreement was executed on June 22, 1998. On June 19,
1998, the last trading day preceding public announcement of the Wilson
Acquisition, the high and low sales prices of Cornerstone Common Stock on the
NYSE were $16.31 and $16.13, respectively.
28
<PAGE>
REASONS FOR THE WILSON ACQUISITION
Management of Cornerstone and the Cornerstone Board believe that the Wilson
Acquisition will enhance Cornerstone's position as a leading owner and operator
of Class A office properties in major United States markets and will advance its
objective of increasing its earnings and asset base through the acquisition,
development and leasing of office properties in these markets. In determining to
approve the Contribution Agreement and the Wilson Acquisition and recommend that
the stockholders of Cornerstone approve the Wilson Issuance and the PGGM
Investment, the Cornerstone Board considered a number of prospective benefits to
Cornerstone resulting from the Wilson Acquisition, including, but not limited to
the following:
(i) ACCRETION TO FFO PER SHARE FOR 1999. The Wilson Acquisition is
expected to result in increased funds from operations per share of
Cornerstone Common Stock in 1999. This is economically advantageous to
Cornerstone's current shareholders because FFO is a widely accepted measure
of an equity REIT's operating performance. Management believes that FFO is a
useful measure of a REIT's operating performance because it measures a
REIT'S ability to generate earnings from its recurring operations, after the
payment of all administrative costs and interest expense. FFO thus allows an
investor to evaluate a REIT based on the company's ability to generate
operating earnings on a recurring basis.
(ii) EXPANDED PRESENCE IN ATTRACTIVE CALIFORNIA MARKETS. California
markets have limited available space, escalating demand and significant
barriers to entry. The Wilson Acquisition allows Cornerstone to acquire an
expanded presence in California markets immediately, rather than over time
on a property-by-property basis.
(iii) HIGHER INTERNAL GROWTH RATE FOR THE COMBINED
PORTFOLIO. Cornerstone's existing portfolio does not have significant
tenant turnover. As a result of the completion of the Wilson Acquisition,
the number of Cornerstone leases will increase from approximately 670 to
approximately 1,950, resulting in more frequent lease expirations for the
combined company's portfolio. Although such increased turnover presents
certain risks (see "Risk Factors--Cornerstone's Performance and Value Are
Subject to Real Estate Investment Risks--Lease Expirations; Failure to Renew
or Relet on Favorable Terms"), it also provides Cornerstone with increased
opportunity for growth.
(iv) EXPANDED CAPABILITIES AND MANAGEMENT DEPTH. Cornerstone believes
that the WW&A personnel who will become employees of Cornerstone, including
six employees who will become executive officers of Cornerstone, upon
completion of the Wilson Acquisition, will provide expanded acquisition,
property management, construction management, leasing and development
expertise to the abilities of Cornerstone's current employees. The Wilson
Acquisition will particularly allow Cornerstone to capitalize on the
property management abilities of current WW&A personnel to internalize the
property management functions at its existing properties that are currently
undertaken by third parties.
(v) DIVERSIFICATION OF CORNERSTONE TENANT BASE. The Wilson Acquisition
will add approximately 1,280 leases to Cornerstone's current lease
portfolio, for a combined total of approximately 1,950 leases. This increase
in leases adds to the diversity and stability of Cornerstone's portfolio.
(vi) EXPANDED BASE OF INVESTORS AND INCREASED MARKET
CAPITALIZATION. While the Cornerstone Board recognizes that increased size
does not necessarily result in increased profitability, the Cornerstone
Board believes that such increased size will result in two specific
advantages for Cornerstone. First, the increased number of shares in the
market are expected to result in greater liquidity for holders of
Cornerstone Common Stock. The Cornerstone Board believes that larger
capitalization companies generally have greater trading liquidity, which
allows the purchase and sale of larger volumes of shares without disrupting
the market for such shares. Furthermore, larger capitalization companies are
more attractive to certain institutional investors and, therefore, the
Wilson Acquisition is expected to increase the universe of potential buyers
of Cornerstone's equity securities.
29
<PAGE>
(vii) ACCESS TO FORMER WW&A RELATIONSHIPS. William Wilson III, the
founder of WW&A, has over 35 years of experience in developing and managing
office properties. In addition, WW&A has been developing and managing office
properties since 1978. Over time, Mr. Wilson and WW&A, as well as WW&A's
other employees who will become employees of Cornerstone upon completion of
the Wilson Acquisition, have developed business relationships throughout the
Western United States as a part of their business operations. After
completion of the Wilson Acquisition, Cornerstone will have access to these
relationships.
BOARD RECOMMENDATION
THE CORNERSTONE BOARD BELIEVES THAT THE WILSON ACQUISITION IS FAIR TO, AND
IN THE BEST INTERESTS OF, CORNERSTONE AND THE STOCKHOLDERS OF CORNERSTONE. THE
CORNERSTONE BOARD UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF CORNERSTONE
VOTE FOR APPROVAL OF THE WILSON ISSUANCE AND THE PGGM INVESTMENT.
In determining to approve the Contribution Agreement and the Wilson
Acquisition, the Cornerstone Board consulted with Cornerstone's management, as
well as its legal counsel and its financial advisors, and considered a number of
factors, including the following:
(i) the structure of the Wilson Acquisition and the terms and conditions
of the Contribution Agreement and the Registration Rights Agreement,
including the fact that the Wilson Acquisition is expected to be accretive
to Cornerstone's FFO per share;
(ii) the complementary nature of the Wilson Projects and Cornerstone's
current portfolio in terms of geographic and tenant diversity; and
(iii) the presentation of Morgan Stanley, Cornerstone's financial
advisor, including its opinion, dated as of June 17, 1998, which sets forth,
among other things, assumptions made, procedures followed, matters
considered and limitations on the review undertaken, that the consideration
to be paid to the Wilson Investors and the shareholders of WW&A pursuant to
the Contribution Agreement is fair from a financial point of view to
Cornerstone.
The foregoing discussion of information and factors considered and given
weight by the Cornerstone Board is not intended to be exhaustive. In view of the
wide variety of factors considered in connection with its evaluation of the
terms of the Wilson Acquisition, the Cornerstone Board did not find it
practicable to, and did not, quantify or otherwise attempt to assign relative
weights to the specific factors considered in reaching its determinations. In
addition, individual members of the Cornerstone Board may have given different
weights to different factors.
OPINION OF CORNERSTONE'S FINANCIAL ADVISOR
Pursuant to an engagement letter agreement dated April 9, 1998, Cornerstone
retained Morgan Stanley to act as its financial advisor in connection with the
Wilson Acquisition. Morgan Stanley was selected by the Cornerstone Board to act
as Cornerstone's financial advisor based on Morgan Stanley's qualifications,
expertise and reputation. No limitations were imposed by the Cornerstone Board
upon Morgan Stanley with respect to the investigation made or the procedures
followed by it in rendering its fairness opinion.
On June 17, 1998 and November 13, 1998, Morgan Stanley rendered its written
opinions to the Cornerstone Board that, as of the dates of such opinions and
based upon and subject to the various considerations set forth in such opinions,
the Consideration to be paid to the Wilson Investors and the shareholders of
WW&A pursuant to the Contribution Agreement is fair from a financial point of
view to Cornerstone. THE FULL TEXT OF MORGAN STANLEY'S OPINION, DATED AS OF
NOVEMBER 13, 1998, WHICH SETS FORTH, AMONG OTHER THINGS, ASSUMPTIONS MADE,
PROCEDURES FOLLOWED, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW
UNDERTAKEN, IS ATTACHED AS ANNEX C TO THIS PROXY STATEMENT. STOCKHOLDERS OF
CORNERSTONE ARE URGED TO, AND SHOULD, READ THE OPINION CAREFULLY AND IN ITS
ENTIRETY. MORGAN STANLEY'S OPINION IS DIRECTED TO THE
30
<PAGE>
CORNERSTONE BOARD, ADDRESSES ONLY THE FAIRNESS OF THE CONSIDERATION TO BE PAID
TO THE WILSON INVESTORS AND THE SHAREHOLDERS OF WW&A, AND DOES NOT ADDRESS ANY
OTHER ASPECT OF THE WILSON ACQUISITION ON THE PGGM INVESTMENT NOR CONSTITUTES A
RECOMMENDATION TO ANY STOCKHOLDER OF CORNERSTONE AS TO HOW SUCH STOCKHOLDER
SHOULD VOTE AT THE SPECIAL MEETING. THE SUMMARY OF MORGAN STANLEY'S OPINION,
DATED AS OF NOVEMBER 13, 1998, AS SET FORTH IN ANNEX C IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In connection with rendering its opinions, Morgan Stanley, among other
things: (i) reviewed certain publicly available financial statements and other
information of Cornerstone and the Operating Partnership; (ii) reviewed certain
internal financial statements and other financial and operating data concerning
WW&A and the Wilson Projects prepared by the management of WW&A; (iii) analyzed
certain financial projections prepared by the management of WW&A; (iv) discussed
the past and current operations and financial condition and the prospects of
WW&A and the Wilson Projects with senior executives of WW&A; (v) analyzed
certain internal financial statements and other financial operating data
concerning Cornerstone and the Operating Partnership prepared by the management
of Cornerstone; (vi) analyzed certain financial projections, including
individual property cash flow projections for WW&A and the Wilson Projects,
prepared by the management of Cornerstone; (vii) discussed the past and current
operations and financial condition and the prospects of Cornerstone and the
Operating Partnership with senior executives of Cornerstone; (viii) analyzed the
pro forma impact of the Wilson Acquisition on Cornerstone's FFO per share,
consolidated capitalization and financial ratios; (ix) discussed the strategic
objectives of the Wilson Acquisition and the plan for the combined company with
senior executives of WW&A and Cornerstone; (x) reviewed the reported prices and
trading activity for Cornerstone Common Stock; (xi) reviewed the financial
terms, to the extent publicly available, of certain comparable acquisition
transactions; (xii) participated in discussions and negotiations among
representatives of WW&A and Cornerstone and their financial and legal advisors;
(xiii) reviewed the Contribution Agreement and certain related documents,
including a letter from AE Properties Inc. dated June 8, 1998; and (xiii)
performed such other analyses and considered such factors as Morgan Stanley
deemed appropriate.
Morgan Stanley assumed and relied upon without independent verification the
accuracy and completeness of the information reviewed by it for purposes of its
opinions. With respect to the financial projections, Morgan Stanley assumed that
they were reasonably prepared on bases reflecting the best currently available
estimates and judgments of the future financial performance of Cornerstone, the
Operating Parnership, WW&A and the Wilson Projects. Morgan Stanley did not make
any independent valuation or appraisal of the assets or liabilities of WW&A or
the Wilson Projects, nor was it furnished with any such appraisals. Morgan
Stanley assumed that the Wilson Acquisition would be consummated in accordance
with the terms set forth in the Contribution Agreement. Morgan Stanley's
opinions were necessarily based on economic, market and other conditions in
effect on, and the information made available to Morgan Stanley as of, June 17
and November 13, 1998.
The following is a brief summary of certain analyses performed by Morgan
Stanley in connection with the preparation of its opinion as of November 13,
1998:
COMPARABLE COMPANY ANALYSIS
As part of its analysis, Morgan Stanley compared certain financial and
operating information of WW&A and the Wilson Projects with that of a group of
publicly traded REITs that Morgan Stanley considered comparable: Equity Office
Properties Trust, Crescent Real Estate Equities Company, Vornado Realty Trust,
Spieker Properties, Inc., Cornerstone, Boston Properties, Inc., CarrAmerica
Realty Corporation, Mack-Cali Realty Corporation, Highwoods Properties, Inc.,
Arden Realty, Inc. and Kilroy Realty Corporation. (collectively, the
"Comparables"). The Comparables were selected primarily because they possess
general business, operating and financial characteristics, and property
portfolios which are generally similar to WW&A and the Wilson Projects. The
financial information analyzed included a review of financial ratios (in each
case based on the share prices as of November 11, 1998) such as the ratio of
equity market capitalization to FFO (the "FFO Multiple") and to adjusted funds
from operations ("AFFO" and such ratio the "AFFO Multiple"), and the ratio of
total market capitalization to earnings
31
<PAGE>
before interest, taxes, depreciation and amortization ("EBITDA," and such ratio
the "EBITDA Multiple"). Morgan Stanley noted that based on a compilation of FFO
estimates from First Call Corporation, the Comparables traded at: (i) 1999 FFO
Multiples between 7.3 times and 11.3 times with a median of 8.7 times; (ii) 1999
AFFO Multiples between 7.9 times and 12.7 times with a median of 10.2 times; and
(iii) 1999 EBITDA Multiples between 6.2 and 11.3 with a median of 9.2 times.
Based on the analysis of the financial ratios of the Comparables, Morgan Stanley
calculated theoretical aggregate values for WW&A and the Wilson Projects of
between $1.500 billion and $1.891 billion.
No company considered for purposes of comparison to WW&A and the Wilson
Projects in the comparable company analysis is identical to WW&A and the Wilson
Projects. In evaluating the Comparables, Morgan Stanley made judgements and
assumptions with regard to industry performance, general, business, economic,
market and financial conditions and other matters. Mathematical analysis (such
as determining the average or median) of the financial ratios of the Comparables
is not in itself a meaningful method of using comparable company data.
ANALYSIS OF SELECTED PRECEDENT TRANSACTIONS
Morgan Stanley reviewed certain recent acquisition transactions and business
combinations in the real estate sector. Terms for certain transactions which
would be relevant to the Wilson Acquisition, particularly those involving
private companies, were not publicly available. Morgan Stanley focused on
transactions involving REITs and private companies or major single assets. Using
publicly available information, Morgan Stanley reviewed the financial terms of
the following transactions: Vornado Realty Trust's acquisition of the Mendik
Company; Morgan Stanley Real Estate Fund and PaineWebber's acquisition of
Bellmead Development; Kilroy Realty Corporation's acquisition of the Allen
Group; Equity Office Properties Trust's acquisitions of an office portfolio from
Prudential Insurance, 10 & 30 South Wacker Drive, the assets of Wright Runstad &
Co., the Collonade complex, and an office portfolio from Miller Global/Anschutz
Properties; Equity Office Properties Trust's merger with Beacon Properties
Corp.; Cali Realty Corp.'s acquisition of the Mack Companies and Patriot
American Office Group; Cornerstone's acquisition of an office portfolio from
DIHC; Mack-Cali Realty Corporation's acquisition of Pacifica Holdings; Spieker
Properties, Inc.'s acquisition of WCB Properties; Arden Realty Inc.'s
acquisition of a portfolio from AEW and Layton-Bellings Associates; and Boston
Properties, Inc.'s acquisitions of Embarcadero Center and the office portions of
Prudential Center. Morgan Stanley noted that these transactions were completed
at yields on the first fiscal year net operating income ("NOI") between 6.6% and
9.8%, with an average of 8.1% (weighted by aggregate transaction value), and
aggregate values per square foot between $108 and $325, with an average of $173.
Based on this analysis, Morgan Stanley calculated aggregate values for WW&A and
the Wilson Projects of between $1.533 billion and $2.277 billion.
No transaction considered for purposes of the precedent transaction analysis
is identical to the Wilson Acquisition. In evaluating precedent transactions,
Morgan Stanley made judgements and assumptions with regard to industry
performance, general business, economic, market and financial conditions, among
other factors. Mathematical analysis (such as determining the average or median)
of the financial ratios of the Comparables is not in itself a meaningful method
of using comparable company data.
DISCOUNTED CASH FLOW ANALYSIS
Morgan Stanley performed several discounted cash flow analyses in order to
estimate the present value of the unleveraged free cash flow generated by the
Wilson Projects. Such discounted cash flow analyses were based on cash flow
models for the fiscal years 1998 through 2008 provided by Cornerstone in ARGUS,
a popular brand of financial modeling software for real estate properties. ARGUS
calculated unleveraged net property cash flow as NOI less tenant improvements,
leasing commissions and other recurring capital expenditures. These amounts
equaled $116.6 million in 1999 and increased to $211.9 million in 2008. Morgan
Stanley also performed several discounted cash flow analyses to estimate the
present value of the combined unleveraged net cash flow of the Wilson Projects
and the WW&A management business. Morgan Stanley arrived at discounted cash flow
valuations by applying a range of
32
<PAGE>
discount rates between 10.5% and 12.5% and calculated terminal values by
capitalizing NOI at rates ranging from 8.50% to 9.50%. Based on this analysis,
Morgan Stanley calculated combined aggregate values for WW&A and the Wilson
Projects of between $1.646 billion and $1.982 billion.
CONTRIBUTION ANALYSIS
Morgan Stanley analyzed the pro forma contribution of WW&A and the Wilson
Projects, on the one hand, and Cornerstone, on the other hand, to the 1999 and
2000 FFO and NOI of the combined company. Such analysis was based upon estimates
of NOI and FFO provided by the management of Cornerstone and, with respect to
WW&A and the Wilson Projects, projections based on ARGUS models, management
projections and other information provided by Cornerstone. Management of
Cornerstone advised Morgan Stanley that they expected (i) FFO contribution to
the combined company from WW&A and the Wilson Projects to be $98.8 million and
$111.3 million in 1999 and 2000, respectively, including the effect of
straight-line rents and (ii) NOI contribution to the combined company from WW&A
and the Wilson Projects to be $161.6 million and $176.9 million in 1999 and
2000, respectively. The analysis indicated that WW&A and the Wilson Projects
would contribute 40.2% and 41.0% of the combined company's 1999 and 2000 pro
forma NOI, respectively. In addition, WW&A and the Wilson Projects would
contribute 37.8% and 39.7% of the combined company's 1999 and 2000 FFO,
respectively.
ANALYSIS OF THE WILSON ACQUISITION
Morgan Stanley analyzed the pro forma impact of the Wilson Acquisition on
Cornerstone's FFO per share for 1999 and 2000. The analysis was performed using
certain financial projections provided by the management of Cornerstone with
respect to NOI and FFO (as described above), potential cost savings of the
Wilson Acquisition, refinancing of certain debt assumed in the Wilson
Acquisition, and a desired debt-to-total-market-capitalization assumed to be 40%
subsequent to the Wilson Acquisition. Based on this analysis, the Wilson
Acquisition is expected to be accretive to Cornerstone's FFO for both 1999 and
2000. Morgan Stanley's analysis assumed that 50% of the consideration would be
paid in shares of Cornerstone Common Stock, that all fixed rate debt assumed and
interest thereon were marked-to-market using an interest rate of 6.91% and that
any financing required for the cash portion of the Consideration was obtained at
an interest rate of 6.91%.
In connection with its written opinion dated as of November 13, 1998, Morgan
Stanley reviewed the analyses used to render its June 17, 1998 opinion by
performing procedures to update certain such analyses and by reviewing the
assumptions upon which such analyses were based and the factors considered in
connection therewith.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to a partial analysis or summary description. In
arriving at its opinion, Morgan Stanley considered the results of all its
analyses as a whole and did not attribute any particular weight to any
particular analysis or factor considered by it. Furthermore, selecting any
portion of Morgan Stanley's analyses or factors considered by it, without
considering all analyses and factors, would create an incomplete view of the
process underlying its opinion. The range of valuations resulting from any
particular analysis described above should therefore not be taken to be Morgan
Stanley's view of the actual value of WW&A and the Wilson Projects.
In performing its analyses, Morgan Stanley made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of Cornerstone and WW&A. The
analyses performed by Morgan Stanley are not necessarily indicative of actual
values or actual future results, which may be significantly more or less
favorable than suggested by such analyses. Such analyses were prepared solely as
a part of Morgan Stanley's analyses of the fairness from a financial point of
view of the consideration to be paid to the Wilson Investors and the
shareholders of WW&A pursuant to the Contribution Agreement and were conducted
in connection with the delivery of Morgan Stanley's opinions. The analyses do
not purport to be appraisals or to reflect the prices at which businesses
actually may be valued in the marketplace.
33
<PAGE>
In addition, as described above, Morgan Stanley's opinions dated June 17,
1998 and November 13, 1998 were among many factors taken into consideration by
the Cornerstone Board in making its determination to recommend approval of the
Wilson Acquisition. Consequently, the Morgan Stanley analyses described above
should not be viewed as determinative of the opinion of the Cornerstone Board or
the view of the management of Cornerstone with respect to the value of
Cornerstone or of whether the Cornerstone Board would have been willing to agree
to a different consideration to be paid in the Wilson Acquisition. Such
consideration was determined through negotiations between Cornerstone and WW&A
and was approved by the Cornerstone Board. Morgan Stanley provided advice to
Cornerstone during the course of such negotiations; however, the decision to
enter into the Contribution Agreement and to agree to the consideration to be
paid in the Wilson Acquisition was solely that of the Cornerstone Board.
As part of its investment banking business, Morgan Stanley is regularly
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations, for estate, corporate and other purposes. In the course of its
market-making and other trading activities, Morgan Stanley may, from time to
time, have a long or short position in, and buy and sell, securities of
Cornerstone.
Pursuant to a letter agreement dated April 9, 1998, between Cornerstone and
Morgan Stanley, Cornerstone has agreed to pay to Morgan Stanley (i) an advisory
fee estimated to be approximately $100,000, which is payable if the Wilson
Acquisition is not consummated and (ii) a transaction fee equal to approximately
$5.6 million, based upon a percentage of the assumed aggregate value of the
Consideration to be paid to the Wilson Investors and shareholders of WW&A of
$1.8 billion, which is payable upon the consummation of the Wilson Acquisition.
Any advisory fee paid will be credited against the transaction fee. Cornerstone
has also agreed to reimburse Morgan Stanley for its out-of-pocket expenses and
to indemnify Morgan Stanley and its affiliates, their respective directors,
officers, agents and employees and each person, if any, controlling Morgan
Stanley or any of its affiliates against certain liabilities, including
liabilities under federal securities laws, and expenses, related to Morgan
Stanley's engagement.
In addition, by letter agreement dated June 18, 1998, Cornerstone engaged
Merrill Lynch & Co. to render financial advisory services in connection with the
Wilson Acquisition. Cornerstone has agreed to pay Merrill Lynch & Co. an
advisory fee of $200,000, of which $100,000 has been paid and $100,000 will be
paid upon completion of the Wilson Acquisition.
TERMS OF THE CONTRIBUTION AGREEMENT
GENERAL
The Cornerstone Board has approved the Contribution Agreement, which
provides for (A) the acquisition by Cornerstone and the Operating Partnership of
Interests in the Joint Ventures, the Funds, other intermediate tier entities and
the Project Entities from the holders thereof in exchange for the Consideration
and (B) the Merger. This section describes certain provisions of the
Contribution Agreement. This description does not purport to be complete and is
qualified in its entirety by reference to the Contribution Agreement, a copy of
which is attached hereto as Annex A and is incorporated herein by this
reference. All stockholders of Cornerstone are urged to read the Contribution
Agreement carefully and in its entirety.
CONTRIBUTION TRANSACTIONS
Cornerstone and the Operating Partnership will acquire the Interests from
the Wilson Investors in exchange for the Consideration. The amounts payable to
the Wilson Investors are equal to the aggregate values allocated to the Wilson
Projects in the Contribution Agreement (the "Project Values"), less the
aggregate outstanding principal balances and accrued and unpaid interest of the
debt secured by and related to the Wilson Projects on the date of closing (the
"Net Project Values").
34
<PAGE>
THE MERGER
WW&A will be merged into Cornerstone, the separate corporate existence of
WW&A will cease, and Cornerstone will continue as the surviving corporation. As
a result of the Merger, all the property, rights, privileges, powers and
franchises of WW&A will vest in Cornerstone, and all debts, liabilities,
obligations, restrictions, disabilities and duties of WW&A will be assumed by
Cornerstone. Upon the closing of the Merger, shareholders of WW&A will receive,
in conversion of all of their shares of WW&A common stock, approximately
3,136,000 shares of Cornerstone Common Stock, which amount was determined by
dividing: (i) the value allocated to WW&A in the Contribution Agreement (the
"WW&A Company Value") (after adjustment for costs of the Wilson Acquisition, but
excluding the Consideration payable to WW&A in respect of its Interests in the
Wilson Projects); by (ii) the Effective Price of $17.25. In the event that the
value of WW&A's construction operations through its Commercial Interior
Contractors ("CIC") division exceeds $1,800,000 (based on a valuation formula of
six times 1998 EBITDA), additional shares of Cornerstone Common Stock will be
issued to the WW&A shareholders in an aggregate number equal to the amount of
such excess divided by the Effective Price, subject to a maximum excess payment
of $1,800,000. The number of shares of Cornerstone Common Stock issuable to the
shareholders of WW&A in the Merger will also be subject to adjustment if a
Wilson Project in which WW&A owns an Interest is withdrawn from the Wilson
Acquisition or if any other events affecting Project Values should occur with
respect to Wilson Projects in which WW&A owns an Interest.
CORNERSTONE BOARD
Pursuant to the terms of the Contribution Agreement, upon completion of the
Wilson Acquisition, Cornerstone will amend and restate its Bylaws to provide
certain governance rights for William Wilson III and PGGM, as described below.
The following is a summary description of such rights and is qualified in its
entirety by the full text of the proposed Amended and Restated Bylaws of
Cornerstone, a copy of which is attached as an exhibit to the Registration
Rights Agreement.
BOARD SEATS. The number of members of the Cornerstone Board will be
expanded from 11 to 14. For three years after the closing of the Wilson
Acquisition (the "Wilson Period"), William Wilson III will be Chairman of
the Cornerstone Board and will have the right to designate two other
individuals to be nominated by the Cornerstone Board for election as
directors of Cornerstone. At least one Wilson Director must be an
"independent" director under the rules of the NYSE and a "non-employee
director" under the rules promulgated under Section 16(b) of the Exchange
Act. Under the rules of the NYSE, "independent" directors are those who are
independent of management and free from any relationship that, in the
opinion of the board of directors, would interfere with the exercise of
independent judgement. Rule 16b-3(b)(3)(i) under the Exchange Act defines a
"non-employee director" as a director who (i) is not currently an officer of
the issuer or a parent or subsidiary of the issuer, or otherwise currently
employed by Cornerstone or a subsidiary of Cornerstone, (ii) does not
receive compensation, either directly or indirectly, from Cornerstone or a
subsidiary of Cornerstone, for services rendered as a consultant or in any
capacity other than as a director, except for an amount that does not exceed
$60,000, (iii) does not possess an interest in any other transaction with
Cornerstone or its subsidiaries in an amount in excess of $60,000, (iv) is
not an executive officer of or owner of a ten percent or more equity
interest in any entity that is engaged in any business relationship with
Cornerstone or its subsidiaries which involves payments by or to Cornerstone
or its subsidiaries in excess of five percent of (A) Cornerstone's
consolidated gross revenues for its last full fiscal year, or (B) the other
entity's consolidated gross revenues for its last full fiscal year, or any
entity that is indebted at the end of its last fiscal year to Cornerstone or
its subsidiaries in an amount in excess of five percent of Cornerstone's
total consolidated assets at the end of such fiscal year, (v) is not a
member of or of counsel to a law firm that Cornerstone has retained or
proposes to retain where the dollar amount of fees paid to such law firm
exceeds five percent of such firm's gross revenues for that firm's last full
fiscal year, (vi) is not a partner or executive officer of any investment
banking firm that
35
<PAGE>
has performed services for the registrant, other than as a participating
underwriter in a syndicate, or that Cornerstone proposes to have perform
services where the dollar amount of compensation received by such firm
exceeds five percent of such firm's consolidated gross revenues for that
firm's last full fiscal year and (vii) does not have any other relationship
with Cornerstone that is substantially similar in nature and scope to those
listed in clauses (iv), (v) and (vi) above. So long as PGGM and its
affiliates own at least 5% of the outstanding shares of Cornerstone Common
Stock, the Cornerstone Board will nominate for election as directors two
individuals designated by PGGM. Until the expiration of the Wilson Period
and the "PGGM Period" (as defined below), the number of directors
constituting the full Cornerstone Board may not be increased without the
approval of a majority of the entire board and the unanimous approval of the
Board Affairs Committee.
DIRECTOR NOMINATIONS. All nominees for election as directors of
Cornerstone (other than PGGM Directors who are affiliated with PGGM, Mr.
Wilson and the incumbent members of the Cornerstone Board, including
directors designated by NYSTRS, Rodamco and Deutsche Bank AG) must be
approved by a majority of the entire Cornerstone Board and the unanimous
vote of the Board Affairs Committee. During the period ending upon the
earlier of: (i) the date on which PGGM and its affiliates own less than 25%
of the outstanding Cornerstone Common Stock; or (ii) October 31, 2002 (the
"PGGM Period"), no nominee for election as a director, other than the PGGM
Directors, may be affiliated with PGGM.
COMMITTEES. Mr. Wilson will be a member of the Board Affairs Committee
during the Wilson Period. The duties and responsibilities of the Board
Affairs Committee (which include approving all nominees for the Cornerstone
Board) shall not be changed by the Cornerstone Board without the approval of
a majority of the entire Cornerstone Board and the unanimous approval of the
Board Affairs Committee during either the Wilson Period or the PGGM Period.
In addition, during the Wilson Period, each committee of the Cornerstone
Board will include at least one Wilson Director (provided that the Wilson
Directors serving on the Audit and Compensation Committees must be
independent). During the PGGM Period, each committee other than the Audit
and Compensation Committees will include at least one PGGM Director, and at
least half of the members of the Investment Committee must be independent.
The Amended and Restated Bylaws will also restrict the ability of the
Cornerstone Board to amend the foregoing provisions under certain
circumstances without the unanimous approval of the Board Affairs Committee.
WITHDRAWAL OF WILSON PROJECTS
A Wilson Project generally may be withdrawn from the Wilson Acquisition: (i)
at Cornerstone's election, if certain of the projects suffer a major casualty or
condemnation or if the consent of a lender for the prepayment or assumption of
debt secured by any of the projects cannot be obtained in accordance with the
Contribution Agreement; or (ii) at the election of Cornerstone or the Wilson
Parties, if certain representations or warranties of the Wilson Parties with
respect to a project are discovered to have been inaccurately made or if certain
other facts concerning encumbrances or environmental conditions affecting the
property are discovered, and in either case such occurrence results in a loss or
liability to Cornerstone equal to at least 15% of the Project Value allocated to
the Wilson Project in the Contribution Agreement; provided, however, that the
Wilson Parties may not elect to withdraw a project on the basis of an inaccuracy
caused through their breach of a provision of the Contribution Agreement or
their intentional action or omission. In the case of the Wilson Project known as
Bayhill 4-7, Cornerstone has agreed that a Wilson Investor affiliated with
Travelers Group may elect to withdraw such project from the Wilson Acquisition
in the event that any such occurrence results in a loss or liability to such
Wilson Investor in excess of 5% of the Project Value allocated to such Wilson
Project. In the event any Wilson Project is withdrawn from the Wilson
Acquisition, the Cornerstone Parties will not acquire any Interest in the
withdrawn Wilson Project or assume any loan related to it, and the entity that
owns such Wilson Project will either retain the project (and withdraw from the
Wilson Acquisition) or, if the entity is otherwise to be
36
<PAGE>
acquired by the Cornerstone Parties in the Wilson Acquisition, distribute such
withdrawn Wilson Project to the Investors who own the Project Entity, who will
then retain the Wilson Project following the closing.
CONDITIONS TO THE CONSUMMATION OF THE WILSON ACQUISITION
Each party's obligations to effect the Wilson Acquisition are conditioned
upon the satisfaction or waiver on or prior to the closing of various conditions
which include, in addition to other customary closing conditions, the following:
(i) the closing shall have occurred prior to 12:01 A.M. San Francisco
time, on January 1, 1999;
(ii) the representations and warranties of the Wilson Parties, on the
one hand, and the Cornerstone Parties, on the other hand, made in the
Contribution Agreement shall be true, complete and correct as of the closing
date, provided a party may not terminate the Contribution Agreement based
upon inaccurate representations or warranties unless the loss or liability
resulting therefrom exceeds the sum of (A) 3% of the sum of all Project
Values for the Wilson Projects included in the Wilson Acquisition (adjusted
pro rata to reflect partially-acquired Wilson Projects) plus (B) $5,000,000;
(iii) each party shall have complied with and duly performed all of its
applicable covenants, obligations and agreements, provided a party may not
terminate the Contribution Agreement unless the failure of such performance
by the other party would have a material adverse effect on the Wilson
Acquisition;
(iv) there shall not be in effect any order which enjoins or prohibits
completion of the Wilson Acquisition, nor any action pending which seeks the
imposition of such an order;
(v) the waiting period under the HSR Act shall have expired or been
terminated;
(vi) the Cornerstone stockholders shall have approved the Wilson
Issuance and the PGGM Investment at the Special Meeting;
(vii) with respect to the Wilson Parties' obligations to close, (A)
Cornerstone shall be qualified as a REIT for federal income tax purposes as
of the closing of the Wilson Acquisition, (B) the Operating Partnership
shall be classified as a partnership for federal, state and local income tax
purposes as of the closing of the Wilson Acquisition, (C) the PGGM
Investment shall have closed or shall close simultaneously with the closing
of the Wilson Acquisition, (D) the Amended and Restated Bylaws of
Cornerstone, in the form attached as an exhibit to the Contribution
Agreement, shall be in full force and effect, (E) no change in control
transaction shall have occurred with respect to any of the Cornerstone
Parties nor shall any agreement have been entered into relating thereto, (F)
no Fund Projects shall have been designated as withdrawn Wilson Projects nor
shall any adjustments to Project Values to account for breaches of
representations and warranties by the Wilson Parties have been effected
which together have the effect of causing any Wilson Investor owning
Interests in a Fund to receive less than 95% of the Consideration such
Wilson Investors would have received but for such events and (G) receipt of
an opinion of counsel to Cornerstone reasonably satisfactory to the Wilson
Parties and in a form to be mutually agreed upon by the Cornerstone Parties
and the Wilson Parties, which opinion shall address: (I) the existence, good
standing and qualification of the Cornerstone Parties; (II) the power and
authority of the Cornerstone Parties to enter into the Contribution
Agreement and close the transactions contemplated thereby, including the
execution of the various agreements pursuant thereto; (III) the matters
customarily covered in a 10b-5 "cold comfort" discussion pursuant to the
applicable securities laws; and (IV) that, commencing with its taxable year
ended December 31, 1997, Cornerstone was organized and has operated in
comformity with the requirements for qualification as a REIT under the Code,
and the Operating Partnership has been during and since its formation, and
continues to be, treated for federal income tax purposes as a partnership
and not as a corporation or association taxable as a corporation; and
37
<PAGE>
(viii) with respect to the Cornerstone Parties' obligations to close, (A)
the outstanding principal balance of the indebtedness on the Wilson Projects
to be assumed by Cornerstone at the closing shall not be less than
$496,000,000, (B) the aggregate Consideration which would have been payable
to all non-consenting Wilson Investors asserting dissenters' rights in the
Wilson Acquisition if they had been consenting Wilson Investors shall not
exceed $50,000,000 and (C) the Cornerstone Parties shall have received a
reasonably acceptable "comfort letter" from PricewaterhouseCoopers LLP with
respect to this Proxy Statement.
ADJUSTMENTS FOR CERTAIN PROJECTS
For five of the Wilson Projects -- Concar, Agoura Hills, Peninsula Office
Park-IX, Bay Park Plaza and Pruneyard -- there will be special adjustments to
the Consideration and/or Project Values or Net Project Values because of the
circumstances at these Wilson Projects. The Agoura Hills project was acquired in
April 1998, and the parties agreed that the Project Value for that Wilson
Project will be equal to the actual capital costs incurred with respect to the
project, which may increase prior to the closing. Concar, Peninsula Office
Park-IX, Bay Park Plaza and Pruneyard are undergoing development or significant
improvement. As set forth below, the Project Values or Net Project Values for
each of those projects and/ or the Consideration payable to Wilson Investors
with Interests in those projects will be adjusted at the closing and, in the
case of the Pruneyard project, a portion of the Consideration will be placed in
a special holdback escrow at the closing and a further adjustment will be made
upon completion of the improvements currently underway at the project. Those
adjustments are as follows:
CONCAR. The Project Value for the Concar project is intended to be an
estimate of the sum of actual out-of-pocket capitalized costs (including
unamortized lease costs and capital expenditures) incurred by the related
Project Entity in acquiring the project. Such Project Entity is in the
process of acquiring the Concar project. It is anticipated that control of
Concar for development will be obtained through a ground lease to be entered
into between the Project Entity and the current, unaffiliated owner of the
project. Upon review of the proposed terms of the ground lease, the
Cornerstone Parties may elect to exclude the project from the Wilson
Acquisition. If the Concar project is included in the Wilson Acquisition,
the Operating Partnership will assume all obligations for the project and
will reimburse the related Project Entity in cash for all development costs
incurred through the closing, including budgeted amounts of development or
construction fees or other payments to WW&A or its affiliates and any
amounts advanced by WW&A or its affiliates to pay development costs,
together with all closing and transaction costs for assigning the project to
the Operating Partnership.
AGOURA HILLS. The Project Value for Agoura Hills is intended to be an
estimate of the sum of the actual out-of-pocket capitalized costs (including
unamortized lease costs and capital expenditures) incurred by the related
Project Entity from its acquisition of the project until the closing of the
Wilson Acquisition, including an acquisition fee to WW&A of 75 basis points
on the project's acquisition cost. At the closing, the Project Value for
Agoura Hills will be adjusted to reflect the actual amounts of such costs.
PENINSULA OFFICE PARK-IX AND BAY PARK PLAZA. The Project Values for the
Peninsula Office Park-IX and Bay Park Plaza projects reflect the values
allocated to such projects assuming completion of the improvements currently
underway at the projects and full funding of the construction loans for such
projects. Prior to the closing of the Wilson Acquisition, the Cornerstone
Parties will make a reasonable determination, with respect to each such
project, of the additional costs the Operating Partnership will incur after
closing to complete the improvements, which determination will be subject to
reasonable approval by the Wilson Parties. At the closing, the Project Value
for each project will be reduced by the amount of remaining completion
costs, as so determined, and the Net Project Value will be calculated by
deducting the actual principal balance and accrued and unpaid interest of
the debt secured by and related to such project from such adjusted Project
Value.
38
<PAGE>
PRUNEYARD. As with the Peninsula Office Park-IX and Bay Park Plaza
projects, the Project Value for the Pruneyard project assumes completion of
the improvements currently underway. The Consideration payable at the
closing to Wilson Investors with Interests in Pruneyard (the "Pruneyard
Closing Consideration") will be that Project Value reduced by any
development, construction, management, leasing or similar fees payable to
WW&A or its affiliates after the closing, and further reduced by the net
estimated costs to be incurred by the Cornerstone Parties after the closing
to complete the improvements currently underway, including interest on the
existing debt secured by and related to the project and a comparable return
on any equity invested by the Cornerstone Parties to fund such completion
costs. Upon substantial completion of the improvements, the actual
completion costs will be determined. To the extent the actual completion
costs are less than the estimated amount used to determine the Pruneyard
Closing Consideration, the Cornerstone Parties will be required to pay the
amount of such cost savings to the Wilson Investors with Interests in
Pruneyard as additional Consideration (the "Pruneyard Additional
Consideration"), and to the extent the actual completion costs are more than
the estimated amount, the Wilson Investors will be required to pay the
amount of such cost overruns to the Cornerstone Parties.
To provide a mechanism for the payment of any amounts due to Cornerstone in
the event of completion cost overruns, Consideration equal to 15% of the
estimated completion costs at the time of closing will be withheld from the
Wilson Investors with Interests in Pruneyard and placed in a special escrow
account pending completion of the improvements. The escrow account will be
comprised of shares of Cornerstone Common Stock, Units and/or cash proportional
to the overall Consideration payable to the Wilson Investors with Interests in
Pruneyard. At the request of the Wilson Representative, the amount retained in
the escrow account may be reduced and released to the Wilson Investors with
Interests in Pruneyard from time to time if periodic redeterminations of the
completion costs result in reductions to the original estimate. For purposes of
any payments to Cornerstone or returns to the Wilson Investors with Interests in
Pruneyard, the value of any shares or Units in the escrow account will be based
on the Effective Price during the first year of the escrow and on a 10-day
market price average thereafter. Any cost overrun payments due to Cornerstone
which cannot be made from the escrow account will be the responsibility of the
Wilson Investors with Interests in Pruneyard, allocable among them in proportion
to their respective amounts of the overall Consideration payable for the
Pruneyard project.
ADDITIONAL ACQUISITIONS
Pending the closing of the Wilson Acquisition, Office Opportunity Fund IV,
L.P. ("Fund-IV") and WW&A and its affiliates may make additional acquisitions of
real estate projects only with the approval of Cornerstone, and if approved such
acquisitions shall be included in the Wilson Acquisition. Interests in the
Project Entities related to any such acquisitions which are to be included in
the Wilson Acquisition Approved Additional Projects will be contributed to the
Operating Partnership at the closing of the Wilson Acquisition, and any
acquisitions which are not to be included in the Wilson Acquisition will be
distributed to the beneficial owners before the closing. At the request of WW&A,
Cornerstone will be required to make a loan to the acquiring Project Entity (an
"Acquisition Loan") in an amount equal to all out-of-pocket costs reasonably
incurred in connection with the acquisition of the Approved Additional Project
(excluding amounts payable to WW&A or any affiliate of WW&A unless approved by
Cornerstone in its discretion). Each such Acquisition Loan will be secured by
the Approved Additional Project, will be payable out of all distributable cash
from the Approved Additional Project, and will be guaranteed by Fund-IV, WW&A or
another party acceptable to Cornerstone. If the closing of the Wilson
Acquisition does not occur, 20% of the outstanding amount of each Acquisition
Loan shall become due and payable upon 10 business days' demand by Cornerstone,
and the balance and all interest accrued and unpaid thereon shall be due 180
days thereafter. All advances under an Acquisition Loan shall accrue interest at
a rate per annum until paid equal to LIBOR plus 150 basis points, but, prior to
maturity, shall only be payable to the extent of distributable cash from the
related Approved Additional Project. "LIBOR" means the one month London
Interbank Offer Rate as reported from time to time under the heading "Interest:
39
<PAGE>
LIBOR (One Month)" by THE WALL STREET JOURNAL. If the closing of the Wilson
Acquisition occurs, each Approved Additional Project will be included in the
Wilson Acquisition for an amount of Consideration equal to the sum of: (i) all
unrecovered out-of-pocket costs incurred in connection with the acquisition and
ownership of such Approved Additional Project (not including costs paid to WW&A
or any affiliate of WW&A, unless otherwise approved by the Cornerstone Parties);
plus (ii) all cumulative negative cash flow paid by the related Project Entity
from the date of the acquisition to the closing of the Wilson Acquisition; and
less (iii) the amount of all indebtedness related to the Approved Additional
Project, including the principal balance and accrued and unpaid interest under
the Acquisition Loan.
To date, Cornerstone has approved two Approved Additional Projects known as
PeopleSoft Plaza in Pleasanton, California, and Seaport Plaza in Redwood City,
California, and has funded Acquisition Loans in an aggregate amount of
approximately $60,000,000 in connection with the acquisition of such Approved
Additional Projects. The terms of the PeopleSoft Plaza Acquisition Loan differ
from the Acquisition Loan terms contemplated by the Contribution Agreement in
the following respects: (i) the loan is guaranteed by WWA Investors, LLC, an
entity controlled by the management of WW&A ("WWA Investors"); (ii) effective 12
months after the date of the loan, the per annum interest rate on the loan
increases from LIBOR plus 150 basis points to LIBOR plus 200 basis points; and
(iii) if the closing of the Wilson Acquisition does not occur, the entire unpaid
principal balance and all accrued and unpaid interest thereon shall be due and
payable 18 months after the date of the loan.
LEASE COSTS AND CAPITAL EXPENDITURES
As used in the Contribution Agreement, "Lease Costs" include all leasing
commissions, tenant improvement allowances, costs of tenant improvement work and
other out-of-pocket inducements for leases at the Wilson Projects, and "Capital
Expenditures" include all costs for capital improvements or repairs to the
Wilson Projects. Each Project Entity will be responsible for all Lease Costs for
leases entered into before April 1, 1998, and all Capital Expenditures incurred
and paid or due and payable before April 1, 1998, related to such Project
Entity. Except for the Concar and Agoura Hills projects and any Approved
Additional Projects and buildings under construction at the Pruneyard, Peninsula
Office Park-IX and Bay Park Plaza projects, all Lease Costs for leases entered
into, and all Capital Expenditures incurred and paid or due and payable, on or
after April 1, 1998 and prior to the closing will be borne equally by the
Operating Partnership and the respective Project Entities benefited by those
leases or work; provided that the Operating Partnership's share will be reduced
proportionally for any Project Entities with respect to which it acquires less
than full ownership.
A $3,000,000 credit will be established at the closing of the Wilson
Acquisition to be applied against the obligations of investors in Fund-IV and
co-investors in Project Entities in which Fund-IV and/or co-investors in Fund-IV
are investors (collectively, "Fund-IV Related Investors") to pay Lease Costs and
Capital Expenditures and certain costs of the Wilson Acquisition, with any
unapplied balance to be paid to them at the closing as additional Consideration.
The credit will be allocated in proportion to the respective amounts of
Consideration paid to the Fund-IV Related Investors. This $3,000,000 credit to
the Fund-IV Related Investors was negotiated by the Wilson Parties and the
Cornerstone Parties to reflect additional value resulting from the lease-up of
the Seaport Plaza project and the increase in the value of the lease in
connection with the Concar project.
40
<PAGE>
TERMINATION
The Contribution Agreement may be terminated and the Wilson Acquisition
abandoned at any time prior to the closing in the following circumstances:
(i) by the mutual written consent of the Wilson Parties and the
Cornerstone Parties;
(ii) by either WW&A or the Cornerstone Parties if the other party shall
have materially breached any covenant, agreement or obligation under the
Contribution Agreement and not remedied such breach within the applicable
notice and cure period;
(iii) by either the Wilson Parties or the Cornerstone Parties if, after
submission of this Proxy Statement to the Cornerstone stockholders,
sufficient stockholders have responded and, based on such responses, the
Cornerstone stockholders' approval of the Wilson Issuance and the PGGM
Investment will not be obtained for any reason (other than as a result of
the terminating party's default under the Contribution Agreement) and the
Cornerstone stockholders' approval of the Wilson Issuance and the PGGM
Investment in fact has not been received due to a change in vote or other
factors within 30 days thereafter;
(iv) by either the Wilson Parties or the Cornerstone Parties if any
governmental action would prevent the closing of the Wilson Acquisition or
would have a material adverse effect on the Wilson Acquisition;
(v) by the Cornerstone Parties if any of their conditions to closing
have not been satisfied by the closing;
(vi) by the Wilson Parties if any of their conditions to closing have
not been satisfied by the closing; or
(vii) automatically if the closing shall not have occurred prior to 12:01
A.M. San Francisco time, on January 1, 1999, or, if such time falls within a
cure period for a default under the Contribution Agreement, at the end of
such cure period.
NO SOLICITATION
WW&A has agreed that, except as expressly permitted under the Contribution
Agreement, it will not, directly or indirectly, initiate or solicit any
inquiries or any proposal, or participate in any discussions or negotiations
regarding a proposal, involving: (i) any merger, business combination or similar
transaction between WW&A or the Wilson Projects and any third party; (ii) any
sale, lease or other disposition of the real estate projects controlled by WW&A
other than in the ordinary course of business or in connection with existing
legal obligations; (iii) any public announcement of a proposal, plan or
intention to do any of the foregoing restricted activities or any agreement to
engage in any of the foregoing restricted activities; or (iv) any action that
would preclude WW&A from being able to complete the Wilson Acquisition.
The Cornerstone Parties have agreed that, except as expressly permitted
under the Contribution Agreement, they will not, directly or indirectly,
initiate or solicit any inquiries or any proposal, or participate in any
discussions or negotiations regarding a proposal, involving: (i) any merger,
business combination or similar transaction with a third party; (ii) any sale,
lease or other disposition of 20% or more of the assets owned by the Cornerstone
Parties; (iii) any public announcement of a proposal, plan or intention to do
any of the foregoing restricted activities or any agreement to engage in any of
the foregoing restricted activities; or (iv) any action that would preclude the
Cornerstone Parties from being able to complete the Wilson Acquisition.
The non-solicitation obligations of WW&A and Cornerstone described above
will terminate if the Contribution Agreement is terminated in accordance with
its terms.
41
<PAGE>
STANDSTILL AGREEMENT
The parties have agreed that, if the closing of the Wilson Acquisition does
not occur, then for a period of 24 months after the date of the Contribution
Agreement, unless specifically invited in writing by the other party's Board of
Directors, neither Cornerstone nor WW&A (nor any of their respective affiliates)
will, directly or indirectly; (A) effect or seek, offer or propose to effect, or
cause to participate in, (i) the acquisition of the other party's securities or
assets, (ii) any tender or exchange offer, merger or other business combination
involving the other party, (iii) any recapitalization, restructuring or other
extraordinary transaction with respect to the other party, or (iv) any
solicitation of proxies or consents to vote any of the other party's voting
securities; (B) form, join or in any way participate in a group or otherwise
act, alone or in concert with others, to seek to control or influence the other
party's management, Board of Directors or policies; or (C) enter into any
discussion or arrangement with any third party with respect to any of the
foregoing; provided that the restrictions set forth above shall not apply to
professional asset managers or investment advisers retained by Cornerstone or
WW&A or their respective affiliates who are authorized to exercise discretion
with respect to all or a portion of the assets which they manage for Cornerstone
or WW&A or their respective affiliates. However, if the closing does not occur
due to a willful and intentional breach by one party of any of its obligations
under the Contribution Agreement, the non-defaulting party will not be bound by
such standstill restrictions.
CONDUCT OF BUSINESS PRIOR TO CLOSING
The Contribution Agreement provides that, pending the closing, each party
must continue to operate its business in the ordinary course and, with the
exception, in the case of Cornerstone, of the PGGM Investment, borrowings and
liens as may be necessary to close the transactions contemplated by the
Contribution Agreement, any other transactions necessary or appropriate to
effect such transactions, the exercise of stock options by employees of
Cornerstone and the repurchase of shares from a terminated employees and
investments previously disclosed in writing by Cornerstone to, and approved by,
the Wilson Parties, neither party may undertake any substantial transactions or
activities other than in the ordinary course of business, such as significant
acquisitions or dispositions of assets, major financing transactions or changes
in capital structure. In particular, the Cornerstone Parties have agreed that,
among other things and subject to certain exceptions, neither they nor any of
their subsidiaries will, without the prior written consent of the Wilson
Representative:
(i) amend its articles of incorporation, bylaws, partnership agreement
or other charter documents, except as contemplated by the Contribution
Agreement;
(ii) except for Cornerstone's Dividend Reinvestment Share Purchase Plan
and the exercise of share options or issuances of shares pursuant to stock
rights, options, restricted share or performance share awards or warrants
outstanding on the date of the Contribution Agreement, issue, deliver or
sell, or grant any option or other right in respect of, any shares of
Cornerstone Common Stock, any other voting securities of Cornerstone or any
Cornerstone subsidiary or any securities convertible into, or any rights,
warrants or options to acquire, any such shares, voting securities or
convertible securities (except to Cornerstone or a Cornerstone subsidiary)
or effect any stock split, reverse stock split, stock dividend,
recapitalization or similar transaction, except the foregoing shall not
prohibit the issuance of Cornerstone Common Stock in connection with the
conversion of any currently outstanding convertible preferred stock, Units
or convertible notes;
(iii) except for (A) regular quarterly dividends or distributions not in
excess of $0.30 per share of Cornerstone Common Stock or per Unit, (B)
regular annual dividends not in excess or $1.155 per share of preferred
stock, (C) as required to maintain Cornerstone's REIT qualification or (D)
the special dividend to be declared at closing described below, declare, set
aside or pay any dividends on, or make any other distribution in respect of,
its outstanding shares of capital stock or Units;
42
<PAGE>
(iv) directly or indirectly redeem, purchase or otherwise acquire any
shares of its capital stock or the capital stock of its affiliates in an
aggregate amount in excess of $10,000,000 or make any commitments for such
action, except for the repurchase of shares from employees upon termination
of employment pursuant to Cornerstone's existing stock plans;
(v) merge or consolidate with any person;
(vi) engage in any transaction or series of related transactions
involving capital, securities or other assets or indebtedness of
Cornerstone, a Cornerstone subsidiary, or any combination thereof in excess
of $25,000,000;
(vii) acquire by merging or consolidating with, or by purchasing all or a
substantial portion of the equity securities or all or substantially all of
the assets of, or by any other manner, any business or any corporation,
partnership, limited liability company, joint venture, association, REIT,
business trust or other business organization or division thereof or
interest therein;
(viii) sell, lease or otherwise dispose of any of its properties or any
material assets or assign or encumber the right to receive income,
dividends, distributions and the like;
(ix) incur any indebtedness, issue or refinance any indebtedness or make
any loans, advances or capital contributions to, or investments in, any
other person or entity, excluding (A) an amendment to Cornerstone's and the
Operating Partnership's principal line of credit as necessary to enable
Cornerstone and the Operating Partnership to fund the costs of closing the
Wilson Acquisition and (B) financial transactions undertaken by Cornerstone
or its subsidiaries in accordance with their respective ordinary cash
management practices such as investments or deposits in commercial paper,
obligations of the United States of America or its agencies or
instrumentalities, certificates of deposit, time deposits, repurchase
agreements and similar financial arrangements;
(x) make any loans in amounts that are in the aggregate material to
Cornerstone or the Operating Partnership, or any loans, advances or capital
contributions to, or investments in, any unaffiliated third party other than
as contemplated by the Wilson Acquisition or in the ordinary course of
business;
(xi) make any tax election unless required by law or necessary to
preserve Cornerstone's REIT status or the status of the Operating
Partnership or of any other subsidiary as a partnership for federal income
tax purposes;
(xii) adopt any new employee benefit plan, incentive plan, severance
plan, stock option or similar plan or amend any existing plan or rights,
except such changes as are required by law or are necessary to accommodate
the Wilson Acquisition;
(xiii) change in any material manner any of its methods, principles or
practices of accounting in effect at the date of the Contribution Agreement
except as may be required by the Commission, applicable law or GAAP;
(xiv) initiate or rescind any suit, litigation, proceeding, arbitration,
investigation, audit or controversy relating to taxes, except in the case of
settlements or compromises relating to taxes in an amount not to exceed,
individually or in the aggregate, $2,000,000, or change any of its methods
of reporting income or deductions for federal income tax purposes from those
employed in preparation of its federal income tax return for the most
recently completed taxable year;
(xv) enter into or amend or otherwise modify any agreement or arrangement
with persons that are affiliates or, as of the date hereof, executive
officers or directors of Cornerstone or any subsidiary of Cornerstone; or
(xvi) pay, discharge or satisfy any material amount of claims,
liabilities or obligations, other than in the ordinary course or, in
accordance with their terms, liabilities reflected or reserved against in,
or
43
<PAGE>
contemplated by, the most recent consolidated financial statements of
Cornerstone included in Cornerstone's quarterly report on Form 10-Q for the
quarter ended March 31, 1998, or incurred in the ordinary course consistent
with past practice, except such payment, discharge or satisfaction that will
not have a material adverse effect on Cornerstone or the Operating
Partnership.
The Contribution Agreement also provides that, immediately prior to the
closing, Cornerstone shall declare a special, pro rata dividend to its
stockholders (and the Operating Partnership will make a corresponding
distribution to its partners), so that, for Wilson Investors who receive shares
of Cornerstone Common Stock or Units in the Wilson Acquisition, the rights to
future dividends and distributions will accrue beginning on the closing date.
CONTROL SHARE ACQUISITIONS
Cornerstone has agreed to take all necessary steps to ensure that certain
provisions of Nevada law will not apply to the issuance of shares of Cornerstone
Common Stock in the Transaction. Pursuant to Sections 78.378 to 78.3793 of the
Nevada General Corporation Law (the "NGCL"), an "acquiring person," who acquires
a "controlling interest" in an "issuing corporation," may not exercise voting
rights on any "control shares" unless such voting rights are conferred by a
majority vote of the disinterested stockholders of the issuing corporation at an
annual meeting or a special meeting of such stockholders held upon the request
and at the expense of the acquiring person. In the event that the control shares
are accorded full voting rights and the acquiring person acquires control shares
with a majority or more of all the voting powers, any stockholder, other than
the acquiring person, who does not vote in favor of authorizing voting rights
for the control shares is entitled to demand payment for the fair value of his
shares, and the corporation must comply with the demand. For purposes of the
above provisions, "acquiring person" means (subject to certain exceptions) any
person who, individually or in association with others, acquires or offers to
acquire, directly or indirectly, a controlling interest in an issuing
corporation. "Controlling interest" means the ownership of outstanding voting
shares of an issuing corporation sufficient to enable the acquiring person,
individually or in association with others, directly or indirectly, to exercise:
(i) one-fifth or more but less than one-third; (ii) one-third or more but less
than a majority; and/or (iii) a majority or more of the voting power of the
issuing corporation in the election of directors. Voting rights must be
conferred by a majority of the disinterested stockholders as each threshold is
reached and/or exceeded. "Control Shares" means those outstanding voting shares
of an issuing corporation which an acquiring person acquires or offers to
acquire in an acquisition or within 90 days immediately preceding the date when
the acquiring person became an acquiring person. "Issuing corporation" means a
corporation that is organized in Nevada, has 200 or more stockholders (at least
100 of whom are stockholders of record and residents of Nevada) and does
business in Nevada directly or through an affiliated corporation. The above
provisions do not apply if the articles of incorporation or bylaws of the
corporation in effect on the 10th day following the acquisition of a controlling
interest by an acquiring person provide that said provisions do not apply.
Cornerstone's Articles of Incorporation and Bylaws currently do not exclude
Cornerstone from the restrictions imposed by such provisions.
AMENDMENT AND WAIVER
The Contribution Agreement may be amended by an instrument in writing signed
by the Cornerstone Parties and the Wilson Parties; provided that the Wilson
Representative may propose or consent to amendments which are necessary or
desirable in its reasonable business judgment to achieve the purposes of the
Wilson Acquisition, so long as the economic and tax treatment results applicable
to the shareholders of WW&A and the Wilson Investors are maintained in all
material respects. The Wilson Representative has agreed with certain Wilson
Investors not to consent to any amendment to the Contribution Agreement that
would: (i) create personal liability for any of the Wilson Investors; (ii)
reduce the Project Value of or withdraw any Fund Project or Other Project; or
(iii) create any material indemnity or other obligation of the Wilson Investors.
44
<PAGE>
EXPENSES
All out-of-pocket expenses (including, without limitation, all fees and
expenses of counsel, accountants, investment bankers, experts and consultants)
incurred in connection with the Contribution Agreement and the transactions
contemplated thereby will be paid by the party incurring such expenses.
Notwithstanding the foregoing, the first $3,500,000 of Closing Costs (as defined
below) will be paid by the Cornerstone Parties, and Closing Costs in excess of
$3,500,000 will be borne equally by the Cornerstone Parties and the Wilson
Parties. "Closing Costs" consist of the following costs incurred in connection
with the completion of the Wilson Acquisition: (i) loan assumption fees and
payment penalties, if any, and other costs and charges incurred in connection
with the assumption by the Operating Partnership of the debt secured by the
Wilson Projects; (ii) up to $200,000 of auditor's fees and expenses incurred by
the Wilson Parties in the preparation of certain audited financial statements in
connection with the Wilson Acquisition; (iii) recording fees and costs, transfer
taxes, title insurance premiums and fees and costs required for the conveyance
of the Interests and the Wilson Projects to the Cornerstone Parties; and (iv)
expenses incurred in making any necessary filings under the HSR Act.
REPRESENTATIONS AND WARRANTIES
The Contribution Agreement contains various customary representations and
warranties on the part of the Wilson Parties and the Cornerstone Parties
relating to, among other things: (i) due incorporation and organization of the
Wilson Parties, the Funds, the Project Entities and the Cornerstone Parties and
similar corporate and organizational matters; (ii) the authorization, execution,
delivery and enforceability of the Contribution Agreement and other agreements
contemplated thereby; (iii) certain financial statements of the Wilson Parties,
the Funds and the Project Entities; (iv) reports filed by Cornerstone under the
Exchange Act; (v) the conduct of business in the ordinary course and the absence
of certain changes or events that would have a material adverse effect on the
Wilson Projects or the business, results of operations or prospects of the
Wilson Parties, the Funds, the Project Entities or the Cornerstone Parties; (vi)
the Wilson Projects and Cornerstone's properties, including title; (vii)
liabilities and indebtedness; (viii) certain material contracts; (ix)
environmental matters; (x) retirement and other employee benefit plans; (xi)
litigation; and (xii) taxes.
In the Contribution Agreement, representations with respect to the Wilson
Projects, Project Entities and Funds are made severally by the WW&A affiliate
serving as a general partner or manager of the related entity (each, a "GP
Party"). Upon receipt of the requisite consents from Wilson Investors with
respect to a Wilson Project, pursuant to such consents, the related Project
Entity, rather than such GP Party, has been deemed to have made such
representations and warranties, which means that the Project Entity will be
liable for inaccurate representations and warranties to the extent not otherwise
limited by the Contribution Agreement, and which may entitle the GP Party to
exculpation or indemnification with respect to such representations and
warranties under the partnership or operating agreements for that Project
Entity.
If either the Wilson Parties or the Cornerstone Parties discover before
closing that any of the representations or warranties of the other party have
been inaccurately made and the inaccuracy or inaccuracies would result in an
aggregate loss or liability of more than 3% of the sum of the Project Values for
all Wilson Projects included in the Wilson Acquisition plus $5,000,000
(estimated to be approximately $53,000,000, subject to certain adjustments), the
affected party may elect to terminate the Wilson Acquisition. If certain
representations and warranties of WW&A are discovered to have been inaccurately
made, and such occurrence would result in a loss or liability to the Cornerstone
Parties in excess of 15% of the WW&A Company Value, then, at either the election
of the Cornerstone Parties or the Wilson Parties (provided that the Wilson
Parties have not caused the inaccuracy through their breach of the Contribution
Agreement or through intentional action or omission), the Wilson Acquisition may
be terminated. If certain representations and warranties of the Wilson Parties
with respect to a Wilson Project or a Project Entity are discovered to have been
inaccurately made, and such occurrence would result in a loss or
45
<PAGE>
liability to the Cornerstone Parties in excess of the greater of (A) $500,000 or
(B) 1% of the related Project Value, then, at the Cornerstone Parties' election,
the Project Value will be reduced by an amount equal to the full amount of such
loss or liability. Similarly, if certain representations and warranties of WW&A
are discovered to have been inaccurately made, and such occurrence would result
in a loss or liability to the Cornerstone Parties exceeding the greater of (A)
$500,000 or (B) 1% of the WW&A Company Value, then, at the Cornerstone Parties'
election, the WW&A Company Value will be reduced by an amount equal to the full
amount of such loss or liability. If certain representations and warranties of
the Wilson Parties with respect to a Wilson Project or a Project Entity are
discovered to have been inaccurately made, and such occurrence would result in a
loss or liability to the Cornerstone Parties in excess of 15% of the related
Project Value, then, at the election of either the Cornerstone Parties or the
Wilson Parties (provided that the Wilson Parties have not caused the inaccuracy
through their breach of the Contribution Agreement or intentional action or
omission), the Related Project may be withdrawn from the Wilson Acquisition. If
either the Wilson Parties or the Cornerstone Parties discover before the closing
that a representation or warranty of the other parties has been inaccurately
made, and do not elect to terminate the Wilson Acquisition or invoke a price
adjustment, the discovering parties will be deemed to have proceeded to close
the Wilson Acquisition subject to, and will have no further rights,
indemnification or recourse with respect to, the inaccuracy.
INDEMNIFICATION
The Contribution Agreement provides for each of the Wilson Parties and the
Cornerstone Parties to indemnify the other parties from liabilities resulting
from, among other things: (i) any inaccuracy in any representation made by, or
the failure to comply with any agreement of, the indemnifying party set forth in
the Contribution Agreement or any other agreement entered into in connection
with the Wilson Acquisition (each, an "Acquisition Agreement"); (ii) any untrue
or misleading statement made by the indemnifying party in the Confidential
Information Statement, Solicitation of Consents and Private Placement Memorandum
delivered to the Wilson Investors or in this Proxy Statement; (iii) any breach
by the indemnifying party of its fiduciary duties; or (iv) any document filed or
to be filed with any governmental authority by or on behalf of the indemnifying
party or any other document prepared or distributed by the indemnifying party in
connection with the Wilson Acquisition (excluding any information provided by
the other party for inclusion in any such document).
With certain exceptions, neither the Cornerstone Parties nor the Wilson
Parties are entitled to make a claim for indemnification unless the total amount
of all claims by such indemnified parties exceeds, in the aggregate, a threshold
amount (the "Threshold Amount") equal to 50% of the Holdback Amount (as defined
below), which Threshold Amount is a deductible and is estimated to be
approximately $18,000,000. The Threshold Amount is a deductible amount, and the
indemnification obligation of the indemnifying parties will not include the
Threshold Amount but will include all other losses subject to indemnification.
To the extent the total claims against the Cornerstone Parties exceed the
Threshold Amount, their liability for losses and liabilities will be limited,
with certain exceptions, to an amount (the "Holdback Amount") equal to 2% of the
sum of (A) the WW&A Company Value and (B) the aggregate Project Values of all
Wilson Projects or portions thereof (other than the Agoura Hills and Concar
projects and any Approved Additional Project) which are ultimately included in
the Wilson Acquisition plus, in the case of WW&A, an additional amount of
$5,000,000 for certain claims against WW&A. The Wilson Parties shall not, with
certain exceptions, be liable for losses and liabilities in excess of the
Holdback Amount, except to the extent of any cash, Units or shares remaining in
the Investor Indemnity Escrow Fund or the Escrow Fund (each is hereinafter
defined). The Holdback Amount is presently estimated to be approximately
$36,000,000. All claims for indemnification, with certain exceptions, must be
filed by the first anniversary of the closing of the Wilson Acquisition.
46
<PAGE>
As security for any payments which may be required from the Wilson Parties
under their indemnification obligations and to provide for the payment of
out-of-pocket costs incurred by the Wilson Representative in prosecuting,
defending and administering claims, the Contribution Agreement provides for: (i)
Consideration otherwise payable to the WW&A shareholders and the Wilson
Investors in an amount equal to the Holdback Amount to be held back and retained
in an escrow account (the "Investor Indemnity Escrow Fund"); (ii) $500,000 of
Consideration otherwise payable to the Wilson Investors and WW&A shareholders to
be held back and retained in a second escrow account (the "Wilson Representative
Escrow Fund"); and (iii) shares valued at $5,000,000 otherwise payable to the
WW&A shareholders to be held back and retained in a third escrow account (the
"WW&A Escrow Fund"). The Investor Indemnity Escrow Fund, the Wilson
Representative Escrow Fund and the WW&A Escrow Fund are referred to herein
collectively as the "Escrow Funds." The required deposit from the WW&A
shareholders and the Wilson Investors to the Investor Indemnity Escrow Fund and
the Wilson Representative Escrow Fund will be in the form of cash, Units and
shares of Cornerstone Common Stock (with Units and shares valued at the
Effective Price), and the required deposit from the WW&A shareholders to the
Investor Indemnity Escrow Fund, the Wilson Representative Escrow Fund and the
WW&A Escrow Fund will be in the form of shares of Cornerstone Common Stock
(valued at the Effective Price). The amounts to be withheld in the Investor
Indemnity Escrow Fund will be apportioned among the Wilson Investors and the
WW&A Shareholders in proportion to the total Consideration each receives in the
Wilson Acquisition, including the shares received by WW&A shareholders in the
Merger. The amounts to be withheld in the Wilson Representative Escrow Fund will
be apportioned among the Investors and the WW&A shareholders in proportion to
the total Consideration each receives in the Wilson Acquisition. The amounts to
be withheld in the WW&A Escrow Fund will be apportioned among the WW&A
shareholders in proportion to the shares of Cornerstone Common Stock each
receives in the Merger. For purposes of any payments out of the Escrow Funds,
Units and shares will be valued based on the 10-day market price average
immediately preceding such payment. Such a valuation based on current market
values, as opposed to the Effective Price, may alter the relative proportions of
cash to shares and Units remaining in the Escrow Funds at any time.
Interest, dividends and distributions (other than from stock splits)
received with respect to cash, shares and Units held in the Escrow Funds will be
distributed to the Wilson Investors and WW&A shareholders currently, and the
Wilson Investors and WW&A shareholders will retain all voting rights with
respect to shares and Units in the Escrow Funds. The Escrow Funds will be held
with and administered by an escrow agent (the "Escrow Agent") under the terms of
an Escrow Agreement in substantially the form attached as an exhibit to the
Contribution Agreement (the "Escrow Agreement") to be entered into at the
closing by the Cornerstone Parties and the Wilson Representative (on behalf of
the Wilson Investors).
To the extent not required to resolve pending claims, all cash, shares and
Units then remaining in the Investor Indemnity Escrow Fund and the WW&A Escrow
Fund will be distributed to the Wilson Investors and the WW&A shareholders, as
applicable, promptly following the first anniversary of the date of the closing
of the Wilson Acquisition. Upon the resolution of the last of the claims filed
by the anniversary date and payment of all costs thereof, all remaining cash,
shares and Units in the Escrow Funds will be similarly distributed. The fees and
costs of administering the Escrow Funds will be paid by Cornerstone, provided
that the WW&A shareholders and the Wilson Investors will jointly be liable for
50% of the losses and liabilities (payable out of the amounts on deposit in the
Escrow Funds) associated with customary indemnification of the Escrow Agent and
similar costs. In addition, the WW&A shareholders and the Wilson Investors will
be responsible for paying the out-of-pocket fees and expenses of the Wilson
Representative incurred in administering the Escrow Agreement and prosecuting,
defending and resolving any related claims to the extent the amounts in the
Wilson Representative Escrow Fund are insufficient to pay such costs.
47
<PAGE>
ROCKWOOD TRANSACTION
To facilitate the inclusion in the Wilson Acquisition of the Pruneyard,
Gateway, Golden Bear Center, Apple Building, Centerside II and Scottsdale Centre
projects (the "Rockwood Projects"), on June 23, 1998, WWA Investors purchased
all of the interests not owned by WW&A affiliates (the "Rockwood Interests") in
the six Project Entities which own the Rockwood Projects (the "Rockwood Project
Entities"). All of the remaining Interests in the Rockwood Project Entities (the
"Other Rockwood Interests") are owned by two of the Funds (Office Opportunity
Fund I, L.P. ("Fund-I") and Office Opportunity Fund II, L.P.("Fund-II") and
certain GP Parties acting as general partners or managers of those entities. WWA
Investors used the proceeds of a loan from the Operating Partnership (the
"Rockwood Loan") to fund the purchase and certain related costs. The Rockwood
Loan provides that all excess distributable cash payable to WWA Investors with
respect to the Rockwood Interests will be paid to the Operating Partnership and
applied first to the accrued interest on the loan, with the balance retained as
a participation payment, except that certain distributable cash in respect of
the Rockwood Projects' cash balances and certain proceeds of an existing
construction loan for the Pruneyard Project (expected to be approximately
$4,250,000) will be applied prior to the closing of the Wilson Acquisition to
reduce the principal balance of the Rockwood Loan. If the Wilson Acquisition
does not close, the Rockwood Loan will become due on December 31, 1999, and the
parties will have other rights and obligations as set forth in the Rockwood Loan
documents.
Upon the closing of the Wilson Acquisition, WWA Investors will contribute
the Rockwood Interests to the Cornerstone Parties and, in exchange therefor,
will be relieved from all obligations under the Rockwood Loan. Fund-I, Fund-II
and the GP Parties having Interests in the Rockwood Project Entities will
contribute the Other Rockwood Interests and, pursuant to special allocation
provisions accepted by WWA Investors, will receive all of the net Consideration
payable with respect to the Rockwood Projects (including any Pruneyard
Additional Consideration which may become payable after the closing, as
described above), after deducting the outstanding principal balance of the
Rockwood Loan and a fee equal to 1% of the amount paid for the Rockwood
Interests (approximately $750,000) payable to WWA Investors for arranging the
Rockwood transaction for the benefit of the Fund-I and Fund-II Investors.
The Consideration payable with respect to the Other Rockwood Interests will
be subject to adjustment as follows: it will be (i) INCREASED by an amount equal
to 50% of the closing costs for the acquisition of the Rockwood Interests paid
by WWA Investors from the proceeds of the Rockwood Loan; (ii) INCREASED by an
amount equal to the aggregate proration debit, if any, paid by WWA Investors out
of the proceeds of the Rockwood Loan to the former owners of the Rockwood
Interests; (iii) DECREASED by the amount of the aggregate proration credit, if
any, received by WWA Investors in connection with the purchase of the Rockwood
Interests; (iv) DECREASED by 50% of the amounts credited to the buyer of the
Rockwood Interests for a mitigation fee at Golden Bear Center; (v) DECREASED by
amounts paid to Christopher Meany under his incentive compensation arrangement
with Fund-I with respect to the Pruneyard Shopping Center; and (vi) DECREASED by
$1,500,000 with respect to an agreed-upon adjustment if by the closing of the
Wilson Acquisition the Operating Partnership has not received a distribution of
refinancing proceeds in that amount under the Rockwood Loan documents. Further,
the Operating Partnership will credit or pay to the owners of the Other Rockwood
Interests at the closing an amount equal to 50% of the difference between: (i)
the Lease Costs and Capital Expenditures payable by the owners of the Rockwood
Interests under the Contribution Agreement for the period after April 1, 1998
until the closing of the Wilson Acquisition; and (ii) the amount paid by or
credited against the sellers of the Rockwood Interests for Lease Costs and
Capital Expenditures for the period after April 1, 1998 until the closing of the
purchase of the Rockwood Interests. The foregoing adjustments are intended to
provide to the Cornerstone Parties upon closing of the Wilson Acquisition the
benefits and burdens of the ownership of the Rockwood Interests from June 23,
1998, as if the Cornerstone Parties had acquired the Rockwood Interests from the
sellers. If a Rockwood Project is withdrawn from the Wilson Acquisition, the
foregoing additional adjustments and payments will be modified as described in
the Contribution Agreement.
48
<PAGE>
Due primarily to the favorable pricing to the buyer associated with a
purchase of the Rockwood Projects in their entirety and the timing and certain
advantages obtained by the sellers of the Rockwood Interests in closing their
sale without waiting for the Wilson Acquisition closing, a favorable
differential exists between the price that WWA Investors paid for the Rockwood
Interests and the Consideration which would have been payable for those
Interests in the Wilson Acquisition (calculated at $17.25 per share and per
Unit). As a result of that favorable differential and WWA Investors' decision to
forego any net Consideration (beyond receipt of the 1% facilitation fee), the
aggregate Consideration payable with respect to the Rockwood Projects to the
Fund-I and Fund-II Investors and the GP Parties having Interests in the Rockwood
Project Entities will be greater than it would have been had the WWA Investors
not purchased the Rockwood Interests and instead the owners of the Rockwood
Interests had contributed those Interests to the Operating Partnership as a part
of the Wilson Acquisition.
RESALE OF CORNERSTONE COMMON STOCK; REGISTRATION RIGHTS AGREEMENT
RESTRICTED SECURITIES
Shares of Cornerstone Common Stock and Units delivered at the closing of the
Wilson Acquisition will be issued in a transaction exempt from registration
under state and federal securities laws pursuant to one or more private offering
exemptions. Such securities are "restricted securities" within the meaning of
federal securities laws and generally cannot be resold without registration or
an exemption from registration. In particular, under the federal securities
laws, Wilson Investors who attempt public resales of any shares received in the
Wilson Acquisition, without registration or compliance with Rule 144 (as
described below), will be at risk of violating the resale limitation provisions
of the registration exemption under which the shares were issued to them. In
addition, persons who are affiliates of an issuer (i.e., persons who directly or
indirectly control, are controlled by or are under common control with the
issuer) are at risk of violating the federal securities laws whenever they
resell, without registration, any shares of the issuer, whether or not such
shares are restricted securities.
Rule 144 under the Securities Act is a non-exclusive safe harbor which sets
forth conditions under which, without registration, affiliates and
non-affiliates may resell restricted securities and affiliates may publicly
resell any securities of the affiliated issuer. Pursuant to Rule 144, each
Wilson Investor receiving shares of Cornerstone Common Stock in the Wilson
Acquisition will be able to sell such shares one year after they receive them,
so long as such Wilson Investor does not sell, in any three-month period, more
than the greater of 1% of the outstanding shares of Cornerstone Common Stock or
an amount equal to the average weekly trading volume of Cornerstone Common Stock
for the four weeks preceding the filing with the Commission of a related notice
of sale on Form 144 and such Wilson Investor complies with the other
requirements of Rule 144, including requirements that certain current
information about Cornerstone be publicly available and that the sales be made
in standard broker transactions. Wilson Investors receiving shares of
Cornerstone Common Stock in the Wilson Acquisition generally will be able to
sell such shares without regard to the volume limitations and other requirements
of Rule 144 beginning two years after they receive such shares, unless they are
or have been affiliates of Cornerstone. Affiliates of Cornerstone will continue
to be subject to the volume limitations on unregistered sales and certain other
requirements of Rule 144 following the expiration of the two-year period.
Holding periods under Rule 144 commence only when a holder receives shares of
Cornerstone Common Stock; that is, in the case of shares received on redemption
of Units, the holding period will not commence until the date of receipt of the
shares.
LOCK-UP PROVISIONS
Generally, the Registration Rights Agreement restricts the Wilson Investors
and the WW&A shareholders from transferring their shares of Cornerstone Common
Stock or Units for one year from the closing of the Wilson Acquisition (three
years in the case of William Wilson III, and two years in the case of certain
other members of WW&A's management). Such restrictions are subject, however, to:
(i) the permitted transfers and partial release provisions described below in
the case of Mr. Wilson and certain
49
<PAGE>
other members of WW&A's management; (ii) the general qualification that all
lock-up provisions terminate upon the occurrence of a "change in control" (as
defined below) of Cornerstone; and (iii) the qualification that, in the case of
Mr. Wilson and certain other members of WW&A's management, all lock-up
provisions will terminate in the event of such member's death or permanent
disability or involuntary termination of employment with Cornerstone without
cause (or, in the case of Mr. Wilson, his involuntary termination as Chairman of
the Cornerstone Board without cause). As used in the Registration Rights
Agreement, "change in control" means any of the following occurrences: (i)
securities of Cornerstone representing twenty-five percent (25%) or more of the
combined voting power of Cornerstone's then outstanding voting securities are
acquired pursuant to a tender offer or an exchange offer; (ii) a merger or
consolidation is consummated in which Cornerstone is a constituent corporation
and which results in less than fifty percent (50%) of the outstanding voting
securities of the surviving or resulting entity being owned by the persons who
were the stockholders of Cornerstone immediately prior to the merger or
consolidation; (iii) any person becomes the beneficial owner, directly, or
indirectly, of securities of Cornerstone representing twenty-five percent (25%)
or more of the combined voting power of Cornerstone's then outstanding
securities; (iv) any person, other than Cornerstone, becomes the beneficial
owner, directly or indirectly, through acquisition, merger, consolidation or
otherwise of securities of the Operating Partnership representing twenty-five
(25%) or more of the combined capital, profits or voting interests of the
Operating Partnership; or (v) all or substantially all of the assets of
Cornerstone or the Operating Partnership, or all or substantially all of
Cornerstone's interest in the general or limited partnership interests in the
Operating Partnership, are sold, liquidated or distributed, in one or more
related transactions. Notwithstanding the foregoing, "change in control" shall
in no event refer to any of the foregoing if, as a result thereof, control of
Cornerstone is held by a person who is an affiliate of Cornerstone as defined in
the Exchange Act, as of the date hereof, or who owns securities of Cornerstone
representing twenty-five percent (25%) or more of the combined voting power of
Cornerstone's outstanding voting securities as of the date hereof. Prior to the
end of the applicable lock-up period, the holders of shares and Units issued in
connection with the Wilson Acquisition will not be permitted to offer, sell or
otherwise dispose of such shares or Units, directly or indirectly, except that
they may dispose of shares or Units (subject, in the case of Units, to any
applicable restrictions contained in the Operating Partnership Agreement)
pursuant to a pledge, grant of security interest or other encumbrance effected
in a bona fide transaction with an unrelated pledgee which is a bank or other
bona fide financial institution and which is an "accredited investor" under the
Securities Act. In addition, during their applicable lock-up periods, Mr. Wilson
and certain other members of WW&A's management may transfer shares or Units to
members of their immediate families, or trusts or other entities solely or
primarily for the benefit of members of their immediate family, and to
charitable institutions; provided that in the case of transfers to charitable
institutions the transferor must retain at least one-half of the shares and
Units such person receives at the closing. Any shares or Units which are pledged
or transferred pursuant to the preceding two sentences will remain subject to
the Registration Rights Agreement, and any transferee (including any pledgee who
acquires such shares or Units upon foreclosure) will be required to agree in
writing to the lock-up provisions of the Registration Rights Agreement.
Certain shares and Units issued to Wilson Investors will be released from
the lock-up provisions prior to expiration of the applicable restricted periods
as follows: (i) 20% of Mr. Wilson's shares and Units will be released two years
after the closing; and (ii) 20% of the shares and Units of certain other members
of WW&A's management will be released 18 months after the closing.
REGISTRATION RIGHTS
The Registration Rights Agreement requires Cornerstone to file with the
Commission, within 60 days following the closing of the Wilson Acquisition, a
shelf registration statement covering: (i) the issuance by Cornerstone of all
shares of Cornerstone Common Stock issuable upon the redemption of Units issued
in the Wilson Acquisition; (ii) the public resale of all restricted securities
issued in the Wilson Acquisition; and (iii) the public resale by Wilson
Investors who are affiliates of Cornerstone of shares of Cornerstone
50
<PAGE>
Common Stock in transactions in which such public resales would otherwise be
subject to the limitations of Rule 144. So long as Cornerstone maintains the
effectiveness of such shelf registration statement, which it is required to do
until all transactions covered by the shelf registration statement have
occurred, Wilson Investors who receive shares of Cornerstone Common Stock at the
closing or upon redemption of Units, whether affiliates or non-affiliates, will
be able to resell those shares and redeem those Units free of the volume and
other limitations of Rule 144, subject, however, to the right of Cornerstone
under the Registration Rights Agreement to impose various blackout periods (for
instance, while Cornerstone is engaged in a stock-based acquisition).
It is expected that resales of shares by Wilson Investors under the shelf
registration statement ordinarily will be effected through standard market
transactions, which may include negotiated purchases, block trades or other
non-underwritten, brokered sales. However, the Registration Rights Agreement
also grants Wilson Investors certain rights to initiate or participate in
underwritten public distributions of Cornerstone Common Stock. Under their
"demand" rights, Wilson Investors may require Cornerstone to undertake, under
the shelf registration statement, and use commercially reasonable efforts to
support an organized or underwritten offering of shares, including participation
by Cornerstone executives in a "road show" and similar presentations in
connection with such underwritten offerings. Such a demand offering imposes a
greater burden on Cornerstone than that required to maintain the shelf
registration statement for standard market transactions. Such demand offerings
must be initiated by holders of at least 5% of the shares which then remain
covered by the Registration Rights Agreement (subject to certain exclusions) and
must be for an offering of shares of at least $40 million (based on then current
trading prices of Cornerstone Common Stock). Wilson Investors may not require
Cornerstone to effect more than one demand offering in any twelve-month period
or more than eight demand offerings overall. Under their "piggyback" rights,
Wilson Investors may have their shares included in other registrations
(including underwritten offerings) which Cornerstone may file on its own behalf
or on behalf of other stockholders. Both the "demand" and "piggyback" rights are
subject to blackout periods which Cornerstone may impose and may also be
affected by certain priority rights of other parties which hold similar
registration rights pursuant to other registration rights agreements entered
into prior to the date of the Contribution Agreement.
VOTING IN SUPPORT OF PGGM
By becoming a party to the Registration Rights Agreement, each Wilson
Investor will agree, during the period in which the shares of Cornerstone Common
Stock owned by such Wilson Investor are subject to lock-up restrictions as
described above and so long thereafter as such Wilson Investor continues to hold
such shares, and provided PGGM and its affiliates own in the aggregate 5% or
more of the Cornerstone Common Stock: (i) to vote for the individuals designated
by PGGM for nomination by the Cornerstone Board for election as directors; (ii)
to use commercially reasonable efforts to cause William Wilson III and the other
Wilson Directors not to unreasonably withhold their approval of any of the
individuals designated by PGGM for nomination by the Cornerstone Board for
election as directors and to approve in all cases any nominee who is an
employee, officer or director of PGGM or DIHC; and (iii) not to vote to repeal
or amend the provisions of the Amended and Restated Bylaws of Cornerstone
relating to the special nominating rights accorded to PGGM.
The foregoing description is only a general summary of the Registration
Rights Agreement, and it is qualified in its entirety by the terms of the
Registration Rights Agreement attached as Annex B hereto.
REGULATORY APPROVALS REQUIRED
Under the Contribution Agreement, the obligations of both the Wilson Parties
and the Cornerstone Parties to complete the Wilson Acquisition are conditioned
upon the receipt of all required regulatory approvals. Under the HSR Act and the
rules promulgated thereunder by the FTC, the Merger may not be consummated
unless notification has been given and certain information has been furnished to
the FTC
51
<PAGE>
and the Antitrust Division and the waiting period has expired or been terminated
early. Pursuant to the HSR Act, on September 28, 1998, and October 5, 1998,
Cornerstone and WW&A, respectively, filed a Notification and Report Form with
the FTC and the Antitrust Division for review in connection with the Merger. The
30-day waiting period under the HSR Act applicable to the Merger was terminated
early by the FTC on October 19, 1998. Notwithstanding the termination of the
waiting period, there can be no assurance that the Merger will not be
investigated or opposed by the FTC or the Antitrust Division.
ACCOUNTING TREATMENT OF THE WILSON ACQUISITION
The Wilson Acquisition will be accounted for under the "purchase" method of
accounting, pursuant to which the assets and liabilities of WW&A and the other
entities acquired by Cornerstone will be adjusted to their respective fair
values and included with those of Cornerstone as of the closing date of the
Wilson Acquisition. Consolidated financial statements of Cornerstone issued
after the closing date will reflect such values and will not be restated
retroactively to reflect the historical financial position or results of
operations of WW&A or any of the Wilson Projects. Certain third-party fee
businesses of WW&A and the Pruneyard Hotel will be owned by Cornerstone through
subsidiaries that will be accounted for under the equity method.
APPROVAL OF LIMITED PARTNERS OF THE OPERATING PARTNERSHIP
Cornerstone, as the general partner of the Operating Partnership, intends to
submit the Merger to the limited partners of the Operating Partnership for their
approval in connection with its submission to such limited partners of certain
amendments to the Operating Partnership Agreement. On the proposal to approve
the Merger, Cornerstone will vote the partner interests in the Operating
Partnership that it owns in proportion to the votes in favor and votes against
cast by the Cornerstone stockholders on the proposal to approve the Wilson
Issuance at the Special Meeting.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The Wilson Acquisition has been structured so that Wilson Investors
receiving only Units in exchange for their Interests generally should not
recognize gain or loss for federal income tax purposes as a result of such
receipt, except to the extent that (A) the "disguised sale" rules of the Code
may apply or (B) a Wilson Investor is considered to receive an actual or deemed
distribution of money from a net reduction in such Wilson Investor's share of
liabilities resulting from the exchange that exceeds such Wilson Investor's tax
basis in his Interest. In order to reduce the potential for, and provide
affected Wilson Investors with a means of avoiding, such adverse tax
consequences, the Contribution Agreement provides that (A) the Operating
Partnership will maintain a minimum of $50,000,000 of recourse indebtedness at
all times until January 1, 2010, unless waived by a majority-in-interest (based
on the amount of Operating Partnership recourse debt with respect to which such
Wilson Investor has agreed to bear the risk of loss) of those Wilson Investors
who have undertaken deficit capital account restoration obligations, and (B) the
Operating Partnership has agreed to cooperate in permitting Wilson Investors
with negative capital accounts to maintain "bottomside" guarantees of Operating
Partnership indebtedness or take on liability for deficit capital account
restoration obligations, and thereby avoid a taxable reduction in the Wilson
Investor's share of partnership liabilities as a result of the Wilson
Acquisition. In addition, Cornerstone has agreed that during the term of the
existing nonrecourse indebtedness secured by the Bixby Ranch project, it will
maintain an amount of nonrecourse indebtedness equal to or in excess of the
principal amount of such existing indebtedness (approximately $19.6 million) and
thereafter it will maintain sufficient nonrecourse indebtedness secured by such
project to accommodate a deficit capital account restoration obligation for
Bixby Ranch Company's negative capital account. Wilson Investors receiving
shares of Cornerstone Common Stock or cash as partial consideration for their
Interests will immediately recognize gain or, subject to certain limitations,
loss in the Wilson Acquisition.
52
<PAGE>
Substantially all of the Wilson Projects will have built-in gain (I.E., a
Project Value in excess of the Wilson Project's adjusted tax basis at the time
it is acquired by the Operating Partnership) which could produce taxable gain
for Wilson Investors having Interests in such projects upon certain taxable
dispositions of the projects. The Contribution Agreement places certain
restrictions on the sale of certain of the Wilson Projects with built-in gain.
The Cornerstone Parties have agreed until after December 31, 2009 not to sell
seven Wilson Projects (and any properties received in exchange therefor) in any
transaction with adverse tax consequences to certain Wilson Investors. With
respect to the remaining 45 Wilson Projects other than PeopleSoft Plaza and
Seaport Plaza (and any properties received in exchange therefor), the
Cornerstone Parties have agreed until after December 31, 1999 not to sell any
such projects in a transaction with adverse tax consequences to certain Wilson
Investors and thereafter to limit such taxable sales of such properties so that
the recognized built-in gain in such properties does not exceed, annually on a
cumulative basis, 10% of the aggregate built-in gain of all Wilson Projects in
this category determined as of the closing of the Wilson Acquisition. The
restriction, as to both the first and second category of Wilson Projects, does
not apply to (A) a tax-free exchange pursuant to Section 1031 of the Code or any
other transaction that does not result in recognition of taxable income or gain
or (B) a transfer of an otherwise covered Wilson Project by means of a
foreclosure or a deed in lieu of foreclosure as a result of a bona fide default
with respect to indebtedness secured by such Wilson Project. The foregoing
restrictions may be waived by (A) the Wilson Representative for transactions
with respect to properties in the second category that are entered into prior to
January 1, 2000, and (B) a majority-in-interest (based on the amount of built-in
gain, if any, that each affected Wilson Investor would recognize) of those
Wilson Investors which would recognize built-in gain as a result of a breach or
waiver of such covenant or restriction for any transactions involving properties
in the second category entered into on and after January 1, 2000 and any
transaction, whenever occurring, with respect to properties in the first
category.
To assist Cornerstone in becoming a "domestically controlled REIT" under the
Code, Article 9 of Cornerstone's Articles of Incorporation provides that shares
of Cornerstone's stock will not be transferred by any "U.S. Person" to any
"Non-U.S. Person" if such transfer would cause such Non-U.S. Person to exceed
the "Non-U.S. Ownership Limit." Shares of stock acquired in excess of the
Non-U.S. Ownership Limit will be deemed to be transferred to Cornerstone as
trustee for the benefit of the person to whom the Non-U.S. Person who acquired
the excess shares later transfers such shares. In addition, excess shares will
be deemed to have been offered for sale to Cornerstone or its designee at their
"fair market value" for a 90-day period. Article 9 does not apply, however, to
involuntary transfers by any U.S. Person by operation of law or pursuant to
death, a merger or sale of substantially all of the assets of such person,
bankruptcy or pledges of security. Article 9 is designed to limit the ownership
of Cornerstone Common Stock by Non-U.S. Persons and thereby assist Cornerstone
in becoming, and thereafter remaining, a "domestically controlled REIT" under
the Code. Status as a domestically controlled REIT may be beneficial to certain
stockholders who are nonresident alien individuals, foreign corporations,
foreign partnerships, foreign trusts, or foreign estates and who hold or have
held substantial positions in Cornerstone Common Stock. Cornerstone has agreed
to waive the provisions of Article 9 with respect to the transfer of shares of
Cornerstone Common Stock by certain Wilson Investors affiliated with the
Government of Singapore to their non-U.S. affiliates within 18 months after the
completion of the Wilson Acquisition.
The Merger is expected to qualify as a reorganization for federal income tax
purposes so that no gain or loss will be recognized by Cornerstone stockholders
as a result of the Merger. Neither the Merger itself, nor the acquisition by
Cornerstone and the Operating Partnership of substantially all of the properties
and business operations of WW&A and its affiliates in the Wilson Acquisition, is
expected to have any adverse effect on Cornerstone's ability to continue to
qualify for taxation as a REIT under the Code.
53
<PAGE>
CORNERSTONE AND THE OPERATING PARTNERSHIP
Cornerstone is a self-advised equity REIT with interests in 21 Class A
office properties comprising approximately 11,400,000 rentable square feet.
Cornerstone's properties are located in 11 metropolitan areas throughout the
United States: Atlanta, Boston, Charlotte, Chicago, Denver, Minneapolis, New
York City, San Francisco, Santa Monica, Seattle and Washington D.C. and
surrounding suburbs. All of the properties were built between 1979 and 1991.
Cornerstone's strategy is to own 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, attract
premium rents and experience the highest tenant retention rates within their
markets.
Cornerstone focuses its professional and executive staff on the execution of
its acquisition and management strategy, including market research, budgeting,
leasing, capital planning, finance and asset management. Cornerstone engages
prominent regional or national third-party management companies to provide
day-to-day property management functions at the local level. In all cases,
Cornerstone retains full responsibility for capital planning, budgeting,
leasing, major tenant relationships, financing and strategic initiatives with
respect to its properties. Following completion of the Wilson Acquisition,
Cornerstone anticipates transitioning to internal day-to-day property
management, facilitated by the addition of WW&A personnel with significant
property management experience to the Cornerstone management team.
In January 1998, Cornerstone converted its corporate structure into an
umbrella limited partnership REIT ("UPREIT") through the Operating Partnership.
Under the UPREIT structure, all of Cornerstone's interests in the properties are
held by or through the Operating Partnership, of which Cornerstone is the sole
general partner. The UPREIT structure provides Cornerstone with more flexibility
in accessing equity capital in connection with its acquisition strategy by
allowing Cornerstone to acquire properties in transactions that allow the seller
tax-deferred treatment through the issuance of Units to the seller. At the
request of a Unitholder, each Unit may be redeemed for cash, or, at the election
of Cornerstone, for one share of Cornerstone Common Stock. As of November 9,
1998, Cornerstone owned directly or indirectly 96.1% of the outstanding Units.
The principal executive offices of Cornerstone are located at Tower 56, 126
East 56th Street, New York, NY 10022, and its telephone number at that location
is (212) 605-7100. Cornerstone was incorporated under the laws of the State of
Nevada in May 1981.
WW&A AND THE WILSON PROJECTS
WW&A was founded by William Wilson III in 1978. WW&A is a fully integrated
real estate company engaged in the business of acquiring, investing in,
financing, developing, leasing and managing urban and suburban office and other
projects in the Western United States, with a primary focus in the San Francisco
Bay area. The WW&A real estate business consists of the acquisition,
development, construction management, leasing, tenant improvement, asset
management and administrative functions, which are provided directly by WW&A,
and the real estate properties and property interests owned by WW&A and its
affiliates, which are held through multiple single-purpose entities. Interests
in 51 of the Wilson Projects are owned by the Funds. Each of the Funds has
Wilson Investors as its limited partners and an affiliate of WW&A as its general
partner. With the exception of certain specified assets, which the parties have
agreed to exclude from the Wilson Acquisition for various reasons, all of the
office building assets which are owned by WW&A affiliates are subject to the
Wilson Acquisition.
54
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
The following tables set forth: (i) selected historical and unaudited pro
forma consolidated financial data for Cornerstone; (ii) selected historical
financial data for WW&A; and (iii) selected historical financial data for the
Pruneyard Hotel for the periods and as of the dates indicated. The selected and
pro forma financial data of Cornerstone should be read in conjunction with and
is qualified in its entirety by the consolidated financial statements and the
related notes thereto of Cornerstone included in the documents described under
"Where You Can Find More Information," the historical financial statements of
WW&A and the Pruneyard Hotel included elsewhere in this Proxy Statement and pro
forma financial statements of Cornerstone and related notes thereto included
elsewhere in this Proxy Statement. The following data should also be read in
conjunction with the information set forth in the respective "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included or incorporated by reference in this Proxy Statement. The selected
consolidated operating and balance sheet data of Cornerstone as of and for the
years ended December 31, 1993 through 1997 have been derived from Cornerstone's
audited financial statements. The selected financial data of Cornerstone at June
30, 1998 and 1997, and for the six months ended June 30, 1998 and 1997, is
derived from unaudited financial statements of Cornerstone incorporated by
reference herein and include all adjustments consisting of only normal recurring
adjustments that Cornerstone management considers necessary for a fair
presentation of the financial position and results of operations for these
periods. The selected financial data of WW&A and the Pruneyard Hotel for the
years ended December 31, 1994 through 1997 for operating data and as of December
31, 1997 and 1996 for balance sheet data have been derived from audited
financial statements of WW&A and the unaudited financial statements of the
Pruneyard Hotel included in this Proxy Statement. The selected financial data of
WW&A and the Pruneyard Hotel as of December 31, 1995, 1994 and 1993 and for the
years ended December 31, 1994 and 1993, and as of and for the six months ended
June 30, 1998 and 1997, are derived from the respective unaudited financial
statements of WW&A and the Pruneyard Hotel and include all adjustments
consisting of only normal recurring adjustments that WW&A management considers
necessary for a fair presentation of the financial position and results of
operations for these periods. Operating results for the six months ended June
30, 1998 are not necessarily indicative of the results of operations expected
for the entire year ended December 31, 1998.
The unaudited selected pro forma operating data are presented as if: (i) the
Transaction; (ii) the public offerings of Cornerstone Common Stock in April 1997
and February 1998; (iii) the conversion of the 8% Preferred Stock; (iv)
Cornerstone's repayment of a $32,500,000 term loan from Deutsche Bank AG; (v)
the DIHC Acquisition; and (vi) the acquisition of six properties and the sale of
one property in 1997 and 1998 had occurred on January 1, 1997. The unaudited
selected pro forma balance sheet data are presented as if the Transaction had
occurred on June 30, 1998. The pro forma data are not necessarily indicative of
the results of operations or the consolidated financial position that would have
resulted had the Transaction and the other aforementioned transactions been
consummated at the dates indicated, nor are they intended to project
Cornerstone's results of operations or consolidated financial position for any
future period or date.
The pro forma data has been derived from and should be read in conjunction
with the unaudited condensed consolidated pro forma financial statements
included elsewhere in this Proxy Statement.
55
<PAGE>
CORNERSTONE--HISTORICAL AND PRO FORMA
(UNAUDITED)
<TABLE>
<CAPTION>
AS OF AND FOR THE AS OF AND FOR THE
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
--------------------------------- --------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
HISTORICAL HISTORICAL
PRO FORMA -------------------- PRO FORMA -------------------------------
1998 1998 1997 1997 1997 1996 1995
----------- --------- --------- ----------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues:
Office and parking rentals.............. $ 236,031 $ 156,540 $ 68,691 $ 510,448 $ 159,828 $ 111,494 $ 88,548
Equity in earnings of unconsolidated
entities.............................. (149) (2,688) -- 15,977 -- -- --
Interest and other income............... 17,421 14,194 4,564 18,328 14,083 5,414 3,839
----------- --------- --------- ----------- --------- --------- ---------
Total Revenues........................ 280,303 168,046 73,255 544,753 173,911 116,908 92,387
----------- --------- --------- ----------- --------- --------- ---------
Expenses:
Building operating expenses............. 91,636 56,917 26,653 186,192 61,522 44,188 31,530
Interest expense........................ 69,908 31,667 14,990 139,527 33,977 31,735 30,722
Depreciation and amortization........... 49,761 26,859 13,808 98,559 30,978 24,316 22,572
General and administrative expense...... 13,935 5,544 3,265 20,588 7,564 6,407 5,603
Loss on sale of real estate assets...... 212 2,197 -- -- -- -- --
Unrealized (gain) loss on interest rate
swap.................................. -- -- (99) (99) (99) (4,278) 7,672
----------- --------- --------- ----------- --------- --------- ---------
Total Expenses........................ 225,502 123,184 58,617 444,767 133,942 102,368 98,099
----------- --------- --------- ----------- --------- --------- ---------
Income (loss) from operations............. 54,801 44,862 14,638 99,986 39,969 14,540 (5,712)
Minority interest......................... 10,565 2,856 994 16,887 2,368 1,519 3,417
----------- --------- --------- ----------- --------- --------- ---------
Income (loss) before extraordinary
items................................... 44,236 42,006 13,644 83,099 37,601 13,021 (9,129)
Extraordinary loss........................ -- -- (54) (54) (54) (3,925) (4,445)
----------- --------- --------- ----------- --------- --------- ---------
Net income (loss)......................... $ 44,236 $ 42,006 $ 13,590 $ 83,045 $ 37,547 $ 9,096 $ (13,574)
----------- --------- --------- ----------- --------- --------- ---------
----------- --------- --------- ----------- --------- --------- ---------
Net income (loss) per share............. $ 0.34 $ 0.42 $ 0.19 $ 0.63 $ 0.63 $ 0.19 $ (0.94)
----------- --------- --------- ----------- --------- --------- ---------
----------- --------- --------- ----------- --------- --------- ---------
Declared distributions to stockholders/
unitholders per share/unit............ $ 0.60 $ 0.60 $ 1.04 $ 1.20 $ 1.16
----------- --------- --------- ----------- --------- --------- ---------
----------- --------- --------- ----------- --------- --------- ---------
BALANCE SHEET DATA:
Real estate investment before accumulated
depreciation............................ 4,382,653 2,549,865 873,211 2,187,525 799,662 706,988
Total assets.............................. 4,365,157 2,476,869 972,941 2,051,481 766,180 586,089
Long-term debt............................ 1,491,385 849,196 367,103 706,178 400,142 369,600
Credit facility debt...................... 534,473 75,000 -- 187,000 -- --
Total liabilities..................... 2,164,632 987,970 445,198 940,062 442,375 403,927
Minority interest......................... 343,669 70,949 (17,510) 15,420 (17,478) (7,194)
Redeemable preferred stock................ -- -- 162,517 -- 162,743 --
Preferred stock........................... 50,000 50,000 50,000 50,000 50,000 50,000
Common stockholders' equity............... 1,806,856 1,367,950 332,738 1,045,999 128,540 139,356
OTHER DATA:
Funds from operations available for
diluted shares of Common Stock and Units
outstanding (1)......................... 104,686 74,024 27,566 197,604 69,100 35,487 21,424
Capital expenditures...................... 8,958 5,065 10,295 6,100 712
Preferred stock dividends (2)............. 1,750 1,750 8,410 3,500 10,160 5,153 1,449
Common stock distributions................ 55,483 18,653 39,418 24,551 18,485
Cash flow provided by (used in):
Operating activities.................... 80,979 26,978 65,922 34,522 20,036
Investing activities.................... (232,106) (72,224) (462,837) (57,259) (135,527)
Financing activities.................... 155,115 153,017 306,842 129,800 110,725
Total rentable square footage of
properties.............................. 20,940 11,387 4,941 20,940 10,270 4,725 4,087
Weighted average number of basic shares of
Common Stock outstanding................ 126,490 96,653 27,237 125,760 43,572 20,411 15,910
Weighted average number of diluted shares
of Common Stock outstanding for FFO..... 130,787 100,918 42,729 129,930 54,192 25,821 15,910
Weighted average number of diluted shares
of Common Stock and Units outstanding
for FFO................................. 152,599 102,458 NA 151,742 NA NA NA
<CAPTION>
<S> <C> <C>
1994 1993
--------- ---------
<S> <C> <C>
OPERATING DATA:
Revenues:
Office and parking rentals.............. $ 83,557 $ 47,405
Equity in earnings of unconsolidated
entities.............................. -- 6,874
Interest and other income............... 2,017 11,548
--------- ---------
Total Revenues........................ 85,574 65,827
--------- ---------
Expenses:
Building operating expenses............. 29,991 17,527
Interest expense........................ 31,903 31,652
Depreciation and amortization........... 22,321 17,454
General and administrative expense...... 3,869 3,728
Loss on sale of real estate assets...... -- --
Unrealized (gain) loss on interest rate
swap.................................. -- --
--------- ---------
Total Expenses........................ 88,084 70,361
--------- ---------
Income (loss) from operations............. (2,510) (4,534)
Minority interest......................... 3,899 1,214
--------- ---------
Income (loss) before extraordinary
items................................... (6,409) (5,748)
Extraordinary loss........................ (581) --
--------- ---------
Net income (loss)......................... $ (6,990) $ (5,748)
--------- ---------
--------- ---------
Net income (loss) per share............. $ (0.53) $ (0.43)
--------- ---------
--------- ---------
Declared distributions to stockholders/
unitholders per share/unit............ $ 1.16 $ 1.16
--------- ---------
--------- ---------
BALANCE SHEET DATA:
Real estate investment before accumulated
depreciation............................ 577,134 576,764
Total assets.............................. 477,996 515,792
Long-term debt............................ 130,500 141,638
Credit facility debt...................... 236,467 235,677
Total liabilities..................... 400,712 407,964
Minority interest......................... (6,642) 1,553
Redeemable preferred stock................ -- --
Preferred stock........................... -- --
Common stockholders' equity............... 83,926 106,275
OTHER DATA:
Funds from operations available for
diluted shares of Common Stock and Units
outstanding (1)......................... 15,562 22,237
Capital expenditures...................... 1,790 3,195
Preferred stock dividends (2)............. -- --
Common stock distributions................ 15,359 15,227
Cash flow provided by (used in):
Operating activities.................... 28,968 20,077
Investing activities.................... (1,762) 13,240
Financing activities.................... (33,141) (24,137)
Total rentable square footage of
properties.............................. 3,461 3,461
Weighted average number of basic shares of
Common Stock outstanding................ 13,241 13,241
Weighted average number of diluted shares
of Common Stock outstanding for FFO..... 13,241 13,241
Weighted average number of diluted shares
of Common Stock and Units outstanding
for FFO................................. NA NA
</TABLE>
- ------------------------------
(1) Cornerstone calculates FFO based upon guidance from NAREIT. FFO is defined
as net income, excluding gains or losses from debt restructuring and sales
of property, plus real estate depreciation and amortization and after
adjustments for unconsolidated joint ventures. Cornerstone makes two
adjustments to FFO which are not contemplated by NAREIT in its definition.
The first
56
<PAGE>
adjustment is for the principal payments of the rent notes receivable from
Hines which were put in place to compensate Cornerstone for its share of
cash flow from the partnership which owned One Norwest Center during the
period when Cornerstone owned 90% of the partnership but received 100% of
the cash flow. The notes were kept in place at the time of the acquisition
of Hines' 10% partnership interest to compensate Cornerstone for the future
value of the cash flow which Cornerstone would have received had the
partnership remained in place. These notes will be fully repaid as of
December 31, 1998. The second adjustment is made for the differential
between the real estate tax expense at Norwest Center and the accrual of the
recovery of such taxes due to the one-year time lag between the assessment
of such taxes and actual payment. Cornerstone believes that, since the
building is 100% leased, these funds will be collected under any
circumstance as a pass-through to the tenants. Based on this fact,
Cornerstone eliminates the timing effects of these tax increases in its
calculation of FFO. The effect of the adjustment in 1996 and 1995 is
substantial due to a 29.4% and 13.8% increase in real estate taxes,
respectively.
The table below sets forth the adjustments which were made to the
historical net income (loss) of Cornerstone for the years ended December
31, 1997, 1996, 1995, 1994 and 1993 and the six months ended June 30, 1998
and 1997 and the pro forma net income for the year ended December 31, 1997
and the six months ended June 30, 1998, in the calculation of FFO.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
--------------------------------- --------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
HISTORICAL HISTORICAL
PRO FORMA -------------------- PROFORMA -------------------------------
1998 1998 1997 1997 1997 1996 1995
----------- --------- --------- ----------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net income (loss)........................ $ 44,236 $ 42,006 $ 13,590 $ 83,045 $ 37,547 $ 9,096 $ (13,574)
NAREIT Adjustments:
Depreciation and amortization.......... 49,761 26,859 13,808 98,559 30,978 24,317 22,572
Net (gain) loss on swap transactions... -- -- (99) (99) (99) (4,278) 7,672
Loss on sale of real estate assets..... 212 2,197 -- -- --
Extraordinary losses................... -- -- 54 54 54 3,925 4,445
Unconsolidated joint venture
depreciation......................... 2,174 2,174 -- 3,506 -- -- --
Minority interest adjustments.......... (1,689) (1,008) (737) (3,428) (1,551) (2,011) (1,617)
Other Adjustments:
Amortization on rent notes............. 746 746 557 1,379 1,379 1,242 1,119
Real estate tax adjustments............ -- -- -- -- -- 2,428 807
----------- --------- --------- ----------- --------- --------- ---------
Funds from operations.................. $ 95,440 $ 72,974 $ 27,173 $ 183,016 $ 68,308 $ 34,719 $ 21,424
----------- --------- --------- ----------- --------- --------- ---------
----------- --------- --------- ----------- --------- --------- ---------
Minority interest in operating
partnership.......................... 8,842 646 -- 13,796 -- -- --
Interest expense on convertible note..... 404 404 393 792 792 769 --
----------- --------- --------- ----------- --------- --------- ---------
Funds from operations available for
diluted shares of Common Stock and
Units outstanding.................... $ 104,686 $ 74,024 $ 27,566 $ 197,604 $ 69,100 $ 35,488 $ 21,424
----------- --------- --------- ----------- --------- --------- ---------
----------- --------- --------- ----------- --------- --------- ---------
<CAPTION>
<S> <C> <C>
1994 1993
--------- ---------
<S> <C> <C>
Net income (loss)........................ $ (6,990) $ (5,748)
NAREIT Adjustments:
Depreciation and amortization.......... 22,321 24,785
Net (gain) loss on swap transactions... -- --
Loss on sale of real estate assets..... -- --
Extraordinary losses................... 581 2,697
Unconsolidated joint venture
depreciation......................... --
Minority interest adjustments.......... (1,358) (404)
Other Adjustments:
Amortization on rent notes............. 1,008 907
Real estate tax adjustments............ -- --
--------- ---------
Funds from operations.................. $ 15,562 $ 22,237
--------- ---------
--------- ---------
Minority interest in operating
partnership.......................... -- --
Interest expense on convertible note..... -- --
--------- ---------
Funds from operations available for
diluted shares of Common Stock and
Units outstanding.................... $ 15,562 $ 22,237
--------- ---------
--------- ---------
</TABLE>
Although Cornerstone believes that this table is a full and fair
presentation of Cornerstone's FFO, similarly-captioned items may be defined
differently by other REITs, in which case direct comparisons may not be
possible.
Industry analysts generally consider FFO to be an appropriate measure of
performance of any equity REIT such as Cornerstone, and Cornerstone
believes that FFO is helpful to investors as a measure of the performance
of an equity REIT. FFO does not represent cash generated from operating
activities in accordance with GAAP and should not be considered a
substitute for net income or cash flow from operating activities calculated
in accordance with GAAP as a measure of performance or liquidity.
(2) Includes preferred stock dividends accrued but not declared. Pro forma
amounts reflect the conversion of the 8% Preferred Stock.
57
<PAGE>
WW&A
<TABLE>
<CAPTION>
AS OF AND FOR THE
SIX MONTHS ENDED JUNE AS OF AND FOR THE
30, YEAR ENDED DECEMBER 31,
--------------------- -----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1998 1997 1997 1996 1995 1994 1993
--------- ---------- --------- --------- --------- --------- ---------
OPERATING DATA:
REVENUES:
Office and parking rentals
Equity in loss of real estate joint
venture............................. 12,968 (50,330) (105,120) (45,065) (105,195) (40,353) (36,427)
Interest and other income
Interest.......................... 244,607 196,659 618,826 735,418 267,579 138,846 173,135
Suite improvement................. 20,688,446 10,914,696 33,307,967 26,325,354 35,181,102 21,163,127 15,889,996
Management fee.................... 3,034,149 2,703,000 5,426,895 4,731,325 3,748,969 3,180,422 2,639,313
Leasing commission................ 3,699,443 1,938,901 4,473,875 3,548,251 1,701,417 1,544,087 1,068,129
Development fees.................. 1,661,837 995,610 2,510,605 1,955,880 1,324,830 1,252,412 429,000
Asset management fees............. 2,482,759 1,564,841 3,653,034 1,729,843 453,772 156,448 --
Acquisition fees.................. 435,693 907,067 1,744,661 1,430,609 869,248 346,427 --
Other income (expense)............ 72,203 (3,859) 22,264 180,614 98,182 68,324 75,145
--------- ---------- --------- --------- --------- --------- ---------
Total revenues................ 32,332,105 19,166,585 51,653,007 40,592,229 43,539,904 27,809,740 20,238,291
--------- ---------- --------- --------- --------- --------- ---------
EXPENSES:
Building operating expenses
Interest expense...................... 179,209 393,529 993,078 757,876 215,919 25,986 21,215
Depreciation and amortization......... 282,669 238,391 476,782 266,511 254,313 268,560 173,080
Direct costs
Cost of suite improvement......... 19,774,158 10,393,460 32,031,811 24,842,102 33,028,275 19,516,859 14,588,336
Management fee--third party....... -- 6,668 6,668 23,917 32,187 29,004 27,337
Leasing commission--third party... -- -- -- 305,000 -- -- --
Consulting fee--development....... 48,290 183,937 195,474 291,464 190,078 102,284 --
General and administrative expenses... 9,337,987 6,721,344 14,065,456 11,299,394 8,108,306 6,121,076 5,026,189
--------- ---------- --------- --------- --------- --------- ---------
Total expenses................ 29,622,313 17,937,329 47,769,269 37,786,264 41,829,078 26,063,769 19,836,157
--------- ---------- --------- --------- --------- --------- ---------
Net income.............................. $2,709,792 $1,229,256 $3,883,738 $2,805,965 $1,710,826 $1,745,971 $ 402,134
--------- ---------- --------- --------- --------- --------- ---------
--------- ---------- --------- --------- --------- --------- ---------
Net income per share.................. $ 48.78 $ 22.13 $ 69.91 $ 51.36 $ 31.86 $ 33.08 $ 8.04
--------- ---------- --------- --------- --------- --------- ---------
--------- ---------- --------- --------- --------- --------- ---------
BALANCE SHEET DATA:
Total assets.......................... 24,983,043 28,372,837 21,961,019 19,264,382 18,754,099 10,819,363 6,195,292
Long-term debt........................ 2,426,313 1,716,419 2,697,455 1,794,237 2,068,351 712,440 265,899
Credit facility debt.................. 2,210,736 15,809,002 1,810,736 5,458,296 4,497,500 -- --
--------- ---------- --------- --------- --------- --------- ---------
Total liabilities............... 20,077,739 24,210,877 16,991,604 15,026,050 16,554,287 6,827,621 3,701,247
Shareholders' equity.................. 4,905,304 4,161,960 4,969,415 4,238,332 2,199,812 3,991,742 2,494,045
OTHER DATA:
Capital expenditures.................. 582,613 620,029 1,013,310 588,259 1,885,364 328,280 9,557
Shareholder distributions............. 2,650,000 1,360,000 1,900,000 900,000 3,183,108 100,000 1,333,915
Cash flow provided by (used in)
Operating activities............ 4,111,937 1,097,790 3,557,374 622,417 3,882,772 1,105,188 1,121,989
Investing activities............ (1,286,408) (13,279,117) (1,947,562) (1,041,798) (5,644,386) (940,095) (152,845)
Financing activities............ (2,521,142) 9,027,712 (4,529,518) (132,756) 2,720,303 465,792 (1,391,005)
Weighted average number of basic
shares outstanding.................. 55,556 55,556 55,556 54,630 53,704 52,778 50,000
</TABLE>
58
<PAGE>
THE PRUNEYARD HOTEL
<TABLE>
<CAPTION>
AS OF AND FOR THE
SIX MONTHS ENDED AS OF AND FOR THE
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------------- ----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998 1997 1997 1996 1995 1994(1)
------------ ------------ ----------- ----------- ------------ ------------
OPERATING DATA:
REVENUES:
Hotel operating income............. $ 2,712,933 $ 2,429,772 $ 4,932,424 $ 4,304,595 $ 3,644,686 2,190,329
------------ ------------ ----------- ----------- ------------ ------------
EXPENSES:
Interest........................... 223,708 230,509 461,017 500,139 516,321 303,435
Depreciation and amortization...... 175,011 175,011 350,021 350,021 350,021 233,347
Property operating costs........... 668,206 606,528 1,217,127 1,139,012 1,058,853 640,370
Utilities.......................... 46,798 53,827 115,599 124,795 133,544 91,134
Repairs and maintenance............ 101,170 113,710 213,728 238,994 202,716 121,438
Property taxes..................... 44,722 44,522 88,982 86,313 83,723 15,251
Management fees.................... 135,551 120,883 246,622 214,997 182,232 60,233
General and administrative......... 314,769 314,415 590,682 632,086 666,377 379,692
------------ ------------ ----------- ----------- ------------ ------------
Total expenses................... 1,709,935 1,659,405 3,283,778 3,286,357 3,193,787 1,844,900
------------ ------------ ----------- ----------- ------------ ------------
Net income........................... $ 1,002,998 $ 770,367 $ 1,648,646 $ 1,018,238 $ 450,899 $ 345,429
------------ ------------ ----------- ----------- ------------ ------------
------------ ------------ ----------- ----------- ------------ ------------
BALANCE SHEET DATA:
Total assets......................... $ 12,658,780 $ 12,125,001 $11,354,536 $11,994,259 $ 11,396,288 $ 11,631,002
Note payable......................... 5,693,009 5,746,037 5,720,306 5,770,342 5,807,219 5,936,885
Total liabilities.................... 6,074,529 6,530,694 6,192,278 6,635,410 5,833,430 6,006,545
Members' equity...................... 6,584,251 5,594,307 5,162,258 5,358,849 5,562,858 5,624,456
OTHER DATA:
Net cash provided by (used in):
Operating activities............... $ 697,706 $ 722,488 $ 1,571,848 $ 1,701,914 $ 640,163
Investing activities............... (584,596) -- -- -- --
Financing activities............... 391,788 (559,214) (1,895,273) (1,433,677) (629,399)
</TABLE>
- ------------------------
(1) The hotel was acquired by Pruneyard Associates, L.L.C., a WW&A affiliate, in
April 1994.
59
<PAGE>
WW&A
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Selected Financial and Operating Data set forth above and the historical
financial statements of WW&A and notes thereto included elsewhere in this Proxy
Statement.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1998 TO SIX MONTHS ENDED JUNE 30, 1997
REVENUES
For the six months ended June 30, 1998, suite improvement revenues increased
$9.8 million or 90%, to $20.7 million from $10.9 million for the same period in
1997. This increase was related to the build-out of suites in recent development
projects and a significant increase in third party work for a single client.
Management fee income increased by $331,000 or 12%. This increase was consistent
with the 14% increase in the size of WW&A's portfolio of assets under management
(the "WW&A Portfolio"). Leasing commission income increased by $1.8 million or
91%. This increase was also related to the increase in the WW&A Portfolio,
initial leasing of new development projects and several early renewals of
existing tenants. Development fee income increased by $666,000 or 67%. This
increase was the result of three development projects started in 1997 and 1998.
Asset management fee income increased by $918,000 or 59%. This significant
increase was directly related to the increased property acquisitions during
1997. Acquisition fee income decreased by $471,000 or 52%. This decrease was
attributable to the decrease in new acquisitions during 1998.
DIRECT COSTS
Cost of suite improvement increased by $9.4 million or 90%. This increase
was consistent with the increase in suite improvement revenue. Development
consulting fees decreased by $136,000 or 74%. The decrease was related to the
reduction of outside consultants and utilization of permanent employees.
GENERAL AND ADMINISTRATIVE COSTS
General and administrative expenses increased by $2.6 million or 39%. This
increase was attributable to increased personnel and related overhead as a
result of WW&A's growth.
OTHER INCOME (EXPENSE) ITEMS
Interest expense decreased $214,000 or 54%. This was attributable to a
decrease in the average balance on WW&A's line of credit from 1997 to 1998.
NET INCOME
Net income for the six months ended June 30, 1998, was $2.7 million, a 120%
increase over the 1997 amount of $1.2 million. This increase resulted from the
continued growth in the WW&A Portfolio.
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO YEAR ENDED DECEMBER 31, 1996
REVENUES
For the year ended December 31, 1997, suite improvement revenues increased
$7.0 million or 27%, to $33 million from $26 million for the same period in
1996. This increase was the direct result of the increase
60
<PAGE>
in the amount of third-party work done in 1997. Management fee income increased
by $696,000 or 15%. This increase was consistent with the 14% increase in the
size of the WW&A Portfolio. Leasing commission income increased by $926,000 or
26%. This increase was also related to the increase in the WW&A Portfolio and
initial leasing of new development projects. Development fee income increased by
$555,000 or 28%. This increase was the result of two development projects
started in 1997. Asset management fee income increased by $1.9 million or 111%.
This significant increase was directly related to the amount of properties
acquired during 1997 ($413 million) versus 1996 ($289 million). In addition to
the increase in portfolio size, fees were collected for a full year on all
properties acquired in 1996. Acquisition fee income increased by $314,000 or
22%. This increase was attributable to the increase in the amount of properties
acquired in 1997 over the amount of properties acquired in 1997. Although the
amount of properties acquired in 1997 increased by 43% over 1996, the fee income
increased only 22% due to increased co-investment from limited partners on the
properties purchased in 1997, for which WW&A does not earn an acquisition fee.
DIRECT COSTS
Cost of suite improvement increased by $7.2 million or 29%. This increase
was consistent with the increase in suite improvement income, additionally the
margin on third-party work decreased due to an increasingly competitive market
place. Leasing commissions--third party decreased by $305,000 or 100%. This
decrease was due to a one-time payment to an outside broker made in 1996.
Consulting fee-- development decreased by $96,000 or 33%. The decrease was due
to expensing costs associated with a development project that was abandoned in
1996.
GENERAL AND ADMINISTRATIVE COSTS
General and administrative expenses increased by $2.8 million or 24%. This
increase was attributable to increased personnel and related overhead as a
result of WW&A's growth.
OTHER INCOME (EXPENSE) ITEMS
Interest income decreased by $117,000 or 16%. This decrease was a result of
the decrease in WW&A's cash balances in interest bearing accounts. Depreciation
and amortization expense increased $210,000 or 79%, as a result of a larger
asset base due to WW&A's growth. Interest expense increased $235,000 or 31%.
This was attributable to an increase in the average balance on WW&A's line of
credit from 1996 to 1997.
NET INCOME
Net income for the year ended December 31, 1997, was $3.9 million, a 38%
increase over the 1996 amount of $2.8 million. This increase resulted from the
continued growth in the WW&A Portfolio.
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995
REVENUES
For the year ended December 31, 1996, suite improvement revenues decreased
$8.9 million or 25%, to $26.3 million from $35.2 million for the same period in
1995. This decrease was the direct result of the decrease in the amount of
third-party work done in 1996. Management fee income increased by $982,000 or
26%. This increase was consistent with the 32% increase in the size of the WW&A
Portfolio of assets under management, offset by reduction of the standard
management fee from 3% to 2% on all new acquisitions. Leasing commission income
increased by $1.8 million or 109%. This significant increase was also related to
the increase in the WW&A Portfolio, the leasing of a development project and
several early renewals of existing tenants. Development fee income increased by
$631,000 or 48%. This increase was the
61
<PAGE>
result of two projects started in 1996. Asset management fee income increased by
$1.3 million or 281%. This significant increase was directly related to the
amount of properties acquired during 1996 ($289 million) versus 1995 ($141
million). In addition to the increase in the portfolio size, fees were collected
for a full year on all properties acquired in 1995. Acquisition fee income
increased by $561,000 or 65%. Although the amount of properties acquired in 1996
increased by 105% over 1995, the fee income increased only 65% due to increased
co-investment from limited partners on the properties purchased in 1996, for
which WW&A does not earn an acquisition fee.
DIRECT COSTS
Cost of suite improvement decreased by $8.2 million or 25%. This decrease
was consistent with the decrease in suite improvement revenue. Third-party
leasing commissions--third party increased by $305,000 or 100%. This increase
was due to a one-time payment to an outside broker made in 1996. Development
consulting fees increased by $101,000 or 53%. The increase was due to expensing
costs associated with a development project that was abandoned in 1996.
GENERAL AND ADMINISTRATIVE COSTS
General and administrative expenses increased by $3.2 million or 39%. This
increase was attributable to increased personnel and related overhead as a
result of WW&A's growth.
OTHER INCOME (EXPENSE) ITEMS
Interest income increased by $468,000 or 175%. This increase was a result of
the increase in loans to related parties, which was consistent with the increase
of $542,000 or 251%, in interest expense as WW&A's line of credit was used to
finance the loans to related parties.
NET INCOME
Net income for the year ended December 31, 1996, was $2.8 million, a 64%
increase over the 1995 amount of $1.7 million. This increase resulted from the
continued growth in WW&A Portfolio.
LIQUIDITY AND CAPITAL RESOURCES
WW&A relies on its positive cash flow from fee revenue related to operations
of the WW&A Portfolio and third-party contracts to cover all operating expenses
and the majority of its investing and financing activities. Fee revenue is not
subject to seasonal fluctuations. Fee revenue is subject to adverse economic
conditions that may effect the underlying properties under management. A
significant decline in the economic conditions of these properties under
management, the sale of properties in the WW&A Portfolio and the ability to
maintain or attract third-party management contracts could have a material
adverse effect on WW&A. WW&A has a borrowing capacity of $5 million under its
line of credit to cover any shortfall in cash flow needed for additional
investing and financing activities.
YEAR 2000
GENERAL
The Year 2000 compliance issue concerns the inability of computerized
information systems to accurately calculate, store or use a date after December
31, 1999. This could result in a system failure or miscalculation causing
disruptions of operations. The Year 2000 issue affects virtually all companies
and all organizations. WW&A recognizes the importance of ensuring that its
business systems are not disrupted as a result of Year 2000 related computer
system and software issues.
62
<PAGE>
READINESS
WW&A created a Year 2000 task force to evaluate and take the appropriate
actions regarding Year 2000 compliance. The task force conducted an assessment
of its computer information systems and its corporate business and operational
information systems. Financial, tenant management and building operating (i.e.,
security, energy, elevator and safety) systems were all included in this
assessment. The assessment covers the following major tasks: (i) inventory of
all information systems; (ii) analysis of inventory including assessment of
risk; (iii) verification of compliance with vendors; (iv) testing of critical
equipment and processes; and (v) replacement or modification of systems. WW&A is
now taking further necessary steps to understand the nature and extent of the
work required to make its systems, in those situations in which WW&A is required
to do so, Year 2000 compliant. These steps may require WW&A to modify, upgrade
or replace some of its existing systems. WW&A currently believes that it will
complete any needed modification, upgrading or replacing of existing systems and
become Year 2000 compliant by December 31, 1999.
COST
The total historical and anticipated remaining costs for Year 2000
compliance are estimated to be immaterial to WW&A's financial condition. The
costs to date have been expensed as incurred and consist of immaterial internal
staff cost and other expenses such as telephone and mailing cost. In addition,
where the appropriate course of action includes replacement or upgrade of
certain systems or equipment, WW&A believes, based on available information,
that these costs will not have a material adverse effect on the financial
position, results of operations and liquidity of WW&A. The information systems
that have thus far been identified as non-compliant are approaching the end of
their useful lives and will be replaced or upgraded as part of normal operations
and maintenance.
RISKS AND CONTINGENCY PLANS
Considering the substantial progress made to date, WW&A does not anticipate
delays in finalizing Year 2000 remediation within remaining time schedules.
However, third parties having a material relationship with WW&A (e.g.,
utilities, financial institutions, governmental agencies, municipalities and
major tenants) may be a potential risk based on their individual Year 2000
preparedness which may not be within WW&A's reasonable control. WW&A is in the
process of identifying, reviewing and logging the Year 2000 preparedness of
critical third parties.
Based on information received to date, the primary accounting system used by
WW&A is Year 2000 compliant. However the accounting system owned by WW&A and
used to service the Wilson Projects is not Year 2000 compliant. When surveyed,
the manufacturer indicated that a Year 2000 compliant version will be available
in the first quarter of 1999. Depending on the timing of the availability of
this updated software, WW&A plans to install the Year 2000 compliant version of
this software in the second quarter of 1999. WW&A estimates the cost of
installing the compliant version at less than $10,000.
In addition, there are a small number of non-Year 2000 compliant personal
computers installed in WW&A sites. WW&A routinely replaces personal computers to
take advantage of technological improvements and replacement of these computers
is planned for the first quarter of 1999.
WW&A intends to develop contingency plans to handle its most reasonably
likely worst-case Year 2000 scenarios. These have not yet been identified fully.
WW&A intends to complete its determination of worst-case scenarios after it has
received and analyzed responses to substantially all of the inquiries it has
made of third parties. Following its analysis, WW&A intends to develop a
timetable for completing its contingency plans.
Although WW&A's Year 2000 efforts are intended to minimize the adverse
effects of the Year 2000 issue on WW&A's business and operations, the actual
effects of the issue and the success or failure of
63
<PAGE>
WW&A's efforts described above cannot be known until the Year 2000. Failure by
WW&A's major suppliers, and other service providers to address adequately their
respective Year 2000 issues in a timely manner (insofar as such issues relate to
WW&A's business) could have a material adverse effect on WW&A's business,
results of operations and financial condition. However, WW&A believes that such
material effect is primarily limited to items of a utility nature furnished by
third parties to WW&A and a wide universe of other customers. Included are items
such as electricity, natural gas, telephone service and water, all of which are
not readily susceptible to alternate sources and which in all likelihood will be
available in some form.
OTHER MATTERS
In the ordinary course of business WW&A is subject to various claims and
contingencies. It is the opinion of management, after consultation with outside
counsel, that the resolution of these claims will not have a material effect on
the financial position or results of operations of WW&A.
64
<PAGE>
THE PRUNEYARD HOTEL
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE PRUNEYARD HOTEL
The following discussion and analysis should be read in conjunction with the
Selected Financial and Operating Data set forth above and the historical
financial statements of the Pruneyard Hotel and notes thereto included elsewhere
in this Proxy Statement.
GENERAL
The Pruneyard Inn Hotel is a three-story, 118-room hotel located in
Campbell, California. The hotel is owned by Pruneyard Associates, LLC, an
affiliate of WW&A whose principal investors are Fund-I and WWA Investors, and
managed by Wyndham Hotels & Resorts, which manages over 90 hotels nationwide.
The Pruneyard Inn Hotel serves the corporate traveler in the San Jose/Peninsula
region of Northern California.
Primary competitors in the area are The Campbell Inn, The Tollhouse Hotel,
and a Residence Inn. Demand for hotels in the area is expected to grow as the
Silicon Valley area expands and grows. Two new hotels are planned for future
development in the downtown San Jose area. Because they are not in the immediate
area of Campbell, management does not anticipate any negative effect on the
Pruneyard Inn Hotel as a result of these new hotels.
The Pruneyard Hotel does not constitute a legal entity but represents the
results of operations attributed to the hotel.
Construction is underway on a 54-room expansion of the hotel. The project is
expected to be complete in April 1999. Total estimated cost of the expansion is
$4,800,000, of which approximately $585,000 had been incurred as of June 30,
1998. The expansion is financed by a construction loan. The portion of the loan
specified for the hotel expansion is approximately $4,300,000 plus interest
during construction. The loan, which originated in July 1998, bears interest at
variable rates ranging from LIBOR plus 1.5% to LIBOR plus 2% and matures in July
2003.
RESULTS OF OPERATIONS
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1998 TO SIX MONTHS ENDED JUNE 30, 1997
For the six months ended June 30, 1998 hotel operating income increased by
$283,000, or 12%, compared to the six months ended June 30, 1997. The increase
was attributable to higher room rates which resulted in a 10% increase in the
average daily rate ("ADR"), and an increase in food and beverage revenues.
Average occupancy was 82.0% for the six months ended June 30, 1998, and also for
the same period in 1997.
Hotel operating expenses showed little change during the same period.
Property operating expenses rose slightly but were offset by a decrease in
utilities and repairs and maintenance expense. Management fees increased as a
result of the increase in revenues.
Net income increased $233,000, or 30%, for the six months ended June 30,
1998, compared to the six months ended June 30, 1997, due to the increase in
revenue and reduction of operating expenses as discussed above.
65
<PAGE>
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO YEAR ENDED DECEMBER 31, 1996
For the year ended December 31, 1997 hotel operating income increased by
$628,000, or 15%, compared to the previous year ended December 31, 1996. The
increase was attributable to a 12% increase in the ADR and a 2% increase in the
average occupancy for the year. Average occupancy for the year ending December
31, 1997 was 82.2% as compared to 80.6% for the year ending December 31, 1996.
Hotel operating expenses showed very little change during the same period.
Property operating expenses rose slightly but were offset by a decrease in
utilities and repairs and maintenance expense. Management fees increased as a
result of the increase in revenues.
Net income increased $630,000, or 62%, for the year ended December 31, 1997,
compared to the year ended December 31, 1996, due to the increase in revenue and
reduction of operating expenses as discussed above.
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995
For the year ended December 31, 1996 hotel operating income increased by
$660,000, or 18%, over the previous year ended December 31, 1995. The increase
was attributable to a 20% increase in the ADR, and a 2% decrease in the average
occupancy for the year. Average occupancy for the year ending December 31, 1996
was 80.6% as compared to 82.2% for the year ending December 31, 1995.
Hotel operating expenses showed a 3% increase during the same period.
Property operating expenses rose slightly as a result of the increase in
occupancy. Repairs and maintenance increased by $36,000, or 18%. Management fees
increased as a result of the increase in revenues.
Net income increased $567,000, or 126%, for the year ended December 31,
1996, compared to the year ended December 31, 1995, due to the increase in
revenue relative to the increase of operating expenses as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The cash flow from the hotel is available for distribution to its owner. The
location of the hotel makes it vulnerable to adverse changes in the economic
conditions of the Silicon Valley. A significant decline in these economic
conditions could have a material adverse effect on the hotel. The hotel is not
subject to major seasonal fluctuations.
YEAR 2000
GENERAL
The Year 2000 compliance issue concerns the inability of computerized
information systems to accurately calculate, store or use a date after December
31, 1999. This could result in a system failure or miscalculation causing
disruptions of operations. The Year 2000 issue affects virtually all companies
and all organizations. Management recognizes the importance of ensuring that its
business systems are not disrupted as a result of Year 2000 related computer
system and software issues.
READINESS
As part of WW&A's overall Year 2000 program, management created a Year 2000
task force to evaluate and take the appropriate actions regarding Year 2000
compliance. The task force conducted an assessment of its computer information
systems and its corporate business and operational information systems.
Financial, tenant management and building operating (i.e., security, energy,
elevator and safety) systems were all included in the assessment. The assessment
covered the following major tasks: (i) inventory of all information systems,
(ii) analysis of inventory including assessment of risk, (iii) verification of
compliance with vendors, (iv) testing of critical equipment and processes and
66
<PAGE>
(v) replacement or modification of systems. Management is now taking further
necessary steps to understand the nature and extent of the work required to make
its systems, in those situations in which the Pruneyard Hotel is required to do
so, Year 2000 compliant. These steps may require the Pruneyard Hotel to modify,
upgrade or replace some of its existing systems. Management currently believes
that it will complete any needed modification, upgrading or replacing of
existing systems and become Year 2000 compliant by December 31, 1999.
COST
The total historical and anticipated remaining costs for Year 2000
compliance are estimated to be immaterial to the Pruneyard Hotel's financial
condition. The costs to date have been expensed as incurred and consist of
immaterial internal staff costs and other expenses such as telephone and mailing
costs. In addition, where the appropriate course of action includes replacement
or upgrade of certain systems or equipment, the management believes, based on
available information, that these costs will not have a material adverse effect
on the financial position, results of operations and liquidity of the Pruneyard
Hotel. The information systems that have thus far been identified as
non-compliant are approaching the end of their useful lives and will be replaced
or upgraded as part of normal operations and maintenance.
RISKS AND CONTINGENCY PLANS
Considering the substantial progress made to date, management does not
anticipate delays in finalizing Year 2000 remediation within remaining time
schedules.
However, third parties having a material relationship with the Pruneyard
Hotel (e.g., utilities, financial institutions, governmental agencies,
municipalities and the hotel operator) may be a potential risk based on their
individual Year 2000 preparedness which may not be within the Pruneyard Hotel's
reasonable control. Management is in the process of identifying, reviewing and
logging the Year 2000 preparedness of critical third parties.
Based on information gathered to date, the midrange computer used to run the
hotel accounting and management system is not Year 2000 compliant. This computer
is being replaced in the fourth quarter of 1998 in the normal course of
business. The software owned by the third party operator of the hotel is Year
2000 compliant.
Management intends to develop contingency plans to handle its most
reasonably likely worst case Year 2000 scenarios. These have not yet been
identified fully. Management intends to complete its determination of worst case
scenarios after it has received and analyzed responses to substantially all of
the inquires it has made of third parties. Following its analysis, the
management intends to develop a timetable for completing its contingency plans.
Although management's Year 2000 efforts are intended to minimize the adverse
effects of the Year 2000 issue on the Pruneyard Hotel's business and operations,
the actual effects of the issue and the success or failure of the efforts
described above cannot be known until the year 2000. Failure by the Pruneyard
Hotel's operator, major suppliers, and other service providers to address
adequately their respective Year 2000 issues in a timely manner (insofar as such
issues relate to the Pruneyard Hotel's business) could have a material adverse
effect on the Pruneyard Hotel's business, results of operations and financial
condition. However, management believes that such potential material adverse
effect is primarily limited to items of a utility nature furnished by third
parties to the Pruneyard Hotel and to a wide universe of other customers.
Included are items such as electricity, natural gas, telephone service and
water, all of which are not readily susceptible to alternate sources and which
in all likelihood will be available in some form.
OTHER MATTERS
The hotel is not aware of any environmental or litigation issues related to
the property. The hotel believes that it has sufficient insurance coverage on
the property.
67
<PAGE>
PROPERTIES
Cornerstone owns and operates 21 Class A office properties, comprising
approximately 11,400,000 rentable square feet. Class A properties generally are
considered to be those which have the most favorable locations and physical
attributes, attract premium rents, and experience the highest tenant retention
rates within their markets. Based on rentable square feet, as of June 30, 1998,
the existing Cornerstone portfolio was approximately 98% leased under
approximately 670 leases.
In the Wilson Acquisition, Cornerstone is acquiring completed properties and
projects under development. Based on rentable square feet, as of September 30,
1998, the Wilson Projects were approximately 95% leased under approximately
1,280 leases.
The following table summarizes certain information with respect to
Cornerstone's existing portfolio, properties to be acquired in the Wilson
Acquisition and the combined portfolio as of the dates indicated.
TABLE OF PROPERTIES(1)
CURRENT CORNERSTONE PORTFOLIO
<TABLE>
<CAPTION>
COMPANY'S TOTAL
PROPERTY NAME YEAR PERCENT RENTABLE
AND LOCATION CONSTRUCTED INTEREST(2) SQUARE FEET
- ------------------------------------------------------------------------------- ----------- --------------- -----------
<S> <C> <C> <C>
DENVER, COLORADO
One Norwest Center............................................................. 1983 100% 1,187,752
MINNEAPOLIS, MINNESOTA
Norwest Center(3).............................................................. 1988 50% 1,118,062
SEATTLE, WASHINGTON
Washington Mutual Tower(4)..................................................... 1988 50% 1,154,560
BOSTON, MASSACHUSETTS
125 Summer Street.............................................................. 1989 100% 463,691
500 Boylston Street............................................................ 1988 91.5% 714,636
222 Berkeley Street............................................................ 1991 91.5% 531,184
Sixty State Street(5).......................................................... 1979 100% 823,014
One Memorial Drive(6).......................................................... 1987 100% 352,764
NEW YORK, NEW YORK
Tower 56....................................................................... 1983 100% 162,034
527 Madison Avenue............................................................. 1986 100% 215,539
SUBURBAN, ILLINOIS
One Lincoln Centre(Oakbrook)................................................... 1986 100% 297,330
Corporate 500 Centre(7) (Deerfield)............................................ 1986/1990 100% 678,885
ATLANTA, GEORGIA
191 Peachtree Street(8)........................................................ 1991 80% 1,220,930
200 Galleria................................................................... 1985 100% 432,698
WASHINGTON, D.C.
Market Square(9)............................................................... 1990 60% 688,709
CHARLOTTE, NORTH CAROLINA
Charlotte Plaza................................................................ 1982 100% 612,728
ALEXANDRIA, VIRGINIA
11 Canal Center................................................................ 1986 100% 70,365
99 Canal Center................................................................ 1986 100% 137,945
TransPotomac Plaza 5........................................................... 1983 100% 96,139
SAN FRANCISCO, CALIFORNIA
201 California Street(10)...................................................... 1980 100% 240,230
SANTA MONICA, CALIFORNIA
Wilshire Palisades(10)......................................................... 1981 100% 186,320
-----------
TOTAL CURRENT CORNERSTONE 11,385,515
PORTFOLIO..................................................................................................
-----------
</TABLE>
68
<PAGE>
WILSON PORTFOLIO
<TABLE>
<CAPTION>
COMPANY'S TOTAL
PROPERTY NAME YEAR PERCENT RENTABLE
AND LOCATION CONSTRUCTED INTEREST(2) SQUARE FEET
- ------------------------------------------------------------------------------- ----------- --------------- -----------
<S> <C> <C> <C>
SAN MATEO COUNTY, CALIFORNIA
Bayhill 4...................................................................... 1985 100% 203,830
Bayhill 5...................................................................... 1983 100% 88,402
Bayhill 6...................................................................... 1982 100% 77,087
Bayhill 7...................................................................... 1987 100% 144,591
One Bay Plaza.................................................................. 1979 100% 176,533
Bay Park Plaza I............................................................... 1985 100% 139,900
Bay Park Plaza II.............................................................. 1998 100% 117,158
Peninsula Office Park 1........................................................ 1971 100% 40,817
Peninsula Office Park 3........................................................ 1973 100% 45,938
Peninsula Office Park 4........................................................ 1976 100% 47,848
Peninsula Office Park 5........................................................ 1977 100% 79,342
Peninsula Office Park 6........................................................ 1981 100% 60,503
Peninsula Office Park 8........................................................ 1982 100% 90,962
Peninsula Office Park 9........................................................ 1998 100% 124,494
66 Bovet....................................................................... 1968 100% 43,746
1300 South El Camino........................................................... 1986 100% 84,322
Belmont Shores................................................................. 1983 100% 141,643
Seaport Centre................................................................. 1988 100% 463,142
EAST BAY, CALIFORNIA
One Corporate Centre........................................................... 1985 100% 127,682
Two Corporate Centre........................................................... 1987 100% 201,770
1600 South Main................................................................ 1983 100% 83,277
2700 Ygnacio Valley Road....................................................... 1984 100% 103,214
One ADP Plaza.................................................................. 1987 100% 149,855
Two ADP Plaza.................................................................. 1989 100% 149,535
2300 Norris Tech............................................................... 1990 100% 67,003
4550 Norris Tech............................................................... 1984 100% 96,975
4600 Norris Tech............................................................... 1984 100% 96,535
Park Plaza..................................................................... 1986 100% 87,040
Foothill Corporate Center...................................................... 1982 100% 70,355
Golden Bear Center............................................................. 1986 100% 160,587
PeopleSoft Plaza............................................................... 1984 100% 279,931
SANTA CLARA COUNTY, CALIFORNIA
Embarcadero Place.............................................................. 1984 100% 192,108
490 California................................................................. 1985 100% 23,369
Pruneyard Tower One............................................................ 1971 100% 116,488
Pruneyard Tower Two............................................................ 1974 100% 115,860
Pruneyard Place(11)............................................................ 1999 100% 123,133
Pruneyard Shopping Center...................................................... 1970s 100% 251,121
Pruneyard Inn(12).............................................................. 1989 100% 90,000
First American Plaza........................................................... 1971 100% 82,596
10 Almaden..................................................................... 1989 100% 296,883
SAN FRANCISCO, CALIFORNIA
One Post....................................................................... 1969 50% 389,660
120 Montgomery................................................................. 1955 67% 410,923
188 Embarcadero................................................................ 1985 100% 85,209
</TABLE>
69
<PAGE>
<TABLE>
<CAPTION>
COMPANY'S TOTAL
PROPERTY NAME YEAR PERCENT RENTABLE
AND LOCATION CONSTRUCTED INTEREST(2) SQUARE FEET
- ------------------------------------------------------------------------------- ----------- --------------- -----------
<S> <C> <C> <C>
LOS ANGELES/ORANGE COUNTY, CALIFORNIA
Westlake Spectrum.............................................................. 1990 100% 62,305
Westlake Spectrum II........................................................... 1990 100% 56,685
Warner Park Center............................................................. 1986 100% 58,798
Tri-Center Plaza............................................................... 1990 100% 141,946
700 North Brand................................................................ 1981 100% 202,785
Bixby Ranch.................................................................... 1987 100% 277,289
Apple Building................................................................. 1991 100% 219,537
2677 North Main................................................................ 1987 100% 212,542
Agoura Hills................................................................... 1987 100% 115,266
SANTA MONICA/WEST LOS ANGELES, CALIFORNIA
Janss Court(13)................................................................ 1989 100% 125,556
Commerce Park.................................................................. 1977 100% 94,252
Searise Office Tower........................................................... 1975 100% 122,292
429 Santa Monica............................................................... 1982 100% 81,414
West Wilshire Office........................................................... 1976 100% 181,452
West Wilshire Medical.......................................................... 1960 100% 54,327
SAN DIEGO, CALIFORNIA
Centerside II.................................................................. 1987 100% 286,941
Crossroads..................................................................... 1983 100% 133,680
SEATTLE, WASHINGTON
110 Atrium Place............................................................... 1981 100% 213,455
Island Corporate Center........................................................ 1987 100% 100,075
ARIZONA
Scottsdale Center.............................................................. 1985 100% 164,469
Biltmore Lakes................................................................. 1982 100% 207,489
One Gateway.................................................................... 1984 100% 105,893
Two Gateway.................................................................... 1985 100% 106,329
OTHER
Exposition Centre (Sacramento, CA)............................................. 1984 100% 71,675
U.S. West (Murray City, Utah).................................................. 1985 100% 136,608
-----------
TOTAL WILSON PORTFOLIO...................................................................... 9,554,429
-----------
-----------
TOTAL COMBINED PORTFOLIO.................................................................... 20,939,944
-----------
-----------
Minority Interest(14).......................................................... (669,127)
TOTAL COMBINED PORTFOLIO 20,270,817
INTEREST..................................................................................
-----------
-----------
</TABLE>
- ------------------------
(1) All Cornerstone property information is presented as of June 30, 1998. All
WW&A property information is presented as of September 30, 1998.
(2) Unless otherwise noted, cash flow and residual proceeds will be distributed
to Cornerstone according to its percentage interest.
(3) While Cornerstone's stated interest in the partnership which owns Norwest
Center is 50%, its economic interest in the property is significantly larger
because of priority distributions it receives on its invested capital base.
For the six months ended June 30, 1998, Cornerstone's share of earnings and
cash distributions from the partnership that owns Norwest Center was 79.3%.
(4) While Cornerstone's stated interest in the partnership which owns Washington
Mutual Tower is 50%, its economic interest in the Property is significantly
larger because of priority distributions it receives on its invested capital
base. For the six months ended June 30, 1998, Cornerstone received 100% of
the cash distributions from the partnership that owns Washington Mutual
Tower.
(5) On December 31, 1997, Cornerstone purchased the second mortgage on Sixty
State Street located in the heart of Boston's Central Business District. The
mortgage is a cash flow mortgage through which all the economic
benefits/risks (subject to the first mortgage) will inure to Cornerstone.
Cornerstone controls all major decisions regarding management and leasing.
The total purchase price for the second mortgage was $131.5 million. The
$78.4 million first mortgage on the property has been recorded by
Cornerstone as an $89.6 million liability due to its above-market interest
rate.
70
<PAGE>
(6) The property was acquired by Cornerstone in April 1998.
(7) The property was acquired by Cornerstone in January 1998.
(8) While Cornerstone's stated interest in the partnership that owns 191
Peachtree Street is 80%, its economic interest is significantly larger
because it owns the first mortgage note on the Property in the amount of
$145 million, which earns interest at 9.375%, and will receive a priority
distribution on its acquired capital base. In addition, in 1997,
Cornerstone's partner in the transaction, CH Associates, Ltd., received an
annual incentive distribution of $250,000 which, Cornerstone expects, it
will continue to receive under the partnership agreement through February
28, 2000, with Cornerstone receiving the remainder of the cash flow of the
property.
(9) In January 1998, Cornerstone acquired partnership interests with a stated
interest of approximately 59% in the partnerships that own Market Square,
with the option to purchase an additional 1%. Cornerstone's economic
interest is significantly larger since it has acquired the first mortgage
note on the property in the amount of $181 million which earns interest at
9.75%, and will receive a priority distribution on its acquired capital
base. In addition, Cornerstone acquired a "buffer loan", with accrued
principal and interest of $46.2 million, which accrues interest at a rate of
11% per annum and is payable from cash flow, refinancing or sales proceeds
from Market Square in excess of the first mortgage. During the six months
ended June 30, 1998, Cornerstone received 100% of the cash flow from the
property. Cornerstone accounts for the transaction as an equity investment
in real estate.
(10) The property was acquired by Cornerstone in June 1998.
(11) Pruneyard Place is under construction with an expected completion date of
mid 1999. The building is entirely pre-leased.
(12) The Pruneyard Inn is a 118-room three-story hotel. The property is
currently undergoing a 25,000 square foot expansion, which will accommodate
54 new rooms.
(13) Janss Court is a seven-story, 125,556 square feet Class A mixed use
building. Along with 92,250 square foot of retail and office space, Janss
Court offers 33,306 rentable square feet of apartments.
(14) Minority interest calculations are based on the minority partners'
percentage interest in the cash flows of the properties.
71
<PAGE>
PROPOSAL THREE: AMENDMENT AND RESTATEMENT OF THE INCENTIVE PLAN
Cornerstone maintains the Cornerstone Properties Inc. 1998 Long Term
Incentive Plan. The Incentive Plan reserves a number of shares of Cornerstone
Common Stock for issuance to certain officers and key employees of Cornerstone
in the form of stock awards, stock options, stock appreciation rights,
restricted stock units, dividend equivalents, other awards, performance awards
and performance units or any combination of the foregoing.
In the event of the completion of the Wilson Acquisition, the number of key
employees of Cornerstone will be significantly increased. As a result, the
Incentive Plan's provision for the number of shares of Cornerstone Common Stock
reserved for issuance (which was designed without the Wilson Acquisition in
mind) would not result in an adequate pool of shares of Cornerstone Common
Stock. The Cornerstone Board has therefore approved, subject to stockholder
approval and completion of the Wilson Acquisition and effective as of the
completion of the Wilson Acquisition, an amendment and restatement of the
Incentive Plan that would (A) increase the shares of Cornerstone Common Stock
otherwise available for issuance for grants under the Incentive Plan to an
amount equal to 5% (rounded down to the nearest whole share) of the total number
of shares of Cornerstone Common Stock and Units outstanding immediately after
the completion of the Transaction and (B) permit the granting of stock options
and other awards (other than incentive stock options) to non-employee directors
of Cornerstone. Cornerstone's obligation to complete the Wilson Acquisition is
not conditioned upon stockholder approval of the Amendment. The Cornerstone
Board, however, will not effect the Amendment if the Wilson Acquisition is not
completed.
The complete text of the Incentive Plan, as amended and restated, is
attached to this Proxy Statement as Annex D. The following is a summary of the
material terms of the Incentive Plan as proposed to be amended, which is
qualified in its entirety by reference to the text of the Incentive Plan.
GENERAL TERMS. The Incentive Plan is an omnibus equity-based incentive plan
that provides for awards in the form of stock awards, restricted stock units,
stock options, stock appreciation rights, performance units, dividend
equivalents and other awards to eligible individuals. The Incentive Plan also
allows the Compensation Committee to grant annual and long-term performance
awards that meet the criteria for "qualified performance-based compensation"
under Section 162(m) of the Code. Only officers and key employees of Cornerstone
or any of its subsidiaries (including key individuals who have accepted an offer
of employment with any of them) are eligible to receive awards under the
Incentive Plan. Cornerstone currently estimates that approximately 12
individuals are eligible to participate in the Incentive Plan.
Cornerstone's ability to issue shares of Cornerstone Common Stock under the
Incentive Plan is subject to a number of limits set forth in the Incentive Plan.
Upon effectiveness of the Amendment, no more than 5% (rounded down to the
nearest whole share) of the total number of shares of Cornerstone Common Stock
and Units outstanding immediately after the completion of the Transaction may be
issued under the Incentive Plan (increased by the number of shares tendered or
withheld in connection with the payment or settlement of an award or for tax
purposes under the Incentive Plan). In order to satisfy the requirements of
Section 162(m) of the Code, no eligible individual may receive under the
Incentive Plan in any calendar year options or stock appreciation rights
covering more than 1,000,000 shares. The limits described above are subject to
adjustment by the Compensation Committee in the event of a merger,
consolidation, stock dividend, stock split or other similar corporate event
affecting the Cornerstone Common Stock. On November 12, 1998, the closing price
of Cornerstone's Common Stock on the NYSE was $14.94.
The Compensation Committee administers the Incentive Plan and has the
authority to select the participants, and determine the type, number and other
terms and conditions of the awards. The
72
<PAGE>
Compensation Committee may prescribe award documents, establish rules and
regulations for the administration of the Incentive Plan, construe and interpret
the Incentive Plan and the award documents and make all other decisions or
interpretations as the Compensation Committee may deem necessary.
Awards under the Incentive Plan may be granted singly or in combination or
tandem with any other award. The terms and conditions of each award will be set
forth in an award document approved by the Compensation Committee. At or after
the time of grant of an award, the Compensation Committee may determine the
vesting, exercisability, payment and other restrictions that apply to the award.
The Compensation Committee will also have authority to determine and specify in
the applicable award document the effect, if any, that an employee's termination
of employment or a change in control of Cornerstone will have on the vesting and
exercisability of an award.
The Incentive Plan contemplates the following types of awards:
STOCK OPTIONS. Stock options may be either nonqualified stock options or
incentive stock options within the meaning of Section 422 of the Code. Incentive
stock options may be granted only to employees of Cornerstone or its
subsidiaries. The term of a stock option may not be longer than ten years, and
the exercise price of an option generally may not be less than the fair market
value of a share of Cornerstone Common Stock at the time of grant. The exercise
price of a stock option may be paid in cash or, if approved by the Compensation
Committee at or after the time of grant, in previously owned stock or both. The
Incentive Plan also allows the Compensation Committee to grant a so-called
"reload option" in connection with the exercise of an option through the tender
of previously owned shares of Cornerstone Common Stock. In order to comply with
the provisions of the Code, the Incentive Plan does not allow for the grant of
incentive stock options of more than 5% (rounded down to the nearest whole
share) of the total number of shares of Cornerstone Common Stock and Units
outstanding immediately after completion of the Transaction.
STOCK APPRECIATION RIGHTS. Each stock appreciation right entitles a
participant to receive the excess, if any, of the fair market value of a share
of Cornerstone Common Stock on the date of exercise over the fair market value
of a share of Cornerstone Common Stock on the date of grant. At the discretion
of the Compensation Committee, payments to an employee upon exercise of a stock
appreciation right may be made in cash, shares of Cornerstone Common Stock or
both. The Compensation Committee may grant stock appreciation rights alone or
together with stock options. If a stock appreciation right is granted in tandem
with a stock option, the stock appreciation right may not be exercised prior to,
or later than, the time the related option could be exercised.
STOCK AWARDS. Stock awards generally consist of one or more shares of
Cornerstone Common Stock granted to a participant for no consideration or sold
to a participant for a stated amount. Stock awards may be subject to
restrictions on transfer and to vesting conditions, as the Compensation
Committee may determine.
RESTRICTED STOCK UNITS. Each restricted stock unit represents the right of
a participant to receive the value of one share of Cornerstone Common Stock at a
payment date specified in connection with the grant of the unit, subject to the
terms and conditions established by the Compensation Committee. When these terms
and conditions are satisfied, restricted stock units will be payable, at the
discretion of the Compensation Committee, in cash or shares of Cornerstone
Common Stock or in other property.
PERFORMANCE UNITS. Performance units may be granted as fixed or variable
share-or-dollar-denominated units, subject to conditions of vesting and time of
payment as the Compensation Committee may determine. Performance units will be
payable, at the discretion of the Compensation Committee, in cash, shares of
Cornerstone Common Stock, awards, other property or in any combination thereof.
DIVIDEND EQUIVALENTS. Each dividend equivalent granted under the Incentive
Plan generally entitles a participant to receive the value of any dividends paid
in respect of a share of Cornerstone Common Stock.
73
<PAGE>
Dividend equivalents may be settled through the payment of cash, shares of
Cornerstone Common Stock, awards or other property and may be awarded on a
free-standing basis or in connection with another award.
OTHER AWARDS. The Incentive Plan authorizes the Compensation Committee to
fashion other types of equity and non-equity based awards and gives the
Compensation Committee broad discretion to specify the terms and provisions of
such other awards. Other awards may be based upon performance goals, the value
of a share of Cornerstone Common Stock, the value of other securities of
Cornerstone, or other criteria that the Compensation Committee specifies. Other
awards may consist solely of cash bonuses or supplemental cash payments to a
participant to permit the participant to pay some or all of the tax liability
incurred in connection with the vesting, exercise, payment or settlement of an
award.
PERFORMANCE AWARDS. The Incentive Plan permits the Compensation Committee
to establish one or more performance periods and to provide for performance
payments to participants upon the achievement of the targets for one or more
performance goals applicable to the performance period. A performance period may
be for such duration as the Compensation Committee may specify at the time that
it sets the performance goals and targets applicable to that period, and the
Incentive Plan allows the Compensation Committee to establish consecutive or
overlapping performance periods. Performance payments are intended to qualify as
"qualified performance-based compensation" for purposes of Section 162(m) of the
Code and to be fully deductible for federal income tax purposes by Cornerstone.
Payments in respect of a performance period may be made only upon the
achievement of the targets for one or more of the following performance goals:
FFO per share, FFO, earnings per share, net income, NOI, pretax profits, pretax
operating income, revenue growth, return on sales, return on equity, return on
assets managed, return on investment, increase in the fair market value of a
share of Cornerstone Common Stock, total return to stockholders, cash flow, or
economic value added. A performance goal may be measured on a periodic, annual
or cumulative basis and may be established on a corporate-wide basis or
established with respect to one or more operating units, divisions,
subsidiaries, acquired businesses, minority investments, partnerships or joint
ventures. Performance goals may be calculated without regard to changes in
accounting rules that occur during a performance period.
Following the completion of a performance period, the Incentive Plan
requires the Compensation Committee to certify that the applicable criteria for
paying amounts in respect of a performance award have been achieved and to
determine the amount of the performance payment to be made to a participant for
the performance period. The Incentive Plan allows the Compensation Committee to
exercise discretion to reduce (but not increase) the amount of the performance
payment for a performance period.
Performance payments may be paid in cash, shares of Cornerstone Common
Stock, awards under the Incentive Plan, in other property or any combination
thereof. The Compensation Committee may also permit a participant to defer
receipt of a performance payment or may require the mandatory deferral of some
or all of a performance payment. Where a performance payment is made in the form
of Cornerstone Common Stock that is subject to transfer or other restrictions,
the Incentive Plan permits, but does not require, the Compensation Committee to
apply a reasonable discount not in excess of 25% to the fair market value of a
share of Cornerstone Common Stock to determine the number of shares of
Cornerstone Common Stock that will be delivered to the participant as part of
the performance payment.
The maximum value of a performance payment that may be made to a participant
for any performance period of twelve months is $2,000,000. If the payment for a
twelve month period is expressed as a percentage of the participant's base
salary, it may not be greater than 300% of the participant's annual base salary
in effect at the start of the performance period. If a performance period is
greater than or less than twelve months, the dollar or salary limit will be
determined by multiplying the applicable twelve-month limit by a fraction, the
numerator of which is the number of whole and partial months in the performance
period and the denominator of which is twelve.
74
<PAGE>
AMENDMENT AND TERMINATION. The Cornerstone Board or the Compensation
Committee may, at any time, terminate or, from time to time, amend, modify or
suspend the Incentive Plan. However, no amendment may increase certain of the
limits set forth in the Incentive Plan, allow for grants of options at an
exercise price less than fair market value at the time of grant or amend the
Incentive Plan in any manner which would permit a reduction in the exercise
price of options, without stockholder approval.
NEW GRANTS
Upon completion of the Wilson Acquisition, the Compensation Committee has
authorized the granting of up to 3,000,000 shares of Cornerstone Common Stock to
employees of Cornerstone, contingent upon the approval of the Amendment by the
Cornerstone stockholders. The allocation of these options will be determined by
the Compensation Committee and approved by the full Cornerstone Board after the
completion of the Wilson Acquisition.
FEDERAL INCOME TAX CONSEQUENCES OF STOCK OPTIONS
The federal income tax consequences of the grant and exercise of a stock
option are summarized below. The summary is not intended to be complete and is
not intended as tax advice to any person.
NONQUALIFIED STOCK OPTIONS. The grant of a nonqualified stock option has no
immediate federal income tax effect; the employee will not recognize taxable
income and Cornerstone will not receive a tax deduction. When the employee
exercises the option, the employee will recognize ordinary income in an amount
equal to the excess of the fair market value of the Cornerstone Common Stock on
the date of exercise over the exercise price, and Cornerstone will generally
receive a tax deduction equal to the amount of income recognized. Nonqualified
stock options granted under the Incentive Plan are intended to qualify as
qualified performance-based compensation for purposes of Section 162(m) of the
Code.
INCENTIVE STOCK OPTIONS. When an employee is granted an incentive stock
option, or when the employee exercises the option, the employee will generally
not recognize taxable income (except for purposes of the alternative minimum
tax) and Cornerstone will not receive a tax deduction. If the employee holds the
shares of Cornerstone Common Stock for at least two years from the date of grant
and one year from the date of exercise, any gain or loss upon a subsequent
disposition of the shares will be treated as long-term capital gain or loss.
BOARD RECOMMENDATION
THE CORNERSTONE BOARD BELIEVES THAT THE AMENDMENT IS FAIR TO, AND IN THE
BEST INTERESTS OF, CORNERSTONE AND THE STOCKHOLDERS OF CORNERSTONE. THE
CORNERSTONE BOARD UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF CORNERSTONE
VOTE FOR APPROVAL OF THE AMENDMENT.
The Cornerstone Board believes that adoption of the Amendment will help
Cornerstone and the Operating Partnership attract and retain talented employees
and thereby increase Cornerstone's performance. At the same time, the issuance
of additional shares of Cornerstone Common Stock pursuant to stock options and
other awards under the Incentive Plan will have a dilutive effect on existing
Cornerstone stockholders. The Cornerstone Board believes that benefits to
stockholders of adopting the Amendment will outweigh these effects over the long
term. Stockholders should consider both the advantages and disadvantages of
adoption of the Amendment in considering whether to vote in favor of the
proposal to approve the Amendment.
75
<PAGE>
OWNERSHIP OF CORNERSTONE COMMON STOCK BY CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to persons known by
Cornerstone to be the beneficial owner of 5% or more of the Cornerstone Common
Stock as of September 1, 1998.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
---------------------------
NUMBER OF PERCENTAGE
NAME AND ADDRESS SHARES OF CLASS
- ------------------------------------------------------------------------------------- ------------ -------------
<S> <C> <C>
PGGM(1).............................................................................. 27,458,750(2) 27.0%
P.O. Box 117
3700 AC Zeist
The Netherlands
DIHC................................................................................. 6,726,750 6.6%
200 Galleria Parkway, NW
Suite 2000
Atlanta, GA 30339
NYSTRS............................................................................... 6,896,550 6.8%
10 Corporate Woods Drive
Albany, NY 12211-2395
</TABLE>
- ------------------------
(1) As the sole stockholder of DIHC, PGGM may be deemed to beneficially own the
shares held beneficially and of record by DIHC. Accordingly, PGGM may be
deemed to own, in the aggregate, 34,185,500 shares, representing 33.6% of
the outstanding shares of the Cornerstone Common Stock.
(2) Does not include 11,594,203 shares of Cornerstone Common Stock which PGGM
has agreed to purchase pursuant to the PGGM Investment and of which PGGM may
be deemed to be the beneficial owner under Rule 13d-1 under the Exchange
Act. Upon completion of the PGGM Investment and the Wilson Acquisition, PGGM
will be the beneficial owner of approximately 36.1% of the outstanding
shares of Cornerstone Common Stock, including shares owned by DIHC.
The following table sets forth the shares of Cornerstone's Common Stock
beneficially owned as of September 1, 1998 by all directors, by each of the
named executive officers, and by the directors and executive officers as a
group. Except as footnoted, each named individual has sole voting and investment
power over the shares listed by that individual's name. All directors and
executive officers as a group beneficially owned approximately 1,589,780 (or
approximately 1.6%) of the outstanding shares of Cornerstone Common Stock at
September 1, 1998. None of the persons in the following table owned in excess of
1.0% of the shares of Cornerstone Common Stock outstanding on September 1, 1998.
76
<PAGE>
<TABLE>
<CAPTION>
NAME SHARES
- ----------------------------------------------------------------------------------------------------- ----------
<S> <C>
Cecil D. Conlee...................................................................................... --
Blake Eagle.......................................................................................... 10,349(1)
Dr. Karl-Ludwig Hermann.............................................................................. 10,000(2)
Hans C. Mautner...................................................................................... 45,194(1)
Dr. Lutz Mellinger................................................................................... --
John S. Moody........................................................................................ 512,306(3)
Craig R. Stapleton................................................................................... 92,900
Dick van den Bos..................................................................................... --
Jan van der Vlist.................................................................................... --
Michael J. G. Topham................................................................................. 10,349(1)
Scott M. Dalrymple................................................................................... 126,300(4)
Rodney C. Dimock..................................................................................... 271,565(5)
Thomas P. Loftus..................................................................................... 126,000(4)
Kevin P. Mahoney..................................................................................... 125,300(4)
Thomas A. Nye........................................................................................ 127,800(4)
Francis H. Shields, Jr............................................................................... 87,289(6)
Barry J. McGowan..................................................................................... 19,178(7)
Karin G. Maas........................................................................................ 12,500(8)
Robert T. Sorrentino................................................................................. 12,500(8)
Peter S. Smichenko................................................................................... 250
All directors and executive officers as a group (20 persons)......................................... 1,589,780
</TABLE>
- ------------------------
(1) Includes 349 restricted shares received as director compensation and 10,000
shares subject to options exercisable within 60 days.
(2) Includes 10,000 shares subject to options exercisable within 60 days.
(3) Includes 93,000 restricted shares awarded to him in his capacity as an
executive officer of Cornerstone and 408,333 shares subject to options
exercisable within 60 days.
(4) Includes 24,000 restricted shares awarded to him in his capacity as an
executive officer of Cornerstone and 101,000 shares subject to options
exercisable within 60 days.
(5) Includes 57,000 restricted shares awarded to him in his capacity as an
executive officer of Cornerstone and 192,833 shares subject to options
exercisable within 60 days.
(6) Includes 21,622 restricted shares awarded to him in his capacity as an
executive officer of Cornerstone and 65,167 shares subject options
exercisable within 60 days.
(7) Includes 19,178 restricted shares awarded to him in his capacity as an
executive officer of Cornerstone.
(8) Includes 12,500 restricted shares awarded to him/her in his/her capacity as
an executive officer of Cornerstone.
77
<PAGE>
DIRECTORS AND OFFICERS OF CORNERSTONE
FOLLOWING THE WILSON ACQUISITION
DIRECTORS
The Contribution Agreement provides that, upon completion of the Wilson
Acquisition, the Cornerstone Bylaws will be amended and restated to provide for
certain corporate governance rights for William Wilson III and PGGM. The
Cornerstone Board will be expanded from 11 to 14 directors, and Mr. Wilson, who
will become Chairman of the Cornerstone Board, will have the right to designate
two individuals to be nominated by the Cornerstone Board for election as
directors. Immediately after the completion of the Wilson Acquisition, the
Cornerstone Board will appoint the Wilson Directors to fill the newly created
board seats, to serve until elected by the stockholders of Cornerstone at the
next annual meeting of stockholders after the closing of the Wilson Acquisition.
The Amended and Restated Bylaws will also incorporate PGGM's existing right to
designate two individuals to be nominated by the Cornerstone Board for election
as directors.
EXECUTIVE OFFICERS
In addition to Mr. Wilson, John J. Hamilton III, Lee Van Boven and R.
Matthew Moran, all of whom are current executive officers of WW&A, will be
appointed to executive positions with Cornerstone. Following the closing of the
Wilson Acquisition, the principal executive officers of Cornerstone will be the
following:
WILLIAM WILSON III (62), CHAIRMAN, CORNERSTONE; PRESIDENT, WILSON
CORNERSTONE. Mr. Wilson has been the President of WW&A since 1978 when he formed
the company.
JOHN S. MOODY (49), PRESIDENT AND CHIEF EXECUTIVE OFFICER, CORNERSTONE. Mr.
Moody has been Chairman and Chief Executive Officer of Cornerstone since
November 1997. He was President and Chief Executive Officer of Cornerstone from
June 1991 to February 1998 and President and Chief Executive Officer of Deutsche
Bank Realty Advisors, Inc. from April 1991 to July 1995.
RODNEY C. DIMOCK (51), CHIEF OPERATING OFFICER, CORNERSTONE. Mr. Dimock has
been President and Chief Operating Officer of Cornerstone since February 1998.
He was Executive Vice President and Chief Operating Officer of Cornerstone from
October 1995 to February 1998 and President of Aetna Realty Investors from April
1991 to October 1995.
H. LEE VAN BOVEN (59), GENERAL COUNSEL, CORNERSTONE; CHIEF OPERATING
OFFICER, WILSON CORNERSTONE. Mr. Van Boven has been Chief Operating Officer of
WW&A since February 1997 and General Counsel and Executive Vice President of
WW&A since September 1996. Prior to joining WW&A, he was a partner with the law
firm of Farella Braun & Martel LLP, San Francisco, California.
KEVIN P. MAHONEY (37), SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER,
CORNERSTONE. Mr. Mahoney has been Chief Financial Officer of Cornerstone since
February 1998. He was Vice President and Treasurer of Cornerstone from September
1992 to February 1998 and Vice President from December 1993 to July 1995 and
Assistant Vice President from July 1991 to December 1993 of Deutsche Bank Realty
Advisors, Inc.
BARRY J. MCGOWAN (39), CO-CHIEF INVESTMENT OFFICER, CORNERSTONE. Mr.
McGowan has been Chief Investment Officer of Cornerstone since March 1998. Prior
to joining Cornerstone, Mr. McGowan was President, Northeast Region from
February 1995 to November 1997, Senior Vice President from April 1994 to
February 1995 and Vice President from January 1993 to April 1994 of Koll Bren
Realty Advisors.
R. MATTHEW MORAN (36), CO-CHIEF INVESTMENT OFFICER, CORNERSTONE. Mr. Moran
has been with WW&A since February 1993, serving at various times as Vice
President, Senior Vice President and currently as Executive Vice President and
Director of Acquisitions.
78
<PAGE>
JOHN J. HAMILTON III (42), CHIEF DEVELOPMENT OFFICER, CORNERSTONE. Mr.
Hamilton has been Executive Vice President of WW&A since March 1993.
THOMAS P. LOFTUS (39), TREASURER AND SECRETARY, CORNERSTONE. Mr. Loftus has
been Chief Administrative Officer of Cornerstone since February 1998. He has
been Vice President and Controller of Cornerstone since June 1992 and Secretary
of Cornerstone since June 1993. During that time, Mr. Loftus also served as
Director-Fund Administration from December 1993 to July 1995, Vice
President-Fund Administration from June 1992 to December 1993 and Vice
President-Controller from April 1991 to June 1992 of Deutsche Bank Realty
Advisors, Inc.
M. NEWT YAEGER (53), SENIOR VICE PRESIDENT, WILSON CORNERSTONE. Mr. Yaeger
has been Senior Vice President--Operations of WW&A since September 1993.
STEPHEN J. PILCH (37), SENIOR VICE PRESIDENT, WILSON CORNERSTONE. Mr. Pilch
has been Senior Vice President--Investment Management of WW&A since March 1998
and was Vice President--Investment Management of WW&A from May 1997 to March
1998. Prior to joining WW&A, he served as a Managing Director of Aetna Life
Insurance Company from August 1993 to May 1997.
JAMES W. ARCE (45), SENIOR VICE PRESIDENT, WILSON CORNERSTONE. Mr. Arce has
been Senior Vice President--Asset Management of WW&A since August 1995 and was
Vice President--Asset Management of WW&A from September 1993 to August 1995.
A. ROBERT PARATTE (32), SENIOR VICE PRESIDENT, WILSON CORNERSTONE. Mr.
Paratte has been Senior Vice President of WW&A since December 1997 and was Vice
President of WW&A from November 1994 to December 1997. Prior to joining WW&A, he
served as Vice President of Wells Fargo Bank.
SCOTT M. DALRYMPLE (39), VICE PRESIDENT, CORNERSTONE. Mr. Dalrymple has
been Vice President of Cornerstone since July 1991. During that time, he also
served as Vice President from December 1993 to July 1995 and Assistant Vice
President from July 1991 to December 1993 of Deutsche Bank Realty Advisors, Inc.
KAREN G. MAAS (34), VICE PRESIDENT, CORNERSTONE. Ms. Maas has been Vice
President of Cornerstone since February 1998. Prior to joining Cornerstone, she
was Vice President from March 1993 to October 1997 and Assistant Vice President
from November 1992 to March 1993 of Deutsche Morgan Grenfell.
THOMAS A. NYE (33), VICE PRESIDENT, CORNERSTONE. Mr. Nye has been Vice
President of Cornerstone since July 1995. Prior to joining Cornerstone, he was
Vice President from December 1993 to July 1995 and Assistant Vice President from
July 1991 to December 1993 of Deutsche Bank Realty Advisors, Inc.
FRANCES H. SHIELDS (33), JR., VICE PRESIDENT, CORNERSTONE. Mr. Shields has
been Vice President of Cornerstone since December 1996. He was Assistant Vice
President of Cornerstone from March 1994 to December 1996. Mr. Shields also
served as Assistant Vice President of Deutsche Bank Realty Advisors from March
1994 to July 1995. He served as Assistant Manager of Edward S. Gordon Company
from May 1992 to March 1994.
PETER S. SMICHENKO (34), VICE PRESIDENT, CORNERSTONE. Mr. Smichenko has
been Vice President of Cornerstone since November 1997. Prior to joining
Cornerstone, he was Assistant Vice President of O'Connor Realty Advisors from
May 1995 to October 1997 and Property Manager for Hines Interests Limited
Partnership from August 1987 to June 1993.
ROBERT T. SORRENTINO (44), VICE PRESIDENT, CORNERSTONE. Mr. Sorrentino has
been Vice President of Cornerstone since October 1997. Prior to joining
Cornerstone, he was Executive Vice President and Chief Financial Officer of DIHC
Management Corp. from 1991 to October 1997.
79
<PAGE>
EMPLOYMENT ARRANGEMENTS
Effective upon the completion of the Wilson Acquisition, Mr. Wilson will
enter into an employment agreement with Cornerstone. Mr. Wilson's contract will
be for a term of three years and will provide for: (i) an initial base salary of
$400,000 per year; (ii) restrictions on Mr. Wilson's participation in business
activities outside the scope of his employment other than (A) passive investment
in companies or businesses in which Mr. Wilson does not have operating control
and does not hold an executive or advisory position and (B) participation in
strategic and significant business decisions concerning management of the real
estate assets of WW&A and its affiliates excluded or withdrawn from the Wilson
Acquisition; and (iii) participation in the Cornerstone incentive compensation
plans as determined by the Compensation Committee of the Cornerstone Board.
Effective upon completion of the Wilson Acquisition, Mr. Moody will enter
into an employment agreement with Cornerstone. Mr. Moody's contract will be for
a term of three years and will provide for: (i) a base salary for 1998 of
$350,000 per year, subject to adjustments; and (ii) participation in the
Cornerstone incentive compensation plans as determined by the Compensation
Committee of the Cornerstone Board.
Other than Mr. Wilson, none of the members of WW&A's management who will
become Cornerstone executives (the "New Cornerstone Executives") will enter into
employment agreements. Other than Mr. Moody, none of the current executives of
Cornerstone have employment agreements, and no other executives will enter into
employment agreements in connection with the Wilson Acquisition. All of the New
Cornerstone Executives and certain other employees of WW&A will be entitled to
receive salaries, bonuses, restricted stock awards, stock options, Cornerstone
contributions to a 401(k) retirement plan, Cornerstone contributions to a profit
sharing plan and the payment of life insurance premiums. The New Cornerstone
Executives will also be entitled to certain other benefits which Cornerstone
generally provides to its employees. In addition, all of the New Cornerstone
Executives will enter into agreements with Cornerstone that generally will
provide for the payment of: (i) all unpaid base salary through the date of
termination; (ii) an amount in consideration for all unused vacation time; (iii)
the pro rata portion of the annual bonus for the year in which termination
occurs, assuming all performance targets are achieved; and (iv) an amount equal
to two times such executive's annual compensation (three times in the case of
Mr. Wilson and Mr. Van Boven) if the executive's employment with Cornerstone is
terminated during the two-year period commencing on the occurrence of a "Change
in Control" (as defined below under "Executive Compensation--Retention
Agreements") (a "Termination Agreement"). Each Termination Agreement will also
provide that upon such termination: (i) the executive will not be precluded from
investing or engaging in, or providing services as an employee or consultant to,
any business that is competitive with those of the Cornerstone Parties; and (ii)
for a one-year period following such termination, such executive may not
initiate the solicitation of employment of any other employee who is employed by
Cornerstone at the time of such termination.
Upon completion of the Wilson Acquisition, the Compensation Committee has
authorized the granting of options for up to 3,000,000 shares of Cornerstone
Common Stock to employees of Cornerstone, contingent upon the approval of the
Amendment by the Cornerstone stockholders. The allocation of these options will
be determined by the Compensation Committee and approved by the full Cornerstone
Board after the completion of the Wilson Acquisition. See "Proposal Three:
Amendment and Restatement of the Incentive Plan."
80
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation of
Cornerstone's Chief Executive Officer and each of the other four most highly
compensated executive officers of Cornerstone at the end of 1997 (the "Named
Officers"), for the past three years. Prior to July 1, 1995, Cornerstone was
managed pursuant to an advisory agreement with Deutsche Bank Realty Advisors,
Inc. and paid no compensation to its officers, who were compensated by Deutsche
Bank Realty Advisors, Inc. for services to Cornerstone, including the payment of
bonuses.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM AWARDS
-------------------------------------------------
ANNUAL COMPENSATION (1) RESTRICTED SECURITIES
------------------------------- STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS AWARDS(3) OPTIONS(#) COMPENSATION(4)
- --------------------------------- --------- --------- --------- ----------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
John S. Moody.................... 1997 $ 350,000 $ 350,000 $ 579,000 325,000 $ 24,935
Chairman and Chief 1996 350,000 300,000 -- -- 24,659
Executive Officer 1995 175,000 100,000 825,000 300,000 17,010
Rodney C. Dimock................. 1997(2) 275,000 225,000 247,000 160,000 24,720
President and Chief 1996 275,000 200,000 -- -- 21,525
Operating Officer 1995 57,291 100,000 600,000 150,000 15,000
Kevin P. Mahoney................. 1997 110,000 115,000 167,000 78,000 11,355
Chief Financial Officer 1996 95,000 100,000 -- -- 11,251
1995 48,000 50,000 198,000 75,000 6,601
Thomas P. Loftus................. 1997 130,000 75,000 98,000 78,000 12,680
Chief Administrative 1996 125,000 55,000 -- -- 12,571
Officer 1995 62,500 35,000 258,000 75,000 8,612
Scott M. Dalrymple............... 1997 110,000 90,000 167,000 78,000 12,592
Vice President 1996 95,000 75,000 -- -- 12,447
1995 48,000 45,000 198,000 75,000 7,374
</TABLE>
- --------------------------
(1) See the lead-in paragraph to the table.
(2) Mr. Dimock commenced employment with Cornerstone on October 16, 1995.
(3) Dollar value calculated by multiplying the closing market price on the NYSE
with respect to year 1997 and on the Frankfurt Stock Exchange with respect
to years 1995 and 1996 on the date of grant by the number of shares awarded.
The aggregate number of restricted shares held and their value as of
December 31, 1997 were as follows: Mr. Moody--93,000 shares/$1,784,437; Mr.
Dimock--57,000 shares/$1,093,687; Mr. Mahoney--24,000 shares/$460,500; Mr.
Loftus--24,000 shares/$460,500; and Mr. Dalrymple--24,000 shares/ $460,500.
The 1995 awards fully vested with respect to 13.333% on June 30, 1996 and
1997, and will fully vest with respect to 13.333% on June 30, 1998 and 1999,
and with respect to 46.668% on June 30, 2000. The 1997 awards fully vest
with respect to 13.333% on June 30, 1998, 1999, 2000, and 2001, and with
respect to 46.668% on June 30, 2002. Regular dividends are paid on
restricted stock.
(4) "All Other Compensation" includes contributions of $4,000 for each of the
Named Officers to Cornerstone's 401(k) Retirement Plan and contributions to
Cornerstone's Profit Sharing Plan on behalf of the named individuals in the
following amounts for 1997: Mr. Moody--$16,500; Mr. Dimock--$16,500; Mr.
Mahoney--$6,213; Mr. Loftus--$7,314; and Mr. Dalrymple--$7,314. It also
includes premiums paid by Cornerstone for life insurance for the benefit of
the named individuals in the following amounts: Mr. Moody--$4,435; Mr.
Dimock--$4,220; Mr. Mahoney--$1,142; Mr. Loftus--$1,366; and Mr.
Dalrymple--$1,278.
81
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
---------------------------------------------------------------- VALUE AT ASSUMED ANNUAL
NUMBER RATES OF STOCK PRICE
OF SECURITIES % OF TOTAL OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO EXERCISE OR TERM (1)
OPTIONS EMPLOYEES BASE PRICE EXPIRATION -----------------------
NAME GRANTED (#)(2) IN FISCAL YEAR ($/SH) DATE 5%($) 10%($)
- ---------------------------- --------------- --------------------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
John S. Moody............... 325,000 34.2% $ 14.50 3/17/2007 $5,443,750 $11,462,750
Rodney C. Dimock............ 160,000 16.8 14.50 3/17/2007 2,680,000 5,643,200
Kevin P. Mahoney............ 78,000 8.2 14.50 3/17/2007 1,306,500 2,751,060
Thomas P. Loftus............ 78,000 8.2 14.50 3/17/2007 1,306,500 2,751,060
Scott M. Dalrymple.......... 78,000 8.2 14.50 3/17/2007 1,306,500 2,751,060
</TABLE>
- ------------------------
(1) Such values are calculated based on the requirements promulgated by the
Commission and are not intended to forecast future stock appreciation of
Cornerstone Common Stock. There can be no assurance that such values will be
achieved.
(2) Such options vest in increments of 33 1/3% on each of the first three
anniversaries of the date of grant.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-THE-
UNDERLYING UNEXERCISED MONEY OPTIONS AT FY-END
SHARES ACQUIRED VALUE OPTIONS AT FY-END (#) ($)(1)
NAME ON EXERCISES (#) REALIZED ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ------------------------- ----------------- ------------- ------------------------ -----------------------------
<S> <C> <C> <C> <C>
John S. Moody............ 0 $ 0 200,000/425,000 $977,500/$2,481,000
Rodney C. Dimock......... 10,500 37,538 89,500/210,000 437,500/1,177,500
Kevin P. Mahoney......... 0 0 50,000/103,000 244,500/605,000
Thomas P. Loftus......... 0 0 50,000/103,000 244,500/605,000
Scott M. Dalrymple....... 0 0 50,000/103,000 244,500/605,000
</TABLE>
- ------------------------
(1) Market value of Cornerstone Common Stock on the NYSE at year-end less option
price.
RETENTION AGREEMENTS
Cornerstone has entered into retention agreements with twelve officers,
including each of Messrs. Moody, Dimock, Mahoney, Loftus and Dalrymple, to
address the terms and conditions of their employment in the event of a change in
control. "Change in Control" is generally said to occur when: (i) any person
becomes the owner of 25% or more of Cornerstone's voting securities; (ii)
directors who constitute the Cornerstone Board at the beginning of any two-year
period, and any new directors whose election or nomination for election was
approved by a vote of at least three quarters of the directors then in office
who either were directors at the beginning of such period or whose election or
nomination for election was previously so approved, cease to constitute a
majority; (iii) a merger, consolidation or reorganization in which Cornerstone's
voting securities do not continue to represent at least 50% of the surviving
entity; or (iv) a reorganization, liquidation, or sale of all or substantially
all of Cornerstone's assets.
In the event of termination of employment by Cornerstone without cause, or
by the employee for good reason, within two years following a change in control,
Cornerstone will make a lump sum payment of: (i) the pro rata portion of the
annual bonus for the year termination occurred, calculated on the basis of the
target bonus and on the assumption that all performance goals have been or will
be achieved; and (ii) three times annual compensation in the case of Messrs.
Moody and Dimock and two times annual compensation in the case of all other
officers. Annual compensation is generally defined as highest annual bonus plus
the higher of the salary in effect immediately prior to termination or change in
control.
An officer may be terminated for "cause" if he/she is convicted of a felony,
reveals confidential information about Cornerstone or refuses to substantially
perform his/her duties. An officer can terminate for "good reason" if
Cornerstone reduces his/her salary or benefits, relocates his/her office more
then 25 miles from the present location, detrimentally alters his/her title or
position, fails to get a successor to
82
<PAGE>
agree to assume the obligations under the retention agreement or materially
breaches any provision of the agreement.
In addition, the officer and his/her eligible dependents will continue to be
eligible to participate during the benefit continuation period in the medical,
dental, health, life and other welfare benefit plans and arrangements applicable
to him/her immediately prior to his/her termination of employment, on the same
terms and conditions in effect immediately prior to such termination. "Benefit
continuation period" means the period beginning on the day of termination and
ending on the earlier to occur of: (i) the third anniversary of the date of
termination in the case of Messrs. Moody and Dimock and the second anniversary
of the date of termination in the case of all other officers; and (ii) the date
that the officer is eligible and elects coverage under the plans of a subsequent
employer which provide substantially equivalent or greater benefits to the
officer and his dependents.
If the payments to an officer under the retention agreement constitute
"parachute payments" (as defined in Section 280G of the Code), and the officer
would receive more value after taxes if the payments to be made to the officer
were capped at three times the "base amount" less $1.00, then the payments to
the officer will be reduced to that amount.
Cornerstone will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business or assets of Cornerstone expressly to assume and to agree to perform
its obligations under the retention agreements in the same manner and to the
same extent that Cornerstone would be required to perform such obligations if no
such succession had taken place.
SUPPLEMENTAL PENSION BENEFIT
Cornerstone has entered into a contract with Mr. Moody whereby amounts are
accrued under an unfunded arrangement to pay Mr. Moody a supplemental pension.
Under the contract, his supplemental pension account was established with a
credit of $250,000 as of July 1, 1995, and Cornerstone is obligated to credit
the account in the amount of $60,000 each subsequent July 1 during the
continuance of Mr. Moody's employment.
The account is also credited with any deemed income, gains or losses which
would be attributable to a corresponding investment of an equal cash amount in
such investment as Cornerstone, taking into account Mr. Moody's views, shall
deem the account to be invested. In general, unless his employment is terminated
by Cornerstone for cause, Mr. Moody will receive in a lump sum the total amount
credited to his supplemental pension account when he retires or his employment
otherwise ceases. In the event Mr. Moody's employment is terminated by
Cornerstone other than for cause, or if he resigns for good reason, in either
case following a change in control, Cornerstone is obligated to credit his
supplemental pension account with an amount equal to $60,000 times the number of
years (and fractions) remaining between his age on the date his employment
ceases and age 60.
COMPENSATION OF DIRECTORS
In 1997, each director of Cornerstone, other than Mr. Moody, received an
annual retainer fee of $10,000, paid in cash, and an annual cash fee of $5,000
for service on a standing committee of the Cornerstone Board. Messrs. Mellinger,
van den Bos and van der Vlist joined the Cornerstone Board on November 26, 1997
and received no compensation for 1997. Cornerstone either reimburses each
director for his expenses incurred in attending any meeting of the Cornerstone
Board or a committee thereof or pays such expenses directly. If a member of the
Cornerstone Board travels to inspect a property proposed to be acquired by
Cornerstone, such director is reimbursed for his travel expenses.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Cornerstone Board has a standing Compensation Committee, chaired by Hans
C. Mautner with Dr. Karl-Ludwig Hermann and Michael J. G. Topham as its other
members. None of the members of the Compensation Committee are, or have been at
any time, an officer or employee of Cornerstone or any of its subsidiaries.
83
<PAGE>
EXPERTS
The consolidated financial statements and financial statement schedules of
Cornerstone Properties Inc. as of December 31, 1997 and 1996 and for each of the
three years in the period ended December 31, 1997, the financial statements of
William Wilson & Associates as of December 31, 1997 and 1996 and for each of the
three years in the period ended December 31, 1997, and the combined statements
of revenues and certain operating expenses of the Property Acquisition and
Property Acquisition Two for the year ended December 31, 1997, included or
incorporated by reference in this Proxy Statement, have been included or
incorporated herein in reliance upon the reports of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
Cornerstone has been advised that representatives of PricewaterhouseCoopers
LLP are expected to be present at the Special Meeting, and will have the
opportunity to make a statement and will be available to respond to appropriate
questions.
WHERE YOU CAN FIND MORE INFORMATION
Cornerstone is subject to the informational requirements of the Exchange Act
and, in accordance therewith, files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the following regional offices of the Commission: 7 World
Trade Center, Suite 1300, New York, NY 10048 and 500 West Madison Street, Suite
1400, Chicago, IL 60661-2511. Copies of such material can be obtained at
prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549. In addition, such material can be
obtained from the Commission's web site at http://www.sec.gov. Cornerstone
Common Stock is listed and traded on the NYSE under the symbol "CPP," as well as
on the Frankfurt and Dusseldorf Stock Exchanges. All such reports, proxy
statements and other information filed by Cornerstone with the NYSE may be
inspected at the NYSE's offices at 20 Broad Street, New York, NY 10005.
THIS PROXY STATEMENT INCORPORATES CERTAIN CORNERSTONE DOCUMENTS BY REFERENCE
WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (OTHER
THAN THE EXHIBITS TO SUCH DOCUMENTS, UNLESS SUCH EXHIBITS ARE SPECIFICALLY
INCORPORATED BY REFERENCE INTO SUCH DOCUMENTS) ARE AVAILABLE WITHOUT CHARGE UPON
ORAL OR WRITTEN REQUEST FROM CORNERSTONE PROPERTIES INC., TOWER 56, 126 EAST
56TH STREET, NEW YORK, NY 10022, ATTENTION: SECRETARY (TELEPHONE (212)
605-7100). IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST
SHOULD BE MADE BY DECEMBER 7, 1998.
The Commission allows us to incorporate by reference information into this
Proxy Statement, which means that we can disclose important information to you
by referring you to another document filed separately with the Commission. The
following documents, which have been filed with the Commission pursuant to the
Exchange Act, are hereby incorporated herein by reference (Commission File No.
1-12861):
1. Cornerstone's Annual Report on Form 10-K for the year ended December
31, 1997, as amended by Form 10-K/A Amendment No. 1, filed with the
Commission pursuant to the Exchange Act.
2. Cornerstone's Notice of Annual Meeting and Proxy Statement, dated
April 17, 1998, filed with the Commission pursuant to the Exchange Act.
3. Cornerstone's Reports on Form 10-Q for the quarterly periods ending
March 31, 1998 and June 30, 1998, filed with the Commission pursuant to the
Exchange Act.
84
<PAGE>
4. Cornerstone's Current Reports on Form 8-K dated January 14, 1998,
February 3, 1998, February 25, 1998, February 26, 1998, March 31, 1998 and
August 26, 1998 (as amended by a Current Report on Form 8-K/A filed on
September 4, 1998), filed with the Commission pursuant to the Exchange Act.
All documents filed by Cornerstone pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date hereof and prior to the date of the
Special Meeting shall be deemed to be incorporated herein by reference and to be
a part hereof from the date of filing of such documents. All information
appearing in this Proxy Statement or in any document incorporated herein by
reference is not necessarily complete and is qualified in its entirety by the
information and financial statements (including notes thereto) appearing in this
Proxy Statement or the documents incorporated by reference herein and should be
read together with such information and documents.
Any statement contained in a document incorporated or deemed to be
incorporated herein by reference shall be deemed to be modified or superseded
for purposes of this Proxy Statement to the extent that a statement contained
herein or in any other subsequently filed document that is deemed to be
incorporated herein by reference modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Proxy Statement.
No person is authorized to give any information or to make any
representations other than those contained or incorporated by reference in this
Proxy Statement, and if given or made, such information or representations
should not be relied upon as having been authorized. This Proxy Statement is
dated November 13, 1998. Cornerstone has tried to make this Proxy Statement as
accurate as possible, but cannot assure that this document remains accurate
after such date. You should not assume that the information contained in this
Proxy Statement is accurate as of any date other than such date, and the
delivery of this Proxy Statement shall not, under any circumstances, create any
implication that there has been no change in the information set forth or
incorporated herein by reference or in the affairs of Cornerstone since the date
of this Proxy Statement.
STOCKHOLDER PROPOSALS
The Cornerstone Board is not aware of any proposals to be brought before the
Special Meeting other than (i) the Wilson Issuance, (ii) the PGGM Investment and
(iii) the Amendment. Stockholders attending the Special Meeting in person may
move to present unscheduled proposals at the Special Meeting. The Chairman of
the Cornerstone Board will preside at the Special Meeting and will rule on
whether such proposals are in order under the Cornerstone Bylaws and Nevada law.
In order to be eligible for inclusion in Cornerstone's proxy solicitation
materials for its 1999 Annual Meeting of Stockholders, any stockholder proposal
to be considered at such meeting must be received by Cornerstone on or before
December 18, 1998. Any such proposal will be subject to the requirements
contained in the Bylaws of Cornerstone relating to stockholder proposals and the
proxy rules under the Exchange Act.
By Order of the Board of Directors
of Cornerstone Properties Inc.
/s/ Thomas P. Loftus
THOMAS P. LOFTUS
Secretary
85
<PAGE>
GLOSSARY
The following alphabetical listing sets forth the defined terms used in this
Proxy Statement and the location in this Proxy Statement where such terms are
first defined.
"ACQUIRING PERSON" means (subject to certain exceptions) any person who,
individually or in association with others, acquires or offers to acquire,
directly or indirectly, a controlling interest in an issuing corporation. (p.
44)
"ACQUISITION AGREEMENT" means an agreement entered into in connection with
the Wilson Acquisition. (p. 46)
"ACQUISITION LOAN" means a loan to an acquiring Project Entity in connection
with the acquisition of an Approved Additional Project. (p. 39)
"ADR" means average daily rate. (p. 65)
"AFFO" means adjusted funds from operations. (p. 31)
"AFFO MULTIPLE" means the ratio of equity market capitalization to AFFO,
based on the share price of Cornerstone Common Stock as of June 9, 1998. (p. 31)
"ALL OTHER COMPENSATION" means the contributions for each of the Named
Officers to Cornerstone's 401(k) Retirement Plan and contributions to
Cornerstone's Profit Sharing Plan on behalf of the Named Officers. (p. 81)
"AMENDMENT" means the amendment and restatement of the Cornerstone
Properties Inc. 1998 Long-Term Incentive Plan. (p. i)
"ANTITRUST DIVISION" means the Antitrust Division of the U.S. Department of
Justice. (p. 7)
"APPROVED ADDITIONAL PROJECTS" means acquisitions by Project Entities
approved by Cornerstone which are to be included in the Wilson Acquisition. (p.
27)
"BENEFIT CONTINUATION PERIOD" means the period beginning on the day of
termination of employment and ending on the earlier to occur of (i) the third
anniversary of the date of termination in the case of certain officers and (ii)
the date that such officer is eligible and elects coverage under the plans of a
subsequent employer which provides substantially equivalent or greater benefits
to such officer and his dependents. (p. 83)
"CAPITAL EXPENDITURES" means all costs for capital improvements or repairs
to the Wilson Projects. (p. 40)
"CHANGE IN CONTROL" means an event in which either: (i) any person becomes
the owner of 25% or more of Cornerstone's voting securities; (ii) directors who
constitute the Cornerstone Board at the beginning of any two-year period, and
any new directors whose election or nomination for election was approved by a
vote of at least three quarters of the directors then in office who either were
directors at the beginning of such period or whose election or nomination for
election was previously so approved, cease to constitute a majority; (iii) a
merger, consolidation or reorganization in which Cornerstone's voting securities
do not continue to represent at least 50% of the surviving entity; or (iv) a
reorganization, liquidation, or sale of all or substantially all of
Cornerstone's assets. (p. 82)
"CIC" means Commercial Interior Contractors. (p. 35)
"CLOSING COSTS" means the following costs incurred in connection with the
completion of the Wilson Acquisition: (i) loan assumption fees and payment
penalties, if any, and other costs and charges incurred in connection with the
assumption by the Operating Partnership of the debt secured by the Wilson
Projects; (ii) up to $200,000 of auditor's fees and expenses incurred by the
Wilson Parties in the preparation of certain audited financial statements in
connection with the Wilson Acquisition; (iii) recording fees and
86
<PAGE>
costs, transfer taxes, title insurance premiums and fees and costs required for
the conveyance of the Interests and the Wilson Projects to Cornerstone; and (iv)
expenses incurred in making any necessary filings under the HSR Act. (p. 45)
"CODE" means the Internal Revenue Code of 1986, as amended. (p. 7)
"COMMISSION" means the Securities and Exchange Commission. (p. 5)
"COMPARABLES" means Equity Office Properties Trust, Crescent Real Estate
Equities Company, Vornado Realty Trust, Spieker Properties, Inc., Cornerstone,
Boston Properties, Inc., CarrAmerica Realty Corporation, MackCali Realty
Corporation, Highwoods Properties, Inc., Arden Realty, Inc. and Kilroy Realty
Corporation. (p. 31)
"CONTROL SHARES" means those outstanding voting shares of an issuing
corporation which an acquiring person acquires or offers to acquire in an
acquisition or within 90 days immediately preceding the date when the acquiring
person became an acquiring person. (p. 44)
"CONTROLLING INTEREST" means the ownership of outstanding voting shares of
an issuing corporation sufficient to enable the acquiring person, individually
or in association with others, directly or indirectly, to exercise (i) one-fifth
or more but less than one-third, (ii) one-third or more but less than a majority
and/or (iii) a majority or more of the voting power of the issuing corporation
in the election of directors. (p. 44)
"CONSIDERATION" means the consideration the Wilson Investors owning the
Interests will receive upon contribution of these Interests to Cornerstone or
the Operating Partnership. (p. 2)
"CONTRIBUTION AGREEMENT" means the Contribution Agreement and Agreement and
Plan of Merger, dated as of June 22, 1998, as amended by the First Amendment to
Contribution Agreement and Agreement and Plan of Merger, dated as of July 10,
1998, and the Second Amendment to Contribution Agreement and Agreement and Plan
of Merger, dated as of September 12, 1998, by and among the Cornerstone Parties
and the Wilson Parties. (p. i)
"CORNERSTONE" means Cornerstone Properties Inc., a Nevada corporation. (p.
i)
"CORNERSTONE BOARD" means the Board of Directors of Cornerstone. (p. i)
"CORNERSTONE COMMON STOCK" means the shares of common stock, no par value,
of Cornerstone. (p. i)
"CORNERSTONE PARTIES" means Cornerstone and the Operating Partnership. (p.
i)
"DIHC" means Dutch Institutional Holding Company, Inc. (p. 9)
"DIHC ACQUISITION" means the acquisition of nine properties and an
undeveloped parcel of land from PGGM and DIHC in October 1997. (p. 10)
"EBITDA" means earnings before interest, taxes, depreciation and
amortization. (p. 32)
"EDITDA MULTIPLE" means the ratio of equity market capitalization to EBITDA,
based on the share price of Cornerstone Common Stock as of June 9, 1998. (p. 32)
"EFFECTIVE PRICE" means $17.25. (p. 2)
"8% PREFERRED STOCK" means Cornerstone's 8% Cumulative Convertible Preferred
Stock and 8% Cumulative Convertible Preferred Stock, Series A. (p. 10)
"ESCROW AGENT" means the escrow agent who holds and administers the Escrow
Funds. (p. 47)
"ESCROW AGREEMENT" means the Escrow Agreement in substantially the form
attached as an exhibit to the Contribution Agreement to be entered into at the
closing by the Cornerstone Parties and the Wilson Representative (on behalf of
the Investors). (p. 47)
87
<PAGE>
"ESCROW FUNDS" means the Investor Indemnity Escrow Fund, the Wilson
Representative Escrow Fund and the WW&A Escrow Fund, collectively. (p. 47)
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (p. 8)
"FFO" means Funds from Operations. (p. 6)
"FFO MULTIPLE" means the ratio of equity market capitalization to FFO, based
on the share price of Cornerstone Common Stock as of June 9, 1998. (p. 31)
"FIVE OR FEWER REQUIREMENT" means a requirement promulgated by the Code and
the Treasury Regulations that, during the second half of each taxable year, not
more than 50% in value of the REIT's outstanding stock be owned, directly or
indirectly, by five or fewer individuals (defined in the Code to include certain
specified entities).
"FORWARD-LOOKING STATEMENTS" means the intent, belief or current
expectations of WW&A and Cornerstone and members of their respective management
teams with respect to future operating results of Cornerstone, WW&A and the
Wilson Projects, certain synergies expected to be realized in connection with
the Wilson Acquisition, the integration of WW&A's management into Cornerstone,
possible fluctuation in operating results and the ability to manage growth, as
well as the assumptions upon which such statements are based. (p. 8)
"FTC" means the Federal Trade Commission. (p. 7)
"FULL SERVICE STRAIGHT-LINE RENT" means the average of all actual rent
required to be paid through the term of the leases relating to a certain
property calculated in accordance with GAAP, plus recoveries. (p. 15)
"FUND-I" means Office Opportunity Fund I, L.P. (p. 48)
"FUND-II" means Office Opportunity Fund II, L.P. (p. 48)
"FUND-IV" means Office Opportunity Fund IV, L.P. (p. 39)
"FUND-IV RELATED INVESTORS" means investors in Fund-IV and co-investors in
Project Entities in which Fund-IV and/or co-investors in Fund-IV are investors.
(p. 40)
"FUND PROJECTS" means the Wilson Projects held by Project Entities whose
ownership is comprised entirely of the Funds, WW&A affiliates (acting as the
general partners or managers) and, in some cases, certain executive officers of
WW&A and/or certain Fund limited partners as co-investors. (p. 27)
"FUNDS" means four WW&A sponsored real estate investment funds through which
the Wilson Projects are partially owned. (p. 1)
"GAAP" means generally accepted accounting principles. (p. 12)
"GP PARTY" means the WW&A affiliate serving as a general partner or manager
of the related entity. (p. 45)
"HOLDBACK AMOUNT" means an amount equal to 2% of the sum of (A) the WW&A
Company Value and (B) the aggregate Project Values of all Wilson Projects or
portions thereof (other than the Agoura Hills and Concar projects and any
Approved Additional Project) which are ultimately included in the Wilson
Acquisition plus, in the case of WW&A, an additional amount of $5,000,000 for
certain claims against WW&A. (p. 46)
"HSR ACT" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended. (p. 7)
"INCENTIVE PLAN" means the Cornerstone Properties Inc. 1998 Long-Term
Incentive Plan. (p. 7)
"INTERESTS" means interests, either direct or indirect, in the Wilson
Projects. (p. 2)
88
<PAGE>
"INVESTOR INDEMNITY ESCROW FUND" means the escrow account provided for by
the Contribution Agreement and consists of cash, Units and shares of Cornerstone
Common Stock otherwise payable to the Wilson Investors and the WW&A shareholders
in an amount equal to the Holdback Amount. (p. 47)
"ISSUING CORPORATION" means a corporation that is organized in Nevada, has
200 or more stockholders (at least 100 of whom are stockholders of record and
residents of Nevada) and does business in Nevada directly or through an
affiliated corporation. (p. 44)
"JOINT VENTURE PROJECTS" means the Wilson Projects held by the Joint
Ventures, whose ownership includes WW&A affiliates and Unaffiliated Investors,
but which do not have a Fund as a partner or member. (p. 27)
"JOINT VENTURES" means the three joint ventures in which WW&A affiliates are
partners with Unaffiliated Investors through which the Wilson Projects are
partially owned. (p. 1)
"LAZARD FRERES" means Lazard Freres & Co. LLC. (p. 28)
"LEASE COSTS" means all leasing commissions, tenant improvement allowances,
costs of tenant improvement work and other out-of-pocket inducements for leases
at the Wilson Projects. (p. 40)
"LIBOR" means the one month London Interbank Offer Rate as reported from
time to time under the heading "Interest: LIBOR (One Month)" by The Wall Street
Journal. (p. 39)
"MERGER" means the merger of WW&A with and into Cornerstone. (p. i)
"MORGAN STANLEY" means Morgan Stanley & Co. Incorporated. (p. 6)
"NAMED OFFICERS" means Cornerstone's Chief Executive Officer and each of the
other four most highly compensated executive officers of Cornerstone at the end
of 1997. (p. 81)
"NAREIT" means the National Association of Real Estate Investment Trusts.
(p. 11)
"NET PROJECT VALUES" means the aggregate outstanding principal balances and
accrued and unpaid interest of the debt secured by and related to the Wilson
Projects on the date of completion of the Wilson Acquisition. (p. 34)
"NEW CORNERSTONE EXECUTIVES" means the members of WW&A's management who will
become Cornerstone executives. (p. 80)
"NON-U.S. PERSON" means (i) a nonresident alien individual (as defined in
the Code), (ii) a foreign corporation, foreign partnership, foreign trust,
foreign estate, foreign goverment, and any other organization or entity which is
not organized under the laws of the Untied States or a State, and (iii) any
other person or entity treated as a "foreign person" under regulations
promulated under the Code. (p. 25)
"NON-VOTING STOCK SUB" means a taxable C corporation which will conduct
certain third-party service activities and tenant build-out construction
activities and as to which the Operating Partnership will own 95% of the
non-voting common stock and none of the voting common stock.
"NGCL" means the Nevada General Corporation Law. (p. 44)
"NOI" means fiscal year net operating income. (p. 32)
"NYSE" means The New York Stock Exchange, Inc. (p. 3)
"NYSTRS" means New York State Teachers' Retirement System. (p. 2)
"OPERATING PARTNERSHIP" means Cornerstone Properties Limited Partnership, a
Delaware limited partnership. (p. i)
"OTHER PROJECTS" means the Wilson Projects held by Project Entities whose
ownership includes, in addition to Funds (and Fund affiliates), certain
Unaffiliated Investors. (p. 27)
"OTHER ROCKWOOD INTERESTS" means Interests in the Rockwood Project Entities
which were not acquired by WWA Investors. (p. 48)
89
<PAGE>
"PART I PROPERTIES" means certain Wilson Projects (and any properties
received in exchange therefor) set forth in the Contribution Agreement that are
not to be sold by Cornerstone in transactions that result in adverse tax
consequences to certain Wilson Investors until after December 31, 2009. (p. 15)
"PART II PROPERTIES" means certain Wilson Projects (and any properties
received in exchange therefor) set forth in the Contribution Agreement, the
taxable sales of which are to be deferred until after December 31, 1999. (p. 15)
"PGGM" means Stichting Pensioenfonds Voor de Gezondheid, Geestelijke en
Maatschappelijke Belangen. (p. i)
"PGGM DIRECTORS" means the two individuals designated by PGGM to be
nominated by the Cornerstone Board for election as directors to the Cornerstone
Board. (p. 4)
"PGGM INVESTMENT" means the purchase by PGGM of 11,594,203 shares of
Cornerstone Common Stock for an aggregate purchase price of $200,000,000
pursuant to the Stock Purchase Agreement, dated as of June 22, 1998, between
Cornerstone and PGGM. (p. i)
"PGGM PERIOD" means the period ending upon the earlier of the date on which
PGGM and its affiliates own less than 25% of the outstanding shares of
Cornerstone Common Stock or October 31, 2002. (p. 36)
"PROJECT ENTITIES" means the entities owning the Wilson Projects. (p. 5)
"PROJECT VALUES" means the aggregate values allocated to the Wilson Projects
in the Contribution Agreement. (p. 34)
"PRUNEYARD ADDITIONAL CONSIDERATION" means the additional Consideration
equal to the amount of cost savings paid by Cornerstone to the Pruneyard
Investors in the event that the actual completion costs are less than the
estimated amount used to determine the Pruneyard Closing Consideration. (p. 39)
"PRUNEYARD CLOSING CONSIDERATION" means the Consideration payable at the
closing to Wilson Investors with Interests in Pruneyard. (p. 39)
"REIT" means real estate investment trust. (p. 1)
"RECORD DATE" means November 9, 1998. (p. 1)
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights and Lockup
Agreement to be entered into at the closing of the Wilson Acquisition in which
Wilson Investors receiving shares of Cornerstone Common Stock and Units in the
Wilson Acquisition will have certain rights to have shares of Cornerstone Common
Stock registered under the Securities Act. (p. 6)
"RESTRICTED SECURITIES" means shares of Cornerstone Common Stock and Units
delivered at the closing of the Wilson Acquisition that will be issued in a
transaction exempt from registration under state and federal securities laws
pursuant to one or more private offering exemptions. (p. 49)
"ROCKWOOD INTERESTS" means interests in the six Project Entities which own
the Rockwood Projects. (p. 48)
"ROCKWOOD LOAN" means the loan from the Operating Partnership to WWA
Investors, the proceeds of which were used to fund the purchase of the Rockwood
Interests and certain related costs. (p. 48)
"ROCKWOOD PROJECTS" means the Pruneyard, Gateway, Golden Bear Center, Apple
Building, Centerside II and Scottsdale Centre projects. (p. 48)
"ROCKWOOD PROJECT ENTITIES" means the six Project Entities which own the
Rockwood Projects. (p. 48)
"RODAMCO" means Rodamco N.V. (p. 2)
"SECURITIES ACT" means the Securities Act of 1933, as amended. (p. 6)
"SPECIAL MEETING" means the Special Meeting of stockholders of Cornerstone
to be held on December 14, 1998, at the offices of King & Spalding, 34th Floor,
1185 Avenue of the Americas, New York, NY, commencing at 10:00 A.M. local time.
(p. i)
90
<PAGE>
"TERMINATION AGREEMENT" means the agreement with Cornerstone that will
provide for the payment of certain benefits if the executive's employment with
Cornerstone is terminated under certain conditions. (p. 80)
"THRESHOLD AMOUNT" means a threshold amount equal to 50% of the Holdback
Amount. (p. 46)
"TRANSACTION" means the Wilson Acquisition and the PGGM Investment. (p. i)
"U.S. PERSON" means any person other than a Non-U.S. Person. (p. 25)
"UNAFFILIATED INVESTORS" means certain outside owners of Wilson Projects who
are not Funds, limited partners of Funds, WW&A affiliates or executive officers
of WW&A. (p. 27)
"UNITS" means common units of limited partner interest of the Operating
Partnership, which are redeemable by the holders thereof for cash or, at the
election of Cornerstone, shares of Cornerstone Common Stock. (p. i)
"UPREIT" means an umbrella limited partnership REIT. (p. 54)
"WILSON ACQUISITION" means the acquisition by Cornerstone and the Operating
Partnership of substantially all of the properties and real estate operations of
WW&A and its affiliates pursuant to the Contribution Agreement. (p. i)
"WILSON CORNERSTONE PROPERTIES" means the operational name for the Western
Division of Cornerstone after completion of the Wilson Acquisition, to include
the businesses currently operated by WW&A. (p. 4)
"WILSON DIRECTORS" means William Wilson III and the two individuals
designated by Mr. Wilson, subject to the unanimous approval of the Board Affairs
Committee, to be nominated by the Cornerstone Board for election as directors to
the Cornerstone Board. (p. 4)
"WILSON INVESTORS" means the investors owning the Interests that will be
contributed to Cornerstone or the Operating Partnership in exchange for the
Consideration. (p. 2)
"WILSON ISSUANCE" means the issuance by Cornerstone of up to 39,000,000
shares of Cornerstone Common Stock pursuant to the transactions contemplated by
the Contribution Agreement. (p. i)
"WILSON PARTIES" means WW&A and the affiliates of WW&A listed on Schedule I
to the Contribution Agreement. (p. i)
"WILSON PERIOD" means three years after the closing of the Wilson
Acquisition. (p. 35)
"WILSON PROJECTS" means the properties to be acquired by Cornerstone as part
of the Wilson Acquisition. (p. 1)
"WILSON REPRESENTATIVE" means the representative of the Wilson Investors
with respect to the Wilson Acquisition appointed by the Wilson Investors as part
of their consent to the Wilson Acquisition. (p. 15)
"WILSON REPRESENTATIVE ESCROW FUND" means the escrow account provided for by
the Contribution Agreement to hold $500,000 of Consideration otherwise payable
to the Wilson Investors and WW&A shareholders. (p. 47)
"WWA INVESTORS" means WWA Investors, LLC, an entity controlled by the
management of WW&A. (p. 40)
"WW&A" means William Wilson & Associates, a California corporation. (p. i)
"WW&A COMPANY VALUE" means the value allocated to WW&A in the Contribution
Agreement. (p. 35)
"WW&A ESCROW FUND" means the escrow account provided for by the Contribution
Agreement to hold $5,000,000 of shares of Cornerstone Common Stock otherwise
payable to the WW&A shareholders. (p. 47)
"WW&A PORTFOLIO" means WW&A's portfolio of assets under management. (p. 60)
91
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
CORNERSTONE PROPERTIES INC. AND SUBSIDIARIES
Unaudited Pro Forma Condensed Consolidated Financial Statements:
Condensed Consolidated Pro Forma Balance Sheet at June 30, 1998.................... F-3
Condensed Consolidated Pro Forma Statement of Income for
the Twelve Months Ended December 31, 1997........................................ F-4
Condensed Consolidated Pro Forma Statement of Income for
the Six Months Ended June 30, 1998............................................... F-5
Notes to Unaudited Condensed Consolidated Pro Forma Financial Statements........... F-6
PROPERTY ACQUISITION (Fund Projects and Other Projects)
Report of Independent Accountants.................................................. F-11
Combined Statement of Revenues and Certain Operating Expenses for the Six Months
Ended June 30, 1998 and 1997 (Unaudited) and the Year Ended December 31, 1997.... F-12
Notes to Combined Statements of Revenues and Certain Operating Expenses............ F-13
PROPERTY ACQUISITION TWO (Joint Venture Projects)
Report of Independent Accountants.................................................. F-15
Combined Statements of Revenues and Certain Operating Expenses for the Six Months
Ended June 30, 1998 and 1997 (Unaudited) and the Year Ended December 31, 1997.... F-16
Notes to Combined Statements of Revenues and Certain Operating Expenses............ F-17
WILLIAM WILSON & ASSOCIATES
Report of Independent Accountants.................................................. F-19
Balance Sheets as of June 30, 1998 and 1997 (Unaudited) and December 31, 1997 and
1996............................................................................. F-20
Statements of Income for the Six Months Ended June 30, 1998 and 1997 (Unaudited)
and the Years Ended December 31, 1997, 1996 and 1995............................. F-21
Statements of Changes in Shareholders' Equity for the Six Months Ended June 30,
1998 (Unaudited) and the Years Ended December 31, 1997, 1996 and 1995............ F-22
Statements of Cash Flows for the Six Months Ended June 30, 1998 and 1997
(Unaudited) and the Years Ended December 31, 1997, 1996 and 1995................. F-23
Notes to Financial Statements...................................................... F-24
THE PRUNEYARD HOTEL (Unaudited)
Balance Sheets as of June 30, 1998 and 1997 and December 31, 1997 and 1996......... F-33
Statements of Operations for the Six Months Ended June 30, 1998 and 1997 and the
Years Ended December 31, 1997, 1996 and 1995..................................... F-34
Statements of Changes in Members' Equity for the Years Ended December 31, 1995,
1996 and 1997 and the Six Months Ended June 30, 1998............................. F-35
Statements of Cash Flows for the Six Months Ended June 30, 1998 and 1997 and the
Years Ended December 31, 1997, 1996 and 1995..................................... F-36
Notes to Financial Statements...................................................... F-37
</TABLE>
F-1
<PAGE>
CORNERSTONE PROPERTIES INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA
FINANCIAL STATEMENTS
The following unaudited condensed consolidated pro forma statements of
income give effect to the Transaction, the DIHC Acquisition, the public
offerings of Cornerstone Common Stock in April 1997 and February 1998, the
conversion of the 8% Preferred Stock into Cornerstone Common Stock,
Cornerstone's repayment of a $32,500,000 term loan from Deutsche Bank and the
acquisition of six properties and sale of one property in 1997 and 1998 as if
they had occurred on January 1, 1997. The unaudited condensed consolidated pro
forma balance sheet is presented as if the Transaction and the Additional
Acquisitions had occurred on June 30, 1998.
The unaudited condensed consolidated pro forma financial statements are not
necessarily indicative of results of operations or the consolidated financial
position that would have resulted had the aforementioned transactions been
consummated at the dates indicated, nor are they intended to project
Cornerstone's results of operations or consolidated financial position for any
future period or date. The unaudited condensed consolidated pro forma financial
statements should be read in connection with the audited and unaudited financial
statements of Cornerstone and other documents including those on Form 8-K which
were previously filed with the Securities and Exchange Commission and the
financial statements of WW&A, the Pruneyard Hotel, the Property Acquisition, and
the Property Acquisition Two included elsewhere in this Proxy Statement.
F-2
<PAGE>
CORNERSTONE PROPERTIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED PRO FORMA BALANCE SHEET
AS OF JUNE 30, 1998
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FUNDING
FROM PROPERTY THE PRUNEYARD WILLIAM WILSON
HISTORICAL WILSON PGGM ACQUISITION ACQUISITION HOTEL & ASSOCIATES
CORNERSTONE ISSUANCE INVESTMENT CREDIT LINE I AND II ACQUISITION ACQUISITION
------------ ----------- ----------- ----------- ----------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets
Real estate
investments........ $2,549,865 $ -- $ -- $ -- $1,771,219 $ 17,277 $ --
Less: Accumulated
depreciation....... 256,003 -- -- -- -- -- --
------------ ----------- ----------- ----------- ----------- --------------- -------
Real estate
investments, net... 2,293,862 -- -- -- 1,771,219 17,277 --
Cash and cash
equivalents........ 28,718 537,346 200,000 534,473 (1,184,231) (12,088) (55,500)
Other assets......... 154,289 -- -- -- -- 55,500
------------ ----------- ----------- ----------- ----------- --------------- -------
Total assets......... $2,476,869 $ 537,346 $ 200,000 $ 534,473 $ 586,988 $ 5,189 --
------------ ----------- ----------- ----------- ----------- --------------- -------
------------ ----------- ----------- ----------- ----------- --------------- -------
Liabilities
Long term debt....... $ 849,196 -- -- -- $ 586,988 $ 5,189 --
Other liabilities.... 138,774 -- -- 534,473 -- -- --
------------ ----------- ----------- ----------- ----------- --------------- -------
Total liabilities.... 987,970 -- -- 534,473 586,988 5,189 --
------------ ----------- ----------- ----------- ----------- --------------- -------
Minority interest in
operating
partnership.......... 55,934 304,737 -- -- -- -- --
Minority interest in
real estate joint
ventures............. 15,015 -- -- -- -- -- --
Stockholders'
investment........... 1,417,950 232,609 200,000 -- -- -- --
------------ ----------- ----------- ----------- ----------- --------------- -------
Total liabilities and
stockholders'
investment........... $2,476,869 $ 537,346 $ 200,000 $ 534,473 $ 586,988 $ 5,189 --
------------ ----------- ----------- ----------- ----------- --------------- -------
------------ ----------- ----------- ----------- ----------- --------------- -------
<CAPTION>
(1)
PRO FORMA PRO FORMA
ADJUSTMENTS CORNERSTONE
------------ ------------
<S> <C> <C>
Assets
Real estate
investments........ $ 44,292 $4,382,653
Less: Accumulated
depreciation....... -- 256,003
------------ ------------
Real estate
investments, net... 44,292 4,126,650
Cash and cash
equivalents........ (20,000) 28,718
Other assets......... -- 209,789
------------ ------------
Total assets......... $ 24,292 $4,365,157
------------ ------------
------------ ------------
Liabilities
Long term debt....... $ 50,012 $1,491,385
Other liabilities.... -- 673,247
------------ ------------
Total liabilities.... 50,012 2,164,632
------------ ------------
Minority interest in
operating
partnership.......... (49,042) 311,629
Minority interest in
real estate joint
ventures............. 17,025 32,040
Stockholders'
investment........... 6,297 1,856,856
------------ ------------
Total liabilities and
stockholders'
investment........... $ 24,292 $4,365,157
------------ ------------
------------ ------------
</TABLE>
F-3
<PAGE>
CORNERSTONE PROPERTIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF INCOME
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
(2) HISTORICAL HISTORICAL HISTORICAL
PREVIOUS PROPERTY THE WILLIAM (3)
HISTORICAL PROPERTY ACQUISITION PRUNEYARD WILSON & PRO FORMA PRO FORMA
CORNERSTONE TRANSACTIONS I AND II HOTEL ASSOCIATES ADJUSTMENTS CORNERSTONE
----------- ------------ ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues
Office and parking
rentals................. $ 159,828 $ 160,372 $ 180,975 $ -- $ -- $ 9,273 $ 510,448
Equity in earnings of
unconsolidated
entities................ -- 11,903 -- -- (105) 4,179 15,977
Interest and other
income.................. 14,083 9,504 1,388 4,932 51,751 (63,330) 18,328
----------- ------------ ----------- ----------- ----------- ----------- -----------
Total Revenues.......... 173,911 181,779 182,363 4,932 51,646 (49,878) 544,753
----------- ------------ ----------- ----------- ----------- ----------- -----------
Expenses
Building operating
expenses................ 61,522 57,484 67,186 2,473 -- (2,473) 186,192
Interest expense.......... 33,977 30,922 -- 461 993 73,174 139,527
Depreciation and
amortization............ 30,978 25,721 -- 350 477 41,033 98,559
General and
administrative.......... 7,564 -- -- -- 14,065 (1,041) 20,588
Other expenses............ -- -- -- -- 32,227 (32,227) --
----------- ------------ ----------- ----------- ----------- ----------- -----------
Total Expenses.......... 134,041 114,127 67,186 3,284 47,762 78,466 444,866
----------- ------------ ----------- ----------- ----------- ----------- -----------
Other income (expenses)
Net gain on interest rate
swap.................... 99 -- -- -- -- -- 99
Minority interest in
operating partnership... -- -- -- -- -- (13,796) (13,796)
Minority interest in real
estate joint ventures... (2,368) (1,762) -- -- -- 1,039 (3,091)
----------- ------------ ----------- ----------- ----------- ----------- -----------
Income (loss) before
extraordinary loss........ $ 37,601 $ 65,890 $ 115,177 $ 1,648 $ 3,884 $(141,101) $ 83,099
----------- ------------ ----------- ----------- ----------- ----------- -----------
----------- ------------ ----------- ----------- ----------- ----------- -----------
Extraordinary loss.......... (54) -- -- -- -- -- (54)
Net income (loss)........... $ 37,547 $ 65,890 $ 115,177 $ 1,648 $ 3,884 $(141,101) $ 83,045
----------- ------------ ----------- ----------- ----------- ----------- -----------
----------- ------------ ----------- ----------- ----------- ----------- -----------
Preferred dividends......... 10,160 -- -- -- -- (6,660) 3,500
Income available for common
stockholders.............. $ 27,387 $ 65,890 $ 115,177 $ 1,648 $ 3,884 $(134,441) $ 79,545
----------- ------------ ----------- ----------- ----------- ----------- -----------
----------- ------------ ----------- ----------- ----------- ----------- -----------
Income before extraordinary
loss per share............ $ 0.63 $ 0.63
----------- -----------
----------- -----------
Income per share (basic and
diluted).................. $ 0.63 $ 0.63
----------- -----------
----------- -----------
Weighted shares outstanding-
basic..................... 43,572 125,760
----------- -----------
----------- -----------
Weighted shares outstanding-
diluted................... 43,808 125,996
----------- -----------
----------- -----------
</TABLE>
F-4
<PAGE>
CORNERSTONE PROPERTIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
(4) HISTORICAL HISTORICAL HISTORICAL
PREVIOUS PROPERTY THE WILLIAM (5)
HISTORICAL PROPERTY ACQUISITION PRUNEYARD WILSON & PRO FORMA PRO FORMA
CORNERSTONE TRANSACTIONS I AND II HOTEL ASSOCIATES ADJUSTMENTS CORNERSTONE
----------- ------------ ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues
Office and parking
rentals................. $ 156,540 $ 10,291 $ 91,959 $ -- $ -- $ 4,241 $ 263,031
Equity in earnings of
unconsolidated
entities................ (2,688) -- -- -- 13 2,526 (149)
Interest and other
income.................. 14,194 455 767 2,713 32,319 (33,027) 17,421
----------- ------------ ----------- ----------- ----------- ----------- -----------
Total revenues........ 168,046 10,746 92,726 2,713 32,332 (26,260) 280,303
----------- ------------ ----------- ----------- ----------- ----------- -----------
Expenses
Building operating
expenses................ 56,917 3,144 31,575 1,311 -- (1,311) 91,636
Interest expense.......... 31,667 2,205 -- 224 179 35,633 69,908
Depreciation and
amortization............ 26,859 1,972 -- 175 283 20,472 49,761
General and
administrative.......... 5,544 -- -- -- 9,338 (897) 13,985
Other expenses............ -- -- -- -- 19,822 (19,822) --
----------- ------------ ----------- ----------- ----------- ----------- -----------
Total expenses........ 120,987 7,321 31,575 1,710 29,622 34,075 225,290
----------- ------------ ----------- ----------- ----------- ----------- -----------
Other income (expenses)
Loss on sale of real
estate assets........... (2,197) 1,985 -- -- -- -- (212)
Minority interest in
operating partnership... (646) -- -- -- -- (8,196) (8,842)
Minority interest in real
estate joint ventures... (2,210) -- -- -- -- 487 (1,723)
----------- ------------ ----------- ----------- ----------- ----------- -----------
Net income (loss)........... $ 42,006 $ 5,410 $ 61,151 $ 1,003 $ 2,710 $ (68,044) $ 44,236
----------- ------------ ----------- ----------- ----------- ----------- -----------
----------- ------------ ----------- ----------- ----------- ----------- -----------
Preferred dividends......... 1,750 -- -- -- -- -- 1,750
----------- ------------ ----------- ----------- ----------- ----------- -----------
Income available for common
stockholders.............. $ 40,256 $ 5,410 $ 61,151 $ 1,003 $ 2,710 $ (68,044) $ 42,486
----------- ------------ ----------- ----------- ----------- ----------- -----------
----------- ------------ ----------- ----------- ----------- ----------- -----------
Net income per share........ $ 0.42 $ 0.34
----------- -----------
----------- -----------
Diluted net income per
share..................... $ 0.42 $ 0.34
----------- -----------
----------- -----------
Weighted shares
outstanding-basic......... 96,653 126,490
----------- -----------
----------- -----------
Weighted shares
outstanding-diluted....... 96,984 126,821
----------- -----------
----------- -----------
</TABLE>
F-5
<PAGE>
CORNERSTONE PROPERTIES INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED PRO FORMA
FINANCIAL STATEMENTS
1. Pro forma adjustments to the June 30, 1998 pro forma balance sheet are
detailed below:
<TABLE>
<CAPTION>
(C)
(A) OPERATING
JOINT VENTURE ESTIMATED PARTNERSHIP TOTAL
MINORITY (B) ACQUISITION/ MINORITY OTHER
INTEREST ADJUSTMENT CLOSING COSTS INTEREST ADJUSTMENTS
------------- -------------- ------------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
Assets
Real estate investments...... $ 50,079,784 $ (25,787,368) $ 20,000,000 $ -- $ 44,292,416
Less: Accumulated
depreciation................. -- -- -- -- --
------------- -------------- ------------- ---------------- -------------
Real estate investments,
net.......................... 50,079,784 (25,787,368) 20,000,000 -- 44,292,416
Cash and cash equivalents.... -- -- (20,000,000) -- (20,000,000)
Other assets................. -- -- -- --
------------- -------------- ------------- ---------------- -------------
Total assets................. $ 50,079,784 $ (25,787,368) $ -- $ -- $ 24,292,416
------------- -------------- ------------- ---------------- -------------
------------- -------------- ------------- ---------------- -------------
Liabilities
Long term debt............... $ 33,054,315 $ 16,957,292 $ -- $ -- $ 50,011,607
Other liabilities............ -- -- -- -- --
------------- -------------- ------------- ---------------- -------------
Total liabilities............ 33,054,315 16,957,292 -- -- 50,011,607
------------- -------------- ------------- ---------------- -------------
Minority interest in operating
partnership.................... -- (17,665,885) -- (31,376,000) (49,041,885)
Minority interest in real estate
joint ventures................. 17,025,469 -- -- -- 17,025,469
Stockholders' investment......... -- (25,078,775) -- 31,376,000 6,297,225
------------- -------------- ------------- ---------------- -------------
Total liabilities and
stockholders' investment....... $ 50,079,784 $ (25,787,368) $ -- $ -- $ 24,292,416
------------- -------------- ------------- ---------------- -------------
------------- -------------- ------------- ---------------- -------------
</TABLE>
- ------------------------
a. Pro forma adjustment for the minority interest in 120 Montgomery (33%) and
One Post (50%).
b. Pro forma adjustments to reflect the accounting value of the assumed debt
and equity issued. An adjustment has been recorded to recognize the
difference between the stated value of the equity issued ($17.25/share) and
the average price per share for the period surrounding the announcement of
the Transaction ($16.25/share). Adjustments also reflect the premium on the
debt assumed in the Property Acquisition I and II using a 6.90% interest
rate.
c. Pro forma adjustment to reflect the minority interest (14.71%) in the
Operating Partnership's net assets as of June 30, 1998.
F-6
<PAGE>
CORNERSTONE PROPERTIES INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS
2. Property transactions (excluding the Transaction) occurring after January
1, 1997 and their effect on the pro forma statement of income for the twelve
months ended December 31, 1997 are as follows:
<TABLE>
<CAPTION>
ACQUISITION ACQUISITION DISPOSITION ACQUISITION ACQUISITION ACQUISITION ACQUISITION
527 MADISON DIHC THE FRICK SIXTY STATE CORPORATE500 ONE MEMORIAL 201
PROPERTY AVENUE PROPERTIES BUILDING STREET CENTRE DRIVE CALIFORNIA
- --------------------------- ------------ ------------- ---------- ----------- ------------ ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Transaction date........... 2/14/97 10/27/97 4/24/98 12/31/97 1/29/98 4/28/98 6/3/98
Transaction price (includes
minority interest, if
any)..................... $67,000,000 $1,083,197,000 $26,550,000 $221,000,000 1$50,000,000 $112,500,000 $57,100,000
Debt assumed/incurred...... -- 250,000,000 -- 89,629,475 80,000,000 -- 33,292,000
Weighted average interest
rate on debt............. -- 7.45% -- 6.84% 6.63% -- 6.70%
Office and parking
rentals(a)............... $1,412,000 110,476,000 $(6,032,000) $28,047,000 $21,227,000 $12,832,000 $6,684,000
Equity in earnings of
unconsolidated
entities(b).............. -- -- -- -- -- -- --
Interest and other
income(a)................ 12,000 6,185,000 (63,000) 1,837,000 1,577,000 33,000 48,000
Building operating
expenses(a).............. 623,000 39,344,000 (3,140,000) 12,476,000 6,776,000 3,854,000 2,756,000
Interest expense(c)........ -- 15,257,192 -- 6,070,000 5,304,000 -- 2,218,752
Depreciation and
amortization(d).......... 161,534 17,746,625 (786,000) 4,420,000 3,000,000 2,250,000 1,142,000
General and
administrative........... -- -- -- -- -- -- --
Minority interest in joint
ventures(e).............. -- (1,762,000) -- -- -- -- --
<CAPTION>
ACQUISITION ADJUSTMENT TOTAL
WILSHIRE MARKET PREVIOUS
PROPERTY PALISADES SQUARE (B) PROPERTY
- --------------------------- ---------- ----------- -----------
<S> <C> <C> <C>
Transaction date........... 6/3/98
Transaction price (includes
minority interest, if
any)..................... $64,603,000
Debt assumed/incurred...... 31,319,000
Weighted average interest
rate on debt............. 6.70%
Office and parking
rentals(a)............... $8,588,000 $(22,862,000) $160,372,000
Equity in earnings of
unconsolidated
entities(b).............. -- 11,903,000 11,903,000
Interest and other
income(a)................ 40,000 (165,000) 9,504,000
Building operating
expenses(a).............. 2,413,000 (7,618,000) 57,484,000
Interest expense(c)........ 2,071,578 -- 30,921,522
Depreciation and
amortization(d).......... 1,292,060 (3,506,000) 25,720,219
General and
administrative........... -- -- --
Minority interest in joint
ventures(e).............. -- -- (1,762,000)
</TABLE>
- ------------------------------
a. Historical revenues and expenses from the properties from January 1, 1997
through the date of acquisition or December 31, 1997, whichever is earlier.
Office and parking rentals include a pro forma straight line rent adjustment
based on a lease reset date of January 1, 1997. For the pro forma
disposition of the Frick building, actual revenue and expenses have been
eliminated through December 31, 1997.
b. Market Square, a building purchased as part of the DIHC Acquisition, has
been accounted for by the equity method of accounting. Market Square's
revenue and expenses are included in the DIHC Properties column and
reclassed into equity in earnings of unconsolidated entities in the
adjustment column. Under the equity method, Cornerstone recognizes its
economic share (100%) of Market Square's earnings and losses.
c. Pro forma adjustments for interest expense have been calculated for the
period January 1, 1997 through the date of acquisition or December 31, 1997,
whichever is earlier, based on the indicated assumed/incurred debt and
weighted average interest rate. Included in the calculation is an adjustment
for principal amortization, if any.
d. Pro froma adjustments for depreciation expense have been calculated for the
period January 1, 1997 through the date of acquisition or December 31, 1997,
whichever is earlier, based on an estimated 80% allocation of the purchase
price to depreciable assets over a 40 year life using the straight line
method.
e. Represents the minority partners' share of net income in three buildings of
the DIHC Acquisition.
F-7
<PAGE>
CORNERSTONE PROPERTIES INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS
3. Pro forma adjustments for the twelve months ended December 31, 1997:
<TABLE>
<CAPTION>
COMMERCIAL
PROPERTY INTERIOR OTHER
ACQUISITION I AND WILLIAM WILSON THE PRUNEYARD CONTRACTORS ELIMINATION ADJUSTMENTS
ADJUSTMENT II & ASSOCIATES HOTEL (H) ENTRY (I) (J)
- -------------------------------- ------------------ -------------- -------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Acquisition price (includes
minority interest)............ $1,815,511,416 $ 55,500,000 $ 17,277,000
Debt assumed/incurred (including
premium)...................... 637,000,266 na 5,189,000
Credit line financing........... 534,472,946 na na
Weighted average interest rate
on debt....................... 6.90% 6.90%
Office and parking rentals...... $ 9,273,000(a) $ -- $ -- $ -- $ -- $ --
Equity in earnings of
unconsolidated entities....... -- 105,120(e) 1,650,696(g) 2,422,773 -- --
Interest and other income....... -- (641,090)(e) (4,932,424)(g) (35,818,572) (14,452,000) (7,485,982)
Building operating expenses..... -- -- (2,473,000)(g) -- -- --
Interest expense................ 75,123,385(b) (993,078)(e) (461,017)(e) -- -- (495,156)
Depreciation and amortization... 36,310,228(c) 5,073,218(f) (350,021)(e) -- -- --
General and administrative...... -- -- -- (1,041,000) -- --
Other expenses.................. -- -- -- (32,227,285) -- --
Minority interest in operating
partnership................... -- -- -- -- -- --
Minority interest in real estate
joint ventures................ 1,039,000(d) -- -- -- -- --
Preferred dividends............. -- -- -- -- -- (6,660,000)
<CAPTION>
UPREIT
MINORITY TOTAL
INTEREST THE
ADJUSTMENT (K) TRANSACTION
- -------------------------------- ----------- -----------
<S> <C> <C>
Acquisition price (includes
minority interest)............
Debt assumed/incurred (including
premium)......................
Credit line financing...........
Weighted average interest rate
on debt.......................
Office and parking rentals...... $ -- $ 9,273,000
Equity in earnings of
unconsolidated entities....... -- 4,178,589
Interest and other income....... -- (63,330,068)
Building operating expenses..... -- (2,473,000)
Interest expense................ -- 73,174,134
Depreciation and amortization... -- 41,033,425
General and administrative...... -- (1,041,000)
Other expenses.................. -- (32,227,285)
Minority interest in operating
partnership................... (13,796,000) (13,796,000)
Minority interest in real estate
joint ventures................ -- 1,039,000
Preferred dividends............. -- (6,660,000)
</TABLE>
a. Proforma adjustment for the straight line rent adjustment based on a lease
reset date of January 1, 1997.
b. Pro forma adjustments for interest expense have been calculated based on the
indicated assumed/incurred debt and weighted average interest rate. Included
in the calculation is an adjustment for principal amortization, if any. For
the Property Acquisition I and II, interest expense was not calculated on
estimated construction debt of $78,803,465. It is contemplated that the
interest expense on this debt will be capitalized.
c. Pro forma adjustments for depreciation expense have been calculated based on
an 80% allocation of the purchase price to depreciable assets over a 40 year
life using the straight line method.
d. Pro forma adjustments for the minority partners' share of net income in two
buildings of the Property Acquisition I and II.
e. Represents the elimination of revenues and expenses not included as part of
the Transaction.
f. Represents the elimination of historical depreciation expense and the
proforma adjustment for amortization expense based on the WW&A purchase
price. Amortization of the William Wilson & Associates purchase has been
calculated over a 10 year life using the straight line method.
g. The investment in the Pruneyard Hotel will be accounted for under the equity
method of accounting. Pro forma adjustments have been made to reflect
Cornerstone's economic share (95%) of the interest and other income and
building operating expenses of the Pruneyard Hotel. Additionally, the equity
in earnings of unconsolidated entities includes pro forma adjustments for
depreciation and interest expense.
h. The investment in Commercial Interior Contractors ("CIC"), the construction
division of WW&A, will be accounted for under the equity method of
accounting. Pro forma adjustments have been made to reflect Cornerstone's
economic share (95%) of the interest and other income, other expenses and
general and administrative expenses of CIC.
i. Represents the elimination of fees earned by William Wilson & Associates
from Property Acquisition I and II.
j. To eliminate interest income on excess cash presumed to have been used to
fund the cash requirements of the property transactions. Adjustments also
eliminate the interest expense incurred on temporary acquisition line
financing presumed to have been funded by debt indicated in this footnote
and footnote 2 and to eliminate the preferred dividends paid on
Cornerstone's 8% Preferred Stock. The 8% Preferred Stock is presumed to have
been converted into Cornerstone Common Stock on January 1, 1997.
k. Represents the minority holders' interest (14.71%) in the operating
partnership in the pro forma net income (before this adjustment) available
to common stockholders.
F-8
<PAGE>
CORNERSTONE PROPERTIES INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDNESED CONSOLIDATED PRO FORMA
FINANCIAL STATEMENTS
4. Property transactions (excluding the Transaction) occurring after January
1, 1998 and their effect on the pro forma statement of income for the six months
ended June 30, 1998 are as follows:
<TABLE>
<CAPTION>
DISPOSITION ACQUISITION ACQUISITION ACQUISITION ACQUISITION TOTAL
THE FRICK CORPORATE500 ONE MEMORIAL 201 WILSHIRE PREVIOUS
PROPERTY BUILDING CENTRE DRIVE CALIFORNIA PALISADES PROPERTY
- ---------------------------- ------------- -------------- -------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Transaction date............ 4/24/98 1/29/98 4/28/98 6/3/98 6/3/98
Transaction price (includes
minority interest, if
any)...................... $ 26,550,000 $ 150,000,000 $ 112,500,000 $ 57,100,000 $ 64,603,000
Debt assumed/incurred....... -- 80,000,000 -- 33,292,000 31,319,000
Weighted average interest
rate on debt.............. -- 6.63% -- 6.70% 6.70%
Office and parking rentals
(a)....................... $ (1,867,000) $ 1,466,000 $ 4,450,000 $ 2,784,000 $ 3,458,000 $ 10,291,000
Interest and other income
(a)....................... (2,000) 404,000 24,000 17,000 12,000 455,000
Building operating expenses
(a)....................... (1,041,000) 781,000 1,285,000 1,154,000 965,000 3,144,000
Interest expense (b)........ -- 406,882 -- 927,635 870,315 2,204,833
Depreciation and
amortization (c).......... -- 230,137 721,233 478,701 541,603 1,971,674
General and
administrative............ -- -- -- -- -- --
Loss on sale of real
estate.................... 1,985,000 -- -- -- -- 1,985,000
</TABLE>
a. Historical revenues and expenses from the properties from January 1, 1998
through the date of acquisition. Office and parking rentals include pro
forma straight line rent adjustments based on a lease reset date of January
1, 1997. For the pro forma disposition of the Frick building, actual revenue
and expenses have been eliminated through the date of disposition.
b. Pro forma adjustments for interest expense have been calculated for the
period January 1, 1998 through the date of acquisition, based on the
indicated assumed/incurred debt and weighted average interest rate. Included
in the calculation is an adjustment for principal amortization, if any.
c. Pro forma adjustments for depreciation expense have been calculated for the
period January 1, 1998 through the date of acquisition, based on an
estimated 80% allocation of the purchase price to depreciable assets over a
40 year life using the straight line method.
F-9
<PAGE>
CORNERSTONE PROPERTIES INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS
5. Pro forma adjustments for the six months ended June 30, 1998:
<TABLE>
<CAPTION>
COMMERCIAL
PROPERTY INTERIOR OTHER
ACQUISITION I AND WILLIAM WILSON THE PRUNEYARD CONTRACTORS ELIMINATION ADJUSTMENTS
ADJUSTMENT II & ASSOCIATES HOTEL (H) ENTRY (I) (J)
- ----------------------------- ------------------ -------------- -------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Acquisition price (includes
minority interest)......... $1,815,511,416 $ 55,500,000 $ 17,277,000
Debt assumed/incurred
(including premium)........ 637,000,266 na 5,189,000
Credit line financing........ 534,472,946 na na
Weighted average interest
rate on debt............... 6.90% 6.90%
Office and parking rentals... $ 4,241,000 (a) $ -- $ -- $ -- $ -- $ --
Equity in earnings of
unconsolidated entities.... -- (12,968)(e) 989,748 (g) 1,549,293 -- --
Interest and other income.... -- (316,810)(e) (2,712,933)(g) (22,350,283) (7,224,000) (422,976)
Building operating
expenses................... -- -- (1,311,216)(g) -- -- --
Interest expense............. 37,332,764(b) (179,209)(e) (223,708)(e) -- -- (1,296,740)
Depreciation and
amortization............... 18,155,114(c) 2,492,331(f) (175,011)(e) -- -- --
General and administrative... -- -- -- (897,000) -- --
Other expenses............... -- -- -- (19,822,448) -- --
Minority interest in
operating partnership...... -- -- -- -- -- --
Minority interest in real
estate joint ventures...... 487,000(d) -- -- -- -- --
Preferred dividends.......... -- -- -- -- -- --
<CAPTION>
UPREIT
MINORITY TOTAL
INTEREST THE
ADJUSTMENT (K) TRANSACTION
- ----------------------------- ----------- -----------
<S> <C> <C>
Acquisition price (includes
minority interest).........
Debt assumed/incurred
(including premium)........
Credit line financing........
Weighted average interest
rate on debt...............
Office and parking rentals... $ -- $4,241,000
Equity in earnings of
unconsolidated entities.... -- 2,526,073
Interest and other income.... -- (33,027,002)
Building operating
expenses................... -- (1,311,216)
Interest expense............. -- 35,633,107
Depreciation and
amortization............... -- 20,472,434
General and administrative... -- (897,000)
Other expenses............... -- (19,822,448)
Minority interest in
operating partnership...... (8,196,000) (8,196,000)
Minority interest in real
estate joint ventures...... -- 487,000
Preferred dividends.......... -- --
</TABLE>
- ------------------------------
a. Proforma adjustment for the straight line rent adjustment based on a lease
reset date of January 1, 1997.
b. Pro forma adjustments for interest expense have been calculated based on the
indicated assumed/incurred debt and weighted average interest rate. Included
in the calculation is an adjustment for principal amortization, if any. For
the Property Acquisition I and II, interest expense was not calculated on
estimated construction debt of $78,803,465. It is contemplated that the
interest expense on this debt will be capitalized.
c. Pro forma adjustments for depreciation expense have been calculated based on
an 80% allocation of the purchase price to depreciable assets over a 40 year
life using the straight line method.
d. Pro forma adjustments for the minority partners' share of net income in two
buildings of the Property Acquisition I and II.
e. Represents the elimination of revenues and expenses not included as part of
the Transaction.
f. Represents the elimination of historical depreciation expense and the pro
forma adjustment for amortization expense based on the William Wilson &
Associates purchase price. Amortization of the William Wilson & Associates
purchase has been calculated over a 10 year life using the straight line
method.
g. The investment in the Pruneyard Hotel will be accounted for under the equity
method of accounting. Pro forma adjustments have been made to reflect
Cornerstone's economic share (95%) of the interest and other income and
building operating expenses of the Pruneyard Hotel. Additionally, the equity
in earnings of unconsolidated entities includes pro forma adjustments for
depreciation and interest expense.
h. The investment in CIC, will be accounted for under the equity method of
accounting. Pro forma adjustments have been made to reflect Cornerstone's
economic share (95%) of the interest and other income, other expenses and
general and administrative expenses of CIC.
i. Represents the elimination of fees earned by William Wilson & Associates
from Property Acquisition I and II.
j. To eliminate interest income on excess cash presumed to have been used to
fund the cash requirements of the property transactions. Adjustments also
eliminate the interest expense incurred on temporary acquisition line
financing presumed to have been funded by debt indicated in this footnote
and footnote 4 and to eliminate the preferred dividends paid on
Cornerstone's 8% Preferred Stock. The 8% Preferred Stock is presumed to have
been converted into Cornerstone Common Stock on January 1, 1997.
k. Represents the minority holders' interest (14.71%) in the operating
partnership in the pro forma net income (before this adjustment) available
to common stockholders.
F-10
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
June 19, 1998
To the Board of Directors
Cornerstone Properties Inc.
We have audited the accompanying combined statement of revenues and certain
operating expenses (the Combined Statement) of 46 properties (the Property
Acquisition), as described in Note 1, for the year ended December 31, 1997. The
Combined Statement is the responsibility of Property Acquisition's management.
Our responsibility is to express an opinion on the Combined Statement based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the Combined Statement is free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the Combined Statement. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the Combined Statement. We believe
that our audit provides a reasonable basis for our opinion.
The accompanying Combined Statement was prepared for the purpose of complying
with the rules and regulations of the Securities and Exchange Commission as
described in Note 1, and is not intended to be a complete presentation of the
Property Acquisition's combined revenues and expenses and may not be comparable
to results from proposed future operations of the properties.
In our opinion, the Combined Statement for the year ended December 31, 1997,
presents fairly, in all material respects, the combined revenues and certain
operating expenses of the Property Acquisition as described in Note 1 in
conformity with generally accepted accounting principles.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
San Francisco, California
F-11
<PAGE>
PROPERTY ACQUISITION
COMBINED STATEMENTS OF REVENUES AND CERTAIN OPERATING EXPENSES
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED
------------------------ DECEMBER 31,
1998 1997 1997
----------- ----------- ------------
<S> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Revenues:
Rental income.......................................................... $ 83,526 $ 55,396 $ 165,589
Other income........................................................... 676 658 1,238
----------- ----------- ------------
Total revenues....................................................... 84,202 56,054 166,827
----------- ----------- ------------
Certain operating expenses:
Property operating and maintenance..................................... 15,703 11,336 32,084
Real estate taxes...................................................... 6,168 3,708 11,363
General office and administration...................................... 7,465 5,100 19,083
----------- ----------- ------------
Total certain operating expenses..................................... 29,336 20,144 62,530
----------- ----------- ------------
Revenues in excess of certain operating expenses................... $ 54,866 $ 35,910 $ 104,297
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
F-12
<PAGE>
PROPERTY ACQUISITION
NOTES TO COMBINED STATEMENTS OF REVENUES AND
CERTAIN OPERATING EXPENSES
(AMOUNTS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DESCRIPTION OF PROPERTIES:
The accompanying combined statements of revenues and certain operating
expenses of the 46 office properties (the "Property Acquisition") have been
presented on a combined historical cost basis because of common management
and because the assets and liabilities of these properties are expected to
be acquired by Cornerstone Properties, Inc. ("Cornerstone").
The 46 properties included in the combined statements of revenues and
certain operating expenses are:
<TABLE>
<S> <C> <C>
10 ALMADEN 490 CALIFORNIA NORRIS TECH CENTER
110 ATRIUM 5300 SOUTH ONE BAY PLAZA
120 MONTGOMERY STREET 5820 STONERIDGE ONE POST STREET
1300 S. EL CAMINO REAL 5990 SEPULVEDA ONE AND TWO GATEWAY
1301 SHOREWAY 66 BOVET PARK PLAZA
1320 WILLOW PASS 700 NORTH BRAND PENINSULA OFFICE
1390 WILLOW PASS BAY PARK PLAZA PARK
1600 SOUTH MAIN PLAZA BILTMORE LAKES PRUNEYARD
1737 NORTH FIRST STREET BIXBY OFFICE PARK SCOTTSDALE
18301 VON KARMAN AVENUE CENTERSIDE II SEAPORT
188 EMBARCADERO CROSSROADS SEARISE
2000 CROW CANYON EMBARCADERO PLACE WARNER PARK CENTER
2010 CROW CANYON EXPO CENTRE WEST WILSHIRE
2677 MAIN STREET GOLDEN BEAR WESTLAKE SPECTRUM
2700 YGNACIO CENTER WESTLAKE SPECTRUM II
429 SANTA MONICA ISLAND CORP.
CENTER
JANSS PROMENADE
</TABLE>
BASIS OF PRESENTATION:
The accompanying historical cost basis combined statements have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission and do not reflect all operations of the properties for
the periods presented. The statements exclude certain expenses such as
interest, depreciation, and amortization and other costs not directly
related to the future operations of the properties that may not be
comparable to the expenses expected to be incurred in the proposed future
operations of the properties.
REVENUE RECOGNITION:
Rental revenues are recorded on the straight-line basis over the related
lease terms. Unbilled rental revenue is recorded for rental income earned on
the straight-line basis in excess of rent payments received pursuant to
terms of the individual lease agreements.
F-13
<PAGE>
PROPERTY ACQUISITION
NOTES TO COMBINED STATEMENTS OF REVENUES AND
CERTAIN OPERATING EXPENSES (CONTINUED)
(AMOUNTS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
USE OF ESTIMATES:
The preparation of the combined statements of revenues and certain operating
expenses in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
2. MANAGEMENT AGREEMENTS:
The entities that currently own the Property Acquisition properties have
individually entered into agreements with an affiliate of the seller to
administer the day-to-day operations of the properties. Under the terms of
the respective agreements, the manager received a management fee, payable
monthly, ranging from 1% to 4% of rental receipts. In addition, the manager
received leasing commissions in an amount equal to 50% to 100% of the
customary commission, as defined. For the year ended December 31, 1997, the
Property Acquisition paid or accrued an aggregate of $12,992 for management
fees, leasing commissions and other reimbursements to the manager.
Additionally, the Property Acquisition paid an annual asset management fee
to the manager, in an amount ranging from 0.5% to 0.625% of invested
amounts, which aggregated $3,492 in 1997. Also, the Property Acquisition
paid the manager an acquisition fee equal to 0.75% of the total acquisition
amount of each property acquired, which aggregated $1,757 in 1997.
The above related party fees have been treated as corporate expenses which
will not necessarily be comparable to the proposed future operations of the
properties, and therefore in accordance with the Securities and Exchange
Commission regulations are not included in the accompanying Combined
Statements.
3. OPERATING LEASES:
Office space is leased to tenants under various lease agreements expiring at
various dates through October 31, 2011. Future minimum rental payments to be
received from tenants under operating leases that have initial or remaining
noncancelable terms in excess of one year are as follows as of June 30,
1998:
<TABLE>
<CAPTION>
FOR THE YEARS ENDING DECEMBER 31,
- --------------------------------------------------------------------------------------
<S> <C>
1998.......................................................................... $ 116,067
1999.......................................................................... 99,804
2000.......................................................................... 84,571
2001.......................................................................... 67,406
2002.......................................................................... 47,779
Thereafter.................................................................... 92,856
----------
$ 508,483
----------
----------
</TABLE>
F-14
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
June 19, 1998
To the Board of Directors
Cornerstone Properties Inc.
We have audited the accompanying combined statement of revenues and certain
operating expenses (the Combined Statements) of two properties (the Property
Acquisition Two), as described in Note 1, for the year ended December 31, 1997.
The Combined Statement is the responsibility of the Property Acquisition Two's
management. Our responsibility is to express an opinion on the Combined
Statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the Combined Statement are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the Combined Statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the Combined
Statement. We believe that our audit provides a reasonable basis for our
opinion.
The accompanying Combined Statement was prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission as described in Note 1, and is not intended to be a complete
presentation of the Property Acquisition Two's revenues and expenses and may not
be comparable to results from proposed future operations of the Properties.
In our opinion, the Combined Statement for the year ended December 31, 1997,
presents fairly, in all material respects, the combined revenues and certain
operating expenses of the Property Acquisition Two as described in Note 1 in
conformity with generally accepted accounting principles.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
San Francisco, California
F-15
<PAGE>
PROPERTY ACQUISITION TWO
COMBINED STATEMENTS OF REVENUES AND CERTAIN OPERATING EXPENSES
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED
---------------------------- DECEMBER 31,
1998 1997 1997
------------- ------------- ------------
<S> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Revenues:
Rental income....................................................... $ 8,433 $ 7,654 $ 15,386
Other income........................................................ 91 61 150
------ ------ ------------
Total revenue................................................... 8,524 7,715 15,536
------ ------ ------------
Certain operating expenses:
Property operating and maintenance.................................. 1,216 1,181 2,740
Real estate taxes................................................... 552 441 1,014
General office and administration................................... 471 362 902
------ ------ ------------
Total certain operating expenses................................ 2,239 1,984 4,656
------ ------ ------------
Revenues in excess of certain operating expenses.............. $ 6,285 $ 5,731 $ 10,880
------ ------ ------------
------ ------ ------------
</TABLE>
F-16
<PAGE>
PROPERTY ACQUISITION TWO
NOTES TO COMBINED STATEMENTS OF REVENUES AND
CERTAIN OPERATING EXPENSES
(AMOUNTS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DESCRIPTION OF PROPERTIES:
The accompanying combined statements of revenues and certain operating
expenses of the two office properties (the "Property Acquisition Two") have been
presented on a combined historical basis because of common management and
because the assets and liabilities of these properties are expected to be
acquired by Cornerstone Properties Inc. ("Cornerstone").
The two properties included in the combined statements of revenues and
certain operating expenses are:
Bayhill
Second and Main
BASIS OF PRESENTATION:
The accompanying historical combined statements have been prepared in
accordance with the rules and regulations of the Securities and Exchange
Commission and do not reflect all operations of the properties for the periods
presented. The statements exclude certain expenses such as interest,
depreciation, and amortization and other costs not directly related to the
future operations of the properties that may not be comparable to the expenses
expected to be incurred in the proposed future operations of the properties.
REVENUE RECOGNITION:
Rental revenues are recorded on a straight-line basis over the related lease
terms. Unbilled rental revenue is recorded for rental income earned on a
straight-line basis in excess of rent payments received pursuant to terms of the
individual lease agreements.
USE OF ESTIMATES:
The preparation of the combined statements of revenues and certain operating
expenses in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
2. GROUND LEASES:
There is a ground lease agreement for the land underlying the Second and
Main property. Annual lease payments are $115 through March 31, 2001, then $122
through March 31, 2006, then will be adjusted up to 6.25% based on the CPI every
ten years thereafter, until the lease expiration on March 31, 2041. In addition
to the lease payments, the ownership entity is obligated to pay related property
taxes and other costs of upkeep and ownership.
3. MANAGEMENT AGREEMENTS:
The entities that currently own the Property Acquisition Two properties have
individually entered into agreements with an affiliate of the seller to
administer the day-to-day operations of the properties. Under
F-17
<PAGE>
PROPERTY ACQUISITION TWO
NOTES TO COMBINED STATEMENTS OF REVENUES AND
CERTAIN OPERATING EXPENSES (CONTINUED)
(AMOUNTS IN THOUSANDS)
3. MANAGEMENT AGREEMENTS: (CONTINUED)
the terms of the respective agreements, the manager received a management fee,
payable monthly, ranging from 2% to 3 of rental receipts. In addition, the
manager received leasing commissions in an amount equal to 50% to 100% of the
customary commission, as defined. For the year ended December 31, 1997, the
Property Acquisition Two paid or accrued an aggregate of $1,212 for management
fees and leasing commissions to the manager.
In accordance with the Securities and Exchange Commission regulations,
because such fees are not anticipated to continue to be incurred in the future,
they are not included in the accompanying Combined Statements.
4. OPERATING LEASES:
Office space is leased to tenants under various lease agreements expiring at
various dates through December 31, 2008. Future minimum rental payments to be
received from tenants under operating leases that have initial or remaining
noncancelable terms in excess of one year are as follows as of June 30, 1998:
<TABLE>
<CAPTION>
FOR THE YEAR ENDING DECEMBER 31,
- -----------------------------------------------------------------------------------
<S> <C>
1998....................................................................... $ 13,970
1999....................................................................... 13,123
2000....................................................................... 11,907
2001....................................................................... 10,926
2002....................................................................... 8,912
Thereafter................................................................. 17,972
---------
$ 76,810
---------
---------
</TABLE>
F-18
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
August 10, 1997
To the Board of Directors
William Wilson & Associates
We have audited the accompanying balance sheets of William Wilson &
Associates (the "Company") as of December 31, 1997 and 1996 and the related
statements of income, shareholders' equity, and cash flows for the three years
in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of William Wilson & Associates
as of December 31, 1997 and 1996, and the results of its operations and its cash
flows for three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
San Francisco, California
F-19
<PAGE>
WILLIAM WILSON & ASSOCIATES
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
1998 1997 1997 1996
------------- ------------- ------------- -------------
<CAPTION>
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 938,812 $ 400,516 $ 634,425 $ 3,554,131
Accounts receivable--contracts.................... 10,324,043 4,297,494 8,115,332 3,940,952
Accounts receivable--other........................ 5,208,218 3,335,615 5,645,493 4,420,422
Notes receivable, related parties................. 682,774 11,377,302 515,739 326,222
Other assets...................................... 315,420 103,703 262,023 43,312
------------- ------------- ------------- -------------
Total current assets.......................... 17,469,267 19,514,630 15,173,012 12,285,039
Fixed assets, net................................. 3,436,684 2,981,850 3,136,740 2,600,212
Investments in affiliates......................... 127,468 5,876,357 120,774 4,379,131
Note receivable, related parties.................. 3,949,624 -- 3,530,493 --
------------- ------------- ------------- -------------
Total assets................................ $ 24,983,043 $ 28,372,837 $ 21,961,019 $ 19,264,382
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit.................................... $ 2,210,736 $ 15,809,002 $ 1,810,736 $ 5,458,296
Accounts payable.................................. 8,262,184 3,750,609 8,158,335 4,512,085
Accrued expenses.................................. 1,846,513 1,818,591 1,614,179 2,150,980
Billings in excess of costs....................... 5,331,993 1,116,256 2,710,899 1,110,452
Current portion of long-term debt................. 301,210 288,908 479,926 273,748
------------- ------------- ------------- -------------
Total current liabilities..................... 17,952,636 22,783,366 14,774,075 13,505,561
Note payable to shareholder......................... 1,161,680 -- 1,124,348 --
Notes payable....................................... 963,423 1,427,511 1,093,181 1,520,489
------------- ------------- ------------- -------------
Total liabilities........................... 20,077,739 24,210,877 16,991,604 15,026,050
------------- ------------- ------------- -------------
Commitments and contingencies
(Notes 7 and 10).................................. -- -- -- --
Shareholders' equity:
Common stock, par value $1; 100,000 shares
authorized; 55,556 and 54,630 shares issued and
outstanding, respectively......................... 55,556 55,556 55,556 54,630
Paid-in capital................................... 359,081 359,081 359,081 245,183
Due from shareholders............................. (2,209,037) (778,107) (2,085,134) (717,655)
Retained earnings................................. 6,699,704 4,525,430 6,639,912 4,656,174
------------- ------------- ------------- -------------
Total shareholders' equity.................... 4,905,304 4,161,960 4,969,415 4,238,332
------------- ------------- ------------- -------------
Total liabilities and shareholders'
equity.................................... $ 24,983,043 $ 28,372,837 $ 21,961,019 $ 19,264,382
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
WILLIAM WILSON & ASSOCIATES
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
---------------------------- -------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 1997 1997 1996 1995
------------- ------------- ------------- ------------- -------------
<CAPTION>
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Suite improvement income........... $ 20,688,446 $ 10,914,696 $ 33,307,967 $ 26,325,354 $ 35,181,102
Management fees.................... 3,034,149 2,703,000 5,426,895 4,731,325 3,748,969
Leasing commission income.......... 3,699,443 1,938,901 4,473,875 3,548,251 1,701,417
Development fees................... 1,661,837 995,610 2,510,605 1,955,880 1,324,830
Asset management fees.............. 2,482,759 1,564,841 3,653,034 1,729,843 453,772
Acquisition fees................... 435,693 907,067 1,744,661 1,430,609 869,248
------------- ------------- ------------- ------------- -------------
32,002,327 19,024,115 51,117,037 39,721,262 43,279,338
------------- ------------- ------------- ------------- -------------
Direct costs:
Cost of suite improvement.......... 19,774,158 10,393,460 32,031,811 24,842,102 33,028,275
Management fee--third party........ -- 6,668 6,668 23,917 32,187
Leasing commission--third party.... -- -- -- 305,000 --
Consulting fee--development........ 48,290 183,937 195,474 291,464 190,078
------------- ------------- ------------- ------------- -------------
19,822,448 10,584,065 32,233,953 25,462,483 33,250,540
------------- ------------- ------------- ------------- -------------
General and administrative expense:
Personnel.......................... 6,025,091 4,921,546 9,528,385 7,370,504 5,707,919
Marketing.......................... 451,706 393,901 1,056,488 911,554 539,353
Office and administrative.......... 2,861,190 1,405,897 3,480,583 3,017,336 1,861,034
------------- ------------- ------------- ------------- -------------
9,337,987 6,721,344 14,065,456 11,299,394 8,108,306
------------- ------------- ------------- ------------- -------------
Other income and (expense):
Interest income.................... 244,607 196,659 618,826 735,418 267,579
Equity in net income (loss) of
unconsolidated affiliates........ 12,968 (50,330) (105,120) (45,065) (105,195)
Other income (expense)............. 72,203 (3,859) 22,264 180,614 98,182
Depreciation and amortization...... (282,669) (238,391) (476,782) (266,511) (254,313)
Interest expense................... (179,209) (393,529) (993,078) (757,876) (215,919)
------------- ------------- ------------- ------------- -------------
Net income....................... $ 2,709,792 $ 1,229,256 $ 3,883,738 $ 2,805,965 $ 1,710,826
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Basic and diluted earnings per
share.............................. $ 48.78 $ 22.13 $ 69.91 $ 51.36 $ 31.86
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE>
WILLIAM WILSON & ASSOCIATES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK DUE FROM SHARE-
-------------------- PAID-IN SHARE- RETAINED HOLDERS'
ISSUED AMOUNT CAPITAL HOLDERS EARNINGS EQUITY
--------- --------- ---------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995................... 52,778 $ 52,778 $ 116,473 $ (400,000) $ 4,222,491 $ 3,991,742
Issuance of common stock................... 926 926 49,074 -- -- 50,000
Distributions.............................. -- -- -- -- (3,183,108) (3,183,108)
Due from shareholders...................... -- -- -- (369,648) -- (369,648)
Net income................................. -- -- -- -- 1,710,826 1,710,826
--------- --------- ---------- ------------- ------------ ------------
Balance, December 31, 1995................. 53,704 53,704 165,547 (769,648) 2,750,209 2,199,812
Issuance of common stock................... 926 926 79,636 -- -- 80,562
Distributions.............................. -- -- -- -- (900,000) (900,000)
Due from shareholders...................... -- -- -- 51,993 -- 51,993
Net income................................. -- -- -- -- 2,805,965 2,805,965
--------- --------- ---------- ------------- ------------ ------------
Balance, December 31, 1996................. 54,630 54,630 245,183 (717,655) 4,656,174 4,238,332
Issuance of common stock................... 926 926 113,898 -- -- 114,824
Distributions.............................. -- -- -- -- (1,900,000) (1,900,000)
Due from shareholders...................... -- -- -- (1,367,479) -- (1,367,479)
Net income................................. -- -- -- -- 3,883,738 3,883,738
--------- --------- ---------- ------------- ------------ ------------
Balance, December 31, 1997................. 55,556 55,556 359,081 (2,085,134) 6,639,912 4,969,415
Distributions.............................. -- -- -- -- (2,650,000) (2,650,000)
Due from shareholders...................... -- -- -- (123,903) -- (123,903)
Net income................................. -- -- -- -- 2,709,792 2,709,792
--------- --------- ---------- ------------- ------------ ------------
Balance, June 30, 1998 (unaudited)......... 55,556 $ 55,556 $ 359,081 $ (2,209,037) $ 6,699,704 $ 4,905,304
--------- --------- ---------- ------------- ------------ ------------
--------- --------- ---------- ------------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
WILLIAM WILSON & ASSOCIATES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
------------------------ -----------------------------------
<S> <C> <C> <C> <C> <C>
1998 1997 1997 1996 1995
----------- ----------- ----------- ---------- ----------
<CAPTION>
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.................................... $2,709,792 $ 1,229,256 $ 3,883,738 $2,805,965 $1,710,826
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............. 282,669 238,391 476,782 266,511 254,313
Equity in net (income) loss of
unconsolidated affiliates............... (12,968) 50,330 105,120 45,065 105,195
Changes in operating assets and
liabilities:
Accounts receivable--contracts........ (2,208,711) (356,542) (4,174,380) 2,544,373 (2,013,097)
Accounts receivable--other............ 437,275 1,084,807 (1,225,071) (2,851,883) 5,984
Other assets.......................... (53,397) (60,391) (218,711) 27,305 (53,704)
Accounts payable...................... 103,849 (761,476) 3,646,250 (2,644,872) 4,232,658
Accrued expenses...................... 232,334 (332,389) (536,801) 133,923 143,509
Billings in excess of costs........... 2,621,094 5,804 1,600,447 296,030 (502,912)
----------- ----------- ----------- ---------- ----------
1,402,145 (131,466) (326,364) (2,183,548) 2,171,946
----------- ----------- ----------- ---------- ----------
Net cash provided by operating
activities...................... 4,111,937 1,097,790 3,557,374 622,417 3,882,772
----------- ----------- ----------- ---------- ----------
Cash flows from investing activities:
Acquisition of fixed assets................... (582,613) (620,029) (1,013,310) (588,259) (1,885,364)
Investments in affiliates..................... -- (1,859,848) (6,028,989) (4,613,541) (471,288)
Distributions from affiliates................. 6,274 312,292 344,226 378,169 712,648
Advances on notes receivable, related
parties..................................... (1,122,444) (11,111,532) (15,645,464) (267,660) (4,000,382)
Repayments of notes receivable, related
parties..................................... 412,375 -- 20,395,975 4,049,493 --
----------- ----------- ----------- ---------- ----------
Net cash used in investing activities..... (1,286,408) (13,279,117) (1,947,562) (1,041,798) (5,644,386)
----------- ----------- ----------- ---------- ----------
Cash flows from financing activities:
Proceeds (payments) on line of credit......... 400,000 10,350,706 (3,647,560) 960,796 4,497,500
Proceeds from notes payable................... 16,866 60,638 1,173,206 -- 2,200,000
Principal payments on notes payable........... (288,008) (138,456) (269,988) (274,114) (844,089)
Distributions................................. (2,650,000) (1,360,000) (1,900,000) (900,000) (3,183,108)
Proceeds from sale of stock................... -- 114,824 114,824 80,562 50,000
----------- ----------- ----------- ---------- ----------
Net cash provided by (used in) financing
activities.............................. (2,521,142) 9,027,712 (4,529,518) (132,756) 2,720,303
----------- ----------- ----------- ---------- ----------
Net change in cash........................ 304,387 (3,153,615) (2,919,706) (552,137) 958,689
Cash and cash equivalents at beginning of
period........................................ 634,425 3,554,131 3,554,131 4,106,268 3,147,579
----------- ----------- ----------- ---------- ----------
Cash and cash equivalents at end of period...... $ 938,812 $ 400,516 $ 634,425 $3,554,131 $4,106,268
----------- ----------- ----------- ---------- ----------
----------- ----------- ----------- ---------- ----------
Supplemental cash flow disclosure:
Interest paid................................. $ 76,575 $ 103,494 $ 993,078 $ 757,876 $ 215,919
----------- ----------- ----------- ---------- ----------
----------- ----------- ----------- ---------- ----------
Noncash financing activity:
Disposal of fully depreciated assets.......... -- -- -- $ 589,368 --
----------- ----------- ----------- ---------- ----------
----------- ----------- ----------- ---------- ----------
Exchange of investments in partnerships for
notes receivable from WWAI.................... -- -- $ 9,838,000 -- --
----------- ----------- ----------- ---------- ----------
----------- ----------- ----------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE>
WILLIAM WILSON & ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION:
William Wilson & Associates (the "Company") is a Subchapter S corporation
organized on February 16, 1978. The Company is a full service real estate
operating company providing services to related and third party partnerships and
entities. It provides leasing services, property and asset management,
development, acquisition, marketing and administration services related to
commercial properties. Through its division, Commercial Interior Contractors,
the Company performs construction services related to its affiliates and third
party property owners.
INTERIM UNAUDITED FINANCIAL INFORMATION:
The accompanying interim unaudited financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
may have been condensed or omitted pursuant to such rules and regulations,
although management believes that the disclosures are adequate to make the
information presented not misleading. In the opinion of management, all
adjustments and eliminations, consisting only of normal, recurring adjustments,
necessary to present fairly the financial position of the Company as of June 30,
1998 and 1997, and the results of its operations and cash flows for the six
months ended June 30, 1998 and 1997, have been included. The results of
operations for such interim periods are not necessarily indicative of the
results of the full year.
AFFILIATE INVESTMENTS:
Investments in partnerships and limited liability companies are accounted
for by the equity method. Pursuant to the equity method, the Company's original
investments were recorded at cost and adjusted by the Company's share of
earnings or losses in these entities. The Company's share of earnings (losses)
from these entities is reflected in income as earned and distributions are
credited against investments when distributed. Additionally, under the equity
method of accounting, losses generated by the underlying entities are recognized
to the extent of the Company's investment.
FIXED ASSETS AND DEPRECIATION:
The furniture, fixtures, transportation equipment, computer equipment,
leasehold improvements, and artwork, are recorded at cost. Depreciation of
computer equipment and furniture, fixtures and transportation equipment is
computed using the straight-line method over estimated useful lives ranging from
five to twelve years. Leasehold improvements are amortized using the
straight-line method over their useful lives not to exceed the terms of the
respective leases. Maintenance and repairs are charged to expense as incurred.
CASH AND CASH EQUIVALENTS:
Cash and cash equivalents consist of highly liquid investments with original
maturities of three months or less from the date acquired. All of the Company's
cash is deposited with one major banking institution.
F-24
<PAGE>
WILLIAM WILSON & ASSOCIATES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
Management has estimated the fair value of its financial instruments.
Considerable judgment is required in interpreting market data in order to
develop estimates of the fair value of the Company's financial instruments.
Accordingly, the estimated values are not necessarily indicative of the amounts
that could be realized in current market exchanges. For those financial
instruments for which it is practical to estimate value, management believes
that the carrying amounts of the Company's financial instruments reasonably
approximate their fair value at December 31, 1997 and 1996.
IMPAIRMENT OF LONG-LIVED ASSETS:
In 1995, Statement of Financial Accounting Standards No. 121 (SFAS 121),
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF was issued. This statement requires that companies review
long-lived assets and certain identifiable intangibles for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. If the carrying amount of the asset exceeds its
estimated undiscounted net cash flow before interest, the Company must recognize
an impairment loss equal to the difference between its carrying amount and its
current value. The Company does not believe any of its long-lived assets have
been impaired.
REVENUE RECOGNITION:
Construction revenue is recognized using the percentage-of-completion
method. Under this method, contract revenue is recognized based upon the
estimated stage of physical completion of individual contracts. Losses on
contracts are recognized as soon as such losses can be estimated. The
classification of construction contract-related current assets and current
liabilities is determined substantially on a one-year realization and
liquidation cycle, although the length of the Company's contracts may exceed one
year. Costs in excess of billings (unbilled) and billings in excess of costs
arise from timing differences between billings to owners and revenue recognized
on the percentage-of-completion basis.
Real estate leasing commissions are generally recognized when the Company
has possession of the signed lease agreement and the earlier of receipt of
payment or upon tenant occupation of the leased premises. All other commissions
and fees are recognized at the time the related services have been performed by
the Company, and no future contingencies exist.
INCOME TAXES:
Pursuant to the Company's tax status as a Subchapter S corporation, federal
and state income tax regulations require that the income of the Company be
included in the income tax returns of the
F-25
<PAGE>
WILLIAM WILSON & ASSOCIATES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
shareholders. Accordingly, no provision for federal income taxes has been made
in the financial statements; however, state regulations impose a 1.5% income tax
on Subchapter S corporations which is included in office and administrative
expense due to its immaterial nature.
EARNINGS PER SHARE:
The computation of earnings per share is based upon the weighted average
number of shares outstanding during the period. The Company did not have any
potentially dilutive securities outstanding during the periods presented.
2. ACCOUNTS RECEIVABLE:
Accounts receivable-contracts consist of amounts due the Company related to
suite improvement construction projects. At December 31, 1997 and 1996, accounts
receivable from contracts consisted of the following:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Billed............................................................ $ 7,852,138 $ 3,647,657
Unbilled.......................................................... 263,194 293,295
------------ ------------
$ 8,115,332 $ 3,940,952
------------ ------------
------------ ------------
</TABLE>
Accounts receivable-other consisted of the following at December 31, 1997
and 1996:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Reimbursables--other.............................................. $ 629,687 $ 1,509,805
Reimbursables--salaries........................................... 1,434,313 1,112,221
Asset management fees............................................. 1,132,426 738,660
Leasing commissions............................................... 842,900 332,509
Development fees.................................................. 691,067 274,317
Acquisition fees.................................................. 205,087 238,405
Management fees................................................... 281,984 54,838
Other............................................................. 428,029 159,667
------------ ------------
$ 5,645,493 $ 4,420,422
------------ ------------
------------ ------------
</TABLE>
Reimbursables represent costs incurred by the Company that are passed
through to properties under management or to related parties.
F-26
<PAGE>
WILLIAM WILSON & ASSOCIATES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. FIXED ASSETS:
Fixed assets, at cost, consisted of the following at December 31, 1997 and
1996:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Furniture, fixtures, and transportation equipment................. $ 2,607,607 $ 2,198,200
Computer equipment................................................ 1,394,796 825,852
Leasehold improvements............................................ 81,261 46,302
Artwork........................................................... 53,700 53,700
------------ ------------
4,137,364 3,124,054
Less accumulated depreciation..................................... (1,000,624) (523,842)
------------ ------------
$ 3,136,740 $ 2,600,212
------------ ------------
------------ ------------
</TABLE>
4. AFFILIATE INVESTMENTS:
The Company has investments in certain limited partnerships and limited
liability companies (the "Affiliates") that are accounted for by the equity
method based on the Company's significant influence on the Affiliate. Each
Affiliate may hold interests in other partnerships or limited liability
companies whose purpose is to purchase and operate commercial properties in the
Western United States. The Company held interests in the following entities at
December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
% OWNERSHIP % OWNERSHIP
----------------- -----------------
<S> <C> <C>
Mission Bay Golf Center.......................................... 2 2
Opportunity Capital Partners, L.P................................ 1 1
Opportunity Capital Partners II, L.L.C........................... 2 2
Opportunity Capital Partners III, L.L.C.......................... 2 8
Opportunity Capital Partners IV, L.L.C........................... 5 --
POP Investors.................................................... -- 23
Shores Development, L.L.C........................................ -- 30
Wilson Bayhill Associates........................................ -- 39
Wilson Centrum Partners.......................................... 1 1
Wilson Centrum III Partners...................................... 1 1
Wilson Centrum IV Partners....................................... 27 27
Wilson Centrum V Partners........................................ 27 27
W.G.--Bayhill Five Partners...................................... 3 3
W.G.--Bayhill VII, L.P........................................... 50 50
W.G. Chili's L.P................................................. 8 8
W.G.W. Hotel Partners............................................ 1 1
</TABLE>
F-27
<PAGE>
WILLIAM WILSON & ASSOCIATES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. AFFILIATE INVESTMENTS: (CONTINUED)
A summary of the combined financial condition and results from operations of
the Affiliates as of and for the years ended December 31, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Investments in affiliates:
Assets....................................................... $ 10,168,179 $ 13,510,348
Liabilities.................................................. $ 175,391 $ 1,204,055
Affiliate income............................................. $ 853,775 $ 814,176
</TABLE>
5. LINE OF CREDIT:
At December 31, 1997, the Company had a $3,000,000 unsecured line-of-credit
with a maturity date of November 16, 1998 and an outstanding balance of
$1,810,736. The Company was a co-borrower with one of the shareholders of the
Company on this unsecured line-of-credit. The line-of-credit bears interest at
the bank's reference rate plus .25%. The interest rate at December 31, 1997 was
9.25%. The line-of-credit agreement requires the Company to maintain tangible
net worth of $4,000,000 and liquidity, as defined, of $4,000,000 in aggregate
with the co-borrower. In January 1998 the company increased the unsecured line-
of-credit balance to $5,000,000.
At December 31, 1996, the Company was a co-borrower with one of the
shareholders of the Company on a $10,000,000 unsecured line-of-credit with an
outstanding balance of $5,458,296 and a maturity date of July 15, 1998. The
line-of-credit had a revolving feature which allowed the Company to borrow up to
$10,000,000. The revolving feature expired on July 15, 1997. The line-of-credit
bore interest at the bank's reference rate plus .25%. The interest rate at
December 31, 1996 was 9.0%. The line-of-credit agreement required the Company to
maintain tangible net worth of $2,250,000 and liquidity, as defined, of
$6,000,000 in aggregate with the co-borrower. This line-of-credit was repaid in
full during 1997.
F-28
<PAGE>
WILLIAM WILSON & ASSOCIATES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT:
The Company had the following obligations outstanding at December 31, 1997
and 1996:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Term loan collateralized by personal property due in monthly
principal installments of $14,166 plus interest through July 1,
2000, with the remaining balance of $864,206 due at maturity on
August 1, 2000. The loan bears interest at a fixed rate of
8.61%........................................................... $ 1,303,352 $ 1,473,344
Term loan collateralized by personal property due in monthly
principal installments of $8,333 plus interest through January
1, 1998, with the remaining balance of $216,678 due at maturity
on February 1, 1998. The loan bears interest at a fixed rate of
9.89%. The loan was paid in full before February 1, 1998........ 216,678 316,674
Auto loan collateralized by personal property is due in monthly
principal installments plus interest in the amount of $390
through November 1, 1997. The loan bears interest at a fixed
rate of 8.50%................................................... -- 4,219
Auto loan collateralized by personal property is due in monthly
principal installments plus interest in the amount of $1,506
through May 28, 2001. The loan bears interest at a fixed rate of
8.9%............................................................ 53,077 --
------------ ------------
Subtotal third-party.............................................. 1,573,107 1,794,237
Note payable to a shareholder bears interest only at a fixed rate
of 6.65% which is due by December 31 each year through December
31, 2006. The entire principal balance and all unpaid interest
is due on December 31, 2007..................................... 1,124,348 --
------------ ------------
Total notes payable............................................... 2,697,455 1,794,237
Less current portion.............................................. (479,926) (273,748)
------------ ------------
Total long-term debt.............................................. $ 2,217,529 $ 1,520,489
------------ ------------
------------ ------------
</TABLE>
F-29
<PAGE>
WILLIAM WILSON & ASSOCIATES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT, CONTINUED:
Principal payments required in future years are as follows:
<TABLE>
<S> <C>
1998............................................................ $ 479,926
1999............................................................ 185,190
2000............................................................ 979,974
2001............................................................ 7,365
2002............................................................ --
Thereafter...................................................... 1,045,000
---------
Total $2,697,455
---------
---------
</TABLE>
7. COMMITMENT AND CONTINGENCY:
The Company is also a co-borrower on a $8,000,000 term loan with a related
entity and one of the shareholders of the Company. The proceeds of the loan were
used by the related entity and; therefore no liability has been recorded by the
Company. However, if the related entity were to default on payment of the loan,
the Company would be liable for its repayment (Note 9).
8. EMPLOYEE BENEFITS:
The Company has a qualified 401(k) plan that covers substantially all
eligible employees. The annual contribution is subject to approval by the
Company's Management Committee. The contributions for the years ended December
31, 1997, 1996 and 1995 were $499,524, $391,654 and $300,000, respectively.
9. RELATED PARTY TRANSACTIONS:
Balances with related parties, primarily affiliated entities, shareholders
and key employees, included in the financial statements are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Accounts receivable--contracts.................. $ 901,662 $ 1,117,286 $ 1,169,806
Accounts receivable--other...................... 5,221,609 4,415,560 990,760
Notes receivable, related party................. 4,046,232 326,222 4,056,062
Notes payable, related party.................... 1,124,348 -- --
Accrued expenses................................ 358,051 492,947 378,864
Revenue......................................... 24,071,879 24,203,809 20,602,383
Expenses........................................ 6,382,758 1,082,488 716,886
</TABLE>
The Company had notes outstanding from employees in the amount of $190,317,
and $326,222 at December 31, 1997 and 1996. Proceeds of the notes were used to
purchase interests in related Partnerships. The notes are collateralized by
agreements in which the borrowers granted the Company a security interest in
each borrower's interest in the related partnership. The notes carry interest
rates between 8% and 10%. Principal or interest payments are not required to be
made until 10 days after the employee receives a distribution from the related
company or partnership.
F-30
<PAGE>
WILLIAM WILSON & ASSOCIATES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. RELATED PARTY TRANSACTIONS: (CONTINUED)
The Company had notes receivable from shareholders of $2,085,134 and
$717,655 at December 31, 1997 and 1996, respectively, which have been classified
as a component of equity. The Company earned interest income on these notes of
$82,727 and $163,906 during 1997 and 1996, respectively.
In September 1997, the Company sold certain investments in partnerships to
an affiliate in exchange for a note receivable for $9,838,000. The note bears
interest at 6.25% which is due by September each year through September 9, 2005.
The entire principal balance and all unpaid interest is due on September 9,
2006. During 1997 the Company earned $139,044 in interest on the note and
received payments of $8,000,000. The remaining balance due on the note at
December 31, 1997 was $1,977,044 and is included in note receivable, related
parties in the accompanying balance sheets.
Additionally during 1997, the Company advanced $1,671,407 under a note
receivable to an affiliate which bears interest at a floating rate based on the
Company's borrowing rate. The interest rate at December 31, 1997 was 9.25% per
annum. During 1997 the Company earned $15,083 in interest on the note receivable
and received $133,041 in repayments. The remaining balance due on the note at
December 31, 1997 was $1,553,449.
10. OPERATING LEASES:
The Company has several operating leases for its office space with
affiliates which expire at various times through May 2002. Future minimum
payments by year after December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998............................................................ $ 576,971
1999............................................................ 576,971
2000............................................................ 576,971
2001............................................................ 167,828
2002............................................................ 40,286
---------
$1,939,027
---------
---------
</TABLE>
11. EARNINGS PER SHARE:
The following table presents the basic and diluted earnings per share
calculations for the years ended December 31:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
<S> <C> <C> <C>
1997 1996 1995
------------ ------------ ------------
Numerator:
Earnings available to common shares............... $ 3,883,738 $ 2,805,965 $ 1,710,826
------------ ------------ ------------
------------ ------------ ------------
Denominator:
Basic and diluted:
Weighted average shares outstanding............. 55,556 54,630 53,704
------------ ------------ ------------
------------ ------------ ------------
Earnings available per common share
Basic and diluted:
Earnings available per common share............. $ 69.91 $ 51.36 $ 31.86
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-31
<PAGE>
WILLIAM WILSON & ASSOCIATES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. EARNINGS PER SHARE: (CONTINUED)
The following table presents the basic and diluted earnings per share
calculations for the three months ended March 31:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------
<S> <C> <C>
1998 1997
------------ ------------
Numerator:
Earnings available to common shares............................. $ 2,709,792 $ 1,229,256
------------ ------------
------------ ------------
Denominator:
Basic and diluted:
Weighted average shares outstanding......................... 55,556 55,556
------------ ------------
------------ ------------
Earnings available per common share
Basic and diluted:
Earnings available per common share........................... $ 48.78 $ 22.13
------------ ------------
------------ ------------
</TABLE>
F-32
<PAGE>
THE PRUNEYARD HOTEL
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
1998 1997 1997 1996
------------- ------------- ------------- -------------
ASSETS
Hotel property, at cost:
Land.............................................. $ 1,343,710 $ 1,343,710 $ 1,343,710 $ 1,343,710
Buildings and improvements........................ 9,787,307 9,787,307 9,787,307 9,787,307
Furniture, fixtures and equipment................. 478,888 478,888 478,888 478,888
------------- ------------- ------------- -------------
11,609,905 11,609,905 11,609,905 11,609,905
Less: accumulated depreciation.................... 1,399,081 1,064,398 1,231,739 897,056
------------- ------------- ------------- -------------
Construction in progress............................ 584,596 -- -- --
------------- ------------- ------------- -------------
Net hotel property............................ 10,795,420 10,545,507 10,378,166 10,712,849
Cash and cash equivalents........................... 972,802 954,603 467,904 791,329
Other assets........................................ 890,558 624,891 508,466 490,081
------------- ------------- ------------- -------------
Total assets.................................. $ 12,658,780 $ 12,125,001 $ 11,354,536 $ 11,994,259
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
LIABILITIES AND MEMBERS' EQUITY
Note payable........................................ $ 5,693,099 $ 5,746,037 $ 5,720,306 $ 5,770,342
Other liabilities................................... 381,430 784,657 471,972 865,068
------------- ------------- ------------- -------------
Total liabilities............................. 6,074,529 6,530,694 6,192,278 6,635,410
Members' equity..................................... 6,584,251 5,594,307 5,162,258 5,358,849
------------- ------------- ------------- -------------
Total liabilities and members' equity......... $ 12,658,780 $ 12,125,001 $ 11,354,536 $ 11,994,259
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE>
THE PRUNEYARD HOTEL
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
-------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C>
1998 1997 1997 1996 1995
------------ ------------ ------------ ------------ ------------
Revenue:
Hotel operating income................... $ 2,712,933 $ 2,429,772 $ 4,932,424 $ 4,304,595 $ 3,644,686
------------ ------------ ------------ ------------ ------------
Total operating revenue................ 2,712,933 2,429,772 4,932,424 4,304,595 3,644,686
Expenses:
Interest................................. 223,708 230,509 461,017 500,139 516,321
Depreciation and amortization............ 175,011 175,011 350,021 350,021 350,021
Property operating costs................. 668,206 606,528 1,217,127 1,139,012 1,058,853
Utilities................................ 46,798 53,827 115,599 124,795 133,544
Repairs and maintenance.................. 101,170 113,710 213,728 238,994 202,716
Property taxes........................... 44,722 44,522 88,982 86,313 83,723
Management fees.......................... 135,551 120,883 246,622 214,997 182,232
General and administrative............... 314,769 314,415 590,682 632,086 666,377
------------ ------------ ------------ ------------ ------------
Total expenses......................... 1,709,935 1,659,405 3,283,778 3,286,357 3,193,787
------------ ------------ ------------ ------------ ------------
Net income........................... $ 1,002,998 $ 770,367 $ 1,648,646 $ 1,018,238 $ 450,899
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE>
THE PRUNEYARD HOTEL
STATEMENTS OF CHANGES IN MEMBERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
TOTAL
-------------
<S> <C>
Equity balance, January 1, 1995.................................................................... $ 6,368,395
Intra-company equity transfer...................................................................... (1,081,883)
Net income......................................................................................... 450,899
-------------
Equity balance, December 31, 1995.................................................................. 5,737,411
Intra-company equity transfer...................................................................... (1,396,800)
Net income......................................................................................... 1,018,238
-------------
Equity balance, December 31, 1996.................................................................. 5,358,849
Contributions...................................................................................... 120,000
Intra-company equity transfer...................................................................... (1,965,237)
Net income......................................................................................... 1,648,646
-------------
Capital balance, December 31, 1997................................................................. 5,162,258
Intra-company equity transfer...................................................................... 418,995
Net income......................................................................................... 1,002,998
-------------
Equity balance, March 31, 1998..................................................................... $ 6,584,251
-------------
-------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE>
THE PRUNEYARD HOTEL
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
------------------------ ----------------------------------------
1998 1997 1997 1996 1995
------------ ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income................................. $ 1,002,998 $ 770,367 $ 1,648,646 $ 1,018,238 $ 450,899
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............ 175,011 175,011 350,021 350,021 350,021
Loan fee amortization.................... 6,272 6,272 12,545 12,545 12,545
Changes in operating assets and
liabilities:
Other assets........................... (396,034) (148,751) (46,268) (55,953) (258,738)
Accounts payable and accrued
liabilities.......................... (90,541) (80,411) (393,096) 377,133 85,436
------------ ---------- ------------ ------------ ------------
(305,292) (47,879) (76,798) 683,746 189,264
------------ ---------- ------------ ------------ ------------
Net cash provided by operating
activities......................... 697,706 722,488 1,571,848 1,701,984 640,163
------------ ---------- ------------ ------------ ------------
Cash flows from investing activities:
Improvements to assets..................... (584,596) -- -- -- --
------------ ---------- ------------ ------------ ------------
Net cash used in investing
activities......................... (584,596) -- -- -- --
------------ ---------- ------------ ------------ ------------
Cash flows from financing activities:
Draws on note payable...................... -- -- -- -- 604,500
Principal payments on note payable......... (27,207) (24,305) (50,036) (36,877) (152,016)
Contributions from members................. -- 60,000 120,000 -- --
Intra-company equity transfer.............. 418,995 (594,909) (1,965,237) (1,396,800) (1,081,883)
------------ ---------- ------------ ------------ ------------
Net cash provided by (used in)
financing activities............... 391,788 (559,214) (1,895,273) (1,433,677) (629,399)
------------ ---------- ------------ ------------ ------------
Cash and cash equivalents, beginning of
year....................................... 467,904 791,329 791,329 523,022 512,258
------------ ---------- ------------ ------------ ------------
Cash and cash equivalents, end of year....... $ 972,802 $ 954,603 $ 467,904 $ 791,329 $ 523,022
------------ ---------- ------------ ------------ ------------
------------ ---------- ------------ ------------ ------------
Supplemental cash flow disclosure:
Interest paid.............................. $ 217,435 $ 224,236 $ 448,472 $ 487,594 $ 503,776
------------ ---------- ------------ ------------ ------------
------------ ---------- ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE>
THE PRUNEYARD HOTEL
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION:
The Pruneyard Hotel (the "Hotel") is owned by Pruneyard Associates, LLC (the
"Company"), a limited liability company organized under the laws of the State of
California to succeed Pruneyard Associates, L.P. (the "Partnership"), which was
formed to acquire and own a shopping center, two office buildings, and the Hotel
located in Campbell, California (the "Properties"). RAR/CREL Pruneyard
Investors, L.P. ("RAR") and Opportunity Capital Partners, L.P. ("OCP") each hold
a 1% Class A member interest and participate in managing the Company.
Additionally, RAR also holds a Class B member interest of 59% and Office
Opportunity Fund I, L.P. ("Fund I") holds a 39% Class B member interest.
BASIS OF PRESENTATION:
The Pruneyard Hotel does not constitute a legal entity, but rather
represents the carve-out of the assets, liabilities, and members' equity as well
as the results of operations attributed to the Hotel from the financial
statements of the Company. When identifiable directly to the Hotel, the accounts
have been included in these financial statements at the full value as recognized
in the financial statements of the Company. When not directly identifiable to
the Hotel, management has allocated such accounts to the Hotel based on the
ratio of the account balance to the Hotel's relative cost to the Company in the
aggregate. Management believes that the method of allocation is reasonable.
REAL ESTATE ASSETS:
Hotel property is recorded at cost. Depreciation of building and
improvements is computed using the straight-line method based upon useful lives
ranging from five to forty years and three to ten years for furniture, fixtures,
and equipment.
In 1996, the Company adopted Statement of Financial Accounting Standards No.
121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF, which requires impairment losses to be recorded on
long-lived assets used in operations when indication of impairment is present
and the estimated undiscounted cash flows to be generated by those assets are
less than the carrying amount of the assets. At December 31, 1997, management
believes that the sum of the expected future undiscounted cash flows, excluding
interest charges, for the hotel property is greater than the carrying amount. No
such impairment losses have been recognized to date.
CASH AND CASH EQUIVALENTS:
The Company classifies highly liquid investments with original maturities of
three months or less from the date acquired as cash equivalents.
AMORTIZATION:
Loan fees are deferred and amortized by a method approximating the effective
yield method over the term of the related debt. Organization costs are deferred
and amortized by the straight-line method over five years.
F-37
<PAGE>
THE PRUNEYARD HOTEL
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
REVENUE RECOGNITION:
Revenue is recognized as earned, generally defined as the date upon which a
guest occupies a room and utilizes the Hotel's services. Ongoing credit
evaluations are performed and potential credit losses are expensed at the time
the accounts receivable are estimated to be uncollectible. Historically, credit
losses have not been material to the Hotel's results of operations.
INCOME TAXES:
No provision for income tax expense or benefit is made since the Company's
members report their respective share of the income or loss on their individual
income tax returns and state income taxes are immaterial.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles 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 dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
CONCENTRATIONS:
At December 31, 1997 and 1996, the Company had amounts in a bank that was in
excess of federally insured amounts.
The Hotel is located in Campbell, California. The hotel industry is highly
competitive and the Hotel is subject to competition from other hotels for
guests. The Hotel competes for guests primarily with other similar hotels in its
immediate vicinity and other similar hotels in its geographic market. Management
believes that location, the quality of the hotel and services provided, and
price are the principal competitive factors affecting its continuing operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
For those financial instruments for which it is practical to estimate value,
management believes that the carrying amounts of the Hotel's financial
instruments reasonably approximate their fair value at December 31, 1997 and
1996.
SEASONALITY:
The hotel industry is seasonal in nature. Seasonal variations in revenues at
the Hotel may cause quarterly fluctuations in the Hotel's lease revenues.
INTERIM FINANCIAL INFORMATION:
The accompanying interim unaudited financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted
F-38
<PAGE>
THE PRUNEYARD HOTEL
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
accounting principles may have been condensed or omitted pursuant to such rules
and regulations, although management believes that the disclosures are adequate
to make the information presented not misleading. In the opinion of management,
all adjustments and eliminations, consisting only of normal, recurring
adjustments, necessary to present fairly the financial position of the Hotel as
of June 30, 1998 and 1997, and the results of its operations and cash flows for
the six months ended June 30, 1998 and 1997, have been included. The results of
operations for such interim periods are not necessarily indicative of the
results of the full year.
2. ALLOCATIONS TO MEMBERS:
Net profits and losses and cash available for distribution, as defined,
shall be allocated to the members in accordance with the order and priority
prescribed in the Company's LLC Agreement. For purposes of the accompanying
financial statements, members' equity has been allocated to the Hotel under the
allocation methodology described in Note 1.
Intra-company equity transfers represent the net cash flows between the
Hotel and the Company.
3. NOTE PAYABLE:
On April 28, 1994, the Company obtained an $18,000,000 loan, collateralized
by a first deed of trust with assignment of rents, security agreement and
fixture filing on the Company's property and assignment of construction
contracts. The loan was amended on September 18, 1995, to allow the Company to
borrow up to $29,500,000, the additional proceeds of which could be disbursed by
the lender in connection with the renovation and improvement of the Company's
properties, subject to meeting certain requirements related to the construction
activities. The loan, as amended, is due in monthly installments of principal
and interest through May 2000 and bears interest at LIBOR plus 2.50% (7.88% at
December 31, 1997). Beginning May 1996, and annually thereafter, the monthly
installment is to be adjusted as a result of interest rate changes to fully
amortize the note balance plus accrued interest, if any, over a twenty-five year
period beginning April 1994. The amended loan agreement requires that the
outstanding principal balance is not to exceed 70% of the fair market value of
the Company's properties and that the Company must maintain a ratio of net
operating income to debt service of at least 1.35 to 1.0. RAR has guaranteed 60%
of the loan balance that exceeds $17,097,790, plus interest and other fees
associated with the loan. RAR guarantees this amount until occupancy of the
Properties reaches 85% and then the guarantee is reduced. Book value of the
notes approximates fair value. The loan balance at December 31, 1997 and 1996
was $28,810,589 and $29,204,575, respectively, of which $5,720,306 and
$5,770,342 has been allocated to the Hotel.
Principal payments required in future years are estimated as follows:
<TABLE>
<CAPTION>
THE COMPANY THE HOTEL
------------- ------------
<S> <C> <C>
1998............................................................. $ 426,272 $ 84,636
1999............................................................. 471,990 93,713
2000............................................................. 27,912,327 5,541,957
------------- ------------
$28,810,589... $ 5,720,306
------------- ------------
------------- ------------
</TABLE>
F-39
<PAGE>
THE PRUNEYARD HOTEL
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. COMMITMENTS:
The Company has entered into a management agreement with Wyndham Hotel
Company, Ltd., a Texas Limited Partnership ("Wyndham") to supervise, control,
maintain and operate the Hotel. The agreement is automatically extended for
consecutive one-year periods, subject to certain rights of termination as
defined in the management agreement. Under the terms of the agreement, Wyndham
receives an accounting fee payable monthly in the amount of $4,583. In addition,
Wyndham receives a monthly management fee in an amount equal to 2.75% of gross
revenues. A management incentive fee payable in an amount equal to 2.25% of
gross revenues shall be paid to Wyndham when net income for the year exceeds the
Net Income Minimum, as defined. For the years ended December 31, 1997, 1996, and
1995, total management fees paid to Wyndham amounted to $246,622, $214,997, and
$182,232, respectively, which have been included within hotel expenses.
Additionally, Wyndham has established a reserve equal to 3% of gross
revenues to cover the cost of additions to and substitutions, replacements and
renewals of furniture, fixtures and equipment and certain nonroutine repairs and
maintenance to the hotel, as well as a $75,000 reserve for working capital.
Total reserves, were $302,161 and $250,057, respectively, at December 31, 1997
and 1996.
F-40
<PAGE>
ANNEX A
CONTRIBUTION AGREEMENT
AND
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
WILLIAM WILSON & ASSOCIATES,
a California corporation,
AND
THE ENTITIES IDENTIFIED ON SCHEDULE 1
AS THE "GP PARTIES"
on the one hand,
and
CORNERSTONE PROPERTIES INC.,
a Nevada corporation,
and
CORNERSTONE PROPERTIES LIMITED PARTNERSHIP,
a Delaware limited partnership,
on the other hand.
dated as of June 22, 1998
A-1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C> <C>
RECITALS........................................................................................................ A-14
1. CONTRIBUTION TRANSACTIONS............................................................................ A-16
1.1 Sale or Contribution by Investors......................................................... A-16
1.2 Threshold Contribution Transactions; Partial Interests.................................... A-19
1.3 Determination and Allocation of Consideration............................................. A-21
1.4 Assumption or Prepayment of Mortgage Indebtedness......................................... A-34
1.5 Certain Closing Costs..................................................................... A-36
1.6 Cash Consideration........................................................................ A-36
1.7 Designation of Issuance of Equity Securities.............................................. A-37
1.8 Distribution of Consideration............................................................. A-37
1.9 Withdrawn Project and Net Project Value Adjustments....................................... A-37
1.10 Guaranty.................................................................................. A-39
1.11 Several Liability......................................................................... A-40
1.12 Withholding............................................................................... A-40
2. THE MERGER........................................................................................... A-40
2.1 Merger of WW&A into Cornerstone........................................................... A-40
2.2 Effective Time; Closing................................................................... A-40
2.3 Effect of the Merger...................................................................... A-40
2.4 Articles of Incorporation and Bylaws of the Surviving Corporation......................... A-40
2.5 Pre-Closing Adjustments................................................................... A-41
2.6 Conversion of WW&A Shares................................................................. A-41
2.7. Breach of Representations and Warranties.................................................. A-42
2.8 Cornerstone Common Stock.................................................................. A-43
2.9 Withholding............................................................................... A-43
2.10 Holdback.................................................................................. A-43
2.11 Tax Consequences.......................................................................... A-43
2.12 Further Action............................................................................ A-44
3. REPRESENTATIONS AND WARRANTIES OF THE GP PARTIES..................................................... A-44
3.1 Representations and Warranties............................................................ A-44
3.2 Definition of Knowledge................................................................... A-55
3.3 Remedies for Breach of Representation and Warranty........................................ A-55
3.4. Joinder of Related Entities............................................................... A-56
4. REPRESENTATIONS AND WARRANTIES OF WW&A............................................................... A-56
4.1 Representations and Warranties............................................................ A-56
4.2 Definition of Knowledge................................................................... A-62
4.3 Remedies for Breach of Representation and Warranty........................................ A-62
5. REPRESENTATIONS AND WARRANTIES OF THE CORNERSTONE PARTIES............................................ A-63
5.1 Representations and Warranties............................................................ A-63
5.2 Definition of Knowledge................................................................... A-74
5.3 Remedies for Breach of Representation and Warranty........................................ A-74
6. PRE-CLOSING COVENANTS................................................................................ A-74
6.1 Conduct of the Business of the Wilson Parties............................................. A-74
6.2 Wilson Acquisitions....................................................................... A-78
6.3 Intentionally Omitted..................................................................... A-79
</TABLE>
A-2
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C> <C>
6.4 Intentionally Omitted..................................................................... A-79
6.5 Conduct of the Business of the Cornerstone Parties........................................ A-80
6.6 Preparation of the Information Statement; Proxy Statement; Shareholders Meeting........... A-83
6.7 Good Faith Efforts........................................................................ A-84
6.8 Good Faith Cooperation.................................................................... A-84
6.9 Public Announcements...................................................................... A-84
6.10 Government Filings........................................................................ A-85
6.11 Time of Closing........................................................................... A-85
6.12 No Solicitation........................................................................... A-85
6.13 Confidentiality........................................................................... A-86
6.14 Access to Information..................................................................... A-86
6.15 Standstill Agreement...................................................................... A-87
7. ADDITIONAL AGREEMENTS................................................................................ A-87
7.1 Restrictions on Dispositions of Related Projects Following Closing........................ A-87
7.2 Investor Basis Protection................................................................. A-88
7.3 Listing of Shares......................................................................... A-88
7.4 Registration and Lock Up of Shares........................................................ A-88
7.5 Agreement of Limited Partnership of Operating Partnership................................. A-89
7.6 Payment of 1998 Taxes..................................................................... A-89
7.7 Allocation Method......................................................................... A-89
7.8 Restructuring of Noncustomary Services.................................................... A-89
7.9 Cooperation on Tax Structuring Matters.................................................... A-90
7.10 Preparation of Final Tax Returns: Section 754 Elections................................... A-90
7.11 Survival.................................................................................. A-90
8. EMPLOYEE MATTERS..................................................................................... A-90
8.1 Employment of the Executives.............................................................. A-90
8.2 WW&A's Organization and Staff............................................................. A-92
9. CLOSING.............................................................................................. A-93
9.1 The Closing............................................................................... A-93
9.2 Deliveries at the Closing by the Wilson Parties........................................... A-93
9.3 Deliveries at the Closing by the Cornerstone Parties...................................... A-95
9.4 Project Closing Adjustments............................................................... A-97
9.5 Wilson Closing Adjustments................................................................ A-99
9.6 Expenses.................................................................................. A-101
9.7 No Warranties............................................................................. A-101
10. CONDITIONS PRECEDENT TO CLOSING...................................................................... A-104
10.1 Conditions to Obligations of the Wilson Parties........................................... A-104
10.2 Conditions to Obligations of the Cornerstone Parties...................................... A-106
11. INDEMNIFICATION; CLAIMS AGAINST HOLDBACK............................................................. A-107
11.1 By the Wilson Parties..................................................................... A-107
11.2 By the Cornerstone Parties................................................................ A-108
11.3 Cooperation............................................................................... A-108
11.4 Claims for Indemnification................................................................ A-109
11.5 Limitation on Indemnification............................................................. A-109
11.6 Survival of Representations, Warranties and Covenants..................................... A-110
11.7 Disputes.................................................................................. A-110
</TABLE>
A-3
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C> <C>
11.8 Escrow Fund............................................................................... A-110
11.9 Limitation on Obligations................................................................. A-111
11.10 Wilson Representative..................................................................... A-111
12. DISPUTE RESOLUTION................................................................................... A-111
12.1 Disputes.................................................................................. A-111
12.2 Mediation................................................................................. A-112
12.3 Venue for Actions......................................................................... A-112
12.4 Legal Fees................................................................................ A-112
12.5 Emergency Injunctive Relief............................................................... A-112
13. ASSIGNMENT........................................................................................... A-112
14. NO BROKERS........................................................................................... A-113
15. CASUALTY LOSS........................................................................................ A-113
15.1 Maintenance of Insurance Policies......................................................... A-113
15.2 Casualties................................................................................ A-113
15.3 Interim Repairs........................................................................... A-113
15.4 Earthquake Casualty....................................................................... A-114
16. CONDEMNATION......................................................................................... A-114
17. DEFAULT AND REMEDIES................................................................................. A-114
17.1 Defaults.................................................................................. A-114
17.2 Remedies.................................................................................. A-114
18 TERMINATION.......................................................................................... A-115
18.1 Termination............................................................................... A-115
18.2 Effect of Termination..................................................................... A-116
19. NOTICES.............................................................................................. A-116
20. MISCELLANEOUS........................................................................................ A-117
20.1 Limited Survival of Representations and Warranties........................................ A-117
20.2 Entire Agreement; No Third-Party Rights................................................... A-117
20.3 Amendment................................................................................. A-117
20.4 Governing Law............................................................................. A-117
20.5 Section Headings.......................................................................... A-117
20.6 Severability.............................................................................. A-117
20.7 No Other Rights or Obligations............................................................ A-117
20.8 Counterparts.............................................................................. A-118
20.9 Construction.............................................................................. A-118
20.10 Representatives........................................................................... A-118
20.11 Interpretation............................................................................ A-119
20.12 Updates to Schedule....................................................................... A-119
20.13 Special Closing Expense Credit............................................................ A-119
20.14 Special Post-Execution Provision.......................................................... A-119
</TABLE>
A-4
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
AAA...................................................................................................... A-112
Wilson Acquisition Loan.................................................................................. A-79
Wilson Acquisitions...................................................................................... A-78
Action................................................................................................... A-46
ADA...................................................................................................... A-46
Additional Pruneyard Consideration....................................................................... A-29
Agreement................................................................................................ A-14
Allocable Share.......................................................................................... A-22
Ancillary Agreements..................................................................................... A-44
Applicable Rate.......................................................................................... A-79
Approved Additional Project.............................................................................. A-78
Assumed Loans............................................................................................ A-34
Available Cash Amount.................................................................................... A-36
Bay Park................................................................................................. A-31
Bay Park Completion...................................................................................... A-31
Bay Park Leases.......................................................................................... A-31
Bay Park Loan Documents.................................................................................. A-31
Bay Park Plans........................................................................................... A-31
Board.................................................................................................... A-15
Built-in Gain............................................................................................ A-88
Capital Expenditures..................................................................................... A-76
Casualty................................................................................................. A-113
Casualty Notice.......................................................................................... A-113
CERCLA................................................................................................... A-47
CERCLIS.................................................................................................. A-47
Certificates of Merger................................................................................... A-40
Change in Control Transaction............................................................................ A-105
CIC Value................................................................................................ A-41
Claim.................................................................................................... A-109
Claim Notice............................................................................................. A-109
Claim Notice Date........................................................................................ A-110
Closing.................................................................................................. A-15
Closing Balance of the Pruneyard Loan.................................................................... A-29
Closing Costs............................................................................................ A-36
Closing Date............................................................................................. A-93
Code..................................................................................................... A-43
Company Charter.......................................................................................... A-63
Competitive Activities................................................................................... A-91
Complete Transaction..................................................................................... A-19
Complete Transaction Project............................................................................. A-19
Completed Projects....................................................................................... A-54
Concar Ground Lease...................................................................................... A-30
Condemnation Notice...................................................................................... A-114
Condemned Project........................................................................................ A-114
Confidential Information................................................................................. A-86
Consent.................................................................................................. A-17
Consideration............................................................................................ A-15
</TABLE>
A-5
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Contemplated Transactions................................................................................ A-83
Cornerstone.............................................................................................. A-14
Cornerstone's Knowledge.................................................................................. A-74
Cornerstone Benefit Plans................................................................................ A-72
Cornerstone Competing Transaction........................................................................ A-85
Cornerstone Covered Party................................................................................ A-108
Cornerstone Employee Stock Plans......................................................................... A-64
Cornerstone Ground Lease................................................................................. A-73
Cornerstone Group........................................................................................ A-14
Cornerstone Indemnified Party............................................................................ A-107
Cornerstone Losses....................................................................................... A-108
Cornerstone Management Contracts......................................................................... A-70
Cornerstone Material Adverse Change...................................................................... A-66
Cornerstone Material Contracts........................................................................... A-70
Cornerstone Options...................................................................................... A-64
Cornerstone Parties...................................................................................... A-14
Cornerstone Parties Representatives...................................................................... A-119
Cornerstone Permitted Encumbrances....................................................................... A-67
Cornerstone Preferred Shares............................................................................. A-64
Cornerstone Property..................................................................................... A-67
Cornerstone Pruneyard Investment......................................................................... A-29
Cornerstone Rent Roll.................................................................................... A-73
Cornerstone Shareholder Approvals........................................................................ A-65
Cornerstone Shareholders................................................................................. A-15
Cornerstone Shareholders' Meeting........................................................................ A-83
Cornerstone Subsidiary................................................................................... A-63
Cornerstone Threshold Consent Date....................................................................... A-107
Cornerstone Threshold Consents........................................................................... A-106
Cornerstone Transaction Costs............................................................................ A-101
Crocker.................................................................................................. A-20
current actual knowledge................................................................................. A-55
damaged Property......................................................................................... A-113
Debited Wilson Costs..................................................................................... A-22
Default.................................................................................................. A-114
Development Budget and Schedule.......................................................................... A-54
Development Contracts.................................................................................... A-54
Development Costs........................................................................................ A-31
Development Projects..................................................................................... A-54
DIC...................................................................................................... A-53
Dispute.................................................................................................. A-111
Dispute Notice........................................................................................... A-111
Disputing Parties........................................................................................ A-111
Distributable Cash....................................................................................... A-79
Earthquake Casualty...................................................................................... A-114
Effective Price.......................................................................................... A-23
Effective Time........................................................................................... A-40
Electing Dissenting Investor............................................................................. A-107
Eligible................................................................................................. A-16
Employment Letter........................................................................................ A-58
Encumbrances............................................................................................. A-45
</TABLE>
A-6
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Environment.............................................................................................. A-47
Environmental Claims..................................................................................... A-47
Environmental Condition.................................................................................. A-48
Environmental Laws....................................................................................... A-48
Environmental Permits.................................................................................... A-48
Environmental Reports.................................................................................... A-46
Equity Securities........................................................................................ A-15
ERISA.................................................................................................... A-59
ERISA Affiliate of Cornerstone........................................................................... A-71
Escrow Agent............................................................................................. A-111
Escrow Agreement......................................................................................... A-110
Escrow Fund.............................................................................................. A-111
Estimated Bay Park Completion Costs...................................................................... A-31
Estimated POP-IX Completion Costs........................................................................ A-32
Estimated Pruneyard Inn Completion Costs................................................................. A-26
Estimated Pruneyard Place Completion Costs............................................................... A-26
Exchange Act............................................................................................. A-45
Excluded Assets.......................................................................................... A-42
Execution Date........................................................................................... A-14
Executives............................................................................................... A-90
Existing Project Debt.................................................................................... A-21
Financial Statement Date................................................................................. A-66
Fund Project............................................................................................. A-19
FUND-I................................................................................................... A-14
FUND-II.................................................................................................. A-14
FUND-III................................................................................................. A-14
FUND-IV.................................................................................................. A-14
FUND-IV Investors........................................................................................ A-99
Funds.................................................................................................... A-14
GAAP..................................................................................................... A-50
Governmental Authority................................................................................... A-45
Governmental Order....................................................................................... A-46
GP Parties............................................................................................... A-14
GP Party's Knowledge..................................................................................... A-55
Guaranty................................................................................................. A-39
Hazardous Materials...................................................................................... A-48
Holdback Amount.......................................................................................... A-37
HSR Act.................................................................................................. A-85
Included Dissenting Investors............................................................................ A-119
Indebtedness............................................................................................. A-50
Indemnified Party........................................................................................ A-108
Indemnitor............................................................................................... A-108
Indemnity Escrow Fund.................................................................................... A-110
Information Statement.................................................................................... A-83
Insurance Policies....................................................................................... A-113
Interests................................................................................................ A-15
Investor................................................................................................. A-14
Investor Contribution Agreement.......................................................................... A-19
Joint Ventures........................................................................................... A-14
Knowledge of WW&A........................................................................................ A-62
</TABLE>
A-7
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Knowledge of Cornerstone................................................................................. A-74
Knowledge of the GP Party................................................................................ A-55
Knowledge of the Operating Partnership................................................................... A-74
Law...................................................................................................... A-45
Lease Costs.............................................................................................. A-75
Liability................................................................................................ A-54
LIBOR.................................................................................................... A-79
Loan Assumption Documents................................................................................ A-35
Loan Parties............................................................................................. A-34
Losses................................................................................................... A-108
Major Casualty........................................................................................... A-113
Major Taking............................................................................................. A-114
Material Adverse Effect.................................................................................. A-44
Maximum Additional WW&A Indemnification Amount........................................................... A-110
Maximum Indemnification Amount........................................................................... A-110
Merger................................................................................................... A-40
Merger Shares............................................................................................ A-41
Net Project Value........................................................................................ A-21
Net Working Capital...................................................................................... A-100
Net Working Capital Deficit.............................................................................. A-100
Non-Controlled Joint Venture............................................................................. A-78
Non-Taxable Transaction.................................................................................. A-87
Non-Voting Stock Subs.................................................................................... A-93
Operating Partnership.................................................................................... A-120
Operating Partnership's Knowledge........................................................................ A-74
Ordinary Course.......................................................................................... A-75
Other Non-Voting Stock Sub............................................................................... A-93
Other Projects........................................................................................... A-19
Other Property Financials................................................................................ A-53
Other Rockwood Interests................................................................................. A-24
Part II Properties....................................................................................... A-88
Partially Participating Project.......................................................................... A-19
Participating Investors.................................................................................. A-16
Participating Loans...................................................................................... A-35
Participation Amount..................................................................................... A-35
Partnership Agreement.................................................................................... A-63
PBGC..................................................................................................... A-59
PCBs..................................................................................................... A-48
Permits.................................................................................................. A-46
Permitted Financings..................................................................................... A-77
Permitted Transactions................................................................................... A-82
Permitted Transferee..................................................................................... A-16
PGGM Registration Rights Agreement....................................................................... A-96
POP-IX................................................................................................... A-33
POP-IX Completion........................................................................................ A-33
POP-IX Leases............................................................................................ A-33
POP-IX Loan Documents.................................................................................... A-33
POP-IX Plans............................................................................................. A-33
Project.................................................................................................. A-14
Project Entity........................................................................................... A-14
</TABLE>
A-8
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Project Entity Material Adverse Change................................................................... A-54
Project Estimated Closing Accounting..................................................................... A-97
Project Final Closing Accounting......................................................................... A-99
Project Management Contracts............................................................................. A-49
Project Mortgage Agreements.............................................................................. A-49
Project Value............................................................................................ A-21
Project Value Adjustment Escrow Fund..................................................................... A-111
Project Value for Bay Park............................................................................... A-32
Project Value for POP-IX................................................................................. A-33
Property Financials...................................................................................... A-53
Property Restrictions.................................................................................... A-52
Proxy Statement.......................................................................................... A-65
Pruneyard................................................................................................ A-26
Pruneyard Closing Consideration.......................................................................... A-29
Pruneyard Escrow Fund.................................................................................... A-111
Pruneyard Holdback Amount................................................................................ A-30
Pruneyard Inn............................................................................................ A-26
Pruneyard Inn Budget..................................................................................... A-26
Pruneyard Inn Completion................................................................................. A-27
Pruneyard Inn Completion Costs........................................................................... A-27
Pruneyard Inn Expansion.................................................................................. A-27
Pruneyard Inn Plans...................................................................................... A-27
Pruneyard Loan........................................................................................... A-27
Pruneyard Loan Documents................................................................................. A-27
Pruneyard Participating Investors........................................................................ A-29
Pruneyard Place.......................................................................................... A-27
Pruneyard Place Budget................................................................................... A-27
Pruneyard Place Completion............................................................................... A-27
Pruneyard Place Completion Costs......................................................................... A-28
Pruneyard Place Development.............................................................................. A-28
Pruneyard Place Lease.................................................................................... A-28
Pruneyard Place Plans.................................................................................... A-28
Pruneyard Project Value.................................................................................. A-28
Pruneyard Shortfall Amount............................................................................... A-29
Registration Rights Agreement............................................................................ A-88
Reimbursement Amount..................................................................................... A-24
REIT..................................................................................................... A-14
Related Entities......................................................................................... A-44
Related Fund............................................................................................. A-44
Related Material Contracts............................................................................... A-49
Related Participating Investors.......................................................................... A-97
Related Project.......................................................................................... A-14
Related Project Entity................................................................................... A-14
Related Project Ownership Percentage..................................................................... A-99
Release.................................................................................................. A-48
Remedial Action.......................................................................................... A-49
Rent Roll................................................................................................ A-46
Repaid Loans............................................................................................. A-34
Restated Partnership Agreement........................................................................... A-89
Retained Properties...................................................................................... A-91
</TABLE>
A-9
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Returns.................................................................................................. A-52
Reviewed Leases.......................................................................................... A-46
Rockwood Contract........................................................................................ A-24
Rockwood Interests....................................................................................... A-24
Rockwood Loan............................................................................................ A-24
Rockwood Loan Agreement.................................................................................. A-24
Rockwood Loan Documents.................................................................................. A-24
Rockwood Project Entities................................................................................ A-23
Rockwood Projects........................................................................................ A-23
Rockwood Sellers......................................................................................... A-24
Scheduled Closing Date................................................................................... A-93
SEC...................................................................................................... A-65
SEC Documents............................................................................................ A-66
Securities Act........................................................................................... A-16
Share Issuance........................................................................................... A-64
Shares................................................................................................... A-15
Special Dividend......................................................................................... A-81
Supplement............................................................................................... A-21
Surplus Net Working Capital.............................................................................. A-100
Tax...................................................................................................... A-53
Taxes.................................................................................................... A-53
Threshold Amount......................................................................................... A-109
Transaction Agreements................................................................................... A-44
Transaction Costs........................................................................................ A-101
Transactions............................................................................................. A-14
Transfer and Gains Taxes................................................................................. A-45
Transition Plan.......................................................................................... A-90
Units.................................................................................................... A-15
USTs..................................................................................................... A-49
Voting Agreements........................................................................................ A-16
WWA Investors............................................................................................ A-23
WW&A..................................................................................................... A-14
WW&A Affiliated Interests................................................................................ A-19
WW&A Benefit Plans....................................................................................... A-59
WW&A Board............................................................................................... A-16
WW&A Company Value....................................................................................... A-41
WW&A Escrow Fund......................................................................................... A-110
WW&A Estimated Closing Accounting........................................................................ A-99
WW&A Final Closing Accounting............................................................................ A-100
WW&A Financial Statement Date............................................................................ A-61
WW&A Financial Statements................................................................................ A-61
WW&A Holdback Shares..................................................................................... A-43
WW&A Management Contracts................................................................................ A-58
WW&A Material Adverse Change............................................................................. A-61
WW&A Material Contracts.................................................................................. A-57
WW&A Net Project Prorations.............................................................................. A-100
WW&A Project Interests................................................................................... A-100
WW&A Shareholders........................................................................................ A-14
WW&A Shares.............................................................................................. A-41
WW&A's Knowledge......................................................................................... A-62
</TABLE>
A-10
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
WW&A Value Adjustment Escrow Fund........................................................................ A-111
WW&A Voting Agreement.................................................................................... A-16
Wlliam Wilson III, Employment Agreement.................................................................. A-91
Wilson Competing Transaction............................................................................. A-85
Wilson Costs............................................................................................. A-22
Wilson Covered Party..................................................................................... A-108
Wilson Ground Lease...................................................................................... A-52
Wilson Indemnified Party................................................................................. A-108
Wilson Losses............................................................................................ A-108
Wilson Parties........................................................................................... A-14
Wilson Permitted Encumbrances............................................................................ A-51
Wilson Threshold Consent Date............................................................................ A-105
Wilson Threshold Consents................................................................................ A-105
Wilson Transaction Costs................................................................................. A-101
Wilson Representative.................................................................................... A-17
Withdrawn Project........................................................................................ A-37
</TABLE>
A-11
<PAGE>
SCHEDULES AND EXHIBITS
<TABLE>
<CAPTION>
SCHEDULES
<S> <C>
1. Parties, Projects and Entities
1A GP Parties
1B Project Entities
1C Joint Ventures
1D Fund Projects
1E Other Projects
1.3(a) Project Information
1.3(b) Existing Project Debt
1.3(h) Allocations Regarding Rockwood
Pruneyard Inn Budget
1.3(i)(i)(1)
Pruneyard Inn Plans
1.3(i)(i)(2)
Pruneyard Place Budget
1.3(i)(i)(3)
Pruneyard Place Plans
1.3(i)(i)(4)
1.3(j) Concar Project
1.3(k) Bay Park Plans
1.3(l) POP-IX Plans
1.4(d) Participation Features
2.5 Pre-Closing WW&A Adjustments
2.6(b) WW&A Miscellaneous Interests
3.1 Exceptions to Representations and Warranties of GP Parties
3.1(b) GP Party and Related Party Organizational Documents
3.1(c) GP Party Authorizations
3.1(e) Reviewed Leases
3.1(f) List of Wilson Party Litigation
3.1(h) Environmental Reports
3.1(i)(i) Project Management Contracts
Preferential Rights
3.1(i)(iii)
Project Mortgage Agreements
3.1(i)(viii)
3.1(j)(i) Wilson Party Preliminary Title Reports
3.1(k) Wilson Ground Leases
3.1(m)(iv) Related Entity Tax Returns
3.1(n) Wilson Parties Insurance
3.1(r) Development Projects
3.2 GP Parties Knowledge Persons
4.1 Exceptions to WW&A Representations and Warranties
4.1(c) WW&A Authorizations
WW&A Management Contracts
4.1(g)(i)(B)
WW&A Preferential Rights
4.1(g)(iii)
4.1(i)(ii) WW&A Benefit Plans
4.1(j)(iv) WW&A Tax Returns
4.1(m) WW&A Shareholders
4.2 WW&A Knowledge Parties
5.1 Exceptions to Representations and Warranties of the Cornerstone Parties
5.1(c) Cornerstone Subsidiaries
5.1(d) Cornerstone Capital Structure
5.1(f) Cornerstone Consents
5.1(i) Cornerstone Litigation
</TABLE>
A-12
<PAGE>
<TABLE>
<CAPTION>
SCHEDULES
5.1(j) Cornerstone Properties
<S> <C>
5.1(j)(i) Cornerstone Title Reports
5.1(j)(ii) Cornerstone Property Matters
5.1(l) Cornerstone Related Transactions Disclosure
5.1(k) Cornerstone Environmental Reports
5.1(o) Cornerstone Management Contracts
5.1(p) Cornerstone Benefits
5.1(p)(iv) Cornerstone Severance
5.1(s) Cornerstone Ground Leases
5.1(t) Cornerstone Insurance Policies
5.1(x) Restrictions on Equity Securities
5.2 Cornerstone Knowledge Parties
6.1(h) Wilson Parties Permitted Financing
6.5 Cornerstone Pending Transactions
6.5(c) Cornerstone Employee Grants
7.1 Lock-in Properties
8.1(g) Retention Agreements
10.1(j) Other Wilson Consents
10.2(j) Other Cornerstone Consents
20.10 Cornerstone Parties Representatives
20.13 Special Closing Expense Credit
20.14 Special Post-Execution Provision
EXHIBITS
2.4 Amended and Restated Bylaws
7.4 Registration Rights and Lock-Up Agreement
PGGM Registration Rights Agreement
9.3(d)(iii)
11.8 Escrow Agreement
</TABLE>
A-13
<PAGE>
CONTRIBUTION AGREEMENT AND
AGREEMENT AND PLAN OF MERGER
THIS CONTRIBUTION AGREEMENT AND AGREEMENT AND PLAN OF MERGER (the
"AGREEMENT") is dated as of June 22, 1998 (the "EXECUTION DATE") and is made by
and among (i) WILLIAM WILSON & ASSOCIATES, a California corporation ("WW&A"),
and those entities identified on SCHEDULE 1 (PARTIES, PROJECTS AND ENTITIES) as
the GP PARTIES (the "GP PARTIES"), on the one hand (collectively, the "WILSON
PARTIES"), and (ii) CORNERSTONE PROPERTIES INC., a Nevada corporation
("CORNERSTONE"), and CORNERSTONE PROPERTIES LIMITED PARTNERSHIP, a Delaware
limited partnership (the "OPERATING PARTNERSHIP"; and collectively and jointly
and severally with Cornerstone, the "CORNERSTONE PARTIES"; sometimes in this
Agreement "CORNERSTONE" refers to Cornerstone or the Operating Partnership, as
appropriate in the context in which such term appears in this Agreement), on the
other hand.
RECITALS
A. WW&A and its affiliates are engaged in the business of investing in,
locating and arranging for the acquisition of, financing, developing, leasing,
and managing urban and suburban office and other projects in the Western United
States.
B. Those projects subject to the transactions contemplated by this
Agreement and the "Ancillary Agreements" referenced herein (such transactions,
collectively, the "TRANSACTIONS") are listed on SCHEDULE 1 (PARTIES, PROJECTS
AND ENTITIES) (each listed project, a "PROJECT"). The Projects are more
particularly described in the title insurance commitments referred to in
Section3.1(j) (RELATED PROJECTS). Each of the Projects (or a tenancy in common
interest therein) is owned by the general partnership, limited partnership or
limited liability company indicated on SCHEDULE 1 (PARTIES, PROJECTS AND
ENTITIES) (each, a "PROJECT ENTITY").
C. Office Opportunity Fund I, L.P. ("FUND-I"), Office Opportunity Fund II,
L.P. ("FUND-II"), Office Opportunity Fund III, L.P. ("FUND-III") and Office
Opportunity Fund IV, L.P. ("FUND-IV", and, collectively with FUND-I, FUND-II and
FUND-III, the "FUNDS") are limited partnerships formed for the purpose of
acquiring Projects and investing in Project Entities. Certain GP Parties are the
general partners of each of the Funds and certain GP Parties are the general
partners or managers of the Project Entities, or the general partners thereof.
(With respect to each such GP Party, each Project Entity of which it is the
general partner or manager or the general partner thereof is sometimes referred
to in this Agreement as the "RELATED PROJECT ENTITY", and each Project owned by
such a Related Project Entity is sometimes referred to as a "RELATED PROJECT".)
The Related Project Entities for each GP Party are listed on SCHEDULE 1
(PARTIES, PROJECTS AND ENTITIES). The other partners and members of the Project
Entities are the Funds, shareholders and employees of WW&A, certain affiliates
of WW&A and its shareholders and employees, and third party investors. Those
Project Entities in which a Fund is not a partner or member, and in which there
are partners or members other than a GP Party, are sometimes referred to in this
Agreement as the "JOINT VENTURES". The Joint Ventures are listed in SCHEDULE 1
(PARTIES, PROJECTS AND ENTITIES).
D. Those persons who may be eligible to participate in the Transactions are
those persons who, as of the Execution Date, are the shareholders of WW&A (the
"WW&A SHAREHOLDERS"), the partners of the Funds, the partners and members of the
GP Parties or the GP Parties themselves, together with the partners or members
of the Project Entities and certain intermediate entities (each such person
(other than a WW&A Shareholder in his capacity as such), an "INVESTOR").
E. Cornerstone was formed as a Nevada corporation which has elected to be
treated as a real estate investment trust under Section856 of the Internal
Revenue Code of 1986 (a "REIT"). Cornerstone and the Operating Partnership, of
which Cornerstone is the sole general partner, directly or through affiliates
and subsidiaries (Cornerstone, the Operating Partnership and such affiliates and
subsidiaries, collectively, the "CORNERSTONE GROUP"), own and manage suburban
and urban office projects located in certain United States metropolitan areas.
The Cornerstone Group operates its business through the Operating Partnership as
an
A-14
<PAGE>
umbrella partnership real estate investment trust, or UPREIT, so that all of the
Cornerstone Group's real estate investments and assets are held in the Operating
Partnership or its affiliates or subsidiaries.
F. The Wilson Parties and the Cornerstone Parties envision an opportunity
to combine to their mutual benefit the property acquisition, development,
financing, leasing, property management, construction and asset management
strengths of WW&A and the quality and diversity of as much as possible of the
properties and partnership and property interests of the Project Entities with
those of the Cornerstone Group. Accordingly, the parties have agreed to provide
the owners of WW&A with the opportunity to merge WW&A into Cornerstone and the
Investors, directly or through the Funds and Project Entities, with the
opportunity to contribute their direct and indirect interests in the GP Parties,
the Funds, the Project Entities and the Projects (the "INTERESTS") to the
Cornerstone Parties in accordance with the terms of this Agreement.
G. Accordingly, and subject to obtaining the requisite consents of the
Investors and the shareholders of Cornerstone (the "CORNERSTONE SHAREHOLDERS")
and satisfaction of the other conditions set forth herein, (i) WW&A and
Cornerstone desire to merge WW&A into Cornerstone, (ii) the Cornerstone Parties
desire to offer to those Investors wishing to become "Participating Investors"
(as defined herein) the opportunity to convey all of their respective Interests
to the Operating Partnership or Cornerstone, subject to the terms of this
Agreement, (iii) the Cornerstone Parties desire to acquire Interests from the
Participating Investors for (1) units of limited partnership interest in the
Operating Partnership (the "UNITS"), (2) shares of the no par common stock of
Cornerstone (the "SHARES"; collectively, Units and Shares are sometimes referred
to herein as "EQUITY SECURITIES"), or (3) cash, as the Participating Investors
elect (provided that not more than 40% of the aggregate WW&A Company Value (as
defined herein) plus the aggregate Consideration (as defined herein) for the
Interests, determined in accordance with this Agreement, may be taken in cash,
except as may otherwise be expressly provided herein) (the Equity Securities and
cash issued in exchange for the WW&A Shares (as defined herein) and for the
Interests and Projects pursuant to this Agreement are sometimes referred to as
the "CONSIDERATION"), (v) the eligible Investors in FUND-IV will be able to
elect to invest the amount of their committed but uncalled capital obligations
and certain uncommitted co-investment rights in Units or Shares, (vi) the
effective price for the Units and Shares will be fixed at $17.25 independent of
the trading price from time to time of the Shares, (vii) subject to certain
lock-up periods, the holders of Units will be able to convert their Units to
Shares and the holders of Units and Shares issued as part of the Transactions
will be subject to the benefits and burdens of certain restrictions on the
transfer of these Units and Shares and will be entitled to certain registration
and other rights in accordance with a Registration Rights Agreement (generally
calling for a lock-up period ending three years from consummation of the
Transactions (the "CLOSING") for William Wilson III, two years from Closing for
certain of WW&A's current executives and one year from Closing for all other
Investors) to be executed concurrently with the Transactions, and (viii) the
Cornerstone Parties and the Wilson Parties wish to make certain arrangements
regarding the governance of Cornerstone and the operation of its and the
Operating Partnership's business and the management and disposition of certain
Projects following the Closing, including changes to Cornerstone's bylaws.
H. If the Transactions are consummated in accordance with this Agreement,
among other things, (i) William Wilson III, the President of WW&A, will become
the Chairman of the Board of Cornerstone and enter into a three-year employment
and non-competition agreement, and the current Chairman of the Board of
Cornerstone will become the President and Chief Executive Officer of
Cornerstone, (ii) certain officers of WW&A will become officers of Cornerstone,
(iii) certain other employees of WW&A will become employees of the Cornerstone
Group, (iv) William Wilson III will have the right to be nominated to the Board
of Directors of Cornerstone (the "BOARD") and to have two other persons selected
by him nominated to the Board (at least one of whom must be an "independent
director", as contemplated under the rules of the New York Stock Exchange and
Section16b-3(b)(3)(i) of the Securities Exchange Act of 1934, as amended), and
(v) an integration plan will be adopted to effectively combine the activities of
WW&A and the Project Entities with those of the Cornerstone Group.
A-15
<PAGE>
I. At the Execution Date in accordance with this Agreement, (i) the Board
of Cornerstone and the WW&A Shareholders and Board of Directors of WW&A (the
"WW&A BOARD") will have duly authorized the Transactions, (ii) William Wilson
III, the Wilson Parties, Cornerstone and certain of the Cornerstone Shareholders
will have entered into one or more Voting Rights Agreements, providing certain
rights to and imposing certain obligations on them with respect to the
Transactions, including the obligation to vote in favor of the Transactions in
the Proxy Statement solicitation and providing for certain agreements relating
to the Board of Cornerstone and the governance of Cornerstone following the
Closing (the "VOTING AGREEMENTS"), (iii) the Wilson Parties will be committed to
proceed diligently and in good faith to solicit the requisite consents to the
Transactions from the Investors in the form of an Information Statement (which
will function as a private placement memorandum), to be prepared by the
Cornerstone Parties and the Wilson Parties, (iv) the Cornerstone Parties, WW&A,
the WW&A Shareholders and certain of the GP Parties will have entered into a
pre-Closing Voting Agreement providing certain rights to and imposing certain
obligations on them with respect to the Transactions, including the obligation
to consent, to the extent of their Interests, and with respect to WW&A to the
extent of the interest of WW&A Shareholders therein, to the Transactions (the
"WW&A VOTING AGREEMENT"), (v) upon the successful completion of the consent
solicitation pursuant to the Information Statement, Cornerstone will be
committed to proceed diligently and in good faith to file the Proxy Statement
and solicit the requisite consents of the Cornerstone Shareholders to the
Transactions, and (vi) upon the satisfaction of the requisite conditions the
Transactions will close not later than October 1, 1998, subject to extension as
provided herein.
J. The Cornerstone Parties and the Wilson Parties have agreed that through
December 31, 1998 or the earlier closing of the Transactions and subject to the
terms of this Agreement, neither group of parties, will enter into, solicit,
encourage or cooperate in certain transactions that would potentially compete
with those contemplated by this Agreement or adversely affect their ability to
consummate the Transactions.
K. Apart from the terms defined in the foregoing Recitals, these Recitals
are provided for convenience only, and in the event of any conflict between the
rest of this Agreement and the summary descriptions in these Recitals, the
actual terms and conditions provided in the rest of this Agreement are intended
to govern.
NOW, THEREFORE, in consideration of the mutual promises in this Agreement
and of other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto, intending to be legally bound
hereby, do hereby agree as follows:
1. CONTRIBUTION TRANSACTIONSCONTRIBUTION TRANSACTIONS.
1.1 SALE OR CONTRIBUTION BY INVESTORS. Subject to the terms of this
Agreement, the Cornerstone Parties shall provide to each Investor (A) the right
to sell the Interests owned by such Investor for cash, and each Investor may
elect to so sell its Interests, subject to the limitations on the Available Cash
Amount described in Section1.6 (CASH CONSIDERATION), or (B) only if such
Investor is Eligible (as defined below), the right to contribute, and such
Investor may elect to contribute to Cornerstone or the Operating Partnership, as
the case may be, in exchange for Equity Securities, and Cornerstone and the
Operating Partnership shall be required to accept as contributions in exchange
for Equity Securities, the Interests owned by such Investor (Investors electing
to sell or contribute their Interests in the Transactions are sometimes
described herein as the "PARTICIPATING INVESTORS"), on the following terms and
conditions:
(a) ELIGIBLE INVESTORS. Only Investors who are Investors of record as of
the Execution Date or are Permitted Transferees of such an Investor and, in
either case, are Eligible as of each of (A) the Execution Date, (B) the date
such Investor executes its Consent and (C) the Closing Date will be entitled
to contribute their Interests in exchange for Equity Securities on the terms
of this Agreement. "ELIGIBLE" means, with respect to any person, that such
person is, as of the date of determination, an "accredited investor" as
defined in Rule 501 adopted under the Securities Act of 1933 (the
"SECURITIES ACT") and a "PERMITTED TRANSFEREE" means (A) a member of an
Investor's immediate family, a trust established solely for the benefit of
the Investor's immediate family members or estate or the heirs of
A-16
<PAGE>
a deceased Investor, and (B) a transferee permitted under the applicable
Project Entity Documents, provided such transferee is approved by the
Cornerstone Parties, which approval will not be unreasonably withheld,
conditioned or delayed.
(b) NON-ELIGIBLE INVESTORS. Cornerstone and the Wilson Parties, acting
on the advice of counsel, shall mutually determine those Investors whom they
have reason to believe are Eligible, and they will have the authority to
provide that any Investors they determine not to be Eligible will have the
right to sell their Interests only for cash, it being agreed that neither
Cornerstone nor the Wilson Parties may unreasonably withhold, condition or
delay consent to such determinations.
(c) NO PARTIAL SALE OR CONTRIBUTION. Except as set forth in Section1.2
(THRESHOLD CONTRIBUTION TRANSACTIONS; PARTIAL INTERESTS), each Investor will
have the right to sell or contribute all, but not any lesser portion, of
such Investor's Interests, EXCLUDING, HOWEVER, Interests in respect of
Withdrawn Projects.
(d) CONSIDERATION. Interests will be sold or contributed in exchange for
the amount of Consideration determined in accordance with Section1.3
(DETERMINATION AND ALLOCATION OF CONSIDERATION).
(e) CONSENT. Each Investor wishing to become a Participating Investor
and either sell or contribute its Interests in accordance with the
Transaction Agreements must, as a condition to the Cornerstone Parties'
obligations to exchange Consideration for such Interests, execute in person
or by power of attorney and deliver to the Cornerstone Parties and WW
Holdings, LLC, (such entity, together with its permitted successors and
assigns pursuant to Section20.10 (REPRESENTATIVES), the "WILSON
REPRESENTATIVE") a Consent ("CONSENT") in such form as is mutually agreed by
Cornerstone and WW&A, pursuant to which the Investor, among other things,
(A) irrevocably agrees to sell or contribute its Interests in
exchange for Consideration on the terms hereof and the terms of the
Consent and related Investor Contribution Agreement;
(B) makes representations and warranties as to organization, good
standing, power and authorization (in the case of entities), name,
address, taxpayer identification, Eligible status, free and clear title
to its Interests, power to transfer the Interests, non-contravention,
status as a United States taxpayer, and acknowledgment of restrictions on
transfer and legend conditions, and agrees to indemnify, defend and hold
the Wilson Parties, Wilson Representative and Cornerstone Parties
harmless from and against any loss or liability arising out of any
inaccuracy in any such representation and warranty;
(C) irrevocably elects the proportion of the Consideration to consist
of cash, Units or Shares, respectively, and allocates such cash, Units
and Shares among its various Interests, PROVIDED that non-Eligible
Participating Investors will be deemed to have elected to sell their
Interests for cash only;
(D) consents (to the extent such consent is required) to the
Transactions and agrees to be bound thereby and by the Transaction
Agreements, to the extent applicable;
(E) irrevocably consents to and authorizes any mergers, property
contributions, and other transactions necessary or desirable to effect
the Transactions, provided such actions maintain the economic and tax
treatment results contemplated by this Agreement;
(F) authorizes the Wilson Representative to enter into amendments of
the Transaction Agreements as contemplated by Section 20.3 (AMENDMENT),
to enter into amendments of the organizational documents of the Funds and
Project Entities in which such Investor holds Interests which are
necessary or appropriate, in the exercise of the Wilson Representative's
reasonable business judgment, to enable the parties to achieve the
economic and tax treatment results contemplated by this Agreement, and to
cause the Participating Investors and Wilson Parties to enter into
alternative transactions which are necessary or appropriate, in the
exercise of the Wilson
A-17
<PAGE>
Representative's reasonable business judgment, to enable the parties to
achieve the economic and tax treatment results contemplated by this
Agreement;
(G) appoints (which appointment is coupled with an interest and is
irrevocable) the Wilson Representative as such Investor's
attorney-in-fact, with full power to execute and deliver on behalf of the
Investor the Contribution Agreement and all other assignments,
instruments, amendments and agreements necessary or advisable to
consummate the Transactions, including the merger of any Project Entity
or Fund into the Operating Partnership, and the contribution of a Related
Project to the Operating Partnership, and the execution and delivery of
the Transaction Agreements and any amendments thereof;
(H) generally acknowledges, consents to and agrees to be bound by the
power and authority granted to the Wilson Representative in this
Agreement;
(I) agrees to such other matters as are customary, reasonable and
appropriate to be addressed by consents and agreements in transactions of
the same general types as the Transactions; and
(J) otherwise agrees to the terms of Section20.10 (REPRESENTATIVES)
concerning the authority, exculpation and indemnity of the Wilson
Representative.
(f) CONSENT IRREVOCABLE. The Consents will be distributed to the
Investors for review, approval and execution as part of the Information
Statement pursuant to Section6.6 (PREPARATION OF THE INFORMATION STATEMENT,
PROXY STATEMENT, SHAREHOLDERS MEETING). The consents and agreements
contained in each Consent will be deemed to have been irrevocably and
absolutely given and made when tendered to and accepted by the Wilson
Parties and the Cornerstone Parties in accordance with this Agreement.
Without limiting the generality of the foregoing, each Investor so executing
and delivering a Consent will be deemed to have irrevocably agreed, subject
to acceptance of such Investor's Consent by the Wilson Parties and the
Cornerstone Parties, to become a Participating Investor and either (in the
case of non-Eligible Investors) to sell its Interests for cash or (in the
case of Eligible Investors) to sell its Interests for cash and/or contribute
or transfer its Interests to the Operating Partnership or Cornerstone, as
the case may be, for Equity Securities, subject to the terms of this
Agreement.
(g) FORM OF TRANSACTION. The parties intend that the Transactions be
consummated in a manner which will allow those Investors who receive Units
to receive those Units tax-free under the Code and to allow the Cornerstone
Parties to be able to obtain, directly or indirectly, all of the economic
interests in each Fund and each Complete Transaction Project (as defined
below). The parties agree that this intention will be carried out by
offering each Investor the right to elect to contribute Interests to the
Operating Partnership in exchange for Units in a non-taxable event if an
Eligible Investor or to contribute its Interests for Stock if an Eligible
Investor or sell its Interest for cash to the Cornerstone Parties. In the
alternative, the Wilson Parties may, if necessary or desirable in their
reasonable business judgment to do so, structure Complete Transactions as
contributions of Related Projects to the Operating Partnership. The parties
will cooperate to maintain in existence until January 1, 1999 any Complete
Project Entity or Fund whose Interests at Closing are acquired entirely by
the Cornerstone Parties, and to achieve this result it is anticipated that a
nominal interest in such Complete Project Entity or Fund will be owned by a
Non-Voting Stock Sub. With respect to a Complete Transaction, to the extent
that the requisite majority but not all of the Investors in a Fund or
Project Entity elect to become Participating Investors and make the
foregoing contributions or sales, the parties intend that the Cornerstone
Parties and such Non-Voting Stock Sub together will subsequently acquire all
of the remaining interests in each Fund or Complete Transaction Project by
either having the Project Entity convey the Project to the Operating
Partnership in exchange for Units or merging the Project Entity or Fund into
the Operating Partnership or otherwise, in each case in a manner mutually
agreed between the Wilson Representative and the Cornerstone Parties prior
to the Closing and which would provide the same economic Consideration in
the form of Units or cash to
A-18
<PAGE>
each such non-Participating Investor as if the non-Participating Investor
had elected to become a Participating Investor.
(h) INVESTOR CONTRIBUTION AGREEMENTS. Subject to the satisfaction of the
conditions set forth in Section10 (CONDITIONS PRECEDENT TO CLOSING) on and
as of the Closing Date, the Cornerstone Parties shall execute and deliver to
the Wilson Representative, and the Wilson Representative shall execute and
deliver to the Cornerstone Parties as attorney-in-fact for each
Participating Investor, an Investor Contribution Agreement in form and
substance mutually acceptable to the Cornerstone Parties and the Wilson
Parties, in their reasonable discretion, and containing the terms described
in this Agreement (an "INVESTOR CONTRIBUTION AGREEMENT"), pursuant to which
such Participating Investor will be deemed to sell or convey to the
appropriate Cornerstone Party or Parties, and such Cornerstone Party or
Parties will be deemed to purchase or to accept as a contribution to capital
in exchange for the Consideration, the Participating Investor's Interests.
1.2 THRESHOLD CONTRIBUTION TRANSACTIONS; PARTIAL INTERESTS.
(a) COMPLETE TRANSACTIONS. SectionSection10.1(g) (WILSON THRESHOLD
CONSENTS) and 10.2(g) (CORNERSTONE THRESHOLD CONSENTS) contemplate as
conditions to Closing that a sufficient percentage of Investors consent to
and/or elect to participate in the Transactions and become Participating
Investors so as to permit a Complete Transaction to occur with respect to
all of the Funds and Fund Projects. In addition, the acquisition of other
Interests and Projects are required to satisfy the Cornerstone Threshold
Consents, as described in Section10.2(g) (CORNERSTONE THRESHOLD CONSENTS). A
"COMPLETE TRANSACTION" means, with respect to a Fund or Project Entity that,
as a result of the Transactions, (A) the Cornerstone Parties together with a
Non-Voting Stock Sub will have acquired all of the outstanding Interests in
the Fund or Project Entity or Related Project in question, (B) the
Cornerstone Parties will have the power (subject to statutory notice and
procedural requirements) to cause the Fund or Project Entity to be merged
into a Cornerstone Party or affiliate thereof without the affirmative
consent of any non-Participating Investor as described in Section1.1(g)
(FORM OF TRANSACTION), or (C) the Cornerstone Parties will have the power to
cause the Related Project to be contributed to the Operating Partnership or
an affiliate without the affirmative consent of any non-Participating
Investors, which contribution will be for no greater consideration than is
allocated to all Investors therein pursuant to Section1.3 (DETERMINATION AND
ALLOCATION OF CONSIDERATION). A Project with respect to which sufficient
consents have been received so as to permit a Complete Transaction to occur
is sometimes referred to herein as a "COMPLETE TRANSACTION PROJECT" and each
remaining Project (other than Withdrawn Projects), as a "PARTIALLY
PARTICIPATING PROJECT". "FUND PROJECT" means a Project so designated on
SCHEDULE 1 (PARTIES, PROJECTS AND ENTITIES).
(b) OTHER PROJECTS. Upon the consummation of a Complete Transaction with
respect to the Funds, Cornerstone or the Operating Partnership, as the case
may be, shall also acquire the Interests of the Funds in certain Projects
(other than the Fund Projects) not wholly owned by the Funds or Investors in
the Funds and so designated on SCHEDULE 1 (PARTIES, PROJECTS AND ENTITIES)
(the "OTHER PROJECTS"). Certain of the WW&A Shareholders and entities
controlled by or affiliated with WW&A or the WW&A Shareholders also own
interests in the Other Projects (the "WW&A AFFILIATED INTERESTS"). If a Fund
does not so transfer any such Interests to the Cornerstone Parties at the
Closing, then such Interests owned by a Fund shall be spun off to a new
entity and transferred out of such Fund prior to the Closing as provided in
Section1.9(g) (CONSEQUENCES OF WITHDRAWAL). In the event a sufficient
percentage of Investors shall not have consented to and/or elected to
participate in the Transactions and become Participating Investors to permit
Complete Transactions with respect to the Other Projects, the following
provisions shall control:
(i) with respect to the Other Projects known as (A) the Rockwood
Projects (as hereinafter defined), (B) 120 Montgomery, (C) Bixby, and (D)
2677 North Main, the interests of the Funds and the WW&A Affiliated
Interests shall be required to be transferred to and accepted by the
A-19
<PAGE>
Cornerstone Parties at the Closing, PROVIDED such Interests may be so
transferred pursuant to the applicable Project Entity Documents (as
hereinafter defined) and with any required consents having been obtained
by the parties prior to or at the Closing (but no other Investor shall be
required to sell or contribute its Interests therein);
(ii) with respect to each of (A) the Other Project known as 303
Almaden, (B) the Other Projects known as Bayhill 4, 5, 6, and 7, and (C)
any Other Projects which are included in the Cornerstone Threshold
Consent standard as Projects with respect to which Complete Transactions
are to be achieved, if a Complete Transaction is not achieved but the
Cornerstone Parties proceed with the Closing, the interests of the Funds
and the WW&A Affiliated Interests, at the option of Cornerstone to be
exercisable by notice to the Wilson Parties at least fifteen (15) days
prior to the Scheduled Closing Date, shall be required to be transferred
by the owners thereof to the Cornerstone Parties at the Closing for such
Project or Projects to be selected by the Cornerstone Parties pursuant to
such notice, provided such interests may be so transferred pursuant to
the applicable Project Entity Documents and with any required consents
having been obtained by the parties before the Closing; and
(iii) with respect to each of the Projects known as (A) Commerce Park
and (B) Wells Fargo Center, the interests of the Funds and the WW&A
Affiliated Interests in such Projects may be transferred by the owners
thereof to and accepted by the Cornerstone Parties only with the consent
and approval of such owners and the Cornerstone Parties on or before the
fifteenth (15th) day prior to the Scheduled Closing Date and provided
such interests may be so transferred pursuant to the applicable Project
Entity Documents and with any required consents obtained by the parties
before the Closing.
(iv) the Project known as One Post is owned as a tenancy in common
between Project Entity One Post Associates, LLC, and Crocker Plaza
Company ("CROCKER") with each party owning an undivided one-half ( 1/2)
interest. The Project Value for One Post set forth on SCHEDULE
1.3(A)(PROJECT INFORMATION) is for One Post Associates, LLC's tenancy in
common interest only. In connection with the transactions, Crocker will
be provided with the opportunity to become a Participating Investor with
respect to its tenancy in common interest in One Post. If Crocker becomes
a Participating Investor, (A) One Post will be treated as a Completed
Transaction Project, (B) the Project Value for One Post will be deemed to
be twice the Project Value set forth on SCHEDULE 1.3(A)(PROJECT
INFORMATION) and (C) for the purpose of Section7.1 (RESTRICTIONS ON
DISPOSITIONS OF CERTAIN RELATED PROJECTS FOLLOWING CLOSING) One Post will
be treated as if it were listed on Part I of SCHEDULE 7.1(LOCK-IN
PROPERTIES). If Crocker does not elect to become a Participating
Investor, the Interest therein of One Post Associates, LLC shall be
required to be transferred to and accepted by the Cornerstone Parties at
the Closing, provided, such Interest may be so transferred pursuant to
the applicable co-tenancy agreements with Crocker and with any required
consents having been obtained by the parties by or at the Closing.
(c) POST CLOSING INCLUSIONS. With respect to Joint Ventures and Other
Projects where sufficient consents were not received to enable a Complete
Transaction to occur, and where the Wilson Parties were not able by the time
of Closing to obtain the consent of other Investors therein to the transfer
of the interests of the Funds and the WW&A Affiliated Interests therein, the
related GP Party shall, during the two years following Closing, (A) exercise
commercially reasonable efforts to seek such consent based upon Project
values to be negotiated and agreed upon and, if such consent is obtained and
if the Cornerstone Parties agree to accept the contribution of such
Interests in their sole discretion, will cause their Interests to be
contributed to the Cornerstone Parties for Units and Shares valued at the
average of the closing price for a Share for the ten (10) consecutive
trading days immediately preceding the date of contribution, or at such
other value as the parties agree (PROVIDED, that, subject to clause (B), of
this sentence, the foregoing shall not in any way prevent or restrict the
related GP Parties from selling, refinancing or otherwise dealing with the
underlying Projects during
A-20
<PAGE>
such two-year period), and (B) promptly notify the Cornerstone Parties of,
and to the extent permitted by the governing Project Entity Documents with
respect thereto after exercise of commercially reasonable efforts to obtain
any required consents thereunder, assign to the Cornerstone Parties the
right to exercise any buy-sell, right of first refusal or other purchase
right with respect to the Related Project or the Interests of the
non-affiliated Investors therein held by the related GP Party or by an
entity controlled by WW&A or the WW&A Shareholders.
1.3 DETERMINATION AND ALLOCATION OF CONSIDERATION.
(a) PROJECT VALUE. The "PROJECT VALUE" of each Project is set forth on
SCHEDULE 1.3(A)(PROJECT INFORMATION). The Project Value for each Project has
been determined by negotiation among the Cornerstone Parties and the Wilson
Parties.
(b) NET PROJECT VALUE. Except to the extent otherwise described in this
Section1.3 (DETERMINATION AND ALLOCATION OF CONSIDERATION), the "NET PROJECT
VALUE" of a Project will be (A) the Project Value of that Project, LESS (B)
the sum of the outstanding principal balance and all accrued and unpaid
interest and other charges thereon as of 11:59 p.m. (San Francisco time) of
the Day immediately prior to the Closing Date of the Indebtedness related to
that Project listed on SCHEDULE 1.3(B) (EXISTING PROJECT DEBT) (the
"EXISTING PROJECT DEBT"), and any similar replacement or additional
Indebtedness approved by Cornerstone, whose approval shall not be
unreasonably withheld, conditioned or delayed with respect to that Project,
and not otherwise accounted for pursuant to Section9.4 (PROJECT CLOSING
ADJUSTMENTS) which amount shall be further adjusted in accordance with (i)
Section1.9 (WITHDRAWN PROJECT AND NET PROJECT VALUE ADJUSTMENT), (ii)
Section6.2 (ACQUISITIONS), (iii) Section1.4(d) (PARTICIPATION FEATURES).
(c) INVESTOR CONSIDERATION. The Consideration offered to each
Participating Investor in payment or exchange for its Interests shall be
determined in good faith by the Cornerstone Parties and each GP Party with
respect to its Related Project Entity or Fund based on the distribution
amount the Participating Investor would have received in a liquidation by
treating the Net Project Value for each Project as the net proceeds of a
disposition of the Project as of the Scheduled Closing Date followed by the
liquidation of the appropriate Project Entity or Fund and any intermediate
entities in accordance with the governing documents of these entities,
assuming that all net cash flow and cash on hand of the entities estimated
by the GP Parties after taking into account reasonable reserves to pay
operating expenses, and after payment of their respective share of Wilson
Costs as set forth in Section1.3(d) (CERTAIN CASH ADJUSTMENTS), has been
distributed. For example, an Investor in a Fund would receive Consideration
equal to what the Investor would have received if all the Project Entities
and intermediate entities in which the Fund holds interests had sold their
Related Projects at the Net Project Value and then been liquidated and the
Fund itself had been liquidated, after adjustment for the Investor's
Allocable Share of the certain Wilson Costs as provided in Section1.3(d)
(CERTAIN CASH ADJUSTMENTS). The method of allocating the Consideration to
each Investor will be set forth in the Information Statement (as defined
herein) or in the respective supplements (each, a "SUPPLEMENT") to the
Information Statement with respect to Interests in each Fund and Project
Entity, and such method so set forth and the determinations of Consideration
made in good faith pursuant thereto will be binding on the related
Participating Investors.
(d) CERTAIN CASH ADJUSTMENTS.
(i) The Consideration due the WW&A Shareholders and the Participating
Investors will be adjusted to reflect the following, which will be
settled at or following Closing as provided in this Section1.3(d)
(CERTAIN CASH ADJUSTMENTS): Closing Costs pursuant to Section1.5 (CERTAIN
CLOSING COSTS); final tax return preparation costs pursuant to
Section7.10 (PREPARATION OF FINAL TAX RETURNS); Wilson Transaction Costs
pursuant to Section9.6(a) (GENERAL; TRANSACTION COSTS); Lease Costs
pursuant to Section6.1(b)(LEASING AND LEASE COSTS); Capital Expenditures
pursuant to Section6.1(c) (CAPITAL EXPENDITURES); prorations and other
Closing adjustments pursuant to Section9.4 (PROJECT CLOSING ADJUSTMENTS)
and Section9.5 (WILSON CLOSING ADJUSTMENTS). The share of such
adjustments allocated to the Wilson
A-21
<PAGE>
Parties, Projects, Related Entities, WW&A Shareholders or Investors is
sometimes referred to as the "WILSON COSTS." Adjustments in respect of
Lease Costs, Capital Expenditures, prorations and other Closing
adjustments will be allocated to WW&A or the Projects to the extent
responsible therefor or benefited thereby. Closing Costs and Wilson
Transaction Costs will be allocated to WW&A or a Project in proportion to
its share (based on the Consideration to be received by the WW&A
Shareholders (in the case of WW&A) or the Consideration allocated to all
Investors (in the case of a Complete Transaction Project) or to
Participating Investors (in the case of a Partially Participating
Project) of the aggregate of the Consideration (including consideration
subsequently payable under Section1.3(e) (INVESTOR CONSIDERATION IN
SUBSEQUENT MERGER OR LIQUIDATION)) distributable hereunder. The
settlement of Wilson Costs with respect to any Project will be allocated
to Investors having an interest therein in accordance with such
Investors' Allocable Shares. Net Wilson Costs settlement amounts payable
to the Cornerstone Parties and allocable to WW&A or the Investors under
this Section1.3(d) (CERTAIN CASH ADJUSTMENTS) may be paid out of working
capital or excess cash flow from operations accumulated by WW&A or the
appropriate Fund or Project Entity, or out of, and as a debit against,
any cash distributable to the WW&A Shareholders or such Investors, as the
case may be, in connection with the Transactions or any subsequent merger
or liquidation; PROVIDED, however, if such distributable cash is not
sufficient to fully fund an Investor's net settlement obligation, the
Wilson Parties shall cause such shortfalls to be funded and all such net
settlement obligations to be paid at the Closing, and such Investor shall
reimburse the Wilson Parties after the Closing for the shortfall
attributable to such Investor. The Wilson Parties shall have the option
to have the Cornerstone Parties pay a portion of the Wilson Costs, not to
exceed $10,000,000 (the "DEBITED WILSON COSTS"), in which event the
amount of the Debited Wilson Costs shall be deducted from the aggregate
Consideration due the WW&A Shareholders and all Participating Investors
and allocated to each of them in the same amounts as the amounts of such
Debited Wilson Costs they would have otherwise paid pursuant to this
Section1.3(d) (CERTAIN CASH ADJUSTMENTS). Such option to cause the
Cornerstone Parties to pay such Debited Wilson Costs shall be exercised
at least fifteen (15) days prior to the Closing Date. The Debited Wilson
Costs will not reduce the Available Cash Amount.
(ii) The term "ALLOCABLE SHARE", with respect to a WW&A Shareholder,
means the percentage determined by dividing (A) the Consideration due
such WW&A Shareholder by (B) the aggregate Consideration due all WW&A
Shareholders, and the term "ALLOCABLE SHARE", with respect to a
Participating Investor deriving Consideration from a Project, means the
percentage determined by dividing (x) the Consideration due such
Participating Investor from such Project by (y) the Consideration due all
Participating Investors from such Project; PROVIDED that with respect to
each Complete Transaction Project, the Wilson Costs allocable to that
Project and its Investors will be allocated as if all the Investors were
Participating Investors, and FURTHER PROVIDED that with respect to each
Partially Participating Project, the Wilson Costs allocable to that
Project and its Investors shall be allocated only amongst the
Participating Investors in that Project. If, at the time the Project
Final Closing Accounting is made pursuant to Section9.4(f) (FINAL CLOSING
ACCOUNTING), non-Participating Investors have failed to pay or have paid
on their behalf or have made provisions reasonably acceptable to the
Cornerstone Parties for the payment of such non-Participating Investors'
Allocable Share of Wilson Costs as contemplated in this Section1.3(d)
(CERTAIN CASH ADJUSTMENTS), such Allocable Share of Wilson Costs will be
reallocated to the Participating Investors in each related Project in
proportion to their interests therein for the purpose of final settlement
between the Investors and the Cornerstone Parties, in connection with the
Project Final Closing Accounting, and the Cornerstone Parties will be
deemed to have assigned to such Participating Investors, and such
Participating Investors will be deemed to have accepted and be subrogated
to, any rights of the Cornerstone Parties to collect such Wilson Costs
from such non-Participating Investors.
A-22
<PAGE>
(e) INVESTOR CONSIDERATION IN SUBSEQUENT MERGER OR LIQUIDATION. If a
Fund or Project Entity is merged into a member of the Cornerstone Group, or
contributes its Related Project to a member of the Cornerstone Group and
subsequently liquidates, the merger consideration due non-Participating
Investors will be, or the contribution consideration exchanged for the
Project will be calculated to produce distributions in liquidation to the
non-Participating Investors of, cash or Units (valued at the Effective
Price), or any combination thereof, equal to the amount of Consideration
that such non-Participating Investors would have received for such interests
if they had been Participating Investors at the Closing and the adjustments
provided in Section1.3(d) (CERTAIN CASH ADJUSTMENTS) had been made.
(f) EFFECTIVE PRICE. The number of Units or Shares to be issued at
Closing to each Eligible Participating Investor so electing shall be
determined by dividing that portion of the aggregate Consideration to be
received by such Participating Investor in Units or Shares, as the case may
be, by Seventeen and 25/100 Dollars ($17.25) (the "EFFECTIVE PRICE"). The
Effective Price is an agreed value, and shall remain fixed notwithstanding
the actual market or trading price of the Shares or fair market value of the
Units at the Closing Date or at any other time with respect to which the
Effective Price is to be applied. The Effective Price shall be adjusted to,
and only to, reflect fully the effect of any stock split, reverse split,
stock dividend (including any dividend or distribution of securities
convertible into Shares), reorganization, recapitalization or other like
change with respect to Shares and Units occurring after the Execution Date
and before the Closing or on or before the date of application, as the case
may be, PROVIDED that no such changes to the Shares and Units shall be
effected except in compliance with Section6.5(c) (ISSUANCE OF SHARES) and no
cash or other dividends shall be paid except in compliance with
Section6.5(d) (DIVIDEND). No fraction of a Unit or Share will be issued in
exchange for Interests, but in lieu thereof each Participating Investor who
would otherwise be entitled to a fraction of a Unit or Share (after
aggregating all fractional Units or Shares to be received by such
Participating Investor) will receive from the Operating Partnership or
Cornerstone, as the case may be, an amount of cash (rounded to the nearest
whole cent), without interest, equal to the product of (x) such fraction
multiplied by (y) the Effective Price. If a Participating Investor is to
receive both Units from the Operating Partnership and Shares from
Cornerstone, the procedure indicated in the preceding sentence will be
applied separately as to Units and Shares.
(g) FUND-IV COMMITTED CASH. Participating Investors who are Investors in
FUND-IV and who have at the Closing Date committed but uncalled investor
capital funding obligations with respect to FUND-IV or unexercised
co-investment rights with FUND-IV (not to exceed $60,000,000 in the
aggregate) may each elect in their Consents (but only in their Consents) to
(A) contribute cash to FUND-IV at the Closing in an amount not to exceed
such then committed but uncalled capital funding obligations or
co-investment rights and to receive in exchange therefor Units or Shares at
the Effective Price, or (B) to purchase Shares directly from Cornerstone for
cash, in each case in an amount not to exceed such then committed but
uncalled capital funding obligations or co-investment rights at the
Effective Price at the Closing; PROVIDED, however, that in no event may the
aggregate of such amounts under this Section1.3(g) (FUND-IV COMMITTED CASH)
for all of such Participating Investors exceed $60,000,000. To the extent
that Shares are acquired by the Participating Investors pursuant to this
Section1.3(g), such Shares will be subject to the special restrictions on
transfer set forth in, and will be registered as provided in, the
Registration Rights Agreement.
(h) ROCKWOOD PROJECTS
(i) ROCKWOOD CONTRACT AND LOAN. The Projects known as (A) Pruneyard
Tower 1, (B) Pruneyard Tower 2, (C) Pruneyard Place, (D) Pruneyard
Shopping Center, (E) Pruneyard Inn, (F) 1 Gateway, (G) 2 Gateway, (H)
Golden Bear Center, (I) Apple Building, (J) Centerside II, and (K)
Scottsdale Centre (collectively the "ROCKWOOD PROJECTS") are owned by
Related Project Entities having the Rockwood Sellers (as hereinafter
defined) as partners or members (collectively, the "ROCKWOOD PROJECT
ENTITIES"). WWA Investors, LLC ("WWA INVESTORS"), an affiliate of WW&A,
has entered into an Agreement of Purchase and Sale, dated June 18, 1998
A-23
<PAGE>
(the "ROCKWOOD CONTRACT"), by and among WWA Investors, as "Buyer," and
RAR/CREL Scottsdale Centre Investors, L.L.C., RAR/CREL Gateway Investors,
L.P., RAR/CREL University Investors, L.P., RAR/CREL Pruneyard Investors,
L.P., RAR/CREL Centerside Investors, L.L.C., and RAR/CREL Von Karman
Investors, L.P., (collectively, the "ROCKWOOD SELLERS") as "Sellers",
providing for the purchase and sale of the interests of the Rockwood
Sellers in the Rockwood Project Entities (collectively, the "ROCKWOOD
INTERESTS"). The Operating Partnership has committed to make a loan to
WWA Investors not to exceed $80,000,000 (the "ROCKWOOD LOAN") to fund WWA
Investors' acquisition of the Rockwood Interests pursuant to the Rockwood
Contract, subject to the terms of that certain Loan Agreement, dated June
19, 1998, by and between WWA Investors and the Operating Partnership (the
"ROCKWOOD LOAN AGREEMENT"). The Rockwood Loan Agreement, Promissory Note,
Pledge Agreement, Collateral Assignment of Contract and all other
documents evidencing, securing or relating to the Rockwood Loan are
herein referred to as the "ROCKWOOD LOAN DOCUMENTS."
(ii) FAILURE TO CLOSE. Under the Rockwood Loan Documents, if the
Closing does not occur under this Agreement, (A) the Rockwood Loan shall
mature and be due and payable in full on December 31, 1999, (B) WWA
Investors shall pay to the Operating Partnership, on or before December
31, 1999, the "Reimbursement Amount" pursuant to the Rockwood Loan
Agreement (the "REIMBURSEMENT AMOUNT"), and (C) the Cornerstone Parties
will have the option to purchase the Rockwood Interests on the terms and
subject to the conditions set forth in the Rockwood Loan Agreement.
(iii) EFFECT ON TRANSACTIONS. If the closing occurs under the
Rockwood Contract and the Closing occurs under this Agreement, the
following provisions regarding the Rockwood Interests, the Rockwood
Project Entities and the Rockwood Projects shall apply and control
notwithstanding anything to the contrary set forth in this Agreement:
(A) WWA Investors shall consent to the Transactions and elect to
become a Participating Investor with respect to the Rockwood
Interests, and except as provided in clause (E) below, the
Cornerstone Parties will no longer be entitled to the payment of any
Reimbursement Amount and WWA Investors will no longer be obligated
for the payment of any Reimbursement Amount;
(B) the other interests in the Rockwood Project Entities (the
"OTHER ROCKWOOD INTERESTS") are owned by GP Parties and FUND-I and
FUND-II, and if the Wilson Threshold Consents and Cornerstone
Threshold Consents are obtained, the Cornerstone Parties shall
acquire at the Closing the Other Rockwood Interests (which shall be
the case even if the closing under the Rockwood Contract has not
occurred);
(C) the Project Values for the Rockwood Projects and therefore
the Consideration allocable to WWA Investors, as the successor to the
Rockwood Interests, and to the owners of the Other Rockwood
Interests, are to be specially allocated and paid between WWA
Investors and the owners of the Other Rockwood Interests so that the
Rockwood Loan would be deemed to have been repaid and the WWA
Investors will have received no net Consideration and the owners of
these Other Rockwood Interests receive all of the net Consideration
from these Projects except as the WWA Investors, FUND-I and FUND-II
may otherwise agree amongst themselves; with this being accomplished
by (i) WWA Investors assigning the Rockwood Interests to the
Operating Partnership for a deemed portion of the Net Project Value
for these Projects equal to the outstanding principal balance under
the Rockwood Loan as of the Closing Date and the Operating
Partnership accepting these Rockwood Interests subject to the
Rockwood Loan, including all principal, interest and other charges
due on the loan, provided that in the event that the Prorations
pursuant to Section9.4 (PROJECT CLOSING ADJUSTMENTS) result in an
increase in cash that would otherwise have been
A-24
<PAGE>
distributable to WWA Investors with respect to its Rockwood
Interests, this increase shall be paid to the Operating Partnership,
and (ii) the Net Project Value for the Rockwood Projects will be
determined as provided in Section1.3(b) (NET PROJECT VALUE) and in
Section1.3(i) (PRUNEYARD ADJUSTMENT) and as otherwise provided below
in this Section1.3(h) (ROCKWOOD PROJECTS) including clauses (D),(G)
and (H) PROVIDED, however, that the foregoing provisions of this
clause (C) will only be effective from and after the Closing and will
not be deemed an amendment to any of the related Project Entity
Documents until such time.
(D) for the purpose of determining the Net Project Value for the
Rockwood Projects which is allocable to the owners of the Other
Rockwood Interests, the total Net Project Values for these Projects
(determined as provided above and including the Pruneyard Closing
Consideration and Additional Pruneyard Consideration described in
Section1.3(i) (PRUNEYARD ADJUSTMENT)) will be reduced by an amount
equal to the outstanding principal balance under the Rockwood Loan as
of the Closing Date, and the balance will be the Consideration due to
the owners of the Other Rockwood Interests;
(E) if a Rockwood Project is a Withdrawn Project pursuant to any
other provision of this Agreement, then at the Closing hereunder (1)
the portion of the Rockwood Loan allocable to such withdrawn Rockwood
Project, which shall equal the product of (x) such Rockwood Project's
"Allocable Loan Percentage", as set forth on SCHEDULE 1.3(H)
(ALLOCATIONS REGARDING ROCKWOOD), multiplied by (y) the outstanding
principal balance and accrued interest due under the Rockwood Loan as
of the Closing, shall not be assumed by the Cornerstone Parties at
the Closing, but shall remain an obligation of WWA Investors after
the Closing (and such amount shall bear interest as provided in the
Rockwood Loan Documents) and shall be due and payable in full on
December 31, 1999; and at the Closing WWA Investors and the Operating
Partnership shall enter into amendments to the Rockwood Loan
Documents and new loan documents as necessary to reflect such
modifications; and (2) in connection with such repayment WWA
Investors shall pay to the Cornerstone Parties an amount for each
Rockwood Project equal to the "Allocated Reimbursement Amount", as
shown on SCHEDULE 1.3(H) (ALLOCATIONS REGARDING ROCKWOOD), for such
Rockwood Interest in such withdrawn Rockwood Project;
(F) the Consideration otherwise payable to the owners of the
Other Rockwood Interests will be (i) increased by an amount equal to
fifty percent (50%) of the "Borrower Closing Costs" (as defined in
the Rockwood Loan Agreement), but only to the extent such Borrower
Closing Costs were paid by WWA Investors from the proceeds of the
Rockwood Loan, (ii) increased by an amount equal to the aggregate
"Proration Debit" (as defined in the Rockwood Loan Agreement)
attributable to all of the Rockwood Interests but only to the extent
such Proration Debit was paid by WWA Investors from the proceeds of
the Rockwood Loan, (iii) decreased by an amount equal to the
aggregate "Proration Credit" (as defined in the Rockwood Loan
Agreement) attributable to all of the Rockwood Interests, (iv)
increased by the aggregate "Cash Balance Credit" (as defined in the
Rockwood Loan Agreement), excluding the $1,566,615 "Pruneyard
Construction Amount" (defined in the Rockwood Loan Agreement) but
only to the extent such Cash Balance Credit was paid by WWA Investors
from the proceeds of the Rockwood Loan, and (v) increased by such
$1,566,615 Pruneyard Construction Amount, but only to the extent such
$1,566,615 Pruneyard Construction Amount was paid by WWA Investors
from the proceeds of the Rockwood Loan and then only if the Operating
Partnership received a payment of Excess Distributable Cash (as
defined in the Rockwood Loan Agreement) equal to the $1,566,615
Pruneyard Construction Amount from the proceeds of a loan draw.
Further, it is anticipated that the Pruneyard Associates, L.L.C.
Project Entity will draw an additional amount under the Pruneyard
Loan (hereinafter defined) representing cost savings under the
Pruneyard Project (in excess of the
A-25
<PAGE>
Pruneyard Construction Amount which represents equity invested to pay
pre-development costs), and if any such loan proceeds are distributed
to the Operating Partnership as Excess Distributable Cash under the
Rockwood Loan, then such amount distributed to the Operating
Partnership as such Excess Distributable Cash, but not to exceed
$1,500,000, shall increase the Consideration otherwise payable to the
owners of the Other Rockwood Interests.
(G) the Operating Partnership shall credit or pay to the owners
of the Other Rockwood Interests at the Closing an amount equal to the
product of (x) fifty percent (50%) multiplied by (y) the excess of
(1) an amount equal to the percentage ownership share of the Rockwood
Interests in each of the Rockwood Project Entities multiplied by (z)
the fifty percent (50%) share of the Lease Costs and Capital
Expenditures for such related Rockwood Projects after April 1, 1998
and prior to the Closing, to be paid and assumed by such Rockwood
Project Entities as provided in Section6.1(b) (LEASING AND LEASE
COSTS) and Section6.1(c) (CAPITAL EXPENDITURES) LESS (2) the amount
paid by or credited against the Rockwood Sellers as of Closing under
the Rockwood Contract, for Lease Costs and Capital Expenditures for
the period after April 1, 1998.
(i) PRUNEYARD ADJUSTMENT.
(i) DEFINITIONS. The following terms shall have the meanings set
forth below:
"ESTIMATED PRUNEYARD INN COMPLETION COSTS" means an amount reasonably
determined by the Cornerstone Parties as of the Closing equal to the
estimated Pruneyard Inn Completion Costs; provided, however, the
remaining aggregate proceeds drawable under the Pruneyard Loan after the
Closing to fund Pruneyard Inn Completion Costs (excluding any development
fees, construction fees, management fees, leasing fees, or similar fees
or compensation payable to WW&A or any affiliate of WW&A pursuant to the
applicable budget and not due and payable as of the Closing) shall be
deemed the Estimated Pruneyard Inn Completion Costs, unless such amount
is not a reasonable approximation thereof and either the Cornerstone
Parties or the Wilson Parties object.
"ESTIMATED PRUNEYARD PLACE COMPLETION COSTS" means an amount
reasonably determined by the Cornerstone Parties as of the Closing equal
to the estimated Pruneyard Place Completion Costs; provided, however, the
remaining aggregate proceeds drawable under the Pruneyard Loan after the
Closing to fund Pruneyard Place Completion Costs (excluding any
development fees, construction fees, management fees, leasing fees, or
similar fees or compensation payable to WW&A or any affiliate of WW&A
pursuant to the applicable budget and not due and payable as of the
Closing) shall be deemed the Estimated Pruneyard Place Completion Costs,
unless such amount is not a reasonable approximation thereof and either
the Cornerstone Parties or the Wilson Parties object.
"PRUNEYARD" means, collectively, the Projects known as Pruneyard Inn,
Pruneyard Place, Pruneyard Tower One, Pruneyard Tower Two, and Pruneyard
Shopping Center, all of which Projects are owned by Pruneyard Associates,
L.L.C., a Project Entity.
"PRUNEYARD INN" means the Project owned by Pruneyard Associates,
L.L.C., a Project Entity, and known as Pruneyard Inn, which is currently
and will be as of the Closing under expansion to add another 54 hotel
rooms and other improvements.
"PRUNEYARD INN BUDGET" means the budget for the Pruneyard Inn
Expansion attached as SCHEDULE 1.3(I)(I) (PRUNEYARD INN BUDGET), as the
same may be amended from time to time with the consent of the Cornerstone
Parties and the Wilson Representative, which consent will not be
unreasonably withheld, conditioned or delayed.
A-26
<PAGE>
"PRUNEYARD INN COMPLETION" means (A) completion of the Pruneyard Inn
Expansion substantially in accordance with the Pruneyard Inn Plans, the
Pruneyard Loan Documents and all applicable laws so that the Pruneyard
Inn Expansion may be fully occupied and operated, (B) issuance of a
certificate of occupancy permitting the full occupancy and use of the
Pruneyard Inn Expansion, and (C) the furnishing, installation and
equipping of all furniture, fixtures and equipment within the Pruneyard
Inn Expansion as contemplated by the Pruneyard Inn Plans and the
Pruneyard Loan Documents.
"PRUNEYARD INN COMPLETION COSTS" means all costs and expenses paid or
incurred by the Cornerstone Parties after the Closing to achieve the
Pruneyard Inn Completion, including, without limitation, the costs and
expenses paid or incurred for those items set forth in the Pruneyard Inn
Budget and described in the Pruneyard Loan Documents. The parties
acknowledge that the Pruneyard Inn Completion Costs will include (A)
interest under the Pruneyard Loan to the extent used to, and any other
loan obtained to, finance all or any portion of the Pruneyard Inn
Expansion, to the extent such interest is not covered out of net revenues
available therefor from the Pruneyard Inn Expansion operations, and (B) a
return accruing at a per annum rate equal to the per annum rate under the
Pruneyard Loan on any equity invested by the Cornerstone Parties to fund
other Pruneyard Inn Completion Costs, to the extent such return is not
covered out of net revenues available therefor from Pruneyard Inn
Expansion operations.
"PRUNEYARD INN EXPANSION" means the development, construction,
furnishing and equipping of the 54 additional hotel rooms and other
improvements to Pruneyard Inn substantially in accordance with the
Pruneyard Inn Plans and the Pruneyard Loan Documents.
"PRUNEYARD INN PLANS" means the plans and specifications for the
construction and development of the Pruneyard Inn Expansion described in
SCHEDULE 1.3(I)(I)(2) (PRUNEYARD INN PLANS) attached hereto which have
been approved pursuant to the Pruneyard Loan Documents, as the same may
be amended from time to time with the consent of the Cornerstone Parties
and the Wilson Representative, which consent will not be unreasonably
withheld, conditioned or delayed..
"PRUNEYARD LOAN" means that certain loan to be obtained prior to the
Closing from Bank of America National Trust and Savings Association to
Pruneyard Associates, L.L.C. in the maximum principal amount of
$66,800,000 providing financing for the Pruneyard Inn Expansion, the
Pruneyard Place Development and the refinancing of the existing loan in
the approximate amount of $29,300,000 and funds to distribute in the
Ordinary Course to the Partners of Pruneyard Associates LLC (not to
exceed $5,000,000), to be secured by Pruneyard.
"PRUNEYARD LOAN DOCUMENTS" means the documents evidencing, securing
or relating to the Pruneyard Loan.
"PRUNEYARD PLACE" means the Project owned by Pruneyard Associates,
L.L.C., a Project Entity, and known as Pruneyard Place, which is an
approximately 120,000 square foot, six story office building. Pruneyard
Place is currently and will be as of the Closing under construction. A
tenant has leased 100% of Pruneyard Place pursuant to the Pruneyard Place
Lease.
"PRUNEYARD PLACE BUDGET" means the budget for the Pruneyard Place
Development attached as SCHEDULE 1.3(I)(I)(3) (PRUNEYARD PLACE BUDGET),
as the same may be amended from time to time with the consent of the
Cornerstone Parties and the Wilson Representative, which consent will not
be unreasonably withheld, conditioned or delayed.
"PRUNEYARD PLACE COMPLETION" means (A) completion of the Pruneyard
Place Development substantially in accordance with the Pruneyard Place
Plans, the Pruneyard Loan Documents, the Pruneyard Lease, and all
applicable laws so that Pruneyard Place may be fully occupied and
operated, (B) issuance of a certificate of occupancy permitting the full
occupancy and use of Pruneyard Place, (C) the furnishing, installation
and equipping of all furniture, fixtures and
A-27
<PAGE>
equipment within the Pruneyard Place Development as contemplated by the
Pruneyard Place Plans, the Pruneyard Place Lease and the Pruneyard Loan
Documents, and (D) the occupancy by the tenant of Pruneyard Place
pursuant to the Pruneyard Place Lease and the commencement of the payment
of full rent under said Pruneyard Place Lease.
"PRUNEYARD PLACE COMPLETION COSTS" means all costs and expenses paid
or incurred by the Cornerstone Parties after the Closing to achieve the
Pruneyard Place Completion, including, without limitation, the costs and
expenses paid or incurred for those items set forth in the Pruneyard
Place Budget and described in the Pruneyard Loan Documents. The parties
acknowledge that the Pruneyard Place Completion Costs will include (A)
interest under the Pruneyard Loan, to the extent used to, and any other
loan obtained to, finance all or any portion of the Pruneyard Place
Development to the extent such interest is not covered out of net
revenues available therefor from the Pruneyard Place operations, and (B)
a return accruing, at a per annum rate equal to the per annum rate under
the Pruneyard Loan, on any equity invested by the Cornerstone Parties to
fund other Pruneyard Place Completion Costs, to the extent such return is
not covered out of net revenues available therefor from the Pruneyard
Place operations.
"PRUNEYARD PLACE DEVELOPMENT" means the development, construction,
furnishing, equipping, and leasing of Pruneyard Place substantially in
accordance with the Pruneyard Place Plans, the Pruneyard Place Lease, and
the Pruneyard Loan Documents.
"PRUNEYARD PLACE LEASE" means that certain lease with Compuware, Inc.
for the leasing of Pruneyard Place.
"PRUNEYARD PLACE PLANS" means the plans and specifications for the
construction and development of the Pruneyard Place Development described
in SCHEDULE 1.3(I)(I)(4) (PRUNEYARD PLACE PLANS) attached hereto which
have been approved pursuant to the Pruneyard Place Lease and the
Pruneyard Loan Documents, as the same may be amended from time to time
with the consent of the Cornerstone Parties and the Wilson
Representative, which consent will not be unreasonably withheld,
conditioned or delayed.
"PRUNEYARD PROJECT VALUE" means the difference of (A) the Project
Value of Pruneyard LESS (B) any development fees, construction fees,
management fees, leasing fees, or similar fees or compensation payable to
WW&A or any affiliate of WW&A pursuant to the Pruneyard Inn Budget and
Pruneyard Place Budget and not due and payable as of the Closing.
(ii) CONSTRUCTION. Until the Closing, the GP Party for Pruneyard
Associates, L.L.C., and, if the Rockwood Interests have been acquired by
WWA Investors, WWA Investors, shall use commercially reasonable efforts
to cause, the Pruneyard Inn Expansion and the Pruneyard Place Development
to be pursued substantially in accordance with the Pruneyard Inn Plans
and the Pruneyard Place Plans, respectively, and the requirements of the
Pruneyard Loan Documents and shall not make any material changes to the
Pruneyard Inn Plans, the Pruneyard Place Plans or the Pruneyard Loan
Documents without the approval of the Cornerstone Parties, such approval
not to be unreasonably withheld, conditioned or delayed. After the
Closing, the Cornerstone Parties shall cause the Pruneyard Inn Expansion
and the Pruneyard Place Development to be pursued substantially in
accordance with the Pruneyard Inn Plans and the Pruneyard Place Plans,
respectively, and shall not make any material changes to the Pruneyard
Inn Plans or the Pruneyard Place Plans without the approval of the Wilson
Representative, such approval not to be unreasonably withheld,
conditioned or delayed. Any approval of any material changes to the
Pruneyard Inn Plans or the Pruneyard Place Plans by either the
Cornerstone Parties or the Wilson Representative may be conditioned upon
appropriate adjustments in the respective Project Values solely for the
purpose of adjusting for any increases or decreases in the costs
resulting from such changes. Notwithstanding the foregoing to the
contrary, neither party shall have the right to approve immaterial
changes to the Pruneyard Inn Plans or the Pruneyard Place
A-28
<PAGE>
Plans which do not have a material adverse effect on the quality, cost or
value of such Project; provided, however, such immaterial changes must be
permitted under the Pruneyard Loan Documents, the Pruneyard Place Lease,
if applicable, and any and all applicable Laws.
(iii) PRUNEYARD INN CONTRIBUTION CONSIDERATION--CLOSING
CONSIDERATION, EARNOUT AND HOLDBACK. At the Closing, Participating
Investors owning an Interest, directly or indirectly, in Pruneyard
Associates, L.L.C., and therefore an indirect beneficial interest in
Pruneyard (the "PRUNEYARD PARTICIPATING INVESTORS"), shall receive
Consideration (the "PRUNEYARD CLOSING CONSIDERATION") equal to the
difference of (A) the Pruneyard Project Value, LESS (B) the Estimated
Pruneyard Inn Completion Costs, LESS (C) the Estimated Pruneyard Place
Completion Costs, LESS (D) the outstanding principal balance plus all
accrued and unpaid interest and other charges thereon as of 11:59 p.m.
(San Francisco time) of the day immediately prior to the Closing Date of
the Pruneyard Loan and not otherwise accounted for pursuant to Section9.4
(PROJECT CLOSING ADJUSTMENTS) (the "CLOSING BALANCE OF THE PRUNEYARD
LOAN").
Upon the Pruneyard Inn Completion and Pruneyard Place Completion, the
actual Pruneyard Inn Completion Costs and Pruneyard Place Completion
Costs shall be reasonably determined by the Cornerstone Parties and the
following provisions shall apply:
(A) the "CORNERSTONE PRUNEYARD INVESTMENT" shall mean the sum of
(1) the Pruneyard Closing Consideration (including the deemed amounts
paid to WWA Investors in the event it has acquired the Rockwood
Interests), PLUS (2) the Closing Balance of the Pruneyard Loan, PLUS
(3) the Pruneyard Inn Completion Costs, PLUS (4) the Pruneyard Place
Completion Costs;
(B) if the Pruneyard Project Value is more than the Cornerstone
Pruneyard Investment (such excess being referred to herein as the
"ADDITIONAL PRUNEYARD CONSIDERATION"), then the Additional Pruneyard
Consideration shall be paid to the Pruneyard Participating Investors
as provided in (D),(E), and (F) below;
(C) if the Cornerstone Pruneyard Investment exceeds the Pruneyard
Project Value (such excess being referred to herein as the "PRUNEYARD
SHORTFALL AMOUNT"), then the Pruneyard Shortfall Amount shall be paid
to the Cornerstone Parties by the Pruneyard Participating Investors
as provided in (D) and (E) below; PROVIDED that the Pruneyard
Shortfall Amount shall first be taken from the Pruneyard Holdback
Amount before recourse is sought pursuant to any indemnity under
Section1.3(i)(v) (INDEMNITY);
(D) if, prior to the Closing, WWA Investors acquires the Rockwood
Interests in Pruneyard Associates, L.L.C., a Rockwood Project Entity,
pursuant to the Rockwood Contract, then the allocation of the
Pruneyard Closing Consideration and Additional Pruneyard
Consideration shall be as provided in Section1.3(h)(iii) (EFFECT ON
TRANSACTIONS) and the owners of the Other Rockwood Interests in
Pruneyard Associates, L.L.C. prior to the Closing (and not WWA
Investors as the owner of the Rockwood Interests) shall pay the
entire amount of the Shortfall Amount in proportion to the relative
amounts of Consideration derived by such owners from the Other
Rockwood Interests in Pruneyard Associates, L.L.C.;
(E) if WWA Investors does not acquire the Rockwood Interests in
Pruneyard Associates, L.L.C., a Rockwood Project Entity, pursuant to
the Rockwood Contract, then the Pruneyard Closing Consideration and
Additional Pruneyard Consideration shall be allocated, and the
Pruneyard Shortfall Amount shall be paid by such Participating
Investors, pursuant to their ownership interests in Pruneyard
Associates, L.L.C.; and
(F) the Pruneyard Closing Consideration, if paid in Units or
Shares, shall be determined based on the Effective Price, and the
Additional Pruneyard Consideration, if any, shall be
A-29
<PAGE>
paid in Shares, Units or cash, in proportion to the percentage of
Shares, Units and cash received by each Investor in respect of the
Pruneyard Closing Consideration, but at a price for such Units or
Shares equal to the average of the closing price of a Share for the
ten (10) consecutive trading days immediately preceding the date of
issuance if paid more than one year after the Closing, and paid at
the Effective Price if paid within one year after the Closing.
(iv) PRUNEYARD HOLDBACK. At the Closing, an amount shall be held back
out of the Pruneyard Closing Consideration equal to fifteen percent (15%)
of the sum of (A) the Estimated Pruneyard Inn Completion Costs PLUS (B)
the Estimated Pruneyard Place Completion Costs (the "PRUNEYARD HOLDBACK
AMOUNT"); PROVIDED, HOWEVER, at the request of the Wilson Representative,
but not more frequently than once every sixty (60) days, the Cornerstone
Parties shall reasonably determine the Estimated Pruneyard Inn Completion
Costs and the Estimated Pruneyard Place Completion Costs, based upon the
costs estimated to be incurred from such date to Pruneyard Inn Completion
and Pruneyard Place Completion, respectively, and shall reduce the
Pruneyard Holdback Amount to an amount equal to fifteen percent (15%) of
such Estimated Pruneyard Inn Completion Costs and Estimated Pruneyard
Plan Completion Costs. The Pruneyard Holdback Amount shall be applied by
the Cornerstone Parties to satisfy and pay the Pruneyard Shortfall
Amount, if any, and the price of any Shares and Units within the
Pruneyard Holdback Amount so applied shall be deemed to be the price of a
Share for the ten (10) consecutive trading days immediately preceding the
date so applied, if applied more than one year after the Closing, and
paid at the Effective Price if paid within one year after the Closing.
Any remaining balance of the Pruneyard Holdback Amount, or any reduction
in the Pruneyard Holdback Amount, shall be paid or distributed to the
Participating Investors deriving Consideration from Pruneyard Inn and
Pruneyard Place in proportion to the Consideration so received.
(v) INDEMNITY. If the Pruneyard Holdback Amount is not sufficient to
fully fund the Pruneyard Shortfall Amount, then such deficiency shall be
paid to the Cornerstone Parties by the Participating Investors deriving
Consideration from Pruneyard Inn and Pruneyard Place in proportion to the
Consideration so received.
(j) CONCAR DEVELOPMENT. The Wilson Parties anticipate that a Project
Entity will enter into a Wilson Ground Lease with the owner of the Concar
land (the "CONCAR GROUND LEASE") for development of the Concar Project
described in SCHEDULE 1.3(J) (CONCAR PROJECT). The Wilson Parties shall keep
the Cornerstone Parties informed of the status of the execution form of the
Concar Ground Lease and the proposed Concar Project. The Wilson Parties
shall promptly deliver to the Cornerstone Parties copies of execution drafts
of the Concar Ground Lease and such other material information relating to
the Concar Project as is requested by the Cornerstone Parties and available
to the Wilson Parties. The Cornerstone Parties will in good faith and as
expeditiously as practicable review, comment upon and, if so requested,
approve the proposed Concar Ground Lease and shall generally cooperate with
the Wilson Parties' efforts to negotiate and obtain the Concar Ground Lease
PROVIDED that the Cornerstone Parties will approve (in their discretion) the
execution form of the Concar Ground Lease not more than fifteen (15)
business days after receipt of the Concar Ground Lease and such material
information, which approval will constitute the Cornerstone Parties'
election to include the Concar Project in the Transactions as provided in
this Section1.3(j) (CONCAR DEVELOPMENT). If the Cornerstone Parties do not
so elect to include the Concar Project in the Transactions, then the Concar
Project shall be deemed a Withdrawn Project pursuant to Section1.9
(WITHDRAWN PROJECT AND NET PROJECT VALUE ADJUSTMENTS). If the Concar Ground
Lease has not been executed prior to the Closing, then the Cornerstone
Parties shall have the right, exercisable by notice to the Wilson Parties
not less than fifteen (15) business days prior to the Scheduled Closing
Date, to elect to acquire the Concar Project after the Closing as provided
in this Section1.3(j) (CONCAR DEVELOPMENT), and if the Cornerstone Parties
do not so elect to acquire the Concar Project, then the related development
opportunity for the Concar
A-30
<PAGE>
Project shall be treated as if it were a Withdrawn Project. If the Concar
Project will be included in the Transactions, the following provisions shall
apply: (i) at the Closing, if the Related Project Entity holding the Concar
Project is not included in a Complete Transaction, the Related Project
Entity shall assign to the Operating Partnership all of its right, title,
and interest with respect to the Concar Project, including any interest
under the Concar Ground Lease (if then executed) and the Operating
Partnership shall assume all of the obligations of the Related Project
Entity with respect to the Concar Project arising after the Closing (subject
to the reimbursement obligation with respect to pre-Closing expenses set
forth in clause (ii)), and (ii) after the Closing, the Operating Partnership
shall reimburse such Related Project Entity in cash for all deposits
assigned to and benefiting the Cornerstone Parties, ground rent and
reasonable out-of-pocket third party costs incurred and paid by such Related
Project Entity as of the Closing in connection with the Concar Project
("DEVELOPMENT COSTS"), including, with respect to costs paid or reimbursed
to WW&A or any affiliate of WW&A, only the budgeted development or
construction fees or other amounts payable to WW&A or any affiliate of WW&A
prior to the Closing and any amounts advanced by WW&A or any of its
affiliates to pay any Development Costs, together with all closing and
transaction costs, if any, associated with the assignment of these interests
to the Operating Partnership, and no additional Consideration shall be due
in connection therewith. All development, construction, leasing, management
and other fee generating agreements with respect to Concar and the Related
Project Entity will be entered into with WW&A or with an affiliate of WW&A
that has been approved by Cornerstone, which approval will not be
unreasonably withheld, conditioned or delayed, and at the Closing shall be
assets of WW&A to become the properties of the Cornerstone Parties pursuant
to the Merger.
(k) Bay Park Plaza Adjustment.
(i) DEFINITIONS.
"BAY PARK" means the Project known as Bay Park Plaza 2, which is
owned by Bay Park Plaza Associates, L.P., a Project Entity.
"BAY PARK COMPLETION" means (A) completion of Bay Park in accordance
with the Bay Park Leases, the Bay Park Plans, the Bay Park Loan Documents
and all applicable laws, (B) acceptance of Bay Park by the Bay Park
tenants under the Bay Park Leases, and (C) either the issuance of a
certificate or certificates of occupancy permitting the full occupancy
and use of Bay Park, or the determination by Cornerstone in its
reasonable judgment that such certificates of occupancy could be obtained
but for incomplete tenant improvements which the tenant has the
responsibility to complete (at its own expense to the extent the costs
exceed any applicable tenant improvement allowances).
"BAY PARK LEASES" means those certain leases for all of the tenant
space within Bay Park.
"BAY PARK LOAN DOCUMENTS" means the documents evidencing, securing or
otherwise relating to the Existing Project Debt encumbering Bay Park.
"BAY PARK PLANS" means the plans and specifications for the
construction of Bay Park described on SCHEDULE 1.3(K) (BAY PARK PLANS)
attached hereto which conform to the Bay Park Leases and have been
approved pursuant to the Bay Park Loan Documents, as the same may be
amended from time to time with the consent of the Cornerstone Parties and
the Wilson Representative, which consent will not be unreasonably
withheld, conditioned or delayed.
"ESTIMATED BAY PARK COMPLETION COSTS" means all costs and expenses
estimated to be paid or incurred by the Cornerstone Parties after the
Closing to achieve the Bay Park Completion, including, without
limitation, the costs and expenses paid or incurred for those items set
forth in applicable budgets (including any development fees, construction
fees, management fees, leasing fees, or similar fees or compensation
payable to WW&A or any affiliate of WW&A pursuant to such budgets and not
due and payable as of the Closing) and described in the Bay Park Loan
A-31
<PAGE>
Documents, tenant improvement allowances and leasing commissions. The
parties acknowledge that the Estimated Bay Park Completion Costs will
include an estimate of (A) interest under the Existing Project Debt, to
the extent used to, and any other loan obtained to, finance all or any
portion of Bay Park completion to the extent such interest is not covered
out of net revenues available therefor from Bay Park operations and (B) a
return accruing at a per annum rate equal to the per annum rate under the
Existing Project Debt on any equity invested by the Cornerstone Parties
to fund such costs to the extent such return is not covered out of net
revenues from Bay Park operations. The Cornerstone Parties shall
reasonably determine the Estimated Bay Park Completion Costs before the
Closing, which amount shall be subject to the reasonable approval of the
Wilson Parties, whose approval shall not be unreasonably withheld,
conditioned or delayed.
"PROJECT VALUE FOR BAY PARK" means the difference of (A) the Project
Value of Bay Park as shown in SCHEDULE 1.3(A) (PROJECT INFORMATION),
which represents the Project Value as of the Bay Park Completion, LESS
(B) the Estimated Bay Park Completion Costs.
(ii) CONSTRUCTION. Until the Closing, the GP Party for Bay Park Plaza
Associates, L.P. shall cause the development and construction of Bay Park
to be pursued substantially in accordance with the Bay Park Plans, the
Bay Park Leases, the Bay Park Loan Documents and all applicable laws and
shall not make any material changes to the Bay Park Plans or the Bay Park
Loan Documents without the approval of the Cornerstone Parties, such
approval not to be unreasonably withheld, conditioned or delayed. Any
approval of any material changes to the Bay Park Plans by the Cornerstone
Parties may be conditioned upon appropriate adjustments in the Project
Value for Bay Park solely for the purpose of adjusting for any increases
or decreases in the cost of Bay Park resulting from such changes.
(iii) BAY PARK CONSIDERATION. At the Closing, the Consideration to
the Participating Investors owning an interest, directly or indirectly,
in Bay Park shall be determined in accordance with Section1.3(c)
(INVESTOR CONSIDERATION) using the Project Value for Bay Park described
in this Section1.3(k) (BAY PARK PLAZA ADJUSTMENT), and the amount of such
Consideration shall not be adjusted after the Closing if the actual costs
incurred after the Closing to achieve Bay Park Completion differ from the
Estimated Bay Park Completion Costs.
(l) POP-IX Adjustment.
(i) DEFINITIONS.
"ESTIMATED POP-IX COMPLETION COSTS" means all costs and expenses
estimated to be paid or incurred by the Cornerstone Parties after the
Closing to achieve the POP-IX Completion, including, without limitation,
the costs and expenses paid or incurred for those items set forth in
applicable budgets (including any development fees, construction fees,
management fees, leasing fees or similar fees or compensation payable to
WW&A or any affiliate of WW&A pursuant to such budgets and not due and
payable as of the Closing) and described in the POP-IX Loan Documents,
tenant improvement allowances, and leasing commissions. The parties
acknowledge that the Estimated POP-IX Completion Costs will include an
estimate of (A) interest under the Existing Project Debt, to the extent
used to, and any other loan obtained to, finance all or any portion of
POP-IX Completion, to the extent such interest is not covered out of net
revenues available therefor from POP-IX operations and (B) a return
accruing at a per annum rate equal to the per annum rate under the said
Existing Project Debt on any equity invested by the Cornerstone Parties
to fund such costs to the extent such return is not covered out of net
revenues available therefor from POP-IX operations. The Cornerstone
Parties shall reasonably determine the Estimated POP-IX Completion Costs
before the Closing, which amount shall be subject to the reasonable
approval of the Wilson Parties, whose approval shall not be unreasonably
withheld, conditioned or delayed.
A-32
<PAGE>
"POP-IX" means the Project known as Peninsula Office Park 9, which is
owned by Peninsula Office Park Associates, L.P., a Project Entity.
"POP-IX COMPLETION" means (A) completion of POP-IX in accordance with
the POP-IX Leases, the POP-IX Plans, the POP-IX Loan Documents and all
applicable laws, (B) acceptance of POP-IX by the POP-IX tenants under the
POP-IX Leases, and (C) issuance of a certificate or certificates of
occupancy permitting the full occupancy and use of POP-IX, or the
determination by Cornerstone in its reasonable judgment that such
certificates of occupancy could be obtained but for incomplete tenant
improvements which the tenant has the responsibility to complete at its
own expense (disregarding any tenant improvement allowances).
"POP-IX LEASES" means those certain leases for all of the tenant
space within POP-IX.
"POP-IX LOAN DOCUMENTS" means the documents evidencing, securing or
otherwise relating to the Existing Project Debt encumbering POP-IX.
"POP-IX PLANS" means the plans and specifications for the
construction of POP-IX described on SCHEDULE 1.3(L) (POP-IX PLANS)
attached hereto which conform to the POP-IX Leases and have been approved
pursuant to the POP-IX Loan Documents, as the same may be amended from
time to time with the consent of the Cornerstone Parties and the Wilson
Representative, which consent will not be unreasonably withheld,
conditioned or delayed.
"PROJECT VALUE FOR POP-IX" means the difference of (A) the Project
Value of POP-IX as shown in SCHEDULE 1.3(A) (PROJECT INFORMATION), which
represents the Project Value as of the POP-IX Completion, LESS (B) the
Estimated POP-IX Completion Costs.
(ii) CONSTRUCTION. Until the Closing, the GP Parties for Peninsula
Office Park Associates, L.P. shall cause the development and construction
of POP-IX to be pursued substantially in accordance with the POP-IX
Plans, the POP-IX Leases, the POP-IX Loan Documents and all applicable
laws and shall not make any material changes to the POP-IX Plans or the
POP-IX Loan Documents without the approval of the Cornerstone Parties,
such approval not to be unreasonably withheld, conditioned or delayed.
Any approval of any material changes to the POP-IX Plans by the
Cornerstone Parties may be conditioned upon appropriate adjustments in
the Project Value for POP-IX solely for the purpose of adjusting for any
increases or decreases in the cost of POP-IX resulting from such changes.
(iii) POP-IX CONSIDERATION. At the Closing, the Consideration to the
Participating Investors owning an interest, directly or indirectly, in
POP-IX shall be determined in accordance with Section1.3(c) (INVESTOR
CONSIDERATION) using the Project Value for POP-IX described in this
Section1.3(l) (POP-IX ADJUSTMENT), and the amount of such Consideration
shall not be adjusted after the Closing if the actual costs incurred
after the Closing to achieve POP-IX Completion differ from the Estimated
POP-IX Completion Costs.
(m) AGOURA HILLS. The parties intend that the Project Value at the
Closing for the Agoura Hills Project be equal to the actual out-of-pocket
capitalized costs (including (A) the unamortized amount of Lease Costs, as
amortized over the original term of such leases, and (B) the unamortized
amount of Capital Expenditures, as amortized over the useful life of such
Capital Expenditures) incurred by Agoura Hills Business Park Associates,
L.L.C. from the date of its acquisition of this Project until the Closing,
if not paid to WW&A or any affiliate of WW&A, PLUS acquisitions fees of not
more than 75 basis points times the acquisition price paid to WW&A.
Accordingly, the Project Value for the Agoura Hills Project shown in
SCHEDULE 1.3(A) (PROJECT INFORMATION) shall be adjusted at the Closing to
reflect these capital expenditures from the acquisition of this Project to
the Closing.
(n) APPROVED ADDITIONAL PROJECTS. To the extent, if any, that WW&A or
FUND-IV acquires an Approved Additional Project pursuant to Section6.2
(ACQUISITIONS), the Consideration for the Investors in the Related Project
Entity shall be increased by an amount, if any, equal to the sum of (i) the
actual and reasonable out-of-pocket costs not paid to WW&A or any affiliate
of WW&A (with the exception of an acquisition fee to WW&A if approved by the
Cornerstone Parties as described below), including
A-33
<PAGE>
purchase consideration, due diligence and professional fees related to the
acquisition, closing costs and, if so agreed by the Cornerstone Parties in
their discretion, an acquisition fee not to exceed 75 basis points on the
acquisition price payable to WW&A, PLUS (ii) all cumulative negative cash
flow from the date of the Acquisition to the Closing paid by the Related
Project Entity, after payment of interest on any acquisition loan whether or
not from the Cornerstone Parties, and LESS (iii) the amount of all
Indebtedness related to the Project, including the principal balance and
accrued and unpaid interest under the Acquisition Loan made by the
Cornerstone Parties to the Related Project Entity pursuant to Section6.2
(ACQUISITIONS). Further, the Related Project Entity shall also retain until
Closing, and distribute to the Cornerstone Parties at the Closing, all
cumulative positive cash flow from the Approved Additional Project from the
date of the Acquisition to the Closing, and such payment shall have no
effect on the amount of Consideration determined as provided above.
(o) ADJUSTMENTS TO CONSIDERATION PAYABLE TO NON-ELIGIBLE PARTICIPATING
INVESTORS. Notwithstanding anything to the contrary in this Section1.3
(DETERMINATION AND ALLOCATION OF CONSIDERATION), post-Closing increases in
the Consideration due non-Eligible Participating Investors, if any, who have
sold Interests pursuant hereto in the Pruneyard Projects will be payable in
cash only.
1.4 Assumption or Prepayment of Mortgage Indebtedness.
(a) LOANS ASSUMED. SCHEDULE 1.3(B) (EXISTING PROJECT DEBT) identifies
the loans which the parties contemplate the Operating Partnership will take
subject to at the Closing (subject to any applicable exculpation provisions)
or which the parties would like to have assumed by the Operating Partnership
at the Closing and the loans which they anticipate will be repaid by the
Operating Partnership in connection with the Closing. The Pruneyard Loan
once it is in place shall be included among these loans. The parties will
cooperate as provided in Section1.4(c) (COOPERATION REGARDING LENDERS) to
obtain the requisite consents of any lender whose consent is required to the
assumption of any loan identified to be assumed, without modification of the
material underlying terms. The costs of obtaining the consents, any
assumption or transfer fees or charges, any prepayment penalties with
respect to any loan to be repaid at or in connection with the Closing (but
not Participation Amounts as discussed in Section1.4(d) (PARTICIPATION
FEATURES)) and any related reasonable attorneys fees and costs will be borne
as provided in Section1.5 (CERTAIN CLOSING COSTS).
(i) At Closing, with respect to Existing Project Debt of each Project
other than any Withdrawn Project, (A) the Operating Partnership shall
repay or undertake to repay after (but in no event on) the Closing those
loans which either were anticipated to be repaid in SCHEDULE 1.3(B)
(EXISTING PROJECT DEBT) or for which the parties have not been able to
obtain the requisite lender consents for the loan to be assumed or taken
subject to by the Operating Partnership and subject to which the
Operating Partnership is not willing to take its interests (the "REPAID
LOANS"); and (B) the Operating Partnership shall assume (without change
in the material underlying terms thereof) and agree to pay all
Indebtedness and (subject to any obligation voluntarily incurred by a
Participating Investor under Section7.2(b) (DEFICIT ELECTION)) perform
all obligations arising from and after the Closing Date with respect to
all other Existing Project Debt of the Project Entities and any of their
constituent owners who have guaranteed any amount with respect to this
Existing Project Debt, subject to the applicable exculpation provisions
(the "ASSUMED LOANS"). "Assumed Loans" shall also include the Existing
Project Debt encumbering Partially Participating Projects. The
Cornerstone Parties shall jointly and severally indemnify, defend and
hold harmless the Project Entities and their partners and members and any
guarantors thereof (collectively, the "LOAN PARTIES") from any and all
loss, cost or liability for the Assumed Loans and the Repaid Loans
incurred or arising from and after the Closing Date; PROVIDED, however,
the Cornerstone Parties shall not be required under this Section1.4(a) to
indemnify a non-Participating Investor or any related Loan Parties in a
Partially Participating Project other than Participating Investors.
(ii) The parties contemplate that the outstanding principal balance
of the Assumed Loans at the Closing will not be less than $496,000,000 in
the aggregate.
A-34
<PAGE>
(iii) In the event that the Cornerstone Parties are unable for any
reason to consummate any such permitted assumption of any Existing
Project Debt on its current economic terms, the Operating Partnership
shall cause such Existing Project Debt to be paid in full after (but in
no event on) the Closing, to the extent permitted, and such loan will be
treated as a Repaid Loan. Notwithstanding the foregoing, if, in
accordance with the terms thereof, any Existing Project Debt may not be
repaid, assumed or taken subject to, on its current economic terms
(including all contractual prepayment, assumption or transfer fees or
charges) and the parties, after good faith negotiations, are not able to
reach an agreement with the related lender to permit repayment or
assumption of such Existing Project Debt, the Cornerstone Parties may, by
written notice delivered not less than ten (10) days before the Scheduled
Closing Date, elect to have the Project encumbered by such Existing
Project Debt treated as a Withdrawn Project. Further, certain rights with
respect to Commerce Park, which is encumbered by a Participating Loan,
and 303 Almaden, which is encumbered by a Participating Loan and by a
Wilson Ground Lease (hereinafter defined) having a participation feature,
are set forth in Section1.3(d) (PARTICIPATION FEATURES).
(b) REPLACEMENT COLLATERAL AND RELEASES. The Operating Partnership shall
exercise commercially reasonable efforts to cause the Loan Parties (except
as otherwise provided in Section7.2 (INVESTOR BASIS PROTECTION)) to be
released from any liability on the Assumed Loans from and after the Closing
Date (subject to any obligation voluntarily incurred by a Participating
Investor under Section7.2(b) (DEFICIT ELECTION)) and to have replaced,
released and returned to them any cash, bonds, letters of credit or similar
collateral security other than the Project. Without limiting the foregoing,
the Cornerstone Parties shall deliver, concurrently with or as soon as
practicable after the Closing, replacements for any cash, bonds, letters of
credit or other security posted by or on behalf of the Loan Parties in
connection with any Assumed Loan, and shall arrange for the surrender or
cancellation of such security. On or before the Closing Date, the
Cornerstone Parties and the appropriate Project Entities shall execute and
deliver, with respect to each Assumed Loan, all the documents and
instruments (collectively, the "LOAN ASSUMPTION DOCUMENTS") reasonably
requested by, and in a form satisfactory to, the Loan Parties to evidence
the Cornerstone Parties' assumption of the Assumed Loans, and, if obtained,
the release of the Loan Parties' obligations thereunder.
(c) COOPERATION REGARDING LENDERS. The parties shall cooperate in good
faith and use their commercially reasonable efforts to negotiate with the
relevant lenders to obtain prior to the Scheduled Closing Date the requisite
lender consents and to minimize prepayment and assumption fees and charges
and to obtain favorable terms of assumption for any loans contemplated to be
assumed.
(d) PARTICIPATION FEATURES. The loans identified in SCHEDULE 1.4(D)
(PARTICIPATING LOANS) encumbering the Commerce Park Project and the 303
Almaden Project are referred to as "PARTICIPATING LOANS" and are the only
Participating Loans encumbering any Project. At the Closing, any amount
payable to a lender in connection with the repayment of a Participating Loan
which is based on (A) the appraised value or the sale, exchange or
contribution value of the related Project or (B) any other comparable
participation provision will be calculated as provided in the applicable
loan documents or as otherwise agreed to by the related lender (such amount,
the "PARTICIPATION AMOUNT") and will reduce the Net Project Value of the
Related Project by a like amount. The Wilson Ground Lease for 303 Almaden
also includes a participation feature. At the Closing, any amount payable to
the lessor under such Wilson Ground Lease pursuant to the participation
provision in such Wilson Ground Lease will be calculated as provided in such
Wilson Ground Lease or otherwise agreed to by the ground lessor and will
reduce the Net Project Value of 303 Almaden by a like amount. In the event
Cornerstone Parties are unable for any reason to repay the Participating
Loans for the Commerce Park Project, the Cornerstone Parties may, by written
notice delivered not less than ten (10) days before the Scheduled Closing
Date, elect to have the Commerce Park Project treated as a Withdrawn
Project. In the event either (i) the Cornerstone Parties are unable for any
reason to repay the Participating Loan for the 303 Almaden Project or (ii)
the participation provision under the Wilson Ground Lease is not deleted and
of no further force or effect as of the Closing, after payment of the
participation amount
A-35
<PAGE>
described above, then the Cornerstone Parties may, by written notice
delivered not less than ten (10) days before the Scheduled Closing Date,
elect to have the 303 Almaden Project treated as a Withdrawn Project. The
parties will consider in good faith structuring the Transaction with respect
to 303 Almaden so that a Complete Transaction with respect to 303 Almaden
will not occur until after December 31, 1998 subject to achieving the other
intended results of such Transaction. Further the Wilson Parties shall have
the right to treat the 303 Almaden Project as a Withdrawn Project, by
written notice delivered not less than ten (10) days before the Scheduled
Closing Date, if the sum of (x) the Participation Amount under the
Participating Loan for the 303 Almaden Project plus (y) the participation
amount due under the Wilson Ground Lease for the 303 Almaden Project,
calculated as provided above, exceeds $4,000,000.
1.5 CERTAIN CLOSING COSTS. The first $3,500,000 in Closing Costs incurred by
the parties shall be paid by the Cornerstone Parties. "CLOSING COSTS" means the
following costs incurred by or on behalf of the parties at or in connection with
the Closing: (A) costs incurred in connection with the assumption of the Assumed
Loans and the repayment of the Repaid Loans (other than the Participation
Amounts described in Section1.4 (d) (PARTICIPATION FEATURES) and the outstanding
principal balance and accrued interest with respect to any Repaid Loans),
including prepayment and transfer and assumption fees and other costs and
charges payable to or for the benefit of any lender and any related reasonable
lenders' attorneys fees and costs, (B) reasonable auditor's fees and expenses
and other reasonable out-of-pocket expenses, not to exceed $200,000 in the
aggregate, incurred in the preparation of audited statements of income and
expense with respect to WW&A, the Funds and the Related Project Entities for the
calendar years 1995 and 1996 as contemplated by Section6.1(f) (PRE-CLOSING
AUDITS AND COSTS), (C) recording fees and costs, transfer taxes, documentary
stamp taxes, title insurance premiums and fees and escrow fees, including any
such amounts incurred on or after the Closing as a result of (i) a merger of a
Fund or Project Entity with respect to a Complete Transaction Project into the
Operating Partnership, (ii) the contribution or conveyance of any Complete
Transaction Project to the Cornerstone Parties, or (iii) the collapse and
liquidation of any Fund or Project Entity with respect to a Complete Transaction
Project and the resulting ownership of a Complete Transaction Project by any of
the Cornerstone Parties, whether any such events described in (i) through (iii)
occur on or sometime after the Closing, and (D) expenses incurred in making any
necessary filings under the HSR Act, as described in Section6.10 (GOVERNMENT
FILINGS). Closing Costs in excess of $3,500,000 in the aggregate shall be borne
50% by the Cornerstone Parties and 50% as Wilson Costs by the WW&A Shareholders
and Investors in accordance with Section1.3(d) (CERTAIN CASH ADJUSTMENTS).
1.6 CASH CONSIDERATION. At the Closing, the total amount of Consideration
payable in cash to Participating Investors (the "AVAILABLE CASH AMOUNT") will
not exceed an amount equal to forty percent (40%) of the sum of (i) the WW&A
Company Value, PLUS (ii) the aggregate Consideration distributable to the
Participating Investors and other Investors whose Interests are acquired by the
Cornerstone Parties through a statutory merger of a Project Entity or a
contribution of a Project on or after the Closing; PROVIDED, however, that
(without increasing the aggregate Consideration) an additional Ten Million
Dollars ($10,000,000) will be added to the Available Cash Amount only to the
extent necessary to pay Consideration to non-Eligible Investors and to
dissenting Investors. The Available Cash Amount will be allocated as follows:
First, the Available Cash Amount will be applied to the purchase price of
Interests purchased from non-Eligible Investors pursuant to Section1.1(b)
(NON-ELIGIBLE INVESTORS). Second, the remaining Available Cash Amount will be
reserved (in an amount reasonably determined by the Cornerstone Parties) to be
applied to the claims of any dissenting Investors. Third, each remaining
Eligible Participating Investor requesting cash will receive cash in the
percentage requested, up to 40% of the total Consideration due such
Participating Investor, in proportion to the relative amounts of cash so
requested. Finally, the remaining Available Cash Amount will be distributed
among the remaining Participating Investors requesting more than 40% cash in
proportion to the relative amounts of cash in excess of 40% so requested. If the
Available Cash Amount is insufficient to pay fully the cash Consideration due
any Eligible Participating Investor, the balance will be made up of Shares or
Units at the Effective Price, as the Participating Investor has elected in its
Consent.
A-36
<PAGE>
1.7 DESIGNATION OF ISSUANCE OF EQUITY SECURITIES. The Wilson Representative
shall give the Cornerstone Parties notice at least ten (10) business days before
the Scheduled Closing Date designating the name, address, taxpayer
identification number and other reasonable information required by the
Cornerstone Parties of or relating to the Participating Investors to which the
Equity Securities are to be issued at the Closing as provided in Section1.8
(DISTRIBUTION OF CONSIDERATION).
1.8 DISTRIBUTION OF CONSIDERATION.
(a) CONSIDERATION DISTRIBUTED. At Closing, the Cornerstone Parties shall
deliver to the Wilson Representative that number of duly issued Units and
Shares and that portion of the Available Cash Amount to be issued to the
Participating Investors under this Section1 (CONTRIBUTION TRANSACTIONS),
less the Consideration held back in accordance with Section1.3
(DETERMINATION AND ALLOCATION OF CONSIDERATION) and Section1.8(b)
(CONSIDERATION WITHHELD). The Equity Securities so delivered will be issued
in the names and the amounts designated by the Wilson Representative
pursuant to Section1.7 (DESIGNATION OF ISSUANCE OF EQUITY SECURITIES). The
Wilson Representative shall allocate the Shares, Units and Available Cash
Amount among Participating Investors in accordance with their Consents and
this Agreement and in due course deliver the Consideration to the
Participating Investors.
(b) CONSIDERATION WITHHELD. Notwithstanding the foregoing, an amount of
Consideration equal to two percent (2%) of the sum of (i) the aggregate WW&A
Company Value and (ii) the aggregate Project Value of all Projects other
than the Agoura Hills Project and any Approved Additional Project included
in the Transactions at the Closing (so that the Project Value of each
Withdrawn Project is not included), and with respect to each Partially
Participating Project, LESS the amount of the Project Value of such
Partially Participating Project which is not allocable to Interests owned by
Participating Investors, will be retained pursuant to Section11.8 (ESCROW
FUND) (the "HOLDBACK AMOUNT"). The Holdback Amount will be allocated among
the Participating Investors with respect to the Funds and Project Entities
in proportion to their respective shares of the aggregate Consideration. In
addition to the foregoing amounts, pursuant to Section2.10 (HOLDBACK), the
WW&A Shareholders will have $5,000,000 in Shares held back from their Merger
Consideration. Each Participating Investor's share of the Holdback Amount
will be held in Shares to the extent the Participating Investor elected to
receive Shares, and if that is not sufficient then in Units to the extent
the Investor elected to receive Units, and if that is still not sufficient
then in cash. Thus, a Participating Investor electing to receive its entire
Consideration in cash would have to leave in the escrow the Participating
Investor's proportionate share of the Holdback Amount in cash.
1.9 WITHDRAWN PROJECT AND NET PROJECT VALUE ADJUSTMENTS. Either the
Cornerstone Parties or the GP Party related to a Project, as the case may be as
provided herein, will have the right to declare the Project a "WITHDRAWN
PROJECT" or to adjust the Net Project Value therefor as follows:
(a) PARTIAL INTERESTS. If the Cornerstone Parties are not to acquire any
Interests with respect to such Project pursuant to Section1.2 (THRESHOLD
CONTRIBUTION TRANSACTIONS; PARTIAL INTERESTS), the Project will
automatically be deemed a Withdrawn Project.
(b) PROJECT VALUE ADJUSTMENT FOR BREACH OF REPRESENTATION OR WARRANTY,
IMPAIRMENT OF TITLE OR ENVIRONMENTAL CONDITION. If each of (A) and (B) below
apply:
(A) Either
I. the representations and warranties made in Section3
(REPRESENTATIONS AND WARRANTIES OF THE GP PARTIES), either with
respect to such Project, or with respect to the Project Entity owning
such Project, are not true and correct as of the date made, other
than by reason of a Major Casualty as described in Section15
(CASUALTY LOSS) or Major Taking, as described in Section16
(CONDEMNATION);
II. at the Closing, the Project is subject to any Encumbrance
other than (1) a Wilson Permitted Encumbrance, (2) any Encumbrance
for which title insurance coverage reasonably acceptable to
Cornerstone is available under any policies of title insurance held
by the Related Project Entity or any Wilson Party or under the Title
Commitments (after the
A-37
<PAGE>
payment of any premiums and the fulfillment of any other conditions
to the issuance of insurance thereunder insuring the interest in such
Project of the Cornerstone Parties and their lenders and assigns), or
(3) any Encumbrance for which suretyship bond or other security
reasonably satisfactory to the Cornerstone Parties has been provided;
or
III. at the Closing, an Environmental Condition not disclosed on
the Environmental Reports or not otherwise disclosed in writing to
the Cornerstone Parties prior to the Execution Date exists; and
(B) such occurrence would result in a loss or liability to the
Cornerstone Parties of not less than the greater of (A) Five Hundred
Thousand Dollars ($500,000) or (B) one percent (1%) of the Project Value,
Then, at the Cornerstone Parties' election, the Net Project Value for
the Related Project shall be reduced by an amount equal to the full amount
of such loss or liability, determined in the manner described in
Section1.9(d) (PROCEDURE).
(c) WITHDRAWAL FOR BREACH OF REPRESENTATION OR WARRANTY, IMPAIRMENT OF
TITLE, OR ENVIRONMENTAL CONDITION. Either the Cornerstone Parties or the
related GP Party may elect to treat a Project as a Withdrawn Project if each
of (A) and (B) below apply:
(A) Either
I. the representations and warranties made in Section3
(REPRESENTATIONS AND WARRANTIES OF THE GP PARTIES), either with
respect to such Project, or with respect to the Project Entity owning
such Project, are not true and correct as of the date made other than
by reason of a Major Casualty as described in Section15 (CASUALTY
LOSS) or Major Taking, as described in Section16 (CONDEMNATION);
II. at the Closing, the Project is subject to any Encumbrance
other than (1) a Wilson Permitted Encumbrance, (2) any Encumbrance
for which title insurance coverage reasonably acceptable to
Cornerstone is available under any policies of title insurance held
by the Related Project Entity or any Wilson Party or under the Title
Commitments (after the payment of any premiums and the fulfillment of
any other conditions to the issuance of insurance thereunder insuring
the interest in such Project of the Cornerstone Parties and their
lenders and assigns), or (3) any Encumbrance for which suretyship
bond or other security reasonably satisfactory to the Cornerstone
Parties has been provided; or
III. at the Closing, an Environmental Condition not disclosed on
the Environmental Reports or not otherwise disclosed in writing to
the Cornerstone Parties prior to the Execution Date exists; and
(B) such occurrence would result in a loss or liability to the
Cornerstone Parties equal to at least fifteen percent (15%) of the
Project Value unless the Cornerstone Parties elect to limit the claimed
loss or liability to less than fifteen percent (15%) of the Project
Value, and to proceed exclusively under Section1.9(b) (PROJECT VALUE
ADJUSTMENT FOR BREACH OF REPRESENTATION OR WARRANTY, IMPAIRMENT OF TITLE
OR ENVIRONMENTAL CONDITION), in which event the GP Party will have no
right to cause such Project to become a Withdrawn Project, provided, that
the Wilson Parties will have no right to cause a Project to become a
Withdrawn Project in any event under this Section1.9(c) if to the related
GP Party's Knowledge at the Execution Date the representation and
warranty in question was not true and correct or the facts or
circumstances which caused the representation or warranty to become
incorrect resulted from the intentional action or omission of any of the
Wilson Parties or the Related Project Entity or a breach of a covenant
under this Agreement by any of the Wilson Parties.
(d) PROCEDURE. A party's election to withdraw a Project or to invoke the
price adjustment procedures set forth herein must be invoked by delivery of
written notice to the other parties delivered as promptly as possible after
such party becomes aware of the facts or circumstances giving rise to
A-38
<PAGE>
such right or adjustment, but in all events before the Closing. Any dispute
regarding the existence of a breach of representation or warranty and the
amount of any loss or liability will be resolved as set forth in Section12
(DISPUTE RESOLUTION). If the parties are unable to agree on the amount of
such adjustment by the Closing, Consideration with a value equal to the loss
or liability claimed by the Cornerstone Parties (allocated among cash, Units
and Shares in the same proportions as the Participating Investors in the
Related Project Entity have allocated their Consideration) shall be held
back and placed in escrow in the same manner as the Holdback Amount (and in
addition to the Holdback Amount) pending resolution of the dispute. In
addition, the Cornerstone Parties may, at their election, recover any
adjustment amounts due hereunder from the Holdback Amount, PROVIDED that if
the amounts available under this Section1.9(d) are insufficient to satisfy
the adjustments contemplated by Section1.9(b) (PROJECT VALUE ADJUSTMENT FOR
BREACH OF REPRESENTATION OR WARRANTY, IMPAIRMENT OF TITLE OR ENVIRONMENTAL
CONDITION), the Cornerstone Parties may have direct recourse against the
related GP Parties and the Participating Investors in the appropriate
Related Entities, to the extent, but only to the extent, of the
Consideration received with respect thereto. If any amounts are recovered
from the Holdback Amount under this Section1.9(d) and the Holdback Amount is
otherwise depleted pursuant to the provisions of this Agreement, then the
Cornerstone Parties will have the right to require the Participating
Investors in the appropriate Related Entity to restore, fund and add to the
Holdback Amount the amount so recovered therefrom pursuant to this
Section1.9(d) to the extent, but only to the extent, of the Consideration
received with respect thereto.
(e) CASUALTY/CONDEMNATION. The Cornerstone Parties may elect to withdraw
a Project due to a Major Casualty or Major Taking only pursuant to Section15
(CASUALTY LOSS) or Section16 (CONDEMNATION).
(f) LOCKED-IN LOAN AND PARTICIPATIONS. The Cornerstone Parties may elect
to withdraw a Project subject to Existing Project Debt which cannot be
prepaid, assumed or taken subject to on the current economic terms without
the lender's consent and the lender has failed at the time of the Closing to
allow the loan to be so prepaid, assumed, or taken subject to, and with
respect to which the Cornerstone Parties have not elected to take the
interest in the Project subject to this loan as provided in Section1.4
(ASSUMPTION OR PREPAYMENT OF MORTGAGE INDEBTEDNESS). Further, both the
Wilson Parties and the Cornerstone Parties have the right to withdraw
certain Projects encumbered by a Participating Loan or the Wilson Ground
Lease for 303 Almaden as specifically provided in Section1.3(d)
(PARTICIPATION FEATURES).
(g) CONSEQUENCES OF WITHDRAWAL. In the event any Project becomes a
Withdrawn Project, the Cornerstone Parties will not acquire any interest in
the Withdrawn Project and the Project Entity that owns the Project will
retain the Project, in which event such entity shall no longer be considered
a Project Entity or Related Project Entity for any purpose hereunder, the
Cornerstone Parties will not assume any loan related to the Withdrawn
Project and such loan shall be removed from the definition of Assumed Loans
and the Repaid Loans. The Wilson Parties will, before the Closing Date, form
a new entity and spin off to that entity any interests in a Withdrawn
Project in the event the Cornerstone Parties would otherwise acquire in the
Transactions any direct or indirect interest (through ownership of any
Interests or otherwise) in such Withdrawn Project.
1.10 GUARANTY. At the Closing, Cornerstone shall execute and deliver to the
Wilson Representative a guarantee (the "GUARANTY") in form and substance
satisfactory to the Wilson Representative whereby Cornerstone guarantees the
full and complete performance of the obligations which survive the Closing of
the Operating Partnership under this Agreement and the other Transaction
Agreements.
A-39
<PAGE>
1.11 SEVERAL LIABILITY. No Investor will have any liability with respect to
the Transactions unless and until such person becomes a Participating Investor,
and then each Participating Investor's liability and obligations will be limited
to those specifically undertaken in that Participating Investor's Consent, or as
to non-Participating Investors, the Investor receives Consideration with respect
to the Transactions, and then each such non-Participating Investor will be
obligated only to the extent of Consideration to be received under this
Agreement and otherwise in the same manner as a Participating Investor. No
Participating Investor will have joint and several liability other than with
respect to its interest in the holdbacks pursuant to SectionSection1.3
(DETERMINATION AND ALLOCATION OF CONSIDERATION) and 11.8 (ESCROW FUND). With
respect to each separate Project Entity price adjustment among those Investors
owning interests in an affected Project, the liability of the Investors shall be
several and not joint with respect to these obligations pursuant to
Section1.9(d) (PROCEDURE). Instead, each Participating Investor who has
delivered a Consent or any other Transaction Agreement will have several
liability thereunder for the covenants, agreements, representations and
warranties made or deemed to have been made by it therein to the extent and only
to the extent that any such covenant, agreement, representation or warranty
relates to itself or to the Interests owned or transferred by it, and such
liability will be limited exclusively to the terms of the applicable Consent or
other Transaction Agreements.
1.12 WITHHOLDING. The Cornerstone Parties will be entitled to deduct and
withhold from the Consideration otherwise payable to a Participating Investor or
other Investor (including a dissenting Investor) such amounts as the Cornerstone
Parties reasonably determine are required to be deducted and withheld with
respect to such payment under the Code or any provision of state, local or
foreign tax law. Any amount so withheld shall be treated for all purposes of
this Agreement as having been paid to the Investor in respect of which such
deduction and withholding was made by the Cornerstone Parties. In particular, if
the Investor is or becomes a foreign person (within the meaning of Section1445
of the Code), the Cornerstone Parties are authorized to deduct and withhold ten
percent (10%) of the amount realized by such Investor (within the meaning of
Section1001 of the Code) unless the Investor timely provides a notice of
nonrecognition transfer with respect to the contribution, as provided in the
applicable Treasury Regulations under Section1445 of the Code.
2. THE MERGER.
2.1 MERGER OF WW&A INTO CORNERSTONE. Upon the terms and subject to the
conditions set forth in this Agreement, and in accordance with Nevada and
California law, at the Effective Time, WW&A will be merged with and into
Cornerstone (the "MERGER"). As a result of the Merger, the separate corporate
existence of WW&A will cease, and Cornerstone will continue as the surviving
corporation of the Merger.
2.2 EFFECTIVE TIME; CLOSING. At the Closing the parties hereto shall cause
the Merger to be consummated by filing this Agreement or certificates or
articles of merger (the "CERTIFICATES OF MERGER") with the Secretaries of the
State of California and Nevada, in such form as is required by, and executed in
accordance with the relevant provisions of, California and Nevada law (the date
and time of the later of such filings being the "EFFECTIVE TIME").
2.3 EFFECT OF THE MERGER. At the Effective Time, the effect of the Merger
will be as provided in the applicable provisions of California and Nevada law.
Without limiting the generality of the foregoing, and subject thereto, at the
Effective Time (i) all the property, rights, privileges, powers and franchises
of WW&A will vest in Cornerstone as the surviving corporation; and (ii) all
debts, liabilities, obligations, restrictions, disabilities and duties of WW&A
will become the debts, liabilities, obligations, restrictions, disabilities and
duties of Cornerstone as the surviving corporation, subject to the terms of this
Agreement.
2.4 ARTICLES OF INCORPORATION AND BYLAWS OF THE SURVIVING CORPORATION.
(a) At the Effective Time, Cornerstone's Articles of Incorporation will
be the Articles of Incorporation of the surviving corporation until
thereafter amended as provided by law and such Articles of Incorporation.
A-40
<PAGE>
(b) At the Effective Time, Cornerstone's Bylaws will be amended and
restated as set forth in EXHIBIT 2.4 (BYLAWS) and, as so amended and
restated, will be the Bylaws of the surviving corporation until thereafter
amended as provided by law, Cornerstone's Articles of Incorporation and such
Bylaws.
2.5 PRE-CLOSING ADJUSTMENTS. Prior to Closing, WW&A shall undertake the
pre-Closing Financial Adjustments set forth in SCHEDULE 2.5 (PRE-CLOSING WW&A
ADJUSTMENTS).
2.6 CONVERSION OF WW&A SHARES.
(a) MERGER SHARES. Subject to Section2.6(e) (NO FRACTIONAL SHARES), the
shares of common stock of WW&A (collectively, the "WW&A SHARES") issued and
outstanding immediately prior to the Effective Time (except for treasury
shares) will, by virtue of the Merger and without any action on the part of
the holder thereof, be converted in their entirety into the aggregate number
of Shares determined by DIVIDING (i) the WW&A Company Value BY (ii) the
Effective Price (the "MERGER SHARES"). The Merger Shares shall be allocated
among the WW&A Shareholders in proportion to their ownership of WW&A Shares
immediately prior to the Effective Time.
(b) WW&A COMPANY VALUE. "WW&A COMPANY VALUE" means an amount equal to
the sum of the following: (i) $49,500,000, PLUS (ii) $1,500,000 for the
miscellaneous non-operating assets consisting of partnership and member
interests owned by WW&A and described on SCHEDULE 2.6(B) (WW&A MISCELLANEOUS
INTERESTS), PLUS (iii) $2,479,200 for the airplane owned by WW&A, plus (iv)
$1,800,000, for that portion of the CIC Value allocated at the Closing as
hereinafter provided in Section2.6(c) (CIC ADJUSTMENT), PLUS (v) the total
Consideration to be received by WW&A by virtue of its direct and indirect
ownership of Interests, MINUS (vi) the outstanding principal balance,
together with all interest and other charges accrued thereon of the purchase
money Indebtedness secured by the WW&A airplane, and no other Indebtedness
of WW&A shall be outstanding as of the Closing Date.
(c) CIC ADJUSTMENT. The WW&A Company Value includes $1,800,000 for an
allocated portion of the CIC Value as of the Closing to be adjusted as
hereinafter provided. The WW&A Company Value will include an additional
amount equal to the difference of (i) an amount equal to six (6) times the
1998 calendar year earnings before debt service, interest, income taxes,
depreciation and amortization attributable to WW&A's CIC division determined
in accordance with GAAP (with such allocation of WW&A overhead as is
consistent with GAAP and with WW&A's past practices in allocating overhead
to its CIC division) (the "CIC VALUE") LESS (ii) $1,800,000 which equals the
allocated portion of the CIC Value as of the Closing, PROVIDED in no event
shall such additional CIC Value exceed $1,800,000 or be less than zero. The
earnings to be included in the calculation of the CIC Value will include
only those earnings derived from the conduct of CIC's business in the
Ordinary Course, which business primarily consists of serving as general
contractor or construction manager for the construction of tenant
improvements. The CIC Value will be determined as soon as practicable after
December 31, 1998. Cornerstone will provide written notice to the WW&A
Representative setting forth in sufficient detail its calculation of the CIC
Value, together with such backup materials as the Wilson Representative may
reasonably request as soon as practicable after December 31, 1998, and the
Wilson Representative shall have ten (10) business days from the receipt of
such written notice to propose any adjustments to Cornerstone's calculation
of the CIC Value by written notice to Cornerstone. If the Wilson
Representative does not so propose any adjustments within such ten-day
period, Cornerstone's calculation of the CIC Value shall be conclusive for
purposes of this Section2.6(c), absent manifest error. If the Wilson
Representative proposes any adjustments to Cornerstone's calculation of the
CIC Value, Cornerstone and the Wilson Representative shall use their good
faith efforts to resolve any disputed adjustments. Any disputed adjustments
which remain unresolved after ten (10) business days from the date of the
written notice from Wilson Representative to Cornerstone shall be submitted
to the San Francisco office of Coopers & Lybrand L.L.P. The determination of
Coopers & Lybrand L.L.P. as to
A-41
<PAGE>
such disputed adjustments shall be conclusive for purposes of determining
the CIC Value in accordance with this Section2.6(c), absent manifest error.
If the actual CIC Value is more than $1,800,000, Cornerstone shall promptly
issue additional Shares to the WW&A Shareholders of record immediately prior
to the Effective Time in proportion to their ownership of WW&A Shares
respectively owned by such WW&A Shareholders immediately prior to the
Effective Time, equal to the quotient of (A) the excess of the CIC Value
over $1,800,000, PROVIDED such excess shall not exceed $1,800,000, DIVIDED
BY (B) the Effective Price; PROVIDED, HOWEVER that said number of additional
Shares shall be further increased by a number of further Shares equal to the
quotient of (x) the dividends which would have been paid by Cornerstone on
such additional Shares (had such additional Shares been issued at Closing)
from the Closing until the issuance of such additional Shares, DIVIDED by
the Effective Price.
(d) EXCLUDED ASSETS. On or prior to the Execution Date, WW&A shall
create and deliver to the Cornerstone Parties a list of tangible and
intangible personal property (the "EXCLUDED ASSETS") located on WW&A
premises and owned by WW&A and not reasonably necessary for the operation of
WW&A's business (including certain artwork), subject to the approval of
Cornerstone, which approval shall not be unreasonably withheld, conditioned
or delayed, which property will be distributed to the WW&A Shareholders
prior to the Effective Time. At the request of either Cornerstone or the
owners thereof, Excluded Assets will be removed from the Related Projects or
any premises in which the business of WW&A is being conducted after Closing.
In addition, there shall be added to the Excluded Assets immediately prior
to the Effective Time and distributed to the WW&A Shareholders all direct
and indirect Interests in any Withdrawn Projects and all cash, cash
equivalents and liquid securities then held by WW&A.
(e) NO FRACTIONAL SHARES. No fraction of a Share will be issued in the
Merger, but in lieu thereof each WW&A Shareholder who would otherwise be
entitled to a fraction of a Share (after aggregating all fractional Shares
to be received by such WW&A Shareholder) will receive from Cornerstone an
amount of cash (rounded to the nearest whole cent), without interest, equal
to the product of (x) such fraction, multiplied by (y) the Effective Price.
2.7 BREACH OF REPRESENTATIONS AND WARRANTIES.
(a) WW&A COMPANY VALUE ADJUSTMENT FOR BREACH OF REPRESENTATION OR
WARRANTY. If each of (A) and (B) apply:
(A) the representations and warranties made in Section4
(REPRESENTATIONS AND WARRANTIES OF WW&A), are not true and correct as of
the date made; and
(B) such inaccuracy would result in a loss or liability to
Cornerstone of not less than the greater of (A) Five Hundred Thousand
Dollars ($500,000) or (B) one percent (1%) of the WW&A Company Value,
then, at Cornerstone's election, the WW&A Company Value shall be reduced
by an amount equal to the full amount of such loss or liability.
(b) TERMINATION FOR BREACH OF WW&A REPRESENTATION OR WARRANTY. If each
of (A) and (B) apply, either the Wilson Parties or the Cornerstone Parties
may terminate this Agreement and the Transactions by notice to the other
party:
(A) The representations and warranties made in Section4
(REPRESENTATIONS AND WARRANTIES OF WW&A), are not true and correct as of
the date made; and
(B) such inaccuracy would result in a loss or liability to
Cornerstone equal to at least fifteen percent (15%) of the WW&A Company
Value unless Cornerstone elects to limit the claimed loss or liability to
less than fifteen percent (15%) of the WW&A Company Value and to proceed
exclusively under Section2.7(a) (WW&A COMPANY VALUE ADJUSTMENT FOR BREACH
OF REPRESENTATION OR
A-42
<PAGE>
WARRANTY), in which event WW&A shall have no right to terminate this
Agreement and the Transactions hereunder,
PROVIDED, that the Wilson Parties will have no right to terminate this
Agreement and the Transactions hereunder if to WW&A's Knowledge at the
Execution Date the representation and warranty in question was not true
and correct or the facts or circumstances which caused the representation
or warranty to become incorrect resulted from the intentional action or
omission of any of the Wilson Parties or a breach of a covenant under
this Agreement by any of the Wilson Parties.
(c) PROCEDURE. A party's election to exercise the rights and remedies
set forth in Section2.7(a) (WW&A COMPANY VALUE ADJUSTMENT FOR BREACH OF
REPRESENTATION OR WARRANTY) or Section2.7(b) (TERMINATION FOR BREACH OF WW&A
REPRESENTATION OR WARRANTY) must be invoked by delivery of written notice by
the Cornerstone Parties delivered as promptly as possible to WW&A after such
party becomes aware of the facts or circumstances giving rise to such right
or remedy, but in all events before the Closing. Any dispute regarding the
existence of a breach of representation or warranty and the amount of any
loss or liability will be resolved as set forth in Section12 (DISPUTE
RESOLUTION). If the parties are unable to agree on the amount of an
adjustment by the Closing, Shares with a value equal to the loss or
liability claimed by Cornerstone shall be held back and placed in the Escrow
Fund in the same manner as the Holdback Amount (and in addition to the
Holdback Amount) pending resolution of the dispute. In addition, the
Cornerstone Parties may, at their election, recover any adjustment amount
due hereunder from the Holdback Amount and the WW&A Holdback Amount,
PROVIDED that if the amounts available under this Section2.7(c) are
insufficient to satisfy the adjustments contemplated by Section2.7(a) (WW&A
COMPANY VALUE ADJUSTMENT FOR BREACH OF REPRESENTATION OR WARRANTY), the
Cornerstone Parties may have direct recourse against the WW&A Shareholders
to the extent, but only to the extent, of the Consideration received by them
in connection with the Merger. If any amounts are recovered from the
Holdback Amount or the WW&A Holdback Shares under this Section2.7(c), and
the Holdback Amount and the WW&A Holdback Shares are otherwise depleted
pursuant to the provisions of this Agreement, then the Cornerstone Parties
will have the right to require the WW&A Shareholders to restore, fund and
add to the Holdback Amount and the WW&A Holdback Shares the amounts so
recovered therefrom pursuant to this Section2.7(c) to the extent, but only
to the extent, of the Consideration received by them with respect to the
Merger.
2.8 CORNERSTONE COMMON STOCK. Each Share issued and outstanding immediately
prior to the Effective Time will remain outstanding and will not be affected by
the Merger.
2.9 WITHHOLDING. Cornerstone will be entitled to deduct, and withhold from
the Consideration otherwise payable hereunder to any WW&A Shareholder, such
amounts as Cornerstone is required to deduct and withhold with respect to the
making of such payment under the Code or any provision of state, local or
foreign tax law. To the extent that amounts are so withheld by Cornerstone, such
withheld amounts will be treated for all purposes of this Agreement as having
been paid to the holder of the WW&A Shares in respect of which such deduction
and withholding was made by Cornerstone.
2.10 HOLDBACK. The Cornerstone Parties shall cause Merger Shares
representing an aggregate Effective Price of $5,000,000 (the "WW&A HOLDBACK
SHARES") to be retained pursuant to Section11.8 (ESCROW FUND).
2.11 TAX CONSEQUENCES. It is intended by the parties that the Merger
constitute a tax-free reorganization within the meaning of Section368(a) of the
Internal Revenue Code of 1986, as amended (the "CODE"), except to the extent, if
at all, interest income is required to be imputed under Section483 of the Code
with respect to the WW&A Holdback Shares. With respect to the Merger, the
parties hereby adopt this Agreement as a "plan of reorganization" within the
meaning of Section1.368-2(g) and 1.368-3(a) of the United States Treasury
Regulations. The parties acknowledge that Cornerstone will contribute the assets
and liabilities acquired in the Merger to the Operating Partnership immediately
following the Merger and that the Cornerstone Parties currently intend to
contribute the portion of such assets relating to the third-party
A-43
<PAGE>
businesses conducted by WW&A to one or more non-qualified REIT subsidiaries of
the Operating Partnership.
2.12 FURTHER ACTION. The parties hereto shall each take all such reasonable
and lawful action as may be necessary or appropriate in order to effectuate the
Merger in accordance with this Agreement as promptly as possible. If, at any
time after the Effective Time, any such further action is necessary or desirable
to carry out the purposes of this Agreement and to vest Cornerstone with full
right and title to and possession of all assets, property, rights, privileges,
powers and franchises of WW&A, the parties hereto shall take all such lawful and
necessary action.
3. REPRESENTATIONS AND WARRANTIES OF THE GP PARTIES.
3.1 REPRESENTATIONS AND WARRANTIES. In order to induce Cornerstone and the
Operating Partnership to enter into this Agreement and to perform their
respective obligations hereunder, each GP Party hereby severally warrants and
represents with respect to itself and its Related Project Entities and Related
Projects, as the case may be, and each GP Party that is a general partner of a
Fund hereby severally represents and warrants with respect to such Fund (such
Fund, the "RELATED FUND"; as used in this Agreement with respect to a GP Party,
"RELATED ENTITIES" means its Related Project Entities and Related Fund, if any)
the following, which representations and warranties are made as of the Execution
Date and the Closing Date unless otherwise stated therein and are subject to the
matters set forth in SCHEDULE 3.1 (Exceptions to Representations and Warranties
of the GP Parties) and the specific Schedules referenced in this Section3.1
(REPRESENTATIONS AND WARRANTIES OF THE GP PARTIES), PROVIDED that, for the
purpose of representations and warranties regarding a GP Party, WW&A will not be
considered to be a GP Party under this Section:
(a) ORGANIZATION, GOOD STANDING AND CORPORATE/PARTNERSHIP POWER. Each GP
Party and its Related Project Entities is a general or limited partnership
or a limited liability company, duly formed and validly existing and in good
standing under the laws of the jurisdiction in which it is organized and is
duly qualified to transact business under the laws of each other state in
which the character of the properties owned or leased by it therein or in
which the transaction of its business makes such qualification necessary,
except where the failure to be so qualified would not have a Material
Adverse Effect on the GP Party or the Related Project Entity, as applicable.
With respect to a GP Party that is the general partner of a Fund, that
Related Fund is a limited partnership duly formed and validly existing and
in good standing under the laws of California and is authorized to transact
business under the laws of each other state in which the character of the
properties owned or leased by it therein or in which the transaction of its
business makes such qualification necessary, except where the failure to be
so qualified would not have a Material Adverse Effect on such Related Fund.
The GP Party has all requisite corporate or partnership power and, subject
to the matters set forth on SCHEDULE 3.1(C) (GP PARTY AUTHORIZATIONS),
authority to execute and deliver this Agreement and all other Ancillary
Agreements to be executed and delivered by it in connection herewith, and to
perform its obligations hereunder and thereunder in accordance with the
terms and conditions hereof and thereof. "ANCILLARY AGREEMENTS" means the
Registration Rights and Lock-Up Agreement, the Consents, the Loan Assumption
Documents, the Escrow Agreement, the Guaranty, the William Wilson III,
Employment Agreement, the Restated Partnership Agreement, the Rockwood Loan
Documents, the Investor Contribution Agreements, the Voting Agreements, the
Wilson Voting Agreement, and any other letter or other agreements executed
and delivered in connection with this Agreement. The "TRANSACTION
AGREEMENTS" means, collectively, this Agreement and the Ancillary
Agreements. "MATERIAL ADVERSE EFFECT" means, with respect to any person, a
material adverse effect on the business assets, results of operations or
financial condition of such person or on the person's ability to consummate
the Transactions.
A-44
<PAGE>
(b) ORGANIZATIONAL DOCUMENTS. True and complete copies of the charter,
bylaws, operating agreement or partnership agreement (or similar
organizational documents), and all material amendments thereto through the
Execution Date, of the GP Party and its Related Entities are identified in
SCHEDULE 3.1(B) (GP PARTY AND RELATED PARTY ORGANIZATIONAL DOCUMENTS) and
have been delivered or made available to the Cornerstone Parties.
(c) AUTHORIZATION; NO VIOLATION. Assuming the due and valid
authorization, execution and delivery of this Agreement by WW&A and the
Cornerstone Parties and the delivery of the authorizations described in
SCHEDULE 3.1(C) (GP PARTY AUTHORIZATIONS), SCHEDULE 4.1(C) (WW&A
AUTHORIZATIONS), SCHEDULE 10.1(J)(OTHER WILSON CONSENTS), and Section10.1(g)
(WILSON THRESHOLD CONSENTS) the Transaction Agreements to which it is a
party will be the legal, valid and binding obligations of the GP Party,
enforceable against the GP Party in accordance with their respective terms,
subject to applicable bankruptcy, insolvency, moratorium or similar laws
relating to creditors' rights and general principles of equity. The
execution, delivery and performance by the GP Party of the Transaction
Agreements to which it is a party do not and will not result in any
violation of, or default (with or without notice or lapse of time, or both)
under, or give rise to a right of termination, cancellation or acceleration
of any obligation or to loss of a material benefit under, or result in the
creation of any Encumbrance in favor of any person other than the
Cornerstone Parties upon any of the properties or assets of the GP Party
under (i) the charter or organizational documents or partnership, operating
or similar agreement (as the case may be) of the GP Party, (ii) any Related
Material Contracts (as defined below) or (iii) subject to the governmental
filings and other matters referred to in the following sentence, any
statute, regulation, order or any requirement or rule of common law (each, a
"LAW") applicable to the GP Party and its Related Entities or their
respective properties or assets, including without limitation, its Related
Projects, other than, in the case of clause (ii) or (iii), any such
violations, defaults, rights or Encumbrances that either individually or in
the aggregate would not (x) have a Material Adverse Effect or (y) prevent
the consummation of the Transactions. In this Agreement, "ENCUMBRANCES"
means any security interest, pledge, mortgage, lien (including, without
limitation, environmental and tax liens), charge, encumbrance, adverse
claim, preferential arrangement, or restriction of any kind, including,
without limitation, any restriction on the use, voting, transfer, receipt of
income or other exercise of any attributes of ownership.
(d) CONSENTS. To the Knowledge of the GP Party, no consent, approval,
order or authorization of, or registration, declaration or filing with, any
federal, state or local, governmental, regulatory or administrative
authority, agency or commission or any court, tribunal, or judicial or
arbitral body (any such entity, a "GOVERNMENTAL AUTHORITY") is required by
or with respect to the GP Party or its Related Entities in connection with
the execution and delivery of the Transaction Agreements to which it is a
party by the GP Party or the consummation by the GP Party of the
Transactions, except for (i) such filings as may be required in connection
with the payment of any Transfer and Gains Taxes, (ii) filings required
under the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT")
or the Securities Act, (iii) HSR Act filings, and (iv) such consents
necessary to obtain the Cornerstone Threshold Consents, as more particularly
described in Section10.2(g) (CORNERSTONE THRESHOLD CONSENTS), or which, if
not obtained or made, would not prevent or delay in any material respect the
consummation of any of the Transactions or otherwise prevent the GP Party
from performing its obligations under such Transaction Agreements in any
material respect or have, individually or in the aggregate, a Material
Adverse Effect. In this Agreement "TRANSFER AND GAINS TAXES" means any real
property transfer or gains, sales, use, transfer, mortgage recording,
intangible, value added, stock transfer and stamp taxes and any similar
taxes which become payable in connection with the Transactions, excluding
state and federal income taxes (together with any related interests,
penalties or additions to tax).
(e) RENT ROLL; REVIEWED LEASES.
A-45
<PAGE>
(i) The GP Party has delivered or caused to be delivered to the
Cornerstone Parties a rent roll (a "RENT ROLL") for each of its Related
Projects that is current as of May, 15 1998 or such later date as is
stated therein. The Rent Roll reflects all of the leases, tenancies or
occupancies materially affecting such Related Projects as of such date,
and the information set forth in the Rent Roll is true and correct as of
such date. To the GP Party's Knowledge, since the latest stated date of
the Rent Roll, there have not been any material changes in the Rent Rolls
other than in the Ordinary Course which either individually or in the
aggregate would or would be reasonably expected to have a Material
Adverse Effect.
(ii) True and complete copies of all leases, together with all
material amendments and modifications thereof as amended for its Related
Projects to May 15, 1998 designated by the Cornerstone Parties for review
("REVIEWED LEASES") have been delivered or made available to the
Cornerstone Parties for review. The tenants under the Reviewed Leases are
listed in Schedule 3.1(e) (REVIEWED LEASES).
(f) NO LITIGATION. To the Knowledge of the GP Party, except as set forth
in SCHEDULE 3.1(F) (LIST OF WILSON PARTY LITIGATION), there are no suits or
arbitrations, or proceedings or investigations by or before any Governmental
Authority (each, an "ACTION") by or against the GP Party or its Related
Entities or affecting any of its Related Projects, pending before any
Governmental Authority (or, to the Knowledge of the GP Party, overtly
threatened to be brought by or before any Governmental Authority) which
could reasonably be expected to have a Material Adverse Effect or could
affect the legality, validity or enforceability of the Transaction
Agreements. To the Knowledge of the GP Party, none of the actions described
in SCHEDULE 3.1(F) (LIST OF WILSON PARTY LITIGATION), if adversely
determined, has had or could reasonably be expected to have a Material
Adverse Effect or could affect the legality, validity or enforceability of
any Transaction Agreements or the consummation of the Transactions. To the
Knowledge of the GP Party, except as set forth in SCHEDULE 3.1(F) (LIST OF
WILSON PARTY LITIGATION), none of the GP Party or its Related Entities nor
any of their respective assets or properties, including without limitation,
the Related Projects, is subject to any order, writ, judgment, injunction,
decree, stipulation, determination or award entered by or with any
Governmental Authority ("GOVERNMENTAL ORDER") (nor, to the Knowledge of the
GP Party, are there any such Governmental Orders threatened to be imposed by
any Governmental Authority) which has had or could reasonably be expected to
have a Material Adverse Effect.
(g) COMPLIANCE WITH LAWS. To the Knowledge of the GP Party, the GP Party
and its Related Entities have each conducted and continue to conduct their
respective businesses and operations in all material respects in accordance
with all Laws and Governmental Orders applicable to the GP Party or its
Related Entities or any of their respective assets or properties, including
without limitation, the Related Projects, and neither the GP Party nor any
Related Entity is in violation of any such Law or Governmental Order, which
violation has had or could reasonably be expected to have a Material Adverse
Effect. Notwithstanding the foregoing, the GP Party makes no representation
or warranty regarding compliance with Americans with Disabilities Act
("ADA") requirements or with respect to compliance with zoning laws, land
use laws, building codes or environmental matters except as otherwise
specifically provided in other parts of this Section3.1 (REPRESENTATIONS AND
WARRANTIES OF THE GP PARTIES).
(h) ENVIRONMENTAL AND OTHER PERMITS AND LICENSES; RELATED MATTERS. To
the Knowledge of the GP Party, except as expressly disclosed in the reports
set forth in SCHEDULE 3.1(H) (ENVIRONMENTAL REPORTS) (the "ENVIRONMENTAL
REPORTS"), (i) its Related Project Entities currently hold all of the
environmental, health and safety and other permits, licenses,
authorizations, identification numbers, certificates, registrations,
notifications, exceptions and approvals of Governmental Authorities
(collectively, "PERMITS"), including, without limitation, Environmental
Permits, required, necessary or proper for the current use, occupancy and
operation of the Related Projects, and all such Permits and Environmental
Permits (as defined below) are in full force and effect; (ii) there is no
existing practice, action or
A-46
<PAGE>
activity of its Related Project Entities or their tenants and no existing
conditions of or condition including, without limitation, any Environmental
Conditions, associated with its Related Projects, which would give rise to
any civil or criminal Liability (as defined below) under, or violate or
prevent compliance with, any applicable Environmental Law (as defined
below), applicable Permits or applicable Environmental Permits or other
applicable law; (iii) no Related Project Entity has received any notice from
any Governmental Authority proposing to or actually revoking, canceling,
rescinding, materially modifying or refusing to renew any Permit or
Environmental Permit or providing written notice of violations under any
applicable Environmental Law or applicable Environmental Permit; (iv) each
of its Related Project Entities is in all respects in compliance with the
Permits, all applicable Environmental Laws and the requirements of all
Environmental Permits; (v) during the period in which the GP Party or its
Related Fund, if any, has had an interest therein, Hazardous Materials (as
defined below) have not been generated, used, treated, handled or stored on,
or transported to or from, any of its Related Projects (other than such
activities that have been conducted in accordance with all applicable
Environmental Law and Environmental Permits consistent with the nature of
the applicable Related Projects and that would not have a Material Adverse
Effect); (vi) during the period in which the GP Party or its Related Fund,
if any, has had an interest therein, Hazardous Materials (regardless of the
source) have not been released on any of its Related Projects or otherwise
contaminated any of its Related Projects and Hazardous Materials have not
been Released (as defined below) on or contaminated any property adjoining
any Related Projects (except in either instance, Releases or contamination
involving only DE MINIMIS amounts of Hazardous Materials, the Release of or
contamination by which would not violate any applicable Environmental Law,
violate any Environmental Permit, trigger any reporting obligation, or
trigger any obligation to investigate, remediate, cleanup or otherwise
respond to such Hazardous Material); (vii) during the period in which the GP
Party or its Related Fund, if any, has had an interest therein, each Related
Project Entity has disposed of all wastes consisting of or containing
Hazardous Materials in compliance in all material respects with all
applicable Environmental Laws and Environmental Permits; (viii) there are no
past, pending or threatened Environmental Claims against the GP Party or its
Related Entities; (ix) no Related Projects nor any property adjoining any
Related Projects is listed or proposed for listing on the National
Priorities List under CERCLA or on the CERCLIS or any analogous state list
of sites requiring investigation or cleanup of Hazardous Materials; (x)
during the period in which the GP Party or its Related Fund, if any, has had
an interest therein, neither any Related Project Entity nor its tenants has
used or arranged for the use of any location for the treatment, storage,
disposal, Release or other handling of any Hazardous Materials or
transported or arranged for the transportation of any Hazardous Materials to
any location that is listed or proposed for listing on the National
Priorities List under CERCLA or on the CERCLIS or any analogous state list
or which is the subject of any Environmental Claim; (xi) there are not now,
and during the period in which the GP Party or its Related Fund, if any, has
had an interest therein never had been, any USTs located on any Related
Project; and (xii) there is not now any asbestos in, on, or about any
Related Projects.
In this Agreement, the following terms have the following definitions:
"CERCLA" means the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, 42 U.S.C. Section9601, et seq., as amended
through the date hereof.
"CERCLIS" means the Comprehensive Environmental Response, Compensation
and Liability Information System, as updated through the date hereof.
"ENVIRONMENT" means all surface waters, groundwaters, soil, drinking
water supplies, sediments associated with any water body, subsurface strata,
and ambient air and any workplace at any real property.
"ENVIRONMENTAL CLAIMS" means any and all administrative, regulatory or
judicial actions, suits, demands, demand letters, claims (whether based on
strict liability or otherwise), liens, notices of
A-47
<PAGE>
potential responsibility, notices of potential liability, notices of
non-compliance or violation, abatement orders, enforcement actions,
investigations, proceedings, settlements, consent decrees, consent orders or
consent agreements relating in any way to any Environmental Law,
Environmental Condition, Environmental Permit or any Hazardous Material,
including, without limitation, (i) any and all such claims by Governmental
Authorities or any other person for enforcement, cost recovery,
compensation, penalties, fines, restitution, injunctive relief, cleanup,
removal, response, remedial or other actions or damages pursuant to any
applicable Environmental Law or applicable Environmental Permit and (ii) any
and all such claims by any person or Governmental Authority seeking damages,
contribution, indemnification, cost recovery, cleanup, removal, response,
remedial or other actions, compensation or injunctive relief relating to a
Release of a Hazardous Material or arising from an alleged or actual injury
or threat of injury to health, safety, natural resources (including, without
limitation, all flora and fauna) or the Environment.
"ENVIRONMENTAL CONDITION" means a condition relating to or arising or
resulting from a failure or alleged failure to comply with any applicable
Environmental Law or applicable Environmental Permit or relating to or
arising or resulting from an actual or a threatened Release of a Hazardous
Material.
"ENVIRONMENTAL LAWS" means any Law, now or hereafter in effect and as
amended, and any judicial or administrative interpretation thereof,
including any judicial or administrative order, consent decree, order or
judgment, relating to the Environment, health, safety, natural resources
(including, without limitation, all flora and fauna) or Hazardous Materials
including, without limitation, the CERCLA; the Resource Conservation and
Recovery Act, 42 U.S.C. Section 6901, et seq.; the Hazardous Materials
Transportation Act, 49 U.S.C. Section1801, et seq.; the Clean Water Act, 33
U.S.C. Section1251, et seq.; the Toxic Substances Control Act, 15 U.S.C.
Section2601, et seq.; the Clean Air Act, 42 U.S.C. Section7401, et seq.; the
Safe Drinking Water Act, 42 U.S.C. Section300f, et seq.; the Atomic Energy
Act, 42 U.S.C. Section 2011, et seq.; the Federal Insecticide, Fungicide,
and Rodenticide Act, 7 U.S.C. Section136, et seq.; the Occupational Safety
and Health Act, 29 U.S.C. Section651, et seq.; the Endangered Species Act,
16 U.S.C. Section1531, et seq.; the Oil Pollution Act, 33 U.S.C.
Section2701, et seq.; the Emergency Planning and Community Right-To-Know
Act, 42 U.S.C. Section11001, et seq.; and the Federal Food, Drug, and
Cosmetic Act, 21 U.S.C. Section301, et seq.
"ENVIRONMENTAL PERMITS" means all permits, registrations and other
government mandated authorizations required under any applicable
Environmental Law.
"HAZARDOUS MATERIALS" means those substances, materials and items, in
any form, whether solid, liquid, gaseous, semisolid or any combination
thereof, whether waste materials, raw materials, chemicals, finished
products, byproducts or any other material or article, which are regulated
by or form the basis of liability under any applicable Environmental Laws
including, without limitation: (i) wastes, materials, chemicals and
substances defined as or included within the definition of "hazardous
wastes," "hazardous substances," "pollutants," "contaminants," "hazardous
materials," "hazardous chemicals," "extremely hazardous substances," "toxic
substances," "toxic pollutants," "hazardous pollutants" or words of similar
import, under any applicable Environmental Law; and (ii) asbestos in any
form, polychlorinated biphenyls ("PCBS"), transformers or other equipment
containing PCBs, petroleum (including, but not limited to, crude oil,
petroleum-derived substances, wastes, or breakdown or decomposition products
thereof, or any fraction thereof), radioactive substances, radon gas and
urea formaldehyde.
"RELEASE" means disposing, discharging, injecting, spilling, leaking,
leaching, dumping, emitting, escaping, emptying, seeping, placing and like
actions or events (including, without limitation, the abandonment or
discarding of barrels, containers, drums, tanks, or other closed receptacles
containing any Hazardous Materials) resulting in the placement of any
Hazardous Material on, under, about or in any medium of the Environment.
A-48
<PAGE>
"REMEDIAL ACTION" means all action reasonably necessary or required
under any applicable Environmental Law or applicable Environmental Permit
and all actions required by a Governmental Authority to (i) investigate,
mitigate, clean up, remove, treat, store, dispose of, handle or respond in
any other way to Hazardous Materials in the Environment affecting human
health, affecting the Environment or affecting natural resources; (ii)
prevent, control or otherwise respond to the Release of Hazardous Materials
so that they do not migrate, endanger or threaten to endanger public health,
natural resources or the Environment; (iii) perform remedial investigations,
feasibility studies, health assessments, natural resource damage
assessments, corrective actions, closures and postremedial or postclosure
studies, investigations, operations, maintenance and monitoring at, on,
under, about or in any real property, or at any other location affected by
Hazardous Materials associated with the real property; or (iv) come into
compliance with any applicable Environmental Law or any applicable
Environmental Permit.
"USTS" means underground storage tanks (and associated underground
piping), as such term is defined in the Resource Conservation and Recovery
Act, as amended, and the regulations promulgated thereunder, or any other
applicable Environmental Law.
(i) RELATED MATERIAL CONTRACTS.
(i) To the Knowledge of the GP Party, the GP Party has delivered or
made available to the Cornerstone Parties all of the following written
contracts and agreements to which it or any of its Related Entities is a
party, or by which any or all Related Projects is and will be bound as of
the Closing Date (the "RELATED MATERIAL CONTRACTS"):
(A) each contract, agreement and other arrangement of any nature
which involves an unperformed commitment for the provision of
services to a Related Entity or otherwise related to the Related
Projects;
(B) all property management contracts, leasing services
contracts, asset management contracts and similar contracts (or
arrangements), including those listed on SCHEDULE 3.1(I)(I) (PROJECT
MANAGEMENT CONTRACTS) (such listed contracts, the "PROJECT MANAGEMENT
CONTRACTS");
(C) all contracts and agreements relating to Indebtedness of each
GP Party and Related Entity, including the Existing Project Debt (the
"PROJECT MORTGAGE AGREEMENTS");
(D) all contracts and agreements with any Governmental Authority;
(E) all contracts and agreements between or among any Related
Entity and the GP Party or any affiliate of the GP Party;
(F) all partnership, joint venture or similar agreements or
arrangements; and
(G) any power of attorney or agency agreement or arrangement with
any person pursuant to which such person is granted any authority to
act for and on behalf of any Related Entity.
PROVIDED THAT, except for the Project Mortgage Agreements and the
Project Management Contracts, no contract or agreement described in
clauses (A)--(E) above shall be a Related Material Contract unless
under the terms of such contract or agreement, the Related Project
Entities party thereto: (I) is likely to pay or otherwise give
consideration of more than $150,000 in the aggregate during the
calendar year ended December 31, 1998; (II) is likely to pay or
otherwise give consideration of more than $150,000 in the aggregate
over the remaining term of such contract, or (III) cannot cancel such
agreement or contract without penalty or further payment in the
aggregate not exceeding $150,000 and without more than 30 days'
notice, and PROVIDED FURTHER, that Related Material Contracts shall
not include any
A-49
<PAGE>
contract, agreement or arrangement described in clauses (A)--(G)
which is terminated (or which the Cornerstone Parties have the
ability to terminate) on, prior to or immediately after the Closing
Date, or which will otherwise not survive the Closing.
In this Agreement, "INDEBTEDNESS" means, with respect to any person, (I) all
indebtedness of such person, whether or not contingent, for borrowed money, (II)
all obligations of such person for the deferred purchase price of property or
services, (III) all obligations of such person evidenced by notes, bonds,
debentures or other similar instruments, including, with respect to Project
Entities, the Existing Project Debt, (IV) all indebtedness created or arising
under any conditional sale or other title retention agreement with respect to
property acquired by such person (even though the rights and remedies of the
seller or lender under such agreement in the event of default are limited to
repossession or sale of such property), (V) all obligations of such person as
lessee under leases that have been or should be, in accordance with generally
accepted accounting principles, consistently applied as in effect from time to
time in the United States ("GAAP"), recorded as capital leases, (VI) all
obligations, contingent or otherwise, of such person under acceptance, letter of
credit or similar facilities, (VII) all obligations of such person to purchase,
redeem, retire, defease or otherwise acquire for value any capital stock of such
person or any warrants, rights or options to acquire such capital stock, valued,
in the case of redeemable preferred stock, at the greater of its voluntary or
involuntary liquidation preference plus accrued and unpaid dividends, (VIII) all
Indebtedness of others referred to in clauses (I) through (VI) above guaranteed
directly or indirectly in any manner by such person, or in effect guaranteed
directly or indirectly by such person through an agreement (A) to pay or
purchase such Indebtedness, (B) to purchase, sell or lease (as lessee or lessor)
property, or to purchase or sell services, primarily for the purpose of enabling
the debtor to make payment of such Indebtedness or to assure the holder of such
Indebtedness against loss, (C) to supply funds to or in any other manner invest
in the debtor (including any agreement to pay for property or services
irrespective of whether such property is received or such services are rendered)
or (D) otherwise to assure a creditor against loss, and (IX) all Indebtedness
referred to in clauses (I) through (VI) above secured by (or for which the
holder of such Indebtedness has an existing right, contingent or otherwise to be
secured by) any Encumbrance on a Related Project owned by such person, even
though such person has not assumed or become liable for the payment of such
Indebtedness.
(ii) To the Knowledge of the GP Party, each Related Material Contract
is valid and binding on the respective parties thereto and is in full
force and effect. To the Knowledge of the GP Party, neither the GP Party
nor any Related Entity party thereto is in breach of, or default under,
any Related Material Contract in any material respect, and no other party
to any Related Material Contract is in breach thereof or default
thereunder in any material respect.
(iii) Except as set forth in SCHEDULE 3.1(I)(III) (PREFERENTIAL
RIGHTS) or in the organizational documents set forth on SCHEDULE 3.1(B)
(GP Party and Related Party Organizational Documents), there is no
contract, agreement or other arrangement granting any person any
preferential right to purchase or right of first refusal or right of
first offer with respect to the purchase of any of its Related Projects
or any of the applicable Interests (other than, with respect to the
Interests, rights granted by Investors other than the GP Parties, WW&A
Shareholders and their affiliates) which right would not have been
extinguished or waived upon receipt of the Cornerstone Threshold
Consents.
(iv) To the Knowledge of the GP Party, SCHEDULE 3.1(I)(I) (PROJECT
MANAGEMENT CONTRACTS) lists all property management agreements, asset
management agreements and leasing services agreements to which any GP
Party or its Related Entities is a party materially affecting its Related
Projects which will be in place as of the Closing Date. To the Knowledge
of the GP Party, no party to a Project Management Agreement has asserted
rights of setoff or counterclaim against such GP Party under such Project
Management Agreement, and except as described in SCHEDULE 3.1(I)(I)
(PROJECT MANAGEMENT CONTRACTS), neither the GP Party, its Related
Entities, nor
A-50
<PAGE>
any other party thereto is in (A) any monetary default thereunder or (B)
any non-monetary default thereunder in any material respect that could
have a Material Adverse Effect.
(v) To the Knowledge of the GP Party, except with respect to the One
Post, Bixby, 110 Atrium and Island Corporate Center Projects, each of the
Project Management Agreements affecting its Related Projects contemplates
services thereunder to be performed exclusively by WW&A, and WW&A has not
assigned its rights or obligations under any Project Management Agreement
to any other person.
(vi) To the Knowledge of the GP Party, except as described in
SCHEDULE 1.4(D) (PARTICIPATING LOANS), none of the Project Mortgage
Agreements contains cash flow, equity "kicker" or similar participation
provisions.
(vii) To the Knowledge of the GP Party, except as disclosed to the
Cornerstone Parties, there is no contract, agreement or other arrangement
to which the GP Party or any of its Related Entities is a party or by
which any Related Project will be bound as of the Closing Date which
prevents or is reasonably likely to prevent the continued operation of
the Related Project in the Ordinary Course.
(viii) To the Knowledge of the GP Party, true and complete copies of
all Project Mortgage Agreements, as amended to the Execution Date, have
been delivered or made available to the Cornerstone Parties, and SCHEDULE
3.1(I)(VIII) (PROJECT MORTGAGE AGREEMENTS) is a complete and accurate
listing of all Project Mortgage Agreements and other principal loan
documents evidencing unsecured Indebtedness constituting Existing Project
Debt containing all material terms of the Existing Project Debt.
(j) RELATED PROJECTS.
(i) To the GP Party's Knowledge, a Related Project Entity owns fee
simple title (or where indicated, a leasehold estate) to each of the
Related Projects in each case free of all Encumbrances except for Wilson
Permitted Encumbrances. In this Agreement, "WILSON PERMITTED
ENCUMBRANCES" means the following with respect to any party: (a) liens
for taxes, assessments and government charges of Governmental Authorities
or levies not yet past due and payable; (b) rights of tenants, as tenants
only under the applicable lease; (c) those existing title matters
affecting the Related Projects listed on the preliminary title reports
delivered to the Cornerstone Parties prior to the Execution Date and
attached hereto as SCHEDULE 3.1(J)(I) (WILSON PARTY PRELIMINARY TITLE
REPORTS); and (d) survey exceptions and other easements, rights of way,
covenants, restrictions and title exceptions that (i) do not render title
to the property encumbered thereby unmarketable, (ii) do not,
individually or in the aggregate, have a Material Adverse Effect on the
value of or the use of the property encumbered thereby for its present
purposes, and (iii) do not interfere with the ordinary conduct of the
property encumbered thereby or detract from the value or usefulness
thereof; provided that the Wilson Permitted Encumbrances shall not
include any documents evidencing indebtedness other than the Existing
Project Debt notwithstanding the fact that they may be contained in the
preliminary title reports described in SCHEDULE 3.1(J)(I) (WILSON PARTY
PRELIMINARY TITLE REPORTS).
(ii) The GP Party has no Knowledge (A) of any condemnation or
rezoning proceedings pending or threatened with respect to any of its
Related Projects, (B) that any Government Authority has delivered any
notice of default under or has instituted proceedings to revoke any
material permit, license or certificates pertaining to the ownership or
operation of all improvements on the Related Projects, which revocation
could reasonably be expected to have a Material Adverse Effect, (C) that
any improvements on the Related Project or any of the current uses and
conditions thereof violate in any material respect any applicable
building code, deed restrictions or applicable Laws, covenants,
restrictions, agreements, existing site plan approvals, zoning or
A-51
<PAGE>
subdivision regulations or urban redevelopment plans as modified by any
duly issued variances (collectively, the "PROPERTY RESTRICTIONS"),
provided that the GP Party does not make any representation or warranty
with respect to any of the Development Projects which are not Completed
Projects, which violation would or could reasonably be expected to have a
Material Adverse Effect (D) that any person has delivered notice of
intent to terminate or initiated proceedings to terminate any water, gas,
sewer, electric, telephone or storm water and drainage facilities and
other utilities required by Governmental Authorities and used in the
normal operation of each Related Project or any points of access, both
pedestrian and vehicular to and from public roads currently used at any
Related Project, which termination would or would reasonably be expected
to have a Material Adverse Effect, or (E) that any person has delivered
any notice of noncompliance with ADA requirements.
(k) GROUND LEASES. To the Knowledge of the GP Party, each lease, if any,
pursuant to which any of its Related Project Entities holds an interest as a
ground lessee (a "WILSON GROUND LEASE") is identified on SCHEDULE 3.1(K)
(WILSON GROUND LEASES), is valid and in full force and effect and the copy
of each Wilson Ground Lease provided to the Cornerstone Parties is true,
correct and complete and constitutes the entire agreement between the ground
lessor and ground lessee thereunder and there have been no amendments
thereto (either orally or in writing). To the Knowledge of the GP Party,
there is no material default by either the ground lessor or ground lessee
under any Wilson Ground Lease and no conditions exist that with the passage
of time or the giving of notice or both, would constitute a material default
thereunder and no notice of termination has been given by either a ground
lessor or a ground lessee under any Wilson Ground Lease. To the Knowledge of
the GP Party, the applicable Related Project Entity's interest in each
Wilson Ground Lease is free of all Encumbrances except for the Wilson
Permitted Encumbrances.
(l) EMPLOYMENT MATTERS. Each of the GP Party and each of its Related
Entities has no employees (all personnel associated with the Related
Projects being (i) employees of independent contractors of the GP Party or
its Related Entities or (ii) employees of WW&A).
(m) TAXES.
(i) With respect to the GP Party and its Related Entities (A) all
returns and reports in respect of Taxes ("RETURNS") required to be filed
with respect to the GP Party and each of its Related Entities have been
timely filed (taking into account any valid extensions of time for
filing); (B) all Taxes required to be shown on such Returns or otherwise
payable by the partnership or limited liability company have been timely
paid; (C) all such Returns are true, correct and complete in all material
respects; (D) no adjustment relating to such Returns has been proposed
formally or informally by any Tax authority and, to the Knowledge of the
GP Party, no basis exists for any such adjustment; (E) there are no
pending or, to the Knowledge of the GP Party, threatened actions or
proceedings for the assessment or collection of Taxes against the GP
Party or its Related Entities; and (F) there are no Tax liens on any
assets of the GP Party or its Related Entities, apart from real property
taxes which are not delinquent.
(ii) To the Knowledge of the GP Party, (A) there are no outstanding
waivers or agreements extending the statute of limitations for any period
with respect to any Tax to which the GP Party or any of its Related
Entities may be subject; (B) there are no requests for information
currently outstanding that could affect the Taxes of the GP Party or any
Related Entities; (C) there are no proposed reassessments of any property
owned by the GP Party or any of its Related Entities or other proposals
that could materially increase the amount of any Tax to which the GP
Party or any of its Related Entities would be subject, other than by
reason of the Transactions; and (D) no power of attorney that is
currently in force and which will remain in force at the Closing has been
granted with respect to any matter relating to Taxes and could affect any
of its Related Entities.
A-52
<PAGE>
(iii) To the Knowledge of the GP Party, each GP Party and each of its
Related Entities has withheld and paid all material Taxes required to
have been withheld and paid in connection with amounts paid or owing to
any employee, independent contractor, creditor, stockholder, or other
third party.
(iv)(A) To the Knowledge of the GP Party, SCHEDULE 3.1(M)(IV)
(RELATED ENTITY TAX RETURNS) lists all income, franchise and similar
Returns (federal, state, local and foreign) filed with respect to each of
its Related Entities for taxable periods ended on or after December 31,
1995, and indicates those Returns (regardless of when filed) that have
been audited or currently are the subject of audit; and (B) the GP Party
has delivered or made available to the Cornerstone Parties correct and
complete copies of all federal, state and foreign income, franchise and
similar Returns in its possession or otherwise available to it,
examination reports, and statements of deficiencies assessed against or
agreed to by any Related Entity since December 31, 1995.
"TAX" or "TAXES" means any and all taxes, fees, levies, duties, tariffs,
imposts, and other charges of any kind (together with any and all interest,
penalties, additions to tax and additional amounts imposed with respect thereto)
imposed by any foreign, U.S., state or local government or taxing authority,
including, without limitation: taxes or other charges on or with respect to
income, franchises, windfall or other profits, gross receipts, property, sales,
use, capital stock, payroll, employment, social security, workers' compensation,
unemployment compensation, or net worth; taxes or other charges in the nature of
excise, withholding, ad valorem, stamp, transfer, mortgage recording, value
added, or gains taxes, license, registration and documentation fees; and
customs' duties, tariffs, and similar charges.
(n) INSURANCE. To the Knowledge of the GP Party, all casualty,
liability, business interruption, "Difference In Conditions" ("DIC"), and
other insurance policies insuring each of its Related Project Entities in
effect as of the Execution Date are listed on SCHEDULE 3.1(N) (WILSON
PARTIES INSURANCE) and are in full force and effect.
(o) INSOLVENCY. There has not been filed by the GP Party or any of its
Related Entities, nor have any of them received notice of, a petition in
bankruptcy or any other insolvency proceeding, or for the reorganization or
appointment of a receiver or trustee with respect to the GP Party or any of
its Related Entities, nor has the GP Party or any of its Related Entities
made an assignment for the benefit of creditors, nor filed a petition for
arrangement, nor entered into any arrangement of creditors, nor admitted in
writing its inability to pay debts as they become due.
(p) FUND OR PROPERTY FINANCIALS; ABSENCE OF UNDISCLOSED LIABILITIES.
(i) True and complete copies of the audited financial statements of
the Funds, which contain information regarding the results of operations
of each of its Related Projects (excluding only those operations and
assets not contemplated to be contributed to the Operating Partnership
pursuant to this Agreement) for the fiscal year ended as of December 31,
1997 (the "PROPERTY FINANCIALS") have been delivered by the GP Party to
the Cornerstone Parties. True and complete copies of the financial
statements of other Project Entities (not covered in the Property
Financials), with some being audited and some not, contain information
with respect to Projects not covered by the Property Financials for the
fiscal year ended as of December 31, 1997 (the "OTHER PROPERTY
FINANCIALS") and have been delivered by the GP Party to the Cornerstone
Parties. The Property Financials and the Other Property Financials (A)
were prepared in accordance with the books of account and other financial
records of the Funds or Project Entities, as the case may be, (B) present
fairly the operating results of the Funds or Project Entities, as the
case may be, (C) have been prepared in accordance with GAAP applied on a
basis consistent with the historical financial statements of the Funds or
Project Entities, as the case may be (except as otherwise indicated
thereon or in the notes thereto).
A-53
<PAGE>
(ii) Except as otherwise disclosed herein, as of the Execution Date
neither the GP Party nor any of its Related Project Entities has any
current monetary liability, indebtedness, obligation, commitment,
expense, claim or guarantee of any type, including, without limitation,
any Liability to the person or entity from whom or which any of the
Related Project Entities acquired its Related Project ("LIABILITY") or,
to the Knowledge of the GP Party, any non-monetary Liability, except (A)
Wilson Permitted Encumbrances, (B) prepaid rents which are to be prorated
at the Closing, (C) refundable security deposits which are to be
transferred at the Closing, (D) Liabilities reflected on the Property
Financials or Other Property Financials and (E) obligations to be repaid
in full by the GP Party at or prior to the Closing or prorated pursuant
to Section9.4 (PROJECT CLOSING ADJUSTMENTS).
(q) ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed to the
Cornerstone Parties, since the date of the Property Financials or Other
Property Financials and to the Execution Date its Project Entities have
conducted their business only in the Ordinary Course and there has not been
(i) any change that would have a Material Adverse Effect (a "PROJECT ENTITY
MATERIAL ADVERSE CHANGE"), nor has there been any occurrence or circumstance
that with the passage of time would reasonably be expected to result in a
Project Entity Material Adverse Change, (ii) any damage, destruction or loss
to its Related Projects, not covered by insurance, that has or would have a
Material Adverse Effect, or (iii) any change in accounting methods,
principles or practices by the Project Entities, except insofar as required
by the applicable law or a change in GAAP.
(r) DEVELOPMENT PROJECTS. SCHEDULE 3.1(R)(DEVELOPMENT PROJECTS)
identifies each Wilson Project which is in the process of being developed or
redeveloped (collectively, the "DEVELOPMENT PROJECTS") and sets forth the
budget and development or redevelopment schedule therefor prepared for each
of the Development Projects (collectively, the "DEVELOPMENT BUDGET AND
SCHEDULE"). Except as set forth in SCHEDULE 3.1(R)(DEVELOPMENT PROJECTS) and
in SCHEDULE 1.3(J) (CONCAR PROJECT) with respect to the Concar Project, and
except with respect to those Development Projects, the improvements thereon
which (other than tenant improvements) are substantially completed (subject
to customary "punch-list" items) as of Closing (the "COMPLETED PROJECTS"),
to the Knowledge of the GP Party, the development or redevelopment of each
of its Development Projects to date complies in all material respects with
any applicable Property Restrictions or the Related Project Entity has
applied for any required variances or changes, and the GP Party has obtained
all material permits, licenses, consents and authorizations required for the
current stage of development or redevelopment thereon. Except as set forth
in SCHEDULE 3.1(R) (DEVELOPMENT PROJECTS), and except with respect to the
Completed Projects, to the Knowledge of the GP Party, there are no material
impediments to or constraints on the development or redevelopment of any of
its Development Projects, in all material respects within the time frame and
for the cost as set forth in the applicable Development Budget and Schedule.
In the case of each such Development Project the development or
redevelopment of which has commenced, and except with respect to the
Completed Projects, to the Knowledge of the GP Party, the costs and expenses
incurred in connection with its Development Projects and the progress
thereof are consistent and in compliance in all material aspects of the
applicable Development Budget and Schedule. To the Knowledge of the GP
Party, the GP Party has made available to the Cornerstone Party, all
material feasibility studies, soil tests, due diligence reports and other
studies, test or reports performed by or for, or otherwise in the possession
of, such GP Party or its Related Project Entities which relate to such
Development Projects.
(s) DEVELOPMENT CONTRACTS. To the Knowledge of the GP Party, the GP
Party has made available to the Cornerstone Party all material contracts
(the "DEVELOPMENT CONTRACTS") for the development or redevelopment of the
Development Projects. To the Knowledge of the GP Party, and except with
respect to the Completed Projects, the Development Contracts are in full
force and effect in all material respects and, no party is (i) in any
monetary default thereunder or under any construction loans applicable
thereto, or (ii) in any material non-monetary default thereunder or under
any
A-54
<PAGE>
construction loans applicable which would have a Material Adverse Effect,
nor are there any facts or circumstances which with the passage of time or
the giving of notice, or both, would result in any such monetary default or
non-monetary default which would have a Material Adverse Effect with respect
to the applicable Development Property. To the Knowledge of the GP Party,
and except with respect to the Completed Projects, the progress and
remaining expenditures under the Development Contracts are consistent in all
material respects with the Development Budget and Schedule. To the Knowledge
of the GP Party, and except with respect to the Completed Projects, the work
remaining under the Development Contracts is anticipated to be sufficient to
complete the respective projects to which they relate in all material
aspects, so as to comply in all material aspects with existing development
obligations (including, without limitation, obligations under any letters of
intent to lease), obligation of tenant improvements under any leases or for
repairs or other necessary work.
(t) PREVIOUSLY OWNED PROPERTY. To the Knowledge of the GP Party, neither
the GP Party nor any of its Related Project Entities currently owns or has
previously owned any real property other than the Related Projects the
current or previous ownership of which would or would reasonably be expected
to have a Material Adverse Effect, including, without limitation, due to any
Environmental Claims.
(u) NO DEFAULT. Neither the GP Party or any of its Related Entities is
in default under, or in violation of, any provision of its organizational
documents.
(v) SUBSIDIARIES. No Related Entity owns, directly or indirectly, any
interest in a corporation or other entity taxable as a corporation under the
Code.
(w) TAX STATUS OF PROJECT ENTITIES. Each Related Entity (i) is
classified, and since the date of its formation has been classified, as a
partnership for federal, state and local income tax purposes, and has not at
any time been a corporation, an association taxable as a corporation or a
"publicly traded partnership" (within the meaning of Section 7704 of the
Code), (ii) has operated, and intends to continue to operate, in such a
manner as to be classified as a partnership for the taxable year ending
December 31, 1998, and (iii) has not taken or omitted to take any action
which would reasonably be expected to result in a challenge to its status as
a partnership, and to the Knowledge of the GP Party, no such challenge is
pending.
3.2 DEFINITION OF KNOWLEDGE. As used in this Agreement, the terms "GP
PARTY'S KNOWLEDGE" or "KNOWLEDGE OF THE GP PARTY" or phrasings thereof of
similar import shall mean only the current actual knowledge of the persons
listed on SCHEDULE 3.2 (GP PARTIES KNOWLEDGE PERSONS) after consultation with
the regional vice president or regional operations manager of WW&A and the
regional leasing director of WW&A with oversight responsibilities for the
Related Project or Related Project Entity that is the subject of the
representation being made, who in turn have consulted with the local property
managers as deemed necessary concerning the subject matter of the representation
being made. As used herein, the term "CURRENT ACTUAL KNOWLEDGE" shall mean only
the actual, current, conscious (and not constructive, imputed or implied)
knowledge of such designees, and does not include constructive, imputed or
implied knowledge of any partner or agent of any GP Party other than such
designees. Anything herein to the contrary notwithstanding, none of the persons
listed on SCHEDULE 3.2 (GP PARTIES KNOWLEDGE PERSONS) shall have any personal
liability or obligation whatsoever with respect to any of the representations
made by the GP Party being or becoming untrue, inaccurate or incomplete in any
respect. Notwithstanding anything to the contrary in the foregoing, all
representations and warranties made with respect to an Other Project where a GP
Entity is not the sole, managing or administrative general partner or Member are
made solely to the Knowledge of the related GP Entity.
3.3 REMEDIES FOR BREACH OF REPRESENTATION AND WARRANTY.
(a) ACCEPTANCE OF BREACH. If the Cornerstone Parties have Knowledge as
of the Closing that a representation or warranty with respect to a Project
or Related Entity is not true and correct in any material respect as of the
day made and do not elect to terminate this Agreement under Section10.2(a)
A-55
<PAGE>
(REPRESENTATIONS AND WARRANTIES) or, designate the Related Project as a
Withdrawn Project or invoke the price adjustment set forth in Section1.9
(WITHDRAWN PROJECTS AND NET PROJECT VALUE ADJUSTMENTS), the Cornerstone
Parties shall be deemed to have waived such inaccuracy and accepted the
Project and Interests therein "as-is" and subject to such inaccuracy, and
the Cornerstone Parties shall have no further rights or recourse (including,
without limitation, under Section11 (INDEMNIFICATION, CLAIMS AGAINST
HOLDBACK) with respect thereto.
(b) INACCURACIES ASSERTED AFTER CLOSING. In the event that the
Cornerstone Parties proceed or are required to proceed with the Closing of
the Transactions, the sole and exclusive remedy of the Cornerstone Parties
for any representation or warranty not waived pursuant to Section3.3(a)
(ACCEPTANCE OF BREACH) and alleged after the Closing Date to be untrue or
inaccurate in any respect as of the date made shall be as set forth in
Section11 (INDEMNIFICATION; CLAIMS AGAINST HOLDBACK).
3.4. JOINDER OF RELATED ENTITIES. Upon receipt of the Investor Consents
sufficient to cause a Project to become a Complete Transaction Project, the
Related Entity will be deemed to have joined and become a party to this
Agreement and the appropriate Transaction Agreements directly, rather than
through the related GP Party, and such Related Entity, and not the GP Party,
shall be deemed to have made all representations and warranties, and undertaken
all obligations, with respect to itself or its Related Project and the GP Party
shall have no separate liability with respect thereto. Each such Related Entity
shall enter into a supplement to this Agreement at the Cornerstone Parties'
reasonable request confirming such joinder.
4. REPRESENTATIONS AND WARRANTIES OF WW&A.
4.1 REPRESENTATIONS AND WARRANTIES. In order to induce Cornerstone and the
Operating Partnership to enter into this Agreement and to perform their
respective obligations hereunder, WW&A hereby warrants and represents with
respect to itself and the WW&A Shares, as the case may be, the following, which
representations and warranties are made as of the Execution Date and are subject
to the matters set forth in SCHEDULE 4.1 (EXCEPTIONS TO WW&A REPRESENTATIONS AND
WARRANTIES) and the specific Schedules referenced in this
Section4.1(REPRESENTATIONS AND WARRANTIES OF WW&A):
(a) ORGANIZATION, GOOD STANDING AND CORPORATE POWER. WW&A is a
corporation, duly formed and validly existing and in good standing under the
laws of California, is duly qualified to transact business under the laws of
each state in which the character of the properties owned or leased by it
therein or in which the transaction of its business makes such qualification
necessary, except where the failure to be so qualified would not have a
Material Adverse Effect. WW&A has all requisite corporate power and
authority to execute and deliver the Transaction Agreements to be executed
and delivered by it hereunder and to perform its obligations hereunder and
thereunder in accordance with the terms and conditions hereof and thereof.
(b) ORGANIZATIONAL DOCUMENTS. True and complete copies of the charter
and by-laws of WW&A, as amended to the Execution Date, have been delivered
or made available to the Cornerstone Parties.
(c) AUTHORIZATION; NO VIOLATION. WW&A has the requisite power and
authority to enter into this Agreement and has the authority to consummate
the Transactions, subject to delivery of the authorizations and consents
described in SCHEDULE 4.1(C) (WW&A AUTHORIZATIONS), Section10.1(g) (WILSON
THRESHOLD CONSENTS), and SCHEDULE 10.1(J) (OTHER WILSON CONSENTS). Assuming
the due and valid authorization, execution and delivery of the Transaction
Agreements by the Cornerstone Parties and the GP Parties, and the delivery
of the authorizations, if any, listed in SCHEDULE 3.1(C) (GP PARTY
AUTHORIZATIONS), SCHEDULE 4.1(C) (WW&A AUTHORIZATIONS), SCHEDULE 4.1(D)
(WW&A REQUIRED CONSENTS) and SCHEDULE 10.1(J) (OTHER WILSON CONSENTS), each
of the Transaction Agreements to which it is a party will be the legal,
valid and binding obligation of WW&A, enforceable against WW&A in accordance
with its terms, subject to applicable bankruptcy, insolvency, moratorium or
similar laws relating to creditors' rights and general principles of equity.
The execution, delivery and performance by WW&A of the
A-56
<PAGE>
Transaction Agreements to which it is a party do not and will not result in
any violation of, or default (with or without notice or lapse of time, or
both) under, or give rise to a right of termination, cancellation or
acceleration of any obligation or to loss of a material benefit under, or
result in the creation of any Encumbrance upon any of the properties or
assets of WW&A under (i) the charter or organizational documents of WW&A,
(ii) any WW&A Material Contracts, other than WW&A Management Contracts by
which WW&A provides services to non-affiliated persons, or (iii) subject to
the governmental filings and other matters referred to in the following
Sections, any Law applicable to WW&A or its properties or assets, other
than, in the case of clause (ii) or (iii), any such violations, defaults,
rights or Encumbrances that either individually or in the aggregate would
not (x) have a Material Adverse Effect or (y) prevent the consummation of
the Transactions.
(d) CONSENTS. To the Knowledge of WW&A, no consent, approval, order or
authorization of, or registration, declaration or filing with, any
Governmental Authority is required by or with respect to WW&A in connection
with the execution and delivery by WW&A of the Transaction Agreements to
which it is a party to which it is a party, except for (i) such filings as
may be required in connection with the payment of any Transfer and Gains
Taxes, (ii) filings required under the Exchange Act, (iii) HSR Act filings,
if required, and (iv) such other consents, approvals, orders,
authorizations, registrations, declarations and filings, or which, if not
obtained or made, would not prevent or delay in any material respect the
consummation of any of the Transactions or otherwise prevent WW&A from
performing its obligations under the Transaction Agreements to which WW&A is
a party in any material respect or have, individually or in the aggregate, a
Material Adverse Effect.
(e) NO LITIGATION. To the Knowledge of WW&A, except as set forth in
SCHEDULE 3.1(F) (WILSON PARTY LITIGATION), there are no Actions by or
against WW&A or affecting any of its assets, pending before any Governmental
Authority (or, to the Knowledge of WW&A, overtly threatened to be brought by
or before any Governmental Authority) which could reasonably be expected to
have a Material Adverse Effect. To the Knowledge of WW&A, none of the
Actions disclosed in SCHEDULE 3.1(F) (LIST OF WILSON PARTY LITIGATION),
which has had or, if adversely determined, could reasonably be expected to
have a Material Adverse Effect or could affect the legality, validity or
enforceability of any Transaction Agreements or the consummation of the
Transactions. To the Knowledge of WW&A, neither WW&A nor any of its assets
or properties is subject to any Governmental Order (nor, to the Knowledge of
WW&A, are there any such Governmental Orders threatened to be imposed by any
Governmental Authority) which has had or could reasonably be expected to
have a Material Adverse Effect.
(f) COMPLIANCE WITH LAWS. To the Knowledge of WW&A, WW&A has conducted
and continues to conduct its businesses and operations in accordance with
all Laws and Governmental Orders applicable to WW&A or any of its
properties, assets or employees (in their capacity as such), and WW&A is not
in violation of any such Law or Governmental Order, which violation has had
or could reasonably be expected to have a Material Adverse Effect.
Notwithstanding the foregoing, WW&A makes no representation or warranty
regarding compliance of any office, building or facility with ADA
requirements or with respect to compliance with building codes, zoning laws,
land use laws or environmental matters except as specifically provided in
other parts of this Section4.1 (REPRESENTATIONS AND WARRANTIES OF WW&A).
(g) MATERIAL CONTRACTS.
(i) To the Knowledge of WW&A, WW&A has delivered or made available to
the Cornerstone Parties all of the following written contracts and
agreements to which WW&A is a party or by which any of its assets is and
will be bound as of the Closing Date ("WW&A MATERIAL CONTRACTS"):
(A) each contract, agreement and other arrangement of any nature
which involves an unperformed commitment for the provision of
services to WW&A;
A-57
<PAGE>
(B) all property management contracts, leasing services
contracts, development management agreements, asset management
contracts and similar contracts or arrangements, including those
listed on SCHEDULE 4.1(G)(I)(B) (WW&A MANAGEMENT CONTRACTS) (such
listed contracts, the "WW&A MANAGEMENT CONTRACTS"), by which WW&A
provides services to non-affiliated persons;
(C) all contracts and agreements relating to Indebtedness of
WW&A;
(D) all contracts and agreements with any Governmental Authority;
(E) all contracts and agreements for the construction of tenant
improvements between WW&A's CIC division and non-affiliated persons;
(F) all partnership, joint venture or similar agreements or
arrangements; and
(G) any power of attorney or agency agreement or arrangement with
any person pursuant to which such person is granted any authority to
act for and on behalf of WW&A.
PROVIDED that, except for the WW&A Management Contracts, no contract
or agreement described in clauses (A)--(E) above shall be a WW&A
Material Contract unless under the terms of such contract or
agreement, WW&A: (I) is likely to pay or otherwise give consideration
of more than $150,000 in the aggregate during the calendar year ended
December 31, 1998; (II) is likely to pay or otherwise give
consideration of more than $150,000 in the aggregate over the
remaining term of such contract, or (III) cannot cancel such contract
or agreement without penalty or further payment exceeding $150,000 in
the aggregate and without more than 30 days' notice, and, PROVIDED
FURTHER, that WW&A Material Contracts shall not include any contract,
agreement or arrangement described in clauses (A)--(G) which is
terminated on or before the Closing Date.
(ii) To the Knowledge of WW&A, each WW&A Material Contract is valid
and binding on the respective parties thereto and is in full force and
effect. To the Knowledge of WW&A, WW&A is not in breach of, or default
under, any WW&A Material Contract and no other party to any WW&A Material
Contract is in breach thereof or default thereunder.
(iii) Except as set forth in SCHEDULE 4.1(G)(III) (WW&A PREFERENTIAL
RIGHTS), there is no contract, agreement or other arrangement granting
any person any preferential right to purchase any of the properties or
assets of WW&A.
(iv) To the Knowledge of WW&A, SCHEDULE 4.1(G)(I)(B) (WW&A MANAGEMENT
CONTRACTS) lists all property management contracts, leasing contracts,
development management agreements, asset management contracts and similar
contracts or arrangements which are in place as of the Execution Date by
which WW&A provides services to Joint Ventures and non-affiliated persons
other than such contracts with the Project Entities owning Fund Projects.
To the Knowledge of WW&A, except as set forth on SCHEDULE 4.1(G)(I)(B)
(WW&A MANAGEMENT CONTRACTS), no party to a WW&A Management Contract has
asserted rights of set off or counterclaim against WW&A under such WW&A
Management Contract and, as of the Execution Date WW&A has not received
notice of any termination of a WW&A Management Contract from any other
party thereto, and neither WW&A nor any other party to a WW&A Management
Contract is in (A) any monetary default thereunder or (B) any
non-monetary default thereunder in any material respect that could have a
Material Adverse Effect.
(h) EMPLOYMENT MATTERS. To the Knowledge of WW&A, the information set
forth in the Employment Letter of dated June 10, 1998 (the "EMPLOYMENT
LETTER") from WW&A to the Cornerstone Parties relating to the WW&A employees
is true and complete in all material respect as of the date thereof.
A-58
<PAGE>
(i) BENEFIT PLANS; ERISA COMPLIANCE.
(i) Since the WW&A Financial Statement Date, there has not been any
adoption or amendment by WW&A of any bonus, pension, profit sharing,
deferred compensation, incentive compensation, stock ownership, stock
purchase, stock option, phantom stock, retirement, vacation, severance,
disability, death benefit, hospitalization, medical or other employee
benefit plan, arrangement or understanding (whether or not legally
binding, or oral or in writing) providing benefits to any current or
former employee, officer or director of WW&A in accordance with any
generally applicable policy (collectively, "WW&A BENEFIT PLANS").
Notwithstanding the foregoing, WW&A Benefit Plans shall not include
bonuses or participations or interests in Projects granted from time to
time to WW&A employees on a case by case basis. No WW&A Benefit Plan is
or has been subject to title IV of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or to Section412 of the Code
or Section302 of ERISA.
(ii) Each WW&A Benefit Plan is listed on Schedule 4.1(I)(II) (WW&A
BENEFIT PLANS) including, with respect to terminated WW&A Benefit Plans,
the date of termination. True and correct copies of each of the following
have been made available to the Cornerstone Parties: (A) the most recent
annual report (Form 5500) relating to each such WW&A Benefit Plan for
which such a report is required to be filed with the IRS, (B) each such
WW&A Benefit Plan, (C) the trust agreement, if any, relating to each such
WW&A Benefit Plan, (D) the most recent summary plan description for each
such WW&A Benefit Plan for which a summary plan description is required
by ERISA, and (E) the most recent determination letter, if any, issued by
the IRS with respect to any such WW&A Benefit Plan which WW&A treats as
qualified under Section401 of the Code.
(iii) As to any such WW&A Benefit Plan which WW&A treats as qualified
under Section401 of the Code, such WW&A Benefit Plan satisfies in form
and in operation the requirements of such Section and there has been no
termination or partial termination of such WW&A Benefit Plan within the
meaning of Section411(d)(3) of the Code. As to any such terminated WW&A
Benefit Plan which WW&A treated as qualified under Section401 of the
Code, such terminated WW&A Benefit Plan received a favorable
determination letter from the IRS with respect to its termination.
(iv) There are no actions, suits or claims pending (other than
routine claims for benefits) or, to the Knowledge of WW&A, threatened
against, or with respect to, any such WW&A Benefit Plans or their assets
that could reasonably be expected to have a Material Adverse Effect. To
the Knowledge of WW&A, there is no matter pending before the IRS, the
Department of Labor or the Pension Benefit Guaranty Corporation ("PBGC")
with respect to any of such WW&A Benefit Plans. All contributions
required under any WW&A Benefit Plan have been timely made. WW&A is not a
party to or bound by any severance agreement, program or policy. True and
correct copies of all vacation, overtime and other compensation policies
of WW&A relating to its employees have been made available to
Cornerstone. The assets of each WW&A Benefit Plan which are required
under ERISA to be held in trust are held in trust in accordance with
ERISA, and the assets of each such trust, are valued at fair market value
on the books and records of each such Trust at least annually.
(v) Except as would not have a Material Adverse Effect, (A) all WW&A
Benefit Plans, including any such plan that is an "employee benefit plan"
as defined in Section3(3) of ERISA, are in compliance with all applicable
requirements of law, including ERISA and the Code, (B) other than claims
for benefits in the normal course, WW&A has no liabilities or obligations
with respect to any such WW&A Benefit Plan or for the funding of any such
plan or any related trust or insurance arrangement, whether accrued,
contingent or otherwise, nor to the Knowledge of WW&A are any such
liabilities or obligations expected to be incurred, and (C), all
reporting and
A-59
<PAGE>
disclosure requirements with respect to the WW&A Benefit Plans have been
timely and completely satisfied. The execution of and performance of the
Transactions will not constitute an event under any WW&A Benefit Plan,
policy, arrangement or agreement or any trust or loan that will or may
result in any payment (whether of severance pay or otherwise),
acceleration, forgiveness of indebtedness, vesting, distribution,
increase in benefits or obligation to fund benefits with respect to any
employee or director of WW&A, except that certain shareholders of WW&A
shall vest completely in their WW&A Shares.
(j) TAXES.
(i) All Returns required to be filed with respect to WW&A have been
timely filed (taking into account any valid extensions of time for
filing); (B) all Taxes required to be shown on such Returns or otherwise
due from WW&A have been timely paid; (C) all such Returns are true,
correct and complete in all material respects; (D) no adjustment relating
to such Returns has been proposed formally or informally by any Tax
authority and, to the Knowledge of WW&A, no basis exists for any such
adjustment; (E) there are no pending or, to the Knowledge of WW&A,
threatened, actions or proceedings for the assessment or collection of
Taxes against WW&A; (F) there are no Tax liens on any assets of WW&A
apart from real property taxes which are not delinquent; and (G) no
consent under Section341(f) of the Code has been filed with respect to
WW&A.
(ii) To the Knowledge of WW&A, (A) there are no outstanding waivers
or agreements extending the statute of limitations for any period with
respect to any Tax to which WW&A may be subject; (B) there are no
requests for information currently outstanding that could affect the
Taxes of WW&A; (C) there are no proposed reassessments of any property
owned by WW&A or other proposals that could materially increase the
amount of any Tax to which WW&A would be subject; and (D) no power of
attorney that is currently in effect has been granted with respect to any
matter relating to Taxes that could affect WW&A and which would remain in
effect at Closing.
(iii) To the Knowledge of WW&A, WW&A has withheld and paid all
material Taxes required to have been withheld and paid in connection with
amounts paid or owing to any employee, independent contractor, creditor,
stockholder, or other third party.
(iv)(A) To the Knowledge of WW&A, SCHEDULE 4.1(J)(IV) (WW&A TAX
RETURNS) lists all income, franchise and similar Tax Returns (federal,
state, local and foreign) filed with respect to WW&A, for taxable periods
ended on or after December 31, 1995, and indicates those Returns
(regardless of when filed) that have been audited or are currently the
subject of audit; and (B) WW&A has delivered or made available to the
Cornerstone Parties correct and complete copies of all federal, state and
foreign income, franchise and similar Tax Returns, examination reports,
and statements of deficiencies assessed against or agreed to by WW&A
since December 31, 1995.
(k) INSURANCE. To the Knowledge of WW&A, all casualty, liability,
business interruption, DIC and other insurance policies insuring WW&A and
all such insurance policies in effect as of the Execution Date are listed on
SCHEDULE 3.1(N) (WILSON PARTIES INSURANCE) and are in full force and effect.
(l) INSOLVENCY. There has not been filed by nor has WW&A received notice
of a petition in bankruptcy or any other insolvency proceeding, or for the
reorganization or appointment of a receiver or trustee with respect to WW&A,
nor has WW&A made an assignment for the benefit of creditors, nor filed a
petition for arrangement, nor entered into any arrangement of creditors, nor
admitted in writing its inability to pay debts as they become due.
(m) WW&A SHARES. The WW&A Shares are duly authorized, validly issued and
fully paid and non-assessable and, as of the Closing Date, will be free and
clear of any lien, or Encumbrance, other than restrictions under federal and
applicable state securities laws. The WW&A Shares are owned by the
individuals and entities listed on SCHEDULE 4.1(M) (WW&A SHAREHOLDERS).
A-60
<PAGE>
(n) FINANCIAL STATEMENTS. True and complete copies of the audited
financial statements of WW&A representing the results of operations of WW&A
for the fiscal year ended as of December 31, 1997 (the "WW&A FINANCIAL
STATEMENTS") have been delivered by WW&A to the Cornerstone Parties. The
WW&A Financial Statements (i) were prepared in accordance with the books of
account and other financial records of WW&A, (ii) present fairly the
operating results of WW&A, and (iii) have been prepared in accordance with
U.S. GAAP applied on a basis consistent with the historical financial
statements of WW&A (except as otherwise indicated thereon or in the notes
thereto).
(o) ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed to
Cornerstone since the date of the WW&A Financial Statements (the "WW&A
FINANCIAL STATEMENT DATE") and to the Execution Date, WW&A has conducted its
business only in the Ordinary Course (except for actions taken in connection
with the Transactions) and there has not been (i) any change that would have
a Material Adverse Effect (a "WW&A MATERIAL ADVERSE CHANGE"), nor has there
been any occurrence or circumstance that with the passage of time would
reasonably be expected to result in a WW&A Material Adverse Change, (ii) any
split, combination or reclassification of any of WW&A's capital stock or any
issuance or the authorization of any issuance of any other securities in
respect of, in lieu of or in substitution for, or giving the right to
acquire by exchange or exercise, shares of its capital stock, (iii) any
damage, destruction or loss to WW&A's property, not covered by insurance,
that has or would have a Material Adverse Effect, or (iv) any change in
accounting methods, principles or practices by WW&A, except insofar as
required by the applicable law or a change in GAAP.
(p) SUBSIDIARIES. As of the Closing Date, WW&A will have no interest or
investment in any partnership, trust or other entity or organization, other
than certain WW&A owned Interests and the partnership interests listed on
SCHEDULE 2.6(B) (WW&A MISCELLANEOUS INTERESTS), WW&A has no corporate
subsidiary. Each entity in which WW&A owns an interest (i) is classified,
and since the date of its formation has been classified, as a partnership
for federal, state and local income tax purposes, and has not at any time
been a corporation, an association taxable as a corporation or a "publicly
traded partnership" (within the meaning of Section 7704 of the Code), (ii)
has operated, and intends to continue to operate, in such a manner as to be
classified as a partnership for the taxable year ending December 31, 1998,
and (iii) has not taken or omitted to take any action which would reasonably
be expected to result in a challenge to its status as a partnership, and to
the Knowledge of WW&A, no such challenge is pending.
(q) CAPITAL STRUCTURE. The authorized capital stock of WW&A consists of
100,000 WW&A Shares, no par value. On the Execution Date, (i) the issued and
outstanding shares of capital stock of WW&A consists of 55,556 WW&A Shares,
(ii) all the outstanding WW&A Shares have been duly authorized and validly
issued and are fully paid and non-assessable and were not issued in
violation of any preemptive rights, (iii) no WW&A Shares have been reserved
for issuance under any employee benefit or compensation plan, and (iv) no
WW&A Shares have been reserved for issuance upon exercise of any options or
warrants. All of the issued and outstanding WW&A Shares are owned of record
by the persons listed on SCHEDULE 4.1(M) (WW&A SHAREHOLDERS) in the amounts
listed opposite their respective names. There are no outstanding securities,
options, warrants, calls, rights, commitments, agreements, arrangements or
undertakings of any kind to which WW&A is a party or by which it is bound,
obligating WW&A to issue, deliver or sell, or cause to be issued, delivered
or sold, additional shares of capital stock, voting securities or securities
convertible into voting securities or other ownership interests of WW&A or
obligating WW&A to issue, grant, extend or enter into any such security,
option, warrant, call, right, commitment, agreement, arrangement or
undertaking. There are no outstanding contractual obligations of WW&A to
repurchase, redeem or otherwise acquire any WW&A Shares or make any material
investment except as contemplated by this Agreement.
A-61
<PAGE>
(r) NO DEFAULT. WW&A is not in default under, or in violation of, any
provision of its organizational documents.
(s) NO RESTRICTIONS ON WW&A SHARES. Except for the Transaction
Agreements, there are no shareholders' agreements, voting trust agreements
or other restrictive agreements relating to the sale or voting of the WW&A
Shares that would prevent WW&A from consummating the Transactions or would
otherwise have any adverse effect on any of the Transactions.
(t) SUBCHAPTER S STATUS; EARNINGS & PROFITS, SECTION 1374 BUILT-IN GAINS
TAX. WW&A (i) for the period commencing with its initial taxable year has
been a validly electing "S corporation" under Subchapter S of the Code (and
under the corresponding provisions of all applicable state income tax laws
since (A) 1987, with respect to California, or (B) the date WW&A first
started doing business in any other state) and has satisfied all
requirements to qualify for taxation as an S corporation (or the equivalent
status under applicable state income tax laws since 1987) throughout its
existence (ii) has operated, and intends to continue to operate, in such a
manner as to qualify as an S corporation under federal or applicable state
Laws for the taxable year ending on the Closing Date, and (iii) has not
taken or omitted to take any action which would reasonably be expected to
result in a challenge to its status as an S corporation, under federal or
applicable state Laws and to WW&A's Knowledge, no such challenge is pending.
WW&A has not been a party to any reorganization under Section368 of the
Code, is not a successor in interest to any C corporation, and will have no
current or accumulated earnings and profits as of the Closing, as defined
under the Code. WW&A is not subject to the "built-in gains tax" of
Section1374 of the Code (or corresponding provisions of California or other
applicable state income tax Laws) with respect to any of its assets. WW&A
has qualified, and continues to qualify, for taxation as an S corporation
for California income tax purposes for all taxable years commencing with
1987 and thus is not subject to entity-level tax for California income tax
purposes. WW&A does not, and has not at any time since its existence, owned
assets in, or engaged in business in, any state other than California,
Arizona, New Mexico, Nevada, Utah and Washington and has not and does not
file income Returns in any state other than California, Arizona, New Mexico,
Nevada and Utah.
4.2 DEFINITION OF KNOWLEDGE. As used in this Agreement, the terms "WW&A'S
KNOWLEDGE" or "KNOWLEDGE OF WW&A" or phrasings thereof of similar import shall
mean only the current actual knowledge of the persons listed on SCHEDULE 4.2
(WW&A KNOWLEDGE PARTIES). As used herein, the term "CURRENT ACTUAL KNOWLEDGE"
shall mean only the actual, current, conscious (and not constructive, imputed or
implied) knowledge of such designees, and does not include constructive, imputed
or implied knowledge of any shareholder, officer, director, employee or agent of
WW&A other than such designees. Anything herein to the contrary notwithstanding,
none of the persons listed on SCHEDULE 4.2 (WW&A KNOWLEDGE PARTIES) shall have
any personal liability or obligation whatsoever with respect to any of the
representations made by WW&A being or becoming untrue, inaccurate or incomplete
in any respect.
4.3 REMEDIES FOR BREACH OF REPRESENTATION AND WARRANTY.
(a) ACCEPTANCE OF BREACH. If the Cornerstone Parties have Knowledge as
of the Closing that a representation or warranty with respect to WW&A is not
true and correct in any material respect as of the day made and do not elect
to terminate this Agreement under Section10.3(a) (REPRESENTATIONS AND
WARRANTIES), or invoke the price adjustment of the WW&A Company Value
pursuant to Section2.7(a) (WW&A COMPANY VALUE ADJUSTMENT FOR BREACH OF
REPRESENTATION OR WARRANTY), the Cornerstone Parties shall be deemed to have
waived such inaccuracy, and the Cornerstone Parties shall have no further
rights or recourse (including, without limitation, under Section11
(INDEMNIFICATION, CLAIMS AGAINST HOLDBACK)) with respect thereto.
(b) INACCURACIES ASSERTED AFTER CLOSING. In the event that the
Cornerstone Parties proceed or are required to proceed with the Closing of
the Transactions, the sole and exclusive remedy of the Cornerstone Parties
for any representation or warranty in this Section4 (REPRESENTATIONS AND
WARRANTIES OF WW&A) not waived pursuant to Section4.3(a) (ACCEPTANCE OF
BREACH) and alleged after the Closing Date to be untrue or inaccurate in any
material respect shall be as set forth in Section11 (INDEMNIFICATION, CLAIMS
AGAINST HOLDBACK).
A-62
<PAGE>
5. REPRESENTATIONS AND WARRANTIES OF THE CORNERSTONE PARTIES.
5.1 REPRESENTATIONS AND WARRANTIES. In order to induce the Wilson Parties
to enter into this Agreement and to perform their respective obligations
hereunder, Cornerstone and the Operating Partnership hereby jointly and
severally warrant and represent the following, which representations and
warranties are made as of the Execution Date and Closing Date unless otherwise
stated therein and are subject to the matters set forth in SCHEDULE 5.1
(EXCEPTIONS TO REPRESENTATIONS AND WARRANTIES OF THE CORNERSTONE PARTIES) and to
the specific Schedules referenced in this Section5.1 (REPRESENTATIONS AND
WARRANTIES OF THE CORNERSTONE PARTIES):
(a) ORGANIZATION AND AUTHORITY OF CORNERSTONE. Cornerstone is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Nevada and has the requisite corporate power and
authority to carry on its business as now being conducted. Cornerstone is
duly qualified to do business and is in good standing in each jurisdiction
in which the nature of its business or the ownership or leasing of its
properties makes such qualification necessary, other than in such
jurisdictions where the failure to be so qualified, individually or in the
aggregate, would not have a Material Adverse Effect on Cornerstone.
Cornerstone has delivered to the Wilson Parties complete and correct copies
of its Restated Articles of Incorporation (the "COMPANY CHARTER") and
Bylaws, as amended to the Execution Date.
(b) ORGANIZATION, GOOD STANDING AND PARTNERSHIP POWER OF THE OPERATING
PARTNERSHIP. The Operating Partnership is a limited partnership duly
organized and validly existing and in good standing under the laws of the
State of Delaware and has the requisite partnership power and authority to
carry on its business as now being conducted. The Operating Partnership is
duly qualified to transact business under the laws of each state in which
the character of the properties owned or leased by it therein or in which
the transaction of its business makes such qualification necessary, other
than in such jurisdictions where the failure to be so qualified,
individually or in the aggregate, would not have a Material Adverse Effect
on the Operating Partnership. The Operating Partnership has delivered to the
Wilson Parties complete and correct copies of its Agreement of Limited
Partnership (the "PARTNERSHIP AGREEMENT") as amended to the Execution Date.
(c) CORNERSTONE SUBSIDIARIES. SCHEDULE 5.1(C) (CORNERSTONE SUBSIDIARIES)
sets forth each Subsidiary of Cornerstone ("CORNERSTONE SUBSIDIARY") and the
ownership interest therein of Cornerstone. Unless otherwise indicated in
this Agreement, the term "Cornerstone Subsidiary" shall include the
Operating Partnership. All the outstanding shares of capital stock of each
Cornerstone Subsidiary that is a corporation have been validly issued, are
fully paid and nonassessable and are owned by Cornerstone or by another
Cornerstone Subsidiary (other than as reflected in SCHEDULE 5.1(C)
(CORNERSTONE SUBSIDIARIES)) free and clear of all Encumbrances (other than
Cornerstone Permitted Encumbrances) and all equity interests in each
Cornerstone Subsidiary that is a partnership, joint venture, limited
liability company or trust are owned by Cornerstone, by another Cornerstone
Subsidiary, by Cornerstone and another Cornerstone Subsidiary, or by two or
more Cornerstone Subsidiaries (other than as reflected in SCHEDULE 5.1(C)
(CORNERSTONE SUBSIDIARIES)) free and clear of all Encumbrances (other than
Cornerstone Permitted Encumbrances). Except for the capital stock of or
other equity or ownership interests in Cornerstone Subsidiaries, Cornerstone
does not own, directly or indirectly, any capital stock or other ownership
interest in any person. Each Cornerstone Subsidiary that is a corporation is
duly incorporated and validly existing under the laws of its jurisdiction of
incorporation and has the requisite corporate power and authority to carry
on its business as now being conducted, and each Cornerstone Subsidiary that
is a partnership, limited liability company or trust is duly organized and
validly existing under the laws of its jurisdiction of organization and has
the requisite power and authority to carry on its business as now being
conducted. Each Cornerstone Subsidiary is duly qualified to do business and
is in good standing in each jurisdiction in which the nature of its business
or the ownership or leasing of its properties makes such qualification
necessary, other than in such jurisdictions where the failure to be so
qualified, individually or in the aggregate,
A-63
<PAGE>
would not have a Material Adverse Effect. True, complete and correct copies
of the articles of incorporation, bylaws, organization documents and
partnership and joint venture agreements of each Cornerstone Subsidiary
(other than the Operating Partnership), as amended to the date of this
Agreement, have been previously delivered or made available to the Wilson
Parties.
(d) CORNERSTONE CAPITAL STRUCTURE. The authorized capital stock of
Cornerstone consists of 250,000,000 Shares of Cornerstone common stock, no
par value, and 65,000,000 shares of preferred stock of Cornerstone
("CORNERSTONE PREFERRED SHARES"). On the Execution Date (i) 101,542,254
Shares are issued and outstanding, (ii) 3,030,303 Cornerstone Preferred
Shares are issued and outstanding, (iii) 148,457,746 Shares are authorized
but not issued, (iv) certain Shares are reserved for issuance under
Cornerstone's employee benefit or incentive plans pursuant to awards granted
by Cornerstone (the "CORNERSTONE EMPLOYEE STOCK PLANS"), (v) 2,592,000
Shares are issuable upon the exercise of outstanding options (the
"CORNERSTONE OPTIONS") to purchase Shares, (vi) certain Shares are reserved
for issuance for Cornerstone's Dividend Reinvestment Share Purchase Plan,
and (vii) no Shares are reserved for issuance pursuant to Cornerstone's
Employee Share Purchase Plan. As of the second business day immediately
preceding the Execution Date, 4,145,883 Units were outstanding. On the date
of this Agreement, except as set forth above in this Section5.1(d), no
shares of stock or other voting securities (or securities convertible into
voting securities) of Cornerstone or the Operating Partnership were issued,
reserved for issuance or outstanding. Cornerstone has no outstanding stock
appreciation rights relating to the Shares. All outstanding Shares and
Cornerstone Preferred Shares are duly authorized, validly issued, fully paid
and nonassessable and were not issued in violation of any preemptive rights.
SCHEDULE 5.1(D) (CORNERSTONE CAPITAL STRUCTURE) sets forth or references all
rights and preferences in respect of Cornerstone's Preferred Shares, and
true and complete copies of the documents and instruments establishing and
governing such rights and preferences have been delivered to the Wilson
Parties. There are no bonds, debentures, notes or other indebtedness of
Cornerstone having the right to vote (or convertible into, or exchangeable
for, securities having the right to vote) on any matters on which
shareholders of Cornerstone may vote. Except as set forth in this
Section5.1(d), or on SCHEDULE 5.1(D) (CORNERSTONE CAPITAL STRUCTURE), as of
the date of this Agreement there are no outstanding securities, options,
warrants, calls, rights, commitments, agreements, arrangements or
undertakings of any kind to which Cornerstone or any Cornerstone Subsidiary
is a party or by which such entity is bound, obligating Cornerstone or any
Cornerstone Subsidiary to issue, deliver or sell, or cause to be issued,
delivered or sold, additional shares of capital stock, voting securities or
securities convertible into voting securities or other ownership interests
of Cornerstone or any Cornerstone Subsidiary or obligating Cornerstone or
any Cornerstone Subsidiary to issue, grant, extend or enter into any such
security, option, warrant, call, right, commitment, agreement, arrangement
or undertaking (other than to Cornerstone or a Cornerstone Subsidiary).
Other than redemption rights with respect to Units of limited partners in
the Operating Partnership and other than with respect to the 7% Cumulative
Redeemable Preferred Stock and other than as reflected in SCHEDULE 5.1(D)
(CORNERSTONE CAPITAL STRUCTURE), there are no outstanding contractual
obligations of Cornerstone or any Cornerstone Subsidiary to repurchase,
redeem or otherwise acquire any Shares or any other capital stock, voting
securities or other ownership interests in Cornerstone or any Cornerstone
Subsidiary or make any material investment (in the form of a loan, capital
contribution or otherwise) in any person (other than a Cornerstone
Subsidiary).
(e) AUTHORITY; NONCONTRAVENTION. The Cornerstone Parties have the
requisite power and authority to enter into this Agreement and to consummate
the Transactions, subject to (i) the approval of the issuance (the "SHARE
ISSUANCE") of Shares and Units convertible into Shares under this Agreement
by an affirmative vote of the holders of a majority of the Shares present at
a duly convened meeting of the Cornerstone Shareholders in accordance with
the requirements of the New York Stock Exchange as set forth in Section6.6
(PREPARATION OF THE PROXY STATEMENT; SHAREHOLDERS MEETING; INFORMATION
STATEMENT), (ii) the approval of the Merger by a majority of the issued and
outstanding Shares in accordance with
A-64
<PAGE>
the requirements of Nevada law, (iii) the approval (if necessary) of the
Revised Partnership Agreement by an affirmative vote of the holders of a
majority of the issued and outstanding Shares and an affirmative vote of the
holders of a majority of the issued and outstanding Cornerstone Preferred
Shares in accordance with the requirements of Nevada law and the Cornerstone
Charter and in accordance with the Partnership Agreement and Delaware law
(the approvals of the Share Issuance, the Merger and the Revised Partnership
Agreement (if applicable) are sometimes collectively referred to as the
"CORNERSTONE SHAREHOLDER APPROVALS"). The execution and delivery of this
Agreement by the Cornerstone Parties and the consummation by the Cornerstone
Parties of the Transactions to which a Cornerstone Party is a party have
been duly authorized by all necessary corporate or partnership action on the
part of such Cornerstone Party, subject to Cornerstone Shareholder
Approvals. This Agreement has been duly executed and delivered by the
Cornerstone Parties and upon their execution by the Cornerstone Parties and
the other Cornerstone Subsidiaries, assuming the due execution and valid
authorization, execution and delivery of the Transaction Agreements by the
Wilson Parties and of the Ancillary Agreements by the other parties thereto,
the Transaction Agreements will constitute, the legal, valid and binding
obligations of the Cornerstone Parties and such Cornerstone Subsidiaries,
enforceable against the Cornerstone Parties and such Cornerstone
Subsidiaries in accordance with their respective terms, subject to
applicable bankruptcy, insolvency or similar laws affecting the enforcement
of creditors' rights and equitable principles. The execution and delivery by
a Cornerstone Party or a Cornerstone Subsidiary of the Transaction
Agreements to which it is a party does not, and the consummation by such
Cornerstone Party or Cornerstone Subsidiary of the Transactions to which it
is a party and compliance by such Cornerstone Party or Cornerstone
Subsidiary with the provisions of the Transaction Agreements to which it is
a party will not, result in any violation of, or default (with or without
notice or lapse of time, or both) under, or give rise to a right of
termination, cancellation or acceleration of any obligation or to loss of a
material benefit or alteration of rights or obligations under, or result in
the creation of any Encumbrance upon any of the properties or assets of such
Cornerstone Party or any Cornerstone Subsidiary under (i) the Company
Charter and Bylaws of Cornerstone, as amended, or the comparable charter or
organizational documents or partnership or similar agreement (as the case
may be) of any Cornerstone Subsidiary, (ii) any Cornerstone Material
Agreements, (iii) subject to the governmental filings and other matters
referred to in the following sections, any Laws applicable to Cornerstone or
any Cornerstone Subsidiary, or their respective properties or assets, other
than, in the case of clause (ii) or (iii), any such conflicts, violations,
defaults, rights or Encumbrances that either individually or in the
aggregate would not (x) have a Material Adverse Effect or (y) materially
delay or prevent the consummation of the Transactions. Without limiting the
foregoing, Cornerstone has taken all action necessary to ensure that the
issuance of the Shares to Participating Investors and the Wilson
Shareholders pursuant hereto shall not be deemed a violation of
Section8.01(a) of the Company Charter.
(f) CONSENTS. To the Knowledge of the Cornerstone Parties, no consent,
approval, order or authorization of, or registration, declaration or filing
with, any Governmental Authority is required by or with respect to
Cornerstone or any Cornerstone Subsidiary in connection with the execution
and delivery of this Agreement by Cornerstone or the consummation by
Cornerstone or any Cornerstone Subsidiary of the Transactions, except for
(i) the filing with the Securities and Exchange Commission ("SEC") of (x) a
proxy statement relating to the Cornerstone Shareholder Approvals (as
amended or supplemented from time to time, the "PROXY STATEMENT") and (y)
such reports under Section13(a) of the Exchange Act as may be required in
connection with the Transaction Agreements and the Transactions, together
with reports on Form 8-K and accompanying financial statements, (ii) such
filings as may be required in connection with the payment of any Transfer
and Gains Taxes, (iii) the filing of the Certificate of Merger with the
Nevada Secretary of State, (iv) the filing of the Restated Partnership
Agreement with the Delaware Secretary of State, if appropriate, (v) the
filing with the California Secretary of State of the documents described in
paragraphs (1), (2) or (3) of Section1108(d) of the California Corporations
Code, (vi) HSR Act filings, if required, and (vii) such other consents,
A-65
<PAGE>
approvals, orders, authorizations, registrations, declarations and filings
as are set forth on SCHEDULE 5.1(F) (CORNERSTONE CONSENTS) or which, if not
obtained or made, would not prevent or delay in any material respect the
consummation of any of the Transactions or otherwise prevent Cornerstone
from performing its obligations under the Transaction Agreements in any
material respect or have, individually or in the aggregate, a Material
Adverse Effect.
(g) SEC DOCUMENTS; FINANCIAL STATEMENTS; UNDISCLOSED LIABILITIES. Since
January 1, 1997, Cornerstone has timely filed all required reports,
schedules, forms, statements and other documents required to be filed with
the SEC (the "SEC DOCUMENTS"). All of the SEC Documents, as of their
respective filing dates, complied or will comply, as the case may be, in all
material respects with all applicable requirements of the Securities Act,
the Exchange Act, and in each case, the rules and regulations promulgated
thereunder applicable to such SEC Documents. No SEC "stop order" has been
issued or is effective with respect to Cornerstone. None of the SEC
Documents (including, without limitation, the Proxy Statement) at the time
of filing or effectiveness contained, or will contain, as the case may be,
any untrue statement of a material fact or omitted to state any material
fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were
made, not misleading, except to the extent such statements have been
amended, modified or superseded by later SEC Documents (including, without
limitation, the Proxy Statement) and except to the extent such statements
have been provided in writing by the Wilson Parties. The consolidated
financial statements of Cornerstone included in the SEC Documents
(including, without limitation, the Proxy Statement) complied or will
comply, as the case may be, as to form in all material respects with
applicable accounting requirements and the published rules and regulations
of the SEC with respect thereto, have been prepared in accordance with GAAP
(except, in the case of unaudited statements, as permitted by Form 10-Q
promulgated under the Exchange Act) applied on a consistent basis during the
periods involved (except as may be indicated in the notes thereto) and
fairly presented or will fairly present, as the case may be, in accordance
with the applicable requirements of GAAP, the consolidated financial
position of Cornerstone and Cornerstone Subsidiaries as of the dates thereof
and the consolidated results of operations and cash flows for the periods
then ended (subject, in the case of unaudited statements, to normal and
recurring year-end audit adjustments). Except as set forth in Cornerstone
SEC Documents filed with the SEC prior to the date hereof, neither
Cornerstone nor any Cornerstone Subsidiary has any Liabilities (A) required
by GAAP to be set forth on a consolidated balance sheet of Cornerstone and
Cornerstone Subsidiaries or in the notes thereto or (B) which, to the
Knowledge of Cornerstone, individually or in the aggregate, would have a
Material Adverse Effect.
(h) ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in the SEC
Documents filed with the SEC prior to the date hereof, since the date of the
most recent financial statements included in the SEC Documents (the
"FINANCIAL STATEMENT DATE") and to the Execution Date, Cornerstone and
Cornerstone Subsidiaries have conducted their business only in the Ordinary
Course and there has not been (i) any change that would have a Material
Adverse Effect (a "CORNERSTONE MATERIAL ADVERSE CHANGE"), nor has there been
any occurrence or circumstance that with the passage of time would
reasonably be expected to result in a Cornerstone Material Adverse Change,
(ii) any dividends or distributions made or declared except for regular
quarterly dividends not in excess of $.30 per Share and regular annual
dividends not in excess of $1.155 per share of Cornerstone Preferred Shares
with customary record and payment dates, (iii) any issuance or the
authorization of any issuance, or any split, combination or
reclassification, of any of Cornerstone's capital stock, or any issuance or
the authorization of any issuance of any other securities in respect of, in
lieu of or in substitution for, or giving the right to acquire by exchange
or exercise, any shares of its capital stock, or any issuance of an
ownership interest in any Cornerstone Subsidiary, (iv) any damage,
destruction or loss to Cornerstone's or Cornerstone Subsidiaries' property,
not covered by insurance, that has or would have a Material Adverse Effect,
or (v) any change in accounting methods, principles or practices by
A-66
<PAGE>
Cornerstone or any Cornerstone Subsidiary, except insofar as required by the
SEC, applicable law or a change in GAAP.
(i) LITIGATION. To the Knowledge of Cornerstone, except as set forth in
SCHEDULE 5.1(I) (CORNERSTONE LITIGATION) there are no Actions by or against
Cornerstone or any Cornerstone Subsidiary pending before any Governmental
Authority (or, to the Knowledge of Cornerstone, threatened to be brought by
or before any Governmental Authority) which has had or could reasonably be
expected to have a Material Adverse Effect. To the Knowledge of Cornerstone,
none of the Actions disclosed in SCHEDULE 5.1(I) (CORNERSTONE LITIGATION),
has had or could reasonably be expected to have a Material Adverse Effect or
could affect the legality, validity or enforceability of any Transaction
Agreements or the consummation of the Transactions. To the Knowledge of
Cornerstone, except as set forth in SCHEDULE 5.1(I) (CORNERSTONE LITIGATION
none of Cornerstone, the Cornerstone Subsidiaries nor any of their
respective assets or properties is subject to any Governmental Order,
including any stop order by the SEC (nor, to the Knowledge of Cornerstone,
are there any such Governmental Orders threatened to be imposed by any
Governmental Authority) which has had or could reasonably be expected to
have a Material Adverse Effect.
(j) CORNERSTONE PROPERTIES.
(i) To Cornerstone's Knowledge, the Operating Partnership or
Cornerstone Subsidiaries own fee simple title (or, where indicated, a
leasehold estate) to each of the Cornerstone Properties, in each case
free of all Encumbrances except for Cornerstone Permitted Encumbrances.
In this Agreement, "CORNERSTONE PERMITTED ENCUMBRANCES" means the
following with respect to any property: (a) liens for taxes, assessments
and governmental charges of Governmental Authorities or levies not yet
past due and payable; (b) rights of tenants, as tenants only under the
applicable lease; (c) those existing title matters affecting the
Cornerstone Properties listed on the title insurance policies issued to
the Cornerstone Group; copies of which were delivered to the Wilson
Parties prior to the Execution Date and are attached hereto as SCHEDULE
5.1(J)(I) (CORNERSTONE TITLE REPORTS); (d) pledges (i) to secure
obligations under the governance documents to which a Cornerstone
Subsidiary is a party, including obligations to make capital
contributions, or (ii) to secure PGGM purchase money indebtedness (as
described in the SEC Documents); and (e) survey exceptions and other
easements, rights-of-way, covenants, restrictions and title exceptions
that (i) do not render title to the property encumbered thereby
unmarketable, (ii) do not, individually or in the aggregate, have a
Material Adverse Effect on the value of or the use of the property
encumbered thereby for its present purposes, and (iii) do not interfere
with the ordinary conduct of the property encumbered thereby or detract
from the value or usefulness thereof. In this Agreement, "CORNERSTONE
PROPERTY" means each office project directly or indirectly owned by the
Operating Partnership or any other Cornerstone Subsidiary. A true and
correct list of the Cornerstone Properties as of the Execution Date is
attached as SCHEDULE 5.1(J) (CORNERSTONE PROPERTIES).
(ii) Except as disclosed in SCHEDULE 5.1(J)(II) (CORNERSTONE PROPERTY
MATTERS), neither Cornerstone nor any of Cornerstone's Subsidiaries has
Knowledge (A) of any condemnation or rezoning proceedings pending or
threatened with respect to any of the Cornerstone Properties, (B) that
any Governmental Authority has delivered any notice of default under, or
has instituted proceedings to revoke, any material permit, license or
certificate pertaining to the ownership or operation of improvements on
the Cornerstone Properties, which default or revocation would or would
reasonably be expected to have a Material Adverse Effect, (C) that any
improvements on any Cornerstone Property and any of the current uses and
conditions thereof violate any Property Restrictions, except as disclosed
in Schedule 5.1(J)(II) (CORNERSTONE PROPERTY MATTERS), which violation
would or would reasonably be expected to have a Material Adverse Effect,
(D) that any person has delivered notice of intent to terminate, or has
initiated procedures to terminate, water, gas, sewer, electric, telephone
or storm water and drainage facilities or any other utilities
A-67
<PAGE>
required by Governmental Authorities and in the normal operation of each
Cornerstone Property or any points of access, both pedestrian and
vehicular to and from public roads currently used at any Cornerstone
Property, which termination would or would reasonably be expected to have
a Material Adverse Effect, or (E) that any person has delivered any
notice of noncompliance with ADA requirements.
(k) ENVIRONMENTAL AND OTHER PERMITS AND LICENSES; RELATED MATTERS. To
the Knowledge of Cornerstone, except as expressly disclosed in the reports
set forth in SCHEDULE 5.1(K) (CORNERSTONE ENVIRONMENTAL REPORTS) previously
delivered or made available to the Wilson Parties, (i) Cornerstone and the
Cornerstone Subsidiaries currently hold all of the Permits, including,
without limitation, Environmental Permits, required, necessary or proper for
the current use, occupancy and operation of each Cornerstone Property and
all such Permits and Environmental Permits are in full force and effect;
(ii) there is no existing practice, action or activity of Cornerstone or any
Cornerstone Subsidiary or tenants of the Cornerstone Properties and no
existing condition of or condition including, without limitation, any
Environmental Conditions, associated with the Cornerstone Properties which
would give rise to any civil or criminal Liability under, or violate or
prevent compliance with, any applicable Environmental Law, applicable
Permits or applicable Environmental Permits or other applicable Law, (iii)
neither Cornerstone nor any Cornerstone Subsidiary has received any notice
from any Governmental Authority proposing to or actually revoking,
canceling, rescinding, materially modifying or refusing to renew, any Permit
or Environmental Permit or providing written notice of violations under any
applicable Environmental Law or applicable Environmental Permit (iv)
Cornerstone and each Cornerstone Subsidiary is in all respects in compliance
with the Permits, all applicable Environmental Laws and the requirements of
all Environmental Permits; (v) during the period in which Cornerstone or any
Cornerstone Subsidiary has had any interest therein, Hazardous Materials
have not been generated, used, treated, handled or stored on, or transported
to or from, any Cornerstone Property (other than such activities that have
been conducted in accordance with all applicable Environmental Laws and
Environmental Permits consistent with the nature of the applicable
Cornerstone Property and that would not have a Material Adverse Effect);
(vi) during the period in which Cornerstone or any Cornerstone Subsidiary
has had any interest therein, Hazardous Materials (regardless of the source)
have not been Released on any Cornerstone Property or otherwise contaminated
any Cornerstone Property and Hazardous Materials have not been Released on
or contaminated any property adjoining any Cornerstone Property (except, in
either instance, Releases or contamination involving only DE MINIMIS amounts
of Hazardous Materials, the Release of which or contamination by which would
not violate any applicable Environmental Law, violate any Environmental
Permit, trigger any reporting obligation, or trigger any obligation to
investigate, remediate, cleanup or otherwise respond to such Hazardous
Material); (vii) Cornerstone and Cornerstone Subsidiaries have disposed of
all wastes consisting of or containing Hazardous Materials, in compliance in
all material respects with all applicable Environmental Laws and
Environmental Permits; (viii) there are no past, pending or threatened
Environmental Claims against Cornerstone, any Cornerstone Subsidiary or any
Cornerstone Property; (ix) no Cornerstone Property or any property adjoining
any Cornerstone Property is listed or proposed for listing on the National
Priorities List under CERCLA or on the CERCLIS or any analogous state list
of sites requiring investigation or cleanup of Hazardous Materials; (x)
during the period in which Cornerstone or any Cornerstone Subsidiary has had
any interest therein, neither Cornerstone nor any Cornerstone Subsidiary nor
their tenants has used or arranged for the use of any location for the
restment, storage, disposal, Release or other handling of any Hazardous
Materials or transported or arranged for the transportation of any Hazardous
Materials to any location that is listed or proposed for listing on the
National Priorities List under CERCLA or on the CERCLIS or any analogous
state list or which is the subject of any Environmental Claim; (xi) there
are not now, and during the period in which Cornerstone or any Cornerstone
Subsidiary has had any interest therein there never have been, any USTs
located on any Cornerstone Property or on any property
A-68
<PAGE>
adjoining any Cornerstone Property; and (xii) there is not now any asbestos
in, on or about any Cornerstone Property.
(l) RELATED PARTY TRANSACTIONS. Set forth in SCHEDULE 5.1(L)
(CORNERSTONE RELATED TRANSACTIONS DISCLOSURE), or in Cornerstone's SEC
Documents, including Cornerstone's definitive proxy statements for the
annual Meetings of Cornerstone's shareholders held on May 20, 1998, June 2,
1997, June 20, 1996 and June 19, 1995, and the Special Meeting of
Cornerstone's shareholders held on October 27, 1997, is a list of all
arrangements, agreements and contracts entered into by Cornerstone or any of
the Cornerstone Subsidiaries with any person who (i) is an executive
officer, director or affiliate of Cornerstone or any of the Cornerstone
Subsidiaries, or any entity of which any of the foregoing is an affiliate
which would be required to be disclosed under Item 404 of Regulation S-K
promulgated under the Securities Act and the Exchange Act or (ii) acquired
Shares in a private placement. Such documents, copies of all of which have
been previously delivered or made available to the Wilson Parties, are
listed in Schedule 5.1(L) (CORNERSTONE RELATED TRANSACTIONS DISCLOSURE), in
the Cornerstone SEC Documents, or in Cornerstone's definitive proxy
statements for the Annual Meetings of Cornerstone's shareholders held on May
20, 1998, June 2, 1997, June 20, 1996 and June 19, 1995, and the Special
Meeting of Cornerstone's shareholders held on October 27, 1997.
(m) TAXES.
(i) (A) All Returns and reports in respect of Taxes required to be
filed with respect to Cornerstone and each Cornerstone Subsidiary have
been timely filed (taking into account any valid extensions of time for
filing); (B) all Taxes required to be shown on such Returns and reports
or otherwise due have been timely paid; (C) all such Returns and reports
are true, correct and complete in all material respects; (D) no
adjustment relating to such Returns has been proposed formally or
informally by any Tax authority and, to the Knowledge of Cornerstone, no
basis exists for any such adjustment; (E) there are no pending or, to the
Knowledge of Cornerstone, threatened actions or proceedings for the
assessment or collection of Taxes against Cornerstone or any Cornerstone
Subsidiary or (insofar as either relates to the activities or income of
Cornerstone or any Cornerstone Subsidiary, which could result in
liability) any corporation that was includable in the filing or a return
with Cornerstone on a consolidated or combined basis; (F) no consent
under Section341(f) of the Code has been filed with respect to
Cornerstone or any Cornerstone Subsidiary; and (G) there are no Tax liens
on any assets of Cornerstone or any Cornerstone Subsidiary apart from
real property taxes which are not delinquent.
(ii) To the Knowledge of Cornerstone, (A) there are no outstanding
waivers or agreements extending the statute of limitations for any period
with respect to any Tax to which Cornerstone or any Cornerstone
Subsidiary may be subject; (B) there are no requests for information
currently outstanding that could affect the Taxes of Cornerstone or any
Cornerstone Subsidiary; (C) there are no proposed reassessments of any
property owned by Cornerstone or any Cornerstone Subsidiary or other
proposals that could materially increase the amount of any Tax to which
Cornerstone or any Cornerstone Subsidiary would be subject; and (D) no
power of attorney that is currently in force has been granted with
respect to any matter relating to Taxes that could affect any Cornerstone
Subsidiary.
(iii) To the Knowledge of Cornerstone, each of Cornerstone and
Cornerstone Subsidiaries has withheld and paid all Taxes required to have
been withheld and paid in connection with all amounts paid or owing to
any employee, independent contractor, creditor, stockholder or other
third party.
(iv) Neither Cornerstone nor any of the Cornerstone Subsidiaries is a
party to any tax allocation or sharing agreement. Neither Cornerstone nor
any of the Cornerstone Subsidiaries (A) has been a member of an
"affiliated group" (as defined in Section1504(a)(1) of the Code) filing a
consolidated federal income Tax Return (other than a group the common
parent of which was
A-69
<PAGE>
Cornerstone) or (B) to the Knowledge of Cornerstone, has any Liability
for the Taxes of any Person (other than Cornerstone and the Cornerstone
Subsidiaries under Section1.1502-6 of the Treasury Regulations) (or any
similar provision of state, local, or foreign law), as a transferee or
successor, by contract or otherwise.
(v) Cornerstone (A) for the period commencing with the taxable year
ending December 31, 1982, to the present has been organized and operated
in conformity with the requirements for qualification as a REIT (within
the meaning of Section856 of the Code) under the Code and has been
subject to taxation as a REIT and has satisfied all requirements to
qualify as a REIT for such periods, (B) has operated, and intends to
continue to operate, in such a manner as to qualify as a REIT for the tax
year ending December 31, 1998, and (C) has not taken or omitted to take
any action which would reasonably be expected to result in a challenge to
its status as a REIT, and, to Cornerstone's Knowledge, no such challenge
is pending or threatened. Each Cornerstone Subsidiary which is a
partnership, joint venture or limited liability company has been during
and since its formation and continues to be treated for federal income
tax purposes as a partnership and not as a corporation or an association
taxable as a corporation or is disregarded as a separate entity for
federal income tax purposes. Each Cornerstone Subsidiary which is a
corporation is a "qualified REIT subsidiary," as defined in
Section856(i)of the Code (other than one or more non-qualified REIT
subsidiaries which may be organized by the Operating Partnership in
connection with the Closing to conduct certain third party business
activities). Cornerstone did not incur in its 1997 tax year any liability
for taxes under SectionSection857(b), 860(c) or 4981 of the Code.
(n) COMPLIANCE WITH LAWS. To the Knowledge of Cornerstone, Cornerstone
and each of the Cornerstone Subsidiaries has conducted and continues to
conduct its businesses and operations in accordance with all Laws and
Governmental Orders applicable to Cornerstone or any Cornerstone Subsidiary
or any of their properties or assets or employees and neither Cornerstone
nor any Cornerstone Subsidiary is in violation of any such Law or
Governmental Order which has had or could have a Material Adverse Effect.
Notwithstanding the foregoing, Cornerstone makes no representation or
warranty regarding compliance of any building, office or facility with ADA
requirements or with respect to compliance with zoning laws, land use laws,
building codes or environmental matters except as otherwise specifically
provided in other parts of this Section5.1 (REPRESENTATIONS AND WARRANTIES
OF CORNERSTONE AND THE OPERATING PARTNERSHIP).
(o) CORNERSTONE MATERIAL AGREEMENTS.
(i) To the Knowledge of Cornerstone, the Cornerstone Parties have
delivered or made available to the Wilson Parties all of the following
written contracts and agreements of Cornerstone and the Cornerstone
Subsidiaries to which any or all Cornerstone Properties is and will be
bound as of the Closing Date (the "CORNERSTONE MATERIAL CONTRACTS"):
(A) each contract, agreement and other arrangement of any nature
which involves an unperformed commitment or for the provision of
services to Cornerstone or the Cornerstone Subsidiaries or is
otherwise related to the Cornerstone Properties;
(B) all property management contracts, leasing services
contracts, asset management contracts and similar contracts or
arrangements, including those listed on SCHEDULE 5.1(O) (CORNERSTONE
MANAGEMENT CONTRACTS) (such listed contracts, the "CORNERSTONE
MANAGEMENT CONTRACTS");
(C) all contracts and agreements relating to Indebtedness of
Cornerstone or any of the Cornerstone Subsidiaries;
(D) all contracts and agreements with any Governmental Authority;
A-70
<PAGE>
(E) all contracts and agreements between or among Cornerstone or
any of the Cornerstone Subsidiaries and any affiliate thereof;
(F) all partnership, joint venture or similar agreements or
arrangements; and
(G) any power of attorney or agency agreement or arrangement with
any person pursuant to which such person is granted any authority to
act for and on behalf of Cornerstone or any of the Cornerstone
Subsidiaries;
PROVIDED, that, except for the Cornerstone Management Contracts, no
contract or agreement described in clauses (A)--(E) above shall be a
Cornerstone Material Contract unless under the terms of such contract
or agreement Cornerstone or any of the Cornerstone Subsidiaries party
thereto: (I) is likely to pay or otherwise give consideration of more
than $150,000 in the aggregate during the calendar year ended
December 31, 1998; (II) is likely to pay or otherwise give
consideration of more than $150,000 in the aggregate over the
remaining term of such contract; or (III) cannot cancel such
agreement or contract without penalty or further payment in the
aggregate not exceeding $150,000 and without more than thirty (30)
days' notice, and PROVIDED FURTHER, that Cornerstone Material
Contracts shall not include any contract, agreement or arrangement
described in clauses (A)--(G) which is terminated on or prior to the
Closing Date.
(ii) To the Knowledge of Cornerstone, each Cornerstone Material
Contract is valid and binding on the respective parties thereto and is in
full force and effect. To the Knowledge of Cornerstone, neither
Cornerstone nor any Cornerstone Subsidiary is in breach of, or default
under, any Cornerstone Material Contract in any material respect, and no
other party to any Cornerstone Material Contract is in breach thereof or
default thereunder in any material respect.
(iii) Except as set forth in Cornerstone Material Contracts provided
pursuant to Section5.1(o), there is no contract, agreement or other
arrangement granting any person any preferential right to purchase or
right of first refusal or right of first offer with respect to the
purchase of any of the Cornerstone Properties.
(iv) To the Knowledge of Cornerstone, SCHEDULE 5.1(O) (CORNERSTONE
MANAGEMENT CONTRACTS) lists all property management contracts, leasing
contracts, asset management contracts and similar contracts (or
arrangements) to which Cornerstone, the Operating Partnership or any
Cornerstone Subsidiary is a party. To the Knowledge of Cornerstone, no
party to a Cornerstone Management Contract has asserted rights of setoff
or counterclaim against any Cornerstone Party or Cornerstone Subsidiary
under such Cornerstone Management Contract, and except as described in
SCHEDULE 5.1(O) (CORNERSTONE MANAGEMENT CONTRACTS), neither the
Cornerstone Parties nor any of the Cornerstone Subsidiaries nor any other
party thereto is in (A) any monetary default thereunder or (B) any
non-monetary default thereunder in any material respect that could have a
Material Adverse Effect.
(v) To the Knowledge of Cornerstone, except as disclosed in writing
to the Wilson Parties, there is no contract or agreement or other
arrangement to which any of the Cornerstone Parties or any of the
Cornerstone Subsidiaries is a party which prevents or is reasonably
likely to prevent the continued operation by the Cornerstone Parties and
the Cornerstone Subsidiaries of the Cornerstone Properties in the
Ordinary Course.
(p) ABSENCE OF CHANGES IN BENEFIT PLANS; ERISA COMPLIANCE.
(i) Except as disclosed in the SEC Documents, since the Financial
Statement Date there has not been any adoption or amendment by
Cornerstone, any Cornerstone Subsidiary or any Person affiliated with
Cornerstone under Section414(b), (c), (m) or (o) of the Code (each, an
"ERISA AFFILIATE
A-71
<PAGE>
OF CORNERSTONE") of any bonus, pension, profit sharing, deferred
compensation, incentive compensation, stock ownership, stock purchase,
stock option, phantom stock, retirement, vacation, severance, disability,
death benefit, hospitalization, medical or other employee benefit plan,
arrangement or understanding (whether or not legally binding, or oral or
in writing) providing benefits to any current or former employee, officer
or director of Cornerstone, any Cornerstone Subsidiary or any ERISA
Affiliate of Cornerstone in accordance with any generally applicable
policy of Cornerstone (collectively, "CORNERSTONE BENEFIT PLANS"). No
Cornerstone Benefit Plan is or has been subject to title IV of ERISA or
to Section412 of the Code or Section302 of ERISA.
(ii) Each Cornerstone Benefit Plan is listed in SCHEDULE 5.1(P)
(CORNERSTONE BENEFITS), including, with respect to terminated Cornerstone
Benefit Plans, the date of termination. True and correct copies of each
of the following have been made available to the GP Parties: (A) the most
recent annual report (Form 5500) relating to each such Cornerstone
Benefit Plan for which such a report is required to be filed with the
IRS, (B) each such Cornerstone Benefit Plan, (C) the trust agreement, if
any, relating to each such Cornerstone Benefit Plan, (D) the most recent
summary plan description for each such Cornerstone Benefit Plan for which
a summary plan description is required by ERISA, and (E) the most recent
determination letter, if any, issued by the IRS with respect to any such
Cornerstone Benefit Plan which the related Cornerstone Party or
subsidiary treats as qualified under Section401 of the Code.
(iii) As to any such Cornerstone Benefit Plan which the related
Cornerstone Party or subsidiary treats as qualified under Section401 of
the Code, such Cornerstone Benefit Plan satisfies in form and operation
the requirements of such Section and there has been no termination or
partial termination of such Cornerstone Benefit Plan within the meaning
of Section411(d)(3) of the Code. As to any such terminated Cornerstone
Benefit Plan which the related Cornerstone Party or subsidiary treated as
having been qualified under Section401 of the Code, such terminated
Cornerstone Benefit Plan received a favorable determination letter from
the IRS with respect to its termination.
(iv) There are no actions, suits or claims pending (other than
routine claims for benefits) or, to the Knowledge of Cornerstone,
threatened against, or with respect to, any such Cornerstone Benefit
Plans or their assets that could reasonably be expected to have a
Material Adverse Effect. To the Knowledge of Cornerstone, there is no
matter pending before the IRS, the Department of Labor or the PBGC with
respect to any of such Cornerstone Benefit Plans. All contributions
required under any Cornerstone Benefit Plan have been timely made. Other
than as disclosed in SCHEDULE 5.1(P)(IV) (CORNERSTONE SEVERANCE), neither
Cornerstone nor any Cornerstone Subsidiary is a party to or is bound by
any severance agreement, program or policy. True and correct copies of
all employment agreements with officers of Cornerstone and the
Cornerstone Subsidiaries, and all vacation, overtime and other
compensation policies of Cornerstone and the Cornerstone Subsidiaries
relating to their employees, have been made available to the Wilson
Parties. The assets of each Cornerstone Benefit Plan which are required
under ERISA to be held in trust are held in trust in accordance with
ERISA, and the assets of such trust, are valued at fair market value on
the books and records of such trust at least annually.
(v) Except as described in Cornerstone SEC Documents or as would not
have a Material Adverse Effect, (A) all Cornerstone Benefit Plans,
including any such plan that is an "employee benefit plan" as defined in
Section3(3) of ERISA, are in compliance with all applicable requirements
of law, including ERISA and the Code, (B) other than claims for benefits
in the normal course, neither Cornerstone, any Cornerstone Subsidiary nor
any ERISA Affiliate of Cornerstone has any liabilities or obligations
with respect to any such Cornerstone Benefit Plan or for the funding of
any such plan or any related trust or insurance arrangement, whether
accrued, contingent or otherwise, nor to the Knowledge of Cornerstone are
any such liabilities or obligations expected to be incurred, and (C) all
reporting and disclosure requirements with respect to the Cornerstone
A-72
<PAGE>
Benefit Plans have been timely and completely satisfied. The execution of
the Transaction Agreements, and performance of the Transactions, will not
constitute an event under any Cornerstone Benefit Plan, policy,
arrangement or agreement or any trust or loan that will or may result in
any payment (whether of severance pay or otherwise), acceleration,
forgiveness of indebtedness, vesting, distribution, increase in benefits
or obligation to fund benefits with respect to any employee or director
of Cornerstone, any Cornerstone Subsidiary or any ERISA Affiliate of
Cornerstone.
(q) VOTE REQUIRED. The Cornerstone Shareholder Approvals are the only
votes of the holders of any class or series of Cornerstone's shares or other
securities necessary (under applicable Law or otherwise) to approve the
Transactions.
(r) RENT ROLL. Cornerstone has delivered or caused to be delivered to
the Wilson Parties a rent roll (a "CORNERSTONE RENT ROLL") for each of the
Cornerstone Properties that is current as of March 31, 1998, or such later
date as is stated therein. Each Cornerstone Rent Roll reflects all of the
leases, tenancies or occupancies materially affecting such Cornerstone
Properties as of such date, and the information set forth in each
Cornerstone Rent Roll is true and correct as of March 31, 1998, or such
later date as is stated therein. To Cornerstone's Knowledge, since the
latest date stated on the Cornerstone Rent Roll, there have not been any
material changes other than in the Ordinary Course in the Cornerstone Rent
Rolls which either individually or in the aggregate would or would be
reasonably expected to have a Material Adverse Effect.
(s) CORNERSTONE GROUND LEASES. To the Knowledge of Cornerstone, each
ground lease pursuant to which Cornerstone or a Cornerstone Subsidiary holds
any interest as a ground lessee (a "CORNERSTONE GROUND LEASE") is identified
on SCHEDULE 5.1(S) (CORNERSTONE GROUND LEASES) and is valid and in full
force and effect, and the copy of each such Cornerstone Ground Lease as
provided to the Wilson Parties is true, correct and compete and constitutes
the entire agreement between the ground lessor and ground lessee thereunder
and there have been no amendments thereto (either orally or in writing). To
the Knowledge of Cornerstone, there is no material default by either the
ground lessor or ground lessee under any such Cornerstone Ground Lease and
no conditions exist that, with the passage of time or the giving of notice
or both, would constitute a material default thereunder and no notice of
termination has been given by either a ground lessor or a ground lessee
under any such Cornerstone Ground Lease. To the Knowledge of Cornerstone,
the applicable Cornerstone Subsidiary's interest in each such Cornerstone
Ground Lease is free of all Encumbrances except for Cornerstone Permitted
Encumbrances.
(t) INSURANCE. To the Knowledge of Cornerstone, all casualty, liability,
business interruption and other insurance policies insuring Cornerstone, the
Cornerstone Subsidiaries and the Cornerstone Properties in effect on the
Execution Date are listed on SCHEDULE 5.1(T) (CORNERSTONE INSURANCE
POLICIES) and are in full force and effect.
(u) INSOLVENCY. There has not been filed by nor has Cornerstone or any
Cornerstone Subsidiary received notice of a petition in bankruptcy or any
other insolvency proceeding, or for the reorganization or appointment of a
receiver or trustee with respect to Cornerstone or a Cornerstone Subsidiary,
nor has Cornerstone or any Cornerstone Subsidiary made an assignment for the
benefit of creditors, nor filed a petition for arrangement, nor entered into
any arrangement of creditors, nor admitted in writing its inability to pay
debts as they become due.
(v) EQUITY SECURITIES. The Equity Securities to be issued to the WW&A
Shareholders and Participating Investors are, or prior to the Closing will
be, duly authorized and, when issued by the Cornerstone Parties as
contemplated by the terms of this Agreement, will be, in the case of Units,
validly issued under the terms of the Partnership Agreement and, in the case
of the Shares, including those issued upon exchange of the Units, validly
issued, fully paid and non-assessable, free and clear of any Encumbrances
other than restrictions arising from any Encumbrances on WW&A Shares or WW&A
Interests or restrictions set forth in the Escrow Agreement and under
federal and applicable state securities laws.
A-73
<PAGE>
(w) NO DEFAULT. Neither Cornerstone nor any of the Cornerstone
Subsidiaries is in default under, or in violation of, any provision of its
organizational documents.
(x) NO RESTRICTIONS ON EQUITY SECURITIES. Except for the Transaction
Agreements and except as listed and described in SCHEDULE 5.1(X)
(RESTRICTIONS ON EQUITY SECURITIES), there are no shareholders' agreements,
partners' agreements, voting trust agreements or other restrictive
agreements relating to the sale or voting of the Units or the Shares that
would prevent the Cornerstone Parties from consummating the Transactions or
that would otherwise have any adverse effect on any of the Transactions.
(y) TREATMENT AS A PARTNERSHIP. The Operating Partnership is, and since
the date of its formation has been, a partnership for federal, state and
local income tax purposes.
(z) PREVIOUSLY OWNED PROPERTY. To the Knowledge of the Cornerstone,
neither Cornerstone nor the Operating Partnership nor any Cornerstone
Subsidiary currently owns or has previously owned any real property other
than the Cornerstone Properties the current or previous ownership of which
would or would be reasonably expected to have a Material Adverse Effect.
(aa) FORM S-3 REGISTRATION STATEMENT. Cornerstone is eligible to use a
Form S-3 registration statement under the Securities Act.
5.2 DEFINITION OF KNOWLEDGE. As used in this Agreement, the terms
"CORNERSTONE'S KNOWLEDGE" or "OPERATING PARTNERSHIP'S KNOWLEDGE" or "KNOWLEDGE
OF CORNERSTONE" or "KNOWLEDGE OF THE OPERATING PARTNERSHIP" or phrasings thereof
of similar import shall mean only the "current actual knowledge" of the persons
listed on SCHEDULE 5.2 (CORNERSTONE KNOWLEDGE PARTIES) after consultation with
the officers and other employees of the Cornerstone Parties with oversight
responsibilities for the Cornerstone Subsidiaries and the Cornerstone Properties
concerning the subject matter of the representations being made, who in turn
have consulted with the local property managers as deemed necessary concerning
the subject matter of the representations being made. As used herein, the term
"CURRENT ACTUAL KNOWLEDGE" shall mean only the actual, current, conscious (and
not constructive, imputed or implied) knowledge of such designees, and current
actual knowledge does not include constructive, imputed or implied knowledge of
any employee, agent or other representative of Cornerstone or the Operating
Partnership other than such designees. Anything herein to the contrary
notwithstanding, none of the persons listed on SCHEDULE 5.2 (CORNERSTONE
KNOWLEDGE PARTIES) shall have any personal liability or obligation whatsoever
with respect to any of the representations made by Cornerstone or the Operating
Partnership being or becoming untrue, inaccurate or incomplete in any respect.
5.3 REMEDIES FOR BREACH OF REPRESENTATION AND WARRANTY.
(a) ACCEPTANCE OF BREACH. If the Wilson Parties have Knowledge as of
Closing that a representation or warranty with respect to Cornerstone or a
Cornerstone Subsidiary is not true and correct in any material respect as of
the day made and do not elect to terminate this Agreement under
Section10.1(a) (REPRESENTATIONS AND WARRANTIES), the Wilson Parties shall be
deemed to have waived such inaccuracy, and the Wilson Parties shall have no
further rights of recourse (including, without limitation, under Section11
(INDEMNIFICATION, CLAIMS AGAINST HOLDBACK) with respect thereto.
(b) INACCURACIES ASSERTED AFTER CLOSING. In the event that the Wilson
Parties proceed or are required to proceed with the closing of the
Transactions, the sole and exclusive remedy of the Wilson Parties for any
representation or warranty not waived pursuant to Section5.3(a) (ACCEPTANCE
OF BREACH) alleged after the Closing Date to be untrue or inaccurate in any
respect as of the date made shall be as set forth in Section11
(INDEMNIFICATION; CLAIMS AGAINST HOLDBACK).
6. PRE-CLOSING COVENANTS.
6.1 CONDUCT OF THE BUSINESS OF THE WILSON PARTIES. Except as specifically
permitted or provided for in this Section6 (PRE-CLOSING COVENANTS) or with
respect to any Withdrawn Project, the Wilson Parties, severally and
A-74
<PAGE>
not jointly, covenant and agree that from the Execution Date and the earlier of
the termination of this Agreement or the Closing Date, unless the Cornerstone
Parties have consented in writing to any other act or omission (such consent not
to be unreasonably withheld, conditioned or delayed), they shall perform or
observe, or, in the case of GP Parties, cause or, in the case of Other Projects
or Project Entities which have a co-general partner or co-manager, exercise
reasonable efforts to cause their Related Project Entities to perform or observe
(it being understood that the GP Parties do not unilaterally control all actions
and decisions of these entities, and accordingly, the GP Parties shall be deemed
to have complied with the following covenants in the event the appropriate GP
Party performs such covenants consistent with its rights under, including its
powers, authorities and rights as a direct or indirect general partner or
manager, and subject to any limitations on its authority under, the governing
documents for the entity), the following:
(a) OPERATION IN ORDINARY COURSE. Each GP Party, or its Related Project
Entities, shall use commercially reasonable efforts to operate and maintain
its Related Projects in the Ordinary Course and each Wilson Party shall use
commercially reasonable efforts to preserve intact for the Operating
Partnership and Cornerstone the goodwill and advantageous relationships with
tenants, customers, suppliers, managers, employees, independent contractors
and others having beneficial on-going relationships with the Related
Projects, Funds or WW&A, as the case may be. "ORDINARY COURSE" means, with
respect to any person, in the ordinary course of that person's business
consistent with reasonable commercially acceptable business practices, in
good faith, in such person's reasonable business judgment and in compliance
with all Laws.
(b) LEASING AND LEASE COSTS.
(i) The GP Parties shall cause the Related Project Entities to use
reasonable efforts to cause the leasing of the Projects and to continue
to pay all Lease Costs (hereinafter defined) incurred, in the Ordinary
Course, provided, that the Related Project Entities shall not incur any
internal commission obligations in connection therewith, other than as
contemplated by the related Project Management Agreement.
(ii) The appropriate Related Project Entity shall be responsible for
and timely pay all leasing commissions, tenant improvement allowances,
cost of tenant improvement work, and other out of pocket lease
inducements (collectively, "LEASE COSTS") for leases entered into before
April 1, 1998. The appropriate Related Project Entity will be responsible
for fifty percent (50%) of any Lease Costs for leases entered into after
March 31, 1998, and before the Closing Date, with the Operating
Partnership responsible for the remainder. The Operating Partnership will
be responsible for all Lease Costs for leases entered into on and after
the Closing. Lease Costs will be credited and paid in accordance with
Section1.3(d) (CERTAIN CASH ADJUSTMENTS), provided that at the Closing
the Lease Costs for all Approved Additional Projects shall be allocated
in accordance with Section1.3(n) (APPROVED ADDITIONAL PROJECTS) and the
Lease Costs for the Agoura Hills Project shall be allocated in accordance
with Section1.3(m) (AGOURA HILLS).
(iii) The Operating Partnership's share of pre-Closing Lease Costs
incurred by or on behalf of a Partially Participating Project will be
reduced in proportion to that portion of the outstanding Interests in
such Partially Participating Projects not sold or contributed to the
Cornerstone Parties in connection with the Closing. For example, if only
forty percent (40%) of the outstanding Interests in a Partially
Participating Project are sold or contributed to the Cornerstone Parties
in connection with the Closing, the Operating Partnership will be
responsible for twenty percent (20% = 50% x 40%) of Lease Costs for
leases entered into after March 31, 1998 and prior to the Closing Date.
Lease Costs with respect to a Partially Participating Project and leases
entered into on and after the Closing Date will be allocated in
accordance with the appropriate Project Entity's organizational
documents.
(c) CAPITAL EXPENDITURES.
A-75
<PAGE>
(i) The Related Project Entities shall continue to make capital
improvements and repairs to the Projects as necessary to maintain the
Projects in the Ordinary Course and consistent in timing with prior
practices.
(ii) The appropriate Related Project Entity shall be responsible for
and timely pay the cost of any capital improvements or repairs ("CAPITAL
EXPENDITURES") incurred and paid or due and payable prior to April 1,
1998. The appropriate Related Project Entity shall pay fifty percent
(50%) of Capital Expenditures incurred and paid or due and payable after
March 31, 1998, and before the Closing Date, with the Operating
Partnership responsible for the remainder. The Operating Partnership will
be responsible for Capital Expenditures incurred and paid or due and
payable on and after Closing. Notwithstanding the foregoing, the pending
capital improvements at the Pruneyard Inn, Pruneyard Place, POP IX and
Bay Park Plaza Projects will be allocated in accordance with
SectionSection1.3 (i) (PRUNEYARD ADJUSTMENT), 1.3 (k) (BAY PARK PLAZA
ADJUSTMENT), and 1.3 (l) (POP IX ADJUSTMENT). Capital Expenditures shall
be credited and paid in accordance with Section1.3(d) (CERTAIN CASH
ADJUSTMENTS); provided that at the Closing the Capital Expenditures for
all Approved Additional Projects shall be allocated in accordance with
Section1.3(n) (APPROVED ADDITIONAL PROJECTS) and the Capital Expenditures
for the Agoura Hills Project shall be allocated in accordance with
Section1.3(m) (AGOURA HILLS).
(iii) The Operating Partnership's share of the pre-Closing Capital
Expenditures incurred by or on behalf of a Partially Participating
Project will be reduced in proportion to that portion of the outstanding
Interests in such Partially Participating Projects not sold or
contributed to the Cornerstone Parties in connection with the Closing.
For example, if only forty percent (40%) of the outstanding Interests in
a Partially Participating Project are sold or contributed to the
Cornerstone Parties in connection with the Closing, the Operating
Partnership will be responsible for twenty percent (20% = 50% x 40%) of
the Capital Expenditures incurred and paid or due and payable after March
31, 1998, and before the Closing Date. Capital Expenditures with respect
to a Partially Participating Project incurred and paid or due and payable
on and after the Closing Date will be allocated in accordance with the
appropriate Project Entity's organizational documents.
(d) PERSONAL PROPERTY. No GP Party, nor any of its Related Project
Entities, shall remove any material personal property (other than Excluded
Assets) owned by such Parties located in or on its Related Projects, except
as may be required for repair and replacement or to be discarded in the
Ordinary Course. WW&A (other than Excluded Assets) shall not remove any
material personal property located in any premises owned or controlled by
it, except as may be required for repair and replacement or to be discarded
in the Ordinary Course. All replacements must be of quality at least equal
to the replaced items, and either free and clear of Encumbrances, except to
the extent the original personal property was so encumbered or as incurred
in the Ordinary Course and included in Existing Project Debt at the Closing.
(e) MATERIAL CONTRACTS. (i) No GP Party, nor any of its Related Entities
will enter into, renew, extend or modify any Related Material Contract
except in the Ordinary Course or under circumstances in which the GP Party
and its successors and assigns retain a right to terminate on thirty (30)
days' notice with no material cost to exercise such right, and (ii) WW&A
will not renew, extend or modify any WW&A Material Contract except in the
Ordinary Course or under circumstances in which WW&A and its successors and
assigns retain a right to terminate on thirty (30) days' notice with no
material cost to exercise such right.
(f) PRE-CLOSING AUDITS AND COSTS. The Wilson Parties shall, upon request
of the Cornerstone Parties at any time after the Execution Date, assist the
Cornerstone Parties in their preparation of audited statements of income and
expense and such other documentation as the Cornerstone Parties may
reasonably request, covering the period of existence and operation of WW&A
and the Funds and
A-76
<PAGE>
the Related Project Entities' ownership of their Related Projects. The
Cornerstone Parties shall cause such audited statements to be prepared in a
manner which minimizes, to the extent practicable, disruption of the Wilson
Parties' and the Related Project Entities' business operations. The Wilson
Parties shall be responsible for, and shall appropriately allocate among the
persons so audited, the reasonable auditors' fees and expenses and other
reasonable out of pocket expenses of preparing such statements with respect
to calendar year 1997. Auditors' fees and expenses for calendar years 1995
and 1996 shall be payable as set forth in Section 1.5 (CERTAIN CLOSING
COSTS). All other auditors' fees and expenses and out of pocket costs shall
be the responsibility of and be paid for by the Cornerstone Parties.
Auditors' fees and expenses and related out of pocket costs will be
allocated, credited and paid in accordance with Section1.3(d) (CERTAIN CASH
ADJUSTMENTS).
(g) COMPLIANCE WITH AGREEMENTS. Each GP Party or its Related Project
Entities, as applicable, shall make or cause to be made all required
payments within any applicable grace period under related Existing Project
Debt, including the Assumed Loans, and each of the GP Party, its Project
Entities and WW&A shall comply, and shall exercise commercially reasonable
efforts to cause counterparties to comply with all material terms, covenants
and conditions under any such Indebtedness and under the office and
commercial leases, the leases on personal property, the Related Material
Contracts and the WW&A Material Contracts, as the case may be. Each Wilson
Party shall pay all other accounts payable, including trade debt, when due
in the Ordinary Course. Each GP Party or its Related Project Entities, as
applicable, shall not make or cause to be made any material change in any
underlying loan documents evidencing any Existing Project Debt which is
contemplated to be assumed or taken subject to by the Operating Partnership
pursuant to Section1.4 (ASSUMPTION OR PREPAYMENT OF MORTGAGE INDEBTEDNESS)
except in connection with any modifications agreed upon by the lenders and
the Operating Partnership relating to the assumption of the loan and will
not increase the outstanding principal balance of the Existing Project Debt,
except as permitted under the related loan documents.
(h) ALIENATION OF PROJECTS. Except with respect to (i) Permitted
Encumbrances and (ii) Withdrawn Projects, no GP Party shall cause or permit
its Related Projects, or any interest therein, to be alienated, or otherwise
transferred, or any Encumbrance to be placed thereon except (A) the Projects
may be encumbered by easements to the extent necessary or desirable to
permit the development or continual operation of a Project, and (B) the
Projects may be Encumbered to the extent necessary or desirable in
connection with a Permitted Financing. "PERMITTED FINANCINGS" means
financings or refinancings currently in process but not currently completed,
as described in SCHEDULE 6.1(H)(2) (WILSON PARTIES PERMITTED FINANCING) or
as otherwise consented to by Cornerstone in writing, which consent shall not
be unreasonably withheld, conditioned or delayed. Notwithstanding anything
to the contrary in the foregoing, prior to the Closing Date, the Wilson
Parties shall spin off any Withdrawn Projects to the owners thereof or to an
entity created for that purpose in accordance with Section1.9(d)
(PROCEDURE).
(i) MAINTENANCE OF INSURANCE. WW&A and each GP Party or its Related
Project Entities, will to the extent practicable, maintain and keep in full
force and effect the hazard, liability and casualty insurance it is
currently maintaining or the reasonable equivalent thereof.
(j) NOTICE OF VIOLATIONS. Each Wilson Party shall promptly give the
Cornerstone Parties written notice of, and promptly deliver to the
Cornerstone Parties a true and complete copy of, any written notice such
Wilson Party or a Related Entity may receive, on or before the Closing Date,
from any Governmental Authority concerning a violation of any applicable
material Law or of any written notice of default from the holder of any
Assumed Loan, which violation or default could reasonably be expected to
have a Material Adverse Effect.
(k) EMPLOYMENT TERMS. Except for actions taken in the Ordinary Course or
in connection with the Transactions (including one time compensation
benefits related hereto), subject to the limitations, if any, imposed in the
Employment Letter, WW&A shall not materially increase the compensation or
A-77
<PAGE>
benefits paid to any of its employees or adopt, enter into, amend or
terminate in any material respect any employment, consulting, termination,
severance or retention agreement to which such an employee is a party, in a
manner which would have a Material Adverse Effect on the Cornerstone Parties
after the Closing. Nothing in this subsection will prohibit WW&A from making
distributions or paying bonuses to its shareholders or employees prior to
the Closing, subject to the limitations, if any, imposed in the Employment
Letter.
(l) THIRD PARTY CONSENTS. Each Wilson Party shall use commercially
reasonable efforts to obtain all consents from third parties necessary for
the Wilson Party to consummate the Transactions.
(m) TAX EXEMPT INDEBTEDNESS. No modifications will be made to the terms
of any tax exempt bonds or other tax exempt Indebtedness relating to any
Related Projects.
(n) SPECIAL DISTRIBUTIONS TO SHAREHOLDERS AND PARTNERS. Notwithstanding
anything to the contrary in this Section6.1, each Wilson Party and each Fund
and Related Project Entity may accumulate and distribute to its
shareholders, members or partners immediately prior to the Closing Date, any
cash then on hand after payment of costs and adjustments as provided herein,
PROVIDED that it has continued to incur and pay its obligations and collect
its rents in the Ordinary Course, and PROVIDED FURTHER that such cash on
hand will not include the proceeds of insurance or condemnation.
(o) FUND-IV UNCALLED CAPITAL. The Wilson Parties shall not call for
uncalled FUND-IV Investor capital funding obligations and co-investment
rights in excess of $60,000,000 in the aggregate, nor will the Wilson
Parties amend the FUND-IV agreement of limited partnership or co-investment
agreements to increase, over current limits, the uncalled Investor capital
obligations (except to the extent pending calls are cancelled) and
co-investor rights.
(p) CONSENT TO INVESTOR TRANSFERS. No Wilson Party shall effect any
transfer and no GP Party shall consent to any transfer by an Investor of any
portion of that Investor's Interest, other than (i) a pledge to a financial
institution as security for a BONA FIDE loan (which must be released on or
before Closing), or (ii) a transfer to a Permitted Transferee. Any such
consent must be expressly conditioned on the transferee's acknowledgment
that it takes such Interest subject to all prior actions made with respect
thereto, including the Consent.
(q) LIST OF INVESTORS. As soon as practicable, and in all events not
later than fifteen (15) days after the Execution Date, the Wilson Parties
shall create a list of the Investors setting forth for each Investor such
Investor's name, mailing address and Interests as set forth in the books and
records of the related Wilson Party, related Fund or Related Project Entity
and, on such basis, shall be accurate to the related GP Party's Knowledge.
With respect to any Joint Venture in which a GP Party is not an
administrative or managing general partner or member (a "NON-CONTROLLED
JOINT VENTURE"), the appropriate Wilson Party will exercise commercially
reasonable efforts to obtain such information on a timely basis, but will
make no representation or warranty as to the accuracy thereof.
6.2 ACQUISITIONS.
(a) ACQUISITIONS PRIOR TO THRESHOLD CONSENT DATE. The Wilson Parties
may, from time to time prior to the Cornerstone Threshold Consent Date
(hereinafter defined), acquire or enter into binding agreements to acquire,
additional real estate projects or interests therein (such additional
projects or interests, other than Retained Properties and interests or
properties related thereto, the "ACQUISITIONS"). The Wilson Parties shall
from time to time before the Cornerstone Threshold Consent Date notify the
Cornerstone Parties of such proposed Acquisitions, the material terms
thereof, and the status thereof. All such Acquisitions must be made through
WW&A or FUND-IV. Cornerstone may, by notice delivered on or before the fifth
(5th) business day after receipt of such notice and information from the
Wilson Parties, elect in its discretion to have any such Acquisition
included in the Transactions and treated as a Project hereunder, Interests
in which will be included in the Transactions pursuant to Section1.3(n)
(APPROVED ADDITIONAL PROJECTS) (if so approved, an "APPROVED
A-78
<PAGE>
ADDITIONAL PROJECT"). If Cornerstone elects not to so include the
Acquisition in the Transactions, all right, title and interest of the Wilson
Parties in the Acquisition will be spun out to the appropriate owners or an
entity owned by them before the Closing, and the Wilson Parties or their
owners may negotiate and complete the Acquisition outside of and
independently of the Transactions.
(b) ACQUISITIONS AFTER THRESHOLD CONSENT DATE. From and after the
Cornerstone Threshold Consent Date, neither the Wilson Parties nor FUND-IV
may acquire, or enter into binding agreements to acquire, Acquisitions
without the approval of Cornerstone, which approval may be withheld in
Cornerstone's sole discretion. Any Acquisition so approved will be included
as an Approved Additional Project.
(c) INCLUSION OF ACQUISITIONS IN CONTRIBUTION TRANSACTION. Upon Closing,
the Operating Partnership shall assume and perform all of the obligations of
the Wilson Parties or FUND-IV in respect of any pending Approved Additional
Project. Prior to the Closing, Cornerstone shall, upon request by WW&A,
advance and loan from time to time to the Related Project Entity (an
"ACQUISITION LOAN") an amount equal to all out-of-pocket costs and expenses
(not payable to WW&A or an affiliate of WW&A unless expressly approved by
Cornerstone in its discretion) reasonably incurred prior to the Closing by
the Related Project Entity in connection with the acquisition of the
Approved Additional Project. At the request of Cornerstone, such advances
under an Acquisition Loan in excess of $1,000,000 will be secured by a first
priority mortgage or deed of trust on the Approved Additional Project and
evidenced by such loan documentation as Cornerstone may reasonably request,
which shall include, without limitation, provision for all distributable
cash flow and proceeds from the Approved Additional Project to be paid to
the Operating Partnership (the "DISTRIBUTABLE CASH"). Distributable Cash
shall be applied first to accrued and unpaid interest and then to the
principal balance of such Acquisition Loan. In the event that this Agreement
is terminated prior to Closing, twenty percent (20%) of the outstanding
amount of each Acquisition Loan shall become due and payable upon ten (10)
business days' demand by Cornerstone, and the balance and all interest
accrued and unpaid thereon shall be due one hundred eighty (180) days
thereafter. All advances under an Acquisition Loan shall accrue interest at
a rate per annum until paid equal to LIBOR PLUS 150 basis points (the
"APPLICABLE RATE"), but, prior to maturity, shall only be payable to the
extent of Distributable Cash. "LIBOR" means the one month London Interbank
Offer rate as reported from time to time under the heading "Interest: LIBOR
(one month)" by the WALL STREET JOURNAL. FUND-IV shall personally and
unconditionally guarantee the payment of each such Acquisition Loan and the
performance of the borrower under the applicable loan documentation pursuant
to a form of guarantee prescribed by Cornerstone and approved by the Wilson
Representative, which approval will not be unreasonably withheld,
conditioned or delayed. The parties hereto shall enter into appropriate and
mutually agreed amendments to the Transaction Agreements and the Schedules
hereto and thereto to take into appropriate account such Approved Additional
Projects as the Wilson Representative and the Cornerstone Parties may
mutually agree, such agreement not to be unreasonably withheld, conditioned
or delayed. At the Closing, the Approved Additional Projects shall be
conveyed to the Operating Partnership for an amount of Consideration
determined as provided in Section1.3(m) (APPROVED ADDITIONAL PROJECTS).
(d) LIMITATION ON ACQUISITIONS. The Wilson Parties shall not enter into,
and shall not permit any affiliate of the Wilson Parties, the Funds or any
other Project Entity to enter into, any Acquisitions after the Execution
Date except in accordance with this Section 6.2 (ACQUISITIONS). The terms of
any proposed Acquisition shall not include payment of an acquisition,
similar fee or other compensation or amount to WW&A or any affiliate of
WW&A, unless approved by the Cornerstone Parties in their discretion.
6.3 INTENTIONALLY OMITTED.
6.4 INTENTIONALLY OMITTED.
A-79
<PAGE>
6.5 CONDUCT OF THE BUSINESS OF THE CORNERSTONE PARTIES. Except as
specifically provided for in this Section6 (PRE-CLOSING COVENANTS) and except
for Cornerstone Permitted Transactions (as hereinafter defined), the Cornerstone
Parties jointly and severally covenant and agree that between the Execution Date
and the Closing Date, unless the Wilson Representative has consented in writing
to any other act or omission (such consent not to be unreasonably withheld,
conditioned or delayed) and except as described in SCHEDULE 6.5 (CORNERSTONE
PENDING TRANSACTIONS), the Cornerstone Parties shall perform or observe and
shall cause their subsidiaries to perform and observe, the following; PROVIDED,
however, with respect to Cornerstone Subsidiaries which the Operating
Partnership does not own (directly or indirectly) all of the equity interests
and the Operating Partnership thus does not unilaterally control all actions and
decisions of such Cornerstone Subsidiaries, the Cornerstone Parties shall be
deemed to have complied with the following covenants in the event the Operating
Partnership performs such covenants consistent with its rights under (including
its powers, authorities and rights as a direct or indirect general partner or
manager), and subject to any limitations on its authority under, the governing
documents for the Cornerstone Subsidiaries in which the Operating Partnership
does not own (directly or indirectly) all of the equity interests of such
Cornerstone Subsidiaries):
(a) OPERATION IN ORDINARY COURSE. The Cornerstone Parties shall, and
shall cause each of their respective Cornerstone Subsidiaries and affiliates
to, use commercially reasonable efforts to conduct their operations in the
Ordinary Course. The Cornerstone Parties shall use commercially reasonable
efforts to preserve intact the goodwill and advantageous relationships of
the Cornerstone Parties and Cornerstone Subsidiaries with tenants,
customers, suppliers, independent contractors and others having beneficial
on-going relationships with the Cornerstone Properties.
(b) AMENDMENT OF CHARTER DOCUMENTS. Neither Cornerstone nor the
Operating Partnership shall amend its respective Company Charter, bylaws,
Partnership Agreement or other charter document, except as contemplated by
this Agreement, or as may be reasonably necessary to effect a Permitted
Transaction.
(c) ISSUANCE OF SHARES. Except for Cornerstone's Dividend Reinvestment
Share Purchase Plan and the exercise of share options or issuance of shares
pursuant to stock rights, options, restricted share or performance share
awards or warrants outstanding on the date of this Agreement, except as
disclosed in SCHEDULE 6.5(C) (CORNERSTONE EMPLOYEE GRANTS), or except as may
be reasonably necessary to effect a Permitted Transaction, neither
Cornerstone nor the Operating Partnership shall issue, deliver or sell, or
grant any option or other right in respect of, any Shares, any other voting
securities of Cornerstone or any Cornerstone Subsidiary or any securities
(including without limitation, Units) convertible into, or any rights,
warrants or options to acquire, any such Shares, voting securities or
convertible securities (except to Cornerstone or a Cornerstone Subsidiary)
or effect any stock split, reverse stock split, stock dividend,
recapitalization or similar transaction, except the foregoing shall not
prohibit the issuance of Shares in connection with the conversion of any
currently outstanding convertible preferred stock, Units or convertible
notes.
(d) DIVIDEND. Neither Cornerstone nor the Operating Partnership shall
(i) declare, set aside or pay any dividend or make any other distribution or
payment with respect to any shares of its capital stock other than (A)
quarterly dividends and distributions paid by the Cornerstone Parties in the
Ordinary Course of its business not in excess of $0.30 per Share or Unit, as
the case may be, and regular annual dividends not in excess of $1.155 per
share of Cornerstone Preferred Shares (with customary record and payment
dates) or as required to maintain its REIT qualification or (B) the Special
Dividend described in Section6.5(e) (SPECIAL DIVIDEND) or (ii) directly or
indirectly redeem, purchase or otherwise acquire any shares of its capital
stock or the capital stock of any of its affiliates in an aggregate amount
in excess of $10,000,000 or make any commitments for any such action, except
for the repurchase of stock from employees upon termination of employment or
pursuant to Cornerstone's existing stock option plan.
A-80
<PAGE>
(e) SPECIAL DIVIDEND. Cornerstone shall declare a special dividend to
holders of Cornerstone Shares (and a corresponding special distribution will
be made by the Operating Partnership with respect to outstanding Units) with
a record date as of the last business day prior to the Closing in an amount
equal to the prorata portion of Cornerstone's most recent quarterly
dividend, with such prorata amount to equal (x) the number of days since the
last dividend record date through the date of Closing divided by (y) 90
(such dividend and distribution the "SPECIAL DIVIDEND").
(f) CERTAIN CAPITAL TRANSACTIONS. Except to the extent disclosed in
writing and approved by the Wilson Parties on or prior to the Execution
Date, neither Cornerstone nor the Operating Partnership shall, and shall not
permit any Cornerstone Subsidiary to, (i) engage in any transaction or
series of related transactions involving capital, securities or other assets
or Indebtedness of Cornerstone, a Cornerstone Subsidiary, or any combination
thereof in excess of $25,000,000; (ii) acquire by merging or consolidating
with, or by purchasing all or a substantial portion of the equity securities
or all or substantially all of the assets of, or by any other manner, any
business or any corporation, partnership, limited liability company, joint
venture, association, real estate investment trust, business trust or other
business organization or division thereof or interest therein; (iii) sell,
lease (other than in the Ordinary Course) or otherwise dispose of any of the
Cornerstone Properties or any material assets or assign or encumber the
right to receive income, dividends, distributions and the like; or (iv)
incur any indebtedness, issue or refinance any Indebtedness or make any
loans, advances or capital contributions to, or investments in, any other
person; excluding an amendment to the Operating Partnership's line of credit
with Bankers Trust Company as necessary to enable the Operating Partnership
to fund costs for closing of the Transactions, and financial transactions
undertaken by Cornerstone or the Cornerstone Subsidiaries in accordance with
their respective ordinary cash management practices such as investments or
deposits in commercial paper, obligations of the United States of America or
its agencies or instrumentalities, certificates of deposit, time deposits,
repurchase agreements and similar financial arrangements.
(g) LOANS. Neither Cornerstone nor the Operating Partnership shall, and
shall not permit any of its respective Cornerstone Subsidiaries or
affiliates to, make, in amounts that are in the aggregate material to
Cornerstone or the Operating Partnership, any loans, advances or capital
contributions to, or investments in, any unaffiliated third party other than
contemplated by the Transaction Agreements or in the Ordinary Course.
(h) TAX ELECTIONS. Neither Cornerstone nor the Operating Partnership
shall make any tax election (unless required by law or necessary to preserve
Cornerstone's status as a REIT or the status of the Operating Partnership or
of any other Cornerstone Subsidiary as a partnership for federal income tax
purposes), without obtaining the consent thereto of the Wilson
Representative, which shall not be unreasonably withheld, conditioned, or
delayed.
(i) ACCOUNTING AND TAXES. Neither Cornerstone nor the Operating
Partnership shall (i) change in any material manner any of its methods,
principles or practices of accounting in effect at the Execution Date, or
(ii) make or rescind any express or deemed election relating to Taxes,
settle or compromise any claim, action, suit, litigation, proceeding,
arbitration, investigation, audit or controversy relating to Taxes, except
in the case of settlements or compromises relating to Taxes on Projects in
an amount not to exceed, individually or in the aggregate, $2,000,000, or
change any of its methods of reporting income or deductions for federal
income tax purposes from those employed in preparation of its federal income
tax return for the most recently completed taxable year except, in the case
of clause (i), as may be required by the SEC, applicable Law or GAAP.
(j) CORNERSTONE BENEFIT PLANS. Neither Cornerstone nor the Operating
Partnership shall, except as provided in the Transaction Agreements, adopt
any new employee benefit plan, incentive plan, severance plan, stock option
or similar plan or amend any existing plan or rights, except for such
A-81
<PAGE>
changes as are necessary to accommodate the consummation of the Transactions
or are required by Law and except as disclosed in SCHEDULE 6.5(C)
(CORNERSTONE EMPLOYEE GRANTS).
(k) RELATED PARTY TRANSACTIONS. Except as disclosed in SCHEDULE 6.5(C)
(CORNERSTONE EMPLOYEE GRANTS), neither Cornerstone nor the Operating
Partnership shall enter into or amend or otherwise modify any agreement or
arrangement with persons that are affiliates or, as of the Effective Date,
are executive officers or directors of Cornerstone or any Cornerstone
Subsidiary.
(l) SATISFACTION OF OBLIGATIONS. Neither Cornerstone nor the Operating
Partnership shall, and shall not permit any of the Cornerstone Subsidiaries
or affiliates to, pay, discharge or satisfy any material amount of claims,
liabilities or obligations (absolute, accrued, asserted or unasserted,
contingent or otherwise), other than the payment, discharge or satisfaction
in the Ordinary Course or in accordance with their terms, of liabilities
reflected or reserved against in, or contemplated by, the most recent
consolidated financial statements (or the notes thereto) of Cornerstone
included in Cornerstone's SEC Report on Form 10-Q for the quarter ended
March 31, 1998 or incurred in the Ordinary Course consistent with past
practice, except any such payment, discharge or satisfaction that will not
have a Material Adverse Effect on Cornerstone or the Operating Partnership.
(m) MERGER OR CONSOLIDATION. Neither Cornerstone nor the Operating
Partnership shall merge or consolidate with any person or agree to do so.
(n) THIRD PARTY CONSENTS. The Cornerstone Parties will use their
commercially reasonable efforts obtain the consent of their lenders and
other third parties, including Bankers Trust Company under the terms of
Cornerstone's debt instruments, necessary for the Cornerstone Parties to
consummate the Transactions.
(o) PERMITTED TRANSACTIONS. The following are the "PERMITTED
TRANSACTIONS":
(i) PGGM. The issuance of Shares to PGGM or an affiliate thereof at a
price per Share equal to or greater than the Effective Price and
aggregate gross proceeds of $200,000,000 (adjusted for fractional
shares), conditioned on the Closing of the Transactions and closing
simultaneously therewith. The Wilson Parties acknowledge their approval
of the terms of the Share issuance to PGGM, as reflected in the copy of
the Stock Purchase Agreement delivered to the Wilson Parties, PROVIDED
the Wilson Parties shall have the right to approve any material
modifications thereto, which approval shall not be unreasonably withheld,
conditioned or delayed.
(ii) DEBT. Borrow money and incur Indebtedness and Liens as may be
necessary to fund the cash to close the Transactions contemplated
hereunder and otherwise in the Ordinary Course.
(iii) UNITS CONVERSION. Issuance of Shares in redemption or
conversion of outstanding Units in the Ordinary Course.
(iv) PENDING TRANSACTIONS. Acquisition of investments set forth on
SCHEDULE 6.5 (CORNERSTONE PENDING TRANSACTIONS) or otherwise previously
disclosed in writing by Cornerstone to, and approved by, the Wilson
Parties prior to the Execution Date on substantially the terms disclosed
to the Wilson Parties and the issuance of Shares and/or Units and
assumption or issuance of Indebtedness in connection therewith.
(v) TRANSACTIONS HEREUNDER. Any other transactions necessary or
appropriate in order to effect the Transactions.
(vi) STOCK OPTIONS AND SHARES OF BUSINESS. With respect to employees
of Cornerstone, the issuance of Shares upon the exercise of stock options
existing as of the Execution Date and repurchase of Shares from any
terminated employee of Cornerstone.
A-82
<PAGE>
6.6 PREPARATION OF THE INFORMATION STATEMENT; PROXY STATEMENT; SHAREHOLDERS
MEETING.
(a) INFORMATION STATEMENT. As soon as practicable following the
Execution Date, Cornerstone and the Wilson Parties will jointly prepare and
distribute to each of the Investors an information statement (which,
together with all supplements and amendments thereto, if any, is referred to
herein as the "INFORMATION STATEMENT"), together with the supplements
thereto containing certain information concerning Cornerstone, the Operating
Partnership, the Equity Securities and the contemplated Transactions,
soliciting the Investors' consents to the Transactions and attaching the
Consents and Investor Contribution Agreements. The parties will cooperate
with each other in the preparation of the Information Statement and provide
each other with such information (including financial information) relating
to WW&A and Cornerstone and the Projects as is reasonably available to them
and as the other party may request for purposes of preparing the Information
Statement. The final form of the Information Statement shall be subject to
the approval of the Wilson Parties and Cornerstone, respectively, which
approval shall not be unreasonably withheld, conditioned or delayed. The
Cornerstone Parties shall not be required to make any statement therein
regarding the fairness of the Consideration to the Investors and shall have
no liability whatsoever with respect to the fairness to the Investors of
such Consideration, except with respect to applicable California Law
regarding dissenters' rights.
(b) PROXY STATEMENT. As soon as practicable (but in no event more than
thirty (30) days following the Cornerstone Threshold Consent Date,
Cornerstone shall finalize and file with the SEC a preliminary Proxy
Statement and thereafter a definitive Proxy Statement, all in accordance
with Rule 14a-6 promulgated under the Exchange Act. Cornerstone shall use
commercially reasonable efforts to respond to any comments of the SEC and
Cornerstone will use commercially reasonable efforts to cause the Proxy
Statement to be mailed to the Cornerstone Shareholders as promptly as
practicable. Cornerstone will notify the Wilson Parties of any comments from
the SEC and of any request by the SEC for amendments or supplements to the
Proxy Statement or for additional information. The Proxy Statement shall
comply as to form in all material respects with all applicable requirements
of Law. The Wilson Parties shall furnish all information concerning the
Wilson Parties and the Projects as Cornerstone may reasonably request in
connection with such actions and the preparation of the Proxy Statement. The
Proxy Statement shall include a proposal to approve the Share issuance, an
increase in the number of Shares available for employee incentive stock
options and grants, the Merger and the other Transactions (all such actions
proposed to be so approved collectively, the "CONTEMPLATED TRANSACTIONS").
(c) CORNERSTONE SHAREHOLDERS' MEETING. Cornerstone will submit the
Contemplated Transactions to a vote of Cornerstone's shareholders at a
special meeting (the "CORNERSTONE SHAREHOLDERS' MEETING") for the purpose of
obtaining the Cornerstone Shareholder Approvals.
(d) NO CORNERSTONE MATERIAL MISSTATEMENTS. The information provided by
the Cornerstone Parties for inclusion in the Information Statement and the
Proxy Statement shall not, and, except to the extent of information supplied
by the Wilson Parties, the definitive Proxy Statement shall not, (i) at the
time the Information Statement is distributed to Investors or the Proxy
Statement (or any amendment thereof or supplement thereto) is mailed to
Cornerstone Shareholders, (ii) at the time of the Cornerstone Shareholders
Meeting, and (iii) on the Closing Date, contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading. If at any time
prior to the Closing Date any event or circumstances relating to the
Cornerstone Properties or the Cornerstone Parties or their respective
officers or directors should be discovered by the Cornerstone Parties which
should be set forth in an amendment or a supplement to the Proxy Statement
or Information Statement, the Cornerstone Parties shall promptly inform the
Wilson Parties.
A-83
<PAGE>
(e) NO WILSON PARTY MATERIAL MISSTATEMENTS. The information provided by
the Wilson Parties for inclusion in the Proxy Statement and the Information
Statement, shall not, (i) at the time the Proxy Statement (or any amendment
thereof or supplement thereto) is mailed to Cornerstone Shareholders or the
Information Statement is distributed to the Investors, (ii) at the time of
the Cornerstone Shareholders Meeting, and (iii) on the Closing Date, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. Cornerstone shall provide the Wilson Representative a reasonable
opportunity to review the preliminary Proxy Statement and to approve, prior
to the filing of such Proxy Statement with the SEC, (A) the information
provided by Wilson Parties for inclusion therein under the terms of this
Section6.6 and (B) the description of the Transactions, Wilson Parties,
Related Entities and Projects set forth therein, such approvals not to be
unreasonably withheld, conditioned or delayed. If at any time prior to the
Closing Date any event or circumstances relating to the Projects or the
Wilson Parties or their respective officers or directors should be
discovered by the Wilson Parties which should be set forth in an amendment
or a supplement to the Proxy Statement or Information Statement, the Wilson
Parties shall promptly inform Cornerstone.
6.7 GOOD FAITH EFFORTS. Each of the Wilson Parties, on the one hand, and
Cornerstone and the Operating Partnership, on the other hand, shall act in good
faith and shall not take, and shall use commercially reasonable efforts to cause
its respective subsidiaries or affiliates, if any, to refrain from taking, any
action that would result in (i) any of the representations and warranties of
such party set forth in the Transaction Agreements that are qualified as to
materiality becoming untrue, (ii) any of such representations and warranties
that are not so qualified becoming untrue in any material respect or (iii) any
of the conditions precedent to Closing set forth in Section10 (CONDITIONS
PRECEDENT TO CLOSING) not being satisfied.
6.8 GOOD FAITH COOPERATION. Subject to the terms and conditions herein
provided, the parties to this Agreement shall (A) use good faith, commercially
reasonable efforts to cooperate with each other in (i) determining which filings
are required to be made prior to the Closing Date with, and which consents,
approvals, permits or authorizations are required to be obtained prior to the
Closing Date from, Governmental Authorities, third party secured and unsecured
lenders and rating agencies in connection with the execution and delivery of the
Transaction Agreements and the Transactions, (ii) timely making all such filings
and timely seeking all such consents, approvals, permits or authorizations, and
(iii) preparing such financial statements (including pro forma financial
statements) as may be required by Cornerstone or the Operating Partnership for
incorporation in the Proxy Statement, the Information Statement, the
Registration Statement, or any filing required to be made with the SEC or as may
otherwise be required to enable Cornerstone to satisfy its obligations under
applicable Law or regulations; (B) use good faith, commercially reasonable
efforts to obtain in writing any consents required from third parties necessary
to effectuate the Transactions; and (C) use good faith, commercially reasonable
efforts to take, or cause to be taken, all other actions and do, or cause to be
done, all other things necessary, proper or appropriate to consummate and make
effective the Transactions. If, at any time after the Closing Date, any further
action is necessary or desirable to carry out the purpose of this Agreement, the
proper officers and directors and other duly authorized representatives of the
parties hereto shall take all such necessary action.
6.9 PUBLIC ANNOUNCEMENTS. No party hereto will issue any press release or
make any other public announcement relating to the Transactions without the
prior consent of the other party, which consent shall not be unreasonably
withheld, conditioned or delayed. Notwithstanding the foregoing, the Cornerstone
Parties or Wilson Parties may make any disclosure required to be made by such
party under the applicable Law or stock exchange rule if the party to which such
Law or stock exchange rule applies determines that it is necessary to do so and
used its reasonable efforts, prior to the issuance of the disclosure, to provide
the other party with a copy of the text or script for the proposed disclosure
and to discuss the proposed disclosure with the other party.
A-84
<PAGE>
6.10 GOVERNMENT FILINGS. Cornerstone and WW&A shall use good faith,
commercially reasonable efforts to make, prior to the Closing Date, all
necessary filings with all Governmental Authorities (including, without
limitation, such filings as may be required under the Hart-Scott-Rodino
Antitrust Improvement Act of 1976, as amended (the "HSR ACT") to carry out the
Transactions and all expenses incident thereto shall be paid as a part of
Closing Costs under Section1.5 (CERTAIN CLOSING COSTS).
6.11 TIME OF CLOSING. Each of the parties hereto shall use good faith,
commercially reasonable efforts and act in good faith to take all actions
necessary to consummate the Transactions on or prior to the Scheduled Closing
Date (as defined herein).
6.12 NO SOLICITATION.
(a) BY WW&A. From the Execution Date until the earlier of the
termination of this Agreement or the Closing Date, each Wilson Party agrees
that it shall not, directly or indirectly, through any officer, director,
employee, agent, financial advisor or other representative retained by the
Wilson Party, initiate or solicit (including by way of furnishing non-public
information or assistance) any inquiries or the making of any proposal, or
participate in any discussions or negotiations regarding a proposal (other
than to advise any third party of the obligations of the Wilson Party under
the Transaction Agreements and therefore of the inability of the Wilson
Party to discuss or negotiate the matter further), that constitutes a Wilson
Competing Transaction, or authorize or permit any of its officers,
directors, employees or agents or any financial advisor or other
representative retained by WW&A to take any such action. "WILSON COMPETING
TRANSACTION" means any of the following: (i) any merger, consolidation,
share exchange, business combination or similar transaction with a third
party involving any of the Wilson Parties, the GP Parties, the related
entities or the Related Projects; (ii) any sale, lease, exchange, mortgage,
pledge, transfer or other disposition of any one or more of these Projects
other than (A) in the Ordinary Course, (B) in a Wilson Permitted Encumbrance
or (C) in connection with certain existing legal obligations disclosed to
Cornerstone in a single transaction or series of related transactions; (iii)
any public announcement of a proposal, plan or intention to do any of the
foregoing restricted activities or any agreement to engage in any of the
foregoing restricted activities; or (iv) any action that would preclude any
of the Wilson Parties, the Funds, the GP Parties, the Related Project
Entities or the Related Projects from being able to enter into or consummate
the Contemplated Transactions; PROVIDED, HOWEVER, that a Wilson Competing
Transaction shall not be deemed to include any transaction involving WW&A or
its affiliates' purchase or acquisition of all or any portion of any third
party's interest in any of the Projects or any internal reorganization of
WW&A or its affiliates' ownership interests in the Projects that would not
preclude the Wilson Parties, the Funds, the GP Parties or the Related
Project Entities from being able to enter into or consummate the
Transactions. None of the Wilson Parties is currently engaged in discussions
or negotiations with any person or entity other than the Cornerstone Parties
with respect to any Wilson Competing Transaction.
(b) BY CORNERSTONE. From the Execution Date until the earlier
termination of this Agreement or the Closing Date, the Cornerstone Parties
agree that they shall not, directly or indirectly, through any officer,
director, employee, agent, financial advisor or other representative
retained by the Cornerstone Parties, initiate or solicit (including by way
of furnishing non-public information or assistance) any inquiries or the
making of any proposal, or participate in any discussions or negotiations
regarding a proposal (other than to advise any third party of the
obligations of the Cornerstone Parties under the Transaction Agreements and
therefore of the inability of the Cornerstone Parties to discuss or
negotiate the matter further), that constitutes a Cornerstone Competing
Transaction, or authorize or permit any of its officers, directors,
employees or agents or any financial advisor or other representative
retained by the Cornerstone Parties to take any such action. "CORNERSTONE
COMPETING TRANSACTION" means any of the following: (i) any merger,
consolidation, share exchange, business combination or similar transaction
with a third party; (ii) any sale, lease, exchange, mortgage, pledge,
transfer or other disposition of twenty percent (20%) or more of the
Cornerstone Parties' assets in a single
A-85
<PAGE>
transaction or series of related transactions; (iii) any public announcement
of a proposal, plan or intention to do any of the foregoing restricted
activities or any agreement to engage in any of the foregoing restricted
activities; or (iv) any action that would preclude the Cornerstone Parties
from being able to enter into or consummate the Contemplated Transactions;
PROVIDED that a Cornerstone Competing Transaction shall not be deemed to
include closing of any Permitted Transaction; PROVIDED, FURTHER HOWEVER,
that a Cornerstone Competing Transaction shall not be deemed to include any
transaction involving Cornerstone's or its affiliates' purchase or
acquisition of all or any portion of any third party interest in any of its
assets or any internal reorganization of Cornerstone or its affiliates that
would not preclude Cornerstone from being able to enter into or consummate
the Transactions. None of the Cornerstone Parties is currently engaged in
discussions or negotiations with any person or entity other than the Wilson
Parties with respect to any Cornerstone Competing Transaction.
6.13 CONFIDENTIALITY. Each of the Cornerstone Parties and the Wilson
Parties covenant that they shall not, without the prior written consent of the
other, divulge, furnish or make accessible any information or documents provided
to the other in connection with their due diligence review of the other party's
operations and assets ("CONFIDENTIAL INFORMATION") to any other person (other
than as required by Law, including applicable securities law or stock exchange
regulations, and other than to their respective employees, accountants,
attorneys, consultants, investment bankers, financial advisors, creditors,
Investors and Investors' advisors, outside partners or co-venturers in, and
property managers of, any of the parties' properties and other agents who will
be bound by the terms of this Section6.13. In the event either the Wilson
Parties or the Cornerstone Parties make a permitted or unpermitted disclosure of
any Confidential Information to any person (other than a third party who has
signed a confidentiality agreement reasonably acceptable in form and substance
to the other party), either the Wilson Parties or the Cornerstone Parties, as
the case may be, shall be liable to the other party for any failure by such
person to treat such Confidential Information in the same manner as is required
under the terms of this Agreement. The term "Confidential Information" shall not
include information generally available to the public (other than as a result of
a disclosure by the other party or its representatives or agents), information
previously known or in the possession of the other party or which becomes
available prior to any disclosure or use thereof from some other source not
restricted as to disclosure. Cornerstone and Wilson Parties agree that if this
Agreement is terminated, each shall upon request of the other party return to
the other all written Confidential Information and any other written material
containing Confidential Information and shall destroy all memoranda, notes and
other written material and work product prepared by or on behalf of the
Cornerstone Parties or the Wilson Parties and containing, reflecting or
referring to any Confidential Information, and such destruction shall be
certified in writing by an authorized officer supervising this destruction. Each
of Cornerstone, the Operating Partnership and Wilson Parties shall promptly
notify the other of any request or demand by any court, governmental agency or
other person asserting a demand or request for Confidential Information supplied
to such party so that the other party may seek an appropriate protective order.
In the absence of such protective order or receipt of a waiver hereunder, if
Cornerstone, the Operating Partnership or Wilson Parties (or any of their
respective representatives) are, in the reasonable opinion of such party's
counsel, compelled to disclose Confidential Information or else stand liable for
contempt or suffer other censure or significant penalty, Cornerstone, the
Operating Partnership or Wilson Parties may disclose that portion of the
requested information which such party's counsel advises it that it is compelled
to disclose. If such party proposes to make disclosure based upon the opinion of
its counsel as aforesaid, said party will (to the extent reasonably possible and
permitted) advise and consult with the other party prior to such disclosure
concerning the information it proposes to disclose.
6.14 ACCESS TO INFORMATION.
(a) PRE-CLOSING ACCESS. From the date hereof until the Closing, upon
reasonable notice, each party and their respective affiliates and their
respective officers, directors, employees, agents, accountants and counsel
shall: (i) afford the officers, employees and authorized agents,
accountants, counsel, financing sources and representatives of the other
party reasonable access, during normal business
A-86
<PAGE>
hours, to the properties, offices, other facilities, books and records of
such party and its affiliates and to those officers, directors, employees,
agents, accountants and counsel of such party and its affiliates who have
any knowledge relating to such party, its affiliates or its properties, and
(ii) furnish to the officers, employees and authorized agents, accountants,
counsel, financing sources and representatives of the other party such
additional financial and operating data and other information regarding it
and its affiliates' properties as the other party may from time to time
reasonably request.
(b) RETENTION BY CORNERSTONE PARTIES. In order to facilitate the
resolution of any claims made against or incurred by the Wilson Parties
prior to the Closing Date, for a period of seven years after the Closing,
Cornerstone shall (i) retain the books and records of the Wilson Parties and
their Related Entities which are transferred to Cornerstone pursuant to this
Agreement relating to periods prior to the Closing Date in a manner
reasonably consistent with the prior practices of the Wilson Parties and
(ii) upon reasonable notice, afford the officers, employees and authorized
agents and representatives of the Wilson Representative reasonable access
(including the right to make, at the Wilson Representative's expense,
photocopies), during normal business hours, to such books and records.
(c) RETENTION BY WILSON REPRESENTATIVE. In order to facilitate the
resolution of any claims made by or against or incurred by Cornerstone after
the Closing Date or for any other reasonable purpose, for a period of seven
years following the Closing, the Wilson Representative shall (i) retain all
books and records of the Wilson Parties which are not transferred to
Cornerstone pursuant to this Agreement and which relate to the Wilson
Parties or the Related Projects for periods prior to the Closing Date and
which shall not otherwise have been delivered to Cornerstone (including,
without limitation, employee files relating to the employees of the Wilson
Parties which are not being acquired by Cornerstone) and (ii) upon
reasonable notice, afford the officers, employees and authorized agents and
representatives of Cornerstone, reasonable access (including the right to
make photocopies at the expense of Cornerstone), during normal business
hours, to such books and records.
6.15 STANDSTILL AGREEMENT. In the event the Closing does not occur,
Cornerstone and Wilson agree that, for a period of twenty-four (24) months after
the execution of this Agreement, unless specifically invited in writing by the
other party's Board of Directors, neither Cornerstone nor WW&A (nor any of their
respective affiliates) will in any manner, directly or indirectly, (a) effect or
seek, offer or propose (whether publicly or otherwise) to effect, or cause or
participate in, (i) the acquisition of the other party's securities (or
beneficial ownership thereof) or assets, (ii) any tender or exchange offer,
merger or other business combination involving the other party, (iii) any
recapitalization, restructuring, liquidation, dissolution or other extraordinary
transaction with respect to the other party or (iv) any "solicitation" of
"proxies" (as such terms are used in the proxy rules of the SEC) or consents to
vote any of the other party's voting securities; (b) form, join or in any way
participate in a "group" (as defined under the Exchange Act) or otherwise act,
alone or in concert with others, to seek to control or influence the other
party's management, Board of Directors or policies; or (c) enter into any
discussion or arrangement with any third party with respect to any of the
foregoing; provided, however, that the restrictions set forth in this paragraph
shall not apply to professional asset managers or investment advisers retained
by Cornerstone or WW&A or their respective affiliates who are authorized to
exercise discretion with respect to all or a portion of the assets which they
manage for Cornerstone or WW&A or their respective affiliates. Notwithstanding
the foregoing, in the event either of Cornerstone or any Wilson Party willfully
and intentionally breach any of their respective obligations under this
Agreement with the result that a Closing hereunder does not occur, the
non-defaulting party shall not be bound by the covenants in this Section6.15
(STANDSTILL AGREEMENT).
7. ADDITIONAL AGREEMENTS.
7.1 RESTRICTIONS ON DISPOSITIONS OF CERTAIN RELATED PROJECTS FOLLOWING
CLOSING. Except (A) in connection with a tax-free exchange pursuant to
Section1031 of the Code or other transaction that does not result in recognition
of taxable income or gain (a "NON-TAXABLE TRANSACTION"), or (B) through a BONA
FIDE foreclosure or a deed in lieu of foreclosure as a result of a default with
respect to Indebtedness either
A-87
<PAGE>
assumed by Cornerstone or the Cornerstone Subsidiaries or any refinancing
hereof, after the Cornerstone Parties have delivered prompt notice of any
default to the Investors and reasonable cure rights have been extended to the
Investors by the Cornerstone Parties (provided the lender accepts the same) or
the lender, (the Cornerstone Parties' liability for default under this
Section7.1 being limited to their equity in the subject Projects and neither the
Cornerstone Parties nor any Cornerstone Subsidiaries shall have any liability
beyond such amount of equity), neither Cornerstone nor the Operating Partnership
shall, or shall permit any Cornerstone Subsidiary to sell, transfer, assign, or
dispose of any of the Projects except as follows: (i) those Projects listed on
Part I of SCHEDULE 7.1 (LOCK-IN PROPERTIES) may be transferred only after
December 31, 2009, and (ii) with respect to those properties listed in Part II
of this Schedule 7.1 (LOCK-IN PROPERTIES), (the "PART II PROPERTIES"), from and
after January 1, 2000, Cornerstone or the Operating Partnership may transfer the
Part II Properties free of this covenant subject to the annual limitation that
the sum of (a) the Section704(c) Gains recognized with respect to each Part II
Property in any one calendar year, plus (b) the cumulative Section704(c) Gains
recognized with respect to all Part II Properties in all prior calendar years,
does not exceed the product of (x) an amount equal to ten percent (10%) of the
aggregate Built-in Gains (as hereinafter defined) with respect to all Part II
Properties multiplied by (y) the number of calendar years elapsed since January
1, 1999. The Section 704(c) Gain recognized with respect to a property shall
equal the portion of the gain recognized which is required to be specially
allocated to one or more Participating Investors in accordance with
Section704(c) of the Code and the Treasury Regulations thereunder. In this
Agreement "BUILT-IN GAIN" means the amount of unrealized gain equal to the
difference between the Project Value of each Project at the Closing and the
adjusted tax basis of such Project at Closing.
7.2 INVESTOR BASIS PROTECTION.
(a) MINIMUM RECOURSE DEBT. Unless the Wilson Parties otherwise consent,
the Operating Partnership will maintain a minimum of $50,000,000 of recourse
indebtedness at all times during the period ending on January 1, 2010.
(b) DEFICIT ELECTION. The Operating Partnership will accommodate those
Participating Investors with negative capital accounts as of the date of the
Closing with respect to such Participating Investor's ownership interest in
a Project and who thus seek to defer tax gain which such Participating
Investor might otherwise recognize upon any refinancing of such Project by
permitting such Participating Investors to (i) maintain "bottomside"
recourse guarantees of indebtedness, or (ii) be liable for deficit
restoration obligations, as each such Participating Investor may elect.
7.3 LISTING OF SHARES. As provided in the Registration Rights and Lock-Up
Agreement, Cornerstone shall prepare and file with the New York Stock Exchange
within sixty (60) days after the Closing a listing application covering the
Shares to be issued hereunder and upon exchange of the Units and shall use its
best efforts to obtain approval of the listing of such Shares prior to issuance
thereof, subject to official notice of issuance. The obligations of this
Section7.3 (LISTING OF SHARES) shall survive the Closing. Further, the
Cornerstone Parties shall assure that a sufficient number of authorized but
unissued Shares and issuable Units will be available for issuance to the WW&A
Shareholders and certain Investors after the Closing as required by the
Transactions and the provisions of this Agreement, (subject to the conditions,
if any, set forth herein).
7.4 REGISTRATION AND LOCK UP OF SHARES.
(a) REGISTRATION RIGHTS. Cornerstone shall cause to be filed with the
SEC and use its best efforts to have a shelf registration statement and
related prospectus declared and continued effective for the offer and sale
by the Investors as contemplated by the Registration Rights and Lock-Up
Agreement in the form attached as EXHIBIT 7.4 (REGISTRATION RIGHTS AND
LOCK-UP AGREEMENT) and executed and delivered on the Closing Date (the
"REGISTRATION RIGHTS AGREEMENT").
A-88
<PAGE>
(b) LOCK-UP. The WW&A Shareholders and Investors shall be subject to the
restrictions on distribution of the Equity Securities received by them in
connection with the Transactions contemplated herein set forth in the
Registration Rights Agreement.
7.5 AGREEMENT OF LIMITED PARTNERSHIP OF OPERATING
PARTNERSHIP. Concurrently with the Closing, the Agreement of Limited
Partnership of the Operating Partnership shall be amended (the "RESTATED
PARTNERSHIP AGREEMENT"), as may be necessary or appropriate in order to effect
the Transactions and to accommodate other changes proposed by the Wilson
Parties, the approval of which will not be unreasonably withheld, conditioned,
or delayed by Cornerstone, and the Restated Partnership Agreement will remain in
such form until thereafter amended as provided by Law and such Restated
Partnership Agreement.
7.6 PAYMENT OF 1998 TAXES. The Operating Partnership is hereby authorized
by each of the Project Entities with respect to its respective Project, in the
Operating Partnership's sole discretion, to file any applicable proceeding for
the 1998 Tax roll for a reduction of the assessed valuation of the Project. The
refund of Taxes, net of all expenses incurred in connection therewith, if any,
for any Tax year for which the Participating Investor or the Operating
Partnership shall be entitled to share in the refund shall be divided between
the appropriate Participating Investor and the Operating Partnership in
accordance with the apportionment of taxes pursuant to the provisions hereof. No
Participating Investor shall be liable for any such expenses that exceed its
apportionment of Taxes.
7.7 ALLOCATION METHOD. The Operating Partnership and its affiliates will
use the "traditional method" (as defined in Treas. Reg. Section1.704-3(b)) of
allocating income, gain, loss and deduction to account for the variation between
the fair market value and adjusted basis of the Project for federal income tax
purposes with respect to (i) the contribution of the Project, and (ii) any
revaluation of the Project in accordance with the provisions of Treas. Reg.
SectionSection1.704-1(b)(2)(iv)(f), 1.704-1(b)(2)(iv)(g) and 1.704-3(a)(6).
7.8 RESTRUCTURING OF NONCUSTOMARY SERVICES. In the event that Cornerstone
reasonably determines, based on the advice of tax counsel, that any services
currently provided to the tenants of any of the Projects may give rise to
"impermissible tenant service income" (within the meaning of Section856(d)(7) of
the Code) in an amount that could jeopardize Cornerstone's qualification as a
REIT under the Code, the Wilson Parties shall cooperate in good faith with the
Cornerstone Parties to restructure any such services in a manner that enables
Cornerstone to preserve its qualification as a REIT, while preserving for the
Wilson Parties and Investors the economic results contemplated by the
Transactions. The Cornerstone Parties shall jointly and severally indemnify,
defend and hold the Wilson Parties and Investors and their respective agents,
employees, accountants and counsel harmless from and against any tax loss or
liability incurred up to and including the Closing (even though such loss or
liability might not be known or assessed until after the Closing) as a result of
any such restructuring.
A-89
<PAGE>
7.9 COOPERATION ON TAX STRUCTURING MATTERS. The parties to this Agreement
have structured the transactions contemplated hereby so as to effectuate a
tax-advantaged business combination for those Investors retaining an equity
investment in the Cornerstone Parties. It is anticipated that the transfer by
Investors of partnership interests to the Operating Partnership will be treated
as a tax-free contribution of partnership interests to the Operating Partnership
pursuant to Code Section721, except to the extent of cash received and to the
extent the "disguised sale" rules of Code Section707 may apply and except to the
extent an Investor receives a constructive distribution of money in excess of
the Investor's tax basis resulting from any reduction in the Investor's share of
partnership liabilities under Section 752 of the Code. It is also anticipated
that the merger of WW&A into Cornerstone will be treated as a tax-free merger
pursuant to Code Section368(a)(1)(A). The parties hereto are unaware of any
reason why these anticipated tax consequences should not ensue. The parties
agree to report these transactions in a manner consistent with this tax
structuring and to take all reasonable steps to effectuate the tax-advantaged
results contemplated hereby, including the measures described in Section7.2
(INVESTOR BASIS PROTECTION).
7.10 PREPARATION OF FINAL TAX RETURNS: SECTION 754 ELECTIONS. The final
federal and state income tax returns for any such partnership that is terminated
for tax purposes as a result of the acquisition by the Cornerstone Parties of
all or a portion of the interests in such partnership, and the final federal and
state income tax returns for WW&A for the taxable year ending on the date of the
Merger, will be prepared by the Cornerstone Parties, and will be subject to the
review and approval of the affected GP Entities and WW&A. The cost of preparing
such returns will be reasonably estimated by the Wilson Representative, and
approved by Cornerstone, whose approval will not be unreasonably withheld,
conditioned or delayed, and this estimated cost will be borne by the related
Funds or Project Entities with respect to Complete Transaction Projects and be
allocated to the Investors therein at the Closing in the same manner as Wilson
Costs pursuant to Section1.3(d) (CERTAIN COSTS ADJUSTMENTS). Any costs in excess
of this estimate will be borne by the Cornerstone Parties. The Wilson Parties
will use their best efforts to cause each Fund, Project Entity or other entity
which is classified as a partnership for federal income tax purposes and as to
which the Cornerstone Parties will acquire an interest therein, to file an
election under Section754 of the Code (unless such an election is already in
effect) with the partnership's federal income tax return for the taxable year of
the partnership that ends on or includes the Closing Date, unless Cornerstone
otherwise determines in its sole discretion that such an election is not
desirable.
7.11 SURVIVAL. The provisions of this Section7 (ADDITIONAL AGREEMENTS) shall
survive the Closing Date.
8. EMPLOYEE MATTERS.
8.1 EMPLOYMENT OF THE EXECUTIVES.
(a) WILLIAM WILSON III AND EXECUTIVE POSITIONS. At the Closing, William
Wilson III, shall enter into an employment agreement with Cornerstone
pursuant to which Cornerstone will engage William Wilson III as an executive
and as the Chairman of the Board of Cornerstone for so long as William
Wilson III, is elected to such position. In addition, the other designated
WW&A employees identified on SCHEDULE 8.1(G) (RETENTION AGREEMENTS)
(together with William Wilson III, sometimes also referred to as the
"EXECUTIVES") and the other officers of WW&A will become officers of the
Cornerstone Parties in the positions described in the transition plan agreed
to by the parties prior to the Execution Date (the "TRANSITION PLAN").
(b) EXECUTIVE COMPENSATION. From the Closing until January 1, 1999, the
Cornerstone Parties shall during their employment compensate the Executives
and other former WW&A employees on terms, and pursuant to financial
arrangements, in no event less than their current base salary and bonus
compensation with WW&A (so that their overall compensation including base
compensation, bonus compensation, restricted and incentive stock options,
health insurance and other benefits taken as a whole meets this standard, it
being understood that it is contemplated that such Executives and other
former WW&A employees may no longer participate in individual property
appreciation but that there will be an increase in the pool of restricted
and incentive stock options to be made available to
A-90
<PAGE>
certain qualified employees of Cornerstone and the Operating Partnership,
including certain qualified former employees of WW&A, as provided in
Section8.2(c) (STOCK OPTIONS AND RESTRICTED STOCK)).
(c) DUTIES OF EXECUTIVES. The responsibilities, duties and powers of the
Executives will be as set forth in the Transition Plan
(d) WILLIAM WILSON III, EMPLOYMENT AGREEMENTS. William Wilson III's
employment agreement (the "WILLIAM WILSON III, EMPLOYMENT AGREEMENT") shall
be on the terms described in this Section8 (EMPLOYEE MATTERS) and in a form
to be mutually agreed upon by William Wilson III and the Cornerstone
Parties.
(e) RIGHTS WITH RESPECT TO RETAINED PROPERTIES. Notwithstanding the
foregoing in this Section8.1, however, the Cornerstone Parties acknowledge
that from and after the Closing Date, the Executives, in their capacity as
principals of certain Project Entities and for their own account shall
continue to retain a significant interest in (i) Withdrawn Projects; and
(ii) certain other commercial real properties or interests therein that the
Executives, or an affiliate thereof, currently own and which are not
included within the scope of this Agreement (collectively the "RETAINED
PROPERTIES"). On or prior to the Execution Date, the Executives shall
deliver a true and correct list of Retained Properties to the Cornerstone
Parties. At Closing, the owner(s) of the Retained Properties and the
Operating Partnership or a Non-Voting Stock Sub or other corporate affiliate
of the Operating Partnership may enter into a property management, leasing
and/or development agreement regarding some, none or all of the Retained
Properties as the owner(s) may elect on terms to be agreed upon from time to
time. WW&A will use its reasonable efforts to cause the owners of these
Retained Properties to enter into such agreements. If the owner(s) of these
Retained Properties (including Fritzi/KSW, 631-633 Folsom, and the retail
projects through Wilson-Meany) do not enter into such agreements, the
Executives even while employed by Cornerstone shall have the right to
continue to conduct the affairs of these Retained Properties in their
capacities as general partners, managing members or the like, but not on a
fee basis, consistent with the governing documents of the entities owning
the Retained Properties, and the Executives will use commercially reasonable
efforts to cause the owners to enter into appropriate agreements with third
party fee managers and/or developers. However, if the owner(s) of these
Retained Properties do enter into such agreements, the Executives while
employed by Cornerstone may continue to act in their capacities as partners
or members, meet their fiduciary duties, and participate in strategic and
significant business decisions (e.g., development strategy, major contracts,
sale and financing) concerning the Retained Properties, but the Executives
acting in their individual capacity, shall not participate in the day-to-day
management of the Retained Properties other than as employees of Cornerstone
or its affiliates.
(f) OTHER ACTIVITIES. Except as provided in Section8.1(e) (RIGHTS WITH
RESPECT TO RETAINED PROPERTIES), nothing in this Agreement or the Transition
Plan will preclude the Executives from holding or making, and the Executives
may made hold or make (A) investments in the Retained Properties or (B)
investments as passive investors in any real estate or other enterprise so
long as these new investments (i) do not result in their having control over
any operating (as opposed to passive investment) business entity and (ii)
are not related to any business that is the same as or competitive with, or
properties that are of a type that is the same as or competitive with those
of Cornerstone, the Operating Partnership or any of Cornerstone Subsidiaries
("COMPETITIVE ACTIVITIES"), excluding passive investments in such
Competitive Activities in which an Executive holds an interest in the
profits and losses of such enterprise of five percent (5%) or less. In
addition, nothing in this Agreement or the Transition Plan shall preclude
any of the Executives, following the termination of employment with
Cornerstone, from (i) investing or engaging, directly or indirectly, in
Competitive Activities or (ii) accepting employment from, or provide
consulting or advisory services to, any person or company that is engaged in
Competitive Activities, PROVIDED, HOWEVER, for a period of one year
following the termination of employment with Cornerstone, each Executive, on
his own behalf or in the service or on behalf of others, shall not initiate
solicitation of employment of or hire any other Executive or employee who is
employed by Cornerstone at the time of termination and such Executive shall
not induce an employee
A-91
<PAGE>
to terminate his or her employment with Cornerstone prior to such
Executive's termination with a view to soliciting such employee thereafter.
For the purpose of this Section8.1, the general posting or placement of job
openings and descriptions on newspapers, magazines, intranet or internet
websites, bulletin boards, with search agencies or any other form of
advertisement or announcement not targeted specifically at the Executives,
or through any other such general method of solicitation will not be deemed
to be an act of initiating solicitation.
(g) RETENTION AGREEMENTS. At Closing, those Executives listed on
SCHEDULE 8.1(G) (RETENTION AGREEMENTS) shall enter into Retention Agreements
with the Cornerstone Parties on substantially the terms set forth on
SCHEDULE 8.1(G) (RETENTION AGREEMENTS), and the parties shall cooperate to
develop and implement mutually acceptable modifications to Cornerstone's
retention plan with respect to other employees of WW&A and with respect to
Cornerstone employees hired after the Closing.
8.2 WW&A'S ORGANIZATION AND STAFF.
(a) HIRING OF WW&A EMPLOYEES. It is the present intention of the
Cornerstone Parties that the property management, leasing, construction and
development business of WW&A will, after Closing, be conducted as part of
the operations of the Operating Partnership or a subsidiary thereof. All of
the employees of WW&A at the time of the Closing will as a result of the
Merger of WW&A with Cornerstone and the subsequent contribution by
Cornerstone of the business and assets of WW&A to the Operating Partnership
and the contribution by the Operating Partnership of some of this business
and some of these assets to a subsidiary or affiliate will be offered
"at-will" employment as employees of Cornerstone, the Operating Partnership
or its subsidiary or affiliate at no less than their respective current
compensation levels as provided in Section8.1(b) (EXECUTIVE COMPENSATION)
and such minimum levels shall remain effective through December 31, 1998
with respect to all employees whose employment continues in effect for such
period and if employed during such period.
(b) COMPENSATION PLANS. Effective not later than January 1, 1999, the
Cornerstone Parties shall put in place a comprehensive compensation plan
approved by the Cornerstone Board of Directors or its Compensation Committee
and after consultation with William Wilson III and the Chief Executive
Officer of Cornerstone and consultation with such expert advisors as the
Chief Executive Officer and Chairman of Cornerstone and/or the Compensation
Committee elect, providing for the integration of the compensation,
incentive compensation, employee benefits, stock options, grants of
restricted stock and other forms of compensation of the Cornerstone Parties
and WW&A, which plan will provide for compensation levels which in general
are not less than the 70th percentile for comparable positions in comparable
real estate industry positions which is understood to be Cornerstone's
current policy. It is also understood that the Board of Directors of
Cornerstone has approved the payment of cash bonuses of $1,200,000 in the
aggregate payable only to the existing employees of the Cornerstone Parties
who are employed prior to the Closing, with such bonuses and the payment
thereof conditioned upon the Closing of the Transactions.
(c) STOCK OPTIONS AND RESTRICTED STOCK. At or before the Execution Date,
the Board of Directors of Cornerstone shall have approved a plan to increase
the number of Shares subject to employee stock options and grants of
restricted stock (including previous grants of stock options and restricted
Shares) to not less than five percent (5%) of the number of Shares of
Cornerstone projected to be outstanding immediately following the Closing
together with the number of Shares of Cornerstone into which all of the
outstanding Units of the Operating Partnership held by persons other than
Cornerstone could be converted immediately following the Closing, and agreed
to make available for nonqualified stock options not less than 3,000,000 of
these Shares for allocation promptly following the Closing among qualifying
employees of the Cornerstone Parties after the Closing, including qualifying
former WW&A employees, and subject to customary vesting and other terms of
the plan. The Voting Agreements will contain provisions obligating the
parties to those Agreements to vote for the plan when it is submitted to the
Cornerstone Shareholders.
A-92
<PAGE>
(d) NON-VOTING STOCK SUBSIDIARIES. On or before Closing, the Operating
Partnership, John S. Moody and William Wilson III will establish two
subsidiaries (the "NON-VOTING STOCK SUBS"). The Operating Partnership shall
own ninety-five percent (95%) of the equity interest in the Non-Voting Stock
Subs, which equity interest will be in the form of a single class of
non-voting stock. The remaining five percent (5%) common stock interest in
one Non-Voting Stock Sub will be a class of voting common stock and will be
held fifty percent (50%) by John S. Moody and fifty percent (50%) by William
Wilson III. The remaining five percent (5%) common stock interest in the
other Non-Voting Stock Sub (the "OTHER NON-VOTING STOCK SUB") will be a
class of voting common stock and will be held sixty percent (60%) by the
present shareholders of WW&A and forty percent (40%) by John S. Moody. The
principal purpose of both Non-Voting Stock Subs will be to engage in certain
management and construction activities with respect to properties owned by
unaffiliated persons, PROVIDED, HOWEVER, the Other Non-Voting Stock Sub
shall be named William Wilson & Associates, a California corporation, and
shall only be used, at the discretion of Cornerstone after the Closing, to
hold and provide services under certain agreements with unaffiliated
persons, but only to the extent the ownership structure of such Other
Non-Voting Stock Sub is necessary to effect the transfer and assignment of
such agreements.
9. CLOSING.
9.1 THE CLOSING. The Closing shall take place at the offices of Farella
Braun & Martel llp in San Francisco, California or at such other place in
California as the WW&A Parties and the Cornerstone Parties may mutually agree.
The date on which this Closing takes place is the "Closing Date". The parties
shall act diligently and in good faith and use commercially reasonable efforts
to cause the Closing to occur on or before October 1, 1998 or such other date or
further revised dates as Cornerstone and the Wilson Representative may from time
to time agree in writing (the "Scheduled Closing Date"). The Closing will occur
as soon after satisfaction or waiver of all conditions precedent as is
practicable. For convenience of accounting, the parties will endeavor to have
the Closing occur on the first business day of a calendar month, unless the
Cornerstone Parties and the Wilson Representative otherwise agree in writing
prior to the Closing. If the Closing does not occur on or prior to this
Scheduled Closing Date either the Wilson Parties or the Cornerstone Parties may
extend the Scheduled Closing Date to a date on or prior to January 1, 1999 which
date is mutually agreeable to them and, if the parties fail to agree, then the
Cornerstone Parties and the Wilson Representative on behalf of the Wilson
Parties shall each have the option, on one or more occasions as deemed necessary
by such party, to notify the other parties that it elects to extend the
Scheduled Closing Date by not less than ten (10) nor more than thirty (30)
business days, in which event the Closing Date shall be the day to which the
Scheduled Closing Date is so extended by the election. In no event will the
Scheduled Closing Date or the Closing Date be extended beyond January 1, 1999.
9.2 DELIVERIES AT THE CLOSING BY THE WILSON PARTIES. At the Closing, each of
the Wilson Parties, as applicable, will deliver or cause to be delivered to the
Operating Partnership the following:
(a) DELIVERY OF ANCILLARY AGREEMENTS.
(i) With respect to all Interests conveyed to Cornerstone or
Operating Partnership contemplated in Section1.1 (SALE OR CONTRIBUTION BY
INVESTORS), Investor Contribution Agreements executed by the
Participating Investors or the Wilson Representative as their
attorney-in-fact;
(ii) the Loan Assumption Documents, duly executed by the appropriate
Project Entity, if so required;
(iii) the Consents, duly executed by each Participating Investor;
(iv) Wilson Voting Agreements duly executed by William Wilson III and
the WW&A Shareholders and Wilson Parties, if so required;
A-93
<PAGE>
(v) the Escrow Agreement, duly executed by the Wilson Parties and by
the Wilson Representative as the Participating Investors'
attorney-in-fact;
(vi) the William Wilson III Employment Agreement, duly executed by
William Wilson III;
(vii) the Registration Rights Agreement, duly executed by the Wilson
Representative on behalf of the Participating Investors;
(viii) the Restated Partnership Agreement, duly executed by the
Wilson Representative on behalf of the Participating Investors;
(ix) the Certificate of Merger for the merger of WW&A into
Cornerstone, duly executed by WW&A; and
(x) the Voting Agreements, duly executed by the WW&A Shareholders and
Wilson Parties, if so required.
(b) DELIVERIES WITH RESPECT TO PROPERTY. If the Requisite Consents have
been obtained with respect to a Project Entity:
(i) all original Leases and all other documents pertaining thereto or
copies of same if the Project Entity, using its best efforts, is unable
to deliver originals;
(ii) all other original documents or instruments referred to herein,
including, service contracts, licenses, permits, acquisition contracts,
management contracts, construction contracts, and the books and records,
or copies of same if the Project Entity, using its best efforts, is
unable to deliver originals;
(iii) a letter to all tenants of the property of the Project Entity
in a form reasonably satisfactory to the Operating Partnership advising
the tenants of the transactions to be consummated hereunder and directing
that rent and other payments thereafter be sent to the Operating
Partnership or its designee, as the Operating Partnership shall so
direct;
(iv) such affidavits and such other documents or instruments executed
by the Project Entities hereunder as are customarily and reasonably
required by the insurance company providing title insurance coverage for
the benefit of the Cornerstone Parties to consummate the Transactions;
(v) a list of all security deposits delivered by tenants of the
Project Entity; and
(vi) assignments in form and substance reasonably satisfactory to the
Cornerstone Parties of all security deposits and cash holdbacks held by
lenders for Leasing Costs and Capital Expenditures for the Project
Entity.
(c) REPRESENTATION BRING DOWN CERTIFICATE. A certificate executed by the
Wilson Representative on behalf of each of the appropriate Wilson Parties,
in a form reasonably satisfactory to Cornerstone, stating that those
representations and warranties made by the Wilson Parties in this Agreement
which are described in Section3 (REPRESENTATIONS AND WARRANTIES OF GP
PARTIES) and Section4 (REPRESENTATIONS AND WARRANTIES OF WW&A) are true and
correct as of the Closing Date (unless another date is expressly mentioned
in a specific representation to the contrary), or if there have been any
changes, a description thereof.
(d) FIRPTA CERTIFICATES. In order to avoid the imposition of the
withholding tax payment pursuant to Section1445 of the Code, certificates
signed by duly authorized representatives of the Participating Investors to
the effect that they are not "foreign persons" as that term is defined in
Section1445(f)(3) of the Code, or, if such person is a foreign person, a
notice of non-recognition transfer under the Treasury Regulations under
Section1445 of the Code, if applicable, and comparable documents with
respect to comparable state and local law provisions.
A-94
<PAGE>
(e) PROOF OF AUTHORITY. Affidavits and other instruments, including all
organizational documents of the Wilson Parties, including limited
partnership agreements, filed copies of limited partnership certificates,
articles of organization, and certificates of good standing and existence,
and resolutions and consents reasonably requested by the Cornerstone Parties
evidencing the power and authority of the Wilson Parties to enter into and
perform and observe their respective obligations under the Transaction
Agreements.
(f) WW&A SHARE CERTIFICATES. The WW&A Share Certificates, with stock
powers duly endorsed in blank, representing all outstanding WW&A Shares.
(g) BOOKS AND RECORDS. The books and records of each of the Wilson
Parties and of each Fund and Project Entity with respect to which the
Requisite Consents were received.
(h) TRANSFER TAX STATEMENTS. All such transfer and other tax
declarations and returns and information returns, duly executed and sworn to
by each GP Party or Related Project Entity as the case may be, in a form
reasonably satisfactory to Cornerstone, to the extent required by Law in
connection with the conveyance of the Interests to the Operating
Partnership.
(i) LEGAL OPINIONS. An opinion of counsel to WW&A reasonably
satisfactory to the Cornerstone Parties and in a form to be mutually agreed
upon by the Cornerstone Parties and the Wilson Parties. Such legal opinion
shall include opinions addressing: (i) the existence, good standing and
qualification of WW&A, the Funds, and the Project Entities; (ii) the power
and authority to enter into this Agreement and close the Transactions,
including the execution of the various Transaction Agreements; (iii) the
status of WW&A as a subchapter S corporation pursuant to the Code and
California income tax laws; (iv) certain effects on the Transactions of
California statutes governing the merger of limited partnerships and limited
liability companies; (v) partnership classification for federal income tax
purposes of each Project Entity or Fund or other entity in which the
Cornerstone Parties acquire an interest at the Closing; and (vi) the matters
customarily covered in a 10b-5 "cold comfort" discussion pursuant to the
applicable securities laws.
(j) INDEMNIFICATION AGREEMENT. Indemnification agreement in form
reasonably satisfactory to the Cornerstone Parties pursuant to which the
WW&A Shareholders shall indemnify, save and hold harmless Cornerstone, the
Operating Partnership and their respective directors, officers, employees,
agents, representatives and affiliates from and against any and all costs
and losses arising out of, resulting from or incident to the litigation
described in paragraphs 1 and 4 of SCHEDULE 3.1(F) (LIST OF WILSON PARTY
LITIGATION). Notwithstanding anything contained in this Agreement to the
contrary, the WW&A Shareholders' liability under the foregoing
indemnification agreement shall not be limited in any manner by the
provisions of Section11 (INDEMNIFICATIONS; CLAIMS AGAINST HOLDBACK) and
shall survive the Closing.
(k) OTHER DOCUMENTS. Such other documents as may be reasonably required
or appropriate to effectuate the consummation of the Transactions, in forms
reasonably satisfactory to Cornerstone.
9.3 DELIVERIES AT THE CLOSING BY THE CORNERSTONE PARTIES. At the Closing,
Cornerstone and the Operating Partnership shall deliver or cause to be delivered
to the Wilson Parties the following:
(a) CASH. Cash equal to the cash sums to be paid to the Participating
Investors electing to sell their Interests at Closing.
(b) UNITS. The Units to be issued at the Closing properly issued to the
appropriate party, including the Units to be held as part of the Escrow
Fund.
(c) SHARES. The certificates representing Shares to be issued at the
Closing properly issued to the appropriate party, including the Shares to be
held as part of the Escrow Fund.
(d) ANCILLARY AGREEMENTS.
A-95
<PAGE>
(i) the Investor Contribution Agreements, duly executed by the
appropriate Cornerstone Party or Parties;
(ii) the Loan Assumption Documents, duly executed and acknowledged by
the appropriate Cornerstone Party and lender;
(iii) the William Wilson III Employment Agreement, duly executed by
the Operating Partnership;
(iv) the Escrow Agreement, duly executed by the Cornerstone Parties
and the Escrow Agent named therein;
(v) the William Wilson III Employment Agreement, duly executed by the
Operating Partnership;
(vi) the Registration Rights Agreement, duly executed by Cornerstone;
(vii) the Restated Partnership Agreement, duly executed by or on
behalf of the partners of the Operating Partnership;
(viii) the PGGM Registration Rights Agreement in substantially the
form of EXHIBIT 9.3(D)(VIII) (PGGM REGISTRATION RIGHTS AGREEMENT) (the
"PGGM REGISTRATION RIGHTS AGREEMENT");
(ix) the Certificates of Merger for the merger of WW&A into
Cornerstone, duly executed by Cornerstone;
(x) all Voting Agreements, duly executed by all parties thereto,
other than the Wilson Parties; and
(xi) a complete and accurate copy of the amended and restated Bylaws
of Cornerstone attached as EXHIBIT 2.4 (BYLAWS), approved by the Board of
Directors of Cornerstone and any necessary Shareholder Approvals.
(e) REPRESENTATIONS BRING DOWN CERTIFICATE. A certificate executed by a
duly authorized representative of Cornerstone and the Operating Partnership,
in a form reasonably satisfactory to the Wilson Parties, stating that the
representations and warranties made by Cornerstone and the Operating
Partnership in this Agreement as described in Section5 (REPRESENTATIONS AND
WARRANTIES OF CORNERSTONE PARTIES) are true and correct as of the Closing
Date (unless another date is expressly mentioned in a specific
representation to the contrary), or if there have been any changes, a
description thereof.
(f) PROOF OF AUTHORITY. Affidavits and other instruments, including all
organizational documents of Cornerstone and the Operating Partnership and
the Cornerstone Shareholders, including limited partnership agreements,
filed copies of limited partnership certificates, articles of organization,
and certificates of good standing and existence, reasonably requested by the
Wilson Parties evidencing the power and authority of Cornerstone and the
Operating Partnership and the Cornerstone Shareholders to enter into and
perform their respective obligations under the Transaction Agreements.
(g) LEGAL OPINIONS. An opinion of counsel to Cornerstone reasonably
satisfactory to the Wilson Parties and in a form to be mutually agreed upon
by the Cornerstone Parties and the Wilson Parties. Such legal opinion shall
include opinions addressing: (i) the existence, good standing and
qualification of the Cornerstone Parties; (ii) the power and authority to
enter into this Agreement and close the Transactions, including the
execution of the various Transaction Agreements; (iii) the matters
customarily covered in a 10b-5 "cold comfort" discussion pursuant to the
applicable securities laws; and (iv) that, commencing with its taxable year
ended December 31, 1997, Cornerstone was organized and has operated in
conformity with the requirements for qualification as a REIT under the Code,
and the Operating Partnership has been during and since its formation, and
continues to be, treated for
A-96
<PAGE>
federal income tax purposes as a partnership and not as a corporation or
association taxable as a corporation (with customary exceptions, assumptions
and qualifications and based upon customary representations).
(h) OTHER DOCUMENTS. Such other documents as may be reasonably required
or appropriate to effectuate the consummation of the Transactions, in forms
reasonably satisfactory to the Wilson Parties.
9.4 PROJECT CLOSING ADJUSTMENTS.
(a) PROJECT ESTIMATED CLOSING ACCOUNTING. All revenues and expenses with
respect to a Project, applicable to periods of time before and after the
Closing and all Transaction Costs, shall be allocated between the
Participating Investors with respect to the Related Project Entity (the
"RELATED PARTICIPATING INVESTORS"), on the one hand and the Cornerstone
Parties on the other hand, as set forth below. Except as expressly set forth
to the contrary in this Agreement, Related Participating Investors shall be
entitled to all revenue and shall be responsible for all expenses for the
period of time up to but not including the Closing Date and the Cornerstone
Parties shall be entitled to all revenue and shall be responsible for all
expenses for the period of time from and after the Closing Date, as provided
in Section9.4(b) (PROJECT PRORATIONS). Such adjustments shall be shown on
the Estimated Closing Accounting and Final Closing Accountings referred to
herein and any amount owed by any party to another party shall be paid in
cash on or after the Closing as provided in Section 9.4(d) (ADJUSTMENT
PAYMENTS) below. At least fifteen (15) days prior to the Scheduled Closing
Date, the GP Parties, on behalf of the Related Participating Investors,
shall prepare and deliver to the Cornerstone Parties, a proposed accounting
("PROJECT ESTIMATED CLOSING ACCOUNTING") that shall estimate and allocate
Closing Costs, Transaction Costs and other costs allocated among the parties
under the Transaction Agreements and prorating of income and expense, in
itemized form for the Projects.
(b) PROJECT PRORATIONS. All items of income and expenses for the
Projects will be prorated without duplication, (unless otherwise indicated,
as of 11:59 p.m. (San Francisco time) on the date immediately prior to
Closing which prorations, unless otherwise indicated herein, will be on an
accrual basis), including the following:
(i) All charges for water, sewage, electricity, gas and all other
utilities and operating expenses with respect to a Project, to the extent
not paid or payable by tenants under the Leases directly to the provider
and without recourse to the Project Entity, shall be allocated between
the Cornerstone Parties and the Related Participating Investors;
(ii) All real estate taxes, charges and assessments affecting a
Project shall be allocated between the Cornerstone Parties and the
Related Participating Investors. If any real estate taxes, charges or
assessments have not been finally assessed as of the Closing Date for a
Project for the then current calendar tax year, they shall be adjusted at
the Closing based upon the most recently issued bills therefor, but shall
be adjusted in the Final Closing Accounting; and any supplemental tax
assessments for periods prior to the Closing Date shall be debited
against the Related Participating Investors;
(iii) For purposes of the Project Estimated Closing Accounting, all
rents and other charges due under a Lease and thirty (30) days or fewer
delinquent shall be deemed paid and collected. In the Final Closing
Accounting described herein, such rents and charges not more than thirty
(30) days delinquent shall not be deemed paid or collected, and the Final
Closing Accounting shall only reflect the proration of rents and charges
actually collected. All rents shall be prorated and allocated between the
Cornerstone Parties and the Related Participating Investors based on
updated Rent Rolls. For purposes of effecting the prorations, all moneys
received from tenants from and after the Closing shall be applied first
to rent and charges that were thirty (30) days or fewer past due as of
Closing, second to the current rent and charges due after the Closing,
third,
A-97
<PAGE>
to any past due rents due and payable after the Closing, and fourth, to
the rent and charges that were more than thirty (30) days delinquent as
of Closing. After the Closing, the Operating Partnership shall use all
reasonable efforts to collect delinquent rents for the benefit of the
Related Participating Investors and shall cooperate with the Wilson
Representative in the collection of any delinquent amounts. The Wilson
Representative, on behalf of the Related Participating Investors, shall
be entitled to initiate and prosecute proceedings to collect their
respective rents delinquent as of the Closing Date;
(iv) All security and other deposits, prepaid rents, and other
advance payments, tenant escrows, or similar items relating to a Project
shall be transferred or credited to the Cornerstone Parties;
(v) All amounts prepaid by the Related Project Entities under prepaid
insurance (to the extent not terminated) and the Wilson Ground Leases and
any prepaid interest or other amounts in respect of any Existing Project
Debt (and not taken into consideration in the calculation of Net Project
Value) shall be credited to the Related Participating Investors;
(vi) All refundable deposits made by the Related Project Entities,
including, without limitation, all refundable deposits with any utility
company or governmental agency in connection with the Projects shall be
credited to the Related Participating Investors;
(vii) All accounts payable and accrued expenses of the Related
Project Entities shall be credited to the Cornerstone Parties; and
(viii) All accrued but unpaid interest due under the Existing Project
Debt (to the extent not deducted in the calculation of Net Project Value)
shall be credited to the Cornerstone Parties;
(ix) All Lease Costs and Capital Expenditures shall be prorated as
provided in SectionSection6.1(b) (LEASING AND LEASE COSTS) and 6.1(c)
(CAPITAL EXPENDITURES), with the appropriate Project Entity or Fund
receiving a credit for the share of these Lease Costs and Capital
Expenditures to be paid by the Operating Partnership at the Closing; and
(x) All cash on hand and balances in bank deposit accounts will be
credited to the appropriate Project Entity or Fund after the adjustments
provided herein.
(c) CLOSING ACCOUNTING. Following receipt of the Estimated Closing
Accounting by the Cornerstone Parties, the Cornerstone Parties shall review
the Estimated Closing Accounting and shall have the right to approve the
same, such approval not to be unreasonably withheld, conditioned or delayed.
(d) ADJUSTMENT PAYMENTS. To the extent the sum of the amount credited to
the Related Participating Investors MINUS the sum of the amounts credited
the Cornerstone Parties is a positive number, then Cornerstone shall pay to
the Wilson Representative or a mutually agreed disbursing agent for the
benefit of the Related Participating Investors for such Projects, an amount
in cash equal to such difference; to the extent the sum of the amount
credited to the Cornerstone Parties MINUS the amount credited to the Related
Participating Investors is a positive number, the Related Participating
Investors of such Project shall pay to the Cornerstone Parties, in cash, an
amount equal to such difference. In the event that the Wilson Representative
and the Cornerstone Parties are unable to agree on a Project Estimated
Closing Accounting or a Project Final Closing Accounting, the issue shall be
submitted to Coopers & Lybrand, LLP, for final resolution, and the Related
Participating Investors and the Cornerstone Parties shall be bound by such
resolution, absent manifest error.
(e) PARTIALLY PARTICIPATING PROJECTS. The prorations and other
adjustments and the preparation of the Project Estimated Closing Accounting
and Project Final Closing Accounting under this Section9.4 (PROJECT CLOSING
ADJUSTMENTS) shall be effected as follows for Partially Participating
Projects: (i) each Related Participating Investor in a Partially
Participating Project will share in and pay such prorations and amounts
attributable to the Related Project and Related Project Entity based upon
such Related
A-98
<PAGE>
Participating Investor's "RELATED PROJECT OWNERSHIP PERCENTAGE"; and (ii)
the "Related Project Ownership Percentage" of a Related Participating
Investor shall be the percentage determined by dividing (x) the
Consideration received by such Related Participating Investor from such
related Project by (y) the aggregate Consideration which would have been
received from such related Project by all Investors and other parties owning
an interest in such related Project, including all Related Participating
Investors and all other Investors and other parties who did not consent and
elect to be Participating Investors hereinunder. For example, if, after such
prorations and adjustments described herein, the amount owed to the
Cornerstone Parties from a Project would have been $100,000 assuming all of
the interests in such Project were acquired by the Cornerstone Parties, but,
in fact, such Project is a Partially Participating Project and the Related
Participating Investors in such Project held, in the aggregate, a fifty
percent (50%) Related Project Ownership Percentage, then such Related
Participating Investors shall share in and pay fifty percent (50%) of such
proration and amounts attributable to the Related Project and Related
Project Entity.
(f) FINAL CLOSING ACCOUNTING. Within one hundred twenty (120) days after
the Closing, the Wilson Representative, on behalf of the Related
Participating Investors, and the Cornerstone Parties shall complete the
final Closing Accounting pursuant to the provisions of this Section9.4
(PROJECT CLOSING ADJUSTMENTS) (the "PROJECT FINAL CLOSING ACCOUNTING") and,
to the extent it is determined that either party has retained or received
amounts in excess of the amounts to which it is entitled under this
Section9.4 (PROJECT CLOSING ADJUSTMENTS), such party shall remit such excess
to the other party within thirty (30) days of such determination. All
adjustment amounts due a party under this Section9.4 (PROJECT CLOSING
ADJUSTMENTS) will bear interest at the rate of LIBOR plus 150 basis points
from the Closing Date until settled and paid in full. After (i) the Project
Final Closing Accounting has been completed and approved by the Cornerstone
Parties and the Wilson Representative, (ii) the parties have paid all
amounts required to be paid to reflect the adjustments between the Project
Estimated Closing Accounting and the Project Final Closing Accounting, and
(iii) all Wilson Costs have been paid and, to the extent provided in
Section1.3(d) (CERTAIN CASH ADJUSTMENTS), allocated and debited to the cash
distributable to the Related Participating Investors, then any cash balance
existing as of the Closing for a Project Entity after any such payments and
deductions described in (i)--(iii) above shall be distributed to the Related
Participating Investors and the other Investors in accordance with the
distribution provisions of the applicable Project Entity Documents and the
Interests therein owned by the Related Participating Investors and the other
Investors subject to the statutory rights of dissenters under applicable
California law.
(g) FUND-IV CREDIT. At the Closing, there shall be a credit of Three
Million Dollars ($3,000,000) to be paid or given by Cornerstone and applied
against the obligations of FUND-IV Investors and co-investors in Project
Entities in which FUND-IV and/or co-investors in FUND-IV are investors
(collectively, "FUND-IV INVESTORS") with respect to their obligations for
Leasing Costs and Capital Expenditures otherwise allocated to them under
SectionSection6.1(b) (LEASING AND LEASE COSTS) and 6.1(c) (CAPITAL
EXPENDITURES), and to the extent, if any, that these Leasing Costs and
Capital Expenditures are less than $3,000,000, the balance of this credit
may be applied as a credit against the FUND-IV Investors' obligations to pay
a share of Prorations and/or Wilson Costs, or received by the FUND-IV
Investors as increased Consideration payable at the Closing. This $3 million
credit shall be allocated amongst the FUND-IV Investors in proportion to
their Consideration received as FUND-IV Investors.
9.5 WILSON CLOSING ADJUSTMENTS
(a) WW&A ESTIMATED CLOSING ACCOUNTING. At least fifteen (15) days prior
to Scheduled Closing Date, WW&A shall prepare and deliver to the Cornerstone
Parties a proposed accounting prepared in accordance with GAAP consistently
applied ("WW&A ESTIMATED CLOSING ACCOUNTING"), that shall estimate, in
itemized form for WW&A, the following items (unless otherwise indicated, as
of 11:59 p.m. as of the day before the Closing Date):
A-99
<PAGE>
(i) All cash and receivables held by WW&A, including without
limitation, the bank accounts of WW&A and construction, development,
management, asset management, and other fees and amounts payable to WW&A
(excluding any amounts payable to WW&A with respect to its Interests in
Project Entities and Projects) (collectively, the "WW&A PROJECT
INTERESTS"); PROVIDED that nothing herein shall preclude WW&A from making
any distribution of these items to its shareholders prior to the Closing
and the estimate shall be adjusted for any such distributions;
(ii) All amounts prepaid by WW&A under any WW&A Material Contracts
and other contracts and prepaid insurance;
(iii) All refundable deposits made by WW&A, including all refundable
deposits made by WW&A with any utility company or governmental agency;
(iv) All accounts payable and accrued expenses of WW&A including,
without limitation, accounts payable and accrued expenses under leases,
insurance policies, any WW&A Material Contracts and other contracts,
which have not been funded or paid prior to the Closing Date, and all
other ordinary and customary accounts payable and accrued expenses,
including without limitation water, sewer, electricity and gas charges,
real estate taxes and assessments, personal property taxes and sales
taxes;
(v) All accrued but unpaid interest and other debt service due on the
airplane loan to the extent not deducted in calculating the WW&A Company
Value;
(vi) All compensation, salaries, bonuses (including, without
limitation, year end bonuses), payroll expenses, health care, insurance
and other benefits, accrued vacation, retirement and profit sharing
contributions, and other employee costs and expenses, PROVIDED, HOWEVER,
the WW&A Shareholders shall be solely responsible for the payment of (A)
any "transaction" bonuses or other unusual bonuses and (B) any amounts
paid in connection with stock appreciation rights, and such amounts shall
not be prorated in the WW&A Estimated Closing Statement or WW&A Final
Closing Statement; and
(vii) The net amount of cash payable to or due from WW&A, as a
Participating Investor, with respect to its WW&A Project Interests
pursuant to the provisions of Section9.4 (PROJECT CLOSING ADJUSTMENTS)
(the "WW&A NET PROJECT PRORATIONS").
(b) WW&A CLOSING ACCOUNTING. Following receipt of the WW&A Estimated
Closing Accounting by the Cornerstone Parties, the Cornerstone Parties shall
review the WW&A Estimated Closing Accounting and shall have the right to
approve the same, such approval not to be unreasonably withheld conditioned
or delayed. On the day immediately preceding Closing, WW&A and the
Cornerstone Parties shall update the approved WW&A Estimated Closing
Accounting (the "WW&A FINAL CLOSING ACCOUNTING") based upon actual
operations of WW&A as of such date.
(c) To the extent that the sum of the assets described in clauses (i)
through (iii) above of the WW&A Final Closing Accounting MINUS the sum of
the liabilities described in clauses (iv) through (vi) above of the WW&A
Final Closing Accounting, and as adjusted, PLUS OR MINUS, by the WW&A Net
Project Prorations, as the case may be ("NET WORKING CAPITAL") is a positive
number, such positive number is referred to as the "SURPLUS NET WORKING
CAPITAL"; and to the extent that the Net Working Capital is a negative
number, such negative number is referred to as "NET WORKING CAPITAL
DEFICIT". In the event of Surplus Net Working Capital, the amount of such
Surplus Net Working Capital shall be paid by the Cornerstone Parties to the
WW&A Shareholders in cash in proportion to their ownership of WW&A Shares;
and in the event of a Net Working Capital Deficit, the WW&A Shareholders
shall pay to the Cornerstone Parties in cash such Net Working Capital
Deficit in proportion to their ownership of WW&A Shares. In the event that
the parties are unable to agree on the WW&A Estimated Closing Accounting or
the WW&A Final Closing Accounting, the issue shall be resolved in accordance
with Section9.5(d) (RESOLUTION; FINAL ACCOUNTING).
A-100
<PAGE>
(d) RESOLUTION: FINAL ACCOUNTING. In the event the parties are unable to
finally resolve any issue relating to the WW&A Estimated Closing Accounting
or the WW&A Closing Accounting prior to the Closing Date, the matter shall
be resolved following the Closing in a post-closing audit to be conducted by
Coopers & Lybrand L.L.P. Within one hundred and twenty (120) days after the
Closing, the parties shall cause Coopers & Lybrand L.L.P. to conduct an
audit of the WW&A Final Closing Accounting and, to the extent it is
determined that either party has retained or received amounts in excess of
the amounts to which it is entitled under this Section9.5 (WW&A CLOSING
ADJUSTMENTS), such party shall remit such excess to the other party within
thirty (30) days of such determination. All adjustment amounts due a party
under this Section9.5(d) (RESOLUTION; FINAL ACCOUNTING) will bear interest
at the rate of LIBOR plus 150 basis points from the Closing Date until
settled and paid in full.
9.6 EXPENSES.
(a) GENERAL; TRANSACTION COSTS. Except as otherwise specified in this
Agreement, all costs and expenses, including fees and disbursements of
counsel, financial advisors and accountants, incurred in connection with the
Transaction Agreements and the Transactions (collectively, "TRANSACTION
COSTS") shall be paid by the party incurring such costs and expenses whether
or not the Closing shall have occurred. Without limiting the generality of
the foregoing, the Wilson Parties and the Cornerstone Parties acknowledge
and agree that: (i) the Wilson Parties have engaged Coopers & Lybrand LLP
(San Francisco), Farella Braun & Martel LLP, and Lazard Freres & Co., LLC to
advise the Wilson Parties in connection with the Transactions and expect to
engage an investment banker of recognized national standing to render a
fairness opinion, and that they shall be responsible for the fees and
expenses of such advisors and their other Transaction Costs whether the
Closing occurs or not (the "WILSON TRANSACTION COSTS"); the Wilson
Transaction Costs will also include the reasonable fees and expenses of the
Wilson Representative which will be estimated at Closing; and (ii) the
Cornerstone Parties have engaged Coopers & Lybrand LLP (New York), King &
Spalding, Arthur Andersen LLP., Merrill Lynch & Co., and Morgan Stanley &
Co. Incorporated to advise the Cornerstone Parties in connection with the
Transactions, and that the Cornerstone Parties shall be responsible for the
fees and expenses of such advisors and their other Transaction Costs whether
the Closing occurs or not (the "CORNERSTONE TRANSACTION COSTS").
(b) CERTAIN DUE DILIGENCE AND CLOSING COSTS. Cornerstone shall pay the
cost of property surveys, title searches and other investigations ordered,
and the fees and expenses of title insurance and escrow services engaged, in
connection with the Transactions, subject to the provisions of Section1.5
(CERTAIN CLOSING COSTS).
9.7 NO WARRANTIES.
(a) AS IS.
(i) CORNERSTONE AND THE OPERATING PARTNERSHIP ACKNOWLEDGE AND AGREE
THAT, EXCEPT AS SET FORTH IN THE TRANSACTION AGREEMENTS, THE OPERATING
PARTNERSHIP IS ACQUIRING THE INTERESTS AND THAT THE RELATED PROJECTS
SHALL BE IN THEIR "AS IS" CONDITION "SUBJECT TO ALL FAULTS" AND
SPECIFICALLY AND EXPRESSLY WITHOUT ANY WARRANTIES, REPRESENTATIONS OR
GUARANTEES, EITHER EXPRESS OR IMPLIED, OF ANY KIND, NATURE, OR TYPE
WHATSOEVER FROM OR ON BEHALF OF THE WILSON PARTIES. CORNERSTONE AND THE
OPERATING PARTNERSHIP FURTHER ACKNOWLEDGE THAT, EXCEPT AS OTHERWISE SET
FORTH IN THE TRANSACTION AGREEMENTS, ALL MATERIALS RELATING TO THE
PROPERTY WHICH HAVE BEEN PROVIDED BY THE GP PARTIES HAVE BEEN PROVIDED
WITHOUT ANY WARRANTY OR REPRESENTATION, EXPRESSED OR IMPLIED, AS TO THEIR
CONTENT, SUITABILITY FOR ANY PURPOSE, ACCURACY, TRUTHFULNESS OR
COMPLETENESS AND NEITHER THE OPERATING PARTNERSHIP NOR CORNERSTONE SHALL
A-101
<PAGE>
HAVE ANY RECOURSE AGAINST THE WILSON PARTIES OR THEIR COUNSEL, ADVISORS,
AGENTS, OFFICERS, DIRECTORS OR EMPLOYEES FOR ANY INFORMATION IN THE EVENT
OF ANY ERRORS THEREIN OR OMISSIONS THEREFROM. CORNERSTONE AND THE
OPERATING PARTNERSHIP EACH REPRESENT THAT THEY ARE SOPHISTICATED AND
EXPERIENCED IN ALL MATTERS RELATING TO THE PROPERTY AND, EXCEPT AS
OTHERWISE SET FORTH IN THE TRANSACTION AGREEMENTS, THEY ARE RELYING
SOLELY ON SUCH EXPERIENCE AND SOPHISTICATION IN MAKING ALL DECISIONS WITH
RESPECT TO THE TRANSACTIONS CONTEMPLATED HEREIN.
(ii) THE WILSON PARTIES ACKNOWLEDGE AND AGREE THAT, EXCEPT AS SET
FORTH IN THE TRANSACTION AGREEMENTS AND THE INFORMATION STATEMENT, THE
CORNERSTONE PROJECTS SHALL BE IN THEIR "AS IS" CONDITION "SUBJECT TO ALL
FAULTS" AND SPECIFICALLY AND EXPRESSLY WITHOUT ANY WARRANTIES,
REPRESENTATIONS OR GUARANTEES, EITHER EXPRESS OR IMPLIED, OF ANY KIND,
NATURE, OR TYPE WHATSOEVER FROM OR ON BEHALF OF THE CORNERSTONE PARTIES.
THE WILSON PARTIES FURTHER ACKNOWLEDGE THAT, EXCEPT AS OTHERWISE SET
FORTH IN THE TRANSACTION AGREEMENTS, AND THE INFORMATION STATEMENT ALL
MATERIALS RELATING TO THE CORNERSTONE PROPERTIES WHICH HAVE BEEN PROVIDED
BY THE CORNERSTONE PARTIES HAVE BEEN PROVIDED WITHOUT ANY WARRANTY OR
REPRESENTATION, EXPRESSED OR IMPLIED, AS TO THEIR CONTENT, SUITABILITY
FOR ANY PURPOSE, ACCURACY, TRUTHFULNESS OR COMPLETENESS AND NO WILSON
PARTY SHALL HAVE ANY RECOURSE AGAINST THE CORNERSTONE PARTIES OR THEIR
COUNSEL, ADVISORS, AGENTS, OFFICERS, DIRECTORS OR EMPLOYEES FOR ANY
INFORMATION IN THE EVENT OF ANY ERRORS THEREIN OR OMISSIONS THEREFROM.
THE WILSON PARTIES EACH REPRESENT THAT THEY ARE SOPHISTICATED AND
EXPERIENCED IN ALL MATTERS RELATING TO PROPERTY AND, EXCEPT AS OTHERWISE
SET FORTH IN THE TRANSACTION AGREEMENTS, THEY ARE RELYING SOLELY ON SUCH
EXPERIENCE AND SOPHISTICATION IN MAKING ALL DECISIONS WITH RESPECT TO THE
TRANSACTIONS CONTEMPLATED HEREIN.
(b) LIMIT ON WARRANTIES.
(i) CORNERSTONE AND THE OPERATING PARTNERSHIP HEREBY ACKNOWLEDGE AND
AGREE THAT, EXCEPT AS SET FORTH IN THE TRANSACTION AGREEMENTS, THE WILSON
PARTIES HAVE NOT MADE, DO NOT MAKE AND SPECIFICALLY DISCLAIM ANY
REPRESENTATION OR WARRANTY, PROMISE, COVENANT, AGREEMENT OR GUARANTEE OF
ANY NATURE, EXPRESS OR IMPLIED, ORAL OR WRITTEN, AS TO OR REGARDING: (ii)
THE QUALITY, NATURE, ADEQUACY OR PHYSICAL CONDITION, WHETHER LATENT OR
PATENT, OF THE PROJECTS, INCLUDING, BUT NOT LIMITED TO, THE STRUCTURAL
ELEMENTS, FOUNDATION, APPURTENANCES, ACCESS, LANDSCAPING, PARKING
FACILITIES OR THE ELECTRICAL, MECHANICAL, HVAC, PLUMBING, SEWAGE OR
UTILITY SYSTEMS, FACILITIES OR APPLIANCES AT OR IN CONNECTION WITH THE
PROJECTS, IF ANY; (iii) THE EXISTENCE, QUALITY, NATURE, ADEQUACY,
PHYSICAL CONDITION, OR LOCATION OF ANY UTILITIES SERVING THE PROJECTS;
(iv) THE DEVELOPMENT POTENTIAL OF THE PROJECTS, THE HABITABILITY THEREOF
OR, MERCHANTABILITY OR FITNESS, SUITABILITY OR ADEQUACY FOR ANY
PARTICULAR PURPOSE; (v) THE ZONING OR OTHER LEGAL STATUS OF THE PROJECTS
A-102
<PAGE>
OR THE POTENTIAL USE OF THE PROJECTS; (vi) THE PROJECTS OR THEIR
OPERATIONS' COMPLIANCE WITH ANY APPLICABLE LEGAL REQUIREMENTS; (vii) THE
QUALITY OF ANY LABOR OR MATERIALS RELATING IN ANY WAY TO THE PROJECTS;
(viii) COMPLIANCE WITH ANY ENVIRONMENTAL PROTECTION, POLLUTION OR LAND
USE LAWS, RULES, REGULATIONS, ORDERS OR REQUIREMENTS, INCLUDING THE
EXISTENCE IN, ON OR UNDER THE PROJECTS OF ANY HAZARDOUS MATERIALS; OR
(ix) THE CONDITION OF TITLE TO THE PROJECTS OR THE NATURE, STATUS AND
EXTENT OF ANY RIGHT, ENCUMBRANCE, LICENSE, RESERVATION, COVENANT,
CONDITION, RESTRICTION OR ANY OTHER MATTER AFFECTING TITLE TO THE
PROJECTS. WITHOUT LIMITING AND SUBJECT TO THE FOREGOING, AND EXCEPT AS
SET FORTH IN THE TRANSACTION AGREEMENTS, CORNERSTONE AND THE OPERATING
PARTNERSHIP ON BEHALF OF THEMSELVES AND THEIR RESPECTIVE SUCCESSORS AND
ASSIGNS, WAIVE AND RELEASE THE WILSON PARTIES AND THEIR RESPECTIVE
SUCCESSORS AND ASSIGNS FROM ANY AND ALL DEMANDS, CLAIMS, LEGAL OR
ADMINISTRATIVE PROCEEDINGS, LOSSES, LIABILITIES, DAMAGES, PENALTIES,
FINES, LIENS, JUDGMENTS, COSTS OR EXPENSES WHATSOEVER (INCLUDING
ATTORNEYS' FEES AND DEFENSE COSTS), WHETHER DIRECT OR INDIRECT, KNOWN OR
UNKNOWN, FORESEEN OR UNFORESEEN, ARISING FROM OR RELATING TO THE PHYSICAL
CONDITION OF THE PROJECTS OR ANY LAW OR REGULATION APPLICABLE THERETO,
INCLUDING THE PRESENCE OR ALLEGED PRESENCE OF HARMFUL, TOXIC OR HAZARDOUS
SUBSTANCES IN, ON, UNDER OR ABOUT THE PROJECTS.
(ii) THE WILSON PARTIES HEREBY ACKNOWLEDGE AND AGREE THAT, EXCEPT AS
SET FORTH IN THE TRANSACTION AGREEMENTS AND IN THE INFORMATION STATEMENT,
THE CORNERSTONE PARTIES HAVE NOT MADE, DO NOT MAKE AND SPECIFICALLY
DISCLAIM ANY REPRESENTATION OR WARRANTY, PROMISE, COVENANT, AGREEMENT OR
GUARANTEE OF ANY NATURE, EXPRESS OR IMPLIED, ORAL OR WRITTEN, AS TO OR
REGARDING: (i) THE QUALITY, NATURE, ADEQUACY OR PHYSICAL CONDITION,
WHETHER LATENT OR PATENT, OF THE CORNERSTONE PROPERTIES, INCLUDING, BUT
NOT LIMITED TO, THE STRUCTURAL ELEMENTS, FOUNDATION, APPURTENANCES,
ACCESS, LANDSCAPING, PARKING FACILITIES OR THE ELECTRICAL, MECHANICAL,
HVAC, PLUMBING, SEWAGE OR UTILITY SYSTEMS, FACILITIES OR APPLIANCES AT OR
IN CONNECTION WITH THE CORNERSTONE PROPERTIES, IF ANY; (ii) THE
EXISTENCE, QUALITY, NATURE, ADEQUACY, PHYSICAL CONDITION, OR LOCATION OF
ANY UTILITIES SERVING THE CORNERSTONE PROPERTIES; (iii) THE DEVELOPMENT
POTENTIAL OF THE CORNERSTONE PROPERTIES, THE HABITABILITY THEREOF OR,
MERCHANTABILITY OR FITNESS, SUITABILITY OR ADEQUACY FOR ANY PARTICULAR
PURPOSE; (iv) THE ZONING OR OTHER LEGAL STATUS OF THE CORNERSTONE
PROPERTIES OR THE POTENTIAL USE OF THE CORNERSTONE PROPERTIES; (v) THE
CORNERSTONE PROPERTIES OR THEIR OPERATIONS' COMPLIANCE WITH ANY
APPLICABLE LEGAL REQUIREMENTS; (vi) THE QUALITY OF ANY LABOR OR MATERIALS
RELATING IN ANY WAY TO THE CORNERSTONE PROPERTIES; (vii) COMPLIANCE WITH
ANY ENVIRONMENTAL PROTECTION, POLLUTION OR LAND USE LAWS, RULES,
REGULATIONS, ORDERS OR REQUIREMENTS, INCLUDING THE EXISTENCE IN, ON OR
UNDER THE CORNERSTONE PROPERTIES OF ANY HAZARDOUS MATERIALS; OR (viii)
THE CONDITION OF TITLE TO THE CORNERSTONE PROPERTIES OR THE NATURE,
STATUS AND EXTENT OF ANY RIGHT, ENCUMBRANCE, LICENSE, RESERVATION,
COVENANT, CONDITION, RESTRICTION OR ANY OTHER MATTER AFFECTING TITLE TO
THE
A-103
<PAGE>
CORNERSTONE PROPERTIES. WITHOUT LIMITING AND SUBJECT TO THE FOREGOING,
AND EXCEPT AS SET FORTH IN THE TRANSACTION AGREEMENTS, THE WILSON PARTIES
ON BEHALF OF THEMSELVES AND THEIR RESPECTIVE SUCCESSORS AND ASSIGNS,
WAIVE AND RELEASE THE CORNERSTONE PARTIES AND THEIR RESPECTIVE SUCCESSORS
AND ASSIGNS FROM ANY AND ALL DEMANDS, CLAIMS, LEGAL OR ADMINISTRATIVE
PROCEEDINGS LOSSES, LIABILITIES, DAMAGES, PENALTIES, FINES, LIENS,
JUDGMENTS, COSTS OR EXPENSE WHATSOEVER (INCLUDING ATTORNEYS' FEES AND
DEFENSE COSTS), WHETHER DIRECT OR INDIRECT, KNOWN OR UNKNOWN, FORESEEN OR
UNFORESEEN, ARISING FROM OR RELATING TO THE PHYSICAL CONDITION OF THE
CORNERSTONE PROPERTIES OR ANY LAW OR REGULATION APPLICABLE THERETO,
INCLUDING THE PRESENCE OR ALLEGED PRESENCE OF HARMFUL, TOXIC OR HAZARDOUS
SUBSTANCES IN, ON, UNDER OR ABOUT THE CORNERSTONE PROPERTIES.
10. CONDITIONS PRECEDENT TO CLOSING.
10.1 CONDITIONS TO OBLIGATIONS OF THE WILSON PARTIES. The obligations of
each of the Participating Investors to contribute their Interests and of Wilson
to consummate the Merger and of each Wilson Party to perform the other covenants
and obligations to be performed by such Wilson Party on the Closing Date shall
be subject to satisfaction of the following conditions for the sole benefit of
the Wilson Parties (all or any of which may be waived, in whole or in part, by
the Wilson Parties or by the Wilson Representative on their behalf):
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
made by the Cornerstone Parties herein shall be true and correct in all
material respects as of the date made; PROVIDED, HOWEVER, that a failure of
any representations or warranties to be true and correct in all material
respects shall not give rise to a claim or right of termination by the
Wilson Parties hereunder so long as such matters do not result in an
aggregate loss or liability in excess of the sum of (i) three percent (3%)
of the sum of the Project Values for the Projects included in the
Transactions (adjusted prorata to reflect any Partially Participating
Projects) plus (ii) $5,000,000.
(b) DELIVERIES. The Cornerstone Parties shall have executed and
delivered to the Wilson Parties, all of the items and documents provided
herein for said delivery; PROVIDED, HOWEVER, that a failure to execute or
deliver any item or document shall not give rise to a claim or right of
termination by the Wilson Parties hereunder so long as such matters do not
have a Material Adverse Effect on the Transactions and unless the procedures
set forth in Section17.1 (DEFAULTS) have been followed.
(c) PERFORMANCE. The Cornerstone Parties shall have performed all
covenants and obligations undertaken by the Cornerstone Parties herein in
all material respects and materially complied with all conditions required
by this Agreement to be performed or complied with by them on or before the
Closing Date; provided, however, that a failure of any such performance
shall not give rise to a claim or right of termination by the Wilson Parties
hereunder so long as such matters do not have a Material Adverse Effect on
the Transactions and unless the procedures set forth in Section17.1
(DEFAULTS) have been followed.
(d) REIT STATUS. The Cornerstone Parties shall have been treated as a
REIT for Tax purposes in its most recent federal income tax return, and
shall be in compliance with all applicable laws, rules and regulations,
including the Code, necessary to permit it to be so treated. Cornerstone
shall not have taken any action or have failed to take any action which
could be expected to, alone or in conjunction with any other factors, result
in the loss of its status as a REIT for federal income tax purposes.
(e) PARTNERSHIP STATUS. The Operating Partnership shall be classified as
a partnership for federal and all state and local income tax purposes.
(f) CLOSING BY JANUARY 1, 1999. The Closing shall have occurred on or
before January 1, 1999.
A-104
<PAGE>
(g) WILSON THRESHOLD CONSENTS. A sufficient number of Investors shall
have consented to and/or elected to participate in the Transaction and
become Participating Investors (the "WILSON THRESHOLD CONSENTS"): to permit
the Cornerstone Parties to acquire, either directly through contributions
and/or as a result of mergers of the applicable Fund into the Operating
Partnership, the Funds and other Interests such that following the Closing
and any subsequent mergers or Project contributions, Completed Transactions
will have occurred with respect to all of the Funds and Fund Projects. The
date, if ever, that the Wilson Threshold Consents have been obtained is
herein referred to as the "WILSON THRESHOLD CONSENT DATE."
(h) NO TERMINATION. Neither the Wilson Parties nor the Cornerstone
Parties shall have exercised a right to terminate this Agreement and the
Transactions pursuant to the provisions of Section2.7(b) (TERMINATION FOR
BREACH OF WW&A REPRESENTATION OR WARRANTY).
(i) CORNERSTONE SHAREHOLDER APPROVALS. This Agreement, the Merger and
all other matters necessary to consummate the other Transactions to occur on
the Closing Date shall have been approved and adopted by the Cornerstone
Shareholders.
(j) OTHER WILSON CONSENTS. In addition to the Wilson Threshold Consents,
the Wilson Parties shall have obtained the consents and approvals described
in SCHEDULE 10.1(J) (OTHER WILSON CONSENTS).
(k) HSR ACT WAITING PERIOD. The waiting period (and any extension
thereof) applicable to the Transactions under the HSR Act, if applicable,
shall have expired or been terminated.
(l) NO PROCEEDING OR LITIGATION. No Action shall have been commenced by
or before any Governmental Authority against any party hereto, seeking to
restrain or materially and adversely alter the Transactions which, in the
reasonable, good faith determination of the Wilson Parties, is likely to
render it impossible or unlawful to consummate such Transactions; PROVIDED,
HOWEVER, that the provisions of this section shall not apply if the Wilson
Parties or Wilson Representative have directly or indirectly solicited or
encouraged any such Action;
(m) PGGM INVESTMENT. The $200,000,000 investment from PGGM in
Cornerstone described in the definition of "Permitted Transactions" has
closed or is closing simultaneously with the Closing and the PGGM
Registration Rights Agreement has become effective, unless the failure to
close arises out of a breach or a default by the Wilson Parties under this
Agreement;
(n) BYLAWS. The Amended and Restated Bylaws of Cornerstone attached as
EXHIBIT 2.4 (BYLAWS) are in full force and effect.
(o) NO CHANGE IN CONTROL TRANSACTION. No Change of Control Transaction
has occurred with respect to any of the Cornerstone Parties nor has any
agreement been entered to or announced with respect to any such Change of
Control Transaction. In this Agreement "CHANGE IN CONTROL TRANSACTION" means
any of the following occurrences:
(i) securities of Cornerstone representing twenty-five percent (25%)
or more of the combined voting power of Cornerstone's then outstanding
voting securities are acquired pursuant to a tender offer or an exchange
offer; or
(ii) a merger or consolidation is consummated in which Cornerstone is
a constituent corporation and which results in less than fifty percent
(50%) of the outstanding voting securities of the surviving or resulting
entity being owned by the former stockholders of Cornerstone;
(iii) any person becomes the beneficial owner, directly or
indirectly, of securities of Cornerstone representing twenty-five percent
(25%) or more of the combined voting power of Cornerstone's then
outstanding securities; or
(iv) all or substantially all of the assets of the Cornerstone Group
are sold, liquidated or distributed; or
A-105
<PAGE>
(v) the persons who were, as of the Execution Date, members of the
Cornerstone Board, cease for any reason to be a majority thereof.
Notwithstanding the foregoing, "Change of Control" shall in no event
refer to any of the foregoing if, as a result thereof, control of
Cornerstone is held by a person who is an affiliate of Cornerstone as
defined in the Securities Exchange Act of 1934, as amended, as of the
date hereof.
10.2 CONDITIONS TO OBLIGATIONS OF THE CORNERSTONE PARTIES. The obligations
of the Cornerstone Parties to accept the Interests to be contributed and
consummate the Merger, and the Cornerstone Parties' obligations to perform the
other covenants and obligations to be performed by the Cornerstone Parties on
the Closing Date shall be subject to satisfaction of the following conditions
for the sole benefit of the Cornerstone Parties (all or any of which may be
waived, in whole or in part, by the Cornerstone Parties):
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
made by the Wilson Parties herein are true and correct in all material
respects as of the date made; PROVIDED, HOWEVER, that a failure of a
representation or warranty to be true and correct in all material respects
shall not give rise to a claim or right of termination by the Cornerstone
Parties hereunder so long as such matters do not result in an aggregate loss
or liability in excess of the sum of (i) three percent (3%) of the sum of
the Project Values for the Projects to be included in the Transactions
(adjusted prorata to reflect any Partially Participating Projects) PLUS (ii)
$5,000,000.
(b) PERFORMANCE. The Wilson Parties shall have performed all covenants
and obligations undertaken by the Wilson Parties in all material respects
and materially complied with all conditions required by this Agreement to be
performed or complied with by them on or before the Closing Date; PROVIDED,
HOWEVER, that a failure of any such compliance shall not give rise to a
claim or right of termination by the Cornerstone Parties hereunder so long
as such matters do not have a Material Adverse Effect on the Transactions
and unless the procedures set forth in Section 17.1 (DEFAULTS) have been
followed.
(c) DELIVERIES. The Wilson Parties shall have executed and delivered to
the Cornerstone Parties (or caused the execution and delivery of) all of the
items and documents provided herein for said delivery; provided, however,
that a failure to execute or deliver a document or item shall not give rise
to a claim or right of termination by the Cornerstone Parties hereunder so
long as such matters do not have a Material Adverse Effect on the
Transactions and unless the procedures set forth in Section 17.1 (Defaults)
have been followed.
(d) CLOSING BY JANUARY 1, 1999. The Closing shall have occurred on or
before January 1, 1999.
(e) SHAREHOLDER APPROVALS. Cornerstone shall have received the
Cornerstone Shareholder Approvals.
(f) COMFORT LETTER. The Cornerstone Parties shall have received a
"comfort" letter from Coopers & Lybrand, LLP, in form and substance
reasonably satisfactory to Cornerstone.
(g) CORNERSTONE THRESHOLD CONSENTS. A sufficient number of Investors
shall have consented to and/ or elected to participate in the Transaction
and become Participating Investors to permit the Cornerstone Parties and
their affiliates to acquire, either directly through contributions and/or as
a result of mergers of the applicable Fund or Project Entity into the
Operating Partnership, WW&A, the Funds, and other Interests such that
following the Closing and any subsequent mergers, the Cornerstone Parties
will own the following (the "CORNERSTONE THRESHOLD CONSENTS (i) one hundred
percent (100%) of WW&A; (ii) one hundred percent (100%) of the interests in
the Funds; (iii) one hundred percent (100%) of the interests in the Fund
Projects, (iv) one hundred percent (100%) of the interests in the Projects
known as 188 Embarcadero, Exposition Center, and Crossroads; (v) the entire
interests of Peninsula Office Park Associates, L.P. (53.33%) and Peninsula
Office Park Investors, LLC
A-106
<PAGE>
(23.2883%) in Campus Drive Investment Company, the Project Entity which owns
Peninsula Office Park 4; (vi) the entire interests owned by a GP Party (as a
non-member manager), FUND-IV (54.0766%), Nassau Capital Real Estate
Partners, L.P. (4.8423%) and WWOOF IV Delaware, Inc. (7.7477%) in 120
Montgomery Associates, LLC, the Project Entity which owns 120 Montgomery;
(vii) the entire interests owned by a GP Party (as a non-member manager) and
FUND-IV (66.6667%) in Bixby Office Park Associates, LLC, the Project Entity
which owns Bixby Office Park; (viii) the Other Rockwood Interest and the
Rockwood Interests, if WWA Investors has acquired the Rockwood Interests
pursuant to the Rockwood Contract, as described in Section3.1(h) (ROCKWOOD
PROJECTS). The date, if ever, that the Cornerstone Threshold Consents have
been obtained is herein referred to as the "CORNERSTONE THRESHOLD CONSENT
DATE."
(h) NO TERMINATION. Neither the Wilson Parties nor the Cornerstone
Parties shall have exercised a right to terminate this Agreement and the
Transactions, pursuant to the provisions of Section2.7(b) (TERMINATION FOR
BREACH OF WW&A REPRESENTATIONS OR WARRANTIES).
(i) NO PROCEEDING OR LITIGATION. There shall be no effective injunction,
writ or preliminary restraining order or any order of any nature (nor any
Action pending seeking the imposition of such an injunction, writ,
preliminary restraining order or other order) issued by any Government
Authority of competent jurisdiction to the effect that the Transactions may
not be consummated, PROVIDED, HOWEVER, that the provisions of this Section
shall not apply if the Cornerstone Parties have directly or indirectly
solicited or encouraged any such Action.
(j) OTHER CORNERSTONE CONSENTS. In addition to the Cornerstone Threshold
Consents, the Cornerstone Parties shall have obtained the consents and
approvals described on SCHEDULE 10.2(J) (OTHER CORNERSTONE CONSENTS).
(k) ASSUMED LOANS. The outstanding principal balance of the Assumed
Loans at Closing is not less than $496,000,000 in the aggregate.
(l) HSR ACT WAITING PERIOD. The waiting period (and any extension
thereof) applicable to the Transactions under the HSR Act, if applicable,
shall have expired or been terminated.
(m) DISSENTERS. If there are any non-Participating Investors in the
Funds or in any Complete Transaction Project whose Interests will be
acquired by the Cornerstone Parties through a merger into the Operating
Partnership and if any such non-Participating Investors timely and
effectively exercise an available right to have its Interests purchased by
the Operating Partnership, as provided under Section15679.3 of the
California Corporations Code (an "ELECTING DISSENTING INVESTOR"), then, as a
condition under this Section10.2 (CONDITIONS TO OBLIGATIONS OF THE
CORNERSTONE PARTIES), the aggregate Consideration which would have been
received by all such Electing Dissenting Investors in the Transactions, if
they had been Participating Investors hereunder, shall not exceed
$50,000,000.
11. INDEMNIFICATION; CLAIMS AGAINST HOLDBACK.
11.1 BY THE WILSON PARTIES. Subject to the limitations on remedies and
amounts provided in this Section11, the Wilson Parties shall jointly and
severally indemnify, save and hold harmless Cornerstone, the Operating
Partnership and their respective directors, officers, employees, agents,
representatives and affiliates (each of which is a "CORNERSTONE INDEMNIFIED
PARTY"), from and against any and all costs, losses (including, without
limitation, diminution in value), liabilities, obligations, damages, lawsuits,
deficiencies, claims, demands, and expenses (whether or not arising out of
third-party claims), including interest, penalties, lost profits and other
losses, attorneys' fees and all amounts paid in investigation, defense or
settlement of any of the foregoing, incurred in connection with, arising out of,
resulting from or incident to (a) the inaccuracy of any representation made by,
or the failure to comply with any agreement of any Wilson Party set forth in
this Agreement or the Ancillary Agreements or in the certificate or certificates
delivered to the Cornerstone Parties pursuant to Section9.2 (DELIVERIES AT THE
CLOSING BY THE WILSON PARTIES) hereof, (b) any untrue statement of a material
fact contained in those sections of the Information Statement and Proxy
Statement
A-107
<PAGE>
specifically identified as describing or relating to the Wilson Parties, the
Funds, the Project Entities or the Projects or any omission to state any
material fact in any such sections of the Information Statement and Proxy
Statement required to be stated in such sections or necessary to make the
statements in such sections, in light of the circumstances in which they were
made, not misleading, (c) the breach by a Wilson Party of any of its fiduciary
duties (including, without limitation, duties of disclosure and duties regarding
allocation among the Participating Investors of the aggregate Contribution
Consideration and the determination of the financial and other terms to govern
the relationship of the Participating Investors among themselves with respect to
the Transactions) to any other person or entity arising in connection with the
transactions contemplated by this Agreement, or (d) any document filed or to be
filed by or on behalf of any Wilson Party or any direct or indirect shareholder,
partner, member or affiliate of a Wilson Party (the "WILSON COVERED PARTY") with
any Governmental Authority or any other document prepared or distributed by or
on behalf of any Covered Party in connection with the transactions contemplated
hereby, including any document distributed in connection with the solicitation
of consents to the consummation by the Wilson Party of the transactions
contemplated by this Agreement (PROVIDED, HOWEVER, that the foregoing shall not
apply to information provided by the Cornerstone Parties in writing to the
Wilson Covered Party specifically for inclusion or incorporation by reference in
any such document) (the foregoing costs and losses are referred to herein as
"WILSON LOSSES").
11.2 BY THE CORNERSTONE PARTIES. Subject to the limitations on remedies and
amounts provided in this Section11, the Cornerstone Parties shall jointly and
severally indemnify and save and hold harmless each of the Wilson Parties and
their respective directors, officers, employees, agents, representatives and
affiliates (each of which is a "WILSON INDEMNIFIED PARTY"; a Cornerstone
Indemnified Party or a Wilson Indemnified Party sometimes referred to herein as
an "INDEMNIFIED PARTY") from and against any and all costs, losses (including,
without limitation, diminution in value), liabilities, obligations, damages,
lawsuits, deficiencies, claims, demands, and expenses (whether or not arising
out of third-party claims), including interest, penalties, lost profits and
other losses, attorneys' fees and all amounts paid in investigation, defense or
settlement of any of the foregoing incurred in connection with, arising out of,
resulting from or incident to (a) the inaccuracy of any representation made by,
or the failure to comply with any agreement of, the Cornerstone Parties set
forth in this Agreement or in the Ancillary Agreements, (b) any untrue statement
of a material fact contained in the Proxy Statement or omission to state any
material fact in the Proxy Statement required to be stated in the Proxy
Statement or necessary in order to make the statements in the Proxy Statement,
in light of the circumstances under which they were made, not misleading;
provided, however, that the foregoing shall not apply to those sections of the
Proxy Statement specifically identified as describing or relating to the Wilson
Parties, the Funds, the Project Entities or the Projects or to any information
provided by one or more of the Wilson Parties specifically for inclusion or
incorporation in the Proxy Statement, (c) any untrue statement of a material
fact contained in those sections of the Information Statement specifically
identified as describing or relating to the Cornerstone Parties or the Equity
Securities or any omission to state any material fact in any such sections of
the Information Statement required to be stated in such sections or necessary to
make the statements in such sections, in light of the circumstances in which
they were made, not misleading, (d) the breach by a Cornerstone Party of any of
its fiduciary duties (including, without limitation, duties of disclosure) to
any other person or entity arising in connection with the transactions
contemplated by this Agreement, or (e) any document filed or to be filed by or
on behalf of any Cornerstone Party or any direct or indirect shareholder,
partner, member or affiliate of a Cornerstone Party (the "CORNERSTONE COVERED
PARTY") with any Governmental Authority or any other document prepared or
distributed by or on behalf of any Cornerstone Covered Party in connection with
the transactions contemplated hereby (provided, however, that the foregoing
shall not apply to information provided by the Wilson Parties in writing to the
Cornerstone Covered Party specifically for inclusion or incorporation by
reference in any such document) (the foregoing costs and loses are referred to
herein as "CORNERSTONE LOSSES"; Wilson Losses or Cornerstone Losses are
sometimes referred to herein as "LOSSES").
11.3 COOPERATION. Each Indemnified Party shall cooperate in all reasonable
respects with each party from which it is seeking indemnification hereunder (an
"INDEMNITOR") and its representatives (including
A-108
<PAGE>
without limitation its attorneys) in the investigation, trial and defense of any
lawsuit or action and any appeal arising therefrom; PROVIDED, HOWEVER, that the
Indemnified Party may, at its own cost, participate in negotiations,
arbitrations and the investigation, trial and defense of such lawsuit or action
and any appeal arising therefrom. The parties shall cooperate with each other in
any notifications to insurers.
11.4 CLAIMS FOR INDEMNIFICATION. If a claim for Losses (a "CLAIM") is to be
made by a Indemnified Party against the Indemnitor, the party claiming such
indemnification shall give written notice (a "CLAIM NOTICE") to the Indemnitor
as soon as practicable after the party entitled to indemnification becomes aware
of any fact, condition or event which may give rise to Losses for which
indemnification may be sought under this Section11. Such Claim Notice shall
specify the amount of the Claim asserted, if actually known to the Indemnified
Party and method of computation thereof, and shall contain a reference to the
provisions of this Agreement in respect of which such Claim arises. If any
lawsuit or enforcement action is filed by a third party against any Indemnified
Party, written notice thereof shall be given to the Indemnitor as promptly as
practicable (and in any event within 15 calendar days after the service of the
citation or summons). The failure of any Indemnified Party to give timely notice
hereunder shall not affect rights to indemnification hereunder, except to the
extent that the Indemnitor demonstrates actual damage caused by such failure.
After such notice, if the Indemnitor acknowledges in writing to the Indemnified
Party its obligation to indemnify the Indemnified Party hereunder against any
Losses that may result from such lawsuit or enforcement action, then the
Indemnitor shall be entitled, if it so elects at its own cost, risk and expense,
(i) to take control of the defense and investigation of such lawsuit or action,
(ii) to employ and engage attorneys of its own choice, subject to the reasonable
approval of the Indemnified Party, to handle and defend the same unless (A) the
named parties to such action or proceeding (including any impleaded parties)
include both the Indemnitor and the Indemnified Party and (B) the Indemnified
Party has been advised in writing by counsel that there exists or is reasonably
likely to exist a conflict of interest that would make it inappropriate for the
same counsel to represent both the Indemnified Party and the Indemnitor, in
which event the Indemnified Party shall be entitled, at the Indemnitor's cost,
risk and expense, to separate counsel of its own choosing, subject to the
reasonable approval of Indemnitor, and (iii) to compromise or settle such Claim,
which compromise or settlement shall be made only with the written consent of
the Indemnified Party, such consent not to be unreasonably withheld. If the
Indemnitor fails to assume the defense of such Claim within 15 calendar days
after receipt of the Claim Notice, the Indemnified Party against which such
Claim has been asserted will (upon delivering notice to such effect to the
Indemnitor) have the right to undertake, at the Indemnitor's cost and expense,
the defense, compromise or settlement of such claim on behalf of and for the
account and risk of the Indemnitor; provided, however, that such Claim shall not
be compromised or settled without the written consent of the Indemnitor, which
consent shall not be unreasonably withheld. In the event the Indemnified Party
assumes the defense of the Claim, the Indemnified Party will keep the Indemnitor
reasonably informed of the progress of any such defense, compromise or
settlement. The Indemnitor shall be liable for any settlement of any action
effected pursuant to and in accordance with this Section11 and for any final
judgment (subject to any right of appeal), and the Indemnitor agrees to
indemnify and hold harmless an indemnified party from and against any Losses by
reason of such settlement or judgment.
11.5 LIMITATION ON INDEMNIFICATION. No Wilson Indemnified Party will make a
claim under Section11.2 (BY THE CORNERSTONE PARTIES) unless the total of all
claims by all Wilson Indemnified Parties thereunder and theretofor exceeds, in
the aggregate, fifty percent (50%) of the Holdback Amount (the "THRESHOLD
AMOUNT"). No Cornerstone Indemnified Party will make a claim under Section11.1
(BY THE WILSON PARTIES) unless the total of all claims by all Cornerstone
Indemnified Parties thereunder and theretofor exceeds, in the aggregate, the
Threshold Amount. The Threshold Amount is a deductible amount, and the
indemnification obligation of the Indemnitor will not include the Threshold
Amount, but will include all other Losses subject to indemnification.
Notwithstanding the foregoing, (i) the Cornerstone Parties shall not be liable
for Losses above the Threshold Amount, in the aggregate, in excess of the
Holdback Amount; and (ii) the Wilson Parties shall not be liable for Losses
above the Threshold Amount, except to the extent of any cash, Units and/or
Shares remaining in the Indemnity Escrow Fund (hereinafter defined), (such
maximum
A-109
<PAGE>
amount described above with respect to either the Cornerstone Parties or the
Wilson Parties, as the case may be, is herein referred to as the "MAXIMUM
INDEMNIFICATION AMOUNT"), PROVIDED that in the event the Wilson Parties have
then paid the full Maximum Indemnification Amount to satisfy their obligations
hereunder and a Cornerstone Indemnified Party seeks further indemnity for a Loss
arising from a breach by only WW&A covered under Section11.1 (BY THE WILSON
PARTIES), the Cornerstone Indemnified Party shall be entitled to recover an
additional amount to the extent of the WW&A Holdback Shares in the WW&A Escrow
Fund, which shall reflect the then current value of the WW&A Holdback Shares
therein (the "MAXIMUM ADDITIONAL WW&A INDEMNIFICATION AMOUNT"). Notwithstanding
the foregoing, Claims and Losses relating to the following matters or
circumstances will not be limited to the deductible Threshold Amount or apply to
reduce the Maximum Indemnification Amount or Maximum Additional WW&A
Indemnification Amount, as the case may be: (A) a breach of the representation
and indemnity in Section14 relating to brokerage commissions; (B) a breach of
any of the representations, warranties or covenants contained in the Ancillary
Agreements (except as otherwise expressly provided therein); (C) a breach of
indemnity relating to Losses or liens created by or resulting from inspections
conducted by a party; (D) breach of the covenants set forth in
SectionSection6.12, 6.13 and 6.15; (E) an intentionally fraudulent
misrepresentation; (F) a failure of a party to pay costs or expenses required to
be paid by such party under the Transaction Documents, including closing
adjustments; and (G) a breach of the indemnity relating to income tax
liabilities of the Wilson Parties and the Cornerstone Parties. Payments made to
an Indemnified Party hereunder shall be limited to the amount of Losses that
remain after deducting therefrom any insurance proceeds and any indemnity,
contribution or other payment actually received by the Indemnified Party from
any person (other than Indemnitor) with respect thereto.
11.6 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. All Claims for
the breach of any representation or warranty under this Agreement must be
brought, if at all, by the filing of a Claim Notice on or before the first (1st)
anniversary of the Closing Date; and all Claims for the breach of any covenant
under this Agreement or the Ancillary Agreements must be brought, if at all, by
the filing of a Claim Notice on or before the date which is one (1) year from
and after the date when performance of the covenant was required (such date, the
"CLAIM NOTICE DATE"). Notwithstanding the foregoing, Claims and Losses relating
to the following matters and circumstances will not be subject to the foregoing
survival limitations: (A) a breach of the representation and indemnity in
Section14 relating to brokerage commissions; (B) a breach of any of the
representations or warranties contained in the Ancillary Agreements (except as
otherwise expressly provided therein); (C) a breach of an indemnity relating to
Losses and liens created by or resulting from inspections conducted by a party;
(D) a breach of the covenants set forth in SectionSection6.12, 6.13 and 6.15;
(E) a failure of a party to pay costs or expenses required to be paid by such
party under the Transaction Documents, including closing adjustments; and (F) a
breach of the indemnity relating to income tax liabilities of the Wilson Parties
and the Cornerstone Parties.
11.7 DISPUTES. Except as otherwise provided elsewhere in this Agreement, any
and all disagreement among the parties regarding interpretation of, or
obligations under, this Agreement or liability or the amount or payment of
damages or other monetary amounts payable pursuant to this Agreement (including
any disagreement relating to a claim for indemnification made under Section 11.1
(BY THE WILSON PARTIES) or Section 11.2 (BY THE CORNERSTONE PARTIES) will be
resolved in accordance with the provisions of Section 12 (DISPUTE RESOLUTION).
11.8 ESCROW FUND. At the Closing, the parties shall forthwith enter into an
escrow agreement in the form of EXHIBIT 11.8 (ESCROW AGREEMENT) attached hereto
to carry out the terms of this Agreement (the "ESCROW AGREEMENT"). At Closing,
in accordance with the Escrow Agreement, the Wilson Parties shall (i) cause the
Participating Investors to deposit into an escrow account cash, Units and/or
Shares in an aggregate amount equal to the Holdback Amount, with each Unit and
Share valued at the Effective Price regardless of the current trading price (the
"INDEMNITY ESCROW FUND"), (ii) cause the WW&A Shareholders to deposit into an
escrow account the WW&A Holdback Shares (the "WW&A ESCROW FUND"), (iii) pursuant
to Section1.3(i) (PRUNEYARD ADJUSTMENT), cause the Participating Investors
deriving Consideration from
A-110
<PAGE>
Pruneyard Inn and Pruneyard Place to deposit into an escrow account cash, Units
and/or Shares in an amount equal to the Pruneyard Holdback Amount, with each
Unit and Share valued at the Effective Price regardless of the current trading
price (the "PRUNEYARD ESCROW FUND"), (iv) pursuant to Section1.9 (WITHDRAWN
PROJECT AND NET PROJECT VALUE ADJUSTMENTS), cause the Participating Investors in
the Related Project Equity to deposit into an escrow account the holdback amount
described therein with each Unit and Share valued at the Effective Price
regardless of the current trading price (a "PROJECT VALUE ADJUSTMENT ESCROW
FUND") and (v) pursuant to the provisions of Section2.7 (BREACH OF
REPRESENTATIONS AND WARRANTIES), cause the WW&A Shareholders to deposit into an
escrow account Shares in an amount equal to the holdback amount described
therein, with each Share valued at the Effective Price regardless of the current
trading price (the "WW&A VALUE ADJUSTMENT ESCROW FUND"). The Indemnity Escrow
Fund, the WW&A Escrow Fund, the Pruneyard Escrow Fund, the Project Value
Adjustment Escrow Funds, and the WW&A Value Adjustment Escrow Fund are
collectively referred to herein as the "ESCROW FUND"). Only the Indemnity Escrow
Fund and the WW&A Escrow Fund shall be available to satisfy Claims for Losses.
An escrow agent reasonably acceptable to the parties ("ESCROW AGENT") shall hold
and dispose of the Escrow Fund in accordance with the terms of this Agreement
and the Escrow Agreement. The parties to this Agreement understand and agree to
the terms of the Escrow Agreement, which when duly executed shall be
incorporated as part of this Agreement.
11.9 LIMITATION ON OBLIGATIONS. Except as set forth in Section11.5
(LIMITATION ON INDEMNIFICATION), the Cornerstone Parties' sole recourse for
Losses for which the Wilson Parties shall be liable under Section11.1 (BY THE
WILSON PARTIES) shall be to recover against the Indemnity Escrow Fund and WW&A
Escrow Fund as set forth in this Section11 (INDEMNIFICATION; CLAIMS AGAINST
HOLDBACK) and the Escrow Agreement, and the Wilson Parties shall not be liable
for Losses, in the aggregate, under Section11.1 (BY THE WILSON PARTIES) in
excess of an amount which, as of any date, is greater than an amount equal to
the Maximum Indemnification Amount and, subject to the provisions described in
Section11.5 (LIMITATION ON INDEMNIFICATION), the Maximum Additional WW&A
Indemnification Amount. Except as set forth in Section11.5 (LIMITATION ON
INDEMNIFICATION), the Cornerstone Parties shall not be liable for Losses, in the
aggregate, under Section11.2 (BY THE CORNERSTONE PARTIES) in excess of an amount
which, as of any date, is greater than the Holdback Amount (which is the Maximum
Indemnification Amount for the Cornerstone Parties).
11.10 WILSON REPRESENTATIVE. In accordance with Section20.10
(REPRESENTATIVE), any Claim by or on behalf of a Wilson Indemnified Party may be
asserted only by the Wilson Representative and any approval, consent, settlement
or other determination to be made by a Wilson Indemnified Party under this
Section11 and the Escrow Agreement shall be made by the Wilson Representative,
and the Cornerstone Parties and Escrow Agent may rely fully on the acts of the
Wilson Representative as the acts of the Wilson Indemnified Parties.
12. DISPUTE RESOLUTION.
12.1 DISPUTES. Except as otherwise specifically provided in this Agreement
or the Ancillary Agreements, if any parties hereto have any disagreement
regarding the interpretation of, or obligations under, this Agreement or the
Ancillary Agreements, or the amount or payment of damages or other amounts
payable hereunder or thereunder (a "DISPUTE"), they must first deliver to the
other affected parties a notice of the Dispute (the "DISPUTE NOTICE") that
describes in reasonable detail the nature of the Dispute, the amounts claimed or
remedy demanded, and the basis for each claim. For fifteen (15) days after the
effective date of the Dispute Notice, the disputing parties (the "DISPUTING
PARTIES") will attempt in good faith to settle the matter by mutual agreement.
If no settlement is reached in this fifteen (15) days, the Dispute will be
submitted to the chief executive officer of each Disputing Party or of the
general partner thereof or the Wilson Representative. In the case of the Wilson
Parties, the Wilson Representative shall exclusively act for and on behalf of
any of the Wilson Parties which is a Disputing Party or Parties and all
references in this Section12 to such a Disputing Party shall therefore be deemed
to refer to the Wilson Representative in their representative capacity; provided
that on a case by case basis, the Wilson Representative may delegate this
function to the Participating Investors involved in the Dispute.
A-111
<PAGE>
12.2 MEDIATION. Except as otherwise provided in this Agreement, if the
parties thereto have not resolved a Dispute within thirty (30) days after the
effective date of a Dispute Notice, the Disputing Parties will submit the
Dispute to mediation by a mediator at a venue chosen by the Disputing Parties.
If the venue of the mediation is not chosen within forty (40) days after the
effective date of the Dispute Notice, the mediation will be held (i) in San
Francisco, California, if the party against whom a Dispute Notice is first
submitted is a Wilson Party, or (ii) in New York, New York, if the party against
whom the Dispute Notice is first submitted is a Cornerstone Party. If the
mediator is not selected by agreement of the Disputing Parties within forty (40)
days after the effective date of the Dispute Notice, the mediator will be chosen
by the American Arbitration Association ("AAA") of the venue agreed upon by the
parties or selected under the default provision of this Section, and the
mediator so chosen by the AAA must be a judge or retired judge who has conducted
at least three commercial mediations in the preceding three (3) year period, and
who has practiced law in the area of mergers and acquisitions or securities and
public or private investments or heard at least three cases involving
substantial issues in these areas. The mediation shall be conducted under such
procedures as may be agreed to by the parties, or failing such agreement, under
the Commercial Mediation Rules of the AAA.
12.3 VENUE FOR ACTIONS. If a Dispute is not resolved in accordance with
Section12.1 (DISPUTES) and Section12.2 (MEDIATION) or is otherwise subject to
legal or equitable action (including under Section12.5 (EMERGENCY INJUNCTIVE
RELIEF)), that action must be brought in the U.S. District Court for the
Northern District of California, or, if venue in the federal courts is not
legally permitted, a court of appropriate jurisdiction sitting in San Francisco,
California, if the action is brought against a Wilson Party, or the U.S.
District Court for the Southern District of New York, or if venue in the federal
courts is not legally permitted, a court of appropriate jurisdiction sitting in
New York, New York, if the claim is brought against a Cornerstone Party. Each
party hereto hereby irrevocably submits itself to the jurisdiction of a court of
competent jurisdiction in these cities, and to the extent permitted by
applicable law, hereby waives, and agrees not to assert, by way of motion, as a
defense or otherwise, in any such action, the defense that the action is
improper, or that this Agreement and the Ancillary Agreements, or the subject
matter thereof, may not be enforced in or by such courts. Without limiting the
foregoing, each of the parties hereto consents to process being served on it in
any such action at the address of such party as set forth in Section19
(NOTICES).
12.4 LEGAL FEES. The non-prevailing party in any action described in this
Section12 (DISPUTE RESOLUTION) will pay the reasonable expenses (including
attorneys' fees, experts' and consultants' fees and other costs and expenses
reasonably incurred in connection with the Dispute) of the prevailing party and
the judicial fees and court costs associated with the action. A party will be
deemed to be the prevailing party if it prevails on the most significant
disputed matters. In the event of a bankruptcy filing by a party hereto, the
costs and fees of the other parties hereto in dealing with any default or
enforcing their rights in bankruptcy will constitute an "actual pecuniary loss"
that must be paid by the bankruptcy debtor party in accordance with the United
States Bankruptcy Code. For purposes of calculation of the amount of this
"actual pecuniary loss", the fees for the in-house counsel of a non-debtor party
will be charged at the prevailing rate for outside counsel of similar
experience.
12.5 EMERGENCY INJUNCTIVE RELIEF. Notwithstanding anything else in this
Section 12 (DISPUTE RESOLUTION), any party may, at any time and without
completing any of the foregoing procedures, request emergency injunctive or
other equitable relief in a court of appropriate jurisdiction if such relief is
required to protect such party's assets, PROVIDED, HOWEVER, that any Dispute
that gave rise to a request for emergency relief may be submitted to the Dispute
resolution procedures of this Section12 (DISPUTE RESOLUTION).
13. ASSIGNMENT. Except as expressly provided or contemplated herein, no
party may assign this Agreement or any interest therein to any other person
without the prior written consent of the other parties hereto, PROVIDED that the
parties acknowledge and agree that certain of the obligations and duties of the
parties hereto will be performed by their respective affiliates as and to the
extent contemplated herein.
A-112
<PAGE>
14. NO BROKERS. The Wilson Parties, severally and not jointly, on the one
hand, and the Cornerstone Parties jointly, on the other hand, covenant and agree
one with the other that, except as set forth in Section9.6 (EXPENSES), no real
estate commissions, finders' fees or brokers' fees have been or will be incurred
in connection with this Agreement or the Transactions. The Wilson Parties,
severally and not jointly, on the one hand, and the Cornerstone Parties, on the
other hand, shall indemnify, defend and hold each other harmless from and
against any claims, liabilities, obligations or damages for commissions,
finders' or brokers' fees resulting from or arising out of Closing and
consummation of the Transactions asserted against either party by any broker or
other person claiming by, through or under the indemnifying party or whose claim
is based on the indemnifying party's acts or omissions. The provisions of this
Section14 shall survive the Closing or other termination of this Agreement.
15. CASUALTY LOSS.
15.1 MAINTENANCE OF INSURANCE POLICIES. The GP Parties shall cause the
Related Project Entities to continue to maintain in all material respects,
through the Closing Date, the fire and extended coverage insurance and other
casualty (including DIC) and liability insurance coverage with respect to the
Related Projects (the "INSURANCE POLICIES") which are currently in effect (or
reasonably comparable Insurance Policies obtained in the Ordinary Course).
15.2 CASUALTIES.
(a) If at any time prior to the Closing Date all or any portion of any
Project (each, a "DAMAGED PROPERTY") is destroyed or damaged as a result of
fire or any other casualty (a "CASUALTY"), the Wilson Parties shall promptly
give written notice thereof (the "CASUALTY NOTICE") to the Cornerstone
Parties.
(b) If the damaged Property is owned (i) by a Project Entity in which
the Fund has an interest, or (ii) by a Project Entity with respect to which
all of the interests (direct or indirect) in such Project Entity will be
contributed to the Operating Partnership pursuant to Section1 (CONTRIBUTION
TRANSACTIONS), the Cornerstone Parties shall not have the right to terminate
this Agreement as to the damaged Property, but instead, subject to the
rights of any holders of existing debt and to the provisions of the
organizational documents for the Related Project Entity, (A) the proceeds of
any applicable Insurance Policy shall be paid to the Operating Partnership,
and (B) all unpaid claims and rights in connection with the Casualty shall
be assigned to the Operating Partnership at Closing without in any manner
affecting the consideration payable to the Wilson Parties hereunder.
(c) If the damaged Property is a Partially Participating Project and the
estimated cost to repair or restore the damaged Property following and as a
result of the Casualty exceeds 15% of the Project Value of such damaged
Property (such a Casualty, a "MAJOR CASUALTY"), the Cornerstone Parties may
terminate this Agreement as to the Interests in the Project Entity owning
the damaged Property only by written notice to the Wilson Parties within
fifteen (15) days after receipt of the Casualty Notice. If in that event,
such damaged Property shall be treated as a Withdrawn Project under
Section1.9 (WITHDRAWN PROJECT AND NET PROJECT VALUE ADJUSTMENTS), and this
Agreement shall continue in full force and effect as to all other Projects.
If the Cornerstone Parties do not elect to so terminate, the provisions of
clause (b) of this Section15.2 shall apply.
15.3 INTERIM REPAIRS. If a Project is the subject of a Casualty but the
Cornerstone Parties are either not entitled to or do not terminate this
Agreement as to such damaged Property pursuant to the provisions of this
Section15 (CASUALTY LOSS), then the appropriate GP Party shall prior to the
Closing Date cause all temporary repairs to be made to the damaged Property as
shall be required to prevent further deterioration and damage to the damaged
Property and to protect public health and safety; PROVIDED, that the cost of any
such repairs shall not exceed the amount of proceeds made available to such GP
Party. The appropriate GP Party shall have the right to be reimbursed from the
proceeds of any insurance with respect to the damaged Property for the cost of
such temporary repairs.
A-113
<PAGE>
15.4 EARTHQUAKE CASUALTY Notwithstanding anything to the contrary in
Section15.2 (CASUALTIES), if at any time prior to the Closing Date all or any
portion of the Projects are destroyed or damaged as a result of an earthquake or
earthquakes (an "EARTHQUAKE CASUALTY"), and the aggregate estimated cost to
repair or restore all resulting damaged Properties following and as the result
of the Earthquake Casualty exceeds the aggregate amount of DIC Insurance
(without regard to any deductible amount) then maintained by the Wilson Parties,
the Cornerstone Parties may elect to terminate this Agreement only in its
entirety by written notice to the Wilson Parties within fifteen (15) days after
receipt of the related Casualty Notice.
16. CONDEMNATION.
(a) If at any time prior to the Closing Date proceedings are instituted
with respect to a Project (a "CONDEMNED PROJECT") which results in a taking
of all or any part of such Condemned Project or any improvements thereon or
which causes access to such Condemned Project to be taken or materially
diminished, the Wilson Parties shall promptly give written notice thereof (a
"CONDEMNATION NOTICE") to the Cornerstone Parties.
(b) If a Condemned Project is owned by a Project Entity (i) in which a
Fund has an interest, or (ii) with respect to which all of the interests,
(direct or indirect) have been contributed to the Operating Partnership in
accordance with Section1 (CONTRIBUTION TRANSACTIONS), the Cornerstone
Parties shall not have the right to terminate this Agreement as to the
Condemned Property and at Closing, subject to the rights of the holder of
any existing mortgage and the organizational documents for the Related
Project Entity, the proceeds relating to such taking shall be assigned to
the Operating Partnership, the same to be the Operating Partnership's sole
property, and the Operating Partnership shall have the sole right to settle
any claims in connection with the Condemned Property, without in any manner
affecting the consideration payable to the Wilson Parties hereunder.
(c) If a Condemned Project is a Partially Participating Project and the
loss in value of the Condemned Property resulting from and immediately
following the taking exceeds fifteen percent (15%) of the Project Value
thereof (a "MAJOR TAKING"), the Cornerstone Parties may terminate this
Agreement as to the Interests in the Project Entity owning the Condemned
Property only by written notice to the Wilson Parties within fifteen (15)
days after receipt of the Condemnation Notice. In that event, the Condemned
Property shall be treated as a Withdrawn Project under Section1.9 (WITHDRAWN
PROJECT AND NET PROJECT VALUE ADJUSTMENTS) and this Agreement shall continue
in full force and effect as to all other Projects.
17. DEFAULT AND REMEDIES.
17.1 DEFAULTS. A party will be deemed to be in default (a "DEFAULT") under
this Agreement if such party (i) fails to perform or observe any covenant,
agreement or obligation of such party to be performed or observed before the
Closing Date and such failure has not been remedied or corrected within thirty
(30) days after notice of such failure from a non-defaulting party, or, if such
cure cannot reasonably be effected within a thirty (30) day period, the failure
of such party to commence such cure within such thirty (30) day period and to
prosecute such cure diligently and continuously thereafter, and, in any event,
to effect such cure within ninety (90) days after such original notice of such
failure, provided the Closing Date shall be automatically extended to the extent
necessary to permit such cure periods, or (ii) such party fails to consummate
the Closing in accordance with the terms of this Agreement, notwithstanding that
all conditions for the benefit of such party to Closing have been satisfied or
waived, and such failure is not remedied or corrected within five (5) days after
notice of such failure from a non-defaulting party.
17.2 REMEDIES.
(a) GENERAL. In the event a Default occurs and the Closing has not
occurred, and subject to resolution of a dispute regarding the existence of
such Default in accordance with Section12 (DISPUTE RESOLUTION), the
non-defaulting party's remedies shall only be either (i) to terminate this
Agreement by
A-114
<PAGE>
notice to the defaulting party, or (ii) to obtain specific performance of
the defaulting party's obligations under this Agreement.
(b) SPECIFIC PERFORMANCE. The parties agree that irreparable damage
would occur if any of the covenants, agreements and obligations of a party
under the Transaction Agreements were not performed or observed, or if the
Closing were not consummated, in accordance with the terms thereof. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of the Transaction Agreements or to enforce
specifically the terms and conditions of the Transaction Agreements in
accordance with SectionSection12.3 (VENUE FOR ACTIONS) and 12.5 (EMERGENCY
INJUNCTIVE RELIEF).
18. TERMINATION.
18.1 TERMINATION. This Agreement may be terminated by the written agreement
of the Cornerstone Parties and the Wilson Parties (or the Wilson Representative
on their behalf) or by written notice given by the terminating party to the
other party as follows:
(a) by the Cornerstone Parties, if a Default has occurred with respect
to the Wilson Parties and the Cornerstone Parties elect to terminate
pursuant to Section17.2(a)(i) (GENERAL);
(b) by the Wilson Parties, if a Default has occurred with respect to the
Cornerstone Parties and the Wilson Parties elect to terminate pursuant to
Section17.2(a)(i) (GENERAL);
(c) by the Wilson Parties, if the Wilson Threshold Consent Date has not
occurred by September 30, 1998 for any reason other than the terminating
party's Default, PROVIDED the Cornerstone Parties, in their discretion, may
extend said September 30, 1998 date to December 1, 1998 upon notice to the
Wilson Parties on or before September 30, 1998;
(d) by the Cornerstone Parties, if the Cornerstone Threshold Consent
Date has not occurred by September 30, 1998 for any reason other than the
terminating party's Default, PROVIDED the Wilson Parties, in their
discretion, may extend said September 30, 1998 date to December 1, 1998 upon
notice to the Cornerstone Parties on or before September 30, 1998;
(e) by either the Wilson Parties or the Cornerstone Parties, if after
submission of the Proxy to the Cornerstone Shareholders, sufficient
shareholders of Cornerstone have responded and, based on such responses, the
Cornerstone Shareholder Approvals will not be obtained for any reason other
than the terminating party's Default and the Cornerstone Shareholder
Approvals have not been received (due to a change in vote or other factors)
within thirty (30) days thereafter;
(f) by either the Wilson Parties or the Cornerstone Parties, if any
judgment, injunction, order, decree or any action by any Governmental
Authority preventing the consummation of the Transactions or requiring
actions as a condition precedent to the consummation of the Transactions
which would a Material Adverse Effect on the terminating party shall have
become final and nonappealable;
(g) by the Cornerstone Parties if any of the conditions to the
obligations of the Cornerstone Parties set forth in Section10.2 (CONDITIONS
TO OBLIGATIONS OF THE CORNERSTONE PARTIES) is not satisfied at the Closing
for any reason;
(h) by the Wilson Parties if any of the conditions to the obligations of
the Wilson Parties set forth in Section10.1 (CONDITIONS TO OBLIGATIONS OF
THE WILSON PARTIES) is not satisfied at the Closing for any reason; and
(i) automatically at 12:01 a.m. San Francisco time, January 1, 1999,
if (i) the Closing shall not have occurred on or before the Closing Date
or such later date, and (ii) this Agreement has not previously been
terminated pursuant to this Section18.1, unless a party is exercising a
right provided under Section17.1 (DEFAULT).
A-115
<PAGE>
18.2 EFFECT OF TERMINATION. In the event of termination of this Agreement as
provided in this Section18, this Agreement shall terminate and have no further
force and effect, without any liability or obligation of any of the parties
hereto, other than under SectionSection 6.11 (NO SOLICITATION), 6.12
(CONFIDENTIALITY), 6.14 (STANDSTILL AGREEMENT), 14 (NO BROKERS), 19.14
(EXPENSES), and 20.10 (REPRESENTATIVE), as applicable.
19. NOTICES. All notices, demands, requests, or other writings in this
Agreement provided to be given, made or sent, or which may be given, made or
sent, by any party hereto to another, shall be in writing and shall be delivered
by depositing the same with any nationally recognized overnight delivery service
with all transmittal fees prepaid, properly addressed, and sent to the following
addresses, with a courtesy facsimile copy sent by fax, provided that failure to
provide the courtesy copy will not affect the validity of the notice if the
actual notice is duly delivered:
If to the Cornerstone Parties:
c/o Cornerstone Properties Inc.
126 East 56th Street
New York, NY 10022
Telecopy (212) 605-7199
Attention: President
with a copy to:
King & Spalding
Suite 5000
191 Peachtree Street, NE
Atlanta, Georgia 30303
Attention: William B. Fryer, Esq.
A-116
<PAGE>
If to the Wilson Parties:
c/o William Wilson & Associates
2929 Campus Drive, Suite 450
San Mateo, CA 94403
Attention: Chief Operating Officer
with a copy to:
Farella Braun & Martel, LLP
235 Montgomery St.--Suite 3000
San Francisco, CA 94104
Attention: Jeffrey P. Newman, Esq.
or to such other address as either party may from time to time designate by
written notice to the other. Notices given by overnight delivery service as
aforesaid shall be deemed received and effective on the first business day
following such dispatch. Notices may be given by counsel for the parties
described above, and such notices shall be deemed given by said party, for all
purposes hereunder.
20. MISCELLANEOUS.
20.1 LIMITED SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Unless otherwise
expressly provided herein, no representation or warranty in this Agreement shall
survive the Closing.
20.2 ENTIRE AGREEMENT; NO THIRD-PARTY RIGHTS. This Agreement, together with
the documents and instruments to which one or more of the parties hereto are
parties and to which reference is made herein, constitutes the entire agreement
between the parties and incorporates and supersedes all prior negotiations and
discussions between the parties. This Agreement shall be binding upon and inure
solely to the benefit of each party hereto and their successors and permitted
assigns, and nothing in the Agreement, express or implied, is intended to confer
upon any other person (other than the Investors and Participating Investors) any
rights or remedies of any nature whatsoever under or by reason of this
Agreement.
20.3 AMENDMENT. This Agreement cannot be amended, waived or terminated
orally, but only by an agreement in writing signed by each party hereto. The
Wilson Representative may agree to amendments to modify the Transaction
Agreements to the extent necessary or desirable in its reasonable business
judgment, to achieve the purposes of the Transaction Agreements, subject to any
restrictions set forth in a particular Investor's Consent. The parties shall not
unreasonably withhold, condition or delay their approval to any amendment to the
Transaction Agreements to the extent such amendment is required to preserve
Cornerstone's status as a REIT or to preserve the non-recognition of the Merger
as a tax-free reorganization or the non-cash portions of the Contribution
Transactions as non-taxable transactions.
20.4 GOVERNING LAW. This Agreement shall be interpreted and governed by the
laws of the State of California, without regard to its rules of conflicts of
laws and shall be binding upon the parties hereto and their respective
successors and assigns.
20.5 SECTION HEADINGS. The caption headings in this Agreement are for
convenience only and are not intended to be part of this Agreement and shall not
be construed to modify, explain or alter any of the terms, covenants or
conditions herein contained.
20.6 SEVERABILITY. If any term, covenant or condition of this Agreement is
held to be invalid, illegal or unenforceable in any respect, this Agreement
shall be construed without such provision.
20.7 NO OTHER RIGHTS OR OBLIGATIONS. Nothing contained in this Agreement
shall be deemed to create any rights or obligations of partnership, joint
venture or similar association between any of the Wilson Parties and the
Cornerstone Parties.
A-117
<PAGE>
20.8 COUNTERPARTS. This Agreement may be executed by the parties hereto in
counterparts, all of which together shall constitute a single Agreement.
20.9 CONSTRUCTION. All references herein to any Article, Section, Schedule
or Exhibit shall be to the Articles and Sections of this Agreement and to the
Schedules and Exhibits annexed hereto unless the context clearly dictates
otherwise. All of the Schedules and Exhibits annexed hereto are, by this
reference, incorporated herein.
20.10 REPRESENTATIVE.
(a) AUTHORITY OF WILSON REPRESENTATIVE. The Wilson Representative is a
special purpose limited liability company formed for the purpose of
exercising the rights and remedies of the Wilson Parties and Investors as
set forth herein. The Wilson Representative may act through its managers or
officers, duly appointed in writing with notice to the Cornerstone Parties.
Any approval, consent, mutual satisfaction or other determination to be made
or action to be taken under the Transaction Agreements by a Wilson Party,
Fund, or a Project Entity (or a Participating Investor to the extent set
forth in the Consents) may be made in writing by the Wilson Representative
on their behalf. If any for any reason the Wilson Representative should
cease to exist, a successor entity shall be selected by William Wilson III
to serve as the Wilson Representative. The Cornerstone Parties may rely
fully on the acts of the Wilson Representative as the acts of the Wilson
Parties, Fund, Project Entity or Participating Investors, and the Wilson
Parties do, and such other parties shall, release the Cornerstone Parties
from any claim, loss or liability they may incur as a result of the actions
or omissions of the Wilson Representative or the Cornerstone Parties'
reliance thereon.
(b) EXCULPATION. Neither the Wilson Representative nor any of its
members, managers, officers, agents or employees shall be liable for any
action taken or omitted to be taken by them as Wilson Representative under
or in connection with the Transaction Agreements except for their own gross
negligence or willful misconduct. Without limiting the foregoing, the Wilson
Representative: (i) may consult with legal counsel, independent public
accountants and other experts selected by it and shall not be liable for any
action taken or omitted to be taken in good faith by them with the advice of
such counsel, accountant or experts; (ii) makes no warranty or
representation to the Investors and shall not be responsible to the
Investors for any statements, warranties or representations made in or in
connection with the Transaction Agreements; (iii) shall not have any duty to
ascertain or to inquire as to the performance or observance of any of the
terms, covenants or conditions of the Transaction Agreements on the part of
the Cornerstone Parties; (iv) shall not be responsible to any Investors for
the due execution, legality, validity, enforceability, genuineness,
sufficiency or value of the Transaction Agreements, or any other instrument
or document furnished pursuant hereto; and (v) shall incur no liability
under or in respect of the Transaction Agreements by acting upon any notice
(including notice by telephone), consent, certificate or other instrument or
writing (which may be by facsimile) believed by them to be genuine and
signed or sent by the proper party or parties.
(c) INDEMNIFICATION OF THE WILSON REPRESENTATIVE. By executing their
Consents, Participating Investors shall be deemed to have agreed to defend,
indemnify, and hold the Wilson Representative and its members, managers,
officers, agents and employees harmless, ratably in accordance with their
Consideration, from and against any and all liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements of any kind or nature whatsoever which may be imposed on,
incurred by, or asserted against the Wilson Representative in any way
relating to or arising out of Transaction Agreements or any action taken or
omitted by the Wilson Representative under Transaction Agreements, PROVIDED
that the Participating Investors shall not be liable for any portion of such
liabilities, obligations, losses, damages, penalties, actions, judgments,
suits, costs, expenses or disbursements resulting from the Wilson
Representative's gross negligence or willful misconduct or the gross
negligence or willful misconduct of its members, managers, officers, agents
and employees. Without limitation of the foregoing, the Wilson
Representative and its members,
A-118
<PAGE>
managers, officers, agents and employees may reimburse themselves for any
amount indemnified hereunder out of any funds or Consideration otherwise
distributable to the Investors.
(d) AUTHORITY OF CORNERSTONE PARTIES REPRESENTATIVES. Any approval,
consent, mutual satisfaction or similar determination required to be made
hereunder by the Cornerstone Parties or any person included in such term
shall be granted exclusively by the "CORNERSTONE PARTIES REPRESENTATIVES,"
who for purposes of this Agreement, until further notice to the Wilson
Representative, shall be the persons listed on SCHEDULE 20.10 (CORNERSTONE
PARTIES REPRESENTATIVE).
20.11 INTERPRETATION. Whenever used herein, the singular number shall
include the plural, the plural shall include the singular, the use of any gender
shall be applicable to all genders, and includes or including means includes or
including without limitation.
20.12 UPDATES TO SCHEDULE. Each Schedule hereto may be amended prior to
Closing by the party responsible therefor. If the party receiving such Schedule
does not object to the revised Schedule within ten (10) days after receipt
thereof, such party shall be deemed to have approved the revised schedule,
PROVIDED such party shall have received a notice soliciting approval of the
revised schedule which notice stated therein that a failure to respond to such
request within such ten (10) day period would result in such revised schedule
being deemed to be approved.
20.13. SPECIAL CLOSING EXPENSE CREDIT. Set forth on SCHEDULE 20.13 (SPECIAL
CLOSING EXPENSE CREDIT) is a schedule of Closing expense credits available to
the Cornerstone Parties for application as provided in this Section20.13 with
respect to Withdrawn Projects and Partially Participating Projects. If a Project
becomes a Withdrawn Project, the Cornerstone Parties will receive a credit equal
to the amount set forth for that Project on SCHEDULE 20.13 (SPECIAL CLOSING
EXPENSE CREDIT). If a Project becomes a Partially Participating Project, the
Cornerstone Parties will receive a credit equal to the product of (A) the amount
set forth for that Project on SCHEDULE 20.13 (SPECIAL CLOSING EXPENSE CREDIT),
MULTIPLIED BY (B) the quotient obtained by DIVIDING (1) the Consideration which
would have been paid to any non-Participating Investors whose Interests will not
be acquired by the Cornerstone Parties through a merger of a Fund or Project
Entity into the Operating Partnership or through a contribution of a Project by
a Related Project Entity (the "INCLUDED DISSENTING INVESTORS") (before taking
into account any adjustments pursuant to this Section20.13) if they had been
Participating Investors by (2) the Consideration (before taking into account any
adjustments pursuant to this Section20.13) that would have been paid to all
Investors in such Project, had such Project been a Complete Transaction Project.
The aggregate credit available to the Cornerstone Parties pursuant to this
Section20.13 may be applied as a credit against the obligations of the
Cornerstone Parties with respect to Closing Costs, prorations and other costs
and expenses to be settled or paid as of the Closing. The burden of this credit
shall be allocated amongst the WW&A Shareholders, the Participating Investors,
and the Included Dissenting Investors (other than with respect to Withdrawn
Projects) in the same manner as comparable Wilson Costs under Section1.3(d)
(CERTAIN CASH ADJUSTMENTS), or in such other manner as the Wilson Parties and
the Cornerstone Parties may reasonably determine.
20.14 SPECIAL POST-EXECUTION PROVISION. The parties acknowledge that the
items described on SCHEDULE 20.14 (SPECIAL POST-EXECUTION PROVISION) have not
been finalized as of the Execution Date and agree to finalize and/or attach such
items on or before July 10, 1998, as follows: SCHEDULE 20.14 (SPECIAL POST-
EXECUTION PROVISION) describes the party responsible for providing the Schedules
or other information required to finalize and/or attach such items, and such
responsible party shall, in good faith, provide such Schedules or other
information as soon as practicable to the other party for approval, which
approval shall not be unreasonably withheld, conditioned or delayed. Upon the
finalization of such items, the provisions of this Section20.14 shall be of no
further force or effect.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the Execution Date.
A-119
<PAGE>
<TABLE>
<S> <C> <C>
CORNERSTONE PROPERTIES INC.,
a Nevada corporation
By: /s/ JOHN S. MOODY
-----------------------------------------
John S. Moody
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
</TABLE>
<TABLE>
<S> <C> <C>
Attest: /s/ RODNEY C. DIMOCK
--------------------------------------
Rodney C. Dimock
PRESIDENT AND CHIEF OPERATING OFFICER
</TABLE>
<TABLE>
<S> <C> <C>
WILLIAM WILSON & ASSOCIATES,
a California Corporation
By: /s/ WILLIAM WILSON III
-----------------------------------------
William Wilson III
Its: PRESIDENT
By: /s/ H. LEE VAN BOVEN
-----------------------------------------
H. Lee Van Boven
Its: CHIEF OPERATING OFFICER
OPPORTUNITY CAPITAL PARTNERS, L.P.
a California limited partnership
By: Office Opportunity Corporation,
a California corporation
General partner
</TABLE>
<TABLE>
<S> <C> <C>
By: /s/ WILLIAM WILSON III
-----------------------------------------
William Wilson III
PRESIDENT
By: /s/ R. MATTHEW MORAN
-----------------------------------------
R. Matthew Moran
SECRETARY
</TABLE>
A-120
<PAGE>
<TABLE>
<S> <C> <C>
OPPORTUNITY CAPITAL PARTNERS II, LLC,
a California limited liability company
By: /s/ WILLIAM WILSON III
-----------------------------------------
William Wilson III
MANAGER
By: /s/ R. MATTHEW MORAN
-----------------------------------------
R. Matthew Moran
MANAGER
OPPORTUNITY CAPITAL PARTNERS III, LLC,
a California limited liability company
By: /s/ WILLIAM WILSON III
-----------------------------------------
William Wilson III
MANAGER
By: /s/ R. MATTHEW MORAN
-----------------------------------------
R. Matthew Moran
MANAGER
OPPORTUNITY CAPITAL PARTNERS IV, LLC,
a California limited liability company
By: /s/ WILLIAM WILSON III
-----------------------------------------
William Wilson III
MANAGER
By: /s/ R. MATTHEW MORAN
-----------------------------------------
R. Matthew Moran
MANAGER
</TABLE>
A-121
<PAGE>
<TABLE>
<S> <C> <C>
WILSON BAYHILL ASSOCIATES, LLC,
a California limited liability company
By: /s/ WILLIAM WILSON III
-----------------------------------------
William Wilson III
MANAGER
By: William Wilson & Associates,
a California corporation,
Manager
</TABLE>
<TABLE>
<S> <C> <C>
By: /s/ WILLIAM WILSON III
------------------------------------
William Wilson III
PRESIDENT
</TABLE>
<TABLE>
<S> <C> <C>
WILLIAM WILSON III,
---------------------------------------------
in his capacity
as General Partner of Second and Main
Associates, a Utah general partnership
ECA INVESTORS, LLC,
a California limited liability company
By: Opportunity Capital Partners, IV, LLC,
a California limited liability company,
Manager
</TABLE>
<TABLE>
<S> <C> <C>
By: /s/ WILLIAM WILSON III
------------------------------------
William Wilson III
MANAGER
By: /s/ R. MATTHEW MORAN
------------------------------------
R. Matthew Moran
MANAGER
</TABLE>
A-122
<PAGE>
<TABLE>
<S> <C> <C>
PENINSULA OFFICE PARK ASSOCIATES, L.P.
a California limited partnership
By: Peninsula Office Park Investors, LLC,
a California limited liablility company
General Partner
</TABLE>
<TABLE>
<S> <C> <C>
By: Opportunity Capital Partners III, LLC,
a California limited liablility company,
Manager
</TABLE>
<TABLE>
<S> <C> <C>
By: /s/ WILLIAM WILSON III
--------------------------------
William Wilson III
MANAGER
By: /s/ R. MATTHEW MORAN
--------------------------------
R. Matthew Moran
MANAGER
</TABLE>
<TABLE>
<S> <C> <C>
PENINSULA OFFICE PARK INVESTORS, LLC,
a California limited liability company
</TABLE>
<TABLE>
<S> <C> <C>
By: Opportunity Capital Partners III, LLC,
a California limited liablility company,
Manager
</TABLE>
<TABLE>
<S> <C> <C>
By: /s/ WILLIAM WILSON III
--------------------------------
William Wilson III
MANAGER
By: /s/ R. MATTHEW MORAN
--------------------------------
R. Matthew Moran
MANAGER
</TABLE>
A-123
<PAGE>
<TABLE>
<S> <C> <C>
THREE O THREE PARTNERS, L.P.
a California limited partnership
By: WW-303 Corporation
a California corporation
General Partner
</TABLE>
<TABLE>
<S> <C> <C>
By: /s/ DAVID R. WORD
------------------------------------
David R. Word
PRESIDENT
By: /s/ WILLIAM WILSON III
------------------------------------
William Wilson III
VICE PRESIDENT
</TABLE>
<TABLE>
<S> <C> <C>
WW-SACREMENTO, L.P.
a California limited partnership
By: /s/ WILLIAM WILSON III
-----------------------------------------
William Wilson III,
GENERAL PARTNER
By: /s/ DAVID R. WORD
-----------------------------------------
David R. Word,
GENERAL PARTNER
</TABLE>
A-124
<PAGE>
FIRST AMENDMENT
TO
CONTRIBUTION AGREEMENT
AND
AGREEMENT AND PLAN OF MERGER
THIS FIRST AMENDMENT TO CONTRIBUTION AGREEMENT AND AGREEMENT AND PLAN OF
MERGER (the "AMENDMENT") is dated as of July 10, 1998 and is made by and among
(i) WILLIAM WILSON & ASSOCIATES, a California corporation ("WW&A"), and those
entities identified on SCHEDULE 1 (PARTIES, PROJECTS AND ENTITIES) as the GP
Parties (the "GP PARTIES"), on the one hand (collectively, the "WILSON
PARTIES"), and (ii) CORNERSTONE PROPERTIES INC., a Nevada Corporation
("CORNERSTONE"), and CORNERSTONE PROPERTIES LIMITED PARTNERSHIP, a Delaware
limited partnership (the "OPERATING PARTNERSHIP"; and collectively and jointly
and severally with Cornerstone, the "CORNERSTONE PARTIES"), on the other hand.
RECITALS
A. The Wilson Parties and the Cornerstone Parties entered into that certain
Contribution Agreement and Agreement and Plan of Merger, dated as of June 22,
1998 (the "CONTRIBUTION/MERGER AGREEMENT") relating to the combination of the
real estate business of WW&A and the Cornerstone Parties.
B. The Wilson Parties and the Cornerstone Parties desire to amend the
Contribution/Merger Agreement as set forth herein.
C. The defined terms used in this Amendment with an initial capital letter
or letters shall have the same meanings in this Amendment as the meanings
ascribed thereto in the Contribution/Merger Agreement.
NOW, THEREFORE, in consideration of the mutual promises in the
Contribution/Merger Agreement and in this Amendment, and of other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto, intending to be legally bound hereby, do
hereby agree as follows:
1. ROCKWOOD PROJECTS.
(a) GENERAL DESCRIPTION. The Operating Partnership and WWA Investors
have closed the Rockwood Loan and the Operating Partnership funded certain
proceeds thereof to enable WWA Investors to purchase the Rockwood Interests
pursuant to the Rockwood Contract. A portion of the Rockwood Loan proceeds equal
to Four Million, Two Hundred and Forty-Nine Thousand, Nine Hundred and
Seventy-Three Dollars ($4,249,973) was applied by WWA Investors to pay the "Cash
Balance Credit", including the $1,566,615 "Pruneyard Construction Amount" (as
such terms are defined in the Rockwood Loan Agreement). The Rockwood Project
Entities shall distribute to WWA Investors, as a partner or member of such
Rockwood Project Entities, an aggregate amount equal to the Cash Balance Credit
given to the Rockwood Sellers. Such distributions shall be made out of cash
balances of such Rockwood Project Entities as of the date of the purchase of the
Rockwood Interests by WWA Investors (and not out of any cash balances derived
from operations after that date), and, with respect to the $1,566,615 Pruneyard
Construction Amount, out of the proceeds of the Pruneyard Loan. Such aggregate
distributions to WWA Investors shall be paid by WWA Investors to the Operating
Partnership promptly upon receipt thereof (presently expected to occur in August
1998), and applied on such date and upon receipt thereof by the Operating
Partnership to reduce the principal balance of the Rockwood Loan, and the
Rockwood Loan Agreement shall be amended to provide that such payment will so
reduce the principal balance of the Rockwood Loan.
A-125
<PAGE>
b) AMENDMENT. To account appropriately for the distribution and
application regarding the Rockwood Projects described in (a) above, the
Contribution/Merger Agreement is hereby amended to delete all of the language
contained in (iv) and (v) in Section1.3(h)(iii)(F)(ROCKWOOD PROJECTS) of the
Contribution/Merger Agreement.
(c) ADDITIONAL ROCKWOOD CLOSING ADJUSTMENTS. There shall be added to
Section1.3(h)(iii)(F) (ROCKWOOD PROJECTS) of the Contribution/Merger Agreement,
after giving effect to the deletions set forth above, new clauses (iv) and (v)
to read in their entirety as follows:
", (iv) decreased with respect to the Golden Bear Center Project by
Seventy-Five Thousand Dollars ($75,000) to reflect a credit received by WWA
Investors related to a Housing Impact Mitigation Fee with respect to that
Project, and (v) decreased with respect to the Pruneyard Project by One
Million Five Hundred Thousand Dollars ($1,500,000) to reflect an agreed
adjustment."
2. NET PROJECT VALUE ADJUSTMENTS. The Contribution/Merger Agreement is
hereby amended by providing that adjustments with respect to the following will
be made in the form of reductions or adjustments to the appropriate Net Project
Values pursuant to Section1.3(b)(NET PROJECT VALUES), rather than as cash or
Consideration adjustments or reductions: (i) adjustments in respect to Lease
Costs and Capital Expenditures which are to be made and determined in accordance
with Section6.1(b)(ii)(LEASING AND LEASE COSTS), Section6.1(c)(ii)(CAPITAL
EXPENDITURES) and Section9.4(g) (FUND-IV CREDIT)), (ii) reductions, if any, in
respect of the Estimated Bay Park Completion Costs determined in accordance with
Section1.3(k) (BAY PARK PLAZA ADJUSTMENT), (iii) reductions, if any, in respect
of the Estimated POP-IX Completion Costs determined in accordance with
Section1.3(l)(POP-IX ADJUSTMENT), (iv) the adjustments described in clauses (F)
and (G) of Section1.3(h)(iii) (EFFECT ON TRANSACTIONS), and (ix) reductions, if
any, in respect of the credit determined in accordance with Section20.13
(SPECIAL CLOSING CREDIT)(as amended herein).
The first full sentence Section1.3 (d) (CERTAIN CASH ADJUSTMENTS) of the
Contribution/Merger Agreement is hereby amended by deleting therefrom the
following phrase: "Lease Costs pursuant to Section6.1(b) (LEASING AND LEASE
COSTS); Capital Expenditures pursuant to Section6.1(c) (CAPITAL EXPENDITURES);".
3. AMENDMENT REGARDING INVESTOR CONSIDERATION. The first full sentence of
Section1.3(c)(INVESTOR CONSIDERATION) of the Contribution/Merger Agreement is
hereby amended to read in its entirety as follows:
"The allocation of Consideration to each Participating Investor in
payment or exchange for its Interests shall be determined in good faith by
the appropriate GP Party and the Wilson Representative with respect to its
Related Project Entity or Fund based on the distribution amount the
Participating Investor would have received if an amount equal to the Net
Project Value for each Project was distributed as the net proceeds of a sale
of the Project on the Closing Date, in accordance with the governing
documents of the appropriate Project Entity or Fund and any intermediate
entities, assuming that all net proceeds of financings and refinancings and
normal distributions, if any, of operating cash have been made through such
date, after taking into account reasonable reserves to pay operating
expenses, and after the further payments and adjustments set forth in
Section1.3(d) (CERTAIN CASH ADJUSTMENTS) and elsewhere in this Agreement.
The Cornerstone Parties shall have no responsibility or liability for such
allocation of Consideration and shall be entitled to rely on the decision
and direction of such GP Parties and the Wilson Representative."
4. WELLS FARGO CENTER. The Project known as Wells Fargo Center shall be
excluded from the Transactions and no offer shall be made to the Investors
holding Interests therein. Therefore, the Contribution/Merger Agreement is
hereby amended to (i) delete all references therein to the Wells Fargo Center
Project as one of the Projects and (ii) add Wells Fargo Center to the list of
Retained Properties.
5. FRACTIONAL UNITS AND SHARES. Notwithstanding the provisions of
Section1.3(f) (EFFECTIVE PRICE) and Section2.6(e) (NO FRACTIONAL SHARES) of the
Contribution/Merger Agreement to the contrary, if any Investor would receive, in
the aggregate, fractional Units or Shares in the Transactions, then the
aggregate number
A-126
<PAGE>
of Units or Shares, as the case may be, distributable to such Investor will be
rounded up and increased to the next whole number of Units or Shares.
6. FOLLOW-ON TRANSACTIONS. Without limiting any limitations or
restrictions set forth in SectionSection 1.1 (g) (FORM OF TRANSACTION), 1.2 (b)
(OTHER PROJECTS) or elsewhere in the Contribution/Merger Agreement regarding the
ability to, timing of, conditions to or manner of effecting mergers or other
combination transactions to acquire all of the Interests in one or more Project
Entities ("FOLLOW-ON TRANSACTIONS") in which fewer than all of the Investors
have consented and become Participating Investors, PROVIDED the requisite
majority of the Interests in such a Project Entity are held by Participating
Investors, the Cornerstone Parties shall not be obligated to effect Follow-on
Transactions permitted under the Contribution/Merger Agreement.
7. WITHHOLDING. Clause (ii) of the first full sentence of Section1.8 (b)
(CONSIDERATION WITHHELD) of the Consideration/Merger Agreement is hereby amended
to insert ", the Concar Project" after the phrase "the Agoura Hills Project"
therein.
8. SPECIAL PAYMENT WITH RESPECT TO PRUNEYARD. At Closing, the Operating
Partnership shall pay for the account of the Project Entity that owns the
Pruneyard Project the amounts payable to Chris Meany in respect of the Closing
and the retail development of the Pruneyard Project (estimated to be
approximately $300,000)and the aggregate Consideration payable to the
Participating Investors deriving Consideration from the Pruneyard Project will
be reduced by such amount.
9. ACQUISITIONS.
(a) PRIOR TO CORNERSTONE THRESHOLD CONSENT DATE. The third full
sentence of Section6.2(a) (ACQUISITIONS PRIOR TO THRESHOLD CONSENT DATE) of the
Contribution/Merger Agreement is hereby amended to read in its entirety as
follows: All such Acquisitions must be made through WW&A, FUND-IV, an affiliate
of any of the foregoing with a net worth comparable to FUND-IV, or other entity
acceptable to Cornerstone in its sole discretion (a "PERMITTED ACQUIRER").
(b) ACQUISITION LOANS. The first full sentence of Section6.2(c)
(INCLUSION OF ACQUISITIONS IN CONTRIBUTION TRANSACTION) of the
Contribution/Merger Agreement is hereby amended to substitute for the word
"FUND-IV" the phrase "Permitted Acquirer." The eighth full sentence of
Section6.2(c) (INCLUSION OF ACQUISITIONS IN CONTRIBUTION TRANSACTION) of the
Contribution/Merger Agreement is hereby amended to read in its entirety as
follows: "FUND-IV (or another guarantor that is a Permitted Acquirer and is
approved by Cornerstone, which approval shall not be unreasonably withheld,
conditioned or delayed) shall personally and unconditionally guaranty the
payment of each such Acquisition Loan and the performance of borrower under the
applicable loan documentation pursuant to a form of guarantee prescribed by
Cornerstone and approved by the Wilson Representative, which approval will not
be unreasonably withheld, conditioned or delayed."
10. BUILT-IN GAIN. The Contribution/Merger Agreement is hereby amended by
adding the following at the end of Section7.1 (RESTRICTIONS ON DISPOSITIONS OF
CERTAIN RELATED PROJECTS FOLLOWING CLOSING) thereof:
"The amount of Built-in-Gain for each Project shall be estimated by the
Wilson Parties at the Closing and finally determined and calculated by the
Wilson Representative after the Closing PROVIDED the Cornerstone Parties
shall have the right to approve such final determination of Built-in-Gain,
such approval not to be unreasonably withheld, conditioned or delayed. Any
property acquired by any of the Cornerstone Parties or the Cornerstone
Subsidiaries upon disposition of a Project Listed on SCHEDULE 7.1 (LOCK-IN
PROPERTIES) in a Non-Taxable Transaction shall likewise be subject to the
same restrictions imposed under this Section7.1 to the same extent as would
have been applicable to the Project so disposed of (i.e., as if such
acquired property were listed on Part I or Part II, as the case may be, of
SCHEDULE 7.1 (LOCK-IN PROPERTIES)). Any waiver of any of the covenants and
restrictions imposed on the Cornerstone Parties under this Section7.1 or
under Section7.2(a) (MINIMUM RECOURSE DEBT) shall be effective (i) upon
obtaining the written consent of the Wilson Representative, for transactions
in respect of Part II
A-127
<PAGE>
Properties that are entered into prior to January 1, 2000 (which consent may
be given in the exercise of the Wilson Representative's business judgment
taking into account the potential benefits to all Investors of any such
transaction), and (ii) thereafter, and for all transactions involving a Part
II Property, whenever entered into, upon obtaining the written consent of a
majority-in interest (based on the amount of Built-in-Gain, if any, that
each Investor would recognize) of those Investors which would recognize
Built-in-Gain as a result of breach of such covenant or restriction which is
the subject of such waiver, in each case notwithstanding the general
requirements for waivers imposed under Section20.3 (AMENDMENT) hereof."
11. REPAID LOANS--PREPAYMENT CHARGES. The Contribution/Merger Agreement is
hereby amended to provide that notwithstanding anything to the contrary in
Section1.3(d) (CERTAIN CASH ADJUSTMENTS) and Section 1.5 (CERTAIN CLOSING COSTS)
thereof, there shall be allocated to those Investors with Interests in those
Projects with respect to which there is incurred in connection with Closing
prepayment premiums, penalties or similar impositions (other than Participation
Amounts) paid to the holders of the Repaid Loans encumbering such Projects as a
condition to satisfaction thereof (collectively, the "PREPAYMENT COSTS") that
portion of the Closing Costs equal to fifty percent (50%) of the lesser of (i)
the amount by which the aggregate Closing Costs exceeds $3,500,000 and (ii) the
aggregate Prepayment Costs; such portion of the Closing Costs will be allocated
among the related Projects in proportion to the relative amounts of Prepayment
Costs so incurred and among the Investors in proportion to the Consideration
they receive in respect of each such Project.
12. LIST OF INVESTORS. The Contribution/Merger Agreement is hereby amended
by deleting the numbers "fifteen (15)" in the second line of Section6.1(q) (LIST
OF INVESTORS) of the Contribution/Merger Agreement and by inserting in lieu
thereof the number "forty (40)".
13. CORNERSTONE BYLAWS. In the event the Cornerstone Parties and the
Wilson Parties are not satisfied, in their respective discretion (and such
discretion shall be exercised by the Wilson Representative on behalf of the
Wilson Parties), that the provisions of the Nevada Control shares Act, NRS
78.378 to 78.3793, inclusive, or any similar successor act, are inapplicable
with respect to any of the WW&A Shareholders and Investors who shall have
elected to receive Shares or to PGGM with respect to its purchase of Shares to
which reference is made in the Contribution/Merger Agreement, the Amended and
Restated Bylaws of Cornerstone to be effective as of Closing shall so provide.
In addition, the Amended and Restated Bylaws of Cornerstone will be amended as
necessary to accord to William Wilson III or his designee the rights with
respect to the Board Affairs Committee of Cornerstone as contemplated in EXHIBIT
2.4 (AMENDED AND RESTATED BYLAWS OF CORNERSTONE PROPERTIES INC.) in order for
such rights to be legally effective, as approved by the Cornerstone Parties and
the Wilson Parties, which approval will not be unreasonably withheld,
conditioned or delayed, or alternatively, the Cornerstone Parties shall seek
approval of the Cornerstone Shareholders pursuant to the Proxy Statement to
which reference is made in Section6.6(b) (PROXY STATEMENT) of the
Contribution/Merger Agreement to an amendment to Cornerstone's Restated Articles
of Incorporation to create such director rights for the relevant period
contemplated in EXHIBIT 2.4 (AMENDED AND RESTATED BYLAWS OF CORNERSTONE
PROPERTIES INC.).
14. CORNERSTONE CAPITAL STRUCTURE. The Contribution/Merger Agreement is
hereby amended by deleting the word "certain" in each instance in which such
word appears in clauses (iv) and (vi) of Section5.1(d) (CORNERSTONE CAPITAL
STRUCTURE) thereof and inserting in lieu thereof the number "3,000,000" in the
case of clause (iv) and the number "4,657,929" in the case of clause (vi).
15. REIT STATUS DATE. The Contribution/Merger Agreement is hereby amended
to delete the date "December 31, 1982" appearing in line 2 of Section5.1(m)(v)
(TAXES) thereof and inserting "December 31, 1983" in lieu thereof.
16. WILSON PARTIES' INDEMNIFICATION. The Contribution/Merger Agreement is
hereby amended by inserting a new clause (d) in Section11.1 (BY THE WILSON
PARTIES) thereof immediately following clause (c) thereof and by relettering
clause (d) thereof to clause (e), as follows:
A-128
<PAGE>
". . . , (d) the indemnity of J.P. Morgan Securities Inc. ET AL. as
provided in that certain engagement letter, dated April 27, 1998, with
respect to the fairness opinion as to the valuation of the business and
operating assets of WW&A as contemplated thereunder, or (e) . . ."
17. SPECIAL WILSON REPRESENTATIVE EXPENSE HOLDBACK. There will be heldback
from the Consideration otherwise distributable to the Investors at Closing the
Wilson Representative's future costs and expenses reasonably anticipated by the
Wilson Representative to be probable of incurrence in connection with the
performance of the Wilson Representative's duties following closing, including
without limitation, the Wilson Representative's administration of the Escrow
Fund and Escrow Agreement and the prosecution and resolution of Claims under
Section11 (INDEMNIFICATION; CLAIMS AGAINST HOLDBACK) of the Contribution/ Merger
Agreement. The amount heldback will be maintained as the "WILSON REPRESENTATIVE
ESCROW FUND" and will constitute a part of the Escrow Fund and will be
maintained and subject to the terms of the Escrow Agreement.
20. ESCROW AGENT. The parties agree that nothing in the Transaction
Documents will preclude the Wilson Representative and the Cornerstone Parties
from choosing one of such parties or their affiliate as the Escrow Agent.
21. CLOSING COSTS. Clause (C) of the second sentence of Section
1.5(CERTAIN CLOSING COSTS) of the Contribution/Merger Agreement is hereby
amended to insert after the phrase "title insurance premiums and fees" the
following: "(other than premiums and fees associated with utility endorsements,
which premiums and fees will be the sole responsibility of the Cornerstone
Parties)".
22. CORNERSTONE PERMITTED ENCUMBRANCES. Clause (c) of the second sentence
of Section5.1(j)(i)(CORNERSTONE PROPERTIES) of the Contribution/Merger Agreement
is hereby amended in its entirety to read as follows: "(c) those existing title
matters affecting the Cornerstone Properties listed or described as exceptions
to title on the title insurance policies, title insurance commitments and
abstracts of title listed on Schedule 5.1(J)(I)(CORNERSTONE TITLE POLICIES), and
those matters described in the Addendum thereto."
23. SPECIAL CLOSING CREDIT. Section20.13 (SPECIAL CLOSING EXPENSE CREDIT)
of the Contribution/Merger Agreement is hereby amended to read in its entirety
as follows:
"20.13 SPECIAL CLOSING CREDIT. If a Project becomes a Withdrawn Project,
the Net Project Values of the remaining Projects will be reduced by an
amount equal to one percent (1%) of the Project Value of the Withdrawn
Project, to be allocated among such remaining Projects in proportion to the
relative Project Values thereof. If a Project (other than the One Post and
120 Montgomery Projects) becomes a Partially Participating Project, the Net
Project Values of the Projects (other than Withdrawn Projects and as
adjusted for Partially Participating Projects) will be reduced by an amount
equal to the product of (A) one percent (1%) of the Project Value of the
Partially Participating Project, MULTIPLIED BY (B) the quotient obtained by
DIVIDING (1) the Consideration which would have been paid to any non-
Participating Investors whose Interests will not be acquired by the
Cornerstone Parties through a Follow-on Transaction (before taking into
account any adjustments pursuant to this Section20.13) BY (2) the
Consideration (before taking into account any adjustment pursuant to this
Section20.13) that would have been paid to all Investors in such Project,
had such Project been a Complete Transaction Project; such reduction to be
allocated (i) among the Projects in proportion to the relative Project
Values thereof, and (ii) with respect to Partially Participating Projects,
to the Participating Investors therein and the non-Participating Investors
therein whose Interests will be acquired by the Cornerstone Parties through
a Follow-on Transaction."
The Contribution/Merger Agreement shall be further amended by deleting
therefrom all references to Schedule 20.13 (SPECIAL CLOSING EXPENSE CREDIT) and
by deeming all references to "Special Closing Expense Credit" to be references
to "Special Closing Credit".
22. NEW SCHEDULES AND EXHIBITS. The Schedules and Exhibits attached hereto
and listed in Appendix 1 (attached hereto and incorporated herein by this
reference) are hereby agreed upon by the
A-129
<PAGE>
Cornerstone Parties and the Wilson Parties and do hereby become Schedules and
Exhibits to the Contribution/Merger Agreement and attached thereto and
incorporated therein by reference in lieu of any such Schedule or Exhibit
attached thereto and having the same identifying numbers or letters thereof.
23. SPECIAL POST-CLOSING EXECUTION PROVISION. The Contribution/Merger
Agreement is hereby amended by deleting the date "July 10, 1998" as it appears
in the fourth (4th) line of Section20.14 (SPECIAL POST-CLOSING EXECUTION
PROVISION) thereof and by inserting in lieu thereof the date "July 31, 1998".
24. BINDING EFFECT; RATIFICATION. This Amendment shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
permitted assigns under the Contribution/Merger Agreement. The
Contribution/Merger Agreement, as amended hereby, is hereby ratified and
confirmed by the parties hereto.
A-130
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date set forth above.
<TABLE>
<S> <C> <C>
WILLIAM WILSON & ASSOCIATES,
a California corporation
By: /s/ WILLIAM WILSON III
-----------------------------------------
William Wilson III
PRESIDENT
By: /s/ H. LEE VAN BOVEN
-----------------------------------------
H. Lee Van Boven
CHIEF OPERATING OFFICER
</TABLE>
<TABLE>
<S> <C> <C>
OPPORTUNITY CAPITAL PARTNERS, L.P.
a California limited partnership
By: Office Opportunity Corporation,
a California corporation
General Partner
</TABLE>
<TABLE>
<S> <C> <C>
By: /s/ WILLIAM WILSON III
------------------------------------
William Wilson III
PRESIDENT
By: /s/ R. MATTHEW MORAN
------------------------------------
R. Matthew Moran
SECRETARY
</TABLE>
<TABLE>
<S> <C> <C>
OPPORTUNITY CAPITAL PARTNERS II, LLC
a California limited liability company
By: /s/ WILLIAM WILSON III
-----------------------------------------
William Wilson III
MANAGER
By: /s/ R. MATTHEW MORAN
-----------------------------------------
R. Matthew Moran
MANAGER
</TABLE>
A-131
<PAGE>
<TABLE>
<S> <C> <C>
OPPORTUNITY CAPITAL PARTNERS III, LLC
a California limited liability company
By: /s/ WILLIAM WILSON III
-----------------------------------------
William Wilson III
MANAGER
By: /s/ R. MATTHEW MORAN
-----------------------------------------
R. Matthew Moran
MANAGER
</TABLE>
<TABLE>
<S> <C> <C>
OPPORTUNITY CAPITAL PARTNERS IV, LLC
a California limited liability company
By: /s/ WILLIAM WILSON III
-----------------------------------------
William Wilson III
MANAGER
By: /s/ R. MATTHEW MORAN
-----------------------------------------
R. Matthew Moran
MANAGER
</TABLE>
<TABLE>
<S> <C> <C>
PENINSULA OFFICE PARK INVESTORS, LLC,
a California limited liability company
By: Opportunity Capital Partners III, LLC,
a California limited liability company,
Manager
</TABLE>
<TABLE>
<S> <C> <C>
By: /s/ WILLIAM WILSON III
------------------------------------
William Wilson III
MANAGER
By: /s/ R. MATTHEW MORAN
------------------------------------
R. Matthew Moran
MANAGER
</TABLE>
A-132
<PAGE>
<TABLE>
<S> <C> <C>
PENINSULA OFFICE PARK ASSOCIATES, L.P.
a California limited partnership
By: Peninsula Office Park Investors, LLC,
a California limited liability company
General Partner
</TABLE>
<TABLE>
<S> <C> <C>
By: Opportunity Capital Partners III, LLC,
a California limited liability company,
Manager
By: /s/ WILLIAM WILSON III
------------------------------------
William Wilson III
MANAGER
By: /s/ R. MATTHEW MORAN
------------------------------------
R. Matthew Moran
MANAGER
</TABLE>
<TABLE>
<S> <C> <C>
ECA INVESTORS, LLC,
a California limited liability company
By: Opportunity Capital Partners IV, LLC,
a California limited liability company,
Manager
</TABLE>
<TABLE>
<S> <C> <C>
By: /s/ WILLIAM WILSON III
------------------------------------
William Wilson III
MANAGER
By: /s/ R. MATTHEW MORAN
------------------------------------
R. Matthew Moran
MANAGER
</TABLE>
<TABLE>
<S> <C> <C>
/s/ WILLIAM WILSON III
---------------------------------------------
William Wilson III,
IN HIS CAPACITY
AS A GENERAL PARTNER OF SECOND AND MAIN
ASSOCIATES, A UTAH GENERAL PARTNERSHIP
</TABLE>
A-133
<PAGE>
<TABLE>
<S> <C> <C>
WILSON BAYHILL ASSOCIATES, LLC,
a California limited liability company
By: William Wilson & Associates,
a California corporation,
Manager
</TABLE>
<TABLE>
<S> <C> <C>
By: /s/ WILLIAM WILSON III
------------------------------------
William Wilson III
PRESIDENT
By: /s/ H. LEE VAN BOVEN
------------------------------------
H. Lee Van Boven
CHIEF OPERATING OFFICER
</TABLE>
<TABLE>
<S> <C> <C>
By: /s/ WILLIAM WILSON III
-----------------------------------------
William Wilson III
MANAGER
</TABLE>
<TABLE>
<S> <C> <C>
WWA INVESTORS, LLC,
a California limited liability company
By: /s/ WILLIAM WILSON III
-----------------------------------------
William Wilson III
MANAGER
</TABLE>
<TABLE>
<S> <C> <C>
WWA INVESTORS, LLC,
a California limited liability company
By: /s/ H. LEE VAN BOVEN
-----------------------------------------
H. Lee Van Boven
MEMBER AND AUTHORIZED SIGNATORY
</TABLE>
A-134
<PAGE>
<TABLE>
<S> <C> <C>
THREE O THREE PARTNERS, L.P.
a California limited partnership
</TABLE>
<TABLE>
<S> <C> <C>
By: WW-303 Corporation
a California corporation
General Partner
</TABLE>
<TABLE>
<S> <C> <C>
By: /s/ DAVID R. WORD
------------------------------------
David R. Word
PRESIDENT
By: /s/ WILLIAM WILSON III
------------------------------------
William Wilson III
VICE PRESIDENT
</TABLE>
<TABLE>
<S> <C> <C>
WW-SACRAMENTO, L.P.
a California limited partnership
By: /s/ WILLIAM WILSON III
-----------------------------------------
William Wilson III
GENERAL PARTNER
By: /s/ DAVID R. WORD
-----------------------------------------
David R. Word,
GENERAL PARTNER
</TABLE>
A-135
<PAGE>
<TABLE>
<S> <C> <C>
CORNERSTONE PROPERTIES INC.,
a Nevada Corporation.
By: /s/ JOHN S. MOODY
-----------------------------------------
John S. Moody
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Attest: /s/ RODNEY C. DIMOCK
-----------------------------------------
Rodney C. Dimock
PRESIDENT AND CHIEF OPERATING OFFICER
</TABLE>
<TABLE>
<S> <C> <C>
CORNERSTONE PROPERTIES LIMITED PARTNERSHIP,
a Delaware limited partnership
By: Cornerstone Properties Inc., a Nevada
Corporation General Partner
By: /s/ JOHN S. MOODY
-----------------------------------------
John S. Moody
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Attest: /s/ RODNEY C. DIMOCK
-----------------------------------------
Rodney C. Dimock
PRESIDENT AND CHIEF OPERATING OFFICER
</TABLE>
A-136
<PAGE>
SECOND AMENDMENT
TO
CONTRIBUTION AGREEMENT
AND
AGREEMENT AND PLAN OF MERGER
THIS SECOND AMENDMENT TO CONTRIBUTION AGREEMENT AND AGREEMENT AND PLAN OF
MERGER (the "AMENDMENT") is dated as of September 12, 1998, and is made by and
among (i) WILLIAM WILSON & ASSOCIATES, a California corporation ("WW&A"), and
those entities identified on SCHEDULE 1 (PARTIES, PROJECTS AND ENTITIES) as the
GP Parties (the "GP PARTIES", and, collectively with WW&A, the "WILSON
PARTIES"), (ii) WW HOLDINGS, LLC, a California limited liability company (the
"WILSON REPRESENTATIVE"), and (iii) CORNERSTONE PROPERTIES INC., a Nevada
Corporation ("CORNERSTONE"), and CORNERSTONE PROPERTIES LIMITED PARTNERSHIP, a
Delaware limited partnership (the "OPERATING PARTNERSHIP"; and collectively and
jointly and severally with Cornerstone, the "CORNERSTONE PARTIES").
RECITALS
A. The Wilson Parties and the Cornerstone Parties entered into that certain
Contribution Agreement and Agreement and Plan of Merger, dated as of June 22,
1998, as amended by the First Amendment to Contribution Agreement and Agreement
and Plan of Merger, dated as of July 10, 1998 (as so amended, the
"CONTRIBUTION/MERGER AGREEMENT") relating to the combination of the real estate
business of WW&A and the Cornerstone Parties.
B. The Wilson Parties and the Cornerstone Parties desire to further amend
the Contribution/Merger Agreement as set forth herein.
C. The Wilson Representative is executing this Amendment as a party to
acknowledge those agreements herein that are applicable to it.
D. The defined terms used in this Amendment with an initial capital letter
or letters shall have the same meanings in this Amendment as the meanings
ascribed to them in the Contribution/Merger Agreement.
NOW, THEREFORE, in consideration of the mutual promises in the
Contribution/Merger Agreement and in this Amendment, and of other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto, intending to be legally bound hereby, do
hereby agree to amend the Contribution/Merger Agreement as follows:
1. SECTION REFERENCES. All references are to sections of the
Contribution/Merger Agreement.
2. 50% CASH CONSIDERATION. To assure each Participating Investor the right
to receive at least 50% of such Participating Investor's Consideration in cash,
Section1.6 (CASH CONSIDERATION) is hereby amended to read in its entirety as
follows:
At the Closing, the maximum portion of the Consideration that will be
payable in cash to any Participating Investor (the "AVAILABLE CASH AMOUNT") will
equal the greater of the amounts calculated in accordance with the following
methods:
(i) An amount equal to 50% of the aggregate Consideration payable to such
Participating Investor, or
(ii) Such Participating Investor's share of the amount of cash payable to
all Participating Investors, determined by applying the cash amount
calculated pursuant to clause (a) below in the manner set forth in
clause (b) below:
(a) A cash amount equal to:
A-137
<PAGE>
(1) forty percent (40%) of the sum of (A) the WW&A Company Value,
PLUS (B) the aggregate Consideration distributable to the
Participating Investors and to those other Investors whose Interests
are acquired by the Cornerstone Parties through a statutory merger of
a Project Entity or a contribution of a Project on or after the
Closing, plus
(2) that amount (not to exceed Ten Million Dollars ($10,000,000))
necessary (but only to the extent necessary) to pay Consideration to
non-Eligible Investors and to dissenting Investors;
(b) Applied in the following order:
(1) first, to the purchase price of Interests purchased from
non-Eligible Investors pursuant to Section1.1(b) (NON-ELIGIBLE
INVESTORS);
(2) second, to a reserve (in an amount reasonably determined by
the Cornerstone Parties) to be applied to the claims of any
dissenting Investors;
(3) third, to remaining Eligible Participating Investors
requesting cash, cash in the percentage requested, up to 40% of the
total Consideration due such Participating Investors (subject to the
limitations set forth in Paragraph 14 (LIMITATION ON CASH
CONSIDERATION) of this Amendment), in proportion to the relative
amounts of cash so requested; and
(4) finally, the remaining amount will be distributed among the
remaining Participating Investors requesting more than 40% cash in
proportion to the relative amounts of cash in excess of 40% so
requested.
Notwithstanding the foregoing, if the Available Cash Amount with respect to a
Participating Investor requesting at least 50% cash Consideration is calculated
pursuant to clause (i), above, the Available Cash Amount with respect to that
Participating Investor shall not be less than 50% of the Consideration
distributable to that Participating Investor. If the Available Cash Amount is
insufficient to pay fully the cash Consideration requested by any Participating
Investor, the balance will be made up of Shares or Units at the Effective Price,
as the Participating Investor has elected in its Consent.
3. WITHDRAWAL OF PROJECTS AND PROJECT VALUE ADJUSTMENTS.
(a) The Wilson Parties and the Cornerstone Parties acknowledge, for the
benefit of the Participating Investors, that they are not currently aware of any
facts which should cause any Project in which a Fund is an investor to become a
Withdrawn Project or to become subject to a Project Value adjustment pursuant to
Section1.9 (WITHDRAWN PROJECT AND NET PROJECT VALUE ADJUSTMENTS).
(b) There is added to Section10.1 (CONDITIONS TO OBLIGATIONS OF THE WILSON
PARTIES), a new clause (p) to read in its entirety as follows:
(p) WITHDRAWAL OF PROJECTS AND PROJECT VALUE ADJUSTMENTS. No Projects in which a
Fund is an investor have been designated as Withdrawn Projects pursuant to
Section1.9 (WITHDRAWN PROJECT AND NET PROJECT VALUE ADJUSTMENTS) nor have
there been Project Value adjustments with respect to such Projects pursuant
to Section1.9 (Withdrawn Project and Net Project Value Adjustments), which
designations or withdrawals would, in the aggregate, in and of themselves,
cause an Investor in the Funds to receive less than 95% of the Consideration
the Investor would have received but for such events.
4. CONSIDERATION WITHHELD. The phrase "to be deposited by the WW&A
Shareholders" is hereby inserted in the first full sentence of Section1.8(b)
(CONSIDERATION WITHHELD) after the phrase "(i) the aggregate WW&A Company
Value". The phrases "elected to receive" in the fourth full sentence of
Section1.8(b) (CONSIDERATION WITHHELD) are hereby replaced with the word
"received." The phrase "electing to receive" in the fifth full sentence of
Section1.8(b) (CONSIDERATION WITHHELD) is hereby replaced with the phrase "who
received."
A-138
<PAGE>
5. LIMIT ON PRICE ADJUSTMENTS. The last two full sentences of
Section1.9(d) (PROCEDURE) are hereby replaced in their entirety with the
following sentence:
The Cornerstone Parties' exclusive recourse with respect to such price
reduction shall be to the amount held back in accordance with the immediately
preceding sentence, and in no event may the Cornerstone Parties recover the
amount of such price adjustment as ultimately determined from the Holdback
Amount or directly from any of the related GP Parties and the Participating
Investors, regardless of whether the amount so determined exceeds the amount so
held back.
6. SPIN OFF PROJECTS. The following sentence is hereby added at the end of
Section1.9(g) (CONSEQUENCES OF WITHDRAWAL):
If a Fund Project or Other Project becomes a Withdrawn Project and is to be
spun off as provided above, the terms of the partnership or operating agreement
for such new entity shall be substantially similar to the existing, related Fund
partnership agreement (with such modifications as are necessary or desirable for
a single asset entity) and, if applicable, to the existing related co-investment
partnership or operating agreement (with such modifications as are necessary or
desirable for a stand alone entity); PROVIDED that the partnership or operating
agreement for such new entity shall not include provisions imposing on the
limited partners or members thereof any obligation for capital calls for new
project acquisitions.
7. SHAREHOLDER APPROVALS.
(a) Clause (ii) of the first sentence of Section5.1(e) (AUTHORITY;
NON-CONTRAVENTION) is hereby deleted in its entirety, and clause (iii) of
such sentence is hereby redesignated as clause "(ii)." The term "Cornerstone
Shareholder Approvals" accordingly shall be defined to include only the
approvals of the Share Issuance and, if applicable, the Revised Partnership
Agreement.
(b) Section10.1(i) is hereby amended to read in its entirety as follows:
(i) CORNERSTONE SHAREHOLDER APPROVALS. Cornerstone shall have received
the Cornerstone Shareholder Approvals.
8. BUILT-IN GAIN. The phrase "or under Section7.2(a) (MINIMUM RECOURSE
DEBT)" is hereby deleted from the last sentence of Section7.1 (RESTRICTIONS ON
THE DISPOSITION OF CERTAIN RELATED PROJECTS FOLLOWING CLOSING).
9. DISPOSITIONS OF RELATED PROJECTS. The phrase "Unless the Wilson Parties
otherwise consent" is hereby deleted from the first sentence of Section7.2(a)
(MINIMUM RECOURSE DEBT) and the following is added at the end of such Section:
The agreement of the Operating Partnership to maintain a minimum of
$50,000,000 of recourse debt may be reduced or waived at any time by the
unanimous consent of those Investors who have made elections to be liable
to restore their deficit capital accounts in the Operating Partnership
(in accordance with Section 13.3 of the Restated Partnership Agreement)
prior to the beginning of the taxable year in which such waiver is first
sought by the Operating Partnership.
10. CLOSING ACCOUNTING. New clauses (g) and (h) are hereby inserted in
Section9.4 (PROJECT CLOSING ADJUSTMENTS) as follows:
(g) DISTRIBUTION ACCOUNTING. Contemporaneously with the distribution of
Consideration to the Participating Investors and the other Investors in
connection with the Closing, the Wilson Representative shall deliver to
each such Investor information concerning the calculation of such
distribution as well as the Consideration distributed to the Investors
having an interest in the same Fund or Funds (the "DISTRIBUTION
ACCOUNTING") and shall disclose any changes in Project Values as well as
the identity and Project Value of any Withdrawn Projects with respect to
such Fund or Funds. The Wilson Representative shall provide any
additional information related thereto and reasonably requested by such
Investor.
A-139
<PAGE>
(h) FINAL AUDITS AND ADJUSTMENTS. As soon as reasonably practicable, but not
more than 60 days after completion of the Project Final Closing
Accounting, Price Waterhouse Coopers LLP, or such other "Big 5"
independent public accounting firm as the Parties jointly agree, shall
perform an audit of the Project Final Closing Accounting, the
Distribution Accounting and the distribution of Consideration to WW&A and
the GP Entities. Copies of such audits will be promptly provided to each
Participating Investor so requesting. To the extent it has been
determined that a person has retained or received amounts in excess of
that to which it is entitled, such person will remit the excess to the
appropriate person within 30 days of such determination.
Existing clause (g) of Section9.4 (PROJECT CLOSING ADJUSTMENTS) is hereby
relettered as clause (i).
11. SPECIAL INDEMNIFICATION BY WW&A SHAREHOLDERS. The WW&A Shareholders
will indemnify, defend and hold the Participating Investors harmless from and
against any loss or liability (including reasonable attorneys fees, if incurred)
to the extent (i) a claim is or claims are paid out of the Indemnity Escrow
Fund, AND (ii) such claim or claims arise under this section with respect to (A)
the indemnity of J.P. Morgan Securities, Inc. referred to in Section11.1 (BY THE
WILSON PARTIES), or (B) breaches of representations and warranties of WW&A set
forth in Section4 (REPRESENTATIONS AND WARRANTIES OF WW&A), AND (iii) the amount
of such payment exceeds the prorata portion of the Indemnity Escrow Fund
deposited by the WW&A Shareholders in their capacity as such and applied in
payment of such claim. The indemnity obligation described in the preceding
sentence will be limited to the excess described in clause (iii) thereof.
12. INDEMNIFICATION OF THE WILSON REPRESENTATIVE. The word "may" in the
second full sentence of Section20.10(c) (INDEMNIFICATION OF THE WILSON
REPRESENTATIVE) is hereby replaced with the word "shall"; the word "solely" is
hereby added immediately before the phrase "out of any funds or Consideration"
therein; the phrase "and such Investors shall have no personal liability with
respect thereto in excess of any such funds or Consideration received." is
hereby added to the end of such sentence; and the following sentence is added to
the end of Section20.10(c) (INDEMNIFICATION OF THE WILSON REPRESENTATIVE):
Any such amount payable under this Section20.10 shall be paid 50% in
cash and 50% in such combination of (i) Equity Securities deemed to be
valued at $17.25 per Share or Unit and (ii) the equivalent value in cash, as
the indemnitor elects.
13. SPECIAL CLOSING EXPENSE CREDIT. Section20.13 (SPECIAL CLOSING EXPENSE
CREDIT) is hereby deleted in its entirety.
14. LIMITATION ON CASH CONSIDERATION. Notwithstanding the provisions of
Paragraph 2 above (50% CASH CONSIDERATION), the amount of cash Consideration
distributable to or for the ultimate benefit of (i) each employee of WW&A
entitled (collectively with his or her Permitted Beneficiaries) to receive
Consideration of $1,000,000 or more, (ii) each shareholder of WW&A, (iii) each
member of WWA Investors, LLC, and (iv) any Permitted Beneficiary of such
employee or shareholder shall be limited to 25% of the aggregate value of the
Consideration (with any Equity Securities valued at $17.25 per Share or Unit)
that they are entitled to receive under the Contribution/Merger Agreement, as
amended hereby, including the Consideration to which they are entitled in
respect of their interest as shareholders in WW&A and member in WWA Investors,
LLC, and as direct or indirect partners or members of the Funds, GP Parties, or
Project Entities. As used in the preceding sentence, the "PERMITTED BENEFICIARY"
or "PERMITTED BENEFICIARIES" of an employee or shareholder of WW&A or member of
WWA Investors, LLC, described therein are members of such employee's,
shareholder's or member's immediate family, a trust, limited partnership or
limited liability company, the primary beneficiaries, partners or members of
which are such employee's, shareholder's or member's immediate family members or
the heirs of such employee, shareholder or member.
15. FUND IV CAPITAL CALLS. While the Transactions are pending, the related
GP Party will not cause Fund IV to make Acquisitions other than Approved
Additional Projects approved by Cornerstone and with respect to which all
related costs (including acquisition and other fees payable to WW&A or its
affiliates)
A-140
<PAGE>
are to be advanced or reimbursed by Cornerstone as a loan, and the related GP
Party will make no Fund IV capital calls to fund any other Acquisitions.
16. NO IMPACT ON PERSONAL INDEMNITY LIABILITY. Nothing in Section11
(INDEMNIFICATION; CLAIMS AGAINST HOLD BACK) regarding indemnification by the
Wilson Parties is intended to expand or reduce the exculpation and indemnity
rights and obligations of the partners, managers or members of any Fund or
Project Entity to one another.
17. ORDER IN WHICH TRANSACTIONS CONSUMMATED. Transactions with respect to
the Funds, Fund Projects and Other Projects will be closed so that the Interests
are contributed or sold to the Cornerstone Parties, as the case may be, before
any related Follow-on Transaction occurs.
18. INVESTOR CONTRIBUTION AGREEMENTS. The Investor Contribution Agreements
will not expand the personal liability of any Investor, if any, beyond the
undertakings contemplated by that Investor's Consent.
19. LOAN PREPAYMENTS AND ASSUMPTIONS. It is not the Cornerstone Parties'
intention to repay at the Closing any Fund III and Fund IV loans that require
the payment of a prepayment penalty. Further, based on discussions between the
Wilson Parties and the appropriate lenders, the Wilson Parties believe that the
Cornerstone Parties will be permitted to assume all of Fund III and Fund IV
loans and that the aggregate loan assumption fees for the Fund III and Fund IV
loans will not exceed $500,000.
20. INITIAL ESCROW AGREEMENT. The initial Escrow Agent shall satisfy the
successor criteria set forth in Section5(d) (RESIGNATION OF ESCROW AGENT) of the
Escrow Agreement.
21. AMENDMENT AND MODIFICATION. The Transaction Documents shall not be
amended or modified in such a manner so as to create personal liability for any
Participating Investor, or reduce the Project Value of or withdraw any Fund
Project or Other Projects from the Transactions (other than as expressly
contemplated by the Contribution/Merger Agreement as amended by this Amendment,
including, for example, with respect to the power and authority of the Wilson
Representatives and the GP Parties under Section1.9 (WITHDRAWN PROJECT AND NET
PROJECT VALUE ADJUSTMENTS) and Section11 (INDEMNIFICATION; CLAIMS AGAINST
HOLDBACK)), to abrogate any rights or benefit conferred to a Participating
Investor under this Amendment or to create any material new indemnity or other
obligation of any Participating Investor.
22. REGISTRATION RIGHTS AGREEMENT. EXHIBIT 7.4 (REGISTRATION RIGHTS AND
LOCK- UP AGREEMENT) of the Contribution/Merger Agreement is hereby replaced in
its entirety with Exhibit 1 hereto, and all references to the "Registration
Rights Agreement" will be deemed to be references to an agreement in
substantially the form of EXHIBIT 1.
23. ESCROW AGREEMENT. EXHIBIT 11.8 (ESCROW AGREEMENT) of the
Contribution/Merger Agreement is hereby replaced in its entirety with EXHIBIT 2
hereto, and all references to the "Escrow Agreement" will be deemed to be
references to an agreement in substantially the form of EXHIBIT 2.
24. ENTIRE AGREEMENT. This Amendment constitutes the entire agreement
among the parties with respect to the subject matter thereof and incorporates
and supersedes all prior agreements, negotiations and discussions with respect
to the subject matter hereof and thereof.
25. BINDING EFFECT; RATIFICATION. This Amendment shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
permitted assigns under the Contribution/Merger Agreement. The
Contribution/Merger Agreement, as amended hereby, is hereby ratified and
confirmed by the parties hereto.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first set forth above.
A-141
<PAGE>
CORNERSTONE PROPERTIES INC.,
a Nevada Corporation
By:/s/ JOHN S. MOODY
------------------------------------------------
John S. Moody
Chairman and Chief Executive Officer
Attest:/s/ RODNEY C. DIMOCK
------------------------------------------------
Rodney C. Dimock
President and Chief Operating Officer
CORNERSTONE PROPERTIES LIMITED PARTNERSHIP,
a Delaware limited partnership
By: Cornerstone Properties Inc., a Nevada Corporation
General Partner
By: /s/ JOHN S. MOODY
------------------------------------------------
John S. Moody
Chairman and Chief Executive Officer
Attest: /s/ RODNEY C. DIMOCK
------------------------------------------------
Rodney C. Dimock
President and Chief Operating Officer
WILLIAM WILSON & ASSOCIATES,
a California corporation
By: /s/ WILLIAM WILSON III
------------------------------------------------
William Wilson III
President
Attest: /s/ H. LEE VAN BOVEN
------------------------------------------------
H. Lee Van Boven
Chief Operating Officer
A-142
<PAGE>
OPPORTUNITY CAPITAL PARTNERS, L.P.,
a California limited partnership
By: Office Opportunity Corporation,
a California corporation
General Partner
By: /s/ WILLIAM WILSON III
------------------------------------------------
William Wilson III
President
By: /s/ R. MATTHEW MORAN
------------------------------------------------
R. Matthew Moran
Secretary
OPPORTUNITY CAPITAL PARTNERS II, LLC,
a California limited liability company
By: /s/ WILLIAM WILSON III
------------------------------------------------
William Wilson III
Manager
By: /s/ R. MATTHEW MORAN
------------------------------------------------
R. Matthew Moran
Manager
OPPORTUNITY CAPITAL PARTNERS III, LLC,
a California limited liability company
By: /s/ WILLIAM WILSON III
------------------------------------------------
William Wilson III
Manager
By: /s/ R. MATTHEW MORAN
------------------------------------------------
R. Matthew Moran
Manager
A-143
<PAGE>
OPPORTUNITY CAPITAL PARTNERS IV, LLC,
a California limited liability company
By: /s/ WILLIAM WILSON III
------------------------------------------------
William Wilson III
Manager
By: /s/ R. MATTHEW MORAN
------------------------------------------------
R. Matthew Moran
Manager
PENINSULA OFFICE PARK INVESTORS, LLC,
a California limited liability company
By: Opportunity Capital Partners III, LLC,
a California limited liability company,
Manager
By: /s/ WILLIAM WILSON III
------------------------------------------------
William Wilson III
Manager
By: /s/ R. MATTHEW MORAN
------------------------------------------------
R. Matthew Moran
Manager
PENINSULA OFFICE PARK ASSOCIATES, L.P.
a California limited partnership
By: Peninsula Office Park Investors, LLC,
a California limited liability company
General Partner
By: Opportunity Capital Partners III, LLC,
a California limited liability company,
Manager
By: /s/ WILLIAM WILSON III
------------------------------------------------
William Wilson III
Manager
By: /s/ R. MATTHEW MORAN
------------------------------------------------
R. Matthew Moran
Manager
A-144
<PAGE>
ECA INVESTORS, LLC,
a California limited liability company
By: Opportunity Capital Partners IV, LLC,
a California limited liability company,
Manager
By: /s/ WILLIAM WILSON III
William Wilson III
Manager
By: /s/ R. MATTHEW MORAN
------------------------------------------------
R. Matthew Moran
Manager
WILLIAM WILSON III, in his capacity
as General Partner of Second and Main Associates,
a Utah general partnership
WILSON BAYHILL ASSOCIATES, LLC,
a California limited liability company
By: William Wilson & Associates,
a California corporation,
Manager
By: /s/ WILLIAM WILSON III
------------------------------------------------
William Wilson III
President
By: H. Lee Van Boven
Chief Operating Officer
By: /s/ WILLIAM WILSON III
------------------------------------------------
William Wilson III
Manager
WWA INVESTORS, LLC,
a California limited liability company
By: /s/ WILLIAM WILSON III
------------------------------------------------
William Wilson III
Manager
WW HOLDINGS, LLC,
a California limited liability company
By: /s/
------------------------------------------------
Member
By: /s/
------------------------------------------------
Member
A-145
<PAGE>
ANNEX B
FORM OF
REGISTRATION RIGHTS AND LOCK-UP AGREEMENT
THIS REGISTRATION RIGHTS AND LOCK-UP AGREEMENT (this "Agreement"), is made
as of , 1998, by and among CORNERSTONE PROPERTIES INC., a Nevada
corporation (the "Company"), and the parties set forth in Exhibit A attached
hereto (the "Investors").
W I T N E S S E T H:
WHEREAS, the Company, Cornerstone Properties Limited Partnership, a Delaware
limited partnership (the "Operating Partnership"), and certain of the Investors
are parties to a Contribution Agreement and Agreement and Plan of Merger, dated
as of June 22, 1998, as amended (the "Contribution Agreement"), pursuant to
which, among other things, the Investors are to receive one or both of (i)
shares of common stock of the Company and (ii) units of limited partnership
interest in the Operating Partnership which may be converted into shares of
common stock of the Company;
WHEREAS, in order to permit the Investors to offer and sell in compliance
with the Securities Act (as defined below) the shares of common stock of the
Company referred to in clauses (i) and (ii) of the immediately preceding
paragraph, the Company has agreed to provide the Investors with the registration
rights provided herein; and
WHEREAS, this Agreement is entered into pursuant to Section 7.4 of the
Contribution Agreement.
NOW, THEREFORE, the parties agree as follows:
1. CERTAIN OTHER DEFINITIONS. Capitalized terms not otherwise defined
herein shall have the meanings ascribed to them in the Contribution Agreement.
The capitalized terms set forth below (in their singular and plural forms as
applicable) shall have the following meanings:
1.1 "Affiliate" means, with respect to any specified Person, any other
Person that directly, or indirectly through one or more intermediaries,
controls, is controlled by, or is under common control with, such specified
Person.
1.2 "Change in Control" means any of the following occurrences:
(i) securities of the Company representing twenty-five percent (25%)
or more of the combined voting power of the Company's then outstanding
voting securities are acquired pursuant to a tender offer or an exchange
offer; or
(ii) a merger or consolidation is consummated in which the Company
is a constituent corporation and which results in less than fifty percent
(50%) of the outstanding voting securities of the surviving or resulting
entity being owned by the Persons who were the stockholders of the
Company immediately prior to the merger or consolidation; or
(iii) any Person becomes the beneficial owner, directly or
indirectly, of securities of the Company representing twenty-five percent
(25%) or more of the combined voting power of Company's then outstanding
securities; or
(iv) any Person, other than the Company, becomes the beneficial
owner, directly or indirectly, through acquisition, merger, consolidation
or otherwise of securities of the Operating Partnership representing
twenty-five (25%) or more of the combined capital, profits or voting
interests of the Operating Partnership; or
B-1
<PAGE>
(v) all or substantially all of the assets of the Company or the
Operating Partnership, or all or substantially all of the Company's
interest in the general or limited partnership interests in the Operating
Partnership, are sold, liquidated or distributed, in one or more related
transactions.
Notwithstanding the foregoing, "Change in Control" shall in no event refer to
any of the foregoing if, as a result thereof, control of the Company is held by
a Person who is an affiliate of the Company as defined in the Securities
Exchange Act of 1934, as amended, as of the date hereof, or who owns securities
of the Company representing twenty-five percent (25%) or more of the combined
voting power of the Company's outstanding voting securities as of the date
hereof.
1.3 "Closing Date" has the meaning specified in Section 9.1 of the
Contribution Agreement.
1.4 "Commission" shall mean the United States Securities and Exchange
Commission and any successor federal agency having similar powers.
1.5 "Common Stock" shall mean the common stock without par value of the
Company.
1.6 "Control" (including the terms "controlled by" and "under common
control with"), with respect to the relationship between or among two or
more Persons, means the possession, directly or indirectly or as trustee,
personal representative or executor, of the power to direct or cause the
direction of the affairs or management of a Person, whether through the
ownership of voting securities, as trustee, personal representative or
executor, by contract or otherwise, including, without limitation, the
ownership, directly or indirectly, of securities having the power to elect a
majority of the board of directors or similar body governing the affairs of
such Person.
1.7 "Corporate 500 Agreement" means the Registration Rights Agreement
dated as of January 29, 1998, among the Company and the holders identified
therein.
1.8 "Current Market Price" of each share of Common Stock shall mean (i)
the average of the closing prices of the Common Stock for the five New York
Stock Exchange trading days immediately preceding the day in question as
reported by The Wall Street Journal under the New York Stock Exchange
Composite Transactions quotation system (or under any successor quotation
system) or, if the Common Stock is no longer traded on the New York Stock
Exchange under the quotation system under which such closing prices are
reported or, if The Wall Street Journal no longer reports such closing
prices, such closing prices as reported by a newspaper or trade journal
selected by the Company or (ii) if no such closing prices are available on
such dates, the fair market value as determined in good faith by the Board
of Directors of the Company.
1.9 "Demand Offering" shall mean an offering required to be effected
pursuant to Section 2.3 hereof.
1.10 "Demand Registration" shall mean an offering required to be
effected pursuant to Section 2.9 hereof.
1.11 "Demand Registration Prospectus" shall mean the prospectus included
in the Demand Registration Statement, including any preliminary prospectus,
and any amendment or supplement thereto, including any supplement relating
to the terms of the offering of any portion of the Shares covered by the
Demand Registration Prospectus, and in each case including all material
incorporated by reference therein.
1.12 "Demand Registration Statement" shall have the meaning specified in
Section 2.9(a).
1.13 "Demand Prospectus" shall mean the prospectus included in the Shelf
Registration Statement, including any preliminary prospectus, and any
amendment or supplement thereto, including any supplement relating to the
terms of the offering of any portion of the Demand Offering Securities
covered by the Demand Prospectus, and in each case including all material
incorporated by reference therein.
B-2
<PAGE>
1.14 "Demand Offering Securities" shall mean the Shares held by the
Investors or any subsequent Holder to whom this Agreement has, or rights to
cause the Company to register Shares in accordance with Section 2 have, been
assigned pursuant to Section 8, excluding (i) Shares that have been disposed
of by the Holders under the Shelf Registration Statement or any other
effective registration statement, (ii) Shares sold or otherwise transferred
pursuant to Rule 144 under the Securities Act, and (iii) Shares held by any
Holder if all of such Holder's Shares are eligible for sale pursuant to Rule
144 under the Securities Act and all of such Holder's Shares could be sold
by such Holder in a single transaction under Rule 144 under the Securities
Act.
1.15 "Demand Offering Expenses" shall mean any and all expenses incurred
by the Company in connection with Demand Offerings, including, without
limitation: (i) all Commission, stock exchange and National Association of
Securities Dealers, Inc. ("NASD") registration and filing fees, (ii) all
fees and expenses incurred in connection with compliance with state
securities or "blue sky" laws (including reasonable fees and disbursements
of counsel in connection with qualification of any of the Demand Offering
Securities under any state securities or blue sky laws and the preparation
of a blue sky memorandum) and compliance with the rules of the NASD, (iii)
all expenses of any Persons in preparing or assisting in preparing, word
processing, printing and distributing any Demand Prospectus, certificates
and other documents relating to the performance of and compliance with this
Agreement, (iv) all fees and expenses incurred in connection with the
listing, if any, of any of the Demand Offering Securities on any U.S.
securities exchange or exchanges, and (v) the fees and disbursements of
counsel for the Company and of the independent public accountants of the
Company, including the expenses of any special audits or "cold comfort"
letters required by or incident to such performance and compliance. Demand
Offering Expenses shall specifically exclude fees and disbursements of
counsel for the Holders and all Selling Expenses, which shall be borne by
the Holders in all cases.
1.16 "Demand Offering Request" shall have the meaning set forth in
Section 2.3(a) hereof.
1.17 "DIHC" means Dutch Institutional Holding Company, Inc., a Delaware
corporation.
1.18 "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time.
1.19 "Holder" shall mean the Investors (and their respective transferees
of Shares as permitted by this Agreement to whom this Agreement has, or
rights to cause the Company to register Shares in accordance with Section 2
have, been assigned pursuant to Section 8).
1.20 "Maximum Number" shall having the meaning set forth in Section
2.3(e) hereof.
1.21 "Memorial Cornerstone Agreement" means the Registration Rights
Agreement dated as of April 28, 1998, among the Company and the holders
identified therein.
1.22 "Memorial Prudential Agreement" means the Registration Rights
Agreement dated as of April 28, 1998, between the Company and The Prudential
Insurance Company of America.
1.23 "Noro-Tooley Agreement" means the Registration Rights Agreement
dated as of June 3, 1998, among the Company and the investors identified the
1.24 "NYSTRS Agreement" means the Stockholders' Agreement, dated as of
November 22, 1996, by and among the Company and the New York State Teachers'
Retirement System.
1.25 "Person" means any individual, partnership, firm, corporation,
association, trust, unincorporated organization or other entity, as well as
any syndicate or group that would be deemed to be a person under Section
13(d)(3) of the Exchange Act.
1.26 "PGGM" means Stichting Pensioenfonds Voor de Gezondheid,
Geestelijke en Maatschappelijke Belangen, a stichting formed according to
the laws of the Kingdom of The Netherlands.
B-3
<PAGE>
1.27 "PGGM Registration Rights Agreement" means the Amended and Restated
Registration Rights and Voting Agreement dated [CLOSING DATE], 1998, among
the Company, DIHC and PGGM.
1.28 "Piggyback Registration" shall have the meaning set forth in
Section 2.6(a) hereof.
1.29 "Piggyback Registration Request" shall have the meaning set forth
in Section 2.6(a) hereof.
1.30 "Public Offering" means a public offering of Common Stock pursuant
to an effective registration statement under the Securities Act.
1.31 The terms "register", "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act and the declaration or ordering of the
effectiveness of such registration statement by the Commission.
1.32 "Registration Representative" means the "Wilson Representative" as
defined in the Contribution Agreement who or which shall act on behalf of
all Holders in connection with the exercise of certain registration rights
as provided herein.
1.33 "Restriction Provisions" means the provisions set forth in the last
six sentences of Section 2.2(b).
1.34 "Rodamco Agreement" means the Stockholders' Agreement, dated as of
November 7, 1996, by and between the Company and Hexalon Real Estate, Inc.
1.35 "Securities Act" means the Securities Act of 1933, as amended.
1.36 "Selling Expenses" shall mean all underwriting discounts and
selling commissions and transfer taxes applicable to the sale of Shelf
Registrable Securities or Demand Offering Securities and disbursements of
underwriters.
1.37 "Shares" shall mean (a) the shares of Common Stock issued to the
Investors pursuant to the Contribution Agreement, (b) the shares of Common
Stock issued or issuable hereafter to the Investors upon conversion of the
Units issued to the Investors pursuant to the Contribution Agreement, and
(c) shares of Common Stock or any other securities which are hereafter
issued with respect to the shares of Common Stock referred to in clauses (a)
or (b) above by way of conversion, exchange, reclassification, dividend or
distribution, whether or not such securities have been offered and sold to
the public.
1.38 "Shelf Prospectus" shall mean the prospectus included in the Shelf
Registration Statement, including any preliminary prospectus, and any
amendment or supplement thereto, including any supplement relating to the
terms of the offering of any portion of the Shelf Registrable Securities and
other securities covered by the Shelf Registration Statement, and in each
case including all material incorporated by reference therein.
1.39 "Shelf Registration" shall mean the registration required to be
effected pursuant to Section 2.1 hereof.
1.40 "Shelf Registrable Securities" shall mean the Shares held by the
Investors or any subsequent Holder to whom this Agreement has, or rights to
cause the Company to register Shares in accordance with Section 2 have, been
assigned pursuant to Section 7, excluding (i) Shares that have been disposed
of by the Holders under the Shelf Registration Statement or any other
effective registration statement, (ii) Shares sold or otherwise transferred
pursuant to Rule 144 under the Securities Act, and (iii) Shares held by any
Holder if all of such Holder's Shares are eligible for sale pursuant to Rule
144 under the Securities Act and all of such Holder's Shares could be sold
by such Holder in a single transaction under Rule 144 under the Securities
Act.
1.41 "Shelf Registration Expenses" shall mean any and all expenses
incident to performance of or compliance with this Agreement, including,
without limitation: (i) all Commission, stock exchange and
B-4
<PAGE>
NASD registration and filing fees, (ii) all fees and expenses incurred in
connection with compliance with state securities or "blue sky" laws
(including reasonable fees and disbursements of counsel in connection with
qualification of any of the Shelf Registrable Securities under any state
securities or blue sky laws and the preparation of a blue sky memorandum)
and compliance with the rules of the NASD, (iii) all expenses of any Persons
in preparing or assisting in preparing, word processing, printing and
distributing the Shelf Registration Statement, any Shelf Prospectus,
certificates and other documents relating to the performance of and
compliance with this Agreement, (iv) all fees and expenses incurred in
connection with the listing, if any, of any of the Shelf Registrable
Securities on any U.S. securities exchange or exchanges, and (v) the fees
and disbursements of counsel for the Company and of the independent public
accountants of the Company, including the expenses of any special audits or
"cold comfort" letters required by or incident to such performance and
compliance. Shelf Registration Expenses shall specifically exclude fees and
disbursements of counsel for the Holders and all Selling Expenses, which
shall be borne by the Holders in all cases.
1.42 "Shelf Registration Notice" shall have the meaning set forth in
Section 2.2(b) hereof.
1.43 "Shelf Registration Statement" shall mean a registration statement
of the Company (and any other entity required to be a registrant with
respect to such registration statement pursuant to the requirements of the
Securities Act) that covers (i) the issuance by the Company of all Shares
issuable to Investors or their successors in interest upon the conversion of
Units, subject to the right of the Company to pay cash rather than issue
Shares for such Units, as provided in Section 8.6 of the "Partnership
Agreement" (as defined in the Contribution Agreement) (such issuances being
referred to as the "Registered Conversions"), (ii) the resale of all of the
Shelf Registrable Securities to be offered on a delayed or continuous basis
by the Investors pursuant to Rule 415 under the Securities Act, or any
similar rule that may be adopted by the Commission (such resales being
referred to as the "Registered Resales") and (iii) the public resales by
Affiliates of the Company of Shares in transactions in which such public
resales would otherwise be subject to the limitations of Rule 144 under the
Securities Act (such resales being referred to as the "Affiliate Resales");
the term Shelf Registration Statement shall also include all amendments
(including post-effective amendments) to such registration statement, and
all exhibits thereto and materials incorporated by reference therein.
1.44 "Units" means units of limited partnership interest in the
Operating Partnership issued to the Investors pursuant to the Contribution
Agreement.
2. REGISTRATION UNDER SECURITIES ACT.
2.1 SHELF REGISTRATION.
(a) Within 60 days after the Closing Date, the Company shall cause
to be filed a Shelf Registration Statement providing for registration
under the Securities Act of all Shares to be sold in (i) Registered
Conversions, (ii) Registered Resales and (iii) Affiliate Resales. The
Company will use commercially reasonable efforts to cause such Shelf
Registration Statement to be declared effective by the Commission as soon
as practicable after filing. The Company agrees to use commercially
reasonable efforts to keep such Shelf Registration Statement continuously
effective so long as necessary to cover all of the transactions referred
to in clauses (i), (ii) and (iii) above. Subject to Section 2.2(b) and
Section 2.2(i), the Company further agrees to amend the Shelf
Registration Statement if and as required by the rules, regulations or
instructions applicable to the registration form used by the Company for
such Shelf Registration Statement or by the Securities Act or any rules
and regulations thereunder; provided, however, that the Company shall not
be deemed to have used its commercially reasonable efforts to keep the
Shelf Registration Statement effective during the applicable period if it
voluntarily takes any action that would result in the Holders not being
able to sell Shelf Registrable Securities covered thereby during that
period, unless such action is required under applicable law or the
Company has filed a post-effective amendment to the Shelf Registration
Statement and the Commission
B-5
<PAGE>
has not declared it effective or except as otherwise permitted by the
Restriction Provisions. The Holders will provide information reasonably
requested by the Company in connection with the Shelf Registration
Statement as promptly as practicable after receipt of such request. The
"Plan of Distribution" section of the Shelf Registration Statement shall
permit sales by the Company in connection with the conversion of Units
and resales by Investors (in Registered Resales and Affiliate Resales) in
negotiated purchases, secondary distributions, block trades, ordinary
brokerage transactions or a combination of such methods of sale,
provided, however, that the Company's obligations under Sections 2.1 and
2.2 hereof shall not include participation in underwritten offerings or
other organized distributions of securities, which obligations are
limited to registrations under Sections 2.3, 2.6 and 2.9 hereof.
(b) EXPENSES. The Company shall pay all Shelf Registration Expenses
in connection with the registrations pursuant to Section 2.1(a). The
Holders shall pay all fees and expenses of counsel representing the
Holders and all Selling Expenses relating to the sale or disposition by
them of Shelf Registrable Securities pursuant to the Shelf Registration
Statement.
(c) ADDITIONAL REGISTRATION STATEMENTS. If the Company is unable,
for any reason, including without limitation, the rules and regulations
of the Commission and the policies of the Division of Corporation
Finance, as in effect on the date hereof or hereafter, to register on one
shelf registration statement the sales of Shares in the Registered
Resales and the Affiliate Resales, it shall file, and use its best
efforts to cause to become effective and continuously to keep effective,
one or more such additional registration statements as may be required to
cover the sale of Shares in such transactions, in accordance as nearly as
practicable with all the provisions of this Agreement other than those
provisions which contemplate that such transactions and Registered
Conversions would be covered by one shelf registration statement. This
Section 2.1(c) shall not reduce the Company's obligation to effect the
maximum of two Demand Registrations provided for in Section 2.9.
2.2 SHELF REGISTRATION PROCEDURES. In connection with the obligations of
the Company with respect to the Shelf Registration Statement contemplated by
Section 2.1 hereof, the Company shall:
(a) prepare and file with the Commission, within the time period set
forth in Section 2.1(a) hereof, the Shelf Registration Statement, which
Shelf Registration Statement shall comply as to form in all material
respects with the requirements of the applicable form and include all
financial statements required by the Commission to be filed therewith;
(b) subject to the Restriction Provisions and Section 2.2(i) hereof,
(i) prepare and file with the Commission such amendments to such Shelf
Registration Statement as may be necessary to keep such Shelf
Registration Statement effective throughout the applicable period; (ii)
cause the Shelf Prospectus to be amended or supplemented as required and
to be filed as required by Rule 424 or any similar rule that may be
adopted under the Securities Act; and (iii) respond as promptly as
practicable to any comments received from the Commission with respect to
the Shelf Registration Statement or any amendments thereto.
Notwithstanding anything to the contrary contained herein, the Company
shall not be required to take any of the actions described in clauses
(i), (ii) or (iii) in this Section 2.2(b), Section 2.2(d) or Section
2.2(i) with respect to the Shelf Registrable Securities (x) to the extent
that (i) in the reasonable opinion of the Company (A) securities laws
applicable to such sale would require the Company to disclose material
non-public information ("Non-Public Information"), (B) the disclosure of
such Non-Public Information would materially adversely affect the
Company; and (C) the disclosure of such Non-Public Information is not
currently required by applicable law; (ii) such sale would occur during
the measurement period for determining the amount of Common Stock, or the
amount of any other consideration the amount of which will be based on
the price of the Common Stock, in connection with the acquisition of a
business or assets by the Company (a "Measurement
B-6
<PAGE>
Period"); or (iii) the Company is contemplating an underwritten Public
Offering of its securities and in the reasonable opinion of the
underwriters such sale would interfere materially with such Public
Offering by the Company (a "Financing Period"); and the Company delivers
written notice to the Holders to the effect that the Holders may not make
offers or sales under the Shelf Registration Statement for a period not
to exceed 45 days from the date of such notice; provided, however, that
the Company may deliver only four such notices under this Section 2.2(b)
and Section 2.4(a) within any twelve-month period, provided, further,
that the Company may deliver only two such notices under this Section
2.2(b) and Section 2.4(a) within the twelve-month period immediately
following the expiration of the six-month period referred to in Section
2.3(f) hereof and (y) unless and until the Company has received a written
notice (a "Shelf Registration Notice") from any Holder that such Holder
intends to make offers or sales of Shares under the Shelf Registration
Statement as specified in such Shelf Registration Notice; provided,
however, that the Company shall have ten business days to prepare and
file any such amendment or supplement after receipt of the Shelf
Registration Notice. The Measurement Period and Financing Period are
collectively referred to herein as the "Restricted Period." In the event
the sale by the Holders of Shelf Registrable Securities is deferred
because of the existence of Non-Public Information, the Company will
notify the Holders promptly upon such Non-Public Information being
included by the Company in a filing with the Commission, being otherwise
disclosed to the public (other than through the actions of any Holder),
or ceasing to be material to the Company, and upon such notice being
given by the Company, the Holders shall again be entitled to sell Shelf
Registrable Securities as provided herein. In the event the sale by the
Holders of Shelf Registrable Securities is deferred because it is
proposed to be made during a Restricted Period, the Company shall
specify, in notifying the Holders of the deferral of its sale, when the
Restricted Period will end, at which time the Holders shall again be
entitled to sell Shelf Registrable Securities as provided herein. If the
Restricted Period is thereafter changed, the Company will promptly notify
the Holders of such change and upon the end of the Restricted Period as
so changed, the Holders will again be entitled to sell Shelf Registrable
Securities as provided herein. If an agreement to which such Restricted
Period relates is terminated prior to the end of the Restricted Period,
the deferral period hereunder shall end immediately and the Company shall
promptly notify the Holders of the end of the deferral period;
(c) promptly furnish the Holders after a Holder has delivered a
Shelf Registration Notice to the Company, without charge, as many copies
of each Shelf Prospectus and any amendment or supplement thereto as such
Holders reasonably request in order to facilitate the public sale or
other disposition of the Shelf Registrable Securities; the Company
consents to the use of the Shelf Prospectus and any amendment or
supplement thereto by the Holders of Shelf Registrable Securities in
connection with the offering and sale of the Shelf Registrable Securities
covered by the Shelf Prospectus or amendment or supplement thereto;
(d) use commercially reasonable efforts to register or qualify the
Shelf Registrable Securities by the time the Shelf Registration Statement
is declared effective by the Commission under all applicable state
securities or blue sky laws of such jurisdictions in the United States
and its territories and possessions as the Holders shall reasonably
request in writing, keep each such registration or qualification
effective during the period such Shelf Registration Statement is required
to be kept effective or during the period offers or sales are being made
by the Holders after a Holder has delivered a Shelf Registration Notice
to the Company, whichever is shorter; provided, however, that in
connection therewith, the Company shall not be required to (i) qualify as
a foreign corporation to do business or to register as a broker or dealer
in any such jurisdiction where it would not otherwise be required to
qualify or register but for this Section 2.2(d), (ii) subject itself to
taxation in any such jurisdiction, or (iii) file a general consent to
service of process in any such jurisdiction;
B-7
<PAGE>
(e) notify the Holders promptly and, if requested by a Holder,
confirm in writing, (i) when the Shelf Registration Statement and any
post-effective amendments thereto have become effective, (ii) when any
amendment or supplement to the Shelf Prospectus has been filed with the
Commission, (iii) of the issuance by the Commission or any state
securities authority of any stop order suspending the effectiveness of
the Shelf Registration Statement or any part thereof or the initiation of
any proceedings for that purpose, (iv) if the Company receives any
notification with respect to the suspension of the qualification of the
Shelf Registrable Securities for offer or sale in any jurisdiction or the
initiation of any proceeding for such purpose, and (v) of the happening
of any event during the period the Shelf Registration Statement is
effective as a result of which (A) such Shelf Registration Statement
contains any untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading or (B) the Shelf Prospectus as then
amended or supplemented contains any untrue statement of a material fact
or omits to state any material fact necessary in order to make the
statements therein, in light of the circumstances under which they were
made, not misleading;
(f) use its reasonable best efforts to obtain the withdrawal of any
order suspending the effectiveness of the Shelf Registration Statement or
any part thereof as promptly as possible;
(g) promptly furnish to the Holders after a Holder has delivered a
Shelf Registration Notice to the Company, without charge, at least one
conformed copy of the Shelf Registration Statement and any post-effective
amendment thereto (without documents incorporated therein by reference or
exhibits thereto, unless requested);
(h) cooperate with the Holders to facilitate the timely preparation
and delivery of certificates representing Shelf Registrable Securities to
be sold and not bearing any Securities Act legend; and enable
certificates for such Shelf Registrable Securities to be issued for such
numbers of shares as the Holders may reasonably request at least two
business days prior to any sale of Shelf Registrable Securities;
(i) subject to the Restriction Provisions, upon the occurrence of
any event contemplated by clause (v) of Section 2.2(e) hereof, use its
reasonable best efforts promptly to prepare and file an amendment or a
supplement to the Shelf Prospectus or any document incorporated therein
by reference or prepare, file and obtain effectiveness of a
post-effective amendment to the Shelf Registration Statement, or file any
other required document, in any such case to the extent necessary so
that, as thereafter delivered to the purchasers of the Shelf Registrable
Securities, such Shelf Prospectus as then amended or supplemented will
not contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they are made, not misleading;
(j) make available for inspection by the Holders after a Holder has
provided a Shelf Registration Notice to the Company and any counsel,
accountants or other representatives retained by the Holders all
financial and other records, material corporate documents and properties
of the Company and cause the officers, directors and employees of the
Company to supply all such material records, documents or information
reasonably requested by the Holders, counsel, accountants or
representatives in connection with the Shelf Registration Statement;
provided, however, that such records, documents or information which the
Company determines in good faith to be confidential, and notifies the
Holders, counsel, accountants or representatives in writing are
confidential, shall not be disclosed by the Holders, counsel, accountants
or representatives unless (i) such disclosure is ordered pursuant to a
subpoena or other order from a court of competent jurisdiction, or (ii)
such records, documents or information become generally available to the
public other than through a breach of this Agreement;
B-8
<PAGE>
(k) a reasonable time prior to the filing of the Shelf Registration
Statement or any amendment thereto, or any Shelf Prospectus or any
amendment or supplement thereto, provide copies of such document (not
including any documents incorporated by reference therein unless
requested) to the Holders;
(l) use its reasonable best efforts to cause all Shelf Registrable
Securities to be listed on the New York Stock Exchange at the time the
Shelf Registration Statement is declared effective; and
(m) file the appropriate number of copies of each Shelf Prospectus
with the New York Stock Exchange pursuant to Rule 153 under the
Securities Act.
The Company may require the Holders to furnish to the Company in writing
such information regarding the proposed distribution by the Holders as the
Company may from time to time reasonably request in writing.
In connection with and as a condition to the Company's obligations with
respect to the Shelf Registration Statement pursuant to Section 2.1 hereof and
this Section 2.2, the Holders covenant and agree that (i) they will not offer or
sell any Shelf Registrable Securities under the Shelf Registration Statement
until a Holder has provided a Shelf Registration Notice pursuant to Section
2.2(b) and they have received copies of the Shelf Prospectus as then amended or
supplemented as contemplated by Section 2.2(c) and notice from the Company that
the Shelf Registration Statement and any post-effective amendments thereto have
become effective as contemplated by Section 2.2(e); (ii) upon receipt of any
notice from the Company contemplated by Section 2.2(b) or Section 2.2(e) (in
respect of the occurrence of an event contemplated therein), the Holders shall
not offer or sell any Shelf Registrable Securities pursuant to the Shelf
Registration Statement until the Holders receive copies of the supplemented or
amended Shelf Prospectus contemplated by Section 2.2(i) hereof and receive
notice that any post-effective amendment has become effective, and, if so
directed by the Company, the Holders will deliver to the Company (at the expense
of the Company) all copies in its possession, other than permanent file copies
then in the Holders' possession, of the Shelf Prospectus as amended or
supplemented at the time of receipt of such notice; (iii) upon the expiration of
60 days after the first date on which offers or sales can be made pursuant to
clause (i) above, the Holders will not offer or sell any Shelf Registrable
Securities under the Shelf Registration Statement until they have again complied
with the provisions of clause (i) above; (iv) each Holder and such Holder's
partners, officers, directors or Affiliates, if any, will comply with the
provisions of Regulation M under the Exchange Act as applicable to them in
connection with sales of Shelf Registrable Securities pursuant to the Shelf
Registration Statement; (v) each Holder and such Holder's partners, officers,
directors or Affiliates, if any, will comply with the prospectus delivery
requirements of the Securities Act as applicable to them in connection with
sales of Shelf Registrable Securities pursuant to the Shelf Registration
Statement; and (vi) each Holder and such Holder's partners, officers, directors
or Affiliates, if any, will enter into such written agreements as the Company
shall reasonably request to ensure compliance with clauses (iv) and (v) above.
2.3 DEMAND OFFERINGS.
(a) REQUESTS FOR DEMAND OFFERING. A Holder or Holders owning at
least 5% of the Demand Offering Securities (the "Demand Initiating
Holder") acting through the "Registration Representative" may request the
offering under the Securities Act of all or any portion of the Demand
Offering Securities held by such Holders for sale in the manner specified
in such request, including an underwritten offering; PROVIDED THAT, the
minimum offering amount must satisfy the requirements of Section 2.3(c)
hereof. (Notwithstanding any other provision of this Agreement, Holders
shall not have the right to make a Demand Offering Request (as defined
below) with respect to Registered Conversions). Upon receipt of a request
for the offering of all or any portion of the Demand Offering Securities,
the Company will promptly, but in any event within 20 days, give written
notice of such requested registration to all Holders of Demand Offering
B-9
<PAGE>
Securities, and thereupon, in accordance with Section 2.4 hereof, the
Company will use its reasonable best efforts to effect the registration
and sale of:
(i) the Demand Offering Securities which the Company has been so
requested to register by such Demand Initiating Holder;
(ii) all other Demand Offering Securities which the Company has
been requested to register by the other Holders thereof by written
request delivered to the Company within 15 days after the giving of
such written notice by the Company, and
(iii) all shares of Common Stock which the Company may elect to
register for its own account or for the account of others in
connection with the offering of Demand Offering Securities pursuant
to this Section 2.3.
Each initial request for a offering pursuant to this Section 2.3 shall
specify the number of Demand Offering Securities requested to be sold by the
Demand Initiating Holder, the method of disposition to be employed and the
Current Market Price of the Common Stock as of the date of such request. Any
request for an offering pursuant to this Section 2.3(a) shall be referred to
herein as a "Demand Offering Request" and all registrations requested pursuant
to this Section 2.3 are referred to herein as "Demand Offerings."
(b) NUMBER OF DEMAND OFFERINGS. The Company shall not be required
under this Section 2.3 (i) to effect more than one Demand Offering in any
twelve-month period or (ii) to effect more than eight Demand Offerings in
the aggregate. Notwithstanding anything to the contrary contained herein,
if such method of disposition is a firm commitment underwritten public
offering, a registration shall count as a Demand Offering only when all
such Demand Offering Securities shall have been sold pursuant thereto;
provided, however, that if a Demand Prospectus filed by the Company
pursuant to a Demand Offering Request shall be abandoned or withdrawn at
the behest of the Demand Initiating Holder, then, unless the Holders
shall, promptly upon receipt of a request by the Company therefor
supported by an invoice setting forth the expenses in reasonable detail,
reimburse the Company for the Demand Offering Expenses in respect of such
prospectus attributable to the Holders, the Company shall be deemed to
have effected a Demand Offering.
(c) MINIMUM OFFERING AMOUNT. The Company shall not be required to
comply with this Section 2.3 unless the aggregate Current Market Price of
all Demand Offering Securities covered by the Demand Offering Request and
the Demand Offering Securities described in Section 2.3(a)(ii) shall be
$40 million or more (unless and to the extent the Demand Initiating
Holder shall hold less than $40 million of Demand Offering Securities, in
which case such minimum offering amount shall be equal to the amount of
Demand Offering Securities so held).
(d) SELECTION OF UNDERWRITERS. If the method of disposition
specified by the Demand Initiating Holder shall be an underwritten public
offering, the Demand Initiating Holder may designate the managing
underwriter of such offering, subject to the approval of the Company,
which approval shall not be unreasonably withheld.
(e) PRIORITY ON DEMAND OFFERINGS. The Company shall be entitled to
include in any offering referred to in this Section 2.3, for sale in
accordance with the method of disposition specified by the Demand
Initiating Holder, shares of Common Stock to be sold by the Company for
its own account or by other shareholders of the Company for their
account, to the extent provided for herein. Nonetheless, if the managing
underwriters advise the Company in writing that in their opinion the
number of securities requested to be included in such offering exceeds
the maximum number which can be included in such offering without
adversely affecting the marketability of the offering (the "Maximum
Number"), then the Company will limit the number of shares included in
such offering to the Maximum Number, and the shares offered shall be
selected in the following order of priority: (i) first, Demand Offering
Securities covered by the Demand Offering
B-10
<PAGE>
Request and the Demand Offering Securities described in Section
2.3(a)(ii) pro rata among the Holders thereof on the basis of the number
of Shares requested to be included in such registration, subject to the
proviso set forth in clause (iii) below, (ii) second, securities the
Company proposes to sell and (iii) third, all other securities requested
to be included in such registration, pro rata among the holders thereof
on the basis of the number of shares requested to be included in such
registration; PROVIDED THAT, clauses (i), (ii) and (iii) shall be subject
to any priority rights granted to holders pursuant to the Rodamco
Agreement, the NYSTRS Agreement, the PGGM Registration Rights Agreement,
the Corporate 500 Agreement, the Memorial Cornerstone Agreement, the
Memorial Prudential Agreement or the Noro-Tooley Agreement.
(f) EXCEPTION. Anything in this Section 2.3 to the contrary
notwithstanding, the Company shall not be required to file a Demand
Prospectus in connection with a Demand Offering within six months after
the closing date of a Demand Offering or the effective date of any
registration statement (other than pursuant to Section 2.1 or a
registration statement on Form S-8 with respect to an employee benefit
plan or a registration statement on Form S-4 relating to securities to be
issued in a merger or in exchange for securities or assets of another
Person) of the Company.
2.4 DEMAND OFFERING PROCEDURES. If and whenever the Company is required
by the provisions of Section 2.3 hereof to use its reasonable best efforts
to effect the sale of any of the Demand Offering Securities under the
Securities Act, the Company shall use its reasonable best efforts to effect
the registration and sale of the Demand Offering Securities in accordance
with the intended method of disposition thereof and will, as expeditiously
as possible;
(a) within 45 days after receiving a request for a Demand Offering,
prepare and file with the Commission a Demand Prospectus as a supplement
to the Shelf Registration Statement filed pursuant to Section 2.1(a)
hereof with respect to such Demand Offering Securities. Notwithstanding
anything to the contrary contained herein, the filing of such Demand
Prospectus may be delayed for a period not to exceed 45 days if (i) any
of the events specified in clause (x) of Section 2.2(b) hereof shall have
occurred, or (ii) the Company is engaged in any program for the
repurchase of Common Stock or other securities of the Company and the
Company provides written notice to the Demand Initiating Holder;
provided, however, that the Company may deliver only four notices under
this Section 2.4(a) and 2.2(b) hereof within any twelve-month period;
provided, further, that the Company may deliver only two such notices
under this Section 2.4(a) and Section 2.2(b) within the twelve-month
period immediately following the expiration of the six-month period
referred to in Section 2.3(f) hereof.
(b) prior to the filing described in paragraph (a) above, furnish to
the Holders copies of the Demand Prospectus and any amendments or
supplements thereto, which documents shall be subject to the approval of
the Holders only with respect to any statement in the Demand Prospectus
which relates to the Holders;
(c) notify the Holders promptly and, if requested by the Holders,
confirm in writing, (i) when the Demand Prospectus has been filed with
the Commission, (ii) when any amendment or supplement to the Demand
Prospectus has been filed with the Commission, (iii) of the issuance by
the Commission or any state securities authority of any stop order
suspending the effectiveness of the Shelf Registration Statement or any
part thereof or the initiation of any proceedings for that purpose, (iv)
if the Company receives any notification with respect to the suspension
of the qualification of the Demand Offering Securities for offer or sale
in any jurisdiction or the initiation of any proceeding for such purpose,
and (v) of the happening of any event during the period of the offering
pursuant to the Demand Prospectus as a result of which (A) such Shelf
Registration Statement contains any untrue statement of a material fact
or omits to state any material fact required to be stated therein or
necessary to make the statements therein not misleading or (B) the Demand
Prospectus as then amended or supplemented
B-11
<PAGE>
contains any untrue statement of a material fact or omits to state any
material fact necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading;
(d) make every reasonable effort to obtain the withdrawal of any
order suspending the effectiveness of the Shelf Registration Statement or
any part thereof as promptly as possible;
(e) furnish to the Holders after delivery of a Demand Offering
Request to the Company, without charge, at least one conformed copy of
the Shelf Registration Statement and any post-effective amendment thereto
(without documents incorporated therein by reference or exhibits thereto,
unless requested);
(f) prepare and file with the Commission such amendments and
supplements to such Shelf Registration Statement and the Demand
Prospectus used in connection therewith as may be necessary and comply
with the provisions of the Securities Act with respect to the disposition
of all Demand Offering Securities covered by such Demand Prospectus in
accordance with the Holders' intended method of disposition set forth in
such Demand Prospectus for such period;
(g) furnish to the Holders and to each underwriter such number of
copies of the Shelf Registration Statement and the Demand Prospectus
included therein (including each preliminary prospectus) and such other
documents, as such persons may reasonably request in order to facilitate
the public sale or other disposition of the Demand Offering Securities
covered by such Demand Prospectus;
(h) use its reasonable best efforts to register or qualify the
Demand Offering Securities covered by such Demand Prospectus under the
securities or blue sky laws of such jurisdictions as the Holders or, in
the case of an underwritten public offering, the managing underwriter,
shall reasonably request;
(i) provide a transfer agent and registrar, which may be a single
entity, for all Demand Offering Securities;
(j) use its reasonable best efforts to cause all Demand Offering
Securities to be listed on the New York Stock Exchange;
(k) furnish on the date that Demand Offering Securities are
delivered to the underwriters for sale pursuant to such registration: (i)
an opinion dated such date of counsel representing the Company for the
purposes of such registration, addressed to the underwriters, stating
that the Shelf Registration Statement has become effective under the
Securities Act and (A) that to the best knowledge of such counsel, no
stop order suspending the effectiveness thereof has been issued and no
proceedings for that purpose have been instituted or are pending or
contemplated under the Securities Act, (B) that the Shelf Registration
Statement, the related Demand Prospectus, and each amendment or
supplement thereto, comply as to form in all material respects with the
requirements of the Securities Act and the applicable rules and
regulations of the Commission thereunder and that such counsel does not
believe that any such Shelf Registration Statement, Demand Prospectus,
amendment or supplement contains a misstatement of a material fact or an
omission to state a material fact required to be stated therein or
necessary to make the statements made therein, in light of the
circumstances under which they were made, not misleading (except that
such counsel need express no opinion as to financial statements or
financial or statistical data contained therein) and (C) to such other
effects as may reasonably be requested by counsel for the underwriters or
by the Holders or their counsel, and (ii) a "cold comfort" letter dated
such date from the independent public accountants retained by the
Company, addressed to the underwriters, stating that they are independent
public accountants within the meaning of the Securities Act and that, in
the opinion of such accountants, the financial statements of the Company
included in the Shelf Registration Statement or the Demand Prospectus, or
any amendment or supplement thereto, comply as to form in all material
respects
B-12
<PAGE>
with the applicable accounting requirements of the Securities Act, and
such letter shall additionally cover such other financial matters
(including information as to the period ending no more than five business
days prior to the date of such letter) with respect to the registration
in respect of which such letter is being given as such underwriters may
reasonably request; and
(l) make available for inspection by the Holders after the Demand
Initiating Holder has provided a Demand Offering Request to the Company
and any counsel, accountants or other representatives retained by the
Holders all financial and other material records, pertinent corporate
documents and properties of the Company and cause the officers, directors
and employees of the Company to supply all such material records,
documents or information reasonably requested by the Holders, counsel,
accountants or representatives in connection with the Demand Prospectus;
provided, however, that such records, documents or information which the
Company determines in good faith to be confidential, and notifies the
Holders, counsel, accountants or representatives in writing are
confidential, shall not be disclosed by Holders, counsel, accountants or
representatives unless (i) such disclosure is ordered pursuant to a
subpoena or other order from a court of competent jurisdiction, or (ii)
such records, documents or information become generally available to the
public other than through a breach of this Agreement.
For purposes of paragraphs (a) and (f) of this Section 2.4, the period of
distribution of Demand Offering Securities in a firm commitment underwritten
public offering shall be deemed to be that period during which the underwriters
in such offering require (in an underwriting agreement in the form customarily
used by such underwriters for comparable transactions) that the Company keep a
registration statement effective to permit each underwriter to complete the
distribution of all securities purchased by it, and the period of distribution
of Demand Offering Securities in any other registration shall be deemed to
extend until the earlier of the sale of all Demand Offering Securities covered
thereby or nine months after the effective date thereof.
In connection with each registration hereunder, each Holder will furnish to
the Company in writing such information with respect to itself and the proposed
distribution by itself as shall be reasonably necessary in order to assure
compliance with federal and applicable state securities laws. Reasonable
compliance with the obligation to furnish such information shall be a condition
to the rights afforded such Holder hereunder. In addition, each Holder and any
of its partners, officers, directors or Affiliates, if any, (i) will comply with
the provisions of Regulation M as applicable to them in connection with sales of
Demand Offering Securities pursuant to the Demand Prospectus; (ii) will comply
with the prospectus delivery requirements of the Securities Act as applicable to
them in connection with sales of Demand Offering Securities pursuant to the
Demand Prospectus; and (iii) will enter into such written agreements as the
Company shall reasonably request to ensure compliance therewith.
In connection with each registration pursuant to Section 2.3 hereof covering
an underwritten public offering, the Company agrees to enter into a written
agreement with the managing underwriter selected in the manner herein provided
in such form and containing such provisions as are customary in the securities
business for such an arrangement between major underwriters and companies of the
Company's size and investment stature; provided that such agreement shall not
contain any such provision applicable to the Company which is inconsistent with
the provisions hereof; provided further that the time and place of the closing
under said agreement shall be as mutually agreed upon between the Company and
such managing underwriter. The Company agrees to cooperate with such
underwriters and will use its commercially reasonable efforts to assist such
underwriters in connection with the offering and sale of Demand Offering
Securities by causing Cornerstone executives to participate in a "road show" and
similar presentations as is customary in the securities business for an offering
of comparable size.
2.5 DEMAND OFFERING EXPENSES. In connection with any Demand Offering,
the Company shall pay all Demand Offering Expenses and the Holders shall pay
all fees and expenses of counsel for the Holders and all Selling Expenses
applicable to the shares sold by the Holders.
B-13
<PAGE>
2.6 PIGGYBACK REGISTRATIONS.
(a) RIGHT TO PIGGYBACK. In the event that a Holder is not permitted
to effect sales under the Shelf Registration Statement under Section
2.2(b)(x)(iii) hereof or the Holders are not permitted to effect Demand
Offering due to Section 2.4(a)(i), Holders shall become entitled to the
rights of this Section 2.6. The Company will promptly (but in any event
within 30 days) give written notice to the Holders of its intention to
effect a registration of its securities (a "Piggyback Registration") and
a description of any underwriting agreement to be entered into with
respect thereto and will include in such registration all Shelf
Registrable Securities or Demand Offering Securities with respect to
which the Company has received written requests for inclusion within 15
days after the receipt of the Company's notice (a "Piggyback Registration
Request"). (Notwithstanding any other provision of this Agreement,
Holders shall not have the right to make a Piggyback Registration Request
with respect to Registered Conversions). In addition, the Company shall
not be required to include Shelf Registrable Securities or Demand
Offering Securities in the securities to be registered pursuant to a
registration statement on any form which limits the amount of securities
which may be registered by the issuer and/or selling security holders if,
and to the extent that, such inclusion would make the use of such form
unavailable. In the event that any Piggyback Registration shall be, in
whole or in part, an underwritten public offering of Common Stock, the
Holders shall agree that such Demand Offering Securities or Shelf
Registrable Securities are to be included in the underwriting on the same
terms and conditions as the shares of Common Stock otherwise being sold
through underwriters under such registration.
(b) PRIORITY ON PRIMARY REGISTRATIONS. If a Piggyback Registration
is an underwritten primary registration on behalf of the Company, and the
managing underwriters advise the Company in writing that in their opinion
the number of shares requested to be included in such registration
exceeds the Maximum Number, the Company will limit the number of shares
included in such registration to the Maximum Number, and the shares
registered shall be selected in the following order of priority: (i)
first, securities the Company proposes to sell, subject to the proviso
set forth in clause (ii) below, (ii) second, Shelf Registrable Securities
or Demand Offering Securities covered by Piggyback Registration Requests
and securities requested to be included in such registration pursuant to
(t) the Noro-Tooley Agreement, (u) the Corporate 500 Agreement, (v) the
Memorial Prudential Agreement, (w) the Memorial Cornerstone Agreement,
(x) the PGGM Registration Rights Agreement, (y) the NYSTRS Stockholders'
Agreement and (z) the Rodamco Stockholders' Agreement, pro rata among the
holders thereof on the basis of the number of shares requested to be
included in such registration; provided that the securities requested to
be included pursuant to clauses (y) and (z) shall not be reduced to less
than one-third of the total number of shares in such offering, and
provided further that the rights in clause (ii) above shall be subject to
any applicable priority rights, and (iii) third, other securities
requested to be included in such registration.
(c) PRIORITY ON SECONDARY REGISTRATIONS. If a Piggyback Registration
is an underwritten secondary registration on behalf of holders of the
Company's securities, and the managing underwriters advise the Company in
writing that in their opinion the number of securities requested to be
included in such registration exceeds the Maximum Number, the Company
will include in such registration the shares requested to be included
therein by the holders requesting such registration and the Shelf
Registrable Securities and Demand Offering Securities covered by
Piggyback Registration Requests and any other securities requested to be
included in such registration, pro rata among the holders thereof on the
basis of the number of shares requested to be included in such
registration; provided, however, that if the holders requesting
registration are doing so pursuant to demand registration rights of such
holders, such holders' shares shall take priority over any Shelf
Registrable Securities and Demand Offering Securities and any other
B-14
<PAGE>
securities requested to be included, which shall be included on a pro
rata basis, subject to the provisos set forth in Section 2.6(b)(ii).
2.7 INDEMNIFICATION.
(a) INDEMNIFICATION BY THE COMPANY. To the extent permitted by law,
the Company shall indemnify and hold harmless the seller of any Shares
covered by any registration statement (other than the Company as seller
in a Registered Conversion) filed pursuant to Section 2, its directors,
trustees and officers, each other person who participates as an
underwriter in the offering or sale of such securities and each other
person, if any, who controls such seller or any such underwriter within
the meaning of the Securities Act against any losses, claims, damages,
liabilities or expenses, joint or several, to which such seller or any
such director, trustee or officer or participating or controlling person
may become subject under the Securities Act or otherwise, insofar as such
losses, claims, damages, liabilities or expenses (or related actions or
proceedings) arise out of or are based upon (x) any untrue statement or
alleged untrue statement of any material fact contained in any
registration statement under which such securities were registered under
the Securities Act, any preliminary prospectus, final prospectus or
summary prospectus contained in such registration statement, or any
amendment or supplement to such registration statement, or any document
incorporated by reference in such registration statement, or (y) any
omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not
misleading, and the Company will reimburse such seller, and each such
director, trustee, officer, participating person and controlling person
for any legal or any other expenses reasonably incurred by them in
connection with investigating or defending any such loss, claim,
liability, action or proceeding, provided that the Company shall not be
liable in any such case (1) to the extent that any such loss, claim,
damage, liability or expense (or action or proceeding in respect thereof)
arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in such registration
statement, any such preliminary prospectus, final prospectus, summary
prospectus, amendment or supplement in reliance upon and in conformity
with written information furnished to the Company through an instrument
duly executed by such seller or any such director, trustee, officer,
participating person or controlling person specifically stating that it
is for use in the preparation of such registration statement or (2) to
the extent any amount paid in settlement of any such loss, claim, damage,
liability or action of such settlement is effected without the written
consent of the Company (which consent shall not be unreasonably
withheld). Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of such seller or
any such director, trustee, officer, participating person or controlling
person and shall survive the transfer of such securities by such seller.
The Company shall agree to make provision for contribution relating to
such indemnity as shall be reasonably requested by any seller of Shares
or the underwriters.
(b) INDEMNIFICATION BY THE SELLERS. The Company may require, as a
condition to including any Shares in any registration statement filed
pursuant to Section 2 (other than in a case where the Company is the
seller in a Registered Conversion), that the Company shall have received
an undertaking satisfactory to it from each prospective seller of such
securities, severally and not jointly, to indemnify and hold harmless (in
the same manner and to the same extent as set forth in Section 2.7(a))
the Company, each director of the Company, each officer of the Company
who shall sign such registration statement and each other person, if any,
who controls the Company within the meaning of the Securities Act, with
respect to any untrue statement in or omission from such registration
statement, any preliminary prospectus, final prospectus or summary
prospectus included in such registration statement, or any amendment or
supplement to such registration statement, of a material fact if such
statement or omission was made in reliance upon and in conformity with
written information furnished to the Company through an instrument duly
B-15
<PAGE>
executed by such seller specifically stating that it is for use in the
preparation of such registration statement, preliminary prospectus, final
prospectus, summary prospectus, amendment or supplement. Such indemnity
shall remain in full force and effect regardless of any investigation
made by or on behalf of the Company or any such director, officer or
controlling person and shall survive the transfer of such securities by
such seller.
(c) INDEMNIFICATION PROCEDURE. Promptly after receipt by any party
entitled to indemnification pursuant to Section 2.7(a) or 2.7(b) of this
Agreement (an "Indemnified Party") of notice by a third party of any
complaint or the commencement of any action or proceeding with respect to
which indemnification is being sought hereunder, such Indemnified Party
shall notify the party obligated to provide such indemnification (the
"Indemnifying Party") of such complaint or of the commencement of such
action or proceeding; provided, however, that the failure to so notify
the Indemnifying Party shall not relieve the Indemnifying Party from
liability for such claim arising otherwise than under this Agreement, and
such failure to so notify the Indemnifying Party shall relieve the
Indemnifying Party from liability which the Indemnifying Party may have
hereunder with respect to such claim if, but only if, and only to the
extent that, such failure to notify the Indemnifying Party results in the
forfeiture by the Indemnifying Party of material rights and defenses
otherwise available to the Indemnifying Party with respect to such claim.
The Indemnifying Party shall have the right, upon written notice to the
Indemnified Party, to assume the defense of such action or proceeding,
including the employment of counsel reasonably satisfactory to the
Indemnified Party and the payment of the fees and disbursements of such
counsel. In the event, however, that the Indemnifying Party declines or
fails to assume the defense of the action or proceeding or to employ
counsel reasonably satisfactory to the Indemnified Party, in either case
in a timely manner, or if the named parties to any such proceeding
(including any impleaded parties) include both the indemnifying party and
the indemnified party and representation of both parties by the same
counsel would be inappropriate due to actual or potential differing
interests between them, then such Indemnified Party may employ counsel to
represent or defend it in any such action or proceeding and the
Indemnifying Party shall pay the reasonable fees and disbursements of
such counsel as incurred; provided, however, that the Indemnifying Party
shall not be required to pay the fees and disbursements of more than one
counsel for all Indemnified Parties in any jurisdiction in any single
action or proceeding. In any action or proceeding with respect to which
indemnification is being sought hereunder, the Indemnified Party or the
Indemnifying Party, whichever is not assuming the defense of such action,
shall have the right to participate in such litigation and to retain its
own counsel at such party's own expense. The Indemnifying Party or the
Indemnified Party, as the case may be, shall at all times use reasonable
best efforts to keep the Indemnifying Party or the Indemnified Party, as
the case may be, reasonably apprised of the status of the defense of any
action, the defense of which it is maintaining and to cooperate in good
faith with the Indemnifying Party or the Indemnified Party, as the case
may be, with respect to the defense of any such action.
No Indemnified Party may settle or compromise any claim or consent to the
entry of any judgment with respect to which indemnification is being sought
hereunder without the prior written consent of the Indemnifying Party, unless
such settlement, compromise or consent includes an unconditional release of the
Indemnifying Party from all liability arising out of such claim. An Indemnifying
Party may not, without the prior written consent of the Indemnified Party,
settle or compromise any claim or consent to the entry of any judgment with
respect to which indemnification is being sought hereunder unless such
settlement, compromise or consent includes an unconditional release of the
Indemnified Party from all liability arising out of such claim and does not
contain any equitable order, judgment or term which in any manner affects,
restrains or interferes with the business of the Indemnified Party or any of the
Indemnified Party's affiliates.
B-16
<PAGE>
In the event an Indemnified Party shall claim a right to payment pursuant to
this Agreement, such Indemnified Party shall send written notice of such claim
to the appropriate Indemnifying Party. Such notice shall specify the basis for
such claim. As promptly as possible after the Indemnified Party has given such
notice, such Indemnified Party and the appropriate Indemnifying Party shall
establish the merits and amount of such claim (by mutual agreement or otherwise)
and, within five business days of the final determination of the merits and
amount of such claim, the Indemnifying Party shall deliver to the Indemnified
Party immediately available funds in an amount equal to such claim as determined
hereunder.
If for any reason the indemnification provided for in this Section 2.7 is
unavailable to an Indemnified Party or is insufficient to hold it harmless as
contemplated by this Section 2.7, then the Indemnifying Party shall contribute
to the amount paid or payable by the Indemnified Party as a result of such loss,
claim, damage or liability in such proportion as is appropriate to reflect the
relative fault of the Indemnified Party and the Indemnifying Party, as well as
any other relevant equitable considerations; provided that in no event shall the
liability of any Holder for such contribution and indemnification exceed, in the
aggregate, the dollar amount of the proceeds received by such Holder upon the
sale of Shares giving rise to such indemnification and contribution obligations.
The obligations of the parties under this Section 2.7 shall be in addition
to any liability which any party may otherwise have to any other party.
2.8 LIMITATIONS ON REGISTRATION RIGHTS OF OTHERS. The Company represents
and warrants that, except pursuant to this Agreement and pursuant to rights
granted pursuant to the agreements set forth on Exhibit B hereto, it has not
granted to any Person the right to request or require the Company to
register any securities issued by the Company. From and after the date of
this Agreement, the Company shall not, without the prior written consent of
the Registration Representative, enter into any agreement with any holder or
prospective holder of any securities of the Company which is violative of
any provisions of this Agreement or gives such holder or prospective holder
any registration rights which are senior to the priority registration rights
granted to the Investors in Sections 2.3(e), 2.6(b) and 2.6(c) hereof,
PROVIDED THAT, this provision shall not prohibit the Company from entering
into an agreement with any holder or prospective holder of securities of the
Company which grants such holder or prospective holder registration rights
which are PARI PASSU with the registration rights granted to the Investors
hereunder.
2.9 REGISTRATION RIGHTS IF FORM S-3 IS NOT AVAILABLE. The following
provisions shall apply with respect to Shelf Registrable Securities held by
Holders during the period, if any, beginning at such time as Form S-3 (or
similar successor form of registration statement) is not available to the
Company for registration of the Shelf Registrable Securities in Registered
Resales and ending on the date, if any, when the Company is again eligible
to use such Form or successor form for such purpose (the "Supplemental
Rights Period"). Notwithstanding any other provision of this Section 2.9,
the Company shall not be obligated to take any action described in
subsection (a) hereof in any of the circumstances set forth in the
Restriction Provisions. During the Supplemental Rights Period, the Holders
shall have the following rights:
(a) DEMAND RIGHT. The Demand Initiating Holder may make a written
request for registration under the Securities Act of all or part of its
or their Shelf Registrable Securities (a "Demand Registration");
provided, however, that (i) the Company shall not be obligated to effect
more than one Demand Registration for Holders in any twelve month period,
(ii) the number of Shelf Registrable Securities proposed to be sold by
the Holders making such written request shall have a Current Market Value
at the time of such request of at least $40,000,000 and (iii) the Holders
shall be entitled to make or join in a maximum of two Demand
Registrations. The Company shall file any registration statement required
by this paragraph (each, a "Demand Registration Statement") with the
Commission within thirty (30) days of receipt of the requisite Holder
request and shall use its reasonable efforts to cause such registration
statement to be declared
B-17
<PAGE>
effective by the Commission as soon as practicable thereafter. The
Company shall use its reasonable efforts to keep each such registration
statement filed hereunder continuously effective for a period of 90 days,
unless such offering is an underwritten offering and the managing
underwriter requires that the registration statement be kept effective
for a longer period of time, in which event for such longer period up to
120 days (such period, in each case, to be extended by the number of
days, if any, during which Holders were not permitted to make offers or
sales under such registration statement by reason of the Restriction
Provisions). The Company shall not have the right to include in any such
registration statement any securities to be issued by the Company. A
registration shall not constitute a Demand Registration under this
Section 2.9(a) until the Demand Registration Statement has been declared
effective.
(b) EXPENSES. The Company will pay all expenses associated with a
Demand Registration, regardless of their amount, which are of a character
which would be Demand Offering Expenses if the registration were a Demand
Offering. The Holders shall pay all fees and expenses of counsel for the
Holders and all Selling Expenses associated with a Demand Registration.
(c) COMPANY PURCHASE. Upon receipt by the Company of a registration
request pursuant to this Section 2.9, the Company may, but is not
obligated to, purchase from any Holder so requesting registration all,
but not less than all, of the Shelf Registrable Securities which are the
subject of the request at a price per share equal to the average closing
prices of the Common Shares for the five trading days immediately
preceding the date of the registration request. In the event the Company
elects to purchase the Shelf Registrable Securities which are the subject
of the request, the Company shall notify the Holder within five business
days of the date of receipt of the request by the Company, which notice
shall indicate: (i) that the Company will purchase the Shelf Registrable
Securities held by the Holder which are the subject of the request, (ii)
the price per Share, calculated in accordance with the preceding
sentence, which the Company will pay the Holder and (iii) the date upon
which the Company shall repurchase such Shares, which date shall not be
later than the tenth business day after receipt of the request relating
to such Shares. If the Company so elects to purchase the Shares which are
the subject of the registration request made pursuant to this Section
2.9, then upon such purchase the Company shall be relieved of its
obligations under subsections 2.9(a) and (b) with respect to such Shares
or as a result of the registration notice.
2.10 MARKET STAND-OFF AGREEMENTS.
(a) HOLDERS. Each Holder agrees not to effect any public sale or
distribution (including sales pursuant to Rule 144) of Common Stock, or
any securities convertible into or exchangeable or exercisable for such
Common Stock, during such reasonable period of time beginning on the
effective date of any underwritten Demand Offering, any underwritten
Piggyback Registration in which Demand Offering Securities are included,
or any Demand Registration (except as part of such underwritten
registration), as the underwriters managing the registered public
offering may request, PROVIDED THAT each of the Company's officers and
directors who hold Common Stock or any securities convertible into or
exercisable for Common Stock have entered into and are bound by similar
agreements.
(b) COMPANY, OFFICERS AND DIRECTORS. The Company agrees (i) not to
effect any public sale or distribution of its equity securities, or any
securities convertible into or exchangeable or exercisable for such
securities, during the seven days prior to and the 90-day period
beginning on the effective date of any underwritten Demand Offering, any
underwritten Piggyback Registration, or any Demand Registration (except
as part of such underwritten registration or pursuant to registrations on
Form S-8 or any successor form), unless the underwriters managing the
registered public offering otherwise agree, and (ii) to use its
commercially reasonable efforts to cause each of the Company's officers
and directors who hold Common Stock or any securities
B-18
<PAGE>
convertible into or exercisable for Common Stock, to agree not to effect
any public sale or distribution (including sales pursuant to Rule 144) of
any such securities during such period (except as part of such
underwritten registration, if otherwise permitted), unless the
underwriters managing the registered public offering otherwise agree.
3. RULE 144. The Company shall comply with the requirements of Rule 144
under the Securities Act, as such Rule may be amended from time to time (or any
similar rule or regulation hereafter adopted by the Commission), regarding the
availability of current public information to the extent required to enable any
Holder of Shares to sell Shares without registration under the Securities Act
pursuant to Rule 144 (or any similar rule or regulation). Upon the request of
any Holder of Shares, the Company will deliver to such Holder a written
statement as to whether it has complied with such requirements.
4. LOCK-UP AGREEMENT.
(a) LOCK-UP PERIOD FOR THE INVESTORS. Subject to Section 4(e), each of
the Investors hereby agrees that, with respect to all Units and Shares, from
the date hereof until the earlier of (x) one year after the Closing Date or
(y) the occurrence of a Change in Control (the "Lock-up Period"), such
Investor will not offer, sell, contract to sell, distribute or otherwise
dispose of (collectively, "Dispose of"), directly or indirectly, to any
Person any such Units or Shares (including Shares issued in exchange for
Units), except (A) subject to applicable restrictions with respect to Units
as are contained in the Partnership Agreement (as defined in the
Contribution Agreement), an Investor may Dispose of Shares or Units pursuant
to a pledge, grant of security interest or other encumbrance effected in a
bona fide transaction with an unrelated and unaffiliated pledgee that is a
bank or other bona fide financial institution; (B) subject to applicable
exchange restrictions with respect to Units as are contained in the
Partnership Agreement, an Investor may exchange its Units for Shares; (C)
each Investor that is a natural person and whose name on Exhibit A is under
the heading "Two-Year Lock-Up" may transfer Shares or Units to members of
the Investor's immediate family, or trusts or other entities solely or
primarily for the benefit of members of Investor's immediate family, and
pursuant to bona fide gifts to charitable institutions, PROVIDED THAT in the
case of transfers to charitable institutions the Investor retains at least
one-half of the Shares and Units received by such Investor at the Closing of
the transactions contemplated by the Contribution Agreement; and (D) William
Wilson III ("Wilson III"), whose name on Exhibit A is under the heading
"Three-Year Lock-Up," may transfer Shares or Units to members of such
Investor's immediate family, or trusts or other entities solely or primarily
for the benefit of members of such Investor's immediate family, and pursuant
to bona fide gifts to charitable institutions, PROVIDED THAT in the case of
transfers to charitable institutions such Investor retains at least one-half
of the Shares and Units received by such Investor at the Closing of the
transactions contemplated by the Contribution Agreement; PROVIDED, HOWEVER,
that in the case of any transfer of Shares or Units pursuant to clause (A),
the pledgee shall be an "accredited investor" within the meaning of Rule
501(a) of Regulation D under the Securities Act. In the event any Investor
shall Dispose of Shares or Units pursuant to this Section 4(a), such Shares
or Units shall remain subject to this Agreement and, as a condition of the
validity of such disposition, any pledgee who acquires Shares or Units upon
foreclosure or any transferee thereof shall be required to execute and
deliver its written agreement to the lock-up provisions of this Section 4.
(b) LEGENDS. Except as provided in Section 4(d), each certificate
representing the Shares issued to the Investors or transferred to a
subsequent Holder pursuant to the terms hereof shall include, in addition to
the legends relating to provisions of the Company's articles of
incorporation, legends in substantially the following form, PROVIDED that
the first such legend shall not be required if such transfer is being made
in connection with a sale that is (i) pursuant to a Public Offering or (ii)
exempt from registration pursuant to Rule 144 under the Securities Act or if
the opinion of counsel referred to in Section 4(c) is to the further effect
that such legend is not required in order to ensure compliance with the
Securities Act; PROVIDED FURTHER, that the second such legend shall not be
required after the expiration of the Lock-up Period:
B-19
<PAGE>
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE
SECURITIES ACT AND MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE
OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM.
SUCH SHARES MAY BE TRANSFERRED ONLY IN COMPLIANCE WITH THE
CONDITIONS SPECIFIED IN THE REGISTRATION RIGHTS AND LOCK-UP
AGREEMENT DATED AS OF , 1998, AMONG THE ISSUER AND THE OTHER
PARTIES NAMED THEREIN, A COMPLETE AND CORRECT COPY OF WHICH IS
AVAILABLE FOR INSPECTION AT THE PRINCIPAL OFFICE OF THE ISSUER AND
WILL BE FURNISHED TO THE HOLDER HEREOF UPON WRITTEN REQUEST AND
WITHOUT CHARGE.
(c) NOTICE OF TRANSFER. Prior to any proposed assignment, transfer or
sale of any Shares, the Holder of such Shares shall give written notice to
the Company of Holder's intention to effect such assignment, transfer or
sale, which notice shall set forth the date of such proposed assignment,
transfer or sale. Holder shall also furnish to the Company a written
agreement by the transferee that it is taking and holding the same subject
to the terms and conditions specified in this Agreement and, except in
transfers pursuant to a Public Offering or under Rule 144 under the
Securities Act, a written opinion of Holder's counsel, in form reasonably
satisfactory to the Company, to the effect that the proposed transfer may be
effected without registration under the Securities Act.
(d) TERMINATION OF RESTRICTIONS. The restrictions set forth in Section
4(c) shall terminate and cease to be effective with respect to any of the
Shares or Units (i) upon the sale of any Shares or Units by a Holder which
has been registered under the Securities Act or is made pursuant to Rule 144
under the Securities Act or (ii) upon receipt by the Company of an opinion
of counsel, which counsel and which opinion are reasonably satisfactory to
the Company, to the effect that compliance with such restrictions is not
necessary in order to comply with the Securities Act with respect to the
sale of the Shares or Units. The restrictions with respect to a Holder set
forth in Section 4(a) and 4(e) shall terminate upon the end of the Lock-up
Period. Whenever the restrictions in Sections 4(a), 4(c) or 4 (e) as
applicable shall terminate, the Holder of Shares or Units shall be entitled
to receive from the Company, without expense (other than transfer taxes, if
any), certificates for Shares and Units not bearing the respective legends
set forth in Section 4(b).
(e) SPECIAL LOCK-UP PROVISIONS.
(i) For the Investors identified under the heading "Two-Year
Lock-Up" on Exhibit A, the Lock-up Period shall run from the date hereof
until the earlier of (w) two years from the Closing Date or (x) a Change
in Control or (y) the death or permanent disability of the natural person
so identified or (z) the involuntary termination, without cause, of such
person's employment with the Company or the Operating Partnership,
PROVIDED THAT up to 20% of the Shares and 20% of the Units originally
issued to such Investors on the Closing Date may be Disposed of by such
Investor after 18 months following the Closing Date.
(ii) In the case of Wilson III, identified under the heading
"Three-Year Lock-Up" on Exhibit A, the Lock-up Period shall run from the
date hereof until the earlier of (w) three years from the Closing Date or
(x) a Change in Control or (y) the death or permanent disability of
Wilson III or (z) the involuntary termination of Wilson III as Chairman
of Board of the Company or his involuntary termination, without cause, by
the Company under any employment agreement he may have with the Company,
provided that up to 20% of the Shares and 20% of the Units originally
issued to Wilson III on the Closing Date may be Disposed of by Wilson III
after two years following the Closing Date.
B-20
<PAGE>
(f) Each Holder, while holding its Shares during the Lock-Up Period
applicable to that Holder and for so long thereafter as it holds its Shares,
agrees, severally and not jointly, that:
(i) During the period that PGGM and DIHC and their respective
Affiliates own in the aggregate 5% or more of the issued and outstanding
shares of Common Stock (the "5% Period") it shall vote (or provide
written consent with respect to) all shares of Common Stock over which it
exercises voting authority in favor of the persons nominated as PGGM
Directors (as defined in the Amended and Restated Bylaws of the Company
in the form attached hereto as Exhibit C (the "Amended Bylaws") pursuant
to Section 3.03(b) of the Amended Bylaws and approved by the Board
Affairs Committee as set forth in Section 3.03(d) of the Amended Bylaws;
(ii) During the 5% Period it shall use commercially reasonable
efforts to cause the Wilson Directors (as defined in the Amended Bylaws),
in considering the nominees proposed by PGGM for inclusion in the Board's
list of nominees for election as director to approve in all cases any
person who is an employee, officer or director of PGGM or DIHC, and in
considering other persons nominated as PGGM Directors, not to
unreasonably withhold their approval;
(iii) Holders agree that from the date of adoption of the Amended
Bylaws (A) until the end of the PGGM Period (as defined in the Amended
Bylaws) they will not vote to repeal or amend the Amended Bylaws where
such amendment or repeal is governed by Section 10.01(c)(i) of such
Amended Bylaws unless such amendment is approved by the PGGM Directors,
and (B) until the end of the 5% Period they will not vote to repeal or
amend the Amended Bylaws where such amendment or repeal is governed by
Section 10.01(c)(ii) of such Amended Bylaws unless such amendment is
approved by the PGGM Directors.
(iv) PGGM is an intended third party beneficiary of the provisions
of this Section 4(f) and shall have the rights of such an intended
beneficiary to enforce these provisions.
5. AMENDMENTS AND WAIVERS. This Agreement may be amended and the Company
may take any action herein prohibited, or omit to perform any act herein
required to be performed by it, only if the Company shall have obtained the
written consent to such amendment, action or omission to act, of the
Registration Representative or Holders of a majority of the Shares (and, in the
case of any amendment, action or omission to act which materially adversely
affects only a specific Holder of Shares or a specific group of Holders of
Shares and not Holders generally, the written consent of either (i) the
Registration Representative or (ii) each such Holder or Holders of a majority of
the Shares held by such group). Each Holder of any Shares at the time shall be
bound by any consent authorized by this Section 5.
6. POWERS OF REGISTRATION REPRESENTATIVE; EXCULPATION.
(a) POWERS. Unless and until a Holder indicates otherwise in writing to
the Company and the Registration Representative, all rights and powers which
could be exercised by a Holder under this Agreement may be exercised by the
Registration Representative on behalf of such Holder.
(b) EXCULPATION. Neither the Registration Representative nor any of its
agents or employees shall be personally liable for any action taken or
omitted to be taken by them as Registration Representative under or in
connection with this Agreement except for their own gross negligence or
willful misconduct. Without limiting the foregoing, the Registration
Representative: (i) may consult with legal counsel, independent public
accountants and other experts selected by it and shall not be liable for any
action taken or omitted to be taken in good faith with the advice of such
counsel, accountants or experts; (ii) makes no warranty or representation to
the Holders and shall not be responsible to the Holders for any statements,
warranties or representations made in or in connection with this Agreement;
(iii) shall not have any duty to ascertain or to inquire as to the
performance or observance of any of the terms, covenants or conditions of
this Agreement on the part of the Company or the Operating Partnership; (iv)
shall not be responsible to any Holders for the due execution, legality,
validity, enforceability, genuineness, sufficiency or value of this
Agreement, or any other instrument or
B-21
<PAGE>
document furnished pursuant hereto; and (v) shall incur no liability under
or in respect of this Agreement by acting upon any notice (including notice
by telephone), consent, certificate or other instrument or writing (which
may be by facsimile) believed by the Registration Representative to be
genuine and signed or sent by the proper party or parties. By executing
their Consents pursuant to the Contribution Agreement, Participating
Investors shall be deemed severally, but not jointly, to have agreed to
defend, indemnify, and hold the Registration Representative harmless,
ratably in accordance with their Consideration, from and against any and all
liabilities, obligations, losses, damages, penalties, actions, judgments,
suits, costs, expenses or disbursements of any kind or nature whatsoever
which may be imposed on, incurred by, or asserted against the Registration
Representative in any way relating to or arising out of this Agreement or
any action taken or omitted by the Registration Representative under this
Agreement; PROVIDED that no Participating Investor shall be liable for any
portion of such liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses or disbursements (A) resulting
from the Registration Representative's gross negligence or willful
misconduct; or (B) relating to any period during which the Registration
Representative was not acting as the representative hereunder of such
Participating Investor. Without limitation of the foregoing, the
Registration Representative may reimburse itself for any amount indemnified
hereunder out of any funds, Shares, Units or Consideration otherwise
distributable to the Holders.
7. NOMINEES FOR BENEFICIAL OWNERS. In the event that any Shares are held
by a nominee for the beneficial owner thereof, the beneficial owner thereof may,
at its election, be treated as the Holder of such Shares for purposes of any
request or other action by any Holder or Holders of Shares pursuant to this
Agreement or any determination of any number or percentage of Shares held by any
Holder or Holders of Shares contemplated by this Agreement. If the beneficial
owner of any Shares so elects to be treated as the Holder, the Company may
require assurances reasonably satisfactory to it of such owner's beneficial
ownership of such Shares.
8. ASSIGNMENT. After the termination of the Lock-up Period, any of the
rights originally granted to the Investors by the Company under this Agreement
may be transferred or assigned by an original Investor or subsequent Holder to a
transferee or assignee who after such transfer or assignment will hold not less
than one per cent (1%) of the Shares or a combination of Shares and Units which
when converted into Shares would cause such transferee or assignee to hold not
less than such percentage of Shares (as presently constituted and subject to
subsequent adjustments for stock splits, stock dividends, reverse stock splits,
and the like), (PROVIDED THAT the Company is given written notice at the time of
or within a reasonable time after said transfer or assignment, stating the name
and address of the transferee or assignee and identifying the securities with
respect to which such registration rights are being transferred or assigned,
and, provided further, that the transferee or assignee of such rights assumes in
writing the obligations of such Holder under this Agreement. Any such transferee
shall have all the rights of an original Investor hereunder, regardless of when
the transfer to such transferee is effected and the transferor shall also retain
all its rights hereunder to the extent of the Shares or Units it retains.
9. MISCELLANEOUS. This Agreement constitutes the sole understanding of the
parties hereto with respect to the subject matter hereof; provided, however,
that this provision is not intended to abrogate any other written agreement
between or among the parties executed with or after this Agreement or any
written agreement pertaining to another subject matter. No amendment of this
Agreement shall be binding unless made in writing and duly executed by the
parties hereto or, in the case of the Investors, by the Registration
Representative. This Agreement shall be construed in accordance with and
governed by the laws of the State of California without regard to conflict of
laws principles thereof. No provision of this Agreement shall be construed
against or interpreted to the disadvantage of any party hereto by any court or
other governmental or judicial authority or by any board of arbitrators by
reason of such party or its counsel having or being deemed to have structured or
drafted such provision. Unless otherwise expressly provided herein, all
references in this Agreement to Section(s) shall refer to the Section(s) of this
Agreement. The headings in this Agreement are for purposes of reference only and
shall not limit or
B-22
<PAGE>
otherwise affect the meaning of this Agreement. This Agreement may be executed
in any number of counterparts, each of which shall be an original, but all of
which together shall constitute one instrument.
10. NOTICES. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given or made (and
shall be deemed to have been duly given or made upon receipt) by delivery in
person, by courier service, by cable, by telecopy, by telegram, by telex or by
registered or certified mail (postage prepaid, return receipt requested) to the
respective parties at the following addresses (or at such other address for a
party as shall be specified in a notice given in accordance with this Section
10):
(a) if to the Company:
126 East 56th Street
New York, NY 10022
Telecopy: (212) 605-7199
Attention: Mr. John S. Moody
with a copy to:
King & Spalding
191 Peachtree Street, NE
Atlanta, GA 30303
Telecopy: (404) 572-5100
Attention: William B. Fryer, Esq.
(b) if to the Investors:
WW Holdings, LLC
2929 Campus Drive, Suite 450
San Mateo, CA 94403
Telecopy: (650) 345-8264
Attention: General Counsel
with a copy to:
Farella Braun & Martel LLP
235 Montgomery Street, Suite 3000
San Francisco, CA 94104
Telecopy: (415) 954-4480
Attention: Jeffrey P. Newman, Esq.
B-23
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
and delivered as of the date first above written.
<TABLE>
<S> <C> <C>
"COMPANY"
CORNERSTONE PROPERTIES INC.,
a Nevada corporation
By: -----------------------------------------
Name:
-----------------------------------------
Title:
-----------------------------------------
By: -----------------------------------------
Name:
-----------------------------------------
Title:
-----------------------------------------
"INVESTORS"
---------------------------------------------
---------------------------------------------
---------------------------------------------
---------------------------------------------
</TABLE>
B-24
<PAGE>
EXHIBIT C TO
REGISTRATION RIGHTS AND LOCK-UP AGREEMENT
AMENDED AND RESTATED BYLAWS
OF
CORNERSTONE PROPERTIES INC.
ARTICLE I
OFFICES
SECTION 1.01. REGISTERED OFFICE. The registered office of Cornerstone
Properties Inc. (the "Corporation") in the State of Nevada shall be at the
principal office of The Corporation Trust Company of Nevada in the City of Reno,
County of Washoe, and the registered agent in charge thereof shall be
.
SECTION 1.02. OTHER OFFICES. The Corporation may also have an office
or offices at any other place or places within or without the State of Nevada as
the Board of Directors of the Corporation (the "BOARD") may from time to time
determine or the business of the Corporation may from time to time require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 2.01. ANNUAL MEETINGS. The annual meeting of stockholders of
the Corporation for the election of directors of the Corporation ("DIRECTORS"),
and for the transaction of such other business as may properly come before such
meeting, shall be held at such place, date and time as shall be fixed by the
Board and designated in the notice or waiver of notice of such annual meeting;
PROVIDED, HOWEVER, that no annual meeting of stockholders need be held if all
actions, including the election of Directors, required by the General
Corporation Law of the State of Nevada (the "GENERAL CORPORATION LAW") to be
taken at such annual meeting are taken by written consent in lieu of meeting
pursuant to Section 2.09 hereof.
SECTION 2.02. SPECIAL MEETINGS. Special meetings of stockholders for
any purpose or purposes may be called by the Board or the Chairman of the Board,
the President or the Secretary of the Corporation or by the recordholders of at
least a majority of the shares of common stock of the Corporation issued and
outstanding ("SHARES") and entitled to vote thereat, to be held at such place,
date and time as shall be designated in the notice or waiver of notice thereof.
SECTION 2.03. NOTICE OF MEETINGS. (a) Except as otherwise provided by
law, written notice of each annual or special meeting of stockholders stating
the purpose, place, date and time of such meeting shall be given personally or
by first-class mail to each recordholder of Shares (a "STOCKHOLDER") entitled to
vote thereat, not less than 10 nor more than 60 days before the date of such
meeting. If mailed, such notice shall be deemed to be given when deposited in
the mail, postage prepaid, directed to the Stockholder at such Stockholder's
address as it appears on the records of the Corporation. If, prior to the time
of mailing, the Secretary of the Corporation (the "SECRETARY") shall have
received from any Stockholder a written request that notices intended for such
Stockholder are to be mailed to some address other than the address that appears
on the records of the Corporation, notices intended for such Stockholder shall
be mailed to the address designated in such request.
B-25
<PAGE>
(b) Notice of a special meeting of Stockholders may be given by the person
or persons calling the meeting, or, upon the written request of such person or
persons, such notice shall be given by the Secretary on behalf of such person or
persons. If the person or persons calling a special meeting of Stockholders give
notice thereof, such person or persons shall deliver a copy of such notice to
the Secretary. Each request to the Secretary for the giving of notice of a
special meeting of Stockholders shall state the purpose or purposes of such
meeting.
SECTION 2.04. WAIVER OF NOTICE. Notice of any annual or special
meeting of Stockholders need not be given to any Stockholder who files a written
waiver of notice with the Secretary, signed by the person entitled to notice,
whether before or after such meeting. Neither the business to be transacted at,
nor the purpose of, any meeting of Stockholders need be specified in any written
waiver of notice thereof. Attendance of a Stockholder at a meeting, in person or
by proxy, shall constitute a waiver of notice of such meeting, except when such
Stockholder attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business on the grounds that
the notice of such meeting was inadequate or improperly given.
SECTION 2.05. ADJOURNMENTS. Whenever a meeting of Stockholders, annual
or special, is adjourned to another date, time or place, notice need not be
given of the adjourned meeting if the date, time and place thereof are announced
at the meeting at which the adjournment is taken. If the adjournment is for more
than 30 days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
Stockholder entitled to vote thereat. At the adjourned meeting, any business may
be transacted which might have been transacted at the original meeting.
SECTION 2.06. QUORUM. Except as otherwise provided by law or the
Articles of Incorporation of the Corporation (the "ARTICLES OF INCORPORATION"),
the recordholders of 20% of the Shares entitled to vote thereat, present in
person or by proxy, shall constitute a quorum for the transaction of business at
all meetings of Stockholders, whether annual or special. If, however, such
quorum shall not be present in person or by proxy at any meeting of
Stockholders, the Stockholders entitled to vote thereat may adjourn the meeting
from time to time in accordance with Section 2.05 hereof until a quorum shall be
present in person or by proxy.
SECTION 2.07. VOTING. Each Stockholder shall be entitled to one vote
for each Share held of record by such Stockholder. Except as otherwise provided
by law or the Articles of Incorporation, when a quorum is present at any meeting
of Stockholders, the vote of the recordholders of a majority of the Shares
constituting such quorum shall decide any question brought before such meeting.
SECTION 2.08. PROXIES. Each Stockholder entitled to vote at a meeting
of Stockholders or to express, in writing, consent to or dissent from any action
of Stockholders without a meeting may authorize another person or persons to act
for such Stockholder by proxy. Such proxy shall be filed with the Secretary
before such meeting of Stockholders or such action of Stockholders without a
meeting, at such time as the Board may require. No proxy shall be voted or acted
upon more than six months from its date, unless the proxy provides for a longer
period, which may not exceed seven years.
SECTION 2.09. STOCKHOLDERS' CONSENT IN LIEU OF MEETING. Any action
required by the General Corporation Law to be taken at any annual or special
meeting of Stockholders, and any action which may be taken at any annual or
special meeting of Stockholders, may be taken without a meeting, without prior
notice and without a vote, if a consent in writing, setting forth the action so
taken, shall be signed by the recordholders of a majority of the Shares, except
that if a different number of votes is required to authorize or take such action
at a meeting, then that proportion of written consents is required.
B-26
<PAGE>
ARTICLE III
BOARD OF DIRECTORS
SECTION 3.01. GENERAL POWERS. The business and affairs of the
Corporation shall be managed by the Board, which may exercise all such powers of
the Corporation and do all such lawful acts and things as are not by law, the
Articles of Incorporation or these Bylaws directed or required to be exercised
or done by Stockholders.
SECTION 3.02. NUMBER AND TERM OF OFFICE. The number of Directors shall
be not less than three nor more than eighteen. As of the date of the adoption of
these Bylaws, the number of Directors constituting the Board shall be fourteen.
The number of Directors constituting the Board may be increased or decreased by
a resolution adopted by a majority of the entire Board; provided, however, that
during the "Wilson Period" (as defined herein) and during the "PGGM Period" (as
defined herein), such resolution shall also have been adopted by a unanimous
vote of the Board Affairs Committee of the Board. Directors need not be
Stockholders. Directors shall be elected at the annual meeting of Stockholders
or, if, in accordance with Section 2.01 hereof, no such annual meeting is held,
by written consent in lieu of meeting pursuant to Section 2.09 hereof, and each
Director shall hold office until his successor is elected and qualified, or
until his earlier death or resignation or removal in the manner hereinafter
provided. The "WILSON PERIOD" shall mean the period from the date of adoption of
these Bylaws until and including the third anniversary of that date. "PGGM"
shall mean Stichting Pensioenfonds Voor de Gezondheid, Geestelijke en
Maatschappelijke Belangen. "DIHC" shall mean Dutch Institutional Holding
Company, Inc., a Delaware corporation. "AFFILIATE" shall mean, with respect to
any specified individual, partnership, firm, corporation, trust, association,
unincorporated organization or other entity, as well as any syndicate or group
that would be deemed to be a person under Section 13(d)(3) of the Securities
Exchange Act of 1934, as amended ("PERSON"), any other Person that directly, or
indirectly through one or more intermediaries, controls, is controlled by, or is
under common control with, such specified Person. The "PGGM PERIOD" shall mean
the period that ends on the earlier of (i) the date on which PGGM and DIHC and
their respective Affiliates own in the aggregate less than 25% of the Shares or
(ii) October 31, 2002.
SECTION 3.03. MEMBERS OF THE BOARD. (a) Subject to the provisions of
Section 3.09 hereof, during the Wilson Period the Board shall nominate for
election to the Board at any special or annual meeting of stockholders at which
directors are being elected (or in connection with a written consent in lieu of
a meeting pursuant to which directors are proposed to be elected), or appointed
in accordance with Section 3.07 of these Bylaws, William Wilson III ("WILSON
III") and two other individuals designated by Wilson III from time to time
(together with Wilson III, collectively, the "WILSON DIRECTORS") provided that
at least one Wilson Director must satisfy the criteria for independent directors
described in the New York Stock Exchange, Inc. Listed Company Manual and (ii)
satisfy the criteria for non-employee directors described in Rule 16b-3(b)(3)(i)
promulgated under the Securities Exchange Act of 1934, as amended (each Director
satisfying such criteria hereinafter referred to as "INDEPENDENT"), and further
provided that upon the death or incapacity of Wilson III, his designee, who
shall initially be Patricia W. Wilson, or such other person as is designated
from time to time by Wilson III (the "WILSON DESIGNEE"), shall have the right to
designate an individual to be nominated by the Board to replace Wilson III as a
Director, which individual shall have the right to designate the other
individuals to be nominated as Wilson Directors. In the event that the Wilson
Designee is not able, for whatever reason, to designate an individual to be
nominated to replace Wilson III as a Director, that designation shall be made by
the remaining Wilson Directors acting unanimously.
(b) So long as PGGM and DIHC and their respective Affiliates own in the
aggregate 5% or more of the issued and outstanding Shares, the Board shall
nominate for election to the Board at any special or annual meeting of
Stockholders at which Directors are being elected (or in connection with a
written
B-27
<PAGE>
consent in lieu of a meeting pursuant to which Directors are proposed to be
elected), or appointed in accordance with Section 3.07 of these Bylaws, two
individuals designated by PGGM ("PGGM DIRECTORS").
(c) During the PGGM Period, no nominee for election as a Director of the
Corporation shall be a person affiliated with PGGM or DIHC or any of their
respective Affiliates, other than two PGGM Directors.
(d) Until both the Wilson Period and the PGGM Period have expired, all
nominees for election as Directors of the Corporation by the Board (other than
PGGM Directors who are employees, officers or directors of PGGM or DIHC, Wilson
III and Incumbent Directors (defined below)) must be approved by the unanimous
vote of the members of the Board Affairs Committee. "INCUMBENT DIRECTOR" shall
mean (i) all of the individuals constituting the Board of Directors of the
Corporation on the date hereof, (ii) all individuals hereafter designated as
nominees to the Board by the New York State Teachers' Retirement System pursuant
to a letter agreement dated November 22, 1996, (iii) all individuals hereafter
designated as nominees to the Board by Hexalon Real Estate, Inc. pursuant to a
letter agreement dated November 7, 1996, and (iv) one individual at any time
hereafter designated as a nominee to the Board by Deutsche Bank AG.
SECTION 3.04. THE CHAIRMAN OF THE BOARD. The Board may select a
Chairman of the Board of the Corporation (the "CHAIRMAN") who shall have the
power to call special meetings of Stockholders, to call special meetings of the
Board and, if present, to preside at all meetings of Stockholders and all
meetings of the Board. The Chairman shall perform all duties incident to the
office of Chairman of the Board and all such other duties as may from time to
time be assigned to him by the Board or these Bylaws. The provisions of Section
4.03 hereof shall apply to the Chairman. Notwithstanding the foregoing, during
the Wilson Period, Wilson III shall be the Chairman, provided, however that a
majority of the Board may remove Wilson III as Chairman if (i) Wilson III is
convicted of, pleads guilty to or confesses to any felony or any act of fraud,
misappropriation or embezzlement or (ii) a majority of the members of the Board
Affairs Committee determines that Wilson III has engaged in a fraudulent or
dishonest act or has been grossly negligent in carrying out his duties as a
Director or Chairman of the Board, in each case to the material damage or
prejudice of the Corporation or an Affiliate of the Corporation, or in conduct
or activities materially damaging to the property, business or reputation of the
Corporation or an Affiliate of the Corporation.
SECTION 3.05. RESIGNATION. Any Director may resign at any time by
giving written notice to the Board, the Chairman or the Secretary. Such
resignation shall take effect at the time specified in such notice or, if the
time be not specified, upon receipt thereof by the Board, the Chairman or the
Secretary, as the case may be. Unless otherwise specified therein, acceptance of
such resignation shall not be necessary to make it effective.
SECTION 3.06. REMOVAL. Any or all of the Directors may be removed,
with or without cause, at any time by vote of the recordholders of two-thirds of
the Shares then entitled to vote at an election of Directors, or by written
consent of the recordholders of Shares pursuant to Section 2.09 hereof.
SECTION 3.07. VACANCIES. Vacancies occurring on the Board for any
reason, including, without limitation, vacancies occurring as a result of the
creation of new directorships that increase the number of Directors or removal
in accordance with Section 3.06 of these Bylaws, may be filled by vote of the
recordholders of a majority of the Shares then entitled to vote at an election
of Directors, or by written consent of such recordholders pursuant to Section
2.09 hereof or by vote of the Board or by written consent of the Directors
pursuant to Section 3.10 hereof. If the number of Directors then in office is
less than a quorum, such vacancies may be filled by vote of a majority of the
Directors then in office or by written consent of all such Directors pursuant to
Section 3.10 hereof. If a vacancy of the Board is caused by the vacancy of a
Wilson Director during the Wilson Period or a PGGM Director during the period in
which PGGM shall have the right to designate two nominees for Director pursuant
to Section 3.03(b) of these Bylaws, the Board shall fill such vacancy by
appointing another Wilson Director or PGGM Director, as the
B-28
<PAGE>
case may be. Unless earlier removed pursuant to Section 3.06 hereof, each
Director chosen in accordance with this Section 3.07 shall hold office until the
next annual election of Directors by the Stockholders and until his successor
shall be elected and qualified.
SECTION 3.08. MEETINGS. (a) ANNUAL MEETINGS. As soon as practicable
after each annual election of Directors by the Stockholders, the Board shall
meet for the purpose of organization and the transaction of other business,
unless it shall have transacted all such business by written consent pursuant to
Section 3.10 hereof.
(b) OTHER MEETINGS. Other meetings of the Board shall be held at such times
as the Chairman, the President, the Secretary or a majority of the Board shall
from time to time determine.
(c) NOTICE OF MEETINGS. The Secretary shall give written notice to each
Director of each meeting of the Board, which notice shall state the place, date,
time and purpose of such meeting. Notice of each such meeting shall be given to
each Director, if by mail, addressed to him at his residence or usual place of
business, at least two days before the day on which such meeting is to be held,
or shall be sent to him at such place by telecopy, telegraph, cable, or other
form of recorded communication, or be delivered personally or by telephone not
later than the day before the day on which such meeting is to be held. A written
waiver of notice, signed by the Director entitled to notice, whether before or
after the time of the meeting referred to in such waiver, shall be deemed
equivalent to notice. Neither the business to be transacted at, nor the purpose
of any meeting of the Board need be specified in any written waiver of notice
thereof. Attendance of a Director at a meeting of the Board shall constitute a
waiver of notice of such meeting, except as provided by law.
(d) PLACE OF MEETINGS. The Board may hold its meetings at such place or
places within or without the State of Nevada as the Board or the Chairman may
from time to time determine, or as shall be designated in the respective notices
or waivers of notice of such meetings.
(e) QUORUM AND MANNER OF ACTING. A majority of the total number of Directors
then in office shall be present in person at any meeting of the Board in order
to constitute a quorum for the transaction of business at such meeting, and the
vote of a majority of those Directors present at any such meeting at which a
quorum is present shall be necessary for the passage of any resolution or act of
the Board, except as otherwise expressly required by law, the Articles of
Incorporation or these Bylaws. In the absence of a quorum for any such meeting,
a majority of the Directors present thereat may adjourn such meeting from time
to time until a quorum shall be present.
(f) ORGANIZATION. At each meeting of the Board, one of the following shall
act as chairman of the meeting and preside, in the following order of
precedence:
(i) the Chairman;
(ii) the President;
(iii) any Director chosen by a majority of the Directors present.
The Secretary or, in the case of his absence, any person (who shall be an
Assistant Secretary, if an Assistant Secretary is present) whom the chairman of
the meeting shall appoint shall act as secretary of such meeting and keep the
minutes thereof.
SECTION 3.09. COMMITTEES OF THE BOARD. (a) Subject to the other
provisions of this Section 3.09, the Board may, by resolution passed by a
majority of the whole Board, designate one or more committees, each committee to
consist of one or more Directors. The Board may designate one or more Directors
as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of such committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another Director to act at the
meeting in the place of
B-29
<PAGE>
any such absent or disqualified member. Any committee of the Board, to the
extent provided in the resolution of the Board designating such committee, shall
have and may exercise all the powers and authority of the Board in the
management of the business and affairs of the Corporation, and may authorize the
seal of the Corporation to be affixed to all papers which may require it. Each
committee of the Board shall keep regular minutes of its proceedings and report
the same to the Board when so requested by the Board.
(b) During the PGGM Period, the members of each committee of the Board,
except the Audit and Compensation Committees, shall include at least one PGGM
Director (if any are members of the Board).
(c) During the Wilson Period, the members of each committee of the Board
shall include one Wilson Director (if any are members of the Board), provided
that any Wilson Director appointed to serve on the Board's Audit or Compensation
Committees shall be Independent.
(d) While Wilson III is a Director, he shall be the Wilson Director that is
a member of the Board Affairs Committee during the Wilson Period.
(e) By resolution dated December 6, 1996, the Board established the Board
Affairs Committee. The duties and responsibilities of the Board Affairs
Committee, as set forth in such resolution, shall not be amended without the
approval of a majority of the members of the entire Board; provided that until
the expiration of the PGGM Period and the Wilson Period, such amendment must
also be approved by the unanimous vote of the members of the Board Affairs
Committee.
(f) Notwithstanding any other provision of this Section 3.09, during the
PGGM Period, no fewer than half of the members of the Investment Committee shall
be individuals that are not employees of the Corporation.
SECTION 3.10. DIRECTORS' CONSENT IN LIEU OF MEETING. Any action
required or permitted to be taken at any meeting of the Board or of any
committee thereof may be taken without a meeting, without prior notice and
without a vote, if a consent in writing, setting forth the action so taken,
shall be signed by all the members of the Board or such committee and such
consent is filed with the minutes of the proceedings of the Board or such
committee.
SECTION 3.11. ACTION BY MEANS OF TELEPHONE OR SIMILAR COMMUNICATIONS
EQUIPMENT. Any one or more members of the Board, or of any committee thereof,
may participate in a meeting of the Board or such committee by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other, and participation in a
meeting by such means shall constitute presence in person at such meeting.
SECTION 3.12. COMPENSATION. Unless otherwise restricted by the
Articles of Incorporation, the Board may determine the compensation of
Directors. In addition, as determined by the Board, Directors may be reimbursed
by the Corporation for their expenses, if any, in the performance of their
duties as Directors. No such compensation or reimbursement shall preclude any
Director from serving the Corporation in any other capacity and receiving
compensation therefor.
ARTICLE IV
OFFICERS
SECTION 4.01. OFFICERS. The officers of the Corporation shall be the
President, the Secretary and a Treasurer and may include one or more Vice
Presidents (one or more of whom may be designated an Executive Vice President
and one or more of whom may be designated a Senior Vice President) and one or
more Assistant Secretaries and one or more Assistant Treasurers. Any two or more
offices may be held by the same person.
B-30
<PAGE>
SECTION 4.02. AUTHORITY AND DUTIES. All officers shall have such
authority and perform such duties in the management of the Corporation as may be
provided in these Bylaws or, to the extent not so provided, by resolution of the
Board.
SECTION 4.03. TERM OF OFFICE, RESIGNATION AND REMOVAL. (a) Each
officer shall be appointed by the Board and shall hold office for such term as
may be determined by the Board. Each officer shall hold office until his
successor has been appointed and qualified or his earlier death or resignation
or removal in the manner hereinafter provided.
(b) Any officer may resign at any time by giving written notice to the
Board, the Chairman, the President or the Secretary. Such resignation shall take
effect at the time specified in such notice or, if the time be not specified,
upon receipt thereof by the Board, the Chairman, the President or the Secretary,
as the case may be. Unless otherwise specified therein, acceptance of such
resignation shall not be necessary to make it effective.
(c) All officers and agents appointed by the Board shall be subject to
removal, with or without cause, at any time by the Board or by the action of the
recordholders of a majority of the Shares entitled to vote thereon.
SECTION 4.04. VACANCIES. Any vacancy occurring in any office of the
Corporation, for any reason, shall be filled by action of the Board. Unless
earlier removed pursuant to Section 4.03 hereof, any officer appointed by the
Board to fill any such vacancy shall serve only until such time as the unexpired
term of his predecessor expires unless reappointed by the Board.
SECTION 4.05. THE PRESIDENT. The President shall be the chief executive
officer of the Corporation and shall have general and active management and
control of the business and affairs of the Corporation, subject to the control
of the Board, and shall see that all orders and resolutions of the Board are
carried into effect. The President shall perform all duties incident to the
office of President and all such other duties as may from time to time be
assigned to him by the Board or these Bylaws.
SECTION 4.06. VICE PRESIDENTS. Vice Presidents, if any, in order of
their seniority or in any other order determined by the Board, shall generally
assist the President and perform such other duties as the Board or the President
shall prescribe, and in the absence or disability of the President, shall
perform the duties and exercise the powers of the President.
SECTION 4.07. THE SECRETARY. The Secretary shall, to the extent
practicable, attend all meetings of the Board and all meetings of Stockholders
and shall record all votes and the minutes of all proceedings in a book to be
kept for that purpose, and shall perform the same duties for any committee of
the Board when so requested by such committee. He shall give or cause to be
given notice of all meetings of Stockholders and of the Board, shall perform
such other duties as may be prescribed by the Board or the President and shall
act under the supervision of the President. He shall keep in safe custody the
seal of the Corporation and affix the same to any instrument that requires that
the seal be affixed to it and which shall have been duly authorized for
signature in the name of the Corporation and, when so affixed, the seal shall be
attested by his signature or by the signature of the Treasurer of the
Corporation or an Assistant Secretary or Assistant Treasurer of the Corporation.
He shall keep in safe custody the certificate books and stockholder records and
such other books and records of the Corporation as the Board or the President
may direct and shall perform all other duties incident to the office of
Secretary and such other duties as from time to time may be assigned to him by
the Board or the President.
SECTION 4.08. ASSISTANT SECRETARIES. Assistant Secretaries of the
Corporation, if any, in order of their seniority or in any other order
determined by the Board, shall generally assist the Secretary and perform such
other duties as the Board or the Secretary shall prescribe, and, in the absence
or disability of the Secretary, shall perform the duties and exercise the powers
of the Secretary.
B-31
<PAGE>
SECTION 4.09. THE TREASURER. The Treasurer shall have the care and
custody of all the funds of the Corporation and shall deposit such funds in such
banks or other depositories as the Board, or any officer or officers, or any
officer and agent jointly, duly authorized by the Board, shall, from time to
time, direct or approve. He shall disburse the funds of the Corporation under
the direction of the Board and the President. He shall keep a full and accurate
account of all moneys received and paid on account of the Corporation and shall
render a statement of his accounts whenever the Board or the President shall so
request. He shall perform all other necessary actions and duties in connection
with the administration of the financial affairs of the Corporation and shall
generally perform all the duties usually appertaining to the office of
Treasurer. When required by the Board, he shall give bonds for the faithful
discharge of his duties in such sums and with such sureties as the Board shall
approve.
SECTION 4.10. ASSISTANT TREASURERS. Assistant Treasurers of the
Corporation, if any, in order of their seniority or in any other order
determined by the Board, shall generally assist the Treasurer and perform such
other duties as the Board or the Treasurer shall prescribe, and, in the absence
or disability of the Treasurer, shall perform the duties and exercise the powers
of the Treasurer.
SECTION 4.11. THE CONTROLLER. The Controller shall keep complete and
accurate books of account relating to the business of the Corporation, including
records of all assets, liabilities, commitments, receipts, disbursements and
other financial transactions of the Corporation and its subsidiaries. He shall
render a statement of the Corporation's financial condition whenever required to
do so by the Board or the President and shall generally perform all the duties
usually appertaining to the office of Controller.
ARTICLE V
CHECKS, DRAFTS, NOTES, AND PROXIES
SECTION 5.01. CHECKS, DRAFTS AND NOTES. All checks, drafts and other
orders for the payment of money, notes and other evidences of indebtedness
issued in the name of the Corporation shall be signed by such officer or
officers, agent or agents of the Corporation and in such manner as shall be
determined, from time to time, by resolution of the Board.
SECTION 5.02. EXECUTION OF PROXIES. The President, or, in his absence,
any Vice President, may authorize, from time to time, the execution and issuance
of proxies to vote shares of stock or other securities of other corporations
held of record by the Corporation and the execution of consents to action taken
or to be taken by any such corporation. All such proxies and consents, unless
otherwise authorized by the Board, shall be signed in the name of the
Corporation by the President or any Vice President.
ARTICLE VI
SHARES AND TRANSFERS OF SHARES
SECTION 6.01. CERTIFICATES EVIDENCING SHARES. Shares shall be
evidenced by certificates in such form or forms as shall be approved by the
Board or they may be uncertificated. Certificates shall be issued in consecutive
order and shall be numbered in the order of their issue, and shall be signed by
the President or any Vice President and by the Secretary, any Assistant
Secretary, the Treasurer or any Assistant Treasurer. If such a certificate is
manually signed by a transfer agent or registrar, any other signature on the
certificate may be a facsimile. In the event any such officer who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to hold such office or to be employed by the Corporation before such certificate
is delivered, such certificate may be issued and delivered by the Corporation
with the same effect as if such officer had held such office on the date of
delivery.
B-32
<PAGE>
SECTION 6.02. STOCK LEDGER. A stock ledger in one or more counterparts
shall be kept by the Secretary, in which shall be recorded the name and address
of each person, firm or corporation owning the Shares evidenced by each
certificate evidencing Shares issued by the Corporation, the number of Shares
evidenced by each such certificate, the date of issuance thereof and, in the
case of cancellation, the date of cancellation. Except as otherwise expressly
required by law, the person in whose name Shares stand on the stock ledger of
the Corporation shall be deemed the owner and recordholder thereof for all
purposes.
SECTION 6.03. TRANSFERS OF SHARES. Registration of transfers of Shares
shall be made only in the stock ledger of the Corporation upon request of the
registered holder of such Shares, or of his attorney thereunto authorized by
power of attorney duly executed and filed with the Secretary, and upon the
surrender of the certificate or certificates evidencing such Shares properly
endorsed or accompanied by a stock power duly executed, together with such proof
of the authenticity of signatures as the Corporation may reasonably require.
SECTION 6.04. ADDRESSES OF STOCKHOLDERS. Each Stockholder shall
designate to the Secretary an address at which notices of meetings and all other
corporate notices may be served or mailed to such Stockholder, and, if any
Stockholder shall fail to so designate such an address, corporate notices may be
served upon such Stockholder by mail directed to the mailing address, if any, as
the same appears in the stock ledger of the Corporation or at the last known
mailing address of such Stockholder.
SECTION 6.05. LOST, DESTROYED AND MUTILATED CERTIFICATES. Each
recordholder of Shares shall promptly notify the Corporation of any loss,
destruction or mutilation of any certificate or certificates evidencing any
Share or Shares of which he is the recordholder. The Board may, in its
discretion, cause the Corporation to issue a new certificate in place of any
certificate theretofore issued by it and alleged to have been mutilated, lost,
stolen or destroyed, upon the surrender of the mutilated certificate or, in the
case of loss, theft or destruction of the certificate, upon satisfactory proof
of such loss, theft or destruction, and the Board may, in its discretion,
require the recordholder of the Shares evidenced by the lost, stolen or
destroyed certificate or his legal representative to give the Corporation a bond
sufficient to indemnify the Corporation against any claim made against it on
account of the alleged loss, theft or destruction of any such certificate or the
issuance of such new certificate.
SECTION 6.06. REGULATIONS. The Board may make such other rules and
regulations as it may deem expedient, not inconsistent with these Bylaws,
concerning the issue, transfer and registration of certificates evidencing
Shares.
SECTION 6.07. FIXING DATE FOR DETERMINATION OF STOCKHOLDERS OF
RECORD. In order that the Corporation may determine the Stockholders entitled
to notice of or to vote at any meeting of Stockholders or any adjournment
thereof, or to express consent to, or to dissent from, corporate action in
writing without a meeting, or entitled to receive payment of any dividend or
other distribution or allotment of any rights, or entitled to exercise any
rights in respect of any change, conversion or exchange of stock, or for the
purpose of any other lawful action, the Board may fix, in advance, a record
date, which shall not be more than 60 nor less than 10 days before the date of
such meeting, nor more than 60 days prior to any other such action. A
determination of the Stockholders entitled to notice of or to vote at a meeting
of Stockholders shall apply to any adjournment of such meeting; provided,
however, that the Board may fix a new record date for the adjourned meeting.
ARTICLE VII
SEAL
SECTION 7.01. SEAL. The Board may approve and adopt a corporate seal,
which shall be in the form of a circle and shall bear the full name of the
Corporation, the year of its incorporation and the words "Corporate Seal
Nevada".
B-33
<PAGE>
ARTICLE VIII
FISCAL YEAR
SECTION 8.01. FISCAL YEAR. The fiscal year of the Corporation shall
end on the thirty-first day of December of each year unless changed by
resolution of the Board.
ARTICLE IX
INDEMNIFICATION AND INSURANCE
SECTION 9.01. INDEMNIFICATION. (a) The Corporation shall indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the Corporation) by reason of the fact that he is or was a director,
officer, employee or agent of the Corporation, or is or was serving at the
request of the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
(b) The Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the Corporation to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee or agent of
the Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including amounts paid in
settlement and attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in, or not opposed to,
the best interests of the Corporation and except that no indemnification shall
be made in respect of any claim, issue or matter as to which such person shall
have been adjudged by a court of competent jurisdiction, after exhaustion of all
appeals therefrom, to be liable to the Corporation or for amounts paid in
settlement to the Corporation, unless and only to the extent that the court in
which such action or suit was brought or other court of competent jurisdiction
shall determine upon application that, in view of all the circumstances of the
case, such person is fairly and reasonably entitled to indemnity for such
expenses or amounts as the court shall deem proper.
(c) To the extent that a director, officer, employee or agent of the
Corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in Section 9.01(a) and (b) of these
Bylaws, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith.
(d) Any indemnification under Section 9.01(a) and (b) of these Bylaws
(unless ordered by a court or advanced pursuant to Section 9.01(e)) shall be
made by the Corporation only as authorized in the specific case upon a
determination that indemnification of the director, officer, employee or agent
is proper in the circumstances. Such determination shall be made (i) by the
Board by a majority vote of a quorum
B-34
<PAGE>
consisting of directors who were not parties to such action, suit or proceeding,
or (ii) if such a quorum is not obtainable, or, even if obtainable, a quorum of
disinterested directors so directs, by independent legal counsel in a written
opinion, or (iii) by the Stockholders of the Corporation.
(e) Expenses (including attorneys' fees) incurred by an officer or director
in defending any civil, criminal, administrative or investigative action, suit
or proceeding shall be paid by the Corporation as they are incurred and in
advance of the final disposition of such action, suit or proceeding upon receipt
of an undertaking by or on behalf of such director or officer to repay such
amount unless it shall ultimately be determined that he is entitled to be
indemnified by the Corporation pursuant to this Article IX. Such expenses
(including attorneys' fees) incurred by other employees and agents may be so
paid upon such terms and conditions, if any, as the Board deems appropriate.
(f) The indemnification and advancement of expenses provided by, or granted
pursuant to, this Article IX shall not be deemed exclusive of any other rights
to which those seeking indemnification or advancement of expenses may lawfully
be entitled under any law, bylaw, agreement, vote of Stockholders or
disinterested directors or otherwise, both as to action in an official capacity
and as to action in another capacity while holding such office.
(g) For purposes of this Article IX, references to "the Corporation" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, employees or agents so that any
person who is or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, shall stand in the same position under
the provisions of this Article IX with respect to the resulting or surviving
corporation as he would have with respect to such constituent corporation if its
separate existence had continued.
(h) For purposes of this Article IX, references to "other enterprise" shall
include employee benefit plans; references to "fines" shall include any excise
taxes assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the Corporation" shall include any
service as a director, officer, employee or agent of the Corporation which
imposes duties on, or involves service by, such director, officer, employee or
agent with respect to any employee benefit plan, its participants, or
beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the Corporation" as referred to in this Article
IX.
(i) The indemnification and advancement of expenses provided by, or granted
pursuant to, this Article IX shall continue as to a person who has ceased to be
a director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
SECTION 9.02. INSURANCE FOR INDEMNIFICATION. The Corporation may
purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the Corporation, or is or was serving at
the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against any liability asserted against him and liability and expenses incurred
by him in any such capacity, or arising out of his status as such, whether or
not the Corporation would have the power to indemnify him against such liability
under the provisions of Section 751 of the General Corporation Law.
B-35
<PAGE>
ARTICLE X
AMENDMENTS
SECTION 10.01. AMENDMENTS. (a) Any Bylaw may be adopted, amended or
repealed by the vote of the recordholders of a majority of the Shares then
entitled to vote at an election of Directors or by written consent of
Stockholders pursuant to Section 2.09 hereof, or by vote of the Board or by
written consent of Directors pursuant to Section 3.10 hereof.
(b) Notwithstanding the provisions of Subsection 10.01(a), during the Wilson
Period, any amendment by the Board of this Subsection 10.01(b) or of Sections
3.02, 3.03, 3.04, 3.07 or 3.09, shall require the affirmative vote a majority of
the members of the entire Board and the unanimous approval of the members of the
Board Affairs Committee.
(c) Notwithstanding the provisions of Subsection 10.01(a): (i) during the
PGGM Period, any amend-
ment by the Board of this Subsection 10.01(c)(i) or of Sections 3.02, 3.03, 3.07
or 3.09, shall require the affirmative vote a majority of the members of the
entire Board and the unanimous approval of the members of the Board Affairs
Committee, and (ii) so long as PGGM and DIHC and their respective Affiliates own
in the aggregate 5% or more of the issued and outstanding Shares, any amendment
by the Board of Subsection 3.03(b) hereof and this Subsection 10.01(c), shall
require the affirmative vote of a majority of the members of the entire Board
and the unanimous approval of the members of the Board Affairs Committee.
B-36
<PAGE>
[LOGO]
ANNEX C
MORGAN STANLEY FAIRNESS OPINION
November 13, 1998
Board of Directors
Cornerstone Properties Inc.
126 East 56th Street
New York, New York 10022
Members of the Board:
We understand that William Wilson & Associates ("WW&A") and certain
affiliated entities (collectively with WW&A, the "Company"), Cornerstone
Properties Inc. ("Cornerstone Properties") and Cornerstone Properties Limited
Partnership (the "Operating Partnership," and collectively with Cornerstone
Properties, "Cornerstone") have entered into a Contribution Agreement and
Agreement and Plan of Merger, dated June 22, 1998, as amended (the "Merger
Agreement"). The Merger Agreement provides, among other things, for the merger
of WW&A into Cornerstone Properties and the contribution to Cornerstone by
certain of the Company's investors of their interests in WW&A and sixty-eight
office properties for shares of common stock of Cornerstone Properties, units of
limited partnership interest in the Operating Partnership or cash, as such
investors elect, subject to certain limitations (collectively, the "Merger").
The terms and conditions of the transaction are more fully set forth in the
Merger Agreement.
You have asked for our opinion as to whether the consideration to be paid to
the Participating Investors and the WW&A Shareholders (each as defined in the
Merger Agreement) pursuant to the Merger Agreement is fair from a financial
point of view to Cornerstone Properties.
For purposes of the opinion set forth herein, we have:
(i) reviewed certain publicly available financial statements and other
information of Cornerstone;
(ii) reviewed certain internal financial statements and other financial
and operating data concerning the Company prepared by the management of the
Company;
(iii) analyzed certain financial projections prepared by the management
of the Company;
(iv) discussed the past and current operations and financial condition
and the prospects of the Company with senior executives of the Company;
(v) analyzed certain internal financial statements and other financial
operating data concerning Cornerstone prepared by the management of
Cornerstone;
(vi) analyzed certain financial projections, including individual
property cash flow projections for the Company and the Company's properties,
prepared by the management of Cornerstone;
(vii) discussed the past and current operations and financial condition
and the prospects of Cornerstone with senior executives of Cornerstone;
(viii) analyzed the pro forma impact of the Merger on Cornerstone's
funds from operations per share, consolidated capitalization and financial
ratios;
C-1
<PAGE>
[LOGO]
(ix) discussed the strategic objectives of the Merger and the plan for
the combined company with senior executives of the Company and Cornerstone;
(x) reviewed the reported prices and trading activity for Cornerstone
Properties' common stock;
(xi) reviewed the financial terms, to the extent publicly available, of
certain comparable acquisition transactions;
(xii) participated in discussions and negotiations among representatives
of the Company and Cornerstone and their financial and legal advisors;
(xiii) reviewed the Merger Agreement, and certain related documents
including the letter from AE Properties Inc. dated June 8, 1998; and
(xiv) performed such other analyses and considered other factors as we
have deemed appropriate.
We have assumed and relied upon without independent verification the
accuracy and completeness of the information reviewed by us for the purposes of
this opinion. With respect to the financial projections, we have assumed that
they have been reasonably prepared on bases reflecting the best currently
available estimates and judgments of the future financial performance of the
Company and Cornerstone. We have not made any independent valuation or appraisal
of the assets or liabilities of the Company, nor have we been furnished with any
such appraisals. We have assumed that the Merger will be consummated in
accordance with the terms set forth in the Merger Agreement. Our opinion is
necessarily based on economic, market and other conditions as in effect on, and
the information made available to us as of, the date hereof.
We have acted as financial advisor to the Board of Directors of Cornerstone
Properties in connection with this transaction and will receive a fee for our
services. In the past, Morgan Stanley & Co. Incorporated and its affiliates have
provided financing services for Cornerstone and have received fees for the
rendering of these services.
It is understood that this letter is for the information of the Board of
Directors of Cornerstone Properties, except that this opinion may be included in
its entirety in any filing made by Cornerstone Properties in respect of the
Merger with the Securities and Exchange Commission. We express no opinion and
make no recommendation as to how shareholders of Cornerstone Properties should
vote at the shareholders' meeting held in connection with the Merger.
Based on and subject to the foregoing, we are of the opinion on the date
hereof that the consideration to be paid to the Participating Investors and the
WW&A Shareholders pursuant to the Merger Agreement is fair from a financial
point of view to Cornerstone Properties.
<TABLE>
<S> <C> <C>
Very truly yours,
MORGAN STANLEY & CO. INCORPORATED
</TABLE>
/s/ Yie-Hsin Hung
<TABLE>
<S> <C> <C>
BY:
Yie-Hsin Hung
Principal
</TABLE>
C-2
<PAGE>
ANNEX D
AMENDED AND RESTATED
CORNERSTONE PROPERTIES INC.
1998 LONG-TERM INCENTIVE PLAN
1. PURPOSES. The purposes of the Plan are to advance the interest of the
Company and its stockholders by attracting and retaining officers and key
employees and to reward officers and key employees for contributing to the
success of the Company and the creation of stockholder value. The Plan
permits the Committee to make Awards which constitute "qualified
performance-based compensation" for purposes of Section 162(m) of the Code.
2. DEFINITIONS AND RULES OF CONSTRUCTION.
(a) DEFINITIONS. For purposes of the Plan, the following capitalized words
shall have the meanings set forth below:
"Award" means a Stock Award, RSU, Option, SAR, Dividend Equivalent,
Other Award, Performance Award or any combination of the foregoing.
"Award Document" means an agreement, certificate or other type or
form of document or documentation approved by the Committee which sets
forth the terms and conditions of an Award. An Award Document may be in
written, electronic or other media, may be limited to a notation on the
books and records of the Company and, unless the Committee requires
otherwise, need not be signed by a representative of the Company or a
Participant.
"Beneficiary" means the person designated in writing by the
Participant to exercise or to receive an Award or payments or other
amounts in respect thereof in the event of the Participant's death or, if
no such person has been designated in writing by the Participant prior to
the date of death, the Participant's estate. No Beneficiary designation
under the Plan shall be effective unless it is in writing and is received
by the Company prior to the date of death of the applicable Participant.
"Board" means the Board of Directors of the Company.
"Code" means the Internal Revenue Code of 1986, as amended from time
to time, and the rulings and regulations promulgated thereunder.
"Committee" means the Compensation Committee of the Board, or such
other committee of the Board as may be designated by the Board to
administer the Plan.
"Common Stock" means the common stock, no par value per share, of the
Company.
"Companies" means the Company and each Subsidiary.
"Company" means Cornerstone Properties Inc., a Nevada corporation.
"Contribution Agreement" means the Contribution Agreement and
Agreement and Plan of Merger, dated as of June 22, 1998, as amended, by
and among William Wilson & Associates, the entities listed on Schedule I
thereto, the Company and Cornerstone Properties Limited Partnership.
"Deferred Compensation Account" means the account established on the
books and records of the Company to record the amount of deferred
compensation payable under the Plan to a Participant.
"Dividend Equivalent" means a right granted in accordance with
Section 12 to receive a payment in cash, shares of Common Stock or other
property equal in value to the dividends declared and paid on a specified
number of shares of Common Stock. A Dividend Equivalent may constitute a
free-standing Award or may be granted in connection with another type of
Award.
D-1
<PAGE>
"Effective Date" means the date of the closing of the transactions
contemplated by the Contribution Agreement.
"Eligible Individual" means an individual described in Section 4(a).
"Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, and the rulings and regulations promulgated
thereunder.
"Fair Market Value" means with respect to a share of Common Stock,
the fair market value thereof as of the relevant date of determination,
as determined in accordance with a valuation methodology approved by the
Committee. In the absence of any alternative valuation methodology
approved by the Committee, the Fair Market Value of a share of Common
Stock shall equal the closing price of a share of Common Stock on the New
York Stock Exchange, or such other national securities exchange as may be
designated by the Committee.
"GAAP" means U.S. Generally Accepted Accounting Principles.
"Incentive Stock Option" means an Option which meets the requirements
of Section 422 of the Code.
"Nonqualified Stock Option" means any Option which is not an
Incentive Stock Option.
"Option" means an Option granted under Section 9 of the Plan,
including an Incentive Stock Option and a Nonqualified Stock Option.
"Other Award" means an Award granted under the Plan in accordance
with Section 13.
"Participant" means an Eligible Individual who holds an outstanding
Award under the Plan.
"Performance Award" means the right of a Participant to receive a
specified amount following the completion of a Performance Period based
upon performance in respect of one or more of the Performance Goals
applicable to such period.
"Performance Goal" means any of the following: funds from operations,
funds from operations per share, earnings per share, net income, net
operating income, pretax profits, pretax operating income, revenue
growth, return on sales, return on equity, return on assets managed,
return on investment, increase in the Fair Market Value of a share of
Common Stock, total return to stockholders, cash flow or economic value
added. A Performance Goal may be measured over a Performance Period on a
periodic, annual, cumulative or average basis and may be established on a
corporate-wide basis or established with respect to one or more operating
units, divisions, subsidiaries, acquired businesses, minority
investments, partnerships or joint ventures. To the extent that there is
a change in GAAP during a Performance Period, the Committee may calculate
any Performance Goal with or without regard to such change.
"Performance Period" means a period of time designated by the
Committee over which one or more Performance Goals are measured.
"Performance Unit" means an Award granted pursuant to Section 11.
"Plan" means this Cornerstone Properties Inc. 1998 Long Term
Incentive Plan, as the same may be amended from time to time.
"Restoration Option" means an Option that is awarded upon the
exercise of an Option earlier awarded under the Plan or any other plan of
the Company (an "Underlying Option") for which the exercise price is paid
in whole or in part by tendering shares of Common Stock previously owned
by the Participant, where such Restoration Option (i) covers a number of
shares of Common Stock no greater than the number of previously owned
shares tendered in payment of the exercise price of the Underlying Option
plus the number of shares withheld to pay taxes arising upon such
exercise, (ii) the expiration date of the Restoration Option is no later
than the expiration date of the Underlying Option and (iii) the exercise
price per share of the
D-2
<PAGE>
Restoration Option is no less than the Fair Market Value per share of
Common Stock on the date of exercise of the Underlying Option.
"Restricted Shares" means shares of Common Stock subject to a Stock
Award that have not vested or remain subject to forfeiture, transfer or
other restrictions in accordance with Section 7 and the applicable Award
Document.
"RSU" means a restricted stock unit award granted in accordance with
Section 8.
"SAR" means a stock appreciation right or limited stock appreciation
right granted in accordance with Section 10.
"Stock Award" means a grant of shares of Common Stock in accordance
with Section 7.
"Subsidiary" means (i) a corporation or other entity with respect to
which the Company, directly or indirectly, has the power, whether through
the ownership of voting securities, by contract or otherwise, to elect at
least a majority of the members of such corporation's board of directors
or analogous governing body, or (ii) any other corporation or other
entity in which the Company, directly or indirectly, has an equity or
similar interest and which the Committee designates as a Subsidiary for
purposes of the Plan. For purposes of determining eligibility for the
grant of Incentive Stock Options under the Plan, the term "Subsidiary"
shall be defined in the manner required by Section 424(f) of the Code.
"Substitute Award" means an Award granted upon assumption of, or in
substitution for, outstanding awards previously granted by a company or
other entity in connection with a corporate transaction, such as a
merger, combination, consolidation or acquisition of property or stock.
"Target" means the target performance objective set by the Committee
for a Performance Goal.
"Target Payment" means the amount payable to a Participant for a
Performance Period upon the achievement of one or more Targets set by the
Committee for that period.
"Unit" means a unit of limited partner interest in Cornerstone
Properties Limited Partnership, a Delaware limited partnership.
(b) RULES OF CONSTRUCTION.The masculine pronoun shall be deemed to include
the feminine pronoun and the singular form of a word shall be deemed to
include the plural form, unless the context requires otherwise. Unless
the text indicates otherwise, references to sections are to sections of
the Plan.
3. ADMINISTRATION.
(a) AUTHORITY OF THE COMMITTEE. The Plan shall be administered by the
Committee, no member of which shall be eligible to participate in the
Plan. The Committee shall have full and final authority, in each case
subject to and consistent with the provisions of the Plan, (i) to select
the Participants, (ii) to grant Awards, (iii) to determine the type,
number and other terms and conditions of, and all other matters related
to, Awards, (iv) to prescribe Award Documents (which need not be
identical for each Participant), (v) to establish rules and regulations
for the administration of the Plan, (vi) to construe and interpret the
Plan and the forms of Award Documents and to correct defects, supply
omissions or reconcile inconsistencies therein, (vii) to make factual
determinations in connection with the administration or interpretation of
the Plan, and (viii) to make all other decisions or interpretations as
the Committee may deem necessary or advisable for the administration of
the Plan. Any decision of the Committee in the administration of the Plan
shall be final and conclusive on all interested persons.
(b) DELEGATION. The Committee may delegate its responsibility with respect
to the administration of the Plan to one or more officers of the Company,
to one or more members of the Committee or to one or more members of the
Board; PROVIDED, HOWEVER, that the Committee may not delegate
D-3
<PAGE>
its responsibility (i) to make Awards to individuals who are subject to
Section 16 of the Exchange Act, (ii) to make Awards under Section 14
which are intended to constitute "qualified performance-base
compensation" under Section 162(m) of the Code or (iii) to amend or
terminate the Plan in accordance with Section 20. The Committee may also
appoint agents to assist in the day-to-day administration of the Plan and
may delegate the authority to execute documents under the Plan to one or
more members of the Committee or to one or more officers of any of the
Companies.
(c) TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL. The Committee shall
also have full authority to determine and specify in the applicable Award
Document the effect, if any, that a Participant's termination of
employment for any reason will have on the vesting, exercisability,
payment or lapse of restrictions applicable to an Award. The date of a
Participant's termination of employment for any reason shall be determine
in the sole discretion of the Committee. Similarly, the Committee shall
have full authority to determine the effect, if any, of a change in
control of the Company on the vesting, exercisability, payment or lapse
of restrictions applicable to an Award, which effect may be specified in
the applicable Award Document or determined at a subsequent time.
(d) RELIANCE AND INDEMNIFICATION. The Committee shall be entitled to rely in
good faith upon any report or other information furnished to it by an
officer or employee of the Companies or from the financial, accounting,
legal or other advisers of any of the Companies. Each member of the
Committee, each individual to whom the Committee delegates authority
hereunder, each individual designated by the Committee to administer the
Plan and each other person acting at the direction of or on behalf of the
Committee shall not be liable for any determination or anything done or
omitted to be done by him or by any other member of the Committee or any
other such individual in connection with the Plan, except for his own
willful misconduct or as expressly provided by statute, and, to the
extent permitted by law and the bylaws of the Company, shall be fully
indemnified and protected by the Company with respect to such
determination, act or omission.
4. PARTICIPATION.
(a) ELIGIBLE INDIVIDUALS. Only directors, officers and key employees of one
of the Companies (or a division or operating unit thereof) or any
individual who has accepted an offer of employment with any of the
Companies as an officer or key employee shall be eligible to participate
in the Plan and to receive Awards under the Plan, provided, however, that
only key employees of one of the Companies shall be eligible to receive
Incentive Stock Options.
(b) AWARDS TO PARTICIPANTS. The Committee shall have no obligation to grant
any Eligible Individual an Award or to designate an Eligible Individual
as a Participant for a Performance Period solely by reason of such
Eligible Individual having received a prior Award or having been
designated as a Participant for any prior Performance Period. The
Committee may grant more than one Award to a Participant at the same time
or may designate an Eligible Individual as a Participant Periods that
begin on the same date or that cover overlapping periods of time.
5. COMMON STOCK SUBJECT TO THE PLAN.
(a) PLAN LIMIT. Subject to adjustment in accordance with the provisions of
Section 18, the Company is authorized to issue up to a number of shares
of Common Stock equal to 5% (rounded down to the nearest whole share) of
the total number of shares of Common Stock outstanding on the Effective
Date (assuming, for purposes of such calculation, the redemption of all
Units outstanding on the Effective Date for shares of Common Stock) under
the Plan (the "Plan Limit"). Such shares of Common Stock may be newly
issued shares of Common Stock or reacquired shares of Common Stock held
in the treasury of the Company. Any shares issued in connection with
Substitute Awards shall not be counted against the Plan Limit and shall
not be subject to Section 5(d).
D-4
<PAGE>
(b) RULES APPLICABLE TO DETERMINING SHARES AVAILABLE FOR ISSUANCE. For
purposes of determining the number of shares of Common Stock that remain
available for issuance, the following shares shall be added back to the
Plan Limit and again be available for Awards:
(i) The number of shares tendered to pay the exercise price of an Option
or other Award or to satisfy a participant' tax withholding
obligations; and
(ii) The number of shares withheld from any Award to satisfy a
Participant's tax withholding obligations or, if applicable, to pay
the exercise price of an option or other form of Award.
(c) RESERVE. In administering the Plan, the Committee may establish reserves
against the Plan Limit for amounts payable in settlement of Awards or in
settlement of Deferred Compensation Accounts. The Committee may also
promulgate additional rules and procedures for calculating the portion of
the Plan Limit available for Awards. This Section 5 shall be applied and
construed by the Committee so that no share of Common Stock is counted
more than once for purposes of any debit or credit of the Plan Limit.
(d) SPECIAL LIMITS. Anything to the contrary in Section 5(a)
notwithstanding, but subject to Section 18(b), the following special
limits shall apply to shares of Common Stock available for Awards under
the Plan:
(i) The maximum number of shares of Common Stock that may be subject to
Options or free-standing SARs granted to any Eligible Individual in
any calendar year shall equal 1,000,000 shares, plus any shares which
were available under this Section 5(d)(i) for Awards of Options or
free-standing SARs to such Eligible Individual in any prior calendar
year but which were not covered by such Awards.
(ii) In no event will the number of shares of Common Stock issued in
connection with the grant of Incentive Stock Options exceed a number
of shares of Common Stock equal to 5% (rounded down to the nearest
whole share) of the total number of shares of Common Stock
outstanding on the Effective Date (assuming, for purposes of such
calculation, the redemption of all Units outstanding on the Effective
Date for shares of Common Stock).
6. AWARDS IN GENERAL. Awards under the Plan may consist of Stock Awards, RSUs,
Options, SARs, Performance Units, Dividend Equivalents, Other Awards,
Performance Awards or any combination of the foregoing. Any Award may be
granted singly or in combination or tandem with any other Award, as the
Committee may determine. Awards may be made in combination with or as
alternatives to grants or rights under any other compensation or benefit
plan of the Companies, including the plan of any acquired entity. The terms
and conditions of each Award shall be set forth in an Award Document in a
form approved by the Committee for such Award, which shall contain terms and
conditions not inconsistent with the Plan. Except in connection with a
transaction or event described in Section 18(b) or in connection with the
grant of Substitute Awards, nothing in the Plan shall be construed as
permitting the Company to reduce the exercise price of Options previously
granted under this Plan or options previously granted under any other plan
of the Companies without stockholder approval.
7. STOCK AWARDS.
(a) FORM OF AWARD. The Committee is authorized to grant shares of Common
Stock to an Eligible Individual as a Stock Award for no consideration
other than the provision of services or at a purchase price determined by
the Committee. Stock Awards may be granted in lieu of other compensation
or benefits payable to a Participant or in settlement of previously
granted Awards. Shares of Common Stock granted pursuant to this Section 7
shall be subject to such restrictions on transfer or other incidents of
ownership for such periods of time, and shall be subject to such
conditions of vesting, as the Committee may determine. If shares of
Common Stock are offered for sale under the Plan, the purchase price
shall be payable in cash, or, in the sole discretion of the Committee or
as set forth in the applicable Award Document, in shares of Common Stock
D-5
<PAGE>
already owned by the Participant or other consideration acceptable to the
Committee or in any combination of cash, shares of Common Stock or such
other consideration.
(b) SHARE CERTIFICATES; RIGHTS AND PRIVILEGES. At the time Restricted Shares
are granted or sold to a Participant, share certificates representing the
appropriate number of Restricted Shares shall be registered in the name
of the Participant but shall be held by the Company in custody for the
account of such person. The certificate shall bear a legend restricting
their transferability as provided herein. Except for such restrictions on
transfer or other incidents of ownership as may be determined by the
Committee and set forth in the Agreement relating to an award or sale of
Restricted Shares, a Participant shall have the rights of a stockholder
as to such Restricted Shares, including the right to receive dividends
and the right to vote in accordance with applicable law.
(c) DISTRIBUTIONS. Unless the Committee determines otherwise at or after the
time of grant, any shares of Common Stock or other securities of the
Company received by a Participant to whom Restricted Shares have been
granted or sold as a result of a non-cash distribution to holders of
Common Stock or as a stock dividend on Common Stock shall be subject to
the same terms, conditions and restrictions as such Restricted Shares.
8. RSUS. The Committee is authorized to grant RSUs to Eligible Individuals.
Each RSU shall entitle the holder thereof to receive, as determined by the
Committee at or after the time of grant, one share of Common Stock or cash
and other property with a value equal to the Fair Market Value of a share of
Common Stock on the date of settlement of the RSU. RSUs shall be subject to
such vesting, payment and settlement terms and restrictions as the Committee
shall impose. RSUs may be granted in lieu of other compensation or benefits
payable to a Participant or in settlement of previously granted Awards.
9. STOCK OPTIONS.
(a) FORM OF AWARD. The Committee is authorized to grant Options to Eligible
Individuals. An Option shall entitle a Participant to purchase a
specified number of shares of Common Stock during a specified time at an
exercise price that is fixed at the time of grant or for which the method
of determining the exercise price is specified at the time of grant, all
as the Committee may determine; PROVIDED, HOWEVER, that, except in the
case of Options which are Substitute Awards, the exercise price per share
shall be no less than 100% of the Fair Market Value per share on the date
of grant (or if the exercise price is not fixed on the date of grant,
then on such date as the exercise price is fixed). An Option may be an
Incentive Stock Option or a Nonqualified Stock Option as determined by
the Committee and set forth in the applicable Award Document. Payment of
the exercise price of an Option shall be made in cash, or, to the extent
provided by the Committee at or after the time of grant, in shares of
Common Stock (including shares already owned by the Participant or to be
issued in the Participant upon exercise of the Option) or in any
combination of cash and shares of Common Stock. An Option may also be
exercised through a "cashless exercise" procedure facilitated by a broker
approved by the Company, and in accordance with procedures established by
the Committee, for this purpose. An Option shall be effective for such
term as shall be determined by the Committee and set forth in the Award
Document relating to such Option, and the Committee may extend the term
of an Option after the time of grant; PROVIDED, HOWEVER, that the term of
an Option may in no event extend beyond the tenth anniversary of the date
of grant of such Option. The Committee may also provide at or after the
time of grant that a Participant shall have the right to receive a
Restoration Option upon the exercise through the tendering of shares of
Common Stock of an Option or an option granted under another plan of the
Company.
(b) INCENTIVE STOCK OPTIONS. Each Option granted pursuant to the Plan shall
be designated at the time of grant as either an Incentive Stock Option or
as a Nonqualified Stock Option. No Incentive Stock Option may be issued
pursuant to the Plan to any individual who, at the time the Option is
granted, owns stock possession more than 10% of the total combined voting
power of all classes
D-6
<PAGE>
of stock of the Company or any of its Subsidiaries, unless (A) the
exercise price determined as of the date of grant is at least 110% of the
Fair Market Value on the date of grant of the shares of Common Stock
subject to such Option, and (B) the Incentive Stock Option is not
exercisable more than five years from the date of grant thereof. No
Incentive Stock Option may be granted under the Plan after the tenth
anniversary of the Effective Date.
10. STOCK APPRECIATION RIGHTS.
(a) FORM OF AWARD. The Committee is authorized to grant SARs to Eligible
Individuals. An SAR shall entitle a Participant to receive, upon
exercise, (i) an amount in cash equal to the excess, if any, of the Fair
Market Value on the exercise date of the number of shares of Common Stock
for which the stock appreciation right is exercised, over the Fair Market
Value of such number of shares on the date of grant (or, in the case of
an SAR granted in tandem with an Option, the aggregate exercise price
which the Participant would otherwise have been required to pay under the
terms of the Option in order to purchase such shares), (ii) a number of
shares of Common Stock having an aggregate Fair Market Value, as of the
date of exercise, equal to the amount determined as in the proceeding
clause (i), or (iii) a combination of cash and shares having an aggregate
value equal to the amount determined as in the preceding clause (i). An
SAR may be granted on a free-standing basis or in tandem with another
Award. Notwithstanding the foregoing, the exercise price of an SAR that
is a Substitute Award may be less than the Fair Market Value of a share
of Common Stock on the date of grant.
(b) EXERCISABILITY. The Committee shall determine at or after the time of
grant whether payment in respect of an SAR shall be in cash, shares of
Common Stock or a combination thereof. An SAR shall be exercisable at the
time or times established by the Committee at or after the time of grant.
(c) TANDEM SARS. If an SAR is granted in tandem with an Option, the SAR
shall not be exercisable prior to or later than the time the related
Option could be exercised. An SAR granted in tandem with an Option may be
granted either at the same time as such Option or subsequent thereto. If
granted in tandem with an Option, an SAR shall cover the same number of
shares of Common Stock as covered by the Option (or such lesser number of
shares as the Committee may determine) and shall be exercisable only at
such time and to the extent the related Option shall be exercisable, and
shall have the same term and exercise price as the related Option (which,
in the case of an SAR granted after the grant of the related Option, may
be less than the Fair Market Value per share on the date of grant of the
tandem SAR). Upon exercise of an SAR granted in tandem with an Option,
the related Option shall be canceled automatically to the extent of the
number of shares covered by such exercise; conversely, if the related
Option is exercised as to some or all of the shares covered by the tandem
grant, the tandem SAR shall be canceled automatically to the extent of
the number of shares covered by the Option exercise.
11. PERFORMANCE UNITS. The Committee is authorized to grant Performance Units to
Eligible Individuals. Performance Units may be granted as fixed or variable
share-or dollar-denominated units subject to such conditions of vesting and
time of payment as the Committee may determine and as shall be set forth in
the applicable Award Document relating to such Performance Units.
Performance Units may be paid in cash, Common Stock, Awards, other property
or any combination thereof, as the Committee may determine at or after the
time of grant.
12. DIVIDEND EQUIVALENTS. The Committee is authorized to grant Dividend
Equivalents to a Participant, entitling the Participant to receive cash,
Common Stock, Awards or other property equal in value to the dividends paid
in respect of a specified number of shares of Common Stock. Dividend
Equivalents may be awarded on a free-standing basis or in connection with
another Award. The Committee may provide that Dividend Equivalents will be
paid or distributed when accrued or will be deemed reinvested in additional
shares of Common Stock, Awards, or other investment vehicles as the
Committee may specify. Dividend Equivalents may be subject to the same terms
and conditions as any
D-7
<PAGE>
Award granted in connection therewith or to such other terms and conditions
as the Committee specifies in connection with the granting of the Dividend
Equivalents.
13. OTHER AWARDS. The Committee is authorized to grant Other Awards in addition
to the Awards as described in Sections 6 through 12 pursuant to which cash,
Common Stock or other securities of the Company, other property or any
combination thereof is, or in the future may be, acquired by a Participant.
Other Awards may be valued in whole or in part with reference to, or
otherwise based upon or related to one or more Performance Goals, the value
of a share of Common Stock or the value of other securities of the Company,
including preferred stock, debentures, notes, convertible or exchangeable
debt securities, rights or warrants, the value of any asset or property of
the Company or such other criteria as the Committee shall specify. Other
Awards may consist solely of cash bonuses or supplemental cash payments to a
Participant, including without limitation, payments to permit the
Participant to pay some or all of the tax liability incurred in connection
with the vesting, exercise, payment or settlement of an Award. Other Awards
may be granted in lieu of other compensation or benefits payable to a
Participant or in settlement of previously granted Awards.
14. PERFORMANCE AWARDS.
(a) FORM OF AWARD. Subject to the further provisions of this Section 14, the
Committee is authorized to grant Performance Awards under this Section 14
which shall provide for Target Payments to Participants for a Performance
Period upon the achievement of the Target or Targets established by the
Committee for such Performance Period. Target Payments may be made in
cash, Common Stock, Awards, other property or any combination thereof.
The provisions of this Section 14 shall be construed and administered by
the Committee in a manner which complies with the requirements under
Section 162(m) of the Code applicable to "qualified performance-based
compensation."
(b) PERFORMANCE GOALS AND TARGETS. The Performance Goals and Targets
applicable to a Performance Period shall be established by the Committee
prior to, or reasonably promptly following the inception of, a
Performance Period but, to the extent required by Section 162(m) of the
Code and the regulations thereunder, by no later than the earlier of the
date that is ninety days after the commencement of the Performance Period
or the day prior to the date on which twenty-five percent of the
Performance Period has elapsed. At the time that the Committee specifies
the Performance Goals and Targets applicable to a Performance Period, the
Committee shall also specify (i) the Target Payment payable for the
Performance Period if the applicable Target or Targets are achieved, (ii)
the amount, if any, payable in excess of the Target Payment if actual
performance exceeds the Target or Targets and (iii) the amount by which
the Target Payment will be reduced if actual performance is less than the
Target or Targets established for the Performance Period. The Committee
may also establish the minimum level of performance on one or more
Performance Goals for a Performance Period below which no amounts will be
payable for the Performance Period.
(c) ADDITIONAL PROVISIONS APPLICABLE TO PERFORMANCE PERIODS. More than one
Performance Goal may apply to a given Performance Period and the payment
in connection with a Performance Award for a given Performance Period may
be made based upon (i) the attainment of the performance Targets for only
one Performance Goal or for any one of the Performance Goals applicable
to that Performance Period or (ii) performance related to two or more
Performance Goals, whether assessed individually or in combination with
each other. The Committee may, in connection with the establishment of
Performance Goals and Targets for a Performance Period, establish a
matrix setting forth the relationship between performance on two or more
Performance Goals and the amount of the Award payable for that
Performance Period.
(d) DURATION OF THE PERFORMANCE PERIOD. The Committee shall establish the
duration of each Performance Period at the time that it sets the
Performance Goals and Targets applicable to that period. The Committee
shall be authorized to permit overlapping or consecutive Performance
Periods.
D-8
<PAGE>
(e) CERTIFICATION. Following the completion of each Performance Period, the
Committee shall certify, in accordance with the requirements in the
regulations under Section 162(m) of the Code, whether the criteria for
paying amounts in respect of each Performance Award related to that
Performance Period have been achieved. Unless the Committee determines
otherwise, no amounts payable in respect of Performance Awards shall be
paid for a Performance Period until the Performance Period has ended and
the Committee has certified the amount of the Awards payable for the
Performance Period in accordance with Section 162(m) of the Code.
(f) DISCRETION. The Committee is authorized at any time during or after a
Performance Period to reduce or eliminate the amount payable in respect
of a Performance Award to any Participant, for any reason, including,
without limitation, (i) in recognition of unusual or nonrecurring events
affecting the Company, any Subsidiary, or any business division or unit
or the financial statements of the Company or any Subsidiary, or in
response to changes in applicable laws, regulations, or accounting
principles, (ii) to take into account a change in the position or duties
of a Participant during the Performance Period or a change in the
Participant's employment status during the Performance Period or (iii) to
take into account subjective or objective performance factors not
otherwise set forth in the Plan or applicable Award Documents.
(g) TIMING OF PAYMENT. Subject to Section 14(e), the amounts, if any,
payable in respect of Performance Awards for a Performance Period will
generally be paid within ninety days following the end of the applicable
Performance Period.
(h) MAXIMUM AMOUNT PAYABLE PER PARTICIPANT UNDER THIS SECTION 14. The
maximum aggregate value of the cash and other property in settlement of a
Performance Award (prior to adjustment in accordance with Section 14(i))
payable per Participant for any Performance Period of twelve months may
not exceed $2,000,000 (the "PERFORMANCE DOLLAR LIMIT"). If the Target
Payment in connection with a Performance Award payable to a Participant
for a Performance Period of twelve months in expressed as a percentage of
the Participant's base salary, then, in addition to the limit set forth
in the previous sentence, the maximum aggregate value of the cash and
other property (prior to adjustment in accordance with Section 14(i))
payable to such Participant in respect of the Performance Award for such
Performance Period shall not exceed 300% (the "SALARY LIMIT") of the
Participant's annual rate of base salary as of the start of the
Performance Period. If a Performance Period is greater than or less than
twelve months, the applicable Performance Dollar Limit or Salary Limit,
as the case may be, shall be determined by multiplying the applicable
twelve-month limit by a fraction, the numerator of which is the number of
whole and partial months in the Performance Period and the denominator of
which is twelve.
(i) PAYMENT OF PERFORMANCE AWARDS IN SHARES OF COMMON STOCK. In the event
that the Company settles a Performance Award through the payment of
Common Stock that is subject to either forfeiture or transfer
restrictions, the Company may apply a reasonable discount to the then
Fair Market Value of the stock in determining the number of shares issued
in settlement of such portion of the award; PROVIDED, HOWEVER, that the
amount of the discount applied to the Fair Market Value of a share of
Common Stock may not exceed twenty-five percent.
15. VESTING; FORFEITURE; TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL. The
Committee shall specify at or after the time of grant of an Award the
vesting, forfeiture and other conditions applicable to the Award and the
provisions governing the disposition of an Award in the event of a
Participant's termination of employment with the Companies. In connection
with a Participant's termination of employment , the Committee may vary the
vesting, exercisability and settlement provisions of an Award relative to
the circumstances resulting in such termination of employment. The Committee
shall have the discretion to accelerate the vesting or exercisability of,
eliminate the restrictions and conditions applicable to, or extend the
post-termination exercise period of an outstanding Award. Similarly, the
Committee shall have full authority to determine the effect, if any, or a
change in control of the Company on the vesting, exercisability, payment or
lapse of restrictions applicable to an
D-9
<PAGE>
Award, which effect may be specified in the applicable Award Document or
determined at a subsequent time.
16. ACCELERATION AND DEFERRAL.
(a) ACCELERATION. The Committee may accelerate the payment or settlement of
an Award and may apply a reasonable discount to the amount delivered to
the Participant to reflect such accelerated payment or settlement. If the
Committee accelerates the payment or settlement of a Performance Award,
the amount of the discount applied to such accelerated payment or
settlement shall meet the requirements of the regulations under Section
162(m) of the Code.
(b) DEFERRAL. In accordance with rules and procedures established by the
Committee, the Committee (i) may permit a Participant at or after the
time of grant to defer receipt of payment or settlement of some or all of
an Award to one or more dates elected by the Participant, subsequent to
the date on which such Award is payable or otherwise to be settled, or
(ii) may require at or after the time of grant that the portion of an
Award in excess of an amount specified by the Committee be mandatorily
deferred until one or more dates specified by the Committee. Amounts
deferred in accordance with the preceding sentence shall be noted in a
bookkeeping account maintained by the Company for this purpose and may
periodically be credited with notional interest or earnings in accordance
with procedures established by the Committee from time to time. Deferred
amounts shall be paid in cash, Common Stock or other property, as
determined by the Committee at or after the time of deferral, on the date
or dates elected by the Participant or, in the case of amounts which are
mandatorily deferred, on the date or dates specified by the Committee.
17. GENERAL PROVISIONS.
(a) NON-TRANSFERABILITY OF AWARD. Unless the Committee determines otherwise,
no Award or amount payable under, or interest in, the Plan shall be
transferable by a Participant except by will or the laws of descent and
distribution or otherwise be subject in any manner to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance or charge;
PROVIDED, HOWEVER, that the Committee may, in its discretion and subject
to such terms and conditions as it shall specify, permit the transfer of
an Award for no consideration to a Participant's family members or to one
or more trusts or partnerships established in whole or in part for the
benefit of one or more of such family members (collectively, "PERMITTED
TRANSFEREES"); and PROVIDED FURTHER that this sentence shall not preclude
a Participant from designating a Beneficiary to receive the Participant's
outstanding Award following the death of the Participant. Any Award
transferred to a Permitted Transferee shall be further transferable only
by will or the laws of descent and distribution or, for no consideration,
to another Permitted Transferee of the Participant. The Committee, may in
its discretion, permit transfers of Awards other than those contemplated
by this Section 17(a). During the lifetime of the Participant, an Option,
SAR or similar-type Other Award shall be exercisable only by the
Participant or by a Permitted Transferee to whom such Option, SAR or
Other Award has been transferred in accordance with this Section 17(a).
(b) RIGHTS WITH RESPECT TO SHARES. A Participant shall have no rights as a
stockholder with respect to shares of Common Stock covered by an Award
until the date the Participant or his nominee becomes the holder of
record of such shares, and, except as provided in Section 12, no
adjustments shall be made for cash dividends or other distributions or
other rights as to which there is a record date preceding the date such
person becomes the holder of record of such shares.
(c) NO RIGHT TO CONTINUED EMPLOYMENT. Neither the creation of the Plan nor
the granting of Awards thereunder shall be deemed to create a condition
of employment or right to continued employment with the Company, and each
Participant shall be and shall remain subject to discharge by the Company
as though the Plan had never come into existence.
D-10
<PAGE>
(d) CONSENT TO PLAN. By accepting any Award or other benefit under the Plan,
each Participant and each person claiming under or through him shall be
conclusively deemed to have indicated his acceptance and ratification of,
and consent to, any action taken under the Plan by the Company, the Board
or the Committee.
(e) WAGE AND TAX WITHHOLDING. The Company or any Subsidiary is authorized to
withhold from any Award or any compensation or other payment to a
Participant amounts of withholding and other taxes due in connection with
any Award, and to take such other action as the Committee may deem
necessary or advisable to enable the Company and the Participants to
satisfy obligations for the payment of withholding taxes and other tax
obligations relating to any Award. This authority shall include authority
for the Company to withhold or receive Common Stock or other property and
to make cash payments in respect thereof in satisfaction of a
Participant's tax obligations, either on a mandatory or elective basis in
the discretion of the Committee.
(f) COMPLIANCE WITH SECURITIES LAWS. An Award may not be exercised, and no
shares of Common Stock may be issued in connection with an Award, unless
the issuance of such shares has been registered under the Securities Act
of 1933, as amended, and qualified under applicable state "blue sky"
laws, or the Company has determined that an exemption from registration
and from qualification under such state "blue sky" laws is available.
(g) UNFUNDED PLAN. The Plan is intended to constitute an "unfunded" plan for
incentive compensation. Nothing contained in the Plan (or in any Award
Documents or other documentation related thereto) shall give any
Participant any rights that are greater than those of a general creditor
of the Company; PROVIDED, HOWEVER, that the Committee may authorize the
creation of trusts and deposit therein cash, shares of Common Stock, or
other property or make other arrangements, to meet the Company's
obligations under the Plan. Such trusts or other arrangements shall be
consistent with the "unfunded" status of the Plan unless the Committee
determines otherwise. The trustee of such trusts may be authorized to
dispose of trust assets and reinvest the proceeds in alternative
investments, subject to such terms and conditions as the Committee may
specify.
(h) OTHER EMPLOYEES BENEFIT PLANS. Payments received by a Participant under
any Award made pursuant to the Plan shall not be included in, nor have
any effect on, the determination of benefits under any other employee
benefit plan or similar arrangement provided by the Company, unless
otherwise specifically provided for under the terms of such plan or
arrangement or by the Committee.
(i) COMPLIANCE WITH RULE 16B-3. Notwithstanding anything contained in the
Plan or in any Award Document to the contrary, if the consummation of any
transaction under the Plan would result in the possible imposition of
liability on a Participant pursuant to Section 16(b) of the Exchange Act,
the Committee shall have the right, in its sole discretion, but shall not
be obligated, to defer such transaction or the effectiveness of such
action to the extent necessary to avoid such liability, but in no event
for a period longer than six months.
(j) EXPENSES. The costs and expenses of administering and implementing the
Plan shall be borne by the Company.
(k) APPLICATION OF FUNDS. The proceeds received by the Company from the sale
of Common Stock or other securities pursuant to Award will be used for
general corporate purposes.
18. RECAPITALIZATION OR REORGANIZATION.
(a) AUTHORITY OF THE COMPANY AND STOCKHOLDERS. The existence of the Plan,
the Award Documents and the Awards granted hereunder shall not effect or
restrict in any way the right or power of the Company or the stockholders
of the Company to make or authorize any adjustment, recapitalization,
reorganization or other change in the Company's capital structure or its
business, any merger or consolidation of the Company, any issue of stock
or of options, warrants or rights to purchase stock or of bonds,
debentures, preferred or prior preference stocks whose rights are
D-11
<PAGE>
superior to or affect the Common Stock or the rights thereof or which are
convertible into or exchangeable for Common Stock, or the dissolution or
liquidation of the Company, or any sale or transfer of all or any pert of
its assets or business, or any other corporate act or proceeding, whether
of a similar character or otherwise.
(b) CHANGE IN CAPITALIZATION. Notwithstanding any provision of the Plan or
any Award Document, the number and kind of shares authorized for issuance
under Section 5(a), including the maximum number of shares available
under the special limits provided for in Section 5(d), may be equitably
adjusted in the sole discretion of the Committee in the event of a stock
split, stock dividend, recapitalization, reorganization, merger,
consolidation, extraordinary dividend, split-up, spin-off, combination,
exchange of shares, warrants or rights offering to purchase Common Stock
at a price substantially below Fair Market Value or other similar
corporate event affecting the Common Stock in order to preserve, but not
increase, the benefits or potential benefits intended to be made
available under the Plan. In addition, upon the occurrence of any of the
foregoing events, the number of outstanding Awards and number and kind of
shares subject to any outstanding Award and the purchase price per share,
if any, under any outstanding Award may be equitably adjusted (including
by payment of cash to a Participant) in the sole discretion of the
Committee in order to preserve the benefits or potential benefits
intended to be made available to Participants granted Awards. Such
adjustments shall be made by the Committee, whose determination as to
what adjustments shall be made, and the extent thereof, shall be final.
Unless otherwise determined by the Committee, such adjusted Awards shall
be subject to the same vesting schedule and restrictions to which the
underlying Award is subject.
19. EFFECTIVE DATE. The Plan has been adopted by the Board subject to and
effective as of the closing of the transactions contemplated by the
Contribution Agreement. The Plan shall become effective on the Effective
Date, subject to subsequent approval thereof by the Company's stockholders
at the first annual meeting of stockholders to occur after the Effective
Date, and shall remain in effect until it has been terminated pursuant to
Section 20. If the Plan is not approved by the stockholders at such annual
meeting, the Plan and all interests in the Plan awarded to Participants
before the date of such annual meeting shall be void AD INITO and of no
further force and effect. Section 14 of the Plan and the definition of
"Performance Goal" shall be submitted to the Company's stockholders at the
first stockholder meeting that occurs in the fifth year following the year
in which the Plan was last approved by stockholders (or any earlier meeting
designated by the Board), in accordance with the requirements of Section
162(m) of the Code and the regulations thereunder. If stockholder approval
of the Plan is not obtained at any such meeting, then no further Performance
Awards shall be made under Section 14 after the date of such annual meeting,
but the remainder of the Plan shall continue in effect until terminated in
accordance with Section 20.
20. AMENDMENT AND TERMINATION. Notwithstanding anything herein to the contrary,
the Board or the Committee may, at any time, terminate or, from time to
time, amend, modify or suspend the Plan; PROVIDED, HOWEVER, that no
amendment which (i) increases the Plan Limit or increases limits set forth
in Section 5(d) (except as otherwise contemplated by the terms of the Plan
as approved by stockholders), (ii) allows for grants of Options (other than
Substitute Awards) at an exercise price less than Fair Market Value at the
time of grant or (iii) amends the last sentence of Section 6 in a manner
that would permit a reduction in the exercise price of Options (or options
granted under another plan of the Companies), under circumstances other than
those stated in such sentence, shall be effective without stockholder
approval.
21. GOVERNING LAW. The validity, construction and effect of the Plan, any rules
and regulations relating to the Plan, and any Award shall be determined in
accordance with the laws of the State of Nevada applicable to contracts to
be performed entirely within such state and without giving effect to
principles of conflicts of laws.
D-12
<PAGE>
PROXY--CORNERSTONE PROPERTIES INC.
The undersigned stockholder of Cornerstone Properties Inc. ("Cornerstone")
hereby appoints John S. Moody and Rodney C. Dimock, and each of them, as
Proxies, each with the power of substitution, to vote all of the shares of
Common Stock the undersigned may be entitled to vote upon all matters at
Cornerstone's Special Meeting of Stockholders to be held on December 14, 1998,
at the offices of King & Spalding, 1185 Avenue of the Americas, 34th Floor, New
York, NY, commencing at 10:00 A.M. (local time), and at all adjournments and
postponements thereof, with all powers the undersigned would possess if then and
there personally present. Without limiting the general authorization and power
hereby given, the undersigned directs said Proxies to cast the undersigned's
vote as specified on the reverse side hereof. IF NOT OTHERWISE SPECIFIED, THIS
PROXY WILL BE VOTED FOR APPROVAL OF EACH OF THE PROPOSALS LISTED ON THE REVERSE
SIDE HEREOF.
Stockholders who attend the Special Meeting may revoke their proxy by
casting their cote at the meeting in person.
<TABLE>
<S> <C>
Date: -------------------------------------------------------, 1998 ---------------------------------------------------------------
Name of Stockholder (please print)
---------------------------------------------------------------
Signature
---------------------------------------------------------------
Number of Shares Held
---------------------------------------------------------------
Name of Correspondent Bank
</TABLE>
PLEASE DATE, SIGN AND MAIL THIS PROXY TODAY IN THE ENCLOSED ENVELOPE.
(CONTINUED ON THE REVERSE SIDE)
<PAGE>
1. To approve the Wilson Issuance.
/ / FOR / / AGAINST / / ABSTAIN
2. To approve the PGGM Investment.
/ / FOR / / AGAINST / / ABSTAIN
3. To approve the Amendment.
/ / FOR / / AGAINST / / ABSTAIN
4. To vote at the discretion of the Proxies upon such other matters as may
properly come before the Special Meeting or any adjournment or postponement
thereof.
/ / FOR / / AGAINST / / ABSTAIN
I plan to attend the Special Meeting of Stockholders. Please send me an
entry card.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF CORNERSTONE PROPERTIES INC.
(to be dated and signed on the reverse side)
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Cornerstone Properties Inc.
We have audited the consolidated financial statements and financial
statement schedules of Cornerstone Properties Inc. and Subsidiaries (the
"Company") as of December 31, 1997 and 1996, and for each of the three years in
the period ended December 31, 1997, listed in item 14(a)(i) of this Form 10-K.
These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedules based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financing statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Cornerstone
Properties Inc. and Subsidiaries as of December 31, 1997 and 1996 and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles. In addition, in our opinion, the
financial statement schedules referred to above, when considered in relation to
the basic financial statements taken as a whole, present fairly, in all material
respects, the information required to be included therein.
New York, New York /s/ Coopers & Lybrand L.L.P.
February 24, 1998
