<PAGE> 1
Filed Pursuant to rule 424 (b)(5)
Registration No. 333-18303
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS SUPPLEMENT DATED JANUARY 15, 1998
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MARCH 12, 1997)
16,250,000 SHARES
CORNERSTONE PROPERTIES INC.
COMMON STOCK
------------------------
Cornerstone Properties Inc. ("Cornerstone" or the "Company") is a
self-advised equity real estate investment trust ("REIT") which owns interests
in 18 Class A office properties, with a pending closing to increase the
Company's portfolio to interests in 19 properties comprising nearly 11 million
rentable square feet (collectively, the "Properties," and each interest, a
"Property"). The Properties are located in ten major metropolitan areas
throughout the United States: Atlanta, Boston, Charlotte, suburban Chicago,
Denver, Minneapolis, New York City, Pittsburgh, Seattle and Washington, D.C. and
surrounding suburbs. All of the Properties were built between 1979 and 1991,
with the exception of the Pittsburgh Property, which was substantially renovated
in 1988. The Company's strategy is to own Class A office properties in prime
central business district ("CBD") locations and major suburban office markets in
U.S. metropolitan areas. The Company is currently in the process of forming an
umbrella limited partnership REIT ("UPREIT"). As of September 30, 1997, the
Properties were approximately 96% leased under approximately 768 leases.
All of the shares of common stock of the Company, without par value
("Common Stock"), offered hereby are being sold by the Company (the "Offering").
The Common Stock is listed on the New York Stock Exchange (the "NYSE")
under the symbol "CPP." The Common Stock also currently trades on the Frankfurt
and Dusseldorf Stock Exchanges. On January 14, 1998, the last reported sale
price for the Common Stock on the NYSE was $19 1/16 per share.
SEE "RISK FACTORS" BEGINNING ON PAGE S-14 FOR CERTAIN FACTORS RELEVANT TO
AN INVESTMENT IN THE COMMON STOCK.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS TO WHICH IT RELATES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
======================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNTS(1) COMPANY(2)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share..................... $ $ $
- ------------------------------------------------------------------------------------------------------
Total(3)...................... $ $ $
======================================================================================================
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be $ .
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 2,437,500 shares of Common Stock solely to cover
over-allotments, if any. If all such additional shares are purchased, the
total Price to Public, Underwriting Discounts and Proceeds to Company will
be $ , $ and $ , respectively. See
"Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject to
approval of certain legal matters by counsel to the Underwriters. The
Underwriters reserve the right to withdraw, cancel or modify such offer and to
reject orders as a whole or in part. It is expected that delivery of the Common
Stock offered hereby will be made in New York, New York on or about February ,
1998.
------------------------
MERRILL LYNCH & CO.
BT ALEX. BROWN
LAZARD FRERES & CO. LLC
LEHMAN BROTHERS
MORGAN STANLEY DEAN WITTER
NATIONSBANC MONTGOMERY
SECURITIES LLC
SALOMON SMITH BARNEY
------------------------
The date of this Prospectus Supplement is , 1998.
<PAGE> 2
Portfolio Credit Ratings
[PIE CHART]
<TABLE>
<S> <C> <C> <C> <C> <C>
Other S&P "AA" Major S&P "BBB" S&P "A" Big Six
45% 20% Law Firms 10% 4% Accounting
18% 3%
</TABLE>
Total Square Feet Owned
[BAR GRAPH]
<TABLE>
<S> <C> <C> <C> <C>
1994 1995 1996 1997 1998*
3,461 4,087 4,725 10,270 10,949
</TABLE>
*Includes Corporate 500 Centre.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING PURCHASES OF SHARES OF COMMON STOCK TO STABILIZE THEIR MARKET PRICE
AND PURCHASES OF SHARES OF COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION
IN THE SHARES OF COMMON STOCK MAINTAINED BY THE UNDERWRITERS. FOR A DESCRIPTION
OF THESE ACTIVITIES, SEE "UNDERWRITING."
S-2
<PAGE> 3
PHOTOGRAPHS OF BUILDINGS OWNED BY CORNERSTONE PROPERTIES INC.
191 PEACHTREE STREET
ATLANTA, GA
222 BERKELEY/500 BOYLSTON
BOSTON, MA
125 SUMMER STREET
BOSTON, MA
CORPORATE 500 CENTRE
DEERFIELD, IL
<PAGE> 4
PHOTOGRAPHS OF BUILDINGS OWNED BY CORNERSTONE PROPERTIES INC.
ONE NORWEST CENTER
DENVER, CO
WASHINGTON MUTUAL TOWER
SEATTLE, WA
MARKET SQUARE
WASHINGTON, D.C.
NORWEST CENTER
MINNEAPOLIS, MN
SIXTY STATE STREET
BOSTON, MA
<PAGE> 5
PROSPECTUS SUPPLEMENT SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements
appearing elsewhere in, or incorporated by reference into, this Prospectus
Supplement and the accompanying Prospectus. References to the "Company" in this
Prospectus Supplement shall be deemed to include Cornerstone Properties Inc. and
its wholly-owned subsidiaries unless otherwise indicated or the context
indicates otherwise. References herein to a "Property" or "Properties" are
references to any of the 19 interests described in "Properties -- Table of
Properties." References herein to the percentage of a Property or Properties
occupied are calculated by dividing rentable square feet leased by total
rentable square feet, unless otherwise indicated. Unless otherwise indicated,
the information contained in this Prospectus Supplement assumes that the
Underwriters' over-allotment option is not exercised.
When used in this Prospectus Supplement, the words "believes,"
"anticipates," "expects" and similar expressions are intended to identify
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act"), and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company's actual results could
differ materially from those set forth in the forward-looking statements. Such
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially, including, but not limited to, those set
forth in "Risk Factors" in this Prospectus Supplement. Readers are cautioned not
to place undue reliance on these forward-looking statements, which speak only as
of the date hereof.
THE COMPANY
The Company is a self-advised REIT which owns interests in 18 Class A
office properties, with a pending closing to increase the Company's portfolio to
interests in 19 Properties comprising nearly 11 million rentable square feet.
The Properties are located in ten major metropolitan areas throughout the United
States: Atlanta, Boston, Charlotte, suburban Chicago, Denver, Minneapolis, New
York City, Pittsburgh, Seattle and Washington, D.C. and surrounding suburbs. All
of the Properties were built between 1979 and 1991, with the exception of the
Pittsburgh Property, which was substantially renovated in 1988. The Company's
strategy is to own Class A office properties in prime CBD locations and major
suburban office markets in U.S. metropolitan areas. Class A office properties
are generally considered to be those that have the most favorable locations and
physical attributes, command premium rents and experience the highest tenant
retention rates within their markets. The Company is currently in the process of
forming an UPREIT. As of September 30, 1997, the Properties were approximately
96% leased under approximately 768 leases.
The Company is led by John S. Moody, the Chairman of the Board of
Directors, President and Chief Executive Officer, who joined the Company in
1991, and by Rodney C. Dimock, the Executive Vice President and Chief Operating
Officer, who joined the Company in 1995. Mr. Moody and Mr. Dimock together have
approximately 50 years of commercial real estate experience. They are supported
by a team of eight officers with an average of 13 years of experience in all
areas of acquisitions, asset management, leasing and finance, as well as 13
professional and administrative staff members.
The Company 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. The Company
engages prominent regional or national third-party management companies to
provide day-to-day property management functions at the local level. The Company
believes that its use of third-party property managers offers a flexible,
cost-efficient and demonstrably effective means for managing a national office
portfolio, as historically its Properties have consistently outperformed their
respective submarkets' Class A property rent and occupancy levels. In all cases,
the Company retains full responsibility for capital planning, budgeting,
leasing, major tenant relationships, financing and strategic initiatives with
respect to its Properties.
As a major owner of Class A office properties, management believes that the
Company is well positioned to capitalize on the expected improvement in the
fundamentals for office property markets in the United States. Management also
believes that the Company can continue to use its portfolio of premium quality
assets, proven access to multiple sources of debt and equity capital and
efficient management structure to expand nationally through the use of UPREIT
unit transactions and stock-for-asset transactions. Proceeds of
S-3
<PAGE> 6
the Offering, combined with borrowings available under its Revolving Credit
Facility (as defined herein), will provide the Company with sufficient capital
to acquire in excess of $500 million in additional assets.
RECENT DEVELOPMENTS
RECENT ACQUISITIONS
- On December 31, 1997, the Company purchased the second mortgage on Sixty
State Street, an 823,000 square foot Class A office building located in
the heart of Boston's CBD. The mortgage is a cash flow mortgage through
which all of the economic benefits (subject to the first mortgage) will
inure to the Company. The Company will control all major decisions
regarding the Property's management and leasing. The total purchase price
for the second mortgage was $131.5 million. The $78.5 million first
mortgage on the Property has been recorded by the Company as an $89.6
million liability as a result of its above-market interest rate.
- On December 21, 1997, the Company entered into a binding contract to
purchase Corporate 500 Centre in Deerfield, Illinois. This Property
consists of four Class A office buildings with approximately 679,000
rentable square feet. The consideration paid for this Property will be
$130 million in cash and $20 million in UPREIT units, priced at $18.50
per unit, for a total purchase price of $150 million. The Company has
received a commitment for $80 million from Bankers Trust Company to
finance this Property. The Company has entered into an interest rate swap
agreement with Bankers Trust Company that effectively fixes the interest
rate on the loan at 6.63%. The closing for this Property is expected to
occur in late January 1998.
- On October 27, 1997, the Company acquired (the "DIHC Acquisition")
interests in nine Class A office properties comprising approximately 4.5
million rentable square feet in Alexandria, Virginia (3 Properties),
Atlanta (2 Properties), Boston (2 Properties), Charlotte and Washington,
D.C., as well as an undeveloped parcel of land in Chicago (collectively,
the "DIHC Properties"). The Company acquired the DIHC Properties for a
purchase price of approximately $1.06 billion, consisting of
approximately 34 million shares of Common Stock, approximately $260
million in cash and promissory notes for $250 million.
OTHER RECENT DEVELOPMENTS
- The Company is currently in the process of forming an UPREIT, which will
allow the Company to acquire properties in transactions that allow
sellers tax-deferred treatment.
- On October 27, 1997, the Company obtained a $350 million three-year
Revolving Credit Facility to be used for acquisitions and general working
capital purposes, as well as the issuance of letters of credit.
- On October 27, 1997, the Company amended (the "REIT Amendment") its
Restated Articles of Incorporation (the "Articles of Incorporation") to
add provisions designed to cause the Company to become a "domestically
controlled REIT" under the Internal Revenue Code of 1986, as amended (the
"Code").
- On July 25, 1997, all of the outstanding shares of 8% Cumulative
Convertible Preferred Stock and 8% Cumulative Convertible Preferred
Stock, Series A of the Company (collectively, the "8% Preferred Stock"),
which were held by the New York State Teachers' Retirement System
("NYSTRS") and Rodamco N.V. (together with its subsidiaries, "Rodamco"),
were converted into 6,896,550 and 4,586,210 shares of Common Stock,
respectively.
S-4
<PAGE> 7
BUSINESS OBJECTIVES
BUSINESS STRATEGY
The Company's primary objective is to maximize long-term stockholder value
through growth in funds from operations ("FFO") per share and through
appreciation in the value of its holdings. The Company's strategies to
accomplish this objective are to:
- Seek external growth by acquiring additional Class A office properties
with local submarket and asset characteristics consistent with the
Properties currently in its portfolio; and
- Generate internal growth by aggressively maintaining, managing and
leasing its Properties, increasing rent, maintaining high occupancy and
tenant retention levels and maximizing current returns and long-term
value.
EXTERNAL GROWTH STRATEGY
The Company will continue to pursue significant growth in its asset base to
the extent that appropriate Class A office properties and financing are
available on attractive terms. The Company will continue to implement its
external growth strategies by acquiring properties and portfolios of properties
with the following characteristics:
- Class A Office Properties. The Company believes that its strategy of
investing in and owning Class A office properties has the following
benefits: (i) Class A properties can currently be acquired at prices that
produce attractive yields for the Company and are accretive to earnings;
(ii) Class A properties typically maintain higher occupancies because,
when overall vacancy rates are rising, tenants often take the opportunity
to relocate to better located and higher quality buildings; and (iii)
Class A properties generally attract tenants with strong credit,
resulting in a more stable source of cash flow.
- Major Metropolitan Areas. The Company intends to continue targeting
properties located in the CBDs and major suburban submarkets of major
metropolitan areas. Target markets typically exhibit underlying economic,
demographic and employment trends that lead to the positive net
absorption of Class A office space. The Company also expects future
acquisitions to be concentrated in submarkets where high barriers to
entry reduce the likelihood that new office space will be constructed.
- Discount to Replacement Cost. The Company expects to continue acquiring
properties at discounts to replacement cost that possess one or more
competitive advantages, such as a superior location, quality
construction, high-quality tenancy, efficient floorplates and modern
building systems. Because Class A properties being considered for
acquisition by the Company are at prices below replacement cost, the
opportunity exists for the Company to enhance property performance and
operating income, thereby increasing asset values, before potentially
competitive new construction is justified in most markets.
- UPREIT Unit Transactions and Stock-for-Asset Swaps. The Company believes
that opportunities exist for it to grow its asset base and increase
earnings through UPREIT unit transactions and stock-for-asset swaps with
major institutional owners of property. For example, a number of major
pension funds and life insurance companies have publicly announced
initiatives to exchange portfolios of direct real estate holdings for
securities of publicly traded companies in order to improve portfolio
diversification, liquidity and overall investment returns. The Company
believes that the very high quality of the Properties and its intended
future acquisitions should make the Company an attractive vehicle for
swap transactions and afford access to a broader range of acquisition
opportunities.
S-5
<PAGE> 8
INTERNAL GROWTH STRATEGY
The Company believes that its existing portfolio offers opportunities for
growth through the Company's active and aggressive asset management program,
which emphasizes maintaining a strong market position based on superior asset
quality and tenant service. The Company will continue to implement its internal
growth strategies through the following:
- Rental Rate Increases. Based on its own historical activities and
knowledge of its local marketplaces, the Company believes that occupancy
levels and net rents in most of its submarkets are increasing but, on
average, that net rents must still rise significantly in order to justify
and finance new construction. The Company believes that these market
dynamics should enable it to realize rental rate increases without facing
potentially competitive new construction. Ultimately, the Company
believes that its high-quality assets will continue to compete very
effectively even when market rents rise sufficiently to justify new
construction.
- Maintenance. The Company places strong emphasis on programs for regular
maintenance of the Properties as well as periodic refurbishment,
renovation and redevelopment where such investment provides attractive
returns and cash flow growth. Higher maintenance levels generally allow
building systems to operate more efficiently, thereby reducing operating
expenses to a level which is lower than that of competing properties. In
addition, many of the Company's capital and maintenance expenditures,
such as the upgrading of a building's electrical system, are designed to
produce ongoing operational efficiencies in order to increase cash flow
and long-term value.
- Proactive Leasing Program. The Company believes that retention of
existing tenants, and the leasing of additional space to those tenants,
is important to a property's stability and enhances its cash flow and
value over time. Maximizing tenant retention reduces the cost of lease
rollovers and rental revenue fluctuations by removing "down" periods
between tenant occupancies and reducing the "up front" costs (tenant
improvements and leasing commissions) of signing leases. Therefore, the
Company's senior management focuses significant attention on negotiating
lease terms for prospective new tenants and on working with existing
tenants to negotiate lease renewals that meet the tenant's changing space
needs.
FINANCING STRATEGY
The Company believes that in order to continue to maximize the value of its
stockholders' equity and to execute its growth strategies, it is essential to
implement and periodically review a diversified financing strategy that: (i)
incorporates long-term, secured and unsecured corporate debt; (ii) minimizes
exposure to fluctuations of interest rates; and (iii) maintains maximum
flexibility to manage the Company's short-term cash needs. Furthermore, the
Company believes that its capital structure will be conducive to and allow
flexibility for the aggressive growth that the Company seeks to achieve. The
Company anticipates employing the following strategies to enhance stockholder
value:
- Access to Multiple Capital Sources. Because of the high quality of its
assets, the Company believes that it has several competitive advantages
in its ability to access equity capital from several different sources on
attractive terms. This financial flexibility should enable the Company to
choose from among several equity alternatives and to select the capital
source that best meets the Company's needs at that time. The Company
expects to continue to access capital from the most cost-efficient
sources, including public and private equity and debt.
- Prudent Leverage. The Company will use leverage prudently to take
advantage of what it believes to be the positive spread between the total
return on investment and the cost of debt financing in the Class A office
property market. Historically, the Company has employed somewhat higher
levels of leverage than property companies holding assets of lesser
quality, since the Company's high-quality assets and tenancy have
generally produced occupancy rates, rent levels and income streams that
are
S-6
<PAGE> 9
higher and more stable than those associated with lower quality assets.
The Company believes that its use of leverage has been and will continue
to be consistent with its ownership of very high-quality assets in which
a large portion of its tenants carry investment-grade long-term debt
ratings. Approximately 34% of its Full Service Straight-Line Rent (as
defined herein) is received from tenants which carry investment-grade
long-term debt ratings.
- Credit Facility. The Company obtained a three-year, $350 million
unsecured credit facility (the "Revolving Credit Facility") from Bankers
Trust Company and The Chase Manhattan Bank. The Revolving Credit Facility
has been and will continue to be used for the acquisition of additional
properties. Borrowings under the Revolving Credit Facility bear interest
at a rate between 1.10% and 1.40% above the London Interbank Offered Rate
("LIBOR"), depending upon the Company's ratio of total debt to asset
value at the time of borrowing.
S-7
<PAGE> 10
PROPERTIES
The Company owns 18 Properties, with a pending closing to increase the
Company's portfolio to 19 Properties comprising nearly 11 million rentable
square feet. As of September 30, 1997, the Properties were approximately 96%
leased under approximately 768 leases.
The following table summarizes certain information as of September 30, 1997
with respect to the Properties.
TABLE OF PROPERTIES
<TABLE>
<CAPTION>
AVERAGE
REMAINING
LEASE
COMPANY'S TOTAL NUMBER TERM
YEAR PERCENTAGE RENTABLE OCCUPANCY OF (IN
PROPERTY NAME AND LOCATION CONSTRUCTED INTEREST SQUARE FEET RATE LEASES YEARS)
- -------------------------------------- ----------- ---------- ----------- --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
500 Boylston Street(1)(2)
Boston, Massachusetts............... 1988 91.5% 715,000 100% 17 6.4
222 Berkeley Street(1)(2)
Boston, Massachusetts............... 1991 91.5 531,000 99 30 6.7
125 Summer Street
Boston, Massachusetts............... 1989 100 464,000 94 27 3.2
Sixty State Street(3)
Boston, Massachusetts............... 1979 100 823,000 98 42 9.1
Market Square(1)(4)
Washington, D.C..................... 1990 60 689,000 95 48 7.4
11 Canal Center(1)
Alexandria, Virginia................ 1986 100 70,000 97 6 7.6
99 Canal Center(1)
Alexandria, Virginia................ 1986 100 138,000 100 19 3.8
TransPotomac Plaza 5(1)
Alexandria, Virginia................ 1983 100 96,000 82 10 3.9
191 Peachtree Street(1)(5)
Atlanta, Georgia.................... 1991 80 1,221,000 95 37 8.5
200 Galleria(1)
Atlanta, Georgia.................... 1985 100 433,000 95 61 3.5
Corporate 500 Centre(6)
Deerfield, Illinois................. 1986/1990 100 679,000 98 41 6.7
One Lincoln Centre
Oakbrook Terrace, Illinois.......... 1986 100 297,000 95 43 2.5
Tower 56(7)
New York, New York.................. 1983 100 162,000 97 46 3.0
527 Madison Avenue(8)
New York, New York.................. 1986 100 216,000 93 18 5.7
Charlotte Plaza(1)
Charlotte, North Carolina........... 1982 100 613,000 91 43 7.0
One Norwest Center
Denver, Colorado.................... 1983 100 1,188,000 99 48 8.6
Norwest Center(9)
Minneapolis, Minnesota.............. 1988 50 1,118,000 99 35 10.9
The Frick Building(10)
Pittsburgh, Pennsylvania............ 1902 100 341,000 88 74 4.2
Washington Mutual Tower(11)(12)
Seattle, Washington................. 1988 50 1,155,000 98 123 4.9
----------- --- ------ ---
Total/Weighted Average,
All Properties...................... 10,949,000 96% 768 7.0
=========== ========= ====== =========
</TABLE>
S-8
<PAGE> 11
- ---------------
(1) Property acquired in the DIHC Acquisition.
(2) Distributions of cash flow and sales and refinancing proceeds are shared in
proportion to the Company's 91.5% partnership interest and Hines' 8.5%
partnership interest. See "Properties -- Market Data -- Boston."
(3) The Company acquired the second mortgage on the Property on December 31,
1997. Since it is currently projected that all the economic benefits
(subject to the first mortgage) from the Property inure to the Company, it
will be accounted for as an equity investment.
(4) While the Company's stated interest in the partnerships which own Market
Square is 60%, its economic interest is significantly larger since it has
acquired the first mortgage note in the amount of $181 million on the
Property which earns interest at 9.75% and will receive a priority
distribution on its acquired capital base. During 1996, the Company
received 100% of the cash flow from the Property. The interest of Dutch
Institutional Holding Company ("DIHC") in the partnerships which own Market
Square will be acquired in a series of transactions that are expected to be
concluded in January 1998. However, all pro forma data relating to the DIHC
Acquisition are presented as if the Company had acquired DIHC's interest in
the partnerships which own Market Square as of January 1, 1996.
(5) While the Company's stated interest in the partnership which owns 191
Peachtree Street is 80%, its economic interest is significantly larger
since it has acquired the first mortgage note in the amount of $145 million
on the Property, which earns interest at 9.375%, and will receive a
priority distribution on its acquired capital base. In addition, in 1996,
the partner in the transaction, CH Associates, Ltd., received a $250,000
priority distribution, which it will receive under the partnership
agreement through February 28, 2000, while the Company will receive the
remainder.
(6) The Company has entered into a contract to purchase the Property, with the
closing expected to occur in late January 1998.
(7) The Company's headquarters are located at Tower 56.
(8) The Property was acquired by the Company in February 1997.
(9) While the Company'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 nine months ended September 30, 1997, the Company's
share of earnings and cash distributions from the partnership which owns
Norwest Center was 77.27%.
(10) The Property was substantially renovated in 1988.
(11) Includes the Galland and Seneca Buildings. See "Properties -- Market
Data -- Seattle."
(12) While the Company'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 nine months ended September 30, 1997, the
Company received 100% of the cash distributions from the partnership which
owns Washington Mutual Tower.
S-9
<PAGE> 12
THE OFFERING
All of the shares of Common Stock offered hereby are being sold by the
Company. None of the Company's stockholders is selling any Common Stock in the
Offering.
<TABLE>
<S> <C>
Common Stock Offered............... 16,250,000 shares(1)
Common Stock Outstanding
After the Offering............... 99,751,511 shares(1)(2)
Fully Diluted Common Stock
Outstanding After the Offering... 104,766,811 shares(1)(2)
Use of Proceeds.................... The Company intends to use the net cash proceeds of the
Offering to repay indebtedness outstanding under the
Company's Revolving Credit Facility, for future
acquisitions and general corporate purposes. See "Use of
Proceeds."
NYSE Symbol........................ "CPP"
</TABLE>
- ---------------
(1) Does not include up to 2,437,500 shares subject to an over-allotment option
granted to the Underwriters.
(2) Does not include the exercise of options on 1,817,000 shares of Common Stock
held by officers and directors of the Company.
The following table shows the equity activity that has occurred since the
Company's initial U.S. public offering in April 1997 (the "April 1997 Offering")
and the calculation of fully diluted Common Stock outstanding after the
Offering.
<TABLE>
<CAPTION>
DATE DESCRIPTION TOTAL
-------- ------------------------------------------------------------------------ -----------
<S> <C> <C>
Common Shares Outstanding Following April 1997 Offering................. 37,056,453
Shares Issuable Upon Conversion of 7% Convertible Preferred Stock....... 3,030,303
Shares Issuable Upon Conversion of Convertible Promissory Note due
2001(1)................................................................. 903,916
04/30/97 Dividend Reinvestment Plan.............................................. 141,733
07/25/97 Conversion of 8% Preferred Stock........................................ 11,482,760
07/31/97 Dividend Reinvestment Plan.............................................. 175,796
10/27/97 DIHC Acquisition........................................................ 34,187,500
10/31/97 Dividend Reinvestment Plan.............................................. 134,577
11/17/97 Officer Option Exercise................................................. 10,500
12/08/97 Restricted Stock Grants................................................. 4,500
01/05/98 Tower 56 Acquisition(2)................................................. 307,692
01/31/98 Corporate 500 Centre (UPREIT units)..................................... 1,081,081
Common Stock Offered Hereby............................................. 16,250,000
-----------
Fully Diluted Common Stock Outstanding After the Offering............... 104,766,811
============
</TABLE>
- ---------------
(1) Held by Hines Colorado Limited.
(2) On January 5, 1998, the Company purchased the participation rights in the
cash flow and residual value of Tower 56 from Larry Jay Wyman and Mazal
American Partners for 307,692 shares of Common Stock. All cash flow and the
residual value of Tower 56 will now inure to the Company.
S-10
<PAGE> 13
SUMMARY SELECTED CONDENSED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following tables set forth selected historical condensed consolidated
financial data and selected unaudited pro forma consolidated financial data for
the periods and as of the dates indicated for the Company.
The following information should be read in conjunction with and is
qualified in its entirety by the consolidated financial statements and the
related notes thereto of the Company incorporated by reference herein. The
following data should also be read in conjunction with the unaudited pro forma
condensed consolidated financial statements and accompanying notes thereto, the
unaudited historical financial statements and notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The summary selected consolidated operating and balance sheet data as of
and for the years ended December 31, 1994 through 1996 have been derived from
the Company's audited financial statements. The selected financial data at
September 30, 1997 and for the nine months ended September 30, 1997 and 1996 is
derived from unaudited financial statements. The unaudited financial information
includes all adjustments consisting of only normal recurring adjustments that
management considers necessary for a fair presentation of the financial position
and results of operations for these periods. Operating results of the Company
for the nine months ended September 30, 1997 are not necessarily indicative of
results expected for the entire year ended December 31, 1997.
The unaudited summary selected pro forma operating data is presented as if
the offerings, sales and conversions of the various securities sold by the
Company (and the application of the proceeds thereof) and the various
acquisitions of the Company that occurred after January 1, 1996 had occurred at
January 1, 1996. The unaudited summary selected pro forma balance sheet data is
presented as if the transactions described above that occurred after September
30, 1997 had occurred at September 30, 1997. The pro forma amounts 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.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
---------------------------------- ----------------------------------------------
HISTORICAL HISTORICAL
PRO FORMA -------------------- PRO FORMA ---------------------------------
1997 1997 1996 1996 1996 1995 1994
---------- -------- -------- --------- -------- --------- --------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues:
Office and parking
rentals................... $ 213,225 $103,237 $ 80,687 $285,168 $111,494 $ 88,548 $ 83,557
Equity in earnings.......... (2,321) -- -- (333) -- -- --
Interest and other income... 25,610 8,432 4,076 31,105 5,414 3,839 2,017
-------- -------- -------- -------- -------- -------- -------
Total revenues....... 236,514 111,669 84,763 315,940 116,908 92,387 85,574
-------- -------- -------- -------- -------- -------- -------
Expenses:
Building operating
expenses.................. 82,328 40,246 31,726 113,121 44,188 31,530 29,991
Interest expense............ 43,797 22,395 24,054 59,488 31,735 30,722 31,903
Depreciation and
amortization............... 40,076 20,865 17,869 52,768 24,316 22,572 22,321
General and
administrative............ 5,509 5,134 4,662 6,907 6,407 5,603 3,869
Unrealized (gain) loss on
interest rate swap........ (99) (99) (5,401) (4,278) (4,278) 7,672 --
-------- -------- -------- -------- -------- -------- -------
Total expenses....... 171,611 88,541 72,910 228,006 102,368 98,099 88,084
-------- -------- -------- -------- -------- -------- -------
Income (loss) from
operations.................. 64,903 23,128 11,853 87,934 14,540 (5,712) (2,510)
Minority interest............. 3,142 1,408 1,017 3,755 1,519 3,417 3,899
-------- -------- -------- -------- -------- -------- -------
Income (loss) before
extraordinary items......... 61,761 21,720 10,836 84,179 13,021 (9,129) (6,409)
Extraordinary loss(1)......... (54) (54) (3,786) (3,925) (3,925) (4,445) (581)
-------- -------- -------- -------- -------- -------- -------
Net income (loss)............. $ 61,707 $ 21,666 $ 7,050 $ 80,254 $ 9,096 $ (13,574) $ (6,990)
======== ======== ======== ======== ======== ======== =======
Net income (loss)
(per share)............... $ 0.59 $ 0.37 $ 0.40 $ 0.77 $ 0.19 $ (0.94) $ (0.53)
======== ======== ======== ======== ======== ======== =======
Distribution to stockholders
(per share)............... $ -- $ 0.90 $ 0.90 $ -- $ 1.20 $ 1.16 $ 1.16
======== ======== ======== ======== ======== ======== =======
</TABLE>
S-11
<PAGE> 14
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
---------------------------------- --------------------------------------------
HISTORICAL HISTORICAL
PRO FORMA -------------------- PRO FORMA -------------------------------
1997 1997 1996 1996 1996 1995 1994
-------- -------- -------- -------- -------- -------- -------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Real estate investments before
accumulated depreciation.... $2,343,856 $875,714 $721,698 $ -- $799,662 $ 706,988 $577,134
Total assets.................. 2,284,516 971,985 601,598 -- 766,180 586,089 477,996
Long-term debt................ 786,460 366,830 400,405 -- 400,142 369,600 130,500
Credit facility debt.......... -- -- -- -- -- -- 236,467
Total liabilities........... 870,988 451,358 428,224 -- 442,375 403,927 400,712
Minority interest............. 28,739 (17,356) (16,989) -- (17,478) (7,194) (6,642)
Redeemable preferred stock.... -- -- -- -- 162,743 -- --
Preferred stock............... 50,000 50,000 50,000 -- 50,000 50,000 --
Common stockholders' equity... 1,334,789 487,983 190,273 -- 128,540 139,356 83,926
OTHER DATA:
Funds from operations(2)...... 104,328 42,345 24,831 137,970 34,718 21,424 15,562
Capital expenditures.......... -- 7,705 6,128 -- 6,100 712 1,790
Preferred stock
dividends(3)................ 2,625 9,285 2,625 3,500 5,153 1,449 --
Common stock distributions.... -- 29,812 15,685 -- 24,551 18,485 15,359
Cash flow provided by (used
in):
Operations.................. -- 43,472 20,421 -- 34,522 20,036 28,968
Investing................... -- (74,161) (10,229) -- (57,259) (135,527) (1,762)
Financing................... -- 140,760 1,587 -- 129,800 110,725 (33,141)
Total rentable square footage
of properties(4)............ 10,949 4,941 4,087 10,949 4,725 4,087 3,461
Average occupancy............. 96% 97% 97% 96% 97% 98% 98%
Weighted average number of
shares of Common Stock
outstanding................. 100,431 33,494 20,344 99,821 20,411 15,910 13,241
Weighted average number of
fully diluted shares of
Common Stock outstanding.... 104,718 46,404 21,272 104,108 25,821 15,910 13,241
</TABLE>
- ---------------
(1) Reflects the costs associated with the extinguishment of long-term debt.
(2) The Company calculates FFO based upon guidance from the National Association
of Real Estate Investment Trusts, Inc. ("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.
The Company makes two adjustments to FFO that are not contemplated by NAREIT
in its definition. The first adjustment is to include the principal payments
of the rent notes receivable from Hines that were put in place to compensate
the Company for its share of cash flow from the partnership that owned One
Norwest Center during the period when the Company 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 the Company for the future value of the cash flow that the
Company 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. The Company believes that, since the building is 99% leased, these
funds will be collected under any circumstance as a pass-through to the
tenants. Based on this fact, the Company 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 such
real estate taxes, respectively.
S-12
<PAGE> 15
The table below sets forth the adjustments which were made to the net income
(loss) of the Company for the last three years and Pro Forma 1996 and 1997
in the calculation of FFO (in thousands).
FUNDS FROM OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
--------------------------------- ---------------------------------------------
HISTORICAL HISTORICAL
PRO FORMA ------------------ PRO FORMA ------------------------------
1997 1997 1996 1996 1996 1995 1994
----------- ------- ------- ----------- ------- -------- -------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Net income (loss)......... $ 61,707 $21,666 $ 7,050 $ 80,254 $ 9,096 $(13,574) $(6,990)
NAREIT Adjustments:
Depreciation and
amortization.......... 40,076 20,865 17,869 52,768 24,316 22,572 22,321
Net (gain) loss on swap
transactions.......... (99) (99) (5,401) (4,278) (4,278) 7,672 --
Extraordinary losses.... 54 54 3,786 3,925 3,925 4,445 581
Unconsolidated joint
venture
depreciation.......... 3,201 -- -- 4,268 -- -- --
Minority interest
adjustments........... (1,514) (1,044) (1,393) (2,637) (2,011) (1,617) (1,358)
Other Adjustments:
Amortization on rent
notes................. 903 903 813 1,242 1,242 1,119 1,008
Real estate tax
adjustment............ -- -- 2,107 2,428 2,428 807 --
------- ------- ------- -------- ------- ------- -------
Funds from Operations... 104,328 42,345 24,831 137,970 34,718 21,424 15,562
======= ======= ======= ======== ======= ======= =======
Preferred Dividends..... (2,625) (9,285) (2,625) (3,500) (5,153) (1,449) --
======= ======= ======= ======== ======= ======= =======
Funds from Operations
Available for Common
Stockholders.......... $ 101,703 $33,060 $22,206 $ 134,470 $29,565 $ 19,975 $15,562
======= ======= ======= ======== ======= ======= =======
</TABLE>
Although the Company believes that this table is a full and fair
presentation of the Company's FFO, similarly captioned items may be defined
differently by other REITs, in which case direct comparisons may not be
possible.
Industry analysts generally consider FFO to be an appropriate measure of
performance of any equity REIT such as the Company, and the Company 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,
therefore, should not be considered a substitute for net income as a measure
of performance or cash flow from operations as a measure of liquidity
calculated in accordance with GAAP.
(3) Includes preferred stock dividends accrued but not declared. Pro forma
amounts reflect the conversion of the 8% Preferred Stock and 8% Preferred
Stock, Series A, of the Company.
(4) At December 31, 1995, the Company held the mortgage note on Tower 56, and
the square footage of Tower 56 is included as of that date.
S-13
<PAGE> 16
RISK FACTORS
In addition to the other information contained or incorporated by reference
in this Prospectus Supplement and the accompanying Prospectus, prospective
investors should carefully consider the following factors before purchasing the
Common Stock offered hereby.
SUBSTANTIAL CONCENTRATION OF OWNERSHIP OF COMMON STOCK
Stichting Pensioenfonds Voor de Gezondheid, Geestelijke en Maatschappelijke
Belangen ("PGGM") and DIHC together own approximately 40.9% of the Common Stock
of the Company and, following the Offering, will own approximately 34.2% of the
Common Stock of the Company. As of September 30, 1997, NYSTRS and Rodamco owned
8.3% and 5.5%, respectively, and following the Offering, will own 6.9% and 4.6%,
respectively, of the Common Stock of the Company. As of September 30, 1997,
Deutsche Bank AG owned 3.6% and, following the Offering, will own 2.9% of the
Common Stock of the Company, on a fully diluted basis, through its ownership of
preferred stock convertible into Common Stock of the Company, and the Company
has been advised by Deutsche Bank that it has investment discretion over
approximately 3.6 million shares of Common Stock owned by investors in Germany
as of October 27, 1997. PGGM and DIHC together have elected two directors to the
Company's Board of Directors (the "Board"), and NYSTRS and Rodamco each have
elected one director to the Board. These stockholders are the largest
stockholders of the Company and, because of certain limitations that the Company
has adopted to preserve its status as a REIT, no other stockholder is permitted
to own, directly or indirectly, more than 6% of the capital stock of the
Company, subject to certain exceptions set forth in the Articles of
Incorporation or to approval by the Board. This concentration of ownership could
potentially be disadvantageous to other stockholders' interests.
DEPENDENCE ON KEY PERSONNEL
The Company is highly dependent on the efforts of its senior officers and,
in particular, John S. Moody, the Chairman of the Board of Directors, President
and Chief Executive Officer, and Rodney C. Dimock, its Executive Vice President
and Chief Operating Officer. While the Company believes that it could find
replacements for these key personnel, the loss of the services of either could
have a material adverse effect on the Company.
RISKS ASSOCIATED WITH EXPANSION
Part of the Company's strategy for growth is to actively seek to acquire
additional Class A office properties, which acquisitions may include the
acquisition of other companies and business entities owning such properties. The
Company's future growth will depend upon (i) the availability of suitable
properties, (ii) the Company's ability to compete effectively for available
properties and (iii) the availability of capital to complete the acquisitions.
In pursuing a strategy of acquiring additional properties, the Company will face
risks commonly encountered with growth through acquisitions. Although the
Company will engage in due diligence with respect to each new acquisition, there
can be no assurance that the Company will be aware of all potential liabilities
and problems associated with such properties, and the Company may have limited
contractual recourse, or no contractual recourse, against the sellers of such
properties. In addition, risks associated with acquisitions include failure of
the investments to perform in accordance with expectations, failure to
assimilate the acquired properties, disruption of the Company's ongoing
business, dissipation of the Company's limited management resources, failure to
maintain uniform standards, controls and policies and impairment of
relationships with tenants as a result of changes in management. Acquiring
additional properties, as the Company intends, could also have a significant
impact on the Company's financial position, and could cause substantial
fluctuations in the Company's quarterly and yearly operating results. See
"-- Risks Associated with the DIHC Acquisition."
RISKS ASSOCIATED WITH THE DIHC ACQUISITION
In the DIHC Acquisition, the Company acquired interests in nine Class A
office properties comprising approximately 4.5 million rentable square feet in
Alexandria, Virginia (3 Properties), Atlanta (2 Properties), Boston (2
Properties), Charlotte and Washington, D.C., as well as an undeveloped parcel of
land in Chicago. The DIHC Acquisition requires the integration of two portfolios
of Properties that have previously been
S-14
<PAGE> 17
operated independently. No assurance can be given that the Company will be able
to integrate the recently acquired Properties into its operations without
encountering difficulties or that the benefits expected from such integration
will be realized. In addition, there can be no assurance that the Company will
realize anticipated operating synergies from the DIHC Acquisition.
NEED FOR FINANCING AND POSSIBLE DILUTION THROUGH ISSUANCE OF STOCK
The Company will require substantial additional capital in order to
continue to acquire properties in the future. The Company intends to finance
acquisitions through cash on hand, through the issuance from time to time of
additional capital stock or UPREIT units, through the use of its $350 million
unsecured Revolving Credit Facility and through mortgage financing. Using cash
to complete acquisitions could substantially limit the Company's financial
flexibility. Using stock or UPREIT units to consummate acquisitions may result
in significant dilution of stockholders' equity in the Company. Using the
Revolving Credit Facility to complete acquisitions will increase the Company's
exposure to the risks associated with debt financing. See "-- Risks of Debt
Financing." In addition, 13 of the Company's 19 Properties are pledged to secure
the Company's mortgage indebtedness amounting to approximately $786.5 million,
which indebtedness may impede the Company's ability to borrow from other
sources. If the Company is unable to obtain additional capital on acceptable
terms, the Company may be required to reduce the scope of its presently
anticipated expansion, which could materially adversely affect the Company's
business and the value of the Common Stock.
RISKS OF DEBT FINANCING
Dependence on Revolving Credit Facility and Mortgage Financing
The Company is subject to the risks normally associated with debt
financing, including the risk that the Company's cash flow from operations will
be insufficient to meet required payments of principal and interest, the risk
that the Company will not be able to refinance existing indebtedness or that the
terms of any such refinancing will not be as favorable as the terms of such
indebtedness and the risk that the Company may be unable to finance future
acquisitions or capital expenditures on favorable terms, or at all. In addition,
the Revolving Credit Facility provides that an acceleration of any debt
instrument also could, pursuant to a cross-default clause, cause or permit the
acceleration of the Revolving Credit Facility. Any such acceleration could have
a material adverse effect on the Company and its ability to make distributions
to stockholders and to maintain its qualification as a REIT under the Code,
potentially threatening the continued viability of the Company.
Refinancing Risks
The Company has significant amounts of debt maturing under outstanding
mortgage loans beginning in the year 2000 in the following increments: $65.0
million or 8.3% in 2000; $109.9 million or 14.0% in 2001; $80 million or 10.2%
in 2002; $67.8 million or 8.6% in 2003; $65 million or 8.3% in 2004; $278.7
million or 35.4% in 2005; and $120 million or 15.2% in 2007. See
"Properties--Mortgage Indebtedness and Credit Facility." In the event the
Company is unable to secure refinancing of such mortgage indebtedness on
acceptable terms, the Company might be forced to dispose of Properties upon
disadvantageous terms, which might result in losses to the Company and might
adversely affect the cash flow available for distribution to equity holders or
for debt service. In addition, if one or more Properties are mortgaged to secure
payment of indebtedness and the Company is unable to meet mortgage payments, the
mortgage securing such Properties could be foreclosed upon by, or such
Properties could be otherwise transferred to, the mortgagee with a consequent
loss of income and asset value to the Company.
Policies on Indebtedness Subject to Change
While the Company currently intends to maintain a reasonable level of debt
service coverage taking into account the Company's high quality of assets and
tenancy, the Company could become more highly leveraged. This could result in an
increase in debt service that could adversely affect the Company and its ability
to make distributions to stockholders and result in increased risk of default on
its obligations. Moreover, although the Company will consider factors other than
its market capitalization in making decisions regarding the incurrence of debt
(such as the purchase price of properties to be acquired with debt financing,
the estimated
S-15
<PAGE> 18
market value of properties upon refinancing and the ability of particular
properties and the Company as a whole to generate cash flow to cover expected
debt service), there can be no assurance that the Company's future cash flow
will be sufficient to allow the Company, after meeting debt service obligations,
to make stockholder distributions at the level currently expected.
Risk of Rising Interest Rates
Advances under the Revolving Credit Facility bear interest at a variable
rate. In addition, the Company may incur indebtedness in the future that also
bears interest at a variable rate or may be required to refinance its debt at
higher rates. Increases in interest rates could increase the Company's interest
expense, which could adversely affect the Company's ability to pay expected
distributions to stockholders.
CONCENTRATION OF ASSETS IN BOSTON MARKET
Four of the Company's 19 Properties are located in the Downtown Boston
market and account for approximately 27% of the Company's Full Service
Straight-Line Rent (as defined herein) as of September 30, 1997. This
concentration of assets makes the Company particularly vulnerable to adverse
changes in economic conditions in the Boston metropolitan area. A significant
decline in these economic conditions could have a material adverse effect on the
Company.
TAX RISKS; RISKS ASSOCIATED WITH REIT STATUS
Adverse Consequences of the Failure to Maintain Qualification as a REIT
The Company 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 the Company 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 of judicial and administrative interpretations, and the
determination of various factual matters and circumstances not entirely within
the Company'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 the Company's gross income in any year must be derived from qualifying
sources, and the Company 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 issued
by the United States Treasury Department (the "Treasury Regulations") under the
Code, administrative interpretations or court decisions will not significantly
change the tax laws with respect to the Company's qualification as a REIT or the
federal income tax consequences of such qualification. The Company, however, is
not aware of any proposal to amend the tax laws that would significantly and
adversely affect the Company'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 their shareholders, partners, members or
beneficiaries, as the case may be, rather than by such entities. In addition, as
described below, the Articles of Incorporation contain restrictions on share
ownership that are designed to prevent violation of the Five or Fewer
Requirement. See "-- Transfer and Ownership Limitations." Therefore, the Company
believes that it is unlikely that five or fewer "individuals" would be
considered to own more than 50% of the outstanding shares.
If the Company fails to maintain its qualification as a REIT, or is found
not to have qualified as a REIT for any prior year, the Company would not be
entitled to deduct dividends paid to its stockholders and would be subject to
federal income tax (including any applicable alternative minimum tax) on its
taxable income at regular corporate rates. In addition, unless entitled to
relief under certain statutory provisions, the Company would also be
disqualified from treatment as a REIT for the four taxable years following the
year during which qualification was lost. This treatment would reduce amounts
available for investment or distribution to stockholders because of the
additional tax liability to the Company for the year or years involved. In
addition, the Company would no longer be required by the Code to make any
distributions. As a result, disqualification
S-16
<PAGE> 19
of the Company as a REIT could have a material adverse effect on the Company and
its ability to make distributions to stockholders. To the extent that
distributions to stockholders have been made in anticipation of the Company's
qualifying as a REIT, the Company might be required to borrow funds or to
liquidate certain of its investments to pay the applicable tax. See "Federal
Income Tax Considerations" in the accompanying Prospectus.
Effect of Distribution Requirements
To maintain its status as a REIT, the Company is required each year to
distribute to its stockholders at least 95% of its REIT taxable income
(excluding net capital gains). In addition, the Company is subject to a 4%
nondeductible 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. See "Federal
Income Tax Considerations" in the accompanying Prospectus. Although the Company
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 the Company 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 receipt
of income and the payment of expenses in arriving at the taxable income of the
Company could require the Company 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 the Company will be able
to borrow funds or otherwise obtain funds if and when necessary to satisfy such
requirements.
TRANSFER AND OWNERSHIP LIMITATIONS
For the purpose of preserving the Company's REIT qualification, the
Articles of Incorporation provide that no holder is permitted to own, either
actually or constructively under the applicable attribution rules of the Code,
more than 6% of the value of the aggregate outstanding shares of all classes of
stock of the Company (the "6% Limit"). In addition, the Articles of
Incorporation have similar restrictions on transfer designed to encourage Common
Stock to remain in the hands of U.S. Persons (as defined below) in order for the
Company to be considered a domestically controlled REIT for purposes of U.S. tax
law (the "Non-U.S. Ownership Limit"). See "Recent Developments -- Other Recent
Developments -- Amendment of Articles of Incorporation." The Board may waive the
6% Limit and/or the Non-U.S. Ownership Limit with respect to a particular
stockholder if it determines in good faith that the proposed ownership by such
stockholder would not jeopardize the Company's status as a REIT and otherwise
decides such action would be in the best interests of the Company. The Board has
previously waived the 6% Limit in connection with the DIHC Acquisition and
certain private placements of equity. These limits on transfer may preserve the
concentration of ownership for longer periods of time than might be true without
such limits, and, therefore, be potentially disadvantageous to other
stockholders' interests.
RISKS INVOLVED IN PROPERTY OWNERSHIP THROUGH PARTNERSHIPS AND JOINT VENTURES
Interests in six of the Properties are held by the Company through
partnerships in which other entities own an interest. Partnership investments
may, under certain circumstances, involve risks not otherwise present in
property ownership, including the possibility that the Company's partners might
become bankrupt, that such partners or co-venturers might at any time have
economic or other business interests or goals which are inconsistent with the
business interests or goals of the Company, and that such partners may be in a
position to take action contrary to the Company's instructions or requests or
contrary to the Company's policies or objectives, including the Company's policy
with respect to maintaining its qualification as a REIT. The Company will,
however, seek to maintain sufficient control of such partnerships to permit the
Company's business objectives to be achieved. In addition, certain provisions of
the partnership agreements, including rights of first refusal and other
restrictions on the transferability of the Company's partnership interests, may
limit the liquidity of the Company's partnership investments and thereby reduce
the rate of return that may be realized by the Company with respect to such
investments. There is no limitation under the Company's organizational documents
as to the amount of available funds that may be invested in partnerships or
joint ventures.
S-17
<PAGE> 20
REAL ESTATE INVESTMENT RISKS
General
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 properties in
which the Company invests do not generate sufficient income to meet costs,
including debt service and capital expenditures, the Company's results of
operations and ability to make distributions to its stockholders will be
adversely affected. Revenues and values of the Company's properties may be
adversely affected by a number of factors, including the national economic
climate, the local economic climate, local real estate conditions (such as an
oversupply of space or a reduction in demand for real estate in an area), the
attractiveness of the properties to tenants, competition from other available
space, the ability of the Company 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, the Company's results of operations and ability to make
distributions to stockholders could be adversely affected.
Market Illiquidity
Equity real estate investments, especially assets of relatively large size,
are often illiquid. Such illiquidity will tend to limit the ability of the
Company to vary its portfolio promptly in response to changes in economic or
other conditions.
REGULATORY COMPLIANCE
Environmental Matters
Under various federal, state and local laws, ordinances and regulations, an
owner or operator of real estate is liable for the costs of removal or
remediation of certain hazardous or toxic substances released on, above, under
or in such property. Such laws often impose such liability without regard to
whether the owner knew of, or was responsible for, the presence of such
hazardous or toxic substances. The costs of such removal or remediation could be
substantial. Additionally, the presence of such substances, or the failure to
properly remediate such substances, may adversely affect the owner's ability to
borrow using such real estate as collateral. All of the Properties have Phase I
environmental site assessments (which involve inspection without soil sampling
or groundwater analysis) by independent environmental consultants (the "Phase I
Assessments") and have been inspected for hazardous materials as part of the
Company's acquisition inspections. None of the Phase I Assessments has revealed
any environmental conditions requiring material expenditures for remediation. No
assurance can be given that these Phase I Assessments or the Company's
inspections have revealed all environmental liabilities and problems relating to
its Properties.
The Company believes that it is in compliance in all material respects with
all federal, state and local laws regarding hazardous or toxic substances. To
date, compliance with federal, state and local environmental protection
regulations has not had a material effect upon the Company. However, there can
be no assurance that costs of investigating and remediating environmental
matters with respect to properties currently or previously owned by the Company
or properties that the Company may acquire in the future, or other expenditures
or liabilities (including claims by private parties) resulting from hazardous
substances present in, on, under or above such properties or resulting from
circumstances or other actions or claims relating to environmental matters, will
not have a material adverse effect on the Company and its ability to make
distributions to stockholders.
Other Regulations
The Properties are, and properties that the Company may acquire in the
future will be, subject to various other federal, state and local regulatory
requirements such as local building codes and other similar regulations. Failure
to comply with these requirements could result in the imposition of fines by
governmental authorities or awards of damages to private litigants. The Company
believes that the Properties are currently in substantial compliance with all
applicable regulatory requirements. Although no material expenditures are
S-18
<PAGE> 21
contemplated at this time in order to comply with any such laws or regulations,
there can be no assurance that these requirements will not be changed or that
new requirements will not be imposed that would require significant
unanticipated expenditures by the Company, which could have an adverse effect on
the Company and its ability to make distributions to stockholders. Similarly,
changes in laws increasing the potential liability for environmental conditions
existing on the Properties may result in significant unanticipated expenditures,
which could adversely affect the Company and its ability to make distributions
to stockholders.
SHARES AVAILABLE FOR FUTURE SALE; REGISTRATION RIGHTS
Future sales of substantial amounts of the Common Stock in the public
market or the perception that such sales could occur, may have an adverse effect
on the market price of the Common Stock. In addition, any future issuances of
Common Stock or other capital stock of the Company could also be dilutive to
investors in the Common Stock. Upon the completion of the Offering, there will
be 99,751,511 shares of Common Stock outstanding (excluding 1,817,000 shares of
Common Stock that may be issued upon exercise of outstanding options granted to
certain directors and officers). The Company has granted certain of its existing
stockholders registration rights.
HISTORICAL LOSSES; POSSIBILITY OF FUTURE LOSSES
The Company had losses of $7.0 million and $13.6 million for fiscal years
1994 and 1995, respectively. Although such losses were due in large part to the
Company's higher levels of leverage in the past, unrealized losses and certain
non-recurring extraordinary items resulting from prepayment penalties on debt
refinancing, there can be no assurance that the Company will not incur
significant losses in the future. As of September 30, 1997, the Company's
consolidated balance sheet reflected an accumulated deficit aggregating
approximately $9.1 million, resulting from the losses referred to above and the
fact that aggregate distributions to stockholders have exceeded net income. See
"Selected Condensed Consolidated Financial and Operating Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
CHANGE IN POLICIES
The major policies of the Company, including its policies with respect to
maintaining its qualification as a REIT and with respect to dividends,
acquisitions, debt and investments, are established by the Board. Although it
has no current intention to do so, the Board may amend or revise these and other
policies from time to time without a vote of or notice to the stockholders of
the Company (subject to the rights of the holders of the Company's outstanding
series of preferred stock). Accordingly, holders of the shares of Common Stock
will have no control over changes in policies of the Company, including any
policies relating to the payment of dividends or maintaining qualification as a
REIT.
RISK OF INABILITY TO SUSTAIN DISTRIBUTION LEVEL
The Company's current intended distribution level is based on a number of
assumptions, including assumptions relating to the future operations of the
Company. These assumptions concern, among other matters, continued property
occupancy and profitability of tenants, capital expenditures and other costs
relating to the Properties, the level of leasing activity, the strength of real
estate markets, competition, the cost of environmental compliance and compliance
with other laws, the amount of uninsured losses, and decisions by the Company to
reinvest rather than distribute cash available for distribution. The Company
currently expects to maintain its current distribution level. However, some of
the assumptions described above are beyond the control of the Company, and a
significant change in any such assumptions could cause a reduction in cash
available for distributions, which could affect the Company's ability to sustain
its distribution level.
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<PAGE> 22
THE COMPANY
The Company is a self-advised REIT which owns 18 Properties, with a pending
closing to increase the Company's portfolio to 19 Properties comprising nearly
11 million rentable square feet. The Properties are located in ten major
metropolitan areas throughout the United States: Atlanta, Boston, Charlotte,
suburban Chicago, Denver, Minneapolis, New York City, Pittsburgh, Seattle and
Washington, D.C. and surrounding suburbs. All of the Properties were built
between 1978 and 1991, with the exception of the Pittsburgh Property, which was
substantially renovated in 1988. The Company's strategy is to own Class A office
properties in prime CBD 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. As of September 30, 1997, the Properties were approximately 96% leased
under approximately 768 leases.
The Company is led by John S. Moody, the Chairman of the Board, President
and Chief Executive Officer, who joined the Company in 1991, and by Rodney C.
Dimock, the Executive Vice President and Chief Operating Officer, who joined the
Company in 1995. Mr. Moody and Mr. Dimock together have approximately 50 years
of commercial real estate experience. They are supported by a team of eight
officers with an average of 13 years of experience in all areas of acquisitions,
asset management, leasing and finance, as well as 13 professional and
administrative staff members.
The principal executive offices of the Company are located at Tower 56, 126
East 56th Street, New York, New York 10022, and its telephone number at that
location is (212) 605-7100. The Company was organized under the laws of the
State of Nevada in May 1981.
RECENT DEVELOPMENTS
RECENT ACQUISITIONS
On December 31, 1997, the Company purchased the second mortgage on Sixty
State Street, an 823,014 square foot office building. Constructed in 1979, Sixty
State Street is located in the heart of Boston's CBD. The current principal
balance on the mortgage is $160,397,664 with total principal and accrued
interest of $312,878,490. The second mortgage is a cash flow mortgage, which
accrues interest at an 8.5% real interest rate. Since all of the economic
benefits (subject to the first mortgage) will inure to the Company, the Company
has recorded the Property as a real estate investment on its balance sheet. The
Company will also be responsible for and control all major decisions regarding
the Property's management and leasing. The Property is encumbered by a first
mortgage in the amount of $78.5 million, which bears interest at a rate of 9.5%.
Since the interest rate on the mortgage was above market at the time of the
closing, the debt has been recorded on the Company's balance sheet as an $89.6
million liability. The Property is also encumbered by a ground lease that
expires on December 28, 2067 and requires annual lease payments of approximately
$400,000 per annum.
On December 21, 1997, the Company entered into a definitive agreement to
purchase Corporate 500 Centre in Deerfield, Illinois. Constructed between 1986
and 1990, Corporate 500 Centre consists of four Class A office buildings,
comprising approximately 680,000 rentable square feet. The total purchase price
of the Property is $150 million, $20 million of which will be paid in UPREIT
units priced at $18.50 per unit. The Company has received a commitment from
Bankers Trust Company for first mortgage financing in the amount of $80 million
at an interest rate of LIBOR plus 100 basis points. The loan will mature on July
20, 2002. The Company has also entered into an interest rate swap agreement with
Bankers Trust Company that has effectively fixed the interest rate on the loan
at 6.63%.
After receiving stockholder approval on October 27, 1997, the Company
acquired interests in nine Class A office properties, comprising approximately
4.5 million rentable square feet in Alexandria, Virginia (3 Properties), Atlanta
(2 Properties), Boston (2 Properties), Charlotte and Washington, D.C., as well
as an undeveloped parcel of land in Chicago and certain secured and unsecured
loans.
The DIHC Acquisition was effected by the Company purchasing all of the
outstanding stock of certain direct and indirect subsidiaries of DIHC that own
interests in the DIHC Properties, together with certain
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<PAGE> 23
loans to such subsidiaries held by PGGM. DIHC is a wholly-owned subsidiary of
PGGM. As consideration for the DIHC Acquisition, PGGM and DIHC together received
approximately $1.06 billion, consisting of approximately 34 million shares of
Common Stock (approximately 41% of the outstanding shares of the Company at that
time), approximately $260 million in cash and promissory notes for $250 million.
The Company financed the cash portion of the consideration for the DIHC
Acquisition and an estimated $8 million in closing costs with $214 million of
available cash primarily from the April 1997 Offering and $54 million from its
Revolving Credit Facility.
The Company has undertaken the DIHC Acquisition and the other recent
acquisitions in order to solidify the Company's status as a leading Class A
office REIT, and to further its objective of growing its earnings and asset base
by acquiring high-profile Class A office properties in major real estate markets
nationwide. Additional benefits of these acquisitions are expected to include:
(i) accretive effects to the Company's earnings, (ii) strong expansion of the
Company's existing presence in Boston and suburban Chicago, (iii) establishment
of initial market presence in Atlanta, Charlotte and Washington, D.C., (iv)
significant improvement in overall rent roll and a leveling of the Company's
lease expiration schedule and (v) improvement of operating margins by almost
doubling the size of the Company's asset base while reducing the projected
increases in corporate overhead on a percentage basis.
OTHER RECENT DEVELOPMENTS
Formation of UPREIT
The Company is in the process of forming an UPREIT. The Company and its
subsidiaries will transfer to the UPREIT, or entities wholly owned by the
UPREIT, substantially all of the Company's Properties. The Company will be the
sole general partner of the UPREIT and will also own limited partnership
interests therein. The purpose of forming an UPREIT is to create an acquisition
vehicle attractive to sellers whose sale of properties to the Company in
exchange for UPREIT units may be characterized as a tax-deferrable capital
contribution rather than a taxable sale.
Terms of the Revolving Credit Facility
On October 27, 1997, Bankers Trust Company and The Chase Manhattan Bank
provided the Company with the $350 million Revolving Credit Facility for
acquisitions and general working capital purposes as well as the issuance of
letters of credit. The interest rate on the line of credit depends on the
Company's leverage ratio at the time of borrowing and will be at a spread of
1.10% to 1.40% over LIBOR. The letters of credit will be priced at the
applicable Eurodollar credit spread. The line of credit expires on October 27,
2000. As of January 15, 1998, $187.0 million of the credit line was outstanding
at a rate of approximately 7%, all of which will be paid down with a portion of
the proceeds from the Offering. See "Use of Proceeds."
Conversion of Preferred Stock
On July 25, 1997, all of the outstanding shares of the 8% Preferred Stock,
which were held by NYSTRS and Rodamco, were converted into 6,896,550 and
4,586,210 shares of Common Stock, respectively.
Amendment of Articles of Incorporation
The stockholders of the Company also authorized the REIT Amendment to the
Company's Articles of Incorporation to include new provisions that are designed
to cause the Company to become 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 trust or foreign estates ("Non-U.S. Stockholders")
and who hold or have held substantial positions in the Common Stock. The REIT
Amendment provides that shares of the Company's stock may not be transferred by
any U.S. Person (as defined below) to any person if such transfer would cause a
Non-U.S. Person (as defined below) to become the direct or indirect owner of
more than 3% of the value of the outstanding shares of any class of capital
stock of the Company.
S-21
<PAGE> 24
As used in the REIT Amendment:
"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.
See "Certain Federal Income Tax Considerations -- Additional Special Tax
Considerations for Foreign Stockholders" in this Prospectus Supplement for a
discussion of the REIT Amendment and the impact of the Company becoming a
"domestically controlled REIT" on Non-U.S. Persons.
BUSINESS OBJECTIVES
BUSINESS STRATEGY
The Company's primary objective is to maximize long-term stockholder value
through growth in FFO per share and through appreciation in the value of its
Properties. The Company's strategies to accomplish this objective are to:
- Seek external growth by acquiring additional Class A office properties
with local submarket and asset characteristics consistent with those
Properties currently in its portfolio; and
- Generate internal growth by aggressively maintaining, managing, and
leasing its Properties, increasing rent, maintaining high occupancy,
enhancing tenant retention levels and maximizing current returns and
long-term value.
EXTERNAL GROWTH STRATEGY
The Company will continue to pursue significant growth in its asset base to
the extent that appropriate Class A office properties and financing are
available on attractive terms that will enhance stockholder value. The Company
will continue to implement its external growth strategies by acquiring
properties and portfolios of properties with the following characteristics:
Class A Office Properties
The Company believes that its strategy of investing in and owning Class A
office properties has the following benefits: (i) Class A properties can
currently be acquired at prices that produce attractive yields for the Company
and are accretive to earnings; (ii) Class A properties typically maintain higher
occupancies because, when overall vacancy rates are rising, tenants often take
the opportunity to relocate to better located and higher quality buildings; and
(iii) Class A properties generally attract tenants with strong credit resulting
in a more stable source of cash flow.
Major Metropolitan Areas
The Company intends to target properties located in the CBDs and major
suburban submarkets of major metropolitan areas. Target markets will typically
exhibit underlying economic, demographic, and employment trends that lead to the
positive net absorption of Class A office space. The Company also expects future
acquisitions to be concentrated in submarkets where high barriers to entry
reduce the likelihood that new office space will be constructed; such barriers
to entry may include a limited supply of attractive building sites and
significant regulatory constraints on new development.
Discount to Replacement Cost
The Company expects to continue acquiring properties at a discount to
replacement cost that possess one or more competitive advantages, such as a
superior location, quality construction, high-quality tenancy,
S-22
<PAGE> 25
efficient floorplates and modern building systems. Because Class A properties
being considered for acquisition by the Company are at prices below replacement
cost, the opportunity exists for the Company to enhance property performance and
operating income, thereby increasing asset values, before potentially
competitive new construction is justified in most markets.
- The Company estimates that the 12 Properties it has acquired over the
past 18 months were purchased at a price range between 85% and 95% of
replacement cost.
UPREIT Unit Transactions and Stock-for-Asset Swaps
The Company believes that opportunities exist for it to grow its asset
base, and increase earnings, through UPREIT unit transactions and
stock-for-asset swaps with major institutional owners of property. For example,
a number of major pension funds and life insurance companies have publicly
announced initiatives to exchange portfolios of direct real estate holdings for
securities of publicly traded companies in order to improve portfolio
diversification, liquidity and overall investment returns. The Company believes
that the very high quality of the Properties, and its intended future
acquisitions, should make the Company an attractive vehicle for UPREIT unit
transactions and swap transactions and afford access to a broader range of
acquisition opportunities. The Company has successfully implemented this
strategy in a number of transactions:
- In December 1997, the Company entered into a contract to purchase
Corporate 500 Centre for $130 million in cash and $20 million in UPREIT
units;
- In the DIHC Acquisition in October 1997, the Company exchanged Common
Stock, cash and promissory notes in exchange for DIHC's interest in the
DIHC Properties;
- In November 1996, the Company exchanged its 8% Preferred Stock, Series A
for $40 million and The Frick Building with Rodamco; and
- In January 1996, the Company exchanged Common Stock and convertible notes
for Hines' 10% minority interest in One Norwest Center.
INTERNAL GROWTH STRATEGY
The Company believes that its existing portfolio offers opportunities for
growth through the Company's active and aggressive asset management program,
which emphasizes maintaining a strong market position based on superior asset
quality and tenant service. The Company will continue to implement its internal
growth strategies through the following:
Rental Rate Increases
Based on its own historical activities and knowledge of its local
marketplaces, the Company believes that occupancy levels and net rents in most
of its submarkets are increasing but, on average, that net rents must still rise
significantly in order to justify and finance new construction. The Company
believes that these market dynamics should enable it to realize rental rate
increases without facing potentially competitive new construction. Ultimately,
the Company believes that its high-quality assets will continue to compete very
effectively even when market rents rise sufficiently to justify new
construction.
Maintenance
The Company places strong emphasis on programs for regular maintenance of
the Properties as well as periodic refurbishment, renovation and redevelopment
where such investment provides attractive returns and cash flow growth. Higher
maintenance levels generally allow building systems to operate more efficiently,
thereby reducing operating expenses to a level which is lower than that of
competitors in the marketplace. In addition, many of the Company's capital and
maintenance expenditures, such as the upgrading of a building's electrical
system, are designed to produce ongoing operational efficiencies in order to
increase cash flow and long-term value.
S-23
<PAGE> 26
- Over the past several years, the Company has undertaken lighting
retrofits at many of its Properties, producing substantial energy cost
savings and resulting in higher net rental receipts to the Company. With
the deregulation of the energy industry, the Company is exploring bulk
purchases of energy for its portfolio to reduce its overall energy costs.
Additionally, the Company employs sophisticated energy management systems
that allow for dynamic "load shedding" and ultimately lower energy costs.
Proactive Leasing Program
The Company believes that retention of existing tenants, and the leasing of
additional space to those tenants, is important to a property's stability and
enhances its cash flow and value over time. Maximizing tenant retention reduces
the cost of lease rollovers and rental revenue fluctuations by removing "down"
periods between tenant occupancies and reducing the "up front" costs (tenant
improvements and leasing commissions) of signing leases. The Company's senior
management, therefore, focuses significant attention on negotiating lease terms
for prospective new tenants and on working with existing tenants to negotiate
lease renewals that meet the tenant's potentially changing space needs.
- Of those Properties that were owned by the Company since January 1, 1993,
approximately 83% of expiring leased space has been extended either
through a lease renewal with the existing tenant or occupying subtenant
or through the expansion of another existing tenant.
- The Company has maintained average occupancy rates of approximately 96%
for those Properties owned during the same period.
FINANCING STRATEGY
The Company believes that in order to continue to maximize the value of its
stockholders' equity and to execute its growth strategies, it is essential to
implement and periodically review a diversified financing strategy that: (i)
incorporates long-term, secured and unsecured corporate debt; (ii) minimizes
exposure to fluctuations of interest rates; and (iii) maintains maximum
flexibility to manage the Company's short-term cash needs. Furthermore, the
Company believes that its capital structure will be conducive to and allow
flexibility for the aggressive growth which the Company seeks to achieve. The
Company anticipates employing the following strategies to enhance stockholder
value:
Access to Multiple Capital Sources
Because of the high quality of its assets, the Company believes it has
several competitive advantages in its ability to access equity capital from
several different sources on attractive terms. This financial flexibility should
enable the Company to choose from among several equity alternatives and to
select the capital source that best meets the Company's needs at that time. The
Company expects to continue to access capital from the most cost-efficient
sources, including public and private equity and debt.
Prudent Leverage
The Company will use leverage prudently to take advantage of what it
believes to be the positive spread between the total return on investments and
the cost of debt financing in the Class A office property market. The Company
believes that its use of leverage has been and will continue to be consistent
with its ownership of very high-quality assets in which a large proportion of
its tenants carry investment-grade long-term debt ratings. Approximately 34% of
the Full Service Straight-Line Rent is received from tenants, or their financial
subsidiaries, with investment-grade debt ratings.
Credit Facility
The Company obtained a three-year, $350 million unsecured Revolving Credit
Facility from Bankers Trust Company and The Chase Manhattan Bank. The Revolving
Credit Facility has been and will continue to be used for the acquisition of
additional properties. Borrowings under the Revolving Credit Facility will bear
interest at a rate between 1.10% and 1.40% above LIBOR, depending upon the
Company's ratio of total debt to asset value at the time of borrowing.
S-24
<PAGE> 27
USE OF PROCEEDS
The net cash proceeds to the Company from the Offering, after deducting the
estimated underwriting discounts and commissions and estimated expenses of the
Offering, are estimated to be approximately $295 million (approximately $339
million if the Underwriters' over-allotment option is exercised in full). The
Company intends to use approximately $187 million of the net cash proceeds of
the Offering to fully repay borrowings incurred under the Revolving Credit
Facility in connection with the DIHC Acquisition and approximately $50 million
in connection with the Corporate 500 Centre acquisition, with the remaining
amount to be used for future acquisitions and general corporate purposes.
Borrowings under the Revolving Credit Facility bear interest at a variable rate,
which was approximately 7% as of January 15, 1998.
Pending such uses, the Company may invest such net proceeds in short-term
liquid investments which are consistent with the Company's intention to qualify
for taxation as a REIT. Such investments may include, for example, government
and government agency securities, certificates of deposit, interest-bearing bank
deposits, investment grade commercial paper and mutual funds investing in
similar instruments.
PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS
The Common Stock trades on the New York (symbol: "CPP"), Frankfurt and
Dusseldorf Stock Exchanges. The price to the public in the initial U.S. public
offering of the Common Stock was $14 per share. As of December 31, 1997, the
number of registered holders of shares of Common Stock was approximately 100 and
the Company estimates that the number of beneficial owners of its Common Stock
exceeded 20,000 as of such date. The following table sets forth, for the periods
indicated, the quarterly high and low sale prices per share reported on the NYSE
Composite Tape and the distribution paid per share during each such period.
<TABLE>
<CAPTION>
PRICE
--------------------
HIGH LOW DISTRIBUTIONS
------- -------- -------------
<S> <C> <C> <C>
1997
Second Quarter.............................. $15.375 $14.00 $0.30
Third Quarter............................... 19.50 15.25 0.30
Fourth Quarter.............................. 20.00 17.6875 0.14(1)
1998
First Quarter (through January 14, 1998).... $19.625 $19.0625 $0.30(2)
</TABLE>
- ---------------
(1) Special distribution of $0.14 per share related to the DIHC Acquisition was
declared by the Board on October 15, 1997 payable to stockholders of record
as of October 31, 1997.
(2) Declared on January 13, 1998 payable to stockholders of record as of January
30, 1998. This dividend will not be payable to holders purchasing shares of
Common Stock in the Offering.
See the cover page of this Prospectus Supplement for a recent closing sale
price of the Common Stock as reported on the NYSE Composite Tape.
The Company intends to continue to pay regular quarterly cash distributions
to its stockholders. In accordance with the requirements of the Company's
qualification as a REIT, cash distributions will be equal to at least 95% of the
Company's taxable income. The Company intends that at least 85% of all
distributions from income earned during any taxable year will be made prior to
the end of such taxable year. Distributions of $1.20 were declared by the Board
and paid by the Company for 1996, of which $0.29 was a taxable dividend in the
United States. The Company declared dividends of $1.04 during 1997, of which the
Company currently estimates that $0.55 were taxable as dividends in the United
States. The difference between the $1.20 distribution in 1996 and $1.04
distribution in 1997 was the result of a change in the timing of the Company's
distributions. The Company intends to declare its regular distributions payable
to stockholders of record as of the last day of January, April, July and October
in 1998. The distribution payable to stockholders of record as of January 30,
1998 will not be payable to participants in this Offering. No assurance can be
given as to the amounts of future distributions since they are subject to the
Company's FFO, earnings, financial condition, and such other factors as the
Board deems relevant.
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<PAGE> 28
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1997 and as adjusted to reflect: (i) the Offering and the use of
proceeds thereof as described under "Use of Proceeds", (ii) the DIHC Acquisition
and (iii) the acquisitions of Sixty State Street and Corporate 500 Centre. See
"Recent Developments." The information set forth below should be read in
conjunction with the consolidated historical financial statements and notes
thereto incorporated herein by reference, the unaudited pro forma financial
information and notes thereto and the discussion set forth in "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus Supplement.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-----------------------
ACTUAL PRO FORMA
-------- ----------
(IN THOUSANDS)
<S> <C> <C>
Long-term Debt
Mortgage Debt...................................................... $353,904 $ 773,534
Convertible Promissory Note Due 2001............................... 12,926 12,926
Revolving Credit Facility Borrowings............................... 0 0
-------- --------
Total Long-term Debt....................................... 366,830 786,460
-------- --------
Minority interest(1)................................................. (17,356) 28,739
Stockholders' Investment
Common Stock, no par value; 250,000,000 shares authorized;
48,856,742 (actual) and 99,751,511 (pro forma) shares issued and
outstanding..................................................... -- --
7% Cumulative Convertible Preferred Stock, no par value; stated
value $16.50 per share; 15,000,000 shares authorized and
3,030,303 shares issued and outstanding......................... 50,000 50,000
Paid-in Capital.................................................... 499,331 1,346,137
Accumulated deficit................................................ (9,123) (9,123)
Deferred Compensation.............................................. (2,225) (2,225)
-------- --------
Total Stockholders' Investment............................. 537,983 1,384,789
-------- --------
Total Capitalization................................................. $887,457 $2,199,988
======== ========
</TABLE>
- ---------------
(1) Includes 1,081,081 UPREIT units, which are convertible into shares of Common
Stock on a one-for-one basis.
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<PAGE> 29
SELECTED CONDENSED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following tables set forth selected historical condensed consolidated
financial data and selected unaudited pro forma consolidated financial data for
the periods and as of the dates indicated for the Company.
The following information should be read in conjunction with and is
qualified in its entirety by the consolidated financial statements and the
related notes thereto of the Company incorporated by reference herein. The
following data should also be read in conjunction with the unaudited pro forma
condensed consolidated financial statements and accompanying notes thereto, the
unaudited historical financial statements and notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The selected consolidated operating and balance sheet data as of and for
the years ended December 31, 1994 through 1996 have been derived from the
Company's audited financial statements. The selected financial data at September
30, 1997 and for the nine months ended September 30, 1997 and 1996 is derived
from unaudited financial statements. The unaudited financial information
includes all adjustments consisting of only normal recurring adjustments that
management considers necessary for a fair presentation of the financial position
and results of operations for these periods. Operating results of the Company
for the nine months ended September 30, 1997 are not necessarily indicative of
results expected for the entire year ended December 31, 1997.
The unaudited selected pro forma operating data is presented as if the
offerings, sales and conversions of the various securities sold by the Company
(and the application of the proceeds thereof) and the various acquisitions of
the Company that occurred after January 1, 1996 had occurred at January 1, 1996.
The unaudited selected pro forma balance sheet data is presented as if the
transactions described above that occurred after September 30, 1997 had occurred
at September 30, 1997. The pro forma amounts 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.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
--------------------------------- ---------------------------------------------
HISTORICAL HISTORICAL
PRO FORMA ------------------- PRO FORMA -------------------------------
1997 1997 1996 1996 1996 1995 1994
----------- -------- -------- ----------- -------- --------- --------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues:
Office and parking rentals.... $ 213,225 $103,237 $ 80,687 $ 285,168 $111,494 $ 88,548 $ 83,557
Equity in earnings............ (2,321) -- -- (333) -- -- --
Interest and other income..... 25,610 8,432 4,076 31,105 5,414 3,839 2,017
---------- -------- -------- -------- -------- -------- --------
Total revenues......... 236,514 111,669 84,763 315,940 116,908 92,387 85,574
---------- -------- -------- -------- -------- -------- --------
Expenses:
Building operating expenses... 82,328 40,246 31,726 113,121 44,188 31,530 29,991
Interest expense.............. 43,797 22,395 24,054 59,488 31,735 30,722 31,903
Depreciation and
amortization................ 40,076 20,865 17,869 52,768 24,316 22,572 22,321
General and administrative.... 5,509 5,134 4,662 6,907 6,407 5,603 3,869
Unrealized (gain) loss on
interest rate swap.......... (99) (99) (5,401) (4,278) (4,278) 7,672 --
---------- -------- -------- -------- -------- -------- --------
Total expenses......... 171,611 88,541 72,910 228,006 102,368 98,099 88,084
---------- -------- -------- -------- -------- -------- --------
Income (loss) from operations... 64,903 23,128 11,853 87,934 14,540 (5,712) (2,510)
Minority interest............... 3,142 1,408 1,017 3,755 1,519 3,417 3,899
---------- -------- -------- -------- -------- -------- --------
Income (loss) before
extraordinary items........... 61,761 21,720 10,836 84,179 13,021 (9,129) (6,409)
Extraordinary loss(1)........... (54) (54) (3,786) (3,925) (3,925) (4,445) (581)
---------- -------- -------- -------- -------- -------- --------
Net income (loss)............... $ 61,707 $ 21,666 $ 7,050 $ 80,254 $ 9,096 $ (13,574) $ (6,990)
========== ======== ======== ======== ======== ======== ========
Net income (loss) (per
share)...................... $ 0.59 $ 0.37 $ 0.40 $ 0.77 $ 0.19 $ (0.94) $ (0.53)
========== ======== ======== ======== ======== ======== ========
Distribution to stockholders
(per share)................. -- $ 0.90 $ 0.90 -- $ 1.20 $ 1.16 $ 1.16
========== ======== ======== ======== ======== ======== ========
</TABLE>
S-27
<PAGE> 30
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------------------- --------------------------------------------
HISTORICAL HISTORICAL
PRO FORMA ------------------- PRO FORMA -------------------------------
1997 1997 1996 1996 1996 1995 1994
---------- -------- -------- -------- -------- -------- --------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Real estate investments before
accumulated depreciation...... $2,343,856 $875,714 $721,698 $ -- $799,662 $ 706,988 $577,134
Total assets.................... 2,284,516 971,985 601,598 -- 766,180 586,089 477,996
Long-term debt.................. 786,460 366,830 400,405 -- 400,142 369,600 130,500
Credit facility debt............ -- -- -- -- -- -- 236,467
Total liabilities...... 870,988 451,358 428,224 -- 442,375 403,927 400,712
Minority interest............... 28,739 (17,356) (16,989) -- (17,478) (7,194) (6,642)
Redeemable preferred stock...... -- -- -- -- 162,743 -- --
Preferred stock................. 50,000 50,000 50,000 -- 50,000 50,000 --
Common stockholders' equity..... 1,334,789 487,983 190,273 -- 128,540 139,356 83,926
OTHER DATA:
Funds from operations(2)........ 104,328 42,345 24,831 137,970 34,718 21,424 15,562
Capital expenditures............ -- 7,705 6,128 -- 6,100 712 1,790
Preferred stock dividends(3).... 2,625 9,285 2,625 3,500 5,153 1,449 --
Common stock distributions...... -- 29,812 15,685 -- 24,551 18,485 15,359
Cash flow provided by (used in):
Operations.................... -- 43,472 20,421 -- 34,522 20,036 28,968
Investing..................... -- (74,161) (10,229) -- (57,259) (135,527) (1,762)
Financing..................... -- 140,760 1,587 -- 129,800 110,725 (33,141)
Total rentable square footage of
properties(4)................. 10,949 4,941 4,087 10,949 4,725 4,087 3,461
Average occupancy............... 96% 97% 97% 96% 97% 98% 98%
Weighted average number of
shares of Common Stock
outstanding................... 100,431 33,494 20,344 99,821 20,411 15,910 13,241
Weighted average number of fully
diluted shares of Common Stock
outstanding................... 104,718 46,404 21,272 104,108 25,821 15,910 13,241
</TABLE>
- ---------------
(1) Reflects the costs associated with the extinguishment of long-term debt.
(2) The Company 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.
The Company makes two adjustments to FFO that are not contemplated by NAREIT
in its definition. The first adjustment is to include the principal payments
of the rent notes receivable from Hines which were put in place to
compensate the Company for its share of cash flow from the partnership that
owned One Norwest Center during the period when the Company 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 the Company for the future value of the cash flow that the
Company 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. The Company believes that, since the building is 99% leased, these
funds will be collected under any circumstance as a pass-through to the
tenants. Based on this fact, the Company 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 such
real estate taxes, respectively.
S-28
<PAGE> 31
The table below sets forth the adjustments which were made to the net
income (loss) of the Company for the last three years and Pro Forma 1996
and 1997 in the calculation of FFO (in thousands).
<TABLE>
<CAPTION>
FUNDS FROM OPERATIONS
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------------------- ------------------------------------------
PRO FORMA HISTORICAL PRO FORMA HISTORICAL
1997 1997 1996 1996 1996 1995 1994
----------- ------- ------- ----------- ------- -------- -------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Net income (loss)............... $ 61,707 $21,666 $ 7,050 $ 80,254 $ 9,096 $(13,574) $(6,990)
NAREIT Adjustments:
Depreciation and
amortization................ 40,076 20,865 17,869 52,768 24,316 22,572 22,321
Net (gain) loss on swap
transactions................ (99) (99) (5,401) (4,278) (4,278) 7,672 --
Extraordinary losses.......... 54 54 3,786 3,925 3,925 4,445 581
Unconsolidated joint venture
depreciation................ 3,201 -- -- 4,268 -- -- --
Minority interest
adjustments................. (1,514) (1,044) (1,393) (2,637) (2,011) (1,617) (1,358)
Other Adjustments:
Amortization on rent notes.... 903 903 813 1,242 1,242 1,119 1,008
Real estate tax adjustment.... -- -- 2,107 2,428 2,428 807 --
------- ------- ------- -------- ------- ------- -------
Funds from Operations......... 104,328 42,345 24,831 137,970 34,718 21,424 15,562
======= ======= ======= ======== ======= ======= =======
Preferred Dividends........... (2,625) (9,285) (2,625) (3,500) (5,153) (1,449) --
======= ======= ======= ======== ======= ======= =======
Funds from Operations
Available for Common
Stockholders................ $ 101,703 $33,060 $22,206 $ 134,470 $29,565 $ 19,975 $15,562
======= ======= ======= ======== ======= ======= =======
</TABLE>
Although the Company believes that this table is a full and fair
presentation of the Company's FFO, similarly captioned items may be defined
differently by other REITs, in which case direct comparisons may not be
possible.
Industry analysts generally consider FFO to be an appropriate measure of
performance of any equity REIT such as the Company, and the Company 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, therefore, should not be considered a
substitute for net income as a measure of performance or cash flow from
operations as a measure of liquidity calculated in accordance with GAAP.
(3) Includes preferred stock dividends accrued but not declared. Pro forma
amounts reflect the conversion of the 8% Preferred Stock and 8% Preferred
Stock, Series A, of the Company.
(4) At December 31, 1995, the Company held the mortgage note on Tower 56, and
the square footage of Tower 56 is included as of that date.
S-29
<PAGE> 32
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 Condensed Consolidated Financial and Operating Data set forth
above, the Pro Forma Condensed Consolidated Financial Statements and Notes
thereto set forth below, and the Condensed Consolidated Financial Statements and
Notes thereto incorporated by reference herein.
RESULTS OF OPERATIONS
PRO FORMA NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO HISTORICAL NINE
MONTHS ENDED SEPTEMBER 30, 1997.
Net income in the pro forma nine months ended September 30, 1997 ("Pro
Forma Nine Months 1997") was $61,707,000 as compared to $21,666,000 for the same
period in the historical nine months ended September 30, 1997 ("Nine Months
1997").
The increase in office and parking revenues from $103,237,000 in Nine
Months 1997 to $213,225,000 in Pro Forma Nine Months 1997 is due to the revenues
from Sixty State Street, Corporate 500 Centre and the DIHC Properties, which
totalled $104,471,000 in Pro Forma Nine Months 1997, not including the
partnership interest for Market Square, which is accounted for on the equity
method. Additional increases in Pro Forma Nine Months 1997 are due to an
adjustment for a recalculation of straight-line rents of $4,105,000 and the
addition of revenues of $1,412,000 for the period January 1, 1997 through
February 13, 1997 for 527 Madison Avenue. The Equity in Earnings in Pro Forma
Nine Months 1997 of negative $2,321,000 is due to the acquisition of the
partnership interest in Market Square, which is accounted for on the equity
method while the other ten Properties are consolidated (the "ten consolidated
Properties").
The increase in interest and other income from $8,432,000 in Nine Months
1997 to $25,610,000 in Pro Forma Nine Months 1997 is due primarily to a
reduction of $4,935,000 in the interest income earned on the proceeds from the
April 1997 Offering (assumed to be the consideration for the DIHC Properties), a
reduction of $424,000 to account for the purchase of 527 Madison Avenue on a pro
forma basis and a reduction of $379,000 to account for the repayment of the
$32.5 million term loan on a pro forma basis. These amounts are offset by an
increase of $13,188,000 relating to the acquisition of the mortgage on Market
Square and an increase of $9,727,000 due to interest and other income relating
to the ten consolidated Properties.
Building operating expenses increased from $40,246,000 in Nine Months 1997
to $82,328,000 in Pro Forma Nine Months 1997 primarily due to expenses from the
ten consolidated Properties. The increase in interest expense from $22,395,000
in Nine Months 1997 to $43,797,000 in the Pro Forma Nine Months 1997 is due to
the interest on the purchase money mortgages, the mortgage that was assumed on
Sixty State Street and the mortgage on Corporate 500 Centre, reduced by the
elimination of the interest on the $32.5 million term loan.
The increase in depreciation and amortization from $20,865,000 in Nine
Months 1997 to $40,076,000 in Pro Forma Nine Months 1997 is due primarily to
depreciation and amortization from the ten consolidated Properties.
The increase in minority interest from $1,408,000 to $3,142,000 is a result
of Hines' 8.5% share of earnings in 500 Boylston Street and 222 Berkeley Street.
PRO FORMA YEAR ENDED DECEMBER 31, 1996 COMPARED TO HISTORICAL YEAR ENDED
DECEMBER 31, 1996.
Net income in the pro forma year ended December 31, 1996 ("Pro Forma 1996")
was $80,254,000 as compared to $9,096,000 for the same period in the historical
year ended December 31, 1996 ("Historical 1996").
The increase in office and parking revenues from $111,494,000 in Historical
1996 to $285,168,000 in Pro Forma 1996 is due to the increase in revenues from
the ten consolidated Properties, which totalled $145,398,000 in Pro Forma 1996.
Additional increases in Pro Forma 1996 are due to an adjustment for a
recalculation of straight-line rents of $6,178,000 and the addition of revenues
of $22,098,000 for 527 Madison Avenue, One Lincoln Centre and The Frick
Building. The Equity in Earnings in Pro Forma 1996 of negative $333,000 is due
to the acquisition of the partnership interest in Market Square, which is
accounted for on the equity method.
The increase in interest and other income from $5,414,000 in Historical
1996 to $31,105,000 in Pro Forma 1996 is due primarily to an increase of
$17,584,000 relating to the acquisition of the mortgage on Market Square and an
increase due to interest and other income of $8,481,000 relating to the ten
consolidated
S-30
<PAGE> 33
Properties. These amounts are partially offset by a reduction of $374,000 to
account for the purchase of 527 Madison Avenue on a pro forma basis.
Building operating expenses increased from $44,188,000 in Historical 1996
to $113,121,000 in Pro Forma 1996 primarily due to expenses of $59,428,000 from
the ten consolidated Properties and expenses of $9,505,000 on 527 Madison
Avenue, One Lincoln Centre and The Frick Building. The increase in interest
expense from $31,735,000 in Historical 1996 to $59,488,000 in Pro Forma 1996 is
due to the interest on the purchase money mortgages, the mortgage that was
assumed on Sixty State Street and the mortgage on Corporate 500 Centre, reduced
by the elimination of interest on the $32.5 million term loan.
The increase in depreciation and amortization from $24,316,000 in
Historical 1996 to $52,768,000 in Pro Forma 1996 is due primarily to
depreciation and amortization from the ten consolidated Properties.
The increase in minority interest from $1,519,000 in Historical 1996 to
$3,755,000 in Pro Forma 1996 is a result of Hines' 8.5% share of earnings in 500
Boylston Street and 222 Berkeley Street.
LIQUIDITY AND CAPITAL RESOURCES
The ratio of earnings to fixed charges and dividends on preferred stock
increased to 2.27 times for Pro Forma Nine Months 1997 from 1.39 times for Nine
Months 1997 due to the substantial reduction of the Company's leverage ratio and
the conversion of the 8% Preferred Stock into Common Stock.
Long-Term Debt. The Company was required under the terms of its $32.5
million term loan with Deutsche Bank AG to repay the loan upon the completion of
the April 1997 Offering. In anticipation of the April 1997 Offering and listing
on the NYSE, the Company repaid this loan on March 19, 1997. The Company
purchased Sixty State Street subject to a $78.5 million first mortgage, which
bears interest at 9.5% and matures in January 2005. The Company has recorded the
mortgage as an $89.6 million liability bearing interest at a 6.75% effective
interest rate.
The Company entered into a first mortgage on Corporate 500 Centre in the
amount of $80 million through July 2002. The Company has entered into an
interest rate swap agreement that effectively fixes the interest rate at 6.63%.
In connection with the DIHC Acquisition, the Company incurred $250 million
of mortgage indebtedness relating to seven of the DIHC Properties. Of the
mortgage indebtedness, $65 million bears interest at 7.28% and matures in
October 2000, $65 million bears interest at 7.47% and matures in October 2004
and $120,000 bears interest at 7.54% and matures in October 2007.
The Company has no long-term debt maturing until 2000.
Other Matters. The Company is not aware of any environmental issues
involving any of its Properties. The Company believes that it has sufficient
insurance coverage at each of its Properties. A majority of the Company's leases
require the tenants to pay most operating expenses, as well as increases in
common area maintenance expenses, thereby reducing the Company's exposure to
increases in costs and operating expenses resulting from inflation.
Stockholders' Distributions. The Company intends to distribute at least 95
percent of its taxable income to maintain its qualification as a REIT.
Currently, the Company anticipates that FFO will exceed taxable income for the
foreseeable future. The Company's distribution policy is to pay distributions
based upon FFO, less prudent reserves. On January 13, 1998, the Company declared
a dividend of $0.30 per share of Common Stock, payable to all stockholders of
record as of January 30, 1998.
At the present, the Company is current in the payment of all preferred
dividends.
Liquidity. At pro forma September 30, 1997, the Company had $68,645,000 in
cash and cash equivalents and $4,728,000 in restricted cash. Restricted cash is
being held by escrow agents for the loans related to One Norwest Center and
Washington Mutual Tower. The Company has a three-year, $350 million unsecured
Revolving Credit Facility that expires in October 2000. The Revolving Credit
Facility has been and will be used to facilitate development and acquisition
activities and for working capital purposes. A portion of the proceeds of the
Offering will be used to repay $251.2 million of indebtedness currently
outstanding under the Revolving Credit Facility. In addition, the Company
anticipates that it will receive distributions from its real estate partnerships
and rental income from its fee owned Properties on a monthly basis which will be
used to cover normal operating expenses and to pay distributions to its
stockholders. Based upon its cash reserves and other sources of funds, the
Company has sufficient liquidity to meet its cash requirements for the
foreseeable future.
S-31
<PAGE> 34
PROPERTIES
The Company owns 18 Properties, with a pending closing to increase the
Company's portfolio to 19 Properties comprising nearly 11 million rentable
square feet. Based on rentable square feet, as of September 30, 1997, the
Properties were approximately 96% leased under approximately 768 leases.
The following table summarizes certain information as of September 30, 1997
with respect to the Properties.
TABLE OF PROPERTIES
<TABLE>
<CAPTION>
AVERAGE
REMAINING
LEASE
COMPANY'S TOTAL NUMBER TERM
YEAR PERCENTAGE RENTABLE OCCUPANCY OF (IN
PROPERTY NAME AND LOCATION CONSTRUCTED INTEREST SQUARE FEET RATE LEASES YEARS)
- -------------------------------- ----------- --------- ----------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
500 Boylston Street(1)(2)
Boston, Massachusetts......... 1988 91.5% 715,000 100% 17 6.4
222 Berkeley Street(1)(2)
Boston, Massachusetts......... 1991 91.5 531,000 99 30 6.7
125 Summer Street
Boston, Massachusetts......... 1989 100 464,000 94 27 3.2
Sixty State Street(3)
Boston, Massachusetts......... 1979 100 823,000 98 42 9.1
Market Square(1)(4)
Washington, D.C............... 1990 60 689,000 95 48 7.4
<CAPTION>
PROPERTY NAME AND LOCATION LARGEST TENANTS
- -------------------------------- --------------------------------
<S> <C>
500 Boylston Street(1)(2)
Boston, Massachusetts......... Massachusetts Financial Services
The New England Life
Towers Perrin Forster & Crosby,
Inc.
222 Berkeley Street(1)(2)
Boston, Massachusetts......... Houghton Mifflin
Saga International Holidays
Oracle Corporation
125 Summer Street
Boston, Massachusetts......... Deloitte & Touche
BTM Capital Corp.(8)
Burns & Levinson
Sixty State Street(3)
Boston, Massachusetts......... Hale & Dorr
The Pioneer Group, Inc.
ITT/Sheraton
Market Square(1)(4)
Washington, D.C............... Fulbright & Jaworski
Edison Electric Institute
Reid & Preist
Shearman & Sterling
AVERAGE
REMAINING
LEASE
COMPANY'S TOTAL NUMBER TERM
YEAR PERCENTAGE RENTABLE OCCUPANCY OF (IN
PROPERTY NAME AND LOCATION CONSTRUCTED INTEREST SQUARE FEET RATE LEASES YEARS)
- -------------------------------- ----------- --------- ----------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
11 Canal Center(1)
Alexandria, Virginia.......... 1986 100 70,000 97 6 7.6
99 Canal Center(1)
Alexandria, Virginia.......... 1986 100 138,000 100 19 3.8
TransPotomac Plaza 5(1)
Alexandria, Virginia.......... 1983 100 96,000 82 10 3.9
191 Peachtree Street(1)(5)
Atlanta, Georgia.............. 1991 80 1,221,000 95 37 8.5
200 Galleria(1)
Atlanta, Georgia.............. 1985 100 433,000 95 61 3.5
Corporate 500 Centre(6)
Deerfield, Illinois........... 1986/1990 100 679,000 98 41 6.7
One Lincoln Centre
Oakbrook Terrace, Illinois.... 1986 100 297,000 95 43 2.5
Tower 56(7)
New York, New York............ 1983 100 162,000 97 46 3.0
527 Madison Avenue(8)
New York, New York............ 1986 100 216,000 93 18 5.7
Charlotte Plaza(1)
Charlotte, North Carolina..... 1982 100 613,000 91 43 7.0
<CAPTION>
PROPERTY NAME AND LOCATION LARGEST TENANTS
- -------------------------------- --------------------------------
<S> <C>
11 Canal Center(1)
Alexandria, Virginia.......... Robbins Gioia
Veda Inc.
99 Canal Center(1)
Alexandria, Virginia.......... Lowe, Price, LeBlanc & Becker
Howard, Needles, Tannen
& Bergendoff
National District Attorney's
Association
TransPotomac Plaza 5(1)
Alexandria, Virginia.......... Cities In Schools
The Onyx Group
Larson & Taylor
191 Peachtree Street(1)(5)
Atlanta, Georgia.............. Wachovia Bank
King & Spalding
Powell, Goldstein Frazer
& Murphy
200 Galleria(1)
Atlanta, Georgia.............. Liberty Mutual Group
Corporate 500 Centre(6)
Deerfield, Illinois........... MMI Companies Inc.
Fortune Brands
Gaylord Container Corp.
One Lincoln Centre
Oakbrook Terrace, Illinois.... Superior Bank FSB
Microsoft Corporation
Arthur Andersen LLP
Tower 56(7)
New York, New York............ Cornerstone Properties
ICC Associates, L.P.
United Bank of Kuwait
527 Madison Avenue(8)
New York, New York............ The Sumitomo Trust
& Banking Co., Ltd.
W.P. Stewart Co., Inc.
Hill Samuel New York, Inc.
Charlotte Plaza(1)
Charlotte, North Carolina..... First Union
Parker Poe
Adams & Bernstein
</TABLE>
S-32
<PAGE> 35
<TABLE>
<CAPTION>
AVERAGE
REMAINING
LEASE
COMPANY'S TOTAL NUMBER TERM
YEAR PERCENTAGE RENTABLE OCCUPANCY OF (IN
PROPERTY NAME AND LOCATION CONSTRUCTED INTEREST SQUARE FEET RATE LEASES YEARS)
- -------------------------------- ----------- --------- ----------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
One Norwest Center
Denver, Colorado.............. 1983 100 1,188,000 99 48 8.6
Norwest Center(9)
Minneapolis, Minnesota........ 1988 50 1,118,000 99 35 10.9
The Frick Building(10)
Pittsburgh, Pennsylvania...... 1902 100 341,000 88 74 4.2
Washington Mutual Tower(11)(12)
Seattle, Washington........... 1988 50 1,155,000 98 123 4.9
--
----------- --- -------
Total/Weighted Average,
All Properties................ 10,949,000 96% 768 7.0
========= ======== ======= ========
<CAPTION>
PROPERTY NAME AND LOCATION LARGEST TENANTS
- -------------------------------- --------------------------------
<S> <C>
One Norwest Center
Denver, Colorado.............. Norwest Bank Denver N.A.
Norwest Center(9)
Minneapolis, Minnesota........ Norwest Corporation
Faegre & Benson
KPMG Peat Marwick
The Frick Building(10)
Pittsburgh, Pennsylvania...... Meyer, Darragh, Buckler,
Bebenek & Eck
Sable, Makaroff & Gudsky
Washington Mutual Tower(11)(12)
Seattle, Washington........... Perkins Coie
Washington Mutual
Karr Tuttle Campbell
Total/Weighted Average,
All Properties................
</TABLE>
- ---------------
(1) Property acquired in the DIHC Acquisition.
(2) Distributions of cash flow and sales and refinancing proceeds are shared in
proportion to the Company's 91.5% partnership interest and Hines' 8.5%
partnership interest. See "Properties -- Market Data -- Boston."
(3) The Company acquired the second mortgage on the Property on December 31,
1997. Since it is currently projected that all the economic benefits
(subject to the first mortgage) from the Property inure to the Company, it
will be accounted for as an equity investment.
(4) While the Company's stated interest in the partnerships which own Market
Square is 60%, its economic interest is significantly larger since it has
acquired the first mortgage note in the amount of $181 million on the
Property which earns interest at 9.75% and will receive a priority
distribution on its acquired capital base. During 1996, the Company
received 100% of the cash flow from the Property. The interest of DIHC in
the partnerships which own Market Square will be acquired in a series of
transactions which are expected to be concluded in January 1998, however,
all pro forma data relating to the DIHC Acquisition is presented as if the
Company had acquired DIHC's interest in the partnerships which own Market
Square as of January 1, 1996.
(5) While the Company's stated interest in the partnership which owns 191
Peachtree Street is 80%, its economic interest is significantly larger
since it has acquired the first mortgage note in the amount of $145 million
on the Property which earns interest at 9.375% and will receive a priority
distribution on its acquired capital base. In addition, in 1996, the
partner in the transaction, CH Associates, Ltd., received a $250,000
priority distribution, which it will receive under the partnership
agreement through February 28, 2000, with the Company receiving the
remainder.
(6) The Company has entered into a contract to purchase the Property, with the
closing expected to occur in late January 1998.
(7) The Company's headquarters is located at Tower 56.
(8) The Property was acquired by the Company in February 1997.
(9) While the Company's stated interest in the partnership which owns Norwest
Center is 50%, its economic interest in the Property is significantly
larger due to priority distributions it receives on its invested capital
base. For the nine months ended September 30, 1997, the Company's share of
earnings and cash distributions from the partnership which owns Norwest
Center was 77.27%.
(10) The Property was substantially renovated in 1988.
(11) Includes the Galland and Seneca Buildings. See "Properties -- Market
Data -- Seattle."
(12) While the Company's stated interest in the partnership which owns
Washington Mutual Tower is 50%, its economic interest in the Property is
significantly larger due to priority distributions it receives on its
invested capital base. For the nine months ended September 30, 1997, the
Company received 100% of the cash distributions from the partnership which
owns Washington Mutual Tower.
S-33
<PAGE> 36
NET RENT AND NET EFFECTIVE RENT
The following tables show the average annual Base Rent and the average
annual Net Effective Rent (each as defined below) per square foot occupied for
each of the Properties for the periods presented during which such Property was
owned by the Company. "Base Rent" as used herein means (i) the actual stated
fixed rent received on a net or a gross basis (the "Actual Rent"), less (ii)
total operating expenses net of Recoveries. "Recoveries" means the actual
recovery of operating expenses in net lease buildings or the actual recovery of
operating expense escalations in gross lease buildings. "Net Effective Rent" as
used herein means (i) Actual Rent determined for each year on a straight-line
basis through the term of the lease, less (ii) the amount of operating expenses
net of Recoveries and the amortization of deferred leasing costs (tenant
improvements, leasing commissions, takeover obligations and other tenant
inducements). For a discussion of the Company's historical experience concerning
recurring, non-incremental revenue-generating capital expenditures and
non-incremental revenue-generating tenant improvement costs to retain revenues
attributable to existing leased space, see "-- Leasing Costs and Capital
Expenditures."
<TABLE>
<CAPTION>
AVERAGE ANNUAL BASE RENT
TOTAL -------------------------------------------
RENTABLE (PER SQUARE FOOT OCCUPIED)
PROPERTY SQ. FT. 9/97 1996 1995 1994 1993
- --------------------------------------------------------------- -------------- ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
One Norwest Center
Denver, Colorado............................................. 1,188,000 $12.30 $ 12.08 $ 11.78 $ 11.61 $ 12.05
Norwest Center
Minneapolis, Minnesota....................................... 1,118,000 18.24 17.94 17.82 17.25 17.56
Washington Mutual Tower
Seattle, Washington.......................................... 1,155,000 15.74 15.98 16.17 15.27 15.34
125 Summer Street
Boston, Massachusetts........................................ 464,000 21.24 23.24 22.48 -- --
Tower 56
New York, New York........................................... 162,000 23.54 20.45 -- -- --
One Lincoln Centre
Oakbrook Terrace, Illinois................................... 297,000 19.46 18.56 -- -- --
The Frick Building
Pittsburgh, Pennsylvania..................................... 341,000 10.91 11.24 -- -- --
527 Madison Avenue
New York, New York........................................... 216,000 33.62 35.47 -- -- --
--------- ------ ------ ------ ------ ------
Total/Weighted Average......................................... 4,941,000 $16.92 $ 16.99 $ 16.06 $ 14.65 $ 14.93
========= ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL
NET EFFECTIVE RENT
-------------------------------------------
TOTAL RENTABLE (PER SQUARE FOOT OCCUPIED)
PROPERTY SQ. FT. 9/97 1996 1995 1994 1993
- --------------------------------------------------------------- -------------- ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
One Norwest Center
Denver, Colorado............................................. 1,188,000 $11.48 $ 10.80 $ 10.56 $ 10.25 $ 10.59
Norwest Center
Minneapolis, Minnesota....................................... 1,118,000 17.27 17.43 17.31 17.00 17.27
Washington Mutual Tower
Seattle, Washington.......................................... 1,155,000 12.02 11.80 11.83 11.03 10.84
125 Summer Street
Boston, Massachusetts........................................ 464,000 20.36 22.27 23.33 -- --
Tower 56
New York, New York........................................... 162,000 23.11 21.17 -- -- --
One Lincoln Centre
Oakbrook Terrace, Illinois................................... 297,000 20.05 19.70 -- -- --
The Frick Building
Pittsburgh, Pennsylvania..................................... 341,000 10.90 11.69 -- -- --
527 Madison Avenue
New York, New York........................................... 216,000 34.83 30.99 -- -- --
--------- ------ ------ ------ ------ ------
Total/Weighted Average......................................... 4,941,000 $15.63 $ 15.43 $ 14.37 $ 12.69 $ 12.83
========= ====== ====== ====== ====== ======
</TABLE>
S-34
<PAGE> 37
OCCUPANCY RATES
The following table sets forth the occupancy rate, expressed as a
percentage, for each of the Properties for the periods presented during which
such Property was owned by the Company and for each of the Properties as of
September 30, 1997.
<TABLE>
<CAPTION>
OCCUPANCY RATE
TOTAL --------------------------------
RENTABLE (AS OF DEC. 31)
PROPERTY SQ. FT. 9/97 1996 1995 1994 1993
- -------------------------------------------------------------------------- ---------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
One Norwest Center
Denver, Colorado....................................................... 1,188,000 99% 99% 98% 96% 96%
Norwest Center
Minneapolis, Minnesota................................................. 1,118,000 99 100 100 100 100
Washington Mutual Tower
Seattle, Washington.................................................... 1,155,000 98 97 97 97 96
125 Summer Street
Boston, Massachusetts.................................................. 464,000 94 100 94 -- --
Tower 56
New York, New York..................................................... 162,000 97 97 91 -- --
One Lincoln Centre
Oakbrook Terrace, Illinois............................................. 297,000 95 91 -- -- --
The Frick Building
Pittsburgh, Pennsylvania............................................... 341,000 88 85 -- -- --
527 Madison Avenue
New York, New York..................................................... 216,000 93 96 -- -- --
191 Peachtree Street
Atlanta, Georgia....................................................... 1,221,000 95 -- -- -- --
Market Square
Washington, D.C........................................................ 689,000 95 -- -- -- --
500 Boylston Street
Boston, Massachusetts.................................................. 715,000 100 -- -- -- --
222 Berkeley Street
Boston, Massachusetts.................................................. 531,000 99 -- -- -- --
Charlotte Plaza
Charlotte, North Carolina.............................................. 613,000 91 -- -- -- --
200 Galleria
Atlanta, Georgia....................................................... 433,000 95 -- -- -- --
11 Canal Center
Alexandria, Virginia................................................... 70,000 97 -- -- -- --
99 Canal Center
Alexandria, Virginia................................................... 138,000 100 -- -- -- --
TransPotomac Plaza 5
Alexandria, Virginia................................................... 96,000 82 -- -- -- --
Sixty State Street
Boston, Massachusetts.................................................. 823,000 98 -- -- -- --
Corporate 500 Centre
Deerfield, Illinois.................................................... 679,000 98 -- -- -- --
---------- -- --- --- --- ---
Total/Weighted Average................................................... 10,949,000 96% 97% 98% 98% 97%
========== == === === === ===
</TABLE>
S-35
<PAGE> 38
TENANTS
The Company's tenants include local, regional, national and international
companies engaged in a wide variety of businesses. The following table sets
forth, as of September 30, 1997, information concerning the ten largest tenants
(ranked by Full Service Straight-Line Rent as of that date) occupying the
Properties. "Full Service Straight-Line Rent" is Straight-Line Rent plus
Recoveries. "Straight-Line Rent" means the average of all Actual Rent required
to be paid through the term of the lease calculated in accordance with GAAP.
Full Service Straight-Line Rent does not reflect any increases or decreases in
monthly rental rates or any lease expirations that are scheduled to occur or
that may occur after September 30, 1997 or the cost of any leasing commissions
or tenant improvements.
TEN LARGEST TENANTS
<TABLE>
<CAPTION>
FULL SERVICE
STRAIGHT-LINE RENT SCHEDULED
----------------------- LEASE
STRAIGHT-LINE PERCENT EXPIRATION SQUARE
TENANT RENT RECOVERIES AMOUNT OF TOTAL DATE FEET
- ---------------------------------------------- ------------- ----------- ------------ -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Norwest Corporation(1)........................ $ 20,778,000 $10,821,000 $ 31,599,000 10% Jan-99 14,000
Aug-01 7,000
Jul-03 154,000
Jul-13 408,000
Aug-18 451,000
---------
1,034,000
Massachusetts Financial Services.............. 10,069,000 4,425,000 14,494,000 5 Feb-03 359,000
Wachovia Bank................................. 8,966,000 3,451,000 12,417,000 4 Dec-08 382,000
Hale & Dorr................................... 7,345,000 3,814,000 11,159,000 4 Jun-13 273,000
King & Spalding............................... 8,043,000 2,650,000 10,693,000 3 Mar-06 306,000
The New England Life.......................... 5,102,000 2,633,000 7,735,000 2 Sep-08 213,000
Powell Goldstein Frazer & Murphy.............. 5,366,000 1,812,000 7,178,000 2 Jan-06 199,000
First Union(2)................................ 5,155,000 1,749,000 6,904,000 2 Dec-97 4,000
Aug-98 23,000
Dec-98 23,000
Mar-99 23,000
Aug-00 23,000
Mar-01 46,000
Aug-02 22,000
Mar-08 46,000
Mar-09 23,000
Mar-10 47,000
Mar-11 47,000
---------
327,000
Faegre & Benson............................... 3,492,000 3,097,000 6,589,000 2 Dec-97 21,000
Sep-03 175,000
---------
196,000
Perkins Coie.................................. 5,177,000 425,000 5,602,000 2 Dec-97 6,000
Jul-98 7,000
Jul-04 199,000
---------
212,000
---
Ten Largest Tenants........................... $ 79,493,000 $34,877,000 $114,370,000 36%
------------ ----------- ------------ ===
Total Portfolio............................. $237,406,000 $76,816,000 $314,222,000
============ =========== ============
</TABLE>
- ---------------
(1) Includes Norwest Corporation and Norwest Bank Denver N.A.
(2) The 327,000 square feet of space includes 115,000 square feet currently
leased to another tenant, which will be leased by First Union commencing
September 1, 1998.
S-36
<PAGE> 39
LEASE EXPIRATIONS
The following table summarizes certain information relating to lease
expirations for all of the Properties, collectively.
<TABLE>
<CAPTION>
% FULL
FULL SERVICE SERVICE
SQUARE FEET STRAIGHT-LINE STRAIGHT-LINE STRAIGHT-LINE
EXPIRING RENT RECOVERIES RENT RENT CUMULATIVE
----------- ------------- ----------- ------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
10/97-12/97............ 183,000 $ 3,805,000 $ 553,000 $ 4,358,000 1.39% 1.39%
1998................... 714,000 15,586,000 4,492,000 20,078,000 6.39 7.78
1999................... 784,000 17,214,000 4,162,000 21,376,000 6.80 14.58
2000................... 812,000 16,915,000 4,470,000 21,385,000 6.81 21.39
2001................... 822,000 21,458,000 4,118,000 25,576,000 8.14 29.53
2002................... 1,168,000 23,457,000 6,595,000 30,052,000 9.56 39.09
2003................... 1,255,000 27,402,000 10,341,000 37,743,000 12.01 51.10
2004................... 831,000 18,147,000 4,233,000 22,380,000 7.12 58.22
2005................... 236,000 7,211,000 2,068,000 9,279,000 2.95 61.17
2006................... 758,000 20,313,000 6,299,000 26,612,000 8.47 69.64
2007................... 636,000 12,903,000 4,337,000 17,240,000 5.49 75.13
2008 and beyond........ 2,322,000 52,995,000 25,148,000 78,143,000 24.87 100.00
----------- ------------- ----------- -------------
10,521,000 $ 237,406,000 $76,816,000 $ 314,222,000
========== ============= ============ =============
</TABLE>
The following table sets forth certain categories of information relating
to lease expirations for each Property and all of the Properties, collectively.
<TABLE>
<CAPTION>
PROPERTY 10/97-12/97 1998 1999 2000 2001 2002 2003
- ------------------------------------------------- ----------- ------- ------- ------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
One Norwest Center
Square feet expiring.......................... 17,000 25,000 92,000 128,000 55,000 109,000 146,000
Full service St-Line rent per sq. ft.......... $17.76 $12.60 $14.82 $13.84 $16.76 $15.30 $20.58
Asking market rent per sq. ft................. $22.00
Norwest Center
Square feet expiring.......................... 12,000 67,000 61,000 104,000 2,000 53,000 175,000
Full service St-Line rent per sq. ft.......... $32.25 $23.43 $32.82 $31.34 $33.00 $23.72 $30.75
Asking market rent per sq. ft................. $35.00
Washington Mutual Tower
Square feet expiring.......................... 27,000 137,000 193,000 40,000 52,000 96,000 170,000
Full service St-Line rent per sq. ft.......... $17.81 $22.14 $19.81 $18.68 $21.85 $21.06 $21.73
Asking market rent per sq. ft................. $31.00
125 Summer Street
Square feet expiring.......................... 14,000 12,000 135,000 120,000 9,000 121,000 16,000
Full service St-Line rent per sq. ft.......... $24.71 $28.83 $42.71 $38.01 $30.00 $27.30 $29.50
Asking market rent per sq. ft................. $38.00
Tower 56
Square feet expiring.......................... 17,000 15,000 33,000 17,000 37,000 25,000 5,000
Full service St-Line rent per sq. ft.......... $44.35 $38.60 $42.21 $40.29 $42.35 $45.92 $40.00
Asking market rent per sq. ft................. $54.00
One Lincoln Centre
Square feet expiring.......................... 12,000 61,000 41,000 95,000 3,000 70,000 --
Full service St-Line rent per sq. ft.......... $24.92 $26.56 $25.27 $28.36 $26.33 $31.44 --
Asking market rent per sq. ft................. $30.00
The Frick Building
Square feet expiring.......................... 9,000 11,000 38,000 74,000 42,000 35,000 55,000
Full service St-Line rent per sq. ft.......... $22.78 $20.64 $21.13 $20.61 $19.05 $18.09 $19.80
Asking market rent per sq. ft................. $22.00
527 Madison Avenue
Square feet expiring.......................... 207 21,000 -- 9,000 78,000 -- 22,000
Full service St-Line rent per sq. ft.......... $24.15 $60.43 -- $44.78 $62.76 -- $37.09
Asking market rent per sq. ft................. $53.00
191 Peachtree Street
Square feet expiring.......................... -- 17,000 2,000 10,000 137,000 45,000 --
Full service St-Line rent per sq. ft.......... -- $22.76 $18.50 $20.60 $26.87 $25.02 --
Asking market rent per sq. ft................. $26.00
Market Square
Square feet expiring.......................... 7,000 63,000 13,000 50,000 85,000 10,000 11,000
Full service St-Line rent per sq. ft.......... $11.86 $30.68 $37.23 $34.28 $45.55 $33.10 $48.18
Asking market rent per sq. ft................. $44.00
<CAPTION>
2008
AND
PROPERTY 2004 2005 2006 2007 BEYOND TOTAL
- ------------------------------------------------- ------- ------- ------- ------- ------- ---------
<S> <C><C> <C> <C> <C> <C> <C>
One Norwest Center
Square feet expiring.......................... 118,000 -- -- 76,000 406,000 1,172,000
Full service St-Line rent per sq. ft.......... $17.33 -- -- $20.92 $21.96 $18.68
Asking market rent per sq. ft.................
Norwest Center
Square feet expiring.......................... 96,000 -- -- -- 533,000 1,103,000
Full service St-Line rent per sq. ft.......... $32.59 -- -- -- $41.77 $35.64
Asking market rent per sq. ft.................
Washington Mutual Tower
Square feet expiring.......................... 270,000 13,000 -- 138,000 -- 1,136,000
Full service St-Line rent per sq. ft.......... $25.77 $19.00 -- $21.20 -- $22.07
Asking market rent per sq. ft.................
125 Summer Street
Square feet expiring.......................... -- 10,000 -- -- -- 437,000
Full service St-Line rent per sq. ft.......... -- $29.40 -- -- -- $35.14
Asking market rent per sq. ft.................
Tower 56
Square feet expiring.......................... 10,000 -- -- -- -- 159,000
Full service St-Line rent per sq. ft.......... $42.80 -- -- -- -- $42.48
Asking market rent per sq. ft.................
One Lincoln Centre
Square feet expiring.......................... -- -- -- -- -- 282,000
Full service St-Line rent per sq. ft.......... -- -- -- -- -- $28.12
Asking market rent per sq. ft.................
The Frick Building
Square feet expiring.......................... 11,000 -- -- 24,000 -- 299,000
Full service St-Line rent per sq. ft.......... $17.73 -- -- $28.79 -- $20.63
Asking market rent per sq. ft.................
527 Madison Avenue
Square feet expiring.......................... 8,000* 6,000 23,000 33,000 -- 200,207
Full service St-Line rent per sq. ft.......... $141.75 $46.67 $41.30 $49.42 -- $56.86
Asking market rent per sq. ft.................
191 Peachtree Street
Square feet expiring.......................... 34,000 17,000 506,000 -- 386,000 1,154,000
Full service St-Line rent per sq. ft.......... $33.71 $27.53 $35.33 -- $32.27 $32.40
Asking market rent per sq. ft.................
Market Square
Square feet expiring.......................... 26,000 174,000 47,000 7,000 160,000 653,000
Full service St-Line rent per sq. ft.......... $44.35 $43.61 $48.21 $45.00 $43.06 $41.59
Asking market rent per sq. ft.................
</TABLE>
S-37
<PAGE> 40
<TABLE>
<CAPTION>
PROPERTY 10/97-12/97 1998 1999 2000 2001 2002 2003
- ------------------------------------------------- ----------- ------- ------- ------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
500 Boylston Street
Square feet expiring.......................... -- 76,000 16,000 -- -- -- 400,000
Full service St-Line rent per sq. ft.......... -- $46.14 $23.94 -- -- -- $39.23
Asking market rent per sq. ft................. $41.00
222 Berkeley Street
Square feet expiring.......................... 3,000 20,000 50,000 -- 70,000 113,000 --
Full service St-Line rent per sq. ft.......... $63.67 $26.15 $30.12 -- $29.99 $30.13 --
Asking market rent per sq. ft................. $41.00
Charlotte Plaza
Square feet expiring.......................... 8,000 70,000 31,000 26,000 46,000 45,000 17,000
Full service St-Line rent per sq. ft.......... $15.63 $26.33 $26.19 $17.19 $17.04 $23.22 $26.82
Asking market rent per sq. ft................. $22.00
200 Galleria
Square feet expiring.......................... 32,000 38,000 24,000 71,000 61,000 170,000 --
Full service St-Line rent per sq. ft.......... $17.75 $19.82 $21.58 $22.80 $21.67 $20.89 --
Asking market rent per sq. ft................. $27.00
11 Canal Center
Square feet expiring.......................... 9,000 -- 5,000 2,000 -- 5,000 --
Full service St-Line rent per sq. ft.......... $36.11 -- $20.80 $19.50 -- $25.60 --
Asking market rent per sq. ft................. $27.00
99 Canal Center
Square feet expiring.......................... 2,000 4,000 5,000 27,000 62,000 22,000 16,000
Full service St-Line rent per sq. ft.......... -- $15.75 $16.40 $21.07 $25.11 $25.45 $23.13
Asking market rent per sq. ft................. $27.00
TransPotomac Plaza 5
Square feet expiring.......................... 14,000 9,000 2,000 2,000 15,000 27,000 --
Full service St-Line rent per sq. ft.......... $20.50 $18.22 $21.50 $16.00 $18.33 $19.81 --
Asking market rent per sq. ft................. $24.00
Sixty State Street
Square feet expiring.......................... -- 26,000 34,000 3,000 29,000 153,000 90,000
Full service St-Line rent per sq. ft.......... -- $28.50 $27.62 $27.00 $32.07 $32.61 $24.70
Asking market rent per sq. ft................. $39.00
Corporate 500 Centre
Square feet expiring.......................... -- 42,000 9,000 34,000 39,000 69,000 132,000
Full service St-Line rent per sq. ft.......... -- $28.69 $31.33 $30.35 $33.87 $31.14 $28.91
Asking market rent per sq. ft................. $32.00
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
2008
AND
PROPERTY 2004 2005 2006 2007 BEYOND TOTAL
- ------------------------------------------------- ------- ------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
500 Boylston Street
Square feet expiring.......................... 10,000 -- -- -- 213,000 715,000
Full service St-Line rent per sq. ft.......... $24.10 -- -- -- $36.31 $38.54
Asking market rent per sq. ft.................
222 Berkeley Street
Square feet expiring.......................... -- -- -- 253,000 19,000 528,000
Full service St-Line rent per sq. ft.......... -- -- -- $26.76 $36.89 $28.78
Asking market rent per sq. ft.................
Charlotte Plaza
Square feet expiring.......................... 113,000 11,000 1,000 -- 189,000 557,000
Full service St-Line rent per sq. ft.......... $18.42 $26.00 $22.00 -- $19.36 $22.28
Asking market rent per sq. ft.................
200 Galleria
Square feet expiring.......................... 3,000 -- 11,000 -- -- 410,000
Full service St-Line rent per sq. ft.......... $25.33 -- $25.64 -- -- $21.19
Asking market rent per sq. ft.................
11 Canal Center
Square feet expiring.......................... -- 5,000 -- 42,000 -- 68,000
Full service St-Line rent per sq. ft.......... -- $23.20 -- $24.83 -- $25.81
Asking market rent per sq. ft.................
99 Canal Center
Square feet expiring.......................... -- -- -- -- -- 138,000
Full service St-Line rent per sq. ft.......... -- -- -- -- -- $23.20
Asking market rent per sq. ft.................
TransPotomac Plaza 5
Square feet expiring.......................... -- -- -- 10,000 -- 79,000
Full service St-Line rent per sq. ft.......... -- -- -- $26.40 -- $20.25
Asking market rent per sq. ft.................
Sixty State Street
Square feet expiring.......................... 118,000 -- 35,000 10,000 308,000 806,000
Full service St-Line rent per sq. ft.......... $28.83 -- $33.03 $73.20 $39.26 $33.85
Asking market rent per sq. ft.................
Corporate 500 Centre
Square feet expiring.......................... 14,000 -- 135,000 43,000 108,000 625,000
Full service St-Line rent per sq. ft.......... $28.00 -- $30.07 $29.72 $31.76 $30.34
Asking market rent per sq. ft.................
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
PROPERTY 10/97-12/97 1998 1999 2000 2001 2002 2003
- ------------------------------------------------- ----------- ------- ------- ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
All Properties Total
Square feet expiring**........................ 183 714 784 812 822 1,168 1,255
Straight-Line rent**.......................... $ 3,805 $15,586 $17,214 $16,915 $21,458 $23,457 $27,402
Straight-Line rent per sq. ft................. $ 20.79 $ 21.83 $ 21.96 $ 20.83 $ 26.10 $ 20.08 $ 21.83
Recoveries**.................................. $ 553 $ 4,492 $ 4,162 $ 4,470 $ 4,118 $ 6,595 $10,341
Full service St-Line rent**................... $ 4,358 $20,078 $21,376 $21,385 $25,576 $30,052 $37,743
Full service St-Line rent per sq. ft.......... $ 23.81 $ 28.12 $ 27.27 $ 26.34 $ 31.11 $ 25.73 $ 30.07
% Full service St-Line rent................... 1.39% 6.39% 6.80% 6.81% 8.14% 9.56% 12.01%
No. of tenant leases expiring................. 71 145 112 112 87 96 38
Weighted avg. asking market rent per sq.
ft........................................... $ 32.43
<CAPTION>
2008
AND
PROPERTY 2004 2005 2006 2007 BEYOND TOTAL
- ------------------------------------------------- ------- ------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
All Properties Total
<S> <C><C> <C> <C> <C> <C> <C>
Square feet expiring**........................ 831 236 758 636 2,322 10,521
Straight-Line rent**.......................... $18,147 $7,211 $20,313 $12,903 $52,995 $237,406
Straight-Line rent per sq. ft................. $ 21.84 $30.56 $ 26.80 $ 20.29 $ 22.82 $ 22.56
Recoveries**.................................. $ 4,233 $2,068 $ 6,299 $ 4,337 $25,148 $ 76,816
Full service St-Line rent**................... $22,380 $9,279 $26,612 $17,240 $78,143 $314,222
Full service St-Line rent per sq. ft.......... $ 26.93 $39.32 $ 35.11 $ 27.11 $ 33.65 $ 29.87
% Full service St-Line rent................... 7.12% 2.95% 8.47% 5.49% 24.87% 100.00%
No. of tenant leases expiring................. 33 14 13 21 26 768
Weighted avg. asking market rent per sq.
ft...........................................
</TABLE>
- ---------------
* Includes 4,605 square feet of retail space leased to the Gap at a base rent
of $871,000 and recoveries of $6,000, totalling to a full service rent of
$877,000.
** In thousands.
S-38
<PAGE> 41
TENANT RETENTION
The following table sets forth the Company's tenant retention on expiring
leases since January 1, 1993. The analysis is based upon the percentage of
expiring leases in the appropriate building with a tenant or subtenant being
retained in the expiring space or an existing tenant expanding into the expiring
space. A tenant is assumed to be retained in the year in which their lease is
renewed or extended.
<TABLE>
<CAPTION>
1/97-9/97 1996 1995
------------------------------ ------------------------------ ------------------------------
RETAINED EXPIRING RETAINED EXPIRING RETAINED EXPIRING
SQ. FT. SQ. FT. RET. % SQ. FT. SQ. FT. RET. % SQ. FT. SQ. FT. RET. %
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One Norwest Center
Denver, Colorado............... 254,000 286,000 89% 44,000 73,000 60% 65,000 71,000 92%
Norwest Center
Minneapolis, Minnesota........ 184,000 198,000 93 4,000 10,000 40 23,000 24,000 96
Washington Mutual Tower
Seattle, Washington........... 153,000 171,000 89 87,000 106,000 82 30,000 45,000 67
125 Summer Street
Boston, Massachusetts......... 22,000 48,000 46 96,000 97,000 99 -- -- --
Tower 56
New York, New York............ 29,000 34,000 85 46,000 54,000 85 -- -- --
One Lincoln Centre
Oakbrook Terrace, Illinois.... 24,000 31,000 77 -- -- -- -- -- --
The Frick Building
Pittsburgh, Pennsylvania...... 99,000 114,000 87 -- -- -- -- -- --
527 Madison Ave.
New York, New York............ 6,000 21,000 29 -- -- -- -- -- --
------- ------- --- ---- ------- --- --- --- - ------- --- --- --- -
Total/Weighted Average.......... 771,000 903,000 85% 277,000 340,000 81% 118,000 140,000 84%
<CAPTION>
1994 1993
------------------------------ ------------------------------
RETAINED EXPIRING RETAINED EXPIRING
SQ. FT. SQ. FT. RET. % SQ. FT. SQ. FT. RET. %
-------- -------- -------- -------- -------- --------
<S> <<C> <C> <C> <C> <C> <C>
One Norwest Center
Denver, Colorado............... 94,000 95,000 99% 127,000 155,000 82%
Norwest Center
Minneapolis, Minnesota........ 16,000 26,000 62 25,000 38,000 66
Washington Mutual Tower
Seattle, Washington........... 127,000 154,000 82 90,000 130,000 69
125 Summer Street
Boston, Massachusetts......... -- -- -- -- -- --
Tower 56
New York, New York............ -- -- -- -- -- --
One Lincoln Centre
Oakbrook Terrace, Illinois.... -- -- -- -- -- --
The Frick Building
Pittsburgh, Pennsylvania...... -- -- -- -- -- --
527 Madison Ave.
New York, New York............ -- -- -- -- -- --
------- --- --- --- - ------- --- --- --- -
Total/Weighted Average.......... 237,000 275,000 86% 242,000 323,000 75%
</TABLE>
S-39
<PAGE> 42
LEASING COSTS AND CAPITAL EXPENDITURES
NON-INCREMENTAL REVENUE-GENERATING (RECURRING LEASING COSTS AND CAPITAL
EXPENDITURES)
The following table shows Historical Non-Incremental Revenue-Generating
Leasing Costs which are the leasing costs (tenant improvements and leasing
commissions), in total and on a per square foot basis, to re-lease expiring
leases or renew or extend existing leases. Additionally, the table shows
Historical Non-Incremental Revenue-Generating Capital Expenditures which are
capital expenditures expended to maintain a property in a Class A manner and do
not give rise to additional earnings capacity, but rather allow the property to
maintain its competitive position within its market.
<TABLE>
<CAPTION>
TOTAL/WEIGHTED
1/97 - 9/97 1996 1995 1994 1993 AVERAGE
----------- ---------- ---------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
ONE NORWEST CENTER
Total Tenant Lease Costs................. $1,691,088 $1,009,006 $ 141,135 $ 540,444 $ 754,802 $ 4,136,475
Total Per Square Foot Leased............. 5.86 12.39 1.86 4.58 4.25 5.58
NORWEST CENTER
Total Tenant Lease Costs................. 51,651 42,237 144,275 30,193 154,940 423,296
Total Per Square Foot Leased............. 0.27 6.37 5.77 1.12 4.07 1.49
WASHINGTON MUTUAL TOWER
Total Tenant Lease Costs................. 1,061,621 793,361 290,971 1,065,962 1,303,860 4,515,775
Total Per Square Foot Leased............. 5.71 6.37 5.40 7.06 8.66 6.78
125 SUMMER STREET
Total Tenant Lease Costs................. 1,251,353 2,158,339 -- -- -- 3,409,692
Total Per Square Foot Leased............. 53.33 18.32 -- -- -- 24.14
TOWER 56
Total Tenant Lease Costs................. 501,028 339,124 -- -- -- 840,152
Total Per Square Foot Leased............. 10.46 8.04 -- -- -- 9.32
ONE LINCOLN CENTRE
Total Tenant Lease Costs................. 137,796 2,859 -- -- -- 140,655
Total Per Square Foot Leased............. 4.70 0.78 -- -- -- 4.27
THE FRICK BUILDING
Total Tenant Lease Costs................. 1,161,553 -- -- -- -- 1,161,553
Total Per Square Foot Leased............. 11.08 -- -- -- -- 11.08
527 MADISON AVENUE
Total Tenant Lease Costs................. 463,931 -- -- -- -- 463,931
Total Per Square Foot Leased............. 36.19 -- -- -- -- 36.19
-------- ---------- ---------- ---------- ---------- ----------
CORNERSTONE PORTFOLIO
Total Tenant Lease Costs................. $6,320,021 $4,344,926 $ 576,381 $1,636,599 $2,213,602 $ 15,091,529
Total Per Square Foot Leased............. 7.18 11.55 3.72 5.53 6.04 7.28
CAPITAL EXPENDITURES..................... $ 267,151 $ 532,851(1) -- $ 50,801 -- $ 850,803
Weighted Average Square Footage Owned.... 4,905,000 4,139,000 3,500,000 3,461,000 3,461,000 19,466,000
Per Square Foot.......................... $ 0.05 $ 0.13 -- $ 0.01 -- $ 0.04
</TABLE>
- ---------------
(1) Start-up capital included in the purchase price of 125 Summer Street and The
Frick Building.
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<PAGE> 43
INCREMENTAL REVENUE-GENERATING (NON-RECURRING LEASING COSTS AND CAPITAL
EXPENDITURES)
The following table shows Historical Incremental Revenue Generating Leasing
Costs, which are the leasing costs (tenant improvements and leasing commissions)
required (i) to lease first generation space in development properties or (ii)
to lease space which was vacant at the time of the acquisition of a Property
which will increase the overall return on the Property. Additionally, the table
shows Historical Incremental Revenue-Generating Capital Expenditures which are
capital expenditures expended to increase the profitability of the building
either through generation of higher earnings, or by improving building systems
efficiency, thus producing lower operating expenses prospectively.
<TABLE>
<CAPTION>
TOTAL/WEIGHTED
1/97-9/97 1996 1995 1994 1993 AVERAGE
---------- ---------- ---------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
ONE NORWEST CENTER
Total Tenant Lease Costs.................... -- -- -- -- -- --
Total Per Square Foot....................... -- -- -- -- -- --
NORWEST CENTER
Total Tenant Lease Costs.................... -- -- -- -- -- --
Total Per Square Foot....................... -- -- -- -- -- --
WASHINGTON MUTUAL TOWER
Total Tenant Lease Costs.................... $ 378,594 $ 643,235 -- -- -- $1,021,829
Total Per Square Foot....................... 6.04 4.39 -- -- -- 4.89
125 SUMMER STREET
Total Tenant Lease Costs.................... -- 369,727 -- -- -- 369,727
Total Per Square Foot....................... -- 11.16 -- -- -- 11.16
TOWER 56
Total Tenant Lease Costs.................... -- 174,266 -- -- -- 174,266
Total Per Square Foot....................... -- 24.49 -- -- -- 24.49
ONE LINCOLN CENTRE
Total Tenant Lease Costs.................... 261,538 9,706 -- -- -- 271,244
Total Per Square Foot....................... 22.13 5.00 -- -- -- 19.72
THE FRICK BUILDING
Total Tenant Lease Costs.................... 325,041 -- -- -- -- 325,041
Total Per Square Foot....................... 16.77 -- -- -- -- 16.77
527 MADISON AVENUE
Total Tenant Lease Costs.................... -- -- -- -- -- --
Total Per Square Foot....................... -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- -----------
CORNERSTONE PORTFOLIO
Total Tenant Lease Costs.................... $ 965,173 $1,196,934 -- -- -- $2,162,107
Total Per Square Foot....................... 10.28 6.34 -- -- -- 7.65
CAPITAL EXPENDITURES........................ $ 153,007 $ 25,500 $ 135,194 $ 102,567 $ 967,533 $1,383,801
Weighted Average Square Footage Owned....... 4,905,000 4,139,000 3,500,000 3,461,000 3,461,000 19,466,070
Per Square Foot............................. $ 0.03 $ 0.01 $ 0.04 $ 0.03 $ 0.28 $ 0.07
</TABLE>
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<PAGE> 44
MORTGAGE INDEBTEDNESS AND CREDIT FACILITY
The following table sets forth certain information regarding the
consolidated debt obligations of the Company as of September 30, 1997, including
mortgage obligations relating to the Properties but not including indebtedness
under the Revolving Credit Facility. All of this debt, with the exception of the
Convertible Promissory Note Due 2001, is nonrecourse to the Company. However,
even with respect to nonrecourse indebtedness, the lender may have the right to
recover deficiencies from the Company in certain circumstances, including fraud,
misappropriation of funds and environmental liabilities.
The Company has a $350 million, unsecured Revolving Credit Facility from
Bankers Trust Company and The Chase Manhattan Bank which expires in October
2000. Borrowings under the Revolving Credit Facility bear interest at a rate
between 1.10% and 1.40% over LIBOR, depending on the Company's leverage ratio at
the time of borrowing.
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
($ IN
THOUSANDS)
(AS OF INTEREST PREPAYMENT
PROPERTY/OBLIGATION 9/30/97) AMORTIZATION RATE MATURITY DATE PROVISIONS
- ----------------------------------- ---------- ------------- -------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Convertible Promissory Note due
2001(1).......................... $ 12,926 Interest only 8.11%max(2) Jan-2001 Not prepayable
One Norwest Center................. 97,018 30 year 7.50 Aug-2001 (3)
125 Summer Street.................. 50,000 Interest only(4) 7.20 Jan-2003 (5)
Tower 56........................... 17,786 30 year 7.67 May-2003 (6)
Washington Mutual Tower............ 79,100 Interest only 7.53 Nov-2005 (7)
Norwest Center..................... 110,000 Interest only 8.74 Dec-2005 Not prepayable
Dearborn Land(8)................... 10,000 Interest only 0(9) Oct-2000 Not prepayable
TransPotomac Plaza 5 and
Charlotte Plaza(8)............... 55,000 Interest only 7.28 Oct-2000 Not prepayable
527 Madison Avenue and
One Lincoln Centre(8)............ 65,000 Interest only 7.47 Oct-2004 Not prepayable
Market Square(10) and
200 Galleria(8).................. 120,000 Interest only 7.54 Oct-2007 Not prepayable
Sixty State Street(11)............. 89,630 30 year 6.75 Jan-2005 (12)
Corporate 500 Centre............... 80,000 Interest only 6.63(13) July-2002 Prepayable
---------- ---
Total/Weighted Average......... $786,460 7.39%
========== =======
</TABLE>
- ---------------
(1) The lender, Hines Colorado Limited, has the right to convert the note into
Common Stock at a conversion price of $14.30 per share. At maturity, the
Company is entitled to repay the principal of the note with Common Stock
priced at the lesser of $14.30 per share or the then existing share price.
(2) Lesser of 30-day LIBOR plus 0.5% or 8.11%.
(3) No prepayment until July 24, 1998. From July 24, 1998 through July 23,
2000, prepayment fee is greater of 1% of outstanding principal balance or
Treasury Yield Maintenance. Beginning July 24, 2000, prepayment fee is
Treasury Yield Maintenance. Loan may be prepaid at par during last 90 days
of loan.
(4) Interest only payments through January 1, 2001. Beginning February 1, 2001,
25-year amortization schedule.
(5) Beginning July 1, 1999, prepayment fee is greater of Treasury Yield
Maintenance or 1% of outstanding principal balance. Prepayment without fee
on or after three months prior to maturity date.
(6) Open to prepayment after December 31, 1999 with a prepayment fee of greater
of 1.0% of principal balance or Treasury Yield Maintenance. Prepayment
without fee on or after three months prior to maturity date.
(7) No prepayment rights through September 30, 1998, prepayable thereafter,
with a prepayment fee of the greater of: (1) 1.0% of the outstanding
principal balance or (2) Treasury Yield Maintenance. Prepayment without fee
for the six months prior to the maturity date.
(8) The four notes arising from the DIHC Acquisition are cross-collateralized
having the effect of forming a "collateral pool" for the underlying notes.
(9) The interest rate on the loan will increase to 7.28% upon the sale of the
Dearborn Land.
S-42
<PAGE> 45
(10) The collateral for this loan is a pledge of the $181 million first mortgage
loan on Market Square which the Company purchased from PGGM.
(11) While the face amount of the loan is $78,500,000, since the interest rate
is 9.5%, the Company has recorded the debt at $89,630,000, which is the
market value of the loan at the time of the closing based upon a market
interest rate for similar quality loans of 6.84%.
(12) Beginning February 1, 2000, the prepayment fee is equal to the greater of
2% or Treasury Yield Maintenance (as defined in the loan agreement
therefor). The 2% maximum is reduced by 0.25% per annum thereafter until it
reaches 1%. The loan is prepayable during the last 90 days.
(13) The interest rate on the loan is LIBOR plus 100 basis points. However, the
Company has entered into an interest rate swap with Bankers Trust Company
which effectively fixes the interest rate at 6.63%.
MARKET DATA
Boston
The Company has four properties in Downtown Boston: 125 Summer Street, 500
Boylston Street, 222 Berkeley Street and Sixty State Street. The Company,
through a wholly-owned subsidiary, holds the fee interest in 125 Summer Street,
which is managed by Hines pursuant to a management contract that, after December
1998, may be terminated upon 30 days' notice. Hines currently owns 349,650
shares of the Company's Common Stock. Each of 500 Boylston Street and 222
Berkeley Street is owned by a separate partnership in which the Company owns a
91.5% interest and Hines owns an 8.5% interest. Cash flow, excess financing and
sales proceeds are shared on a pro rata basis between the Company and Hines with
respect to each such partnership. The Company consolidates its investment in
both partnerships and will have the right to gain full control of each
underlying asset through buy-sell agreements that become effective in 2007. The
Company holds the second mortgage on Sixty State Street, behind a first mortgage
in the amount of $78.5 million.
The Company believes that the economic fundamentals of the Boston area are
strong. The Boston metropolitan area has one of the healthiest economies in the
northeast and is the growth leader among the largest industrial markets in the
region. With a population of 5.8 million people, Boston is the fifth largest MSA
in the nation. The median per capita personal income in 1995 for the greater
Boston area was $27,361, which is 18% above the national level.
Led by an expanding financial services industry and a revitalized high
technology sector, the economic expansion of Boston has been broad based. Much
of the city's success has come from the strength of its internal resources such
as a highly skilled labor pool, a focus on research and development, local
capital sources and a host of firms that have become dominant in their
respective industries. The Boston economy slowed and the national recession
dominated the area in the late 1980s and early 1990s. Office employment in
Boston grew at an average annual rate of 2.0% over the last ten years ending
March 31, 1997, as compared to 2.7% at the national level. The past few years
have seen continued diversification of the economy and increases in total
employment. In the year ended March 31, 1997, office employment in Boston grew
5.7%, compared to a 4.4% increase nationwide. The services and the financial,
insurance and real estate ("FIRE") sectors dominated local growth, expanding
4.4% and 2.2%, respectively, compared to 4.3% and 1.8%, respectively, at the
national level. Torto Wheaton Research ("Torto Wheaton") forecasts a 2.1%
average annual increase in office employment at both the metropolitan and
national levels over the next decade.
The metropolitan Boston office market contains approximately 105 million
square feet of space, over 50% of which has been built since 1980. The Downtown
submarket, where all of the Boston Properties are located, comprises 48.9
million square feet of office space and consists of seven individual submarkets.
Approximately 31 million square feet, or 63% of Downtown office space, is
classified as Class A office space. As of September 30, 1997, the Downtown
submarket had an overall occupancy rate of 95.4%, with a Class A occupancy rate
of 96.9%. During the second quarter 1997, the newly renovated 590,000 square
foot 28 State Street building returned to the market. This property was 85%
leased within six months of its completion.
Both 125 Summer Street and Sixty State Street are located in the Financial
District of the Downtown submarket. The Financial District is the Downtown's
largest submarket, consisting of 30 million square feet of office space,
approximately 70% of which is Class A space as of September 30, 1997. At that
time, overall and Class A occupancy rates in the Financial District were 96.1%
and 97.1%, respectively.
S-43
<PAGE> 46
The Company's other two Boston assets, 222 Berkeley Street and 500 Boylston
Street, are located in the Back Bay area of the Downtown submarket. The Back Bay
area contained 10.9 million square feet of office space, 7.0 million of which is
classified as Class A, as of September 30, 1997. At that time, the overall and
Class A occupancy rates for the Back Bay area were 96.5% and 96.6%,
respectively.
According to Torto Wheaton's second quarter 1997 forecast, the Downtown
Boston office market is expected to remain tight over the next two years, with
demand continuing to outpace supply. Torto Wheaton forecasts that approximately
614,000 square feet of new supply will enter the market over the forecasted
period, with approximately 966,000 square feet of absorption expected over the
same time period.
Downtown Boston Office Market Demand Trends
<TABLE>
<CAPTION>
Annual Year-End
Net Occupancy
Absorption Rate
---------- ---------
<S> <C> <C>
1992 1,012,000 0.855
1993 1,156,000 0.862
1994 1,626,000 0.9
1995 1,374,000 0.931
1996 1,376,000 0.936
3Q 1997 921,000 0.954
</TABLE>
Source: Torto Wheaton Research.
Note: Time series represents all office space in the entire Downtown Area. Net
Absorption data for 1997 represents the first three quarters of the year only.
Occupancy data for 1997 is as of September 30, 1997.
Washington, D.C.
The Company has four Properties located in the metropolitan Washington,
D.C. area: Market Square, in the East End of Washington, D.C., and 11 Canal
Center, 99 Canal Center and TransPotomac Plaza 5 located within two adjacent
office complexes in the waterfront office district of Alexandria, Virginia. The
Company holds the first mortgage on the Market Square Property and has an option
to purchase an 85.7% interest in Market Square Associates, the partnership that,
together with Crow-Pennsylvania Avenue Limited Partnership, owns a 70% interest
in Avenue Associates along with Western Associates Limited Partnership. Avenue
Associates holds the fee title to Market Square. Trammell Crow Real Estate
Services, Inc. manages this Property under a long-term management agreement. The
Company holds title to 11 Canal Center, 99 Canal Center and TransPotomac Plaza 5
through three wholly-owned subsidiaries. These Properties are managed by Faison
and Associates, Inc.
The Company believes that the economic fundamentals of the Washington, D.C.
area are positive. As of 1997, Washington, D.C. had a metropolitan statistical
area ("MSA") population of 4.6 million people, making it the seventh largest in
the country. The MSA includes the District of Columbia, Suburban Maryland and
Northern Virginia. The mean per capita personal income in 1994 for the MSA was
$27,762, which is 33.4% above the national level.
The Washington, D.C. MSA enjoyed very rapid growth and diversification
during the 1980s, with private sector industries such as high tech, health
services, telecommunications and biotechnology leading the way. The MSA recorded
an annual office growth rate of 2.7% over the last decade ending March 31, 1997.
Over the year ending March 31, 1997, office employment in the MSA increased
2.7%, compared to an increase of 4.4%
S-44
<PAGE> 47
observed nationwide. Over the next decade, Torto Wheaton forecasts an average
annual MSA office employment growth of 2.2%, compared to 2.1% for the nation.
The East End submarket, where Market Square is located, is largely a
creation of the last decade, during which over half of the 24 million square
foot inventory was constructed. The tenant base in the East End is dominated by
services firms, particularly law firms and trade associations. This trend was so
powerful that the East End now contains 14.8 million square feet of Class A
office space, almost as much Class A office space as all other District markets
combined. The East End area also includes many government agencies (12% share of
the Class A market), several hotels, the old retail corridor and the city's
convention center. The MCI Center, a new sports arena located in the center of
the East End, will host the professional basketball and hockey teams of
Washington, D.C. The recently completed MCI Center is expected to revitalize the
Gallery Place area.
As of September 30, 1997, the metropolitan Washington, D.C. market
contained 207.4 million square feet of office space, approximately 63% of which
has been built since 1980. The East End submarket, where Market Square is
located, contained approximately 24 million square feet of space, with over 60%
of that total being Class A office space. As of September 30, 1997, the overall
and Class A occupancy rates for the East End submarket were 89.1% and 95.2%,
respectively. According to Torto Wheaton's second quarter 1997 forecast,
approximately 950,000 square feet of new office supply is expected to enter the
submarket over the next two years, with approximately 1.4 million square feet
projected to be absorbed in the market over that same time period.
East End Washington, D.C.
Office Market Demand Trends
Year-End Occupancy
<TABLE>
<CAPTION>
Annual Year-End
Net Absorption Occupancy Rate
-------------- --------------
<S> <C> <C>
1992 1,723,000 0.872
1993 687,000 0.898
1994 560,000 0.925
1995 430,000 0.924
1996 -482,000 0.905
3Q 1997 10,000 0.891
</TABLE>
Source: Torto Wheaton Research.
Note: Time Series represents all office spance in the East End submarket.
Net absorption data for 1997 represents the first three quarters of the
only. Occupancy data for 1997 is as of September 30, 1997.
S-45
<PAGE> 48
Northern Virginia, where 11 and 99 Canal Center and TransPotomac Plaza 5
are located, is a relatively new market. Approximately 50% of the 83.7 million
square feet of office space has been built since 1980. The real estate industry
in Northern Virginia has made a significant recovery from the collapse of the
market in the late 1980s, as reflected by the third quarter 1997's 95.7% overall
occupancy rate in Northern Virginia. While the exodus of tenants from
Washington, D.C. drove the Suburban market's early recovery and development,
recent growth has been independent of Washington's activity. The technology and
communications industries have transformed Northern Virginia into one of the
nation's top high-technology areas.
The Northern Virginia office market contained 83.7 million square feet of
space and the Alexandria submarket where the Company's Properties are located,
contained approximately 4.6 million square feet of office space, 2.9 million of
which is Class A, as of September 30, 1997. At that time, the Alexandria
submarket recorded overall and Class A occupancy rate of 91.7% and 90.0%,
respectively. According to Torto Wheaton's second quarter 1997 forecast, supply
is expected to outpace demand in the Alexandria submarket over the next two
years. The forecast calls for approximately 354,000 square feet of new office
space over the next two years, with net absorption of approximately 146,000
square feet for the same period.
Alexandria Office Market Demand Trends
<TABLE>
<CAPTION>
Annual Year-End
Net Absorption Occupancy Rate
-------------- --------------
<S> <C> <C>
1992 90,000 0.901
1993 108,000 0.918
1994 -42,000 0.93
1995 171,000 0.942
1996 36,000 0.949
3Q 1997 -9,000 0.947
</TABLE>
Source: Torto Wheaton Research.
Note: Time Series represents all office spance in the Alexandria submarket.
Net absorption data for 1997 represents the first three quarters of the
only. Occupancy data for 1997 is as of September 30, 1997.
Atlanta
The Company has two Properties, 200 Galleria and 191 Peachtree Street,
located in the Atlanta market. The Company holds the fee interest in 200
Galleria through a wholly-owned subsidiary. This Property is managed by CK
Atlanta Office Management, Inc. The Company holds the first mortgage on 191
Peachtree Street and an 80% partnership interest in One Ninety One Peachtree
Associates, the partnership which owns this Property. The Company's interest in
One Ninety One Peachtree Associates is accounted for on the equity method, as
the Company has substantial control over major decisions, as well as the right
to become managing general partner. The minority partner is entitled to receive
$250,000 per annum through February 28, 2000, with the Company receiving the
remaining cash flow. The Company will have the right to gain full control of the
asset through a buy-sell agreement that becomes effective in 2002.
The Company believes economic fundamentals in the Atlanta market are
positive. Atlanta is the political capital of Georgia and is considered the
economic capital of the Southeast region. With a population of approximately 3.6
million as of 1997, Atlanta is the tenth largest metropolitan area in the
nation. The MSA's median per capita personal income of $24,960 in 1995 was 8%
above the national level.
S-46
<PAGE> 49
Atlanta's pro-business attitudes and highly-skilled workforce continue to
be recognized on a national and global level. Over 400 of the Fortune 500
industrial and service companies are represented in the city. Major employers
include Delta Airlines, AT&T, Bell South, Lockheed International Systems and
Turner Broadcasting System. Office employment in Atlanta has been growing at an
average annual rate of 4.9% over the last ten years ended March 31, 1997 as
compared to 2.7% for the nation. In the year ending March 31, 1997, office
employment grew 6.5% in Atlanta, compared to 4.4% at the national level. In the
past year, services and retail trade in Atlanta have been the engines for this
growth increasing at a rate of 8.2% and 7.7%, respectively, compared to
increases of 4.3% and 2.1% observed nationwide. According to Torto Wheaton,
office employment growth over the next decade will continue to outpace
employment growth nationwide. Torto Wheaton forecasts a 2.9% average annual
increase in local office employment, compared to 2.1% nationwide.
As of September 30, 1997, the metropolitan Atlanta office market contained
a total inventory of 95.4 million square feet. The Downtown submarket, where 191
Peachtree Street is located, contained approximately 15.5 million square feet of
total office space, with over 70%, or 11 million square feet, of that total
being Class A space, as of September 30, 1997. At that time, the overall and
Class A occupancy rates for Downtown Atlanta were 83.1% and 87.3%, respectively.
According to the Torto Wheaton's second quarter 1997 forecast, the Downtown
market will continue to tighten over the next two years, with demand expected to
outpace supply. Torto Wheaton projects that 660,000 square feet of new supply
will enter the Downtown market over the next two years, with more than one
million square feet absorbed over that time period.
Downtown Atlanta Office Market Demand Trends
<TABLE>
<CAPTION>
Annual Year-End
Net Occupancy
Absorption Rate
---------- ---------
<S> <C> <C>
1992 1,290,000 0.704
1993 1,076,000 0.761
1994 539,000 0.798
1995 873,000 0.854
1996 -638,000 0.809
3Q 1997 328,000 0.831
</TABLE>
Source: Torto Wheaton Research.
Note: Time series represents all office space in Downtown Atlanta. Net
Absorption data for 1997 represents the first three quarters of the year only.
Occupancy data for 1997 is as of September 30, 1997.
S-47
<PAGE> 50
The Northwest submarket, where 200 Galleria is located, contains
approximately 18.2 million square feet of office space, with 56%, or 10.2
million of that total being Class A office space, as of September 30, 1997. At
that time, the overall and Class A occupancy rates for Northwest Atlanta were
91.4% and 90.7%, respectively. According to Torto Wheaton's second quarter 1997
forecast, 2.2 million square feet of new supply will be delivered to the
submarket over the next two years, with approximately 1.4 million square feet of
total net absorption forecasted for that same time period.
Northwest Atlanta Office Market Demand Trends
<TABLE>
<CAPTION>
Annual Year-End
Net Occupancy
Absorption Rate
---------- ---------
<S> <C> <C>
1992 746,000 0.84
1993 397,000 0.852
1994 593,000 0.886
1995 225,000 0.899
1996 889,000 0.932
3Q 1997 227,000 0.914
</TABLE>
Source: Torto Wheaton Research.
Note: Time series represents all office space in Northwest Atlanta. Net
Absorption data for 1997 represents the first three quarters of the year only.
Occupancy data for 1997 is as of September 30, 1997.
Chicago
The Company has two Properties in the Suburban Chicago area, as well as a
parcel of unimproved land in Downtown Chicago. The Company holds the fee
interest in One Lincoln Centre through a wholly-owned subsidiary. This Property
is managed by Hines pursuant to a management contract that may be terminated
upon 30 days' notice. The Company has entered into a definitive agreement to
purchase Corporate 500 Centre.
The Company believes the economic fundamentals of the Suburban Chicago
markets are strong. As of 1997, the population of the Chicago MSA was 7.8
million, making it the third largest in the country. As of 1995, the median per
capita personal income for the MSA was $27,309, which is 18% above the national
level. The Chicago area has a diversified economic base which is supported by a
number of prospering industries, including brokerage firms, air travel,
electronics, insurance, retail and printing/publishing. This diversity has
helped reduce vulnerability to economic swings, creating a stable economy.
Overall office employment has grown at an annual rate of nearly 3% over the last
ten years ending March 31, 1997, comparable to increases seen at the national
level. Over the year ending March 31, 1997, office employment in the Chicago MSA
grew by a rate of 3.8%, which is slightly lower than the 4.4% growth rate
observed nationwide.
As of September 30, 1997, the Chicago MSA contained 188 million square feet
of space, 50% of which has been built since 1980. Approximately 57% of the MSA's
office space is located Downtown, while the remainder is located in the outlying
suburbs. As of September 30, 1997, Suburban Chicago's 80 million square foot
office market had an occupancy rate of 89.9%, compared to the Downtown rate of
86.1%. The Suburban Class A market, which consisted of 30 million square feet of
space as of September 30, 1997, posted a 93.1% occupancy rate as of that time.
As of September 30, 1997, the Oak Brook submarket, where One Lincoln Centre is
located, contained 26 million square feet of office inventory, 10.2 million of
which is Class A office space. The Oak Brook submarket had overall and Class A
occupancy rates of 90.7% and 91.9%, respectively, as of September 30, 1997. The
Lake County submarket, where Corporate 500 Centre is located, contained six
million square feet of office space, 2.8 million of which is Class A, as of
September 30, 1997. The Lake Country submarket posted third quarter 1997 overall
and Class A occupancy rates of 92% and 94.3%, respectively.
New office development has returned to the Suburban Chicago market, with
Torto Wheaton's second quarter 1997 forecast calling for approximately five
million square feet to be added over the next two years.
S-48
<PAGE> 51
According to Torto Wheaton, demand is expected to lag behind supply over the
same period with total absorption being just over four million.
Suburban Chicago Office Market Demand Trends
<TABLE>
<CAPTION>
Annual Net Year-End
Absorption Occupancy Rate
---------- ---------------
<S> <C> <C> <C>
1992 530,000 0.813 0.817
1993 1,460,000 0.83 0.17
1994 2,229,000 0.855 0.145
1995 2,503,000 0.883 0.117
1996 1,529,000 0.886 0.114
3Q 1997 1,424,000 0.899 0.101
</TABLE>
Source: Torto Wheaton Research.
Note: Time series represents all office space in Suburban Chicago. Net
absorption data for 1997 represents the first three quarters of the year only.
Occupancy data for 1997 is as of September 30, 1997.
New York City
The Company has two Properties in New York City: Tower 56 and 527 Madison
Avenue. The Company, through separate wholly-owned subsidiaries, holds the fee
interest in both of these Properties. Both Properties are managed by HRO
International Ltd. ("HRO") pursuant to management contracts that may be
terminated upon 30 days' notice.
The Company believes that the economic fundamentals of the New York City
area are positive. As of 1997, the population of the New York MSA was 8.65
million people, making it the second largest MSA in the nation. The mean per
capita personal income for 1994 for the MSA was $27,975, which was 34.4% above
the national level.
Over the last decade, the New York MSA sustained significant employment
losses, mainly in the financial services area, due to the nationwide recession.
The average office employment growth over the last ten years ending March 31,
1997 decreased 0.5% annually, compared to 2.7% average increases nationwide. The
national economic recovery, coupled with Wall Street's record year, caused the
MSA to post a 3.1% gain in office employment over the year ending March 31,
1997. Over the next decade, the Torto Wheaton forecasts office employment to
remain positive in the MSA, increasing by an average of 0.6% annually compared
to 2.1% nationwide. Key factors supporting a positive view of the New York City
market include: (1) a strong local economy resulting from significant growth in
financial services, entertainment and tourism; (2) historically low crime
levels; (3) a highly educated workforce with a mean per capita income 34.3%
higher than the national average; (4) major barriers to entry, including a lack
of well-located building sites and the high cost of building new office space;
and (5) the continued trend in the market to redevelop obsolete office space for
alternative uses.
Midtown market leasing has been driven by numerous small to mid-size office
tenants in the legal, communications, entertainment and financial advisory
sectors. These firms have provided sufficient growth to partially offset net
losses from corporate restructuring and financial services consolidation.
However, due to a significant number of large tenants signing long-term leases
over the past few years, smaller transactions are expected to continue to
dominate leasing activity through 1999, when tenants who signed 10-year leases
in new buildings built in the late 1980s return to the market.
As of September 30, 1997, the Manhattan office market contained
approximately 347 million square feet of space. The Midtown submarket, where the
Properties are located, contained approximately 244 million square feet of
space, 183 million, or 75%, of which is Class A space, as of September 30, 1997.
At that time,
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<PAGE> 52
the overall and Class A occupancy rates for Midtown Manhattan were 93.1 % and
94.1%, respectively. There is currently a 1.5 million square foot office tower
(4 Times Square) under construction in the Times Square area of Midtown
Manhattan. The building, expected to be completed in 1999, is heavily pre-leased
to two large tenants.
The Midtown office market comprises 12 individual submarkets. Tower 56 is
located within Midtown's Park/Lexington market, while 527 Madison is located
within the Madison Avenue submarket. As of September 30, 1997, Class A occupancy
in the Park/Lexington and Madison Avenue submarkets was 95.1% and 94.0%,
respectively.
Midtown Manhattan Office Market Demand Trends
<TABLE>
<CAPTION>
Annual Year-End
Net Occupancy
Absorption Rate
---------- ---------
<S> <C> <C>
1992 2,228,000 0.855
1993 4,019,000 0.873
1994 744,000 0.856
1995 3,147,000 0.883
1996 4,915,000 0.906
3Q 1997 3,650,000 0.931
</TABLE>
Source: Torto Wheaton Research.
Note: Time series represents all office space in Midtown Manhattan. Net
absorption data for 1997 represents the first three quarters of the year only.
Occupancy data for 1997 is as of September 30, 1997.
Charlotte
The Company has one Property, Charlotte Plaza, located in Uptown Charlotte.
The Company holds the fee interest in this Property through two wholly-owned
subsidiaries. The Property is managed by Trammell Crow SE, Inc.
The Company believes the economic fundamentals of the Charlotte area are
positive. Charlotte is the financial services and distribution hub of the
Carolina region. Charlotte is the largest metropolitan area between Atlanta and
Washington, D.C., with a population of 1.34 million as of 1997. The median per
capita personal income in 1995 for the MSA was $22,777, which was 2% below the
national average.
Fifty-three of the Fortune 100 companies are represented within the CBD of
Uptown Charlotte. The majority of these firms are involved in the finance,
insurance and real estate industries. Major employers include Duke Power
Company, IBM Corporation, NationsBank Corporation, First Union Corporation,
Southern Bell Telephone and state and local government agencies. Over the last
ten years ending March 31, 1997, office employment in Charlotte grew at an
annual average rate of 5.4%, compared to 2.7% at the national level. Over the
year ended March 31, 1997, Charlotte's office employment growth continued to
outpace the nation's, increasing 5.9%, compared to 4.4% nationally. During the
same period, the services and government sectors' employment levels increased
6.6% and 5.8%, respectively. Over the next decade, Torto Wheaton anticipates
annual average office employment growth of 3.5% and 2.1% at the local and
national levels, respectively.
According to Karnes Research, Uptown Charlotte is currently experiencing a
multi-tenant office building boom. Transamerica Square, a 490,000 square foot
building, was completed in 1997 and was 100% leased as of September 30, 1997. In
addition, the IJL Financial Center (700,000 square feet) and 525 North Tryon
(415,000 square feet) are currently under construction for 1998 delivery. Three
First Union Center (912,000
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<PAGE> 53
square feet), to be developed by Childress Klein and anchored by First Union, is
scheduled to break ground in 1998 and to be completed in late 1999. While these
new projects are heavily pre-leased, these significant additions will cause the
Uptown office market to soften. Over the next two years, approximately two
million square feet of new inventory will be delivered, with total net
absorption of just over one million square feet.
Denver
The Company has one Property, One Norwest Center, located in Downtown
Denver. One Norwest Center is owned by 1700 Lincoln Limited, in which the
Company owns a 90% partnership interest through its wholly-owned subsidiary,
ARICO-Denver, Inc., and a 10% partnership interest through its wholly-owned
subsidiary, 1700 Lincoln Inc. This Property is managed by Hines.
The Company believes economic fundamentals in the Denver market are
positive. Key factors supporting a positive view of the Denver market include:
(1) an expanding local economy, (2) improving office occupancy rates in Downtown
Denver when certain extraordinary effects are excluded and (3) the lack of new
construction of office space. Historically, the financial district in Downtown
Denver has been a major hub for many financial institutions in the Rocky
Mountain region. The Denver population was 1.89 million as of 1997, making it
the 27th largest MSA in the country. As of 1995, the median per capita income
for the MSA was $25,501, which was 10% above the national level.
The Denver area has experienced strong growth in office employment led by a
mix of technological, communications and financial service firms, as well as
businesses engaged in tourism and miscellaneous business services. Office
employment in the Denver area grew at an average annual rate of 4.0% for the
ten-year period ended March 31, 1997, compared to 2.7% nationwide. Over the year
ended March 31, 1997, office employment in the Denver area grew 4.3%, as
compared to a national average employment growth rate of 4.4%. Over the next
decade, Torto Wheaton anticipates annual average office employment growth of
2.7% and 2.1% at the local and national levels, respectively.
As of September 30, 1997, the Denver MSA contained a total inventory of
66.3 million square feet of office space, approximately 63% of which has been
built since 1980. This increase in inventory was largely due to increased
interest in oil and gas exploration in the Rocky Mountain Region. The Downtown
submarket, where One Norwest Center is located, contained approximately 21.4
million square feet of this inventory, 11 million of which is Class A space, as
of September 30, 1997. At that time, the Downtown overall and Class A occupancy
rates were 90.4% and 93.1%, respectively. According to the second quarter 1997
Torto Wheaton forecast, over one million square feet of new supply is expected
to enter the submarket over the next two years, with approximately 1.4 million
square feet absorbed over that same time period.
Downtown Denver Office Market Demand Trends
<TABLE>
<CAPTION>
Annual Year-End
Net Occupancy
Absorption Rate
---------- ---------
<S> <C> <C>
1992 352,000 0.838
1993 373,000 0.857
1994 322,000 0.875
1995 -394,000 0.856
1996 419,000 0,876
3Q 1997 584,000 0,904
</TABLE>
Source: Torto Wheaton Research.
Note: Time series represents all office space in Downtown Denver. Net
absorption data for 1997 represents the first three quarters of the year only.
Occupancy data for 1997 is as of September 30, 1997.
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<PAGE> 54
Minneapolis
The Company has one Property, Norwest Center, located in the Minneapolis
market. Norwest Center is owned by NWC Limited Partnership ("NWC"), a
partnership in which the Company owns a 50% general partnership interest. Sixth
& Marquette Limited Partnership ("S&M") owns a 50% partnership interest in NWC.
The general partner of S&M is also a Minnesota limited partnership in which
Gerald D. Hines, individually, and entities affiliated with Gerald D. Hines are
directly or indirectly the sole general partners. The Company has the right, at
its sole discretion, to become the managing general partner of NWC. Norwest
Center is managed by Hines.
The Company believes the economic fundamentals of the Minneapolis CBD Class
A office market are strong. As of 1997, the population of the Minneapolis MSA
was 2.79 million people, making it the 14th largest MSA in the nation. As of
1995, the median per capita income for the MSA was $26,314 which is 13% above
the national average.
The economic base of the Minneapolis-St. Paul area is well diversified. The
metropolitan economy includes a broad foundation of income-producing trades
including agribusiness, computer/high technology systems, machinery
manufacturing, graphic art, government, medical, and educational institutions.
This diversification has helped prevent any major out-migrations during the past
and has led to general stability and low unemployment rates. Office employment
has been strong during the last ten years, in part because of the area's
reputation as a desirable place for corporate relocations. As of September 1996,
a total of 32 Fortune 500 companies were headquartered in the Minneapolis-St.
Paul area. Over the past ten years, office employment in the MSA grew an average
of 3.4% annually, compared to 2.7% at the national level. Over the past year
ending March 31, 1997, office employment growth slowed at the local level,
increasing 2.0% as compared to 4.4% nationally. The Torto Wheaton forecast calls
for annual average office employment growth of 2.1% at both the local and
national levels.
As of September 30, 1997, the Minneapolis MSA contained a total inventory
of 51.2 million square feet of office space, approximately 55% of which has been
built since 1980. The Minneapolis CBD, where Norwest Center is located,
contained approximately 20.6 million square feet of office space, 12.9 million
of which is Class A, as of September 30, 1997. At that time, the overall and
Class A Minneapolis CBD occupancy rates were 93.5% and 96.1%, respectively.
There is currently 1.5 million square feet of office space under construction in
two Downtown towers. Both buildings are to be 100% occupied by single tenants.
An additional office tower of approximately 900,000 square feet is planned for a
1998 groundbreaking, with over 50% of that project already leased to a single
tenant. Over the next two years, Torto Wheaton forecasts approximately 1.4
million square feet of absorption in the submarket.
Downtown Minneapolis Office Market Demand Trends
<TABLE>
<CAPTION>
Annual Year-End
Net Occupancy
Absorption Rate
---------- ---------
<S> <C> <C>
1992 401,000 0.821
1993 804,000 0.861
1994 1,147,000 0.918
1995 31,000 0.915
1996 370,000 0.933
3Q 1997 119,000 0.935
</TABLE>
Source: Torto Wheaton Research.
Note: Time series represents all office space in Downtown Minneapolis. Net
absorption data for 1997 represents the first three quarters of the year only.
Occupancy data for 1997 is as of September 30, 1997.
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<PAGE> 55
Pittsburgh
The Company has one Property, The Frick Building, located in Downtown
Pittsburgh. The Company, through a wholly-owned subsidiary, holds the fee
interest in this Property. This Property is managed by The Galbreath Company
pursuant to a management contract that may be terminated upon 30 days' notice.
Since the late 1970s, the Pittsburgh MSA has shifted its concentration from
a manufacturing economy to a more diversified economic base. In addition to its
strength in heavy industry, the city is now recognized as a major finance,
business, health care, research and educational center. As a result of
Pittsburgh's transition from a manufacturing-based economy to a diversified one,
its population steadily declined through the 1970s and 1980s. The population
began to stabilize as of 1990, and the current population is approximately 2.5
million.
Pittsburgh is the seventh largest corporate headquarters location in the
United States. Nine Fortune 500 companies have their headquarters in Pittsburgh,
including USX Corporation, PPG Industries and the H.J. Heinz Company. The
Pittsburgh area is known as one of the largest and most productive centers of
scientific and technological innovation in the nation.
As of December 31, 1997, the Pittsburgh MSA contained a total inventory of
37.3 million square feet of office space. The Pittsburgh CBD, where The Frick
Building is located, contained approximately 24.3 million square feet of this
inventory, approximately 14.6 million of which is Class A office space. As of
December 31, 1997, the overall Pittsburgh CBD occupancy rate was 86.8%, with the
Class A office market posting an 84.5% occupancy rate for that time period.
Seattle
The Company has one Property, Washington Mutual Tower, located in the
Seattle market. The project site (the "Project Site") comprises Washington
Mutual Tower and Block 6 ("Block 6"), which consists of a six-level underground
parking facility for 810 cars; an adjacent historic brick building (the Brooklyn
Building); three levels of restaurants, shops and service businesses; and, to
protect sight lines from Washington Mutual Tower, two masonry office buildings
located across the street -- the Galland and Seneca Buildings -- master leased
by Third and University Limited Partnership ("Third Partnership") through 2005
from Samis Land Company. Wright Runstad & Company has a subordinated equity
interest in Washington Mutual Tower and manages the Property for Third
Partnership.
The Project Site is owned by Third Partnership. The Company owns, through a
wholly-owned subsidiary, a 50% general partnership interest in Third
Partnership. Third Partnership is the successor in interest as lessee under a
13-year lease, expiring in 2005, of the Galland and Seneca Buildings. In
general, the Company shares revenues equally with its partner, 1212 Second
Avenue Limited Partnership ("1212 Partnership") and also receives certain
preference returns. In addition, the Company also receives cash flow that is not
shared with 1212 Partnership and is currently due a cumulative preference
deficit. The Company holds the right, at its sole discretion, to elect to become
the managing general partner of Third Partnership. 1212 Partnership, originally
the sole general partner, is now the managing general partner with the
obligation to manage and operate Third Partnership's business.
The Company believes that economic fundamentals in the Seattle market are
strong. As of 1997, the population of Seattle MSA was 2.27 million, making it
the 21st largest in the country. The median per capita personal income in 1995
for the MSA was $28,329, which was 22% above the national level. Annual office
employment growth in the Seattle area has outpaced the nation over the last
decade, increasing 4.7% on average compared to 2.7% at the national level. In
the year ended March 31, 1997, local office employment grew 7.3%, compared to
4.4% nationally. Seattle's job base has become increasingly diversified over the
last 15 years, thus reducing its dependence on the Boeing Company as an
employer. In addition, the Seattle CBD has one of the highest Class A office
occupancy rates in the nation (97% as of September 30, 1997). The Torto Wheaton
forecasts call for healthy office employment growth over the next decade, with a
3.3% average annual growth rate for the MSA compared to 2.1% for the nation.
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<PAGE> 56
The economy in the Seattle and surrounding Puget Sound area is fairly well
diversified. The largest employment sector is the services sector, accounting
for approximately 27% of the total non-agricultural employment in the region.
The next largest employment sector is wholesale and retail trade at
approximately 25% of total 1995 non-agricultural employment. Forest products,
pulp, paper, aircraft, ships and seafood products are recognized as the
traditional components of the region's economic base. Several services, such as
transportation, engineering and finance, are also exported and thus considered
base industries. An increasing share of software and durable goods is also
exported, making these industries significant contributors to the economic base.
The area has consistently experienced relatively low unemployment in recent
years, with rates below the national average, but did experience slight
decreases in employment due to layoffs at Boeing during the early 1990s.
As of September 30, 1997, the Seattle MSA contained a total inventory of
54.0 million square feet of office space, approximately 61% of which has been
built since 1980. The Seattle CBD, where Washington Mutual Tower is located,
contained approximately 16 million square feet of the metropolitan inventory and
13 million square feet of Class A office space, as of September 30, 1997. At
that time, the overall and Class A occupancy rates in the Seattle CBD were 95%
and 97.1%, respectively. According to the second quarter 1997 Torto Wheaton
forecast, the Seattle CBD office market is expected to tighten over the next two
years, with absorption outpacing demand by a margin of greater than 2:1. The
Torto Wheaton forecasts call for approximately 620,000 square feet of new
inventory to be added to the CBD over the next two years, with absorption
totalling approximately 1.4 million for the same period.
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<PAGE> 57
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following tables set forth certain information concerning the Company's
directors and executive officers. Officers of the Company serve at the
discretion of the Board. In addition to the Company's executive officers, 13
full-time employees assist with the management of the Company's day-to-day
operations.
<TABLE>
<CAPTION>
NAME AGE POSITION
-------------------------- ----- -------------------------------------------------------
<S> <C> <C>
John S. Moody(1).......... 49 Chairman of the Board, Director, President and Chief
Executive Officer
Rodney C. Dimock.......... 51 Executive Vice President and Chief Operating Officer
Scott M. Dalrymple........ 38 Vice President - Asset Management
Thomas P. Loftus.......... 39 Vice President, Secretary and Controller
Kevin P. Mahoney.......... 36 Vice President, Treasurer and Assistant Secretary
Thomas A. Nye............. 32 Vice President - Acquisitions
Francis H. Shields, Jr.... 33 Vice President - Acquisitions
Peter Smichenko........... 34 Vice President - Asset Management
Robert T. Sorrentino...... 43 Vice President - Asset Management
Scott M. Haley............ 27 Assistant Vice President - Finance
Dick van den Bos.......... 57 Director; Director of Property Investment for PGGM
Cecil D. Conlee........... 60 Director; Chairman of the Conlee Company and CGR
Advisors, Director of Oxford Industries Inc. and
Central Parking Corp. and Managing Director of Rodamco
George A. Davis........... 58 Director; Real Estate Investment Officer for NYSTRS
Blake Eagle............... 63 Director; Chairman of the Center of Real Estate at the
Massachusetts Institute of Technology
Dr. Karl-Ludwig Hermann... 62 Director; Independent Financial Consultant
Hans C. Mautner........... 59 Director; Chairman, Chief Executive Officer and Trustee
of Corporate Property Investors
Dr. Lutz Mellinger........ 56 Director; Managing Director of Deutsche Bank AG
Gerald Rauenhorst......... 69 Director; Chairman of the Board of Opus U.S.
Corporation and Opus U.S. L.L.C. and Director of
ConAgra, Inc.
Michael J.G. Topham....... 49 Director; Executive Vice President and member of the
Executive Committee of Hines Interests Limited
Partnership
Jan van der Vlist......... 43 Director; Deputy Director of Real Estate Investments
for PGGM
</TABLE>
- ---------------
(1) Mr. Moody is currently a Director and Chairman of the Compensation Committee
of Meridian Industrial Trust.
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<PAGE> 58
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
For a discussion of material federal income tax consequences applicable to
distributions to stockholders and the Company's election to be taxed as a REIT,
see "Federal Income Tax Considerations" in the accompanying Prospectus. The
following discussion of certain federal income tax considerations supplements,
and to the extent inconsistent therewith replaces, the discussion set forth
under "Federal Income Tax Considerations" in the accompanying Prospectus.
THE TAXPAYER RELIEF ACT OF 1997
The Taxpayer Relief Act of 1997 (the "1997 Tax Act") contains significant
changes to (a) the requirements for qualification as a REIT, (b) the taxation of
capital gains of individuals, trusts and estates and (c) the taxation of REITs
and their stockholders. Such changes are effective for the Company's taxable
years beginning on or after January 1, 1998. In addition to the changes
described below, the 1997 Tax Act also contains a number of technical provisions
that reduce the risk that a REIT will inadvertently fail to qualify as a REIT.
REPEAL OF 30% GROSS INCOME REQUIREMENT
Prior to the 1997 Tax Act, less than 30% of the Company's gross income
(including gross income from prohibited transactions) was required to be derived
from the sale or other disposition of (a) stock or securities held for less than
one year, (b) property in a "prohibited transaction" and (c) real property held
for less than four years (apart from involuntary conversions and sales of
foreclosure property). The 1997 Tax Act repealed this requirement for the
Company's taxable years beginning on or after January 1, 1998.
DE MINIMIS RULE FOR TENANT SERVICES INCOME
In determining whether a REIT satisfies the 75% and 95% gross income
requirements, "rents from real property" do not include "impermissible tenant
service income," which is, with respect to any real or personal property, any
amount received or accrued directly or indirectly by the REIT for (a) services
furnished or rendered by the REIT to the tenants of such property or (b)
managing or operating such property. However, "impermissible tenant service
income" does not include amounts derived from (a) services furnished or
rendered, or management or operation provided, through an "independent
contractor" who is adequately compensated and from whom the REIT does not derive
any income and (b) services that are "usually or customarily rendered" in
connection with the rental of room or other space for occupancy only and are not
otherwise considered "rendered to the occupant."
Prior to the 1997 Tax Act, any impermissible tenant services income
received by a REIT from a property caused all rents from such property to be
treated as income other than "rents from real property." Under the 1997 Tax Act,
effective for the Company's taxable years beginning on or after January 1, 1998,
all of the rental income derived by a REIT with respect to a property will not
cease to qualify as "rents from real property" if the "impermissible tenant
services income" from such property (which is deemed to be an amount that is no
less than 150% of the REIT's direct costs of furnishing or rendering the service
or providing the management or operation) does not exceed 1% of all amounts
received or accrued during the taxable year directly or indirectly by the REIT
with respect to such property.
DETERMINATION OF ACTUAL OWNERSHIP OF OUTSTANDING SHARES
In general, a REIT is required to comply each taxable year with certain
Treasury Regulations for the purpose of ascertaining the actual ownership of its
outstanding shares. Prior to the 1997 Tax Act, a REIT's failure to comply with
such Regulations potentially would have resulted in its disqualification as a
REIT. Under the 1997 Tax Act, effective for the Company's taxable years
beginning on or after January 1, 1998, a REIT's failure to comply would instead
result in a monetary fine imposed on such REIT. However, no penalty would be
imposed if such failure is due to reasonable cause and not to willful neglect.
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<PAGE> 59
TAXATION OF CAPITAL GAINS
Under the 1997 Tax Act, for gains realized after July 28, 1997, subject to
certain exceptions, the maximum rate of tax on net capital gains of individuals,
trusts and estates from the sale or exchange of capital assets held for more
than 18 months has been reduced to 20%, and the maximum rate is reduced to 18%
for assets acquired after December 31, 2000 and held for more than five years.
For taxpayers who would be subject to a maximum tax rate of 15%, the rate on net
capital gains is reduced to 10%, and effective for taxable years commencing
after December 31, 2000, the rate is reduced to 8% for assets held for more than
five years. The maximum rate for net capital gains attributable to the sale of
depreciable real property held for more than 18 months is 25% to the extent of
the deductions for depreciation with respect to such property. The maximum rate
of capital gains tax for capital assets held more than one year but not more
than 18 months remains at 28%. The taxation of capital gains of corporations was
not changed by the 1997 Tax Act.
TREATMENT OF UNDISTRIBUTED CAPITAL GAINS
To the extent that the Company does not distribute all of its net capital
gain, it will be subject to tax on the undistributed amount of net capital gain.
Under the 1997 Tax Act, for the Company's taxable years beginning on or after
January 1, 1998, the Company may elect to retain and pay the tax on its net
undistributed long-term capital gains on behalf of its stockholders, in which
case the stockholders would include in income their proportionate share of the
undistributed long-term capital gains and receive a credit or refund for their
share of the tax paid by the Company.
Notwithstanding such an election, the Company apparently continues to be
subject to the rule that if the Company fails to distribute during each calendar
year at least the sum of (a) 85% of its REIT ordinary income for such year, (b)
95% of its capital gain net income for such year and (c) any undistributed
taxable income from prior periods, the Company would to be subject a 4% excise
tax on the excess of such required distribution over the amounts actually
distributed.
DESIGNATION OF CAPITAL GAIN DIVIDENDS
Dividends to U.S. stockholders that are properly designated by the Company
as capital gain dividends are subject to special treatment. According to a
recently published Internal Revenue Service ("IRS") notice, until further
guidance is issued, if the Company designates a dividend as a capital gain
dividend, it may also designate the dividend as (i) a 20% rate gain
distribution, (ii) an unrecaptured section 1250 gain distribution (25% rate) or
(iii) a 28% rate gain distribution. The maximum amount which may be designated
in each class of capital gain dividends is determined by treating the Company as
an individual with capital gains that may be subject to the maximum 20% rate,
the maximum 25% rate, and the maximum 28% rate. If the Company does not
designate all or part of a capital gain dividend as within such classes, the
undesignated portion will be considered as a 28% rate gain distribution. Such
designations are binding on each stockholder, without regard to the period for
which the stockholder has held his stock.
In addition, if the Company elects to pay tax on its undistributed
long-term capital gains on behalf of its stockholders (as discussed above in
"-- Treatment of Undistributed Capital Gains"), the undistributed long-term
capital gains are considered to be designated as capital gain dividends and
therefore eligible for further designation as one of the three types of capital
gain distributions.
ADDITIONAL SPECIAL TAX CONSIDERATIONS FOR FOREIGN STOCKHOLDERS
In general, the sale or other taxable disposition ("sale") of Common Stock
by a Five Percent Non-U.S. Stockholder (as defined below) is subject to United
States income tax unless and until the Company becomes a domestically controlled
REIT. A "Five Percent Non-U.S. Stockholder" is a Non-U.S. Stockholder who, at
some time during the five-year period preceding such sale, beneficially owned
(including under certain rules of constructive ownership) more than five percent
of the total fair market value of the Common Stock (as outstanding from time to
time) or owned shares of another class of stock of the Company that represented
value equivalent to five percent of the Common Stock (measured at the time such
shares were acquired). For so long as the Company continues to be regularly
traded on an established securities market, the sale of shares
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<PAGE> 60
by any other Non-U.S. Stockholder is generally not subject to United States
federal income tax (unless any gain realized therefrom is effectively connected
with a trade or business conducted by such Non-U.S. Stockholder in the United
States or, in the case of a nonresident alien individual, such person is present
in the United States for more than 182 days during the taxable year and certain
other requirements are met).
A REIT is a "domestically controlled REIT" if, at all times during the
five-year period preceding the relevant testing date, less than 50 percent in
value of its shares is held directly or indirectly by Non-U.S. Stockholders
(taking into account those persons required to include the Company's dividends
in income for United States federal income tax purposes). Currently, more than
50 percent in value of the Company's shares is held directly or indirectly by
Non-U.S. Stockholders, and the Company will not qualify as a domestically
controlled REIT for at least five years following such date when less than 50
percent is so held. Further, in part because the Common Stock is publicly traded
in the United States and Germany, no assurance can be given that the Company
will qualify as a domestically controlled REIT even following such five-year
period.
So long as the Company is not a domestically controlled REIT, a Five
Percent Non-U.S. Stockholder will be taxable in the same manner as a U.S.
Stockholder with respect to gain on the sale of Common Stock (subject to
applicable alternative minimum tax and a special alternative minimum tax in the
case of nonresident alien individuals).
Even if the sale of shares of Common Stock by a Non-U.S. Stockholder is not
subject to United States federal income taxation under the above rules, a
Non-U.S. Stockholder would be subject to United States federal income taxation
on any gain from such a sale if either (i) such gain is effectively connected
with the conduct of a trade on business in the United States by such Non-U.S.
Stockholder (in which case the gain will be taxable on a net basis) or (ii) the
Non-U.S. Stockholder is a nonresident alien individual who is present in the
United States for more than 182 days during the taxable year and certain other
requirements are met (in which case such gain will be subject to a 30% tax on a
gross basis).
In all cases, a Non-U.S. Stockholder would remain subject to United States
federal income tax in respect of such Non-U.S. Stockholder's share of any
distribution by the Company to the extent attributable to gain recognized from
the sale of a United States real property interest.
In addition, under recently issued final Treasury Regulations (the "Final
Regulations"), dividends paid to an address outside the United States are no
longer presumed to be paid to a resident of such country for the purpose of
determining the applicability of withholding taxes and the availability of a
reduced tax treaty rate. In addition, the Final Regulations also address certain
issues relating to intermediary certification procedures designed to simplify
compliance by withholding agents. The Final Regulations are generally effective
for payments made on or after January 1, 1999, subject to certain transition
rules. Prospective foreign investors should consult their own tax advisors
concerning the adoption of the Final Regulations and the potential effect on
their ownership of Common Stock.
THE FOREGOING IS A GENERAL SUMMARY OF THE REASON FOR THE REIT AMENDMENT AND
THE ANTICIPATED FEDERAL INCOME TAX CONSEQUENCES TO STOCKHOLDERS THAT MAY RESULT
FROM THE REIT AMENDMENT. THE FOREGOING DISCUSSION IS NOT TAX ADVICE AND IT DOES
NOT DEAL WITH ALL TAX ASPECTS THAT MIGHT BE RELEVANT TO A PARTICULAR
STOCKHOLDER. EACH STOCKHOLDER SHOULD CONSULT SUCH STOCKHOLDER'S OWN TAX ADVISOR
WITH RESPECT TO THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF
A SALE OF COMMON STOCK.
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<PAGE> 61
UNDERWRITING
Subject to the terms and conditions contained in the terms agreement and
related underwriting agreement (collectively, the "Underwriting Agreement"),
the Company has agreed to sell to each of the Underwriters named below (the
"Underwriters"), and each of the Underwriters for whom Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("Merrill Lynch"), BT Alex. Brown Incorporated,
Lazard Freres & Co. LLC, Lehman Brothers Inc., Morgan Stanley & Co.
Incorporated, NationsBanc Montgomery Securities LLC and Smith Barney Inc. are
acting as representatives (the "Representatives") has severally agreed to
purchase from the Company, the respective number of shares of Common Stock set
forth after its name below. The Underwriting Agreement provides that the
obligations of the Underwriters are subject to certain conditions precedent and
that the Underwriters will be obligated to purchase all the shares of Common
Stock if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERWRITER OF COMMON STOCK
------------------------------------------------------------- ----------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith Incorporated...........
BT Alex. Brown Incorporated..................................
Lazard Freres & Co. LLC......................................
Lehman Brothers Inc..........................................
Morgan Stanley & Co. Incorporated............................
NationsBanc Montgomery Securities LLC........................
Smith Barney Inc.............................................
----------
Total........................................... 16,250,000
==========
</TABLE>
The Representatives have advised the Company that the Underwriters propose
initially to offer the Common Stock to the public at the public offering price
set forth on the cover page of this Prospectus Supplement, and to certain
dealers at such price less a concession not in excess of $ per share.
The Underwriters may allow, and such dealers may reallow, a discount not in
excess of $ to certain other dealers. After the initial public
offering, the public offering price, concession and discount may be changed.
The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus Supplement, to purchase up
to an aggregate of additional 2,437,500 shares of Common Stock at the price to
the public set forth on the cover page of this Prospectus Supplement, less the
underwriting discount. The Underwriters may exercise this option only to cover
over-allotments, if any. If the Underwriters exercise this option, each of the
Underwriters will have a firm commitment, subject to certain conditions, to
purchase approximately the same percentage thereof that the number of shares of
Common Stock to be purchased by it shown in the foregoing table bears to the
16,250,000 shares of Common Stock offered hereby.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments the Underwriters may be required to make in respect thereof.
The Company and the directors and executive officers of the Company, as
well as NYSTRS, Rodamco, PGGM and DIHC, have agreed that for a period of 90 days
from the date of this Prospectus Supplement, they will not, without prior and
written consent of Merrill Lynch, offer, sell or otherwise dispose of any shares
of Common Stock or any other security convertible into or exercisable for shares
of Common Stock.
S-59
<PAGE> 62
Merrill Lynch has from time to time provided investment banking and
financial advisory services to the Company. Merrill Lynch and Lazard Freres &
Co. LLC served as financial advisors to the Company in connection with the DIHC
Acquisition and received customary compensation in connection therewith.
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters and
certain selling group members to bid for or purchase of shares of Common Stock.
As an exception to these rules, the Representatives are permitted to engage in
certain transactions that stabilize the price of the Common Stock. Such
transactions may consist of bids or purchases for the purpose of pegging, fixing
or maintaining the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offering (i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus Supplement), the
Representatives may reduce that short position by purchasing Common Stock in the
open market. The Representatives also may elect to reduce any short position by
exercising all or part of the over-allotment option described herein.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the
Representatives will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Lionel Sawyer & Collins, Las Vegas, Nevada. Certain legal matters
related to the sale of the shares of Common Stock will be passed upon for the
Company by Shearman & Sterling, New York, New York. In addition, the
descriptions of federal income tax consequences contained in the section of this
Prospectus Supplement entitled "Certain Federal Income Tax Considerations" and
in the section of the accompanying Prospectus entitled "Federal Income Tax
Considerations" are based upon the opinion of Shearman & Sterling. Certain legal
matters related to the Offering will be passed upon for the Underwriters by
Rogers & Wells, New York, New York.
S-60
<PAGE> 63
CORNERSTONE PROPERTIES INC. AND SUBSIDIARIES
INDEX TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AND NOTES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Condensed Consolidated Pro Forma Balance Sheet as of September 30, 1997............... F-2
Condensed Consolidated Pro Forma Statement of Operations for the nine months ended
September 30, 1997.................................................................. F-3
Condensed Consolidated Pro Forma Statement of Operations for the year ended
December 31, 1996................................................................... F-4
Notes to Condensed Consolidated Pro Forma Financial Statements........................ F-5
</TABLE>
F-1
<PAGE> 64
CORNERSTONE PROPERTIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED PRO FORMA BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
(1)
PREVIOUSLY (2) (2) (3)
HISTORICAL REFLECTED SIXTY STATE CORPORATE PRO FORMA PRO FORMA
CORNERSTONE ADJUSTMENTS STREET 500 CENTRE ADJUSTMENTS CORNERSTONE
----------- ----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Assets
Real estate investments..... $ 875,714 $ 1,094,870 $ 222,222 $ 151,050 $ -- $ 2,343,856
Less: Accumulated
depreciation............. 219,881 -- -- -- -- 219,881
-------- ---------- -------- ---------- --------- -----------
Real estate investments,
net...................... 655,833 1,094,870 222,222 151,050 -- 2,123,975
Other assets................ 316,152 (199,382) -- -- 43,771 160,541
-------- ---------- -------- ---------- --------- -----------
Total assets................ $ 971,985 $ 895,488 $ 222,222 $ 151,050 $ 43,771 $ 2,284,516
======== ========== ======== ========== ========= ===========
Liabilities
Long-term debt.............. $ 366,830 $ 250,000 $ 89,630 $ 80,000 $ -- $ 786,460
Other liabilities........... 84,528 67,548 132,592 51,050 (251,190) 84,528
-------- ---------- -------- ---------- --------- -----------
Total liabilities........... 451,358 317,548 222,222 131,050 (251,190) 870,988
-------- ---------- -------- ---------- --------- -----------
Minority interest............. (17,356) 30,940 -- 15,155 -- 28,739
Redeemable preferred stock.... -- -- -- -- -- --
Stockholders' investment...... 537,983 547,000 -- 4,845 294,961 1,384,789
-------- ---------- -------- ---------- --------- -----------
Total liabilities and
stockholders' investment.... $ 971,985 $ 895,488 $ 222,222 $ 151,050 $ 43,771 $ 2,284,516
======== ========== ======== ========== ========= ===========
</TABLE>
F-2
<PAGE> 65
CORNERSTONE PROPERTIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
(1)
PREVIOUSLY (2) (2) (4)
HISTORICAL REFLECTED SIXTY STATE CORPORATE PRO FORMA PRO FORMA
CORNERSTONE ADJUSTMENTS STREET 500 CENTRE ADJUSTMENTS CORNERSTONE
----------- ----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues
Office and parking
rentals............... $ 103,237 $80,249 $19,349 $ 10,390 $ $ 213,225
Equity in earnings of
joint ventures........ -- (2,321) -- -- -- (2,321)
Interest and other
income................ 8,432 12,608 811 3,759 -- 25,610
-------- ------- ------- ------- ------- --------
Total Revenues... 111,669 90,536 20,160 14,149 -- 236,514
-------- ------- ------- ------- ------- --------
Expenses
Building operating
expenses.............. 40,246 29,250 8,585 4,247 -- 82,328
Interest expense......... 22,395 16,757 4,324 4,050 (3,729) 43,797
Depreciation and
amortization.......... 20,865 12,782 4,163 2,266 40,076
General and
administrative........ 5,134 375 -- -- -- 5,509
-------- ------- ------- ------- ------- --------
Total Expenses... 88,640 59,164 17,072 10,563 (3,729) 171,710
-------- ------- ------- ------- ------- --------
Other income (expenses)
Net gain on interest rate
swap.................. 99 -- -- -- -- 99
Minority Interest........ (1,408) (1,734) -- -- -- (3,142)
-------- ------- ------- ------- ------- --------
Income before extraordinary
loss..................... 21,720 29,638 3,088 3,586 3,729 61,761
-------- ------- ------- ------- ------- --------
Extraordinary Loss......... (54) -- -- -- -- (54)
Net Income................. $ 21,666 $29,638 $ 3,088 $ 3,586 $ 3,729 $ 61,707
======== ======= ======= ======= ======= ========
Preferred Dividends........ 9,285 (6,660) -- -- -- 2,625
Income available for Common
Stockholders............. $ 12,381 $36,298 $ 3,088 $ 3,586 $ 3,729 $ 59,082
======== ======= ======= ======= ======= ========
Income Before Extraordinary
Loss per Share........... $ 0.37 $ 0.59
======== ========
Net Income per Share....... $ 0.37 $ 0.59
======== ========
Weighted Shares
Outstanding.............. 33,494 100,431
======== ========
</TABLE>
F-3
<PAGE> 66
CORNERSTONE PROPERTIES INC. AND SUBSIDIARIES
CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
(1)
PREVIOUSLY (2) (2)
HISTORICAL REFLECTED SIXTY STATE CORPORATE PRO FORMA PRO FORMA
CORNERSTONE ADJUSTMENTS STREET 500 CENTRE ADJUSTMENTS CORNERSTONE
------------ ----------- -------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues
Office and parking
rentals................. $111,494 $ 134,034 $ 25,514 $ 14,126 $ -- $ 285,168
Equity in earnings of joint
ventures................ -- (333) -- -- -- (333)
Interest and other
income.................. 5,414 19,048 1,005 5,638 -- 31,105
-------- -------- ------- ------- -------- --------
Total revenues..... 116,908 152,749 26,519 19,764 -- 315,940
-------- -------- ------- ------- -------- --------
Expenses
Building operating
expenses................ 44,188 50,859 12,045 6,029 -- 113,121
Interest expense........... 31,735 21,256 6,070 5,400 (4,973)(4) 59,488
Depreciation and
amortization............ 24,316 19,881 5,550 3,021 52,768
General and
administrative.......... 6,407 500 -- -- -- 6,907
-------- -------- ------- ------- -------- --------
Total expenses..... 106,646 92,496 23,665 14,450 4,973 232,284
-------- -------- ------- ------- -------- --------
Other income (expenses)
Net gain on interest rate
swap.................... 4,278 -- -- -- -- 4,278
Minority interest.......... (1,519) (2,236) -- -- -- (3,755)
-------- -------- ------- ------- -------- --------
Income before extraordinary
loss....................... 13,021 58,017 2,854 5,314 4,973 84,179
-------- -------- ------- ------- -------- --------
Extraordinary Loss........... (3,925) -- -- -- -- (3,925)
Net Income................... $ 9,096 $ 58,017 $ 2,854 $ 5,314 $ 4,973 $ 80,254
======== ======== ======= ======= ======== ========
Preferred Dividends.......... 5,153 (1,653) -- 3,500
Income available for Common
Stockholders............... $ 3,943 $ 59,670 $ 2,854 $ 5,314 $ 4,973 $ 76,754
======== ======== ======= ======= ======== ========
Income Before Extraordinary
Loss per Share............. $ 0.39 $ 0.81
======== ========
Net Income per Share......... $ 0.19 $ 0.77
======== ========
Weighted Shares
Outstanding................ 20,411 99,821
======== ========
</TABLE>
F-4
<PAGE> 67
CORNERSTONE PROPERTIES INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
The unaudited condensed consolidated pro forma statements of operations are
presented as if the offerings, sales and conversions of the various securities
sold by the Company (and the application of the proceeds thereof) and the
various acquisitions of the Company had occurred as of January 1, 1996. The
unaudited condensed consolidated pro forma balance sheet is presented as if the
transactions described above which occurred after September 30, 1997 had
occurred at September 30, 1997. The pro forma condensed consolidated 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.
(1) Represents the adjustments for Cornerstone's offering of Common Stock in
April 1997, the sale of the Company's 8% Cumulative Convertible Preferred
Stock and 8% Cumulative Convertible Preferred Stock, Series A, the Company's
repayment of a $32.5 million term loan from Deutsche Bank AG and the
acquisition of the DIHC Properties previously reflected in the 8-K dated
December 19, 1997.
(2) Represents the acquisition and income of Sixty State Street and Corporate
500 Centre, including straight line rent, depreciation and mortgage interest
expense.
(3) Represents the Offering proceeds (16,250,000 shares at $19.31 per share)
less Offering costs estimated at $18.8 million including Underwriters'
discount.
(4) Represents the interest savings resulting from the line of credit repayment.
F-5
<PAGE> 68
(This Page Intentionally Left Blank)
<PAGE> 69
PROSPECTUS
$700,000,000
CORNERSTONE PROPERTIES INC.
Common Stock
------------------------
Cornerstone Properties Inc. ("Cornerstone" or the "Company") may offer from
time to time shares of its Common Stock, with no par value ("Common Stock"),
with an aggregate public offering price of up to $700,000,000 in amounts, at
prices and on terms to be determined at the time of offering and set forth in
one or more supplements to this Prospectus (each a "Prospectus Supplement").
The number of the shares and specific terms of the Common Stock in respect
of which this Prospectus is being delivered (the "Offered Securities") will be
set forth in an accompanying Prospectus Supplement, including the initial public
offering price and the net proceeds to the Company.
The applicable Prospectus Supplement will also contain information, where
applicable, about certain United States federal income tax considerations
relating to, and any listing on a securities exchange of, the Offered Securities
covered by such Prospectus Supplement.
The Common Stock may be offered by the Company directly to one or more
purchasers, through agents designated from time to time by the Company or
through dealers or underwriters. If any agents of the Company or any dealers or
underwriters are involved in the offering of Common Stock in respect of which
this Prospectus is being delivered, the names of such agents, dealers or
underwriters and any applicable purchase price, fee, commission or discount will
be set forth, or will be calculable from the information set forth, in the
accompanying Prospectus Supplement, together with the net proceeds to the
Company. See "Plan of Distribution". This Prospectus may not be used to
consummate sales of Common Stock unless accompanied by a Prospectus Supplement
describing the method and terms of the offering of such Common Stock.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
------------------------
The date of this Prospectus is March 12, 1997.
<PAGE> 70
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS OR ANY
ACCOMPANYING PROSPECTUS SUPPLEMENT IN CONNECTION WITH THE OFFER MADE BY THIS
PROSPECTUS OR ANY PROSPECTUS SUPPLEMENT AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR BY ANY UNDERWRITER, DEALER OR AGENT. THIS PROSPECTUS AND ANY
PROSPECTUS SUPPLEMENT DO NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN THOSE TO WHICH THEY RELATE. NEITHER THE
DELIVERY OF THIS PROSPECTUS AND ANY ACCOMPANYING PROSPECTUS SUPPLEMENT NOR ANY
SALE OF OR OFFER TO SELL THE OFFERED SECURITIES SHALL, UNDER ANY CIRCUMSTANCES,
CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY OR THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME AFTER THE DATE
HEREOF. THIS PROSPECTUS AND ANY ACCOMPANYING PROSPECTUS SUPPLEMENT DO NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
OFFERED SECURITIES IN ANY STATE TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE
SUCH OFFER OR SOLICITATION IN SUCH STATE.
------------------------
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement (of which this Prospectus is a part) on
Form S-3 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the Offered Securities. This Prospectus does not contain all the
information set forth in the Registration Statement, certain portions of which
have been omitted as permitted by the rules and regulations of the Commission,
and in the exhibits thereto. Statements contained in this Prospectus as to the
content of any contract or other document are not necessarily complete, and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference and the exhibits and schedules
thereto. For further information regarding the Company and the Offered
Securities, reference is hereby made to the Registration Statement and such
exhibits and schedules, which may be examined without charge at, or copies
obtained upon payment of prescribed fees from, the Commission and its regional
offices listed below.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements, and other information with the
Commission. The Registration Statement, as well as such reports, proxy
statements and other information filed with the Commission, 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 Commission's
Regional Offices at Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661, and Seven World Trade Center, 13th Floor, New York, New
York 10048. Copies of such material also can be obtained from the Public
Reference Section of the Commission, Washington, D.C. 20549 at prescribed rates.
The Company files its reports, proxy statements and other information with the
Commission electronically. The Commission maintains a Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission at http://www.sec.gov.
2
<PAGE> 71
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents have been filed by the Company under the Exchange
Act with the Commission and are incorporated by reference in this Prospectus:
1. The Company's Annual Report on Form 10-K for the year ended December 31,
1996, as amended by the Company's Report on Form 10-K/A, dated March 10,
1997, filed with the Commission pursuant to the Exchange Act.
2. The Company's Report on Form 10-K/A, dated February 21, 1997, amending
the Company's Annual Report on Form 10-K for the year ended December 31,
1995, filed with the Commission pursuant to the Exchange Act.
3. The Company's Current Report on Form 8-K, dated January 29, 1997, filed
with the Commission pursuant to the Exchange Act.
4. The Company's Current Reports on Form 8-K/A, dated January 22, 1997,
February 24, 1997, February 24, 1997 and March 10, 1997, filed with the
Commission pursuant to the Exchange Act.
5. The description of the Company's Common Stock contained in Item 10 of
Form 10 filed with the Commission on April 30, 1982, pursuant to Section
12(g) of the Exchange Act, including all amendments and reports updating
such description.
All documents and reports filed by the Company pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date of filing hereof and prior
to the date on which the Company ceases offering and selling Common Stock
pursuant to this Prospectus shall be deemed to be incorporated by reference in
this Prospectus and to be a part hereof from the dates of filing of such
documents. Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document that also is or is deemed to be
incorporated by reference herein 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 Prospectus.
The Company will furnish without charge to each person, including any
beneficial owner, to whom this Prospectus and the accompanying Prospectus
Supplement are delivered, upon the written or oral request of such person, a
copy of any or all of the documents incorporated herein by reference, other than
exhibits to such documents unless such exhibits are specifically incorporated by
reference into the Registration Statement to which this Prospectus relates or
into such other documents. Requests for documents should be directed to
Cornerstone Properties Inc., Tower 56, 126 East 56th Street, New York, New York
10022, Attention: Secretary (telephone number: (212) 605-7100).
3
<PAGE> 72
THE COMPANY
The Company is a self-advised equity real estate investment trust ("REIT").
Since its formation in 1981, the Company has developed three office properties
in geographically diverse cities of the United States -- Denver, Colorado,
Minneapolis, Minnesota and Seattle, Washington. The Company has also acquired
five office buildings in Boston, Massachusetts, New York, New York, Oakbrook
Terrace, Illinois and Pittsburgh, Pennsylvania. Seven of the eight properties
were built in the mid- to late-1980s and the eighth was fully renovated in the
late 1980s.
The Company's business objective is to increase its funds from operations
by generating sustainable current cash flow and providing capital appreciation
through investments in the office real estate markets of the United States. The
general strategy of the Company is to invest in larger, high-quality office
buildings in major metropolitan markets in the United States. The Company
intends to focus on office properties in central business district locations, as
well as in highly developed suburban markets. Highly qualified, local property
managers are hired to manage the Company's properties on a day-to-day basis.
This allows Cornerstone personnel to remain focused on financing, budgeting,
leasing and other major decisions regarding the properties.
The Company does not intend to undertake any major new business assignments
other than the management of the Company's own portfolio in order to avoid
potential conflicting priorities or the need to serve multiple clients. The
Company continues to have advisory responsibilities to three clients which were
undertaken earlier, but these responsibilities will be terminated by July 1,
1997 and, in any case, are estimated to occupy a minimal amount of management
time.
The principal executive offices of the Company are located at Tower 56, 126
East 56th Street, New York, New York 10022, and its telephone number at that
location is (212) 605-7100. The Company was organized under the laws of the
State of Nevada in May 1981.
USE OF PROCEEDS
Unless otherwise described in the applicable Prospectus Supplement, the
Company intends to use the net cash proceeds from the sale of Offered Securities
for general corporate purposes, including working capital, repayment of
indebtedness, investment in new properties or maintenance or improvement of
currently owned properties. The Prospectus Supplement relating to a particular
sale of Offered Securities will set forth the Company's intended use for the net
proceeds received from the sale of such Offered Securities. Pending application
of the net proceeds of any sale of Offered Securities to such uses, the Company
may invest such net proceeds in short-term liquid investments which are
consistent with the Company's intention to qualify for taxation as a REIT. Such
investments may include, for example, government and government agency
securities, certificates of deposit, interest-bearing bank deposits, investment
grade commercial paper and mutual funds investing in similar instruments.
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
The authorized capital stock of the Company consists of 100,000,000 shares
of Common Stock and 15,000,000 shares of Preferred Stock, with no par value
("Preferred Stock"). Stockholders have no preemptive or other rights to
subscribe for or purchase any proportionate part of any new or additional shares
of stock of any class or of securities convertible into stock of any class. The
following brief description of the capital stock of the Company does not purport
to be complete and is subject in all respects to applicable Nevada law and to
the provisions of the Company's Restated Articles of Incorporation (the
"Articles of Incorporation") and Bylaws, as amended, and to the respective
certificates of designations for each series of Preferred Stock, copies of which
are exhibits to the Registration Statement of which this Prospectus is a part.
4
<PAGE> 73
COMMON STOCK
The Company had 20,853,661 shares of Common Stock outstanding at January
31, 1997. Subject to the provisions of the Articles of Incorporation regarding
preservation of the Company's REIT status, each outstanding share of Common
Stock entitles the holder thereof to one vote on all matters presented to
stockholders for a vote. There are no cumulative voting rights with respect to
the election of directors. Holders of Common Stock have no conversion, sinking
fund or redemption rights. All of the Offered Securities will be, when issued,
fully paid and nonassessable.
The holders of the Common Stock are entitled to receive dividends when, as
and if declared by the Board of Directors of the Company out of funds legally
available therefor, subject to the terms of any Preferred Stock at the time
outstanding and to the provisions of the Articles of Incorporation regarding
preservation of the Company's REIT status. In the event of the liquidation of
the Company, each outstanding share of Common Stock is entitled to participate
pro rata in the assets remaining after payment of, or adequate provision for,
all known debts and liabilities of the Company.
The Transfer Agent and Registrar for the Common Stock is Boston EquiServe.
PREFERRED STOCK
Under the Articles of Incorporation, the Board of Directors of the Company
is authorized, without further stockholder action, to provide for the issuance
of Preferred Stock in one or more series. The powers, designations, preferences
and relative, participating, optional or other special rights, and
qualifications, limitations or restrictions, including dividend rights, voting
rights, conversion rights, terms of redemption and liquidation preferences, of
the Preferred Stock of each series are fixed or designated by the Board of
Directors pursuant to a certificate of designations (each, a "Certificate of
Designations"). Such Preferred Stock may have voting or other rights which could
adversely affect the rights of holders of the Common Stock.
Holders of Preferred Stock have no voting rights in general corporate
matters except as provided by law or as set forth in the Certificate of
Designations therefor. Under Nevada law, if any proposed amendment to the
Articles of Incorporation would alter or change any preference or any relative
or other right given to the holders of Preferred Stock, then the amendment must
be approved by the affirmative vote of the holders of shares representing a
majority of the voting power of each class or series affected by the amendment
regardless of limitations or restrictions on the voting power thereof.
As of January 31, 1997, the Preferred Stock established by the Company
consisted of (i) 3,030,303 shares of 7% Cumulative Convertible Preferred Stock,
with no par value (the "7% Preferred Stock"), all of which were issued and
outstanding and held by Deutsche Bank; (ii) 458,621 shares of 8% Cumulative
Convertible Preferred Stock, Series A, with no par value (the "8% Preferred
Stock, Series A"), all of which were issued and outstanding and held indirectly
by Rodamco, N.V. ("Rodamco"); and (iii) 1,035,483 shares of its 8% Cumulative
Convertible Preferred Stock, with no par value (the "8% Preferred Stock"),
689,655 of which were issued and outstanding and held by the New York State
Teachers' Retirement System. Set forth below is a brief description of the terms
of each series of Preferred Stock.
7% Preferred Stock
Priority. The 7% Preferred Stock, with respect to dividends and
distributions and upon the liquidation, dissolution or winding-up of the
Company, ranks (i) senior to all classes of Common Stock, to the 8% Preferred
Stock, Series A, and to each other class of capital stock or series of Preferred
Stock established by the Board of Directors (except as set forth below) which
does not expressly provide that it ranks senior to the 7% Preferred Stock as to
dividends and distributions and upon the liquidation, winding-up and dissolution
of the Company and (ii) on a parity with the 8% Preferred Stock and any other
class of capital stock or series of Preferred Stock issued by the Company, the
terms of which expressly provide that such class or series will rank on a parity
with the 7% Preferred Stock as to dividends and distributions or upon the
liquidation, dissolution or winding-up of the Company.
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Dividends. Holders of 7% Preferred Stock are entitled to receive
cumulative cash dividends payable annually at the rate of 7% per annum when, as
and if declared by the Board of Directors out of funds legally available
therefor and in preference to any dividend payable on the Common Stock and the
8% Preferred Stock, Series A. Such dividends accrue from day to day and are
cumulative, whether or not declared.
Liquidation. Upon the liquidation, dissolution or winding-up of the
Company (either voluntary or involuntary), holders of 7% Preferred Stock are
entitled to receive out of the assets of the Company available for distribution
after payment of all liabilities, before any distribution is made to the holders
of the 8% Preferred Stock, Series A, or the Common Stock, an amount equal to
$16.50 per share plus an amount equal to all dividends (whether or not earned or
declared) accrued and accumulated and unpaid on the shares of 7% Preferred Stock
to the date of final distribution.
Conversion. Each share of the 7% Preferred Stock is convertible, at the
option of the holder thereof, at any time after August 4, 2000, into that number
of shares of Common Stock as is determined by dividing the stated value of such
share by the conversion price in effect for the 7% Preferred Stock at the time
of conversion. The conversion price currently in effect is $16.50 per share of
Common Stock, subject to adjustment.
Redemption. The 7% Preferred Stock is not redeemable.
Voting. The Certificate of Designations for the 7% Preferred Stock
provides that if dividends payable on the 7% Preferred Stock shall be in arrears
for six calendar quarters or more, whether or not consecutive, the holders of
the outstanding shares of the 7% Preferred Stock shall have the right to elect
two of the authorized number of members of the Board of Directors at the
Company's next annual meeting of stockholders until such arrearages have been
paid or set apart for payment. In addition, the Certificate of Designations for
the 7% Preferred Stock provides that the issuance of any shares of Preferred
Stock ranking prior to the 7% Preferred Stock shall require the consent of the
holders of the 7% Preferred Stock. The Company has agreed that so long as
Deutsche Bank holds at least 1,000,000 shares of the 7% Preferred Stock, the
Company will not issue any shares of Preferred Stock ranking on a parity with
the 7% Preferred Stock without the prior written consent of Deutsche Bank.
Deutsche Bank consented to the issuance of the 8% Preferred Stock.
Registration Rights. If at any time after one year following a registered
initial public offering in the United States by the Company, Deutsche Bank
notifies the Company in writing that it intends to offer or to cause to be
offered for sale its shares of the 7% Preferred Stock and/or shares of Common
Stock issued upon conversion of the 7% Preferred Stock and requests the Company
to cause such securities to be registered under the Securities Act, the Company
will use its best efforts to cause such securities to be so registered if
counsel for the Company shall deem such registration necessary or advisable.
Deutsche Bank is required to hold and to intend to offer for public sale not
less than a total of 1,500,000 shares of the 7% Preferred Stock and/or shares of
Common Stock issued upon conversion thereof at the time of any such request. The
Company is not obligated to make more than one registration pursuant to these
provisions.
8% Preferred Stock
Priority. The 8% Preferred Stock, with respect to dividends and
distributions and upon the liquidation, dissolution or winding-up of the
Company, ranks (i) senior to all classes of Common Stock, to the 8% Preferred
Stock, Series A, and to each other class of capital stock or series of Preferred
Stock established by the Board of Directors which does not expressly provide
that it ranks senior to the 8% Preferred Stock as to dividends and distributions
or upon the liquidation, winding-up and dissolution of the Company and (ii) on
parity with the 7% Preferred Stock and any other class of capital stock or
series of Preferred Stock issued by the Company, the terms of which expressly
provide that such class or series will rank on a parity with the 8% Preferred
Stock as to dividends and distributions or upon the liquidation, dissolution or
winding-up of the Company.
Dividends. Holders of 8% Preferred Stock are entitled to receive
cumulative cash dividends payable quarterly at the rate of 8% per annum when, as
and if declared by the Board of Directors out of funds legally
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available therefor and in preference to any dividend payable on the Common Stock
and the 8% Preferred Stock, Series A. Such dividends accrue from day to day and
are cumulative, whether or not declared.
Liquidation. Upon the liquidation, dissolution or winding-up of the
Company (either voluntary or involuntary), holders of 8% Preferred Stock are
entitled to receive out of the assets of the Company available for distribution
after payment of all liabilities, before any distribution is made to the holders
of the 8% Preferred Stock, Series A, or the Common Stock, an amount equal to
$145.00 per share plus an amount equal to all dividends (whether or not earned
or declared) accrued and accumulated and unpaid on the shares of 8% Preferred
Stock to the date of final distribution.
Conversion. Each share of 8% Preferred Stock is convertible, at the option
of the holder thereof, at any time and from time to time, into that number of
shares of Common Stock as is determined by dividing the stated value of such
share by the conversion price in effect for the 8% Preferred Stock at the time
of conversion. The conversion price currently in effect is $14.50 per share of
Common Stock, subject to adjustment.
Conversion by the Company. The Company has the right, at its option, to
convert all shares of 8% Preferred Stock then outstanding into shares of Common
Stock upon the consummation of a public offering meeting the following
conditions (an "8% Preferred Stock Qualified Public Offering"). An "8% Preferred
Stock Qualified Public Offering" means an underwritten public offering of Common
Stock to be listed on the New York Stock Exchange in which (i) the aggregate net
proceeds to the Company (after payment of all fees and expenses of the offering
and pay-down of any then remaining debt under the Term Loan Agreement, dated as
of August 8, 1995, between the Company and Deutsche Bank AG (London)) together
with the net proceeds of any prior public offerings of Common Stock listed on
the New York Stock Exchange equal or exceed US$200 million, (ii) the expected
distributions on shares of Common Stock of the Company for the 12 months
following the 8% Preferred Stock Qualified Public Offering (as certified by the
treasurer or chief financial officer of the Company) divided by the public
offering price is equal to or less than 7.75% and (iii) (A) if the 8% Preferred
Stock Qualified Public Offering is completed in calendar year 1997, the initial
public offering price is at least $16.00 per share, (B) if the 8% Preferred
Stock Qualified Public Offering is completed in calendar year 1998, the initial
public offering price is at least $16.50 per share and (C) if the 8% Preferred
Stock Qualified Public Offering is completed in calendar year 1999, the initial
public offering price is at least $17.00 per share; provided, however, that an
8% Preferred Stock Qualified Public Offering shall be deemed to occur on the
first business day following any day the condition set forth in clause (i) above
and each of the following conditions is satisfied: (x) the day is prior to
January 1, 2000, (y) the average of the closing prices for shares of Common
Stock as reported on the New York Stock Exchange composite tape for the 20
consecutive trading days immediately preceding such day (the "Composite
Average") equals or exceeds the applicable minimum initial public offering price
for a public offering to be considered an 8% Preferred Stock Qualified Public
Offering at such time and (z) the expected distributions on shares of Common
Stock for the 12 months following such day (as certified by the treasurer or
chief financial officer of the Company) divided by the Composite Average is
equal to or less than 7.75%.
Redemption. The Company may redeem the 8% Preferred Stock at any time on
or after November 22, 2001, as a whole in cash at a redemption price equal to
$145.00 per share plus an amount equal to all dividends accrued and unpaid
thereon to the redemption date, plus a redemption premium calculated to cause
the holders of the 8% Preferred Stock to have received an internal rate of
return of 12% per annum.
Change in Control Put. Each holder of 8% Preferred Stock has the right to
require the redemption of its 8% Preferred Stock by the Company in cash at a
redemption price equal to $146.45 per share plus an amount equal to all
dividends accrued and unpaid thereon to the redemption date upon the occurrence
of a "Change in Control". A "Change in Control" means (i) a merger,
consolidation or reorganization of the Company, if, after giving effect thereto,
the holders of the Common Stock prior to such transaction shall fail to own at
least 51% of the capital stock entitled to vote for the election of directors in
the successor entity, (ii) the sale of a majority or more of the assets of the
Company in any single transaction or in any series of related transactions or
(iii) a change in the composition of the Board of Directors of the Company such
that during any period of two consecutive years the individuals who at the
beginning of such period were directors of the Company shall
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cease for any reason to constitute a majority of the directors then in office
(and not designated to the Board of Directors by any holder of Preferred Stock)
unless the individuals replacing such directors were elected or nominated by the
Board of Directors of the Company.
Restriction on Debt. The Company may not incur debt exceeding 60% of the
appraised value of the assets of the Company other than debt in an amount which
does not exceed the principal amount of outstanding debt of the Company
extended, refinanced, renewed or replaced with the proceeds thereof, plus any
costs associated with the extension, refinancing, renewal or replacement.
Voting. The Certificate of Designations for the 8% Preferred Stock
provides that the holders of shares of 8% Preferred Stock are entitled to elect
one member of the Board of Directors of the Company. The Certificate of
Designations for the 8% Preferred Stock also provides that if (i) on or prior to
December 31, 1999, the Company has not completed an 8% Preferred Stock Qualified
Public Offering, (ii) dividends on the 8% Preferred Stock are in arrears for two
consecutive calendar quarters or more or (iii) the Company has violated the
restriction on debt described above, the holders of the outstanding shares of 8%
Preferred Stock shall have the right to elect one additional member of the Board
of Directors. The Certificate of Designations for the 8% Preferred Stock further
provides that prior to the completion of an 8% Preferred Stock Qualified Public
Offering, the consent of the holders of at least a majority of the shares of 8%
Preferred Stock outstanding at the time shall be necessary to effect certain
material changes to the Articles of Incorporation or to increase the size of the
Board of Directors to greater than nine members. The consent of the holders of
8% Preferred Stock is not required for increases in the size of the Board of
Directors to allow for directors elected by holders of 8% Preferred Stock or 8%
Preferred Stock, Series A, to be seated.
Registration Rights. The holders of at least 25% of the shares of Common
Stock or other securities issuable upon conversion of the 8% Preferred Stock
(the "8% Conversion Stock") may require the Company to use its best efforts to
register the 8% Conversion Stock on the earlier of (i) the date which is six
months after the date the registration statement filed by the Company covering
an 8% Preferred Stock Qualified Public Offering became effective or (ii)
December 31, 1999 if an 8% Preferred Stock Qualified Public Offering shall not
have been completed on or prior to such date. In addition, holders of the 8%
Preferred Stock have been granted certain incidental rights to register 8%
Conversion Stock upon the filing of registration statements by the Company,
subject to certain limitations.
8% Preferred Stock, Series A
Priority. The 8% Preferred Stock, Series A, with respect to dividends and
distributions and upon the liquidation, dissolution or winding-up of the
Company, ranks (i) senior to all classes of Common Stock and each other class of
capital stock or series of preferred stock established by the Board of Directors
(except as set forth below) which does not expressly provide that it ranks
senior to the 8% Preferred Stock as to dividends and distributions or upon the
liquidation, winding-up and dissolution of the Company; (ii) on a parity with
any other class of capital stock or series of Preferred Stock issued by the
Company the terms of which expressly provide that such class or series will rank
on a parity with the 8% Preferred Stock, Series A, with respect to dividends and
distributions or upon the liquidation, dissolution or winding-up of the Company;
and (iii) junior to the 7% Preferred Stock and the 8% Preferred Stock.
Dividends. Holders of 8% Preferred Stock, Series A, are entitled to
receive cumulative cash dividends payable quarterly at the rate of 8% per annum
when, as and if declared by the Board of Directors out of funds legally
available therefor and in preference to any dividend payable on the Common
Stock. Such dividends accrue from day to day and are cumulative, whether or not
declared.
Liquidation. Upon the liquidation, dissolution or winding-up of the
Company (either voluntary or involuntary), holders of 8% Preferred Stock, Series
A, are entitled to receive out of the assets of the Company available for
distribution after payment of all liabilities, before any distribution is made
to the holders of the Common Stock, an amount equal to $145.00 per share plus an
amount equal to all dividends (whether or not earned or declared) accrued and
accumulated and unpaid on the shares of 8% Preferred Stock, Series A, to the
date of final distribution.
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Conversion. Each share of 8% Preferred Stock, Series A, is convertible, at
the option of the holder thereof, at any time and from time to time, into that
number of shares of Common Stock as is determined by dividing the stated value
of such share by the conversion price in effect for the 8% Preferred Stock,
Series A, at the time of conversion. The conversion price currently in effect is
$14.50 per share of Common Stock, subject to adjustment.
Conversion by the Company. The Company has the right, at its option, to
convert all shares of 8% Preferred Stock, Series A, then outstanding into shares
of Common Stock upon the consummation of a "Series A Qualified Public Offering".
A "Series A Qualified Public Offering" means: a "Public Offering" (as defined
below) prior to January 1, 2000 in which (i) the aggregate net proceeds to the
Company (after payment of all fees and expenses of the offering) together with
the net proceeds of any prior Public Offerings of Common Stock listed on the New
York Stock Exchange equal or exceed the Minimum Amount (as defined below) and
(ii) (a) if the Public Offering is completed in calendar year 1997, the initial
public offering price is at least $16.00 per share, (b) if the Public Offering
is completed in calendar year 1998, the initial public offering price is at
least $16.50 per share or (c) if the Public Offering is completed in calendar
year 1999, the initial public offering price is at least $17.00 per share;
provided, however, that a Qualified Public Offering shall be deemed to occur on
the first business day which follows any period of 20 trading days after a
Public Offering and prior to January 1, 2000 in which the Composite Average
equals or exceeds the applicable minimum initial price for a Public Offering to
be considered a Series A Qualified Public Offering at such time. "Public
Offering" means an underwritten public offering of Common Stock pursuant to an
effective registration statement under the 1933 Act and listed on the New York
Stock Exchange. "Minimum Amount" means, at any time, the sum of (i) $75 million
plus (ii) the product of .5618 multiplied by the stated value of all shares of
8% Preferred Stock issued by the Company prior to such time and after November
1, 1996. As of December 1, 1996, the Minimum Amount was $131,180,000.
Redemption. The Company may redeem the 8% Preferred Stock, Series A, at
any time on or after December 31, 2001, as a whole in cash at a redemption price
equal to $145.00 per share plus an amount equal to all dividends accrued and
unpaid thereon through the redemption date, plus a redemption premium calculated
to cause the holders of the 8% Preferred Stock, Series A, to have received an
internal rate of return equal to 12% per annum.
Put if No Public Offering. Each holder of the 8% Preferred Stock, Series
A, has the right to require redemption of its 8% Preferred Stock, Series A, in
cash at a price equal to $145.00 per share plus a sum equal to all dividends
accrued and unpaid thereon (if any) if the Company has not completed, prior to
January 1, 2001, a Public Offering in which the aggregate net proceeds to the
Company (after payment of fees and expenses of the offering) equal or exceed
$75,000,000.
Change in Control Put. Each holder of shares of 8% Preferred Stock, Series
A, has the right to require the redemption of its 8% Preferred Stock, Series A,
by the Company in cash at a redemption price equal to $146.45 per share plus an
amount equal to all dividends accrued and unpaid thereon to the redemption date
upon the occurrence of a Change in Control (as defined above).
Voting. The Certificate of Designations for the 8% Preferred Stock, Series
A, provides that the holders of shares of 8% Preferred Stock, Series A, are
entitled to elect one member of the Board of Directors of the Company. The
Certificate of Designations for the 8% Preferred Stock, Series A, also provides
that if dividends on the 8% Preferred Stock, Series A, are in arrears for two
consecutive calendar quarters or more, the holders of the outstanding shares of
8% Preferred Stock, Series A, shall have the right to elect one additional
member of the Board of Directors of the Company. The Certificate of Designations
for the 8% Preferred Stock, Series A, further provides that prior to the
completion of a Series A Qualified Public Offering, the consent of the holders
of at least a majority of the shares of 8% Preferred Stock, Series A,
outstanding at the time shall be necessary to effect certain material changes to
the Restated Articles of Incorporation or to increase the size of the Board of
Directors to greater than nine members. Such consent is not required for
increases in the size of the Board of Directors to allow for directors elected
by holders of 8% Preferred Stock or 8% Preferred Stock, Series A, to be seated.
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Designation of Director. The Company has agreed that, as long as Rodamco
maintains an investment in the Company of at least $50 million, management of
the Company will continue to nominate a representative of Rodamco for election
to the Board of Directors and the Investment Committee of the Board of
Directors.
Registration Rights. The holders of all the shares of Common Stock or
other securities issuable upon conversion of the 8% Preferred Stock, Series A
("Series A Conversion Stock"), may require the Company to use its best efforts
to register the Series A Conversion Stock on the earlier of (i) the date which
is six months after the date the registration statement filed by the Company
covering a Public Offering shall have become effective and (ii) December 31,
2000 if a Series A Qualified Public Offering shall not have been completed on or
prior to such date. In addition, holders of the 8% Preferred Stock, Series A,
have been granted certain incidental rights to register the Series A Conversion
Stock upon the filing of registration statements by the Company, subject to
certain limitations.
Conversion Price Adjustments
Subject to certain exceptions, the conversion prices per share applicable
to the 7% Preferred Stock, the 8% Preferred Stock and the 8% Preferred Stock,
Series A, are subject to adjustment upon the occurrence of certain events,
including (i) dividends (and other distributions) payable in Common Stock on the
Company's outstanding shares of Common Stock, (ii) the issuance to all holders
of Common Stock of certain rights or warrants entitling them to subscribe for or
purchase Common Stock, (iii) subdivisions, combinations and reclassifications of
Common Stock and (iv) distributions to all holders of Common Stock of evidences
of indebtedness of the Company or assets (including securities, but excluding
those dividends, rights, warrants and distributions referred to above and
dividends and distributions paid in cash out of the profits or surplus of the
Company).
In case the Company shall be a party to any transaction (including, without
limitation, a merger, consolidation or sale of all or substantially all of the
Company's assets), in each case as a result of which shares of Common Stock will
be converted into the right to receive stock, securities or other property
(including cash or any combination thereof), each outstanding share of 7%
Preferred Stock, 8% Preferred Stock and 8% Preferred Stock, Series A, if
convertible after the consummation of the transaction, will thereafter be
convertible into the kind and amount of shares of stock and other securities and
property receivable (including cash or any combination thereof) upon the
consummation of such transaction by a holder of that number of shares or
fraction thereof of Common Stock into which one share of the applicable series
of Preferred Stock is convertible immediately prior to such transaction.
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CERTAIN PROVISIONS OF NEVADA LAW
AND OF THE COMPANY'S ARTICLES OF INCORPORATION
The terms of Chapter 78 of the Nevada Revised Statutes, entitled the Nevada
General Corporation Law (the "NGCL"), apply to the Company. Under certain
circumstances, the following selected provisions of the NGCL may delay or make
more difficult acquisitions or changes of control of the Company. The Articles
of Incorporation and Bylaws of the Company do not exclude the Company from such
provisions of the NGCL. Such provisions may make it more difficult to accomplish
transactions which stockholders may otherwise deem to be in their best
interests. Such provisions may also have the effect of preventing changes in the
management of the Company.
CONTROL SHARE ACQUISITIONS
Pursuant to Sections 78.378 to 78.3793 of 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 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
or her 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. As
noted above, the Company's Articles of Incorporation and Bylaws do not exclude
the Company from the restrictions imposed by such provisions.
CERTAIN BUSINESS COMBINATIONS
Sections 78.411 to 78.444 of the NGCL restrict the ability of a "resident
domestic corporation" to engage in any combination with an "interested
stockholder" for three years following the interested stockholder's date of
acquiring the shares that cause such stockholder to become an interested
stockholder, unless the combination or the purchase of shares by the interested
stockholder on the interested stockholder's date of acquiring the shares that
cause such stockholder to become an interested stockholder is approved by the
board of directors of the resident domestic corporation before that date. If the
combination was not previously approved, the interested stockholder may effect a
combination after the three-year period only if such stockholder receives
approval from a majority of the disinterested shares or the offer meets certain
fair price criteria. For purposes of the above provisions, "resident domestic
corporation" means a Nevada corporation that has 200 or more stockholders.
"Interested stockholder" means any person, other than the resident domestic
corporation or its subsidiaries, who is (i) the beneficial owner, directly or
indirectly, of 10% or more of the voting power of the outstanding voting shares
of the resident domestic corporation or (ii) an affiliate or associate of the
resident domestic corporation and, at any time within three years immediately
before the date in question, was the beneficial owner, directly or indirectly,
of 10% or more of the voting power of the then
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outstanding shares of the resident domestic corporation. The above provisions do
not apply to corporations that so elect in a charter amendment approved by a
majority of the disinterested shares. Such a charter amendment, however, would
not become effective for 18 months after its passage and would apply only to
stock acquisitions occurring after its effective date. As noted above, the
Company's Articles of Incorporation and Bylaws do not exclude the Company from
the restrictions imposed by such provisions.
DIRECTORS' DUTIES
Section 78.138 of the NGCL allows directors and officers, in exercising
their respective powers with a view to the interests of the corporation, to
consider the interests of the corporation's employees, suppliers, creditors and
customers, the economy of the state and the nation, the interests of the
community and of society and the long and short-term interests of the
corporation and its stockholders, including the possibility that these interests
may be best served by the continued independence of the corporation. Directors
may resist a change or potential change in control if the directors, by a
majority vote of a quorum, determine that the change or potential change is
opposed to or not in the best interest of the corporation. In so determining,
the board of directors must consider the interests set forth above or have
reasonable grounds to believe that, within a reasonable time, the debt created
as a result of the change in control would cause the assets of the corporation
or any successor to be less than the liabilities or would render the corporation
or any successor insolvent or lead to bankruptcy proceedings.
PUT PROVISIONS
The terms of the 8% Preferred Stock and the 8% Preferred Stock, Series A,
allow the holders to require the Company to redeem their shares in certain
circumstances, including upon the occurrence of events constituting a "Change in
Control". See "Description of Capital Stock of the Company -- Preferred Stock".
OWNERSHIP RESTRICTIONS
For the Company to qualify as a REIT under the Internal Revenue Code of
1986, as amended (the "Code"), not more than 50% in value of its outstanding
capital stock may be owned, directly or indirectly, by five or fewer individuals
(as defined by the Code to include certain entities) during the last half of a
taxable year. To help ensure that the Company continues to qualify as a REIT,
Article 8 of the Company's Articles of Incorporation provides that shares of the
Company's stock shall not be transferred to any person if such transfer would
cause such person to become the direct or indirect owner of more than 6% of the
value of the outstanding shares of capital stock of the Company (the "6%
Limit"). Shares of stock acquired in excess of the 6% Limit shall be deemed to
be transferred to the Company as trustee for the benefit of the person to whom
the person who acquired the excess shares later transfers such shares. In
addition, excess shares shall be deemed to have been offered for sale to the
Company or its designee at their "fair market value" for a 90-day period.
Article 8 further provides that a person who knowingly violates the 6% Limit
must indemnify the Company and its stockholders for losses if such violation
causes the Company either to fail to qualify as a REIT or to be subject to
personal holding company taxes. The affirmative vote of the holders of at least
80% of the outstanding shares of Common Stock is required to alter, amend,
repeal or adopt any provision inconsistent with such restrictions.
FEDERAL INCOME TAX CONSIDERATIONS
The following is a general summary of the material federal income tax
considerations associated with an investment in the Common Stock offered hereby.
Shearman & Sterling, counsel to the Company, has reviewed the following
discussion and is of the opinion that it fairly summarizes the federal income
tax considerations that are likely to be material to a holder of Common Stock.
The following discussion is not exhaustive of all possible tax considerations
and is not tax advice. Moreover, this summary does not deal with all tax aspects
that might be relevant to a particular prospective stockholder in light of his
or her personal circumstances; nor does it deal with particular types of
stockholders that are subject to special treatment under the Code, such as
insurance companies, financial institutions and broker-dealers. The Code
provisions governing the federal
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income tax treatment of REITs are highly technical and complex, and this summary
is qualified in its entirety by the applicable Code provisions, rules and
Treasury Regulations promulgated thereunder, and administrative and judicial
interpretations thereof. The following discussion and the opinions of Shearman &
Sterling are based on current law.
EACH PROSPECTIVE PURCHASER IS URGED TO CONSULT HIS, HER OR ITS OWN TAX
ADVISOR WITH RESPECT TO SUCH PURCHASER'S SPECIFIC FEDERAL, STATE, LOCAL, FOREIGN
AND OTHER TAX CONSEQUENCES OF THE PURCHASE, HOLDING AND SALE OF COMMON STOCK OF
THE COMPANY.
FEDERAL INCOME TAXATION OF THE COMPANY
The Company believes that, commencing with its taxable year ended December
31, 1983, it was organized and has operated in such a manner so as to qualify
for taxation as a REIT under the Code, and the Company intends to continue to
operate in such a manner, but no assurance can be given that it has qualified or
will remain qualified as a REIT. The Company has not requested and does not
intend to request a ruling from the Internal Revenue Service (the "IRS") as to
its status as a REIT. Based on various assumptions and factual representations
made by the Company, in the opinion of Shearman & Sterling, counsel to the
Company, the Company was organized and has operated in conformity with the
requirements for qualification as a REIT, the Company has operated so as to
qualify as a REIT since its taxable year ended December 31, 1992 (which such
counsel believes is the Company's earliest taxable year which is within the
normal period for federal tax audit), and the Company's proposed method of
operation will enable it to meet the requirements for qualification and taxation
as a REIT under the Code for each of its subsequent taxable years. Such
qualification depends upon the Company's ability to meet the various
requirements imposed under the Code through actual operations, as discussed
below, and no assurance can be given that actual operations will meet these
requirements. The opinion of Shearman & Sterling is not binding on the IRS. The
opinion of Shearman & Sterling also is based upon existing law, the regulations
issued by the United States Treasury Department (the "Treasury Regulations"),
currently published administrative positions of the IRS and judicial decisions,
which are subject to change either prospectively or retroactively.
If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income taxes on that portion of its ordinary income
or capital gain that is currently distributed to stockholders. The REIT
provisions of the Code generally allow a REIT to deduct dividends paid to its
stockholders. This deduction for dividends paid to stockholders substantially
eliminates the federal "double taxation" on earnings (once at the corporate
level and once again at the stockholder level) that usually results from
investments in a corporation.
The Company, however, will be subject to federal income tax, as follows:
first, the Company will be taxed at regular corporate rates on its undistributed
REIT taxable income, including undistributed net capital gains. Second, under
certain circumstances, the Company may be subject to the corporate "alternative
minimum tax." Third, if the Company has net income from the sale or other
disposition of "foreclosure property" that is held primarily for sale to
customers in the ordinary course of business or other non-qualifying income from
foreclosure property, it will be subject to tax at the highest corporate rate on
such income. Fourth, if the Company has net income from prohibited transactions
(which are, in general, certain sales or other dispositions of property other
than foreclosure property held primarily for sale to customers in the ordinary
course of business), such income will be subject to a 100% tax. Fifth, if the
Company should fail to satisfy either the 75% or 95% gross income test
(discussed below) but has nonetheless maintained its qualification as a REIT
because certain other requirements have been met, it will be subject to a 100%
tax on the net income attributable to the greater of the amount by which the
Company fails the 75% or 95% test, multiplied by a fraction intended to reflect
the Company's profitability. Sixth, if the Company fails to distribute during
each year at least the sum of (i) 85% of its REIT ordinary income for such year,
(ii) 95% of its REIT capital gain net income for such year and (iii) any
undistributed taxable income from prior periods, the Company will be subject to
a 4% excise tax on the excess of such required distribution over the amounts
actually distributed. Seventh, if the Company should acquire or be treated as
acquiring any asset from a C corporation (i.e., a corporation generally subject
to full corporate-level tax) in a carryover-basis transaction and the Company
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subsequently recognizes gain on the disposition of such asset during the
ten-year period (the "Recognition Period") beginning on the date on which such
asset was acquired by the Company, then, to the extent of the excess of (a) the
fair market value of the asset as of the beginning of the applicable Recognition
Period over (b) the Company's adjusted basis in such asset as of the beginning
of such Recognition Period (the "Built-In Gain"), such gain will be subject to
tax at the highest regular corporate rate, pursuant to guidelines issued by the
IRS (the "Built-In Gain Rules").
REQUIREMENTS FOR QUALIFICATION
To qualify as a REIT, the Company must elect to be so treated and must meet
the requirements, discussed below, relating to the Company's organization,
sources of income, nature of assets and distributions of income to stockholders.
Organizational Requirements
The Code defines a REIT as a corporation, trust or association: (i) that is
managed by one or more directors or trustees, (ii) the beneficial ownership of
which is evidenced by transferable shares or by transferable certificates of
beneficial interest, (iii) that would be taxable as a domestic corporation but
for Sections 856 through 859 of the Code, (iv) that is neither a financial
institution nor an insurance company subject to certain provisions of the Code,
(v) the beneficial ownership of which is held by 100 or more persons (the "100
Stockholder Requirement"), and (vi) during the last half of each taxable year
not more than 50% in value of the outstanding stock of which is owned, directly
or indirectly, through the application of certain attribution rules, by five or
fewer individuals (as defined in the Code to include certain entities) (the
"Five or Fewer Requirement"). In addition, certain other tests, described below,
regarding the nature of its income and assets also must be satisfied. The Code
provides that conditions (i) through (iv), inclusive, must be met during the
entire taxable year and that condition (v) must be met during at least 335 days
of a taxable year of 12 months or during a proportionate part of a taxable year
of less than 12 months. For purposes of conditions (v) and (vi), pension funds
and certain other tax-exempt entities are treated as individuals, subject to a
"look-through" exception in the case of condition (vi).
In order to protect the Company from a concentration of ownership of its
stock that would cause the Company to fail the Five or Fewer Requirement or the
100 Stockholder Requirement, the Articles of Incorporation of the Company
provides that no holder is permitted to own, either actually or constructively
under the applicable attribution rules of the Code, more than 6% (in value) of
the aggregate outstanding shares of all classes of stock of the Company with
certain exceptions. In addition, no holder is permitted to own, either actually
or constructively under the applicable attribution rules of the Code, any shares
of any class of the Company's stock if such ownership would cause more than 50%
in value of the Company's outstanding stock to be owned by five or fewer
individuals or would result in the Company's stock being beneficially owned by
less than 100 persons (determined without reference to any rule of attribution).
In rendering its opinion that the Company has operated in a manner so as to
qualify, and its proposed method of operation will continue to enable it to
qualify, as a REIT, Shearman & Sterling is relying on the representation of the
Company that the ownership of its stock has satisfied and will satisfy the Five
or Fewer Requirement and the 100 Stockholder Requirement, without regard to
whether, as a matter of law, the provisions contained in the Articles of
Incorporation will preclude the Company from failing the Five or Fewer
Requirement or the 100 Stockholder Requirement.
Pursuant to applicable Treasury Regulations, a REIT must maintain certain
records and request on an annual basis certain information designed to disclose
the actual owners of its outstanding shares. The Company believes it has
satisfied and intends to continue to satisfy such requirements.
In addition, a corporation may not elect to become a REIT unless its
taxable year is the calendar year. The Company has a calendar year taxable year.
The Company owns and operates a number of properties through wholly owned
subsidiaries. Under the Code, a corporation which is a "qualified REIT
subsidiary" is not treated as a separate corporation; rather, all assets,
liabilities and items of income, deduction, and credit of a "qualified REIT
subsidiary" are treated as
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assets, liabilities and such items (as the case may be) of the REIT. Thus, in
applying the requirements described herein, the Company's "qualified REIT
subsidiaries" will be ignored, and all assets, liabilities and items of income,
deduction and credit of such subsidiaries will be treated as assets, liabilities
and items of the Company.
Income Tests
To maintain qualification as a REIT, the Company must satisfy three gross
income requirements annually. First, at least 75% of the Company's gross income,
excluding gross income from certain dispositions of property held primarily for
sale to customers in the ordinary course of a trade or business ("prohibited
transactions") for each taxable year must be derived directly or indirectly from
investments relating to real property or mortgages on real property (including
"rents from real property" and, in certain circumstances, interest) or from
certain types of temporary investments. Second, at least 95% of the Company's
gross income (excluding gross income from "prohibited transactions") for each
taxable year must be derived from such real property investments and from
dividends, interest and gain from the sale or disposition of stock or securities
or from any combination of the foregoing. Third, short-term gain from the sale
or other disposition of stock or securities, gain from "prohibited transactions"
and gain from the sale or other disposition of real property held for less than
four years (apart from involuntary conversions and sales of foreclosure
property) must represent less than 30% of the Company's gross income (including
gross income from prohibited transactions) for each taxable year.
Rents received or deemed to be received by the Company will qualify as
"rents from real property" in satisfying the gross income requirements for a
REIT described above only if several conditions are met. First, the amount of
rent generally must not be based in whole or in part on the income or profits of
any person. However, an amount received or accrued generally will not be
excluded from the term "rents from real property," solely by reason of being
based on a fixed percentage or percentages of receipts or sales. Second, the
Code provides that rents received from a tenant will not qualify as "rents from
real property" in satisfying the gross income tests if the REIT, or a direct or
constructive owner of 10% or more of the REIT, directly or constructively owns
10% or more of such tenant (a "Related Party Tenant"). Third, if rent
attributable to personal property, leased in connection with a lease of real
property, is greater than 15% of the total rent received under the lease, then
the portion of rent attributable to the personal property will not qualify as
"rents from real property." Fourth, for rents to qualify as "rents from real
property" the REIT must not operate or manage the property or furnish or render
services to tenants, other than through an "independent contractor" who is
adequately compensated and from whom the REIT does not derive any income;
provided, however, that a REIT may provide services with respect to its
properties and the income will qualify as "rents from real property" if the
services are "usually or customarily rendered" in connection with the rental of
room or other space for occupancy only and are not otherwise considered
"rendered to the occupant."
The Company has not and does not anticipate that it will in the future (i)
charge rent that is based in whole or in part on the income or profits of any
person (except by reason of being based on a fixed percentage or percentages of
receipts or sales consistent with the rule described above), (ii) derive rent
attributable to personal property leased in connection with real property that
exceeds 15% of the total rents or (iii) derive rent attributable to a Related
Party Tenant. The Company believes it has met and will continue to meet the
three gross income requirements outlined above.
The term "interest" generally does not include any amount received or
accrued (directly or indirectly) if the determination of such amount depends in
whole or in part on the income or profits of any person. An amount received or
accrued generally will not be excluded from the term "interest," however, solely
by reason of being based on a fixed percentage or percentages of receipts or
sales.
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for that year
if it is eligible for relief under certain provisions of the Code. These relief
provisions will be generally available if (i) the Company's failure to meet
these tests was due to reasonable cause and not due to willful neglect, (ii) the
Company attaches a schedule of the sources of its income to its federal income
tax return and (iii) any incorrect information on the schedule is not due to
fraud
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with intent to evade tax. It is not possible, however, to state whether, in all
circumstances, the Company would be entitled to the benefit of these relief
provisions. For example, if the Company fails to satisfy the gross income tests
because nonqualifying income that the Company intentionally incurs exceeds the
limits on such income, the IRS could conclude that the Company's failure to
satisfy the tests was not due to reasonable cause. As discussed above in
"-- Federal Income Taxation of the Company," even if these relief provisions
apply, a tax would be imposed with respect to the excess net income. No similar
mitigation provision provides relief if the Company fails the 30% income test;
and in such case, the Company will cease to qualify as a REIT.
Asset Tests
At the close of each quarter of its taxable year, the Company also must
satisfy three tests relating to the nature and diversification of its assets.
First, at least 75% of the value of the Company's total assets must be
represented by real estate assets, cash, cash items and government securities.
Second, no more than 25% of the Company's total assets may be represented by
securities other than those in the 75% asset class. Third, of the investments
included in the 25% asset class, the value of any one issuer's securities owned
by the Company may not exceed 5% of the value of the Company's total assets, and
the Company may not own more than 10% of any one issuer's outstanding voting
securities (excluding securities of a qualified REIT Subsidiary or another
REIT).
After initially meeting the asset tests at the close of any quarter, the
Company will not lose its status as a REIT for failure to satisfy the asset
tests at the end of a later quarter solely by reason of changes in asset values.
If the failure to satisfy the asset tests results from an acquisition of
securities or other property during a quarter, the failure can be cured by
disposition of sufficient nonqualifying assets within 30 days after the close of
that quarter. The Company has maintained and intends in the future to maintain
adequate records of the value of its assets to ensure compliance with the asset
tests and to take such other actions within 30 days after the close of any
quarter as may be required to cure any noncompliance.
Annual Distribution Requirements
In order to be taxed as a REIT, the Company is required to distribute
dividends (other than capital gain dividends) to its stockholders in an amount
at least equal to (a) the sum of (i) 95% of the Company's "REIT taxable income"
(computed without regard to the dividends-paid deduction and the Company's net
capital gain) and (ii) 95% of the net income, if any, from foreclosure property
in excess of the special tax on income from foreclosure property, minus (b) the
sum of certain items of non-cash income. Such distributions must be paid in the
taxable year to which they relate or in the following taxable year if declared
before the Company timely files its federal income tax return for such year and
if paid on or before the first regular dividend payment after such declaration.
Even if the Company satisfies the foregoing distribution requirements, to the
extent that the Company does not distribute all of its net capital gain or "REIT
taxable income," as adjusted, it will be subject to tax thereon at regular
capital gains or ordinary corporate tax rates. Furthermore, if the Company
should fail to distribute during each calendar year at least the sum of (a) 85%
of its REIT ordinary income for that year, (b) 95% of its capital gain net
income for that year and (c) any undistributed taxable income from prior
periods, the Company would be subject to a 4% excise tax on the excess of such
required distribution over the amounts actually distributed. In addition, during
its Recognition Period, if the Company disposes of any asset subject to the
Built-In Gain Rules, the Company will be required, pursuant to guidance issued
by the IRS, to distribute at least 95% of the Built-In Gain (after tax), if any,
recognized on the disposition of the asset.
It is expected that the Company's REIT taxable income will continue to be
less than its cash flow due to the allowance of depreciation and other non-cash
charges in computing REIT taxable income. Accordingly, the Company anticipates
that it generally will have sufficient cash or liquid assets to enable it to
satisfy the 95% distribution requirement. It is possible, however, that the
Company, from time to time, may not have sufficient cash or other liquid assets
to meet the 95% distribution requirement or to distribute such greater amount as
may be necessary to avoid income and excise taxation, as a result of timing
differences between (i) the actual receipt of income and actual payment of
deductible expenses and (ii) the inclusion of such
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income and deduction of such expenses in arriving at taxable income of the
Company, or as a result of nondeductible expenses such as principal amortization
or repayments, or capital expenditures in excess of non-cash deductions. In the
event that such timing differences occur, the Company may find it necessary to
seek funds through borrowings or the issuance of equity securities (there being
no assurance that it will be able to do so) or, if possible, to pay taxable
stock dividends in order to meet the dividend requirement.
Under certain circumstances, the Company may be able to rectify a failure
to meet the distribution requirement for a year by paying "deficiency dividends"
to stockholders in a later year, which may be included in the Company's
deduction for dividends paid for the earlier year. Thus, the Company may be able
to avoid being taxed on amounts distributed as deficiency dividends. The Company
will, however, be required to pay interest based upon the amount of any
deduction taken for deficiency dividends.
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable year
and the relief provisions do not apply, the Company will be subject to tax
(including any applicable corporate alternative minimum tax) on its taxable
income at regular corporate rates. Distributions to stockholders in any year in
which the Company fails to qualify will not be deductible by the Company nor
will they be required to be made. In such event, to the extent of current or
accumulated earnings and profits, all distributions to stockholders will be
dividends, taxable as ordinary income; and subject to certain limitations of the
Code, corporate distributees may be eligible for the dividends-received
deduction. Unless the Company is entitled to relief under specific statutory
provisions, the Company also will be disqualified from taxation as a REIT for
the four taxable years following the year during which qualification was lost.
It is not possible to state whether in all circumstances the Company would be
entitled to such statutory relief. For example, if the Company fails to satisfy
the gross income tests because nonqualifying income that the Company
intentionally incurs exceeds the limit on such income, the IRS could conclude
that the Company's failure to satisfy the tests was not due to reasonable cause.
TAXATION OF U.S. STOCKHOLDERS
As used herein, the term "U.S. Stockholder" means a holder of Common Stock
that for United States federal income tax purposes is (a) a citizen or resident
of the United States, (b) a corporation, partnership or other entity created or
organized in or under the laws of the United States or of any political
subdivision thereof or (c) an estate or trust, the income of which is subject to
United States federal income taxation regardless of its source. For any taxable
year for which the Company qualifies for taxation as a REIT, amounts distributed
to taxable U.S. Stockholders will be taxed as follows.
Distributions Generally
Distributions to U.S. Stockholders, other than capital gain dividends
discussed below, will constitute dividends up to the amount of the Company's
current or accumulated earnings and profits and will be taxable to the
stockholders as ordinary income. For purposes of determining whether
distributions are out of earnings and profits, the earnings and profits of the
Company will be allocated first to the Company's Preferred Stock (to the extent
of distributions made in respect thereof), and then to the Common Stock.
Distributions are not eligible for the dividends-received deduction for
corporations. To the extent that the Company makes a distribution in excess of
its current or accumulated earnings and profits, the distribution will be
treated first as a tax-free return of capital, reducing the tax basis in the
U.S. Stockholder's Common Stock, and the distribution in excess of a U.S.
Stockholder's tax basis in its Common Stock will be taxable as gain realized
from the sale of its Common Stock. Dividends declared by the Company in October,
November or December of any year payable to a stockholder of record on a
specified date in any such month shall be treated as both paid by the Company
and received by the stockholder on December 31 of that year, provided that the
dividend is actually paid by the Company during January of the following
calendar year. Stockholders may not include on their own federal income tax
returns any losses of the Company.
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The Company will be treated as having sufficient earnings and profits to
treat as a dividend any distribution by the Company up to the amount required to
be distributed in order to avoid imposition of the 4% excise tax discussed in
"-- Federal Income Taxation of the Company" above. Moreover, any "deficiency
dividend" will be treated as an ordinary or capital gain dividend, as the case
may be, regardless of the Company's earnings and profits. As a result,
stockholders may be required to treat certain distributions that would otherwise
result in a tax-free return of capital as taxable dividends.
Capital Gain Dividends
Dividends to U.S. Stockholders that are properly designated by the Company
as capital gain dividends will be treated as long-term capital gains (to the
extent they do not exceed the Company's actual net capital gain for the taxable
year) without regard to the period for which the stockholder has held his stock.
However, corporate stockholders may be required to treat up to 20% of certain
capital gain dividends as ordinary income. Capital gain dividends are not
eligible for the dividends-received deduction for corporations.
Passive Activity Loss and Investment Interest Limitations
Distributions from the Company and gain from the disposition of Common
Stock will not be treated as passive activity income, and therefore stockholders
may not be able to apply any "passive activity losses" against such income.
Dividends from the Company (to the extent they do not constitute a return of
capital) will generally be treated as investment income for purposes of the
investment income limitation on the deduction of investment interest. Under
recently enacted legislation, net capital gain from the disposition of Common
Stock and capital gain dividends generally will be excluded from investment
income.
Certain Dispositions of Shares
In general, a U.S. Stockholder will realize capital gain or loss on the
disposition of shares of Common Stock equal to the difference between the sales
price for such shares and the adjusted tax basis for such shares. Gain or loss
realized upon a sale or exchange of Common Stock by a U.S. Stockholder who has
held such Common Stock for more than one year will be treated as long-term
capital gain or loss, respectively, and otherwise will be treated as short-term
capital gain or loss. However, losses incurred on the sale or exchange of Common
Stock held for less than six months (after applying certain holding period
rules) will be deemed long-term capital loss to the extent of any capital gain
dividends received by the selling stockholder from those shares.
Treatment of Tax-Exempt Stockholders
A tax-exempt investor that is exempt from tax on its investment income,
such as an individual retirement account ("IRA") or a 401(k) plan, that holds
the Common Stock as an investment generally will not be subject to tax on
dividends paid by the Company. However, if such tax-exempt investor is treated
as having purchased its Common Stock with borrowed funds, some or all of its
dividends will be subject to tax. In addition, a portion of the dividends paid
to certain pension plans (including 401(k) plans but not including IRAs and
government pension plans) that own more than 10% (by value) of the Company's
outstanding capital stock will be taxed as unrelated business taxable income if
the Company is a "pension held REIT." The Company does not expect to be a
pension held REIT.
SPECIAL TAX CONSIDERATIONS FOR FOREIGN STOCKHOLDERS
The rules governing United States federal income taxation of non-resident
alien individuals, foreign corporations, foreign partnerships and foreign trusts
and estates (collectively, "Non-U.S. Stockholders") are complex, and the
following discussion is intended only as a summary of these rules. Prospective
Non-U.S. Stockholders should consult with their own tax advisors to determine
the impact of federal, state and local income tax laws on an investment in the
Company, including any reporting requirements.
In general, Non-U.S. Stockholders will be subject to regular United States
federal income tax with respect to their investment in the Company if the
investment is "effectively connected" with the Non-U.S.
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Stockholder's conduct of a trade or business in the United States. A corporate
Non-U.S. Stockholder that receives income that is (or is treated as) effectively
connected with a U.S. trade or business also may be subject to the branch
profits tax under Section 884 of the Code, which is imposed in addition to
regular United States federal corporate income tax generally at the rate of 30%,
subject to reduction under a tax treaty, if applicable. Certain certification
requirements must be met in order for effectively connected income to be exempt
from withholding. The following discussion will apply to Non-U.S. Stockholders
whose investment in the Company is not so effectively connected.
A distribution by the Company that is not attributable to gain from the
sale or exchange by the Company of a United States real property interest and
that is not designated by the Company as a capital gain dividend will be treated
as an ordinary income dividend to the extent that it is made out of current or
accumulated earnings and profits. Generally, any ordinary income dividend will
be subject to a United States federal income tax equal to 30% of the gross
amount of the dividend unless this tax is reduced by an applicable tax treaty.
To the extent that the Company makes a distribution in excess of its current or
accumulated earnings and profits, the distribution will be treated first as a
tax-free return of capital, reducing a Non-U.S. Stockholder's basis in its
Common Stock (but not below zero), and the distribution in excess of a Non-U.S.
Stockholder's tax basis in its Common Stock will be treated as gain realized
from the sale of its Common Stock.
Distributions by the Company that are attributable to gain from the sale or
exchange of a United States real property interest will be taxed to a Non-U.S.
Stockholder under the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Under FIRPTA, such distributions are taxed to a Non-U.S. Stockholder
as if the distributions were gains "effectively connected" with a United States
trade or business. Accordingly, a Non-U.S. Stockholder will be taxed at the
normal capital gains rates applicable to a U.S. Stockholder (subject to any
applicable alternative minimum tax and a special alternative minimum tax in the
case of non-resident alien individuals). Distributions subject to FIRPTA also
may be subject to the branch profits tax generally at the rate of 30%, subject
to reduction under a tax treaty, if applicable.
All dividends payable in respect of the 8% Preferred Stock, Series A, will,
to the extent permitted under the Code, be paid first out of earnings and
profits other than earnings and profits attributable to gain from the sale or
exchange of United States real property interests. Consequently, a
proportionately greater amount of distributions in respect of the Common Stock,
the 7% Preferred Stock and the 8% Preferred Stock may be out of earnings and
profits attributable to gain from the sale or exchange of United States real
property interests.
Although tax treaties may reduce the Company's withholding obligations, the
Company generally will withhold from distributions to Non-U.S. Stockholders, and
remit to the IRS, (i) 35% of designated capital gain dividends (or, if greater,
35% of the amount of any distributions that could be designated as capital gain
dividends) and (ii) 30% of all other distributions out of current or accumulated
earnings and profits, unless reduced by an applicable tax treaty. In addition,
as a result of recently enacted legislation, the Company generally will withhold
10% of any distribution in excess of the Company's current and accumulated
earnings and profits. In addition, if the Company designates prior distributions
as capital gain dividends, subsequent distributions, up to the amount of such
prior distributions, will be treated as capital gain dividends for purposes of
withholding. A Non-U.S. Stockholder generally will be entitled to a refund from
the IRS to the extent an amount is withheld from a distribution that exceeds the
amount of U.S. tax owed by such Non-U.S. Stockholder.
Pursuant to current Treasury Regulations, dividends paid to an address in a
country outside the United States are generally presumed to be paid to a
resident of such country for purposes of determining the applicability of
withholding discussed above and the applicability of a tax treaty rate. Under
proposed Treasury Regulations, not currently in effect, however, a Non-U.S.
Stockholder who wished to claim the benefit of an applicable treaty rate would
be required to satisfy certain certification and other requirements. Under
certain treaties, lower withholding rates generally applicable to dividends do
not apply to dividends from a REIT, such as the Company.
If the Common Stock constitutes a "United States real property interest"
within the meaning of FIRPTA, a sale of Common Stock by a Non-U.S. Stockholder
generally will be subject to United States federal income taxation. The Common
Stock will constitute a United States real property interest unless the
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Company is a "domestically controlled REIT." A domestically controlled REIT is a
REIT in which at all times during a specified testing period less than 50% in
value of its shares is held directly or indirectly by Non-U.S. Stockholders.
Currently, the Company does not qualify as a domestically controlled REIT, and
will not qualify as a domestically controlled REIT for at least five years
following completion of this Offering. It is currently anticipated that,
following the expiration of such five-year period, the Company will be a
domestically controlled REIT and therefore that the sale of Common Stock
thereafter will not be subject to taxation under FIRPTA. However, in part
because the Common Stock is publicly traded in the United States, Luxembourg and
Germany, no assurance can be given that the Company will qualify as a
domestically controlled REIT even following such five-year period. So long as
the Company is not a domestically controlled REIT, gain on the sale of Common
Stock will be subject to taxation under FIRPTA, and a Non-U.S. Stockholder will
be subject to the same treatment as a U.S. Stockholder with respect to the gain
(subject to applicable alternative minimum tax and a special alternative minimum
tax in the case of non-resident alien individuals). Even at such time as the
Company may become a domestically controlled REIT, capital gains will be taxable
to a Non-U.S. Stockholder if the Non-U.S. Stockholder is a non-resident alien
individual who is present in the United States for 183 days or more during the
taxable year and certain other conditions apply, in which case the non-resident
alien individual will be subject to a 30% tax on his or her U.S. source capital
gains.
Upon the death of a foreign individual stockholder, the stockholder's
shares will be treated as part of the stockholder's U.S. estate for purposes of
the U.S. estate tax, except as may be otherwise provided in an applicable estate
tax treaty.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX
The Company will report to its U.S. Stockholders and the IRS the amount of
dividends paid during each calendar year, and the amount of tax withheld, if
any. Under certain circumstances, U.S. Stockholders may be subject to backup
withholding at a rate of 31% on payments made with respect to, or cash proceeds
of a sale or exchange of, Common Stock. Backup withholding will apply only if
the holder (i) fails to furnish his or her taxpayer identification number
("TIN") (which, for an individual, would be his or her Social Security number),
(ii) furnishes an incorrect TIN, (iii) is notified by the IRS that he or she has
failed properly to report payments of interest and dividends or is otherwise
subject to backup withholding or (iv) under certain circumstances, fails to
certify, under penalties of perjury, that he or she has furnished a correct TIN
and (a) that he or she has not been notified by the IRS that he or she is
subject to backup withholding for failure to report interest and dividend
payments or (b) that he or she has been notified by the IRS that he or she is no
longer subject to backup withholding. Backup withholding will not apply with
respect to payments made to certain exempt recipients, such as corporations and
tax-exempt organizations.
U.S. Stockholders should consult their own tax advisors regarding their
qualifications for exemption from backup withholding and the procedure for
obtaining such an exemption. Backup withholding is not an additional tax.
Rather, the amount of any backup withholding with respect to a payment to a U.S.
Stockholder will be allowed as a credit against the U.S. Stockholder's United
States federal income tax liability and may entitle the U.S. Stockholder to a
refund, provided that the required information is furnished to the IRS.
Backup withholding tax and information reporting will generally not apply
to distributions paid to Non-U.S. Stockholders outside the United States that
are treated as (i) dividends subject to the 30% (or lower treaty rate)
withholding tax discussed above, (ii) capital gains dividends or (iii)
distributions attributable to gain from the sale or exchange by the Company of
United States real property interests. As a general matter, backup withholding
and information reporting will not apply to a payment of the proceeds of a sale
of Common Stock by or through a foreign office of a foreign broker. Information
reporting (but not backup withholding) will apply, however, to a payment of the
proceeds of a sale of Common Stock by a foreign office of a broker that (a) is a
United States person, (b) derives 50% or more of its gross income for certain
periods from the conduct of a trade or business in the United States or (c) is a
"controlled foreign corporation" (generally, a foreign corporation controlled by
United States stockholders) for United States tax purposes, unless the broker
has documentary evidence in its records that the holder is a Non-U.S.
Stockholder and certain other conditions are met, or the stockholder otherwise
establishes an exemption. Payment to or
20
<PAGE> 89
through a United States office of a broker of the proceeds of a sale of Common
Stock is subject to both backup withholding and information reporting unless the
stockholder certifies under penalty of perjury that the stockholder is a
Non-U.S. Stockholder, or otherwise establishes an exemption. A Non-U.S.
Stockholder may obtain a refund of any amounts withheld under the backup
withholding rules by filing the appropriate claim for refund with the IRS.
STATE AND LOCAL TAX
The Company and its stockholders may be subject to state and local tax in
states and localities in which it does business or owns property. The tax
treatment of the Company and the stockholders in such jurisdictions may differ
from the federal income tax treatment described above. Consequently, prospective
stockholders should consult their own tax advisors regarding the effect of state
and local tax laws on an investment in the Company.
21
<PAGE> 90
PLAN OF DISTRIBUTION
The Company may sell Common Stock to one or more underwriters or dealers
for public offering and sale by them, or may sell Common Stock to investors
directly or through agents. The Prospectus Supplement with respect to the Common
Stock offered thereby describes the terms of the offering of such Common Stock
and the method of distribution of the Common Stock offered thereby and
identifies any firms acting as underwriters, dealers or agents in connection
therewith.
The Common Stock may be distributed from time to time in one or more
transactions at a fixed price or prices (which may be changed), at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices, at negotiated prices or at prices determined as specified in the
Prospectus Supplement. In connection with the sale of the Common Stock,
underwriters, dealers or agents may be deemed to have received compensation from
the Company in the form of underwriting discounts, concessions or commissions
and may also receive commissions from purchasers of the Common Stock for whom
they may act as agent. Underwriters may sell the Common Stock to or through
dealers, and such dealers may receive compensation in the form of discounts,
concessions or commissions from the underwriters and/or commissions from the
purchasers for whom they may act as agent. Certain of the underwriters, dealers
or agents who participate in the distribution of Common Stock may engage in
other transactions with, or perform other services for, the Company in the
ordinary course of business.
Any underwriting compensation paid by the Company to underwriters or agents
in connection with the offering of Common Stock, and any discounts, concessions
or commissions allowed by underwriters to dealers, are set forth in the
Prospectus Supplement. Underwriters, dealers and agents participating in the
distribution of Common Stock may be deemed to be underwriters, and any discounts
or commissions received by them and any profit realized by them on the resale of
the Common Stock may be deemed to be underwriting discounts and commissions
under the Securities Act. Any such underwriter or agent will be identified, and
any such compensation received from the Company will be described, in the
applicable Prospectus Supplement.
Underwriters and their controlling persons, dealers and agents may be
entitled, under agreements entered into with the Company, to indemnification
against and contribution toward certain civil liabilities, including liabilities
under the Securities Act.
In order to comply with the securities laws of certain states, if
applicable, Common Stock will be sold in such jurisdictions only through
registered or licensed brokers and dealers. In addition, in certain states
Common Stock may not be sold unless it has been registered or qualified for sale
in the applicable state or an exemption from the registration or qualification
requirement is available and is complied with.
EXPERTS
The consolidated financial statements and financial statement schedules as
of December 31, 1996 and 1995, and for the years ended December 31, 1996, 1995
and 1994 incorporated by reference in this Prospectus or elsewhere in the
Registration Statement of which this Prospectus is a part, have been
incorporated herein in reliance upon the report of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of said firm as experts in
accounting and auditing.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Shearman &
Sterling, New York, New York and Lionel, Sawyer & Collins, Las Vegas, Nevada.
22
<PAGE> 91
[MAP OF UNITED STATES DESCRIBING PROPERTY LOCATIONS]
Current City Locations
Core Properties prior to 1995
1995 Acquisitions
1996 Acquisitions
1997 Acquisitions
1998 Acquisitions
<PAGE> 92
=======================================================
NO DEALER, SALESMAN OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER, DEALER OR AGENT. THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS DO NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES BY ANYONE IN
ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS
OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY SINCE SUCH DATE OR, IN THE CASE OF INFORMATION
INCORPORATED HEREIN BY REFERENCE, THE DATE OF FILING WITH THE SECURITIES AND
EXCHANGE COMMISSION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary............... S-3
Risk Factors................................ S-14
The Company................................. S-20
Recent Developments......................... S-20
Business Objectives......................... S-22
Use of Proceeds............................. S-25
Price Range of Common Stock and
Distributions............................. S-25
Capitalization.............................. S-26
Selected Condensed Consolidated Financial
and Operating Data........................ S-27
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................ S-30
Properties.................................. S-32
Management.................................. S-55
Certain Federal Income Tax Considerations... S-56
Underwriting................................ S-59
Legal Matters............................... S-60
Index to Pro Forma Condensed Consolidated
Financial Statements and Notes............ F-1
PROSPECTUS
Available Information....................... 2
Incorporation of Certain Information by
Reference................................. 3
The Company................................. 4
Use of Proceeds............................. 4
Description of Capital Stock of the
Company................................... 4
Certain Provisions of Nevada Law and of the
Company's Articles of Incorporation....... 11
Federal Income Tax Considerations........... 12
Plan of Distribution........................ 22
Experts..................................... 22
Legal Matters............................... 22
</TABLE>
=======================================================
=======================================================
16,250,000 SHARES
CORNERSTONE
PROPERTIES INC.
COMMON STOCK
----------------------------------
PROSPECTUS SUPPLEMENT
----------------------------------
MERRILL LYNCH & CO.
BT ALEX. BROWN
LAZARD FRERES & CO. LLC
LEHMAN BROTHERS
MORGAN STANLEY DEAN WITTER
NATIONSBANC MONTGOMERY
SECURITIES LLC
SALOMON SMITH BARNEY
, 1998
=======================================================
