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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-12861
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CORNERSTONE PROPERTIES INC.
(Exact name of Registrant as specified in its Charter)
NEVADA 74-2170858
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation and organization)
126 EAST 56TH STREET
NEW YORK, NEW YORK
(Address of principal executive offices)
10022
(Zip Code)
(212) 605-7100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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TITLE OF EACH CLASS: NAME OF EACH EXCHANGE ON WHICH REGISTERED:
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Common Stock, no par value New York Stock Exchange
Dusseldorf Stock Exchange
Frankfurt Stock Exchange
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. / /
Aggregate market value of registrant's voting Common Stock held by
non-affiliates as of March 24, 1999: $1,159,484,338.
Number of shares of Common Stock outstanding as of March 24, 1999: 128,210,784.
Index of Exhibits: See Item 14(c) page 53.
DOCUMENTS INCORPORATED BY REFERENCE:
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PART OF FORM 10-K
INTO WHICH
INCORPORATED
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Proxy Statement for Annual Meeting of Stockholders to be held May 25, 1999................. Part III
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Total Number of Pages: 56
Exhibit Index: Page 52
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PART I
ITEM 1. BUSINESS.
THE COMPANY
Cornerstone Properties Inc. (together with its subsidiaries, "Cornerstone"
or the "Company") is a self-administered equity real estate investment trust
("REIT") which owns, through subsidiaries, interests in 96 Class A office
buildings comprising nearly 21 million rentable square feet, a shopping center,
a hotel and developable land (collectively, the "Properties," and each interest,
a "Property"). The Properties are primarily located in twelve major metropolitan
areas throughout the United States: Atlanta, Boston, Charlotte, suburban
Chicago, Denver, Minneapolis, New York City, Phoenix, San Francisco Bay Area,
Seattle, Southern California and Washington, D.C. and surrounding suburbs. 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. 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. In January 1998, Cornerstone converted its corporate structure into an
umbrella limited partnership REIT ("UPREIT"). Under the UPREIT structure,
Cornerstone owns all of its properties and conducts all of its business through
Cornerstone Properties Limited Partnership, a Delaware limited partnership (the
"Operating Partnership"), of which the Company is the sole general partner. As
of March 15, 1999, Cornerstone owned, directly or indirectly, approximately
86.3% of the common units of partnership interest ("UPREIT Units") in the
Operating Partnership.
As a major owner of Class A office properties, management believes that the
Company is well positioned to capitalize on the continued 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 grow earnings through the sale and exchange of
non-core assets and the reinvestment into higher yielding assets.
The Company was incorporated under the laws of the State of Nevada in May
1981. The Company's principal place of business is located at Tower 56, 126 East
56(th) Street, New York, New York 10022. The Company has an internet website at
"http://www.cstoneprop.com".
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 and developing additional Class A office
properties in core markets 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.
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EXTERNAL GROWTH STRATEGY
The Company will continue to pursue significant growth in its asset base to
the extent that appropriate Class A office properties, development opportunities
and financing are available on attractive terms. The Company will continue to
implement its external growth strategies by developing and 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; 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 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 high quality of its Properties makes the Company an
attractive vehicle for stock-for-asset swap transactions and affords
access to a broader range of acquisition opportunities.
- DEVELOPMENT. The Company believes that the acquisition of selective
development sites in strategically located areas will allow the Company to
develop Class A office properties which will provide superior returns and
allow the Company to grow its portfolio with modern technologically
advanced properties. The Company currently owns or has under ground lease
12.8 acres of land held for development on which it can build up to
approximately 360,000 square feet of office space.
INTERNAL GROWTH STRATEGY
The Company believes that its existing portfolio offers opportunities for
growth through the Company's active and aggressive asset and property management
programs, 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 INCOME INCREASES. The Company believes that its current contractual
rents on leases which expire over the next several years are substantially
below the current market rents in the aggregate
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across the portfolio. As a result of this, the Company should continue to
increase its cash flow, even without an increase in occupancy.
- 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 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 obtain 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 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 significant portion of its tenants carry investment-grade
long-term debt ratings.
- REVOLVING CREDIT FACILITY. On November 3, 1998, the Company's corporate
line of credit was increased from $350.0 million to $550.0 million and the
term was extended through November 3, 2001 (the "Revolving Credit
Facility"). The Revolving Credit Facility is with a syndicate of 17 banks
led by Bankers Trust Company, The Chase Manhattan Bank and NationsBank.
The Revolving Credit Facility has been and will continue to be used for
the acquisition of additional properties as well as for general working
capital purposes. Borrowings under the Revolving Credit Facility bear
interest at a rate between 1.10% and 1.40% above the applicable London
Interbank Offered Rate
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("LIBOR"), depending upon the Company's ratio of total debt to asset value
(as defined) at the time of borrowing or the Prime Rate at the borrower's
option. The Revolving Credit Facility is also available for the issuance
of letters of credit.
- REDEPLOYMENT OF ASSETS. The Company periodically reviews its portfolio of
Properties to determine whether any assets are inconsistent with its
long-term business objectives and should, therefore, be sold and the
proceeds therefrom applied to the acquisition of more suitable assets. The
Company currently intends to sell Charlotte Plaza as well as other
non-core assets, but no assurance can be given that the Company will be
able to locate a willing buyer or sell such Properties at attractive
prices.
RECENT DEVELOPMENTS
In 1998, the Company completed more than $2.2 billion of real estate
acquisitions, consisting of 76 Class A office properties containing
approximately 10.7 million rentable square feet, a shopping center, a hotel and
12.8 acres of developable land (collectively, the "Acquired Properties"). With
the purchase of the Acquired Properties, the Company increased its investments
in real estate by approximately 109.0% from December 31, 1997 to December 31,
1998.
1998 ACQUISITIONS AND DISPOSITIONS
CORPORATE 500 CENTRE. On January 28, 1998, the Company purchased Corporate
500 Centre in Deerfield, Illinois. This Property consists of four Class A office
buildings with approximately 679,000 rentable square feet. The consideration
paid for this Property was approximately $135.0 million in cash and
approximately $15.0 million in UPREIT Units, valued at $18.50 per unit, for a
total purchase price of approximately $150.0 million.
DEARBORN LAND. On March 31, 1998, the Company sold the Dearborn Land (an
undeveloped parcel of land in Chicago that was acquired as part of the
acquisition of the PGGM Portfolio (as defined hereinafter) in October 1997) for
gross proceeds of approximately $19.0 million, resulting in a loss of
approximately $0.2 million.
ONE MEMORIAL DRIVE. On April 28, 1998, the Company purchased One Memorial
Drive in Cambridge, Massachusetts. This Class A office Property contains
approximately 353,000 rentable square feet. The total purchase price for the
Property was approximately $112.5 million, approximately $23.5 million of which
was paid in cash, approximately $29.0 million of which was paid in UPREIT Units
valued at $17.50 per unit and approximately $60.0 million of which was paid in
Common Stock valued at $17.50 per share.
FRICK BUILDING. On April 29, 1998, the Company sold the Frick Building,
located in Pittsburgh, Pennsylvania, for gross proceeds of approximately $26.7
million, resulting in a loss of approximately $2.1 million.
201 CALIFORNIA STREET & WILSHIRE PALISADES. On June 3, 1998, the Company
purchased 201 California Street in San Francisco, California and the Wilshire
Palisades building in Santa Monica, California. 201 California Street contains
approximately 240,000 rentable square feet and Wilshire Palisades contains
approximately 187,000 rentable square feet. The total purchase price for the
Properties was approximately $121.5 million, approximately $29.5 million of
which was paid in cash and approximately $29.1 million of which was paid in
UPREIT Units valued at $17.50 per unit. Also included in the purchase price was
$62.9 million in assumed debt (recorded at $64.6 million for GAAP purposes).
WILSON ACQUISITION. After receiving stockholder approval on December 14,
1998, the Company acquired substantially all of the properties and real estate
operations of William Wilson & Associates and related entities ("WW&A") (the
"Wilson Acquisition"). As part of the Wilson Acquisition, the Company acquired
interests in 69 Class A office Properties, comprising approximately 9.2 million
rentable square
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feet located primarily in the San Francisco Bay Area and in Southern California,
a shopping center consisting of approximately 252,000 rentable square feet in
Santa Clara, California, a hotel consisting of 90,000 square feet in Santa
Clara, California and 12.8 acres of developable land in the San Francisco Bay
Area (collectively, the "Wilson Projects").
The Company acquired WW&A for a purchase price of approximately $1.8
billion, consisting of approximately 14.9 million shares of Common Stock valued
at $17.25 per share (recorded at $16.25 per share for generally accepted
accounting principles ("GAAP") purposes), approximately 16.2 million UPREIT
Units valued at $17.25 per unit (recorded at $16.25 per unit for GAAP purposes),
approximately $465.0 million in cash and the assumption of approximately $760.0
million of property and construction related debt (recorded at $773.7 million
for GAAP purposes). The cash portion of the transaction was financed primarily
from the Company's Revolving Credit Facility and the sale of $200.0 million of
Common Stock to Stichting Pensioenfonds Voor de Gezondheid Geestelijke en
Maatschappelijke Belangen ("PGGM"), an approximate 33.6% stockholder prior to
the Wilson Acquisition, priced at $17.25 per share. See "ITEM 2.
PROPERTIES--Table of Properties" for a listing of the Wilson Projects described
above.
The Company has undertaken the Wilson 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. Taken together, the additional benefits of these acquisitions are
expected to include: (i) accretive effects to the Company's FFO for 1999; (ii)
expanded presence in attractive California markets; (iii) higher internal growth
rate for the combined portfolio; (iv) expanded capabilities including
development and property management as well as increased management depth; (v)
diversification of Cornerstone's tenant base; (vi) expanded base of investors
and increased market capitalization; and (vii) access to former WW&A
relationships.
OTHER RECENT DEVELOPMENTS
TOWER 56. On January 5, 1998, the Company purchased for approximately $5.5
million, the remaining participation rights in the cash flow and residual value
of Tower 56 from the former participants for 307,692 shares of Common Stock. As
a result, all of the cash flow and residual value of Tower 56 inures to the
Company.
UPREIT TRANSACTION. On January 20, 1998, the Company transferred
substantially all of its assets into the Operating Partnership. As part of the
UPREIT formation, all of the Company's interests in the Properties are held by
or through the Operating Partnership, a Delaware limited partnership, of which
the Company is the sole general partner. As of March 24, 1999, Cornerstone
owned, directly or indirectly, approximately 86.3% of the UPREIT Units in the
Operating Partnership. The purpose of the Company forming an UPREIT was 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-deferred
capital contribution rather than a taxable sale.
SECONDARY PUBLIC OFFERING. On February 6, 1998, the Company completed a
secondary public offering of 14,375,000 shares of Common Stock at $18.25 per
share. The shares were placed in the U.S. through a syndicate of seven
investment banks led by Merrill Lynch & Co. Net proceeds to the Company were
approximately $247.9 million ($262,343,750 gross proceeds less an underwriting
discount of $13,728,125 and expenses of $750,000). The net proceeds were used to
repay outstanding borrowings under the Revolving Credit Facility and for working
capital purposes.
DEVELOPMENT PROJECT. On April 15, 1998, the Company entered into an
agreement to purchase a 927,000 square-foot Class A office building, currently
under development, in downtown Minneapolis, Minnesota. Approximately $36.9
million has been spent through December 31, 1998 on the construction. The
project is scheduled to be completed in the year 2000 and is 50% pre-leased. The
development is
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being financed through a construction loan by U.S. Bank. Upon completion, the
Company will retire the construction loan and acquire the property from the
developer for an amount to be determined by applying a negotiated formula to
in-place net operating income.
ONE NORWEST CENTER REFINANCING. On September 25, 1998, the Company
completed the refinancing of the $96.1 million mortgage on One Norwest Center
with Connecticut General Life Insurance Company ("CIGNA") and Massachusetts
Mutual Life Insurance Company ("Mass Mutual"). As a result of the refinancing,
the principal was increased to $98.5 million, the term of the loan was extended
from three years to ten years and the interest rate was reduced from 7.50% to
6.90%.
CORPORATE 500 CENTRE REFINANCING. On October 9, 1998, the Company completed
the refinancing of the $80.0 million mortgage on Corporate 500 Centre with
Teachers Insurance and Annuity Association. As a result of the refinancing, the
principal balance was increased to $90.0 million, the term of the loan was
extended from 4.5 years to 10 years and the interest rate was increased by three
basis points to 6.66%.
TERMS OF THE REVOLVING CREDIT FACILITY. On November 3, 1998, a syndicate of
17 banks led by Bankers Trust Company, The Chase Manhattan Bank and NationsBank
provided the Company with a $550.0 million Revolving Credit Facility for
acquisitions, general working capital purposes as well as the issuance of
letters of credit. The interest rate on the Revolving Credit Facility depends on
the Company's ratio of total debt to total asset value (as defined) at the time
of borrowing and will be at a spread of 1.10% to 1.40% over the applicable LIBOR
rate or the Prime Rate at the borrower's option. The Revolving Credit Facility
expires on November 3, 2001.
MARKET SQUARE TRANSACTION. On November 6, 1998, the Company purchased an
additional 14.29% partnership interest in Market Square Associates ("MSA") for
$4.0 million. Upon completion of the transaction, the Company effectively owns
99.14% of the MSA entity, which has a 70.0% interest in Avenue Associates
Limited Partnership ("AALP"). AALP owns and operates Market Square.
AMENDMENT AND RESTATEMENT OF THE INCENTIVE PLAN. On December 14, 1998, the
stockholders of the Company approved the amended and restated Cornerstone
Properties Inc. 1998 Long-Term Incentive Plan (the "Incentive Plan"). The
amendment and restatement increased the number of shares of Cornerstone Common
Stock available for issuance of grants under the Incentive Plan from 3,000,000
to approximately 7,400,000 and permits the granting of stock options and other
awards to non-employee directors of Cornerstone.
RISK FACTORS
Set forth below are the risks that we believe are material to investors who
purchase or own the Company's Common Stock or Units of limited partnership
interest of the Operating Partnership, which are redeemable on a one-for-one
basis for shares of Common Stock or, at our option, cash.
THERE CAN BE NO ASSURANCE THAT WE WILL EFFECTIVELY MANAGE THE WILSON ACQUISITION
AND EXPANSION INTO NEW MARKETS
We have been growing rapidly through acquisitions. As of March 24, 1999, we
owned interests in 96 office buildings containing approximately 21 million
square feet. In October 1997, we acquired nine properties from PGGM. The
acquisition of 201 California Street and the Wilshire Palisades building in June
1998 extended the Company's operations to California. The Wilson Acquisition in
December 1998 added 69 office buildings to the Company's portfolio, primarily in
the San Francisco Bay Area and Southern California. The Wilson Acquisition also
requires the Company to integrate the executive management and other employees
of WW&A into the Company's organization. If we do not effectively manage the
rapid growth of our portfolio and the addition of former WW&A personnel to the
Company's management team, we may not be able to make expected distributions to
our stockholders.
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OUR PERFORMANCE AND SHARE VALUE ARE SUBJECT TO RISKS ASSOCIATED WITH THE REAL
ESTATE INDUSTRY
GENERAL. If our assets do not generate income sufficient to pay our
expenses, service our debt and maintain our properties, we may not be able to
make expected distributions to our stockholders. Several factors may adversely
affect the economic performance and value of our Properties. These factors
include changes in the national, regional and local economic climate, local
conditions such as an oversupply of office properties or a reduction in demand
for office properties, the attractiveness of our Properties to tenants,
competition from other available office properties, changes in market rental
rates and the need to periodically repair, renovate and relet space. Our
performance also depends on our ability to collect rent from tenants and to pay
for adequate maintenance, insurance and other operating costs (including real
estate taxes), which could increase over time. Also, the expenses of owning and
operating a property are not necessarily reduced when circumstances such as
market factors and competition cause a reduction in income from the property. If
a Property is mortgaged and we are unable to meet the mortgage payments, the
lender could foreclose on the mortgage and take the Property. In addition,
interest rate levels, the availability of financing, changes in laws and
governmental regulations (including those governing usage, zoning and taxes) and
financial distress or bankruptcies of tenants may adversely affect our financial
condition.
WE MAY BE UNABLE TO RENEW LEASES OR RELET SPACE AS LEASES EXPIRE. When our
tenants decide not to renew their leases upon their expiration, we may not be
able to relet the space. Even if the tenants do renew or we can relet the space,
the terms of renewal or reletting, including the cost of required renovations,
may be less favorable than current lease terms. Through the end of 2003, leases
will expire on a total of 54.3% of the "Full Service Straight-Line Rent" (the
average of all actual rent required to be paid through the term of the leases
relating to the Properties calculated in accordance with GAAP, plus recoveries).
If we are unable to promptly renew the leases or relet this space, or if the
rental rates upon such renewal or reletting are significantly lower than
expected rates, then our results of operations and financial condition will be
adversely affected. Consequently, our cash flow and ability to service debt and
make distributions to stockholders would be adversely affected.
NEW ACQUISITIONS MAY FAIL TO PERFORM AS EXPECTED. We intend to continue to
actively acquire office properties. Newly acquired properties may fail to
perform as expected. If newly acquired properties fail to deliver expected
returns, our ability to service debt incurred in connection with such
acquisitions and to make distributions to stockholders would be adversely
affected.
COMPETITION FOR ACQUISITIONS MAY RESULT IN INCREASED PRICES FOR
PROPERTIES. Other major real estate investors with significant capital will
compete with us for attractive investment opportunities. These competitors
include other publicly traded REIT's, private REIT's, investment banking firms
and private institutional investment funds. This competition has increased
prices for office properties in recent years. As prices increase, the spread
between the rate of return on investments and our cost of capital is reduced.
Accordingly, the increase in prices for acquisitions will make it more difficult
for us to make suitable property acquisitions on favorable terms.
BECAUSE CORNERSTONE'S PROPERTIES ARE ILLIQUID AND SUBJECT TO RESTRICTIONS ON
SALE, WE MAY NOT BE ABLE TO SELL PROPERTIES AT THE MOST FAVORABLE TIMES. Real
estate investments, especially office property investments of relatively large
size, generally cannot be sold quickly. We may not be able to vary our portfolio
promptly in response to economic or other conditions. This inability to respond
promptly to changes in the performance of our investments could adversely affect
our financial condition and ability to service debt and make distributions to
our stockholders. Further, Cornerstone has entered into several agreements
pursuant to which Cornerstone has subjected a number of its Properties,
including all of the Wilson Projects, to restrictions that may adversely impact
Cornerstone's ability to sell or otherwise dispose of such Properties if such
disposal would result in certain adverse tax consequences for the former owners
of such Properties. The Operating Partnership is also subject to a number of
similar sale and merger restrictions and debt maintenance obligations in
connection with certain of its Properties under the terms of
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amendments to the partnership agreement of the Operating Partnership entered
into at the time of acquisition of such Properties. These restrictions may
prevent us from selling Properties on favorable terms and thereby could
adversely affect our financial position and results of operations.
CORNERSTONE'S ASSETS ARE CONCENTRATED IN SAN FRANCISCO BAY AREA. 45 of the
Company's 96 office Properties are located in the metropolitan San Francisco
area. This concentration of assets makes the Company particularly vulnerable to
adverse changes in the San Francisco economy. A deterioration of economic
conditions in this market would have an adverse effect on our results of
operations and our ability to make expected distributions to stockholders.
CORNERSTONE'S ASSETS ARE CONCENTRATED IN EARTHQUAKE-PRONE AREAS. 66 of our
office Properties are located in California, an area of particular earthquake
risk. A major earthquake in California may cause substantial damage or
destruction to our Properties. We carry earthquake insurance on all of our
Properties located in California. Our earthquake policies, however, are subject
to coverage limitations. In light of the California earthquake risk, California
building codes since the early 1970s have established construction standards for
all new buildings. The current and strictest construction standards were adopted
in 1987. Of the 66 office Properties located in California as of March 24, 1999,
25 have been built since January 1, 1988, and we believe they were constructed
in full compliance with the applicable standards existing at the time of
construction. It is possible that material losses in excess of insurance
proceeds will occur in the future, which would have a material adverse impact on
the Company's financial position.
WE ARE DEPENDENT ON EXTERNAL SOURCES OF CAPITAL
To qualify as a REIT, we must distribute to stockholders each year at least
95% of our "REIT taxable income" (excluding any net capital gain). Because of
these distribution requirements, it is not likely that we will be able to fund
all future capital needs. We therefore will have to rely on third-party sources
of capital, which may or may not be available on favorable terms or at all. Our
access to third-party sources of capital depends on a number of things,
including the market's perception of our growth potential and our current and
potential future earnings. Moreover, additional equity offerings may result in
substantial dilution of stockholders' interests, and additional debt financing
may substantially increase our leverage.
DEBT FINANCING, FINANCIAL COVENANTS, DEGREE OF LEVERAGE AND INCREASES IN
INTEREST RATES COULD ADVERSELY AFFECT OUR PERFORMANCE
SCHEDULED DEBT PAYMENTS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION. Our
business is subject to risks normally associated with debt financing. Cash flow
could be insufficient to pay distributions at expected levels and meet required
payments of principal and interest. We may not be able to refinance existing
indebtedness (which in virtually all cases requires substantial principal
payments at maturity) and, if we can, the terms of such refinancing might not be
as favorable as the terms of existing indebtedness. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources." If principal payments due at maturity cannot be refinanced,
extended or paid with proceeds of other capital transactions, such as new equity
capital, our cash flow will not be sufficient in all years to repay all maturing
debt. If prevailing interest rates or other factors at the time of refinancing
(such as the possible reluctance of lenders to make commercial real estate
loans) result in higher interest rates, increased interest expense would
adversely affect cash flow and our ability to service debt and make
distributions to stockholders.
FINANCIAL COVENANTS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION. If a
Property is mortgaged to secure payment of indebtedness and we are unable to
meet mortgage payments, the mortgagee could foreclose on the Property, resulting
in loss of income and asset value. The mortgages on our Properties contain
customary negative covenants which, among other things, limit our ability,
without the prior consent of the lender, to further mortgage the Property, to
enter into new leases or materially modify existing leases, and to discontinue
insurance coverage. In addition, our Revolving Credit Facility contains
8
<PAGE>
certain customary restrictions, requirements and other limitations on our
ability to incur indebtedness. Foreclosure on mortgaged Properties or an
inability to refinance existing indebtedness would likely have a negative impact
on our financial condition and results of operations.
OUR DEGREE OF LEVERAGE COULD LIMIT OUR ABILITY TO OBTAIN ADDITIONAL
FINANCING. Our Debt-to-Total-Market-Capitalization Ratio, which is defined as
the total indebtedness of the Company as a percentage of total indebtedness plus
the market value of the outstanding shares of Common Stock (assuming the
conversion of all outstanding shares of preferred stock and the redemption of
all UPREIT Units into shares of Common Stock) as of December 31, 1998 was
approximately 45.6%. The degree of leverage could have important consequences to
stockholders, including affecting our ability to obtain additional financing in
the future for working capital, capital expenditures, acquisitions, development
or other general corporate purposes and making us more vulnerable to a downturn
in business or the economy in general.
RISING INTEREST RATES COULD ADVERSELY AFFECT CASH FLOW. Advances under the
Revolving Credit Facility bear interest at a variable rate depending upon the
Company's leverage ratio based upon LIBOR. We had, as of March 24, 1999,
interest rate hedging agreements for approximately $250.0 million of our
floating rate debt to limit our exposure to rising interest rates. Although
hedging agreements enable us to convert floating rate liabilities to fixed rate
liabilities, they expose us to the risk that the counterparties to such hedge
agreements may not perform, which could increase our exposure to rising interest
rates. We may borrow additional money with variable interest rates in the
future, and enter into other transactions to limit our exposure to rising
interest rates as appropriate. Increases in interest rates, or the loss of the
benefits of hedging agreements, would increase our interest expense, which would
adversely affect cash flow and our ability to service our debt and make expected
distributions to stockholders.
PGGM AND WILLIAM WILSON III EXERCISE SIGNIFICANT CONTROL OF CORPORATE GOVERNANCE
MATTERS
PGGM owns approximately 35.7% of the outstanding shares of Common Stock as
of March 24, 1999. As a result, PGGM exercises significant influence over the
outcome of any matters submitted to a vote of stockholders. PGGM also has the
right to designate two individuals for nomination to the Board of Directors of
the Company. The Restated and Amended Bylaws of the Company provide that William
Wilson III shall serve as Chairman of the Board for a term of at least three
years from the date of the Wilson Acquisition, December 16, 1998, and during
such term Mr. Wilson will have the right to designate himself and two other
individuals to serve as directors of the Company. These provisions give Mr.
Wilson significant influence over the management of the Company. In exercising
their control, PGGM and Mr. Wilson may have interests that differ from those of
other stockholders with respect to prospective acquisitions or dispositions of
assets, development opportunities, compensation policy, setting the appropriate
degree of leverage for the Company or other matters. PGGM and Mr. Wilson, if
they act in concert, may delay or prevent a change in control of the Company or
other transaction that could provide the stockholders with a premium over the
then-prevailing market price of their shares of Common Stock or which might
otherwise be in the best interest of our stockholders.
WE HAVE A SHARE OWNERSHIP LIMIT FOR REIT TAX PURPOSES
To remain qualified as a REIT for federal income tax purposes, not more than
50% in value of our outstanding shares of Common Stock may be owned, directly or
indirectly, by five or fewer individuals (as defined in the federal income tax
laws applicable to REITs) at any time during the last half of any year. To
facilitate maintenance of our REIT qualification, our Articles of Incorporation
contain restrictions on share ownership that are designed to prevent violation
of this requirement. We refer to this as the "Ownership Limit." Our Articles of
Incorporation exempt certain stockholders from the Ownership Limit and permit
the Board of Directors to waive or modify the Ownership Limit with respect to a
stockholder where such exemption or waiver would not jeopardize our REIT status.
The Ownership Limit could delay or prevent a change in control and, therefore,
could adversely affect our stockholders' ability to realize a premium over the
then-prevailing market price for the Common Stock.
9
<PAGE>
THIRD-PARTY SERVICES BUSINESS RISKS; LACK OF CONTROL OF WCP SERVICES, INC.
THIRD-PARTY SERVICES CONTRACTS MAY BE TERMINATED. In addition to ownership
of our Properties, we provide fee-based management, leasing, construction and
development services for third parties. Many of these services are provided
under contracts that can be terminated by either party upon short or no notice.
Any such contract would likely be terminated in connection with a sale of the
property, over which we have no control. When they expire, these contracts might
not be renewed or might be renewed on less favorable terms. Also, the rental
revenues on which certain management fees are based could decline as a result of
general real estate market conditions or specific market factors. This would
result in decreased management fee income for the Company.
WE DO NOT CONTROL OUR MANAGEMENT AND SERVICES BUSINESS. To facilitate
maintenance of our REIT qualification, our third-party services business is
conducted by WCP Services, Inc. Although we own 95% of the economic interest in
WCP Services, Inc., its voting stock is owned by William Wilson III and John S.
Moody. We therefore do not control the timing or amount of distributions or the
management and operation of WCP Services, Inc. As a result, decisions relating
to the declaration and payment of distributions and the business policies and
operations of WCP Services, Inc. could be adverse to our interests or could lead
to adverse financial results.
ENVIRONMENTAL PROBLEMS ARE POSSIBLE AND CAN BE COSTLY
Federal, state and local laws and regulations relating to the protection of
the environment may require a current or previous owner or operator of real
estate to investigate and clean up hazardous or toxic substances or petroleum
product releases at such property. The owner or operator may have to pay a
governmental entity or third parties for property damage and for investigation
and clean-up costs incurred by such parties in connection with the
contamination. Such laws typically impose clean-up responsibility and liability
without regard to whether the owner or operator knew of or caused the presence
of the contaminants. Even if more than one person may have been responsible for
the contamination each person covered by the environmental laws may be held
responsible for all of the clean-up costs incurred. In addition, third parties
may sue the owner or operator of a site for damages and costs resulting from
environmental contamination emanating from that site.
We are not aware of any environmental liabilities at the Properties that we
believe would have a material adverse effect on our business, assets, financial
condition or results of operations. We believe that our Properties are in
compliance in all material respects with applicable environmental laws.
Unidentified environmental liabilities could arise, however, and could have an
adverse effect on our financial condition and performance.
THE MARKET VALUE OF THE COMMON STOCK CAN BE ADVERSELY AFFECTED BY A NUMBER OF
FACTORS
CHANGES IN MARKET CONDITIONS COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR
SHARES. As with other publicly traded shares, the value of our Common Stock
depends on various market conditions, which may change from time to time. Among
the market conditions that may affect the value of our publicly traded
securities are the following: the extent of institutional investor interest in
the Company; the reputation of REIT's and office REIT's generally and the
attractiveness of their equity securities in comparison to other equity
securities (including securities issued by other real estate companies); our
financial condition and performance; and general financial market conditions.
OUR EARNINGS AND CASH DISTRIBUTIONS WILL AFFECT THE MARKET PRICE OF OUR
SHARES. We believe that the market value of a REIT's common stock is based at
least in part upon the market's perception of the REIT's growth potential and
its current and potential future cash distributions, as well as upon the real
estate market value of the underlying assets. For that reason, our Common Stock
may trade at prices that are higher or lower than the net asset value per share.
Our failure to meet the market's expectations with
10
<PAGE>
regard to future earnings and cash distributions would likely adversely affect
the market price of our Common Stock.
MARKET INTEREST RATES MAY HAVE AN EFFECT ON THE VALUE OF OUR SHARES. One of
the factors that investors consider important in deciding whether to buy or sell
shares of a REIT is the distribution rate on such shares (as a percentage of the
price of such shares) relative to market interest rates. If market interest
rates go up, prospective purchasers of REIT shares may expect a higher
distribution rate. Higher interest rates would not, however, result in more
funds for us to distribute and, in fact, would likely increase our borrowing
costs and potentially decrease funds available for distribution. Thus, higher
market interest rates could cause the market price of our Common Stock to go
down.
OUR SUCCESS AS A REIT IS DEPENDENT ON COMPLIANCE WITH FEDERAL INCOME TAX
REQUIREMENTS
FAILURE TO QUALIFY AS A REIT WOULD HAVE SERIOUS ADVERSE CONSEQUENCES TO OUR
STOCKHOLDERS. We have made an election to be taxed as a REIT and believe that
we meet the requirements for qualification and taxation as a REIT. We plan to
continue to meet the requirements for taxation as a REIT. Many of these
requirements, however, are highly technical and complex. The determination that
the Company is a REIT requires an analysis of various factual matters and
circumstances that may not be totally within our control. For example, to
qualify as a REIT we must meet certain tests regarding the sources of our gross
income and the nature of our assets. The Company is also required to distribute
to stockholders at least 95% of its REIT taxable income (excluding capital
gains). The fact that we hold our assets through the Operating Partnership and
its subsidiaries further complicates the application of the REIT requirements.
Even a technical or inadvertent mistake could jeopardize our REIT status.
Furthermore, Congress and the Internal Revenue Service ("IRS") might make
changes to the tax laws and regulations, and the courts might issue new rulings
that make it more difficult, or impossible, for the Company to remain qualified
as a REIT.
If the Company fails to qualify as a REIT, the Company would be subject to
federal income tax at regular corporate rates. Also, unless the IRS granted the
Company relief under certain statutory provisions, the Company would remain
disqualified as a REIT for four years following the year the Company first
failed to qualify. If the Company failed to qualify as a REIT, the Company would
have to pay significant income taxes and would therefore have less money
available for investments or for distributions to stockholders. This would
likely have a significant adverse effect on the value of our Common Stock. In
addition, the Company would no longer be required to make any distributions to
stockholders.
EFFECT OF REIT DISTRIBUTION REQUIREMENTS. To qualify as a REIT, we are
required each year to distribute to our stockholders at least 95% of our "REIT
taxable income" (excluding net capital gains). In addition, we are subject to a
nondeductible 4% excise tax on the amount, if any, by which certain
distributions we pay with respect to any calendar year are less than the sum of
85% of our ordinary income and 95% of our capital gain net income for the
calendar year, plus any amount of such income not distributed in prior years.
Although we anticipate that cash flow from operations will be sufficient to
enable us to pay our operating expenses and meet the distribution requirements
discussed above, there can be no assurance that this will be the case. In
addition, there could be differences in timing between the accrual of income and
the deduction of expenses in arriving at our taxable income. Under certain
circumstances, it may be necessary for us to incur borrowings or otherwise
obtain funds to satisfy the distribution requirements associated with
maintaining qualification as a REIT. There can be no assurance that we will be
able to borrow funds or otherwise obtain funds if and when necessary to satisfy
such requirements.
GOVERNMENTAL REGULATIONS MAY IMPOSE SIGNIFICANT COSTS ON OUR BUSINESS
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
11
<PAGE>
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 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 at the Properties may result in significant
unanticipated expenditures, which could adversely affect the Company and its
ability to make distributions to stockholders.
YEAR 2000 COMPLIANCE
GENERAL
The Year 2000 compliance issue concerns the inability of computerized
information systems to accurately calculate, store or use a date after December
31, 1999. This could result in a system failure or miscalculations causing
disruptions of operations. The Year 2000 issue affects virtually all companies
and all organizations. Management recognizes the importance of ensuring that its
business and operational systems are not disrupted as a result of Year 2000
issues.
READINESS
Cornerstone Properties Inc. has created a Year 2000 task force to evaluate
and take the appropriate actions regarding Year 2000 compliance. The Company's
plan is divided into three major sections: (i) compliance of information systems
at the corporate offices in New York and Atlanta ("Home Office"); (ii)
compliance of information and real estate operating systems at the corporate
offices in California and the Wilson Projects ("Wilson"); and (iii) assessment
of compliance of significant service providers including third party managers
and the buildings they manage, vendors and customers ("External Agents"). The
plan covers the following major tasks: (i) inventory of all systems; (ii)
analysis of inventory including assessment of risk; (iii) verification of
compliance of inventory with vendors; (iv) testing of critical equipment and
processes; and (v) replacement or modification of systems.
The first section of the plan, Home Office, is complete. The Wilson and
External Agents sections of the plan are proceeding according to schedule with
expected completions before December 31, 1999. The plan also includes
questionnaires that will be sent to tenants in order to attempt to determine the
effect of Year 2000 on their businesses and ultimately the Company's income
stream.
COST
The total historical and anticipated remaining costs for the Year 2000
remediation are estimated to be immaterial to the Company's financial condition.
The costs to date consist of recurring systems upgrades and replacements,
immaterial internal staff costs and other expenses such as telephone and mailing
costs. The information and real estate operating systems that have thus far been
identified as non-compliant are at or approaching the end of their useful lives
and have been or will be replaced or upgraded as a part of the normal operations
of the Company.
RISKS AND CONTINGENCY PLANS
The Company does not anticipate significant delays in finalizing the first
two sections of its Year 2000 remediation plan. However, External Agents having
a material relationship with the Company (e.g., property managers, utilities,
financial institutions, governmental agencies, municipalities and major tenants)
may be a potential risk based on their individual Year 2000 preparedness, which
may not be within
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<PAGE>
the Company's reasonable control. The Company is in the process of identifying,
reviewing and logging the Year 2000 preparedness of critical External Agents.
While the Company is not aware of any matters with regard to its major
tenants which could give rise to a material default, there may be a potential
risk with regard to their Year 2000 preparedness which may be outside the
Company's reasonable control. The Company is currently in the process of
surveying its tenants to try to predetermine the risk of defaults due to Year
2000 issues.
Currently, there has been no indication or expectation of material risks in
the compliance of the first two sections of the plan. Pending unfavorable
results, the Company will determine what course of action and contingencies will
need to be made. There can be no assurance that external Year 2000 issues will
be resolved. Noncompliance of External Agents as well as the Company's major
tenants could have a material adverse impact on the Company's business,
operating results and financial condition.
YEAR 2000 COMPLIANCE DETAIL
Home Office
I. Inventory of all systems: The Company has inventoried all information
systems at its corporate offices in New York and Atlanta. The hardware
systems primarily consist of desktop and laptop computers, server
computers, printers, phone systems and local area and wide area network
infrastructures. The software applications primarily consist of
commercial off the shelf software ("COTS") products for spreadsheet
analysis, word processing, accounting, cash flow analysis and other
office automation tasks.
II. Analysis of inventory and assessment of risk: The systems inventory has
been analyzed as to its compliance via vendor certifications. All of the
Home Office systems are Year 2000 compliant.
III. Verification of compliance with vendors: The Company has verified
compliance of systems through systems' documentation, mail
correspondences and vendor web sites.
IV. Testing of critical equipment and processes: The Home Office primarily
uses COTS products and does not significantly rely on any proprietary or
customized systems. The Company has performed no testing and has relied
upon vendor certifications and vendor internal testing processes.
V. Replacement or modification of systems: The Company has replaced or
modified non-compliant systems in the ordinary course of business.
Wilson
I. Inventory of all systems: The Company continues to inventory all
information and real estate operating systems at its offices and
Properties, the majority of which are located in California. The
information systems primarily consist of desktop and laptop computers,
server computers, printers, phone systems, local area and wide area
network infrastructures, and COTS products for spreadsheet analysis,
word processing, accounting, cash flow analysis and other office
automation tasks. The real estate operating systems primarily consist of
heating ventilation and air conditioning ("HVAC") systems, elevator
systems, electrical systems, fire and life safety systems and security
control systems.
II. Analysis of inventory and assessment of risk: The systems inventory has
been analyzed as to its compliance via vendor certifications.
Substantially all of the information and real estate operating systems
are Year 2000 compliant. Those systems identified as non-compliant will
be upgraded or replaced in the normal course of business by December 31,
1999. A component of the accounting system used by Wilson has been
identified as non-compliant. An upgrade has been purchased and will be
installed by the end of the second quarter of 1999. The cost of the
upgrade was approximately $10,000.
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III. Verification of compliance with vendors: The Company has verified
compliance of systems through systems' documentation, mail
correspondences and vendor web sites.
IV. Testing of critical equipment and processes: Wilson primarily uses COTS
products and does not significantly rely on any proprietary or
customized systems. The Company has performed no testing and has relied
upon vendor certifications and vendor internal testing processes.
V. Replacement or modification of systems: The Company has and will
continue to replace or modify non-compliant systems in the ordinary
course of business.
External Agents
As part of the Company's Year 2000 compliance plan, significant service
providers, vendors and customers have been identified and steps are being
undertaken to reasonably ascertain their stage of Year 2000 readiness. Through
questionnaires, web sites, interviews, on site visits and other available means,
the Company is assessing the Year 2000 risk of its third party property
managers, financial institutions, significant tenants and other significant
business partners.
Of the External Agents, the Company has focused attention on assessing the
Year 2000 risk of its third party property managers and the associated real
estate operating systems (HVAC systems, elevator systems, electrical systems,
fire and life safety systems and security control systems). Currently, through
the process of surveys, interviews and on site visits, there has been no
indication of material Year 2000 risks at the Company's third-party property
managers. Non-compliant systems will be upgraded or replaced in the normal
course of business before December 31, 1999 or will be addressed with a
contingency plan.
There can be no assurance that external Year 2000 issues will be resolved.
Should non-compliance of External Agents not be discovered, such non-compliance
could have a material adverse impact on the Company's business, operating
results and financial condition. Where possible, the Company will terminate any
vendor relationships should it find any material Year 2000 issues with that
vendor.
TAX STATUS
The Company has elected to be taxed as a REIT for federal income tax
purposes and believes that it has met the requirements for qualification and
taxation as a REIT commencing with its taxable year ended December 31, 1983. As
a REIT, the Company generally is not subject to corporate federal income tax on
net income that it currently distributes to its stockholders, provided that the
Company satisfies certain technical requirements relating to, among other
things, the composition of its gross income and assets and the requirements to
distribute at least 95% of its REIT taxable income to stockholders.
COMPETITION
The leasing of real estate is highly competitive. The Company's Properties
compete for tenants with similar properties located in its markets primarily on
the basis of location, rent charged, services provided and the design and
condition of the improvements. The Company also experiences competition when
attempting to acquire interests in desirable real estate, including competition
from domestic and foreign financial institutions, other REIT's, life insurance
companies, pension trusts, trust funds, partnerships and individual investors.
In addition, the Company competes for the acquisition of building sites or
redevelopment opportunities with domestic and foreign financial institutions,
other REIT's, life insurance companies, pension trusts, trust funds,
partnerships and individual investors.
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INDUSTRY SEGMENTS
The Company has one reportable segment--real estate. The Company does not
have foreign operations and its business is not seasonal. The Company has
adopted Statement of Financial Accounting Standard No. 131 ("SFAS 131"), which
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to stockholders. See Notes to Consolidated
Financial Statements which are part of this report for further discussion.
EMPLOYEES
As of December 31, 1998, the Company had approximately 340 employees.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
In passing the Private Securities Litigation Reform Act of 1995 (the "Reform
Act"), 15 U.S.C.A. Section 77z-2 and 78u-5 (Supp. 1996), Congress encouraged
public companies to make "forward-looking statements" by creating a safe harbor
to protect companies from securities law liability in connection with
forward-looking statements. Cornerstone intends to qualify both its written and
oral forward-looking statements for protection under the Reform Act and any
other similar safe harbor provisions.
"Forward-looking statements" are defined by the Reform Act. Generally,
forward-looking statements include expressed expectations of future events and
the assumptions on which the expressed expectations are based. All
forward-looking statements are inherently uncertain as they are based on various
expectations and assumptions concerning future events and they are subject to
numerous known and unknown risks and uncertainties which could cause actual
events or results to differ materially from those projected. Due to those
uncertainties and risks, the investment community is urged not to place undue
reliance on written or oral forward-looking statements of Cornerstone. The
Company undertakes no obligation to update or revise this Safe Harbor Compliance
Statement for Forward-Looking Statements to reflect future developments. In
addition, Cornerstone undertakes no obligation to update or revise
forward-looking statements to reflect changed assumptions, the occurrence of
unanticipated events or changes to future operating results over time.
The "forward-looking statements" contained in this document are made under
the captions "Business--The Company", "--Business Objectives", "--Recent
Developments", "--Risk Factors", "--Regulatory Compliance", "--Tax Status",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations" and "--Liquidity and Capital Resources".
Moreover, the Company, through its senior management, may from time to time make
"forward-looking statements" about matters described herein or other matters
concerning the Company.
Stockholders are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties and that
actual results may differ materially from those contemplated by such
forward-looking statements. Important factors known to management of Cornerstone
that could cause actual results to differ materially from those contemplated by
the forward-looking statements include, but are not limited to, difficulties
related to acquisitions and integrations of real estate companies or portfolios,
adverse changes in real estate markets, increases in interest rates, increased
development of properties that compete with the Company's portfolio, earthquakes
or other casualties in areas where a substantial number of the Company's
buildings are located, risks related to the Company's liquidity and capital
requirements, risks relating to the Company's failure to ensure its information
systems and those of its tenants are Year 2000 compliant, risks of a
deterioration in general economic conditions and other matters disclosed under
the caption "Risk Factors" herein.
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<PAGE>
ITEM 2. PROPERTIES.
TABLE OF PROPERTIES
The following table summarizes Cornerstone's interest in real estate
investments at December 31, 1998:
<TABLE>
<CAPTION>
TOTAL
MARKET NAME RENTABLE CORNERSTONE
PROPERTY SQUARE FEET INTEREST (A) YEAR CONSTRUCTED OCCUPANCY NOTES
- ----------------------------------------------- ------------- ------------- ---------------- ------------- -----
<S> <C> <C> <C> <C> <C>
BOSTON, MASSACHUSETTS
Sixty State Street........................... 823,014 100.0% 1978 99% B
500 Boylston Street.......................... 714,636 91.5% 1988 100% D
222 Berkeley Street.......................... 531,184 91.5% 1991 100% D
125 Summer Street............................ 463,691 100.0% 1989 97%
One Memorial Drive........................... 352,764 100.0% 1985 100% C
------------- ---
MARKET TOTAL................................. 2,885,289 99%
SAN MATEO COUNTY, CALIFORNIA
Bayhill (4 buildings)........................ 513,910 100.0% 1982-1987 88% E
Peninsula Office Park (7 buildings).......... 493,214 100.0% 1971-1998 98% E
Seaport Centre............................... 463,142 100.0% 1988 65% E
Bay Park Plaza (2 buildings)................. 257,058 100.0% 1985-1998 97% E
One Bay Plaza................................ 176,533 100.0% 1979 93% E
Belmont Shores............................... 141,643 100.0% 1983 97% E
1300 South El Camino......................... 84,441 100.0% 1986 100% E
66 Bovet..................................... 43,968 100.0% 1968 87% E
------------- ---
MARKET TOTAL................................. 2,173,909 88%
EAST BAY, CALIFORNIA
Corporate Centre (2 buildings)............... 329,604 100.0% 1985-1987 97% E
ADP Plaza (2 buildings)...................... 299,591 100.0% 1987-1989 93% E
PeopleSoft Plaza............................. 279,931 100.0% 1984 99% E
Norris Tech Center (3 buildings)............. 260,513 100.0% 1984-1998 96% E
Golden Bear Center........................... 160,587 100.0% 1986 96% E
2700 Ygnacio Valley Road..................... 103,214 100.0% 1984 96% E
Park Plaza................................... 87,040 100.0% 1986 86% E
1600 South Main.............................. 83,277 100.0% 1983 95% E
Foothill Corporate Center.................... 70,355 100.0% 1982 98% E
------------- ---
MARKET TOTAL................................. 1,674,112 96%
ATLANTA, GEORGIA
191 Peachtree Street......................... 1,215,288 80.0% 1991 98% D,F
200 Galleria................................. 432,698 100.0% 1985 95% D
------------- ---
MARKET TOTAL................................. 1,647,986 97%
SEATTLE, WASHINGTON
Washington Mutual Tower (3 buildings)........ 1,154,560 50.0% 1988 99% G
110 Atrium Place 213,854 100.0% 1981 97% E
Island Corporate Center...................... 100,075 100.0% 1987 96% E
------------- ---
MARKET TOTAL................................. 1,468,489 99%
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
TOTAL
MARKET NAME RENTABLE CORNERSTONE
PROPERTY SQUARE FEET INTEREST (A) YEAR CONSTRUCTED OCCUPANCY NOTES
- ----------------------------------------------- ------------- ------------- ---------------- ------------- -----
<S> <C> <C> <C> <C> <C>
SANTA CLARA COUNTY, CALIFORNIA
Pruneyard Office (3 buildings)............... 354,005 100.0% 1971-1999 99% E,H
10 Almaden................................... 293,685 100.0% 1989 100% E
Pruneyard Shopping Center.................... 252,210 100.0% 1970s 95% E
Embarcadero Place (4 buildings).............. 192,108 100.0% 1984 100% E
Pruneyard Inn................................ 90,000 100.0% 1989 E,I
First American Plaza......................... 82,596 100.0% 1971 98% E
490 California............................... 24,539 100.0% 1985 100% E
------------- ---
MARKET TOTAL................................. 1,289,143 99%
DENVER, COLORADO
One Norwest Center........................... 1,187,752 100.0% 1983 97%
------------- ---
MARKET TOTAL................................. 1,187,752 97%
SAN FRANCISCO, CALIFORNIA
120 Montgomery Street........................ 410,902 66.7% 1955 95% E
One Post..................................... 389,660 50.0% 1969 99% E
201 California Street........................ 240,230 100.0% 1980 100% J
188 Embarcadero.............................. 85,209 100.0% 1985 99% E
------------- ---
MARKET TOTAL................................. 1,126,001 98%
MINNEAPOLIS, MINNESOTA
Norwest Center............................... 1,118,062 50.0% 1988 100% K
------------- ---
MARKET TOTAL................................. 1,118,062 100%
WASHINGTON, D.C./ALEXANDRIA, VIRGINIA
Market Square (2 buildings).................. 688,709 70.0% 1990 96% D,L
99 Canal Center.............................. 137,945 100.0% 1986 98% D
TransPotomac Plaza 5......................... 92,980 100.0% 1983 96% D
11 Canal Center.............................. 70,365 100.0% 1986 95% D
------------- ---
MARKET TOTAL................................. 989,999 96%
SUBURBAN CHICAGO, ILLINOIS
Corporate 500 Centre (4 buildings)........... 678,885 100.0% 1986/1990 97% M
One Lincoln Centre........................... 297,067 100.0% 1986 90%
------------- ---
MARKET TOTAL................................. 975,952 95%
SANTA MONICA/WEST LOS ANGELES, CALIFORNIA
West Wilshire (2 buildings).................. 235,781 100.0% 1960-1976 90% E
Wilshire Palisades........................... 186,714 100.0% 1981 99% J
Janss Court.................................. 125,556 100.0% 1989 97% E,N
Searise Office Tower......................... 122,292 100.0% 1975 94% E
Commerce Park................................ 94,252 100.0% 1977 79% E,O
429 Santa Monica............................. 81,414 100.0% 1982 81% E
------------- ---
MARKET TOTAL................................. 846,009 92%
</TABLE>
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<TABLE>
<CAPTION>
TOTAL
MARKET NAME RENTABLE CORNERSTONE
PROPERTY SQUARE FEET INTEREST (A) YEAR CONSTRUCTED OCCUPANCY NOTES
- ----------------------------------------------- ------------- ------------- ---------------- ------------- -----
<S> <C> <C> <C> <C> <C>
ORANGE COUNTY, CALIFORNIA
Bixby Ranch.................................. 277,289 100.0% 1987 98% E
18301 Von Karman............................. 219,537 100.0% 1991 64% E
2677 North Main.............................. 212,542 100.0% 1987 81% E
------------- ---
MARKET TOTAL................................. 709.368 82%
CHARLOTTE, NORTH CAROLINA
Charlotte Plaza.............................. 612,728 100.0% 1982 99% D
------------- ---
MARKET TOTAL................................. 612,728 99%
ARIZONA
Gateway (2 buildings)........................ 212,222 100.0% 1984-1985 92% E
Scottsdale Centre............................ 164,469 100.0% 1985 94% E
Biltmore Lakes............................... 207,489 100.0% 1982 96% E
------------- ---
MARKET TOTAL................................. 584,180 94%
SAN DIEGO, CALIFORNIA
Centerside II................................ 286,941 100.0% 1987 94% E
Crossroads................................... 133,950 100.0% 1983 99% E
------------- ---
MARKET TOTAL................................. 420,891 95%
LOS ANGELES, CALIFORNIA
700 North Brand.............................. 202,785 100.0% 1981 94% E
Tri-Center Plaza............................. 141,946 100.0% 1990 96% E
Warner Park Center........................... 58,798 100.0% 1986 98% E
------------- ---
MARKET TOTAL................................. 403,529 95%
NEW YORK CITY, NEW YORK
527 Madison Avenue........................... 215,332 100.0% 1986 94%
Tower 56..................................... 163,633 100.0% 1983 99% P
------------- ---
MARKET TOTAL................................. 378,965 96%
CONEJO VALLEY (VENTURA), CALIFORNIA
Westlake Spectrum (2 buildings).............. 118,990 100.0% 1990 100% E
Agoura Hills................................. 115,265 100.0% 1987 88% E
------------- ---
MARKET TOTAL................................. 234,255 94%
OTHER REGIONS
U.S. West (Murray, Utah)..................... 136,608 100.0% 1985 86% E
Exposition Centre (Sacramento, California)... 72,547 100.0% 1984 65% E
------------- ---
MARKET TOTAL................................. 209,155 79%
------------- ---
TOTAL PORTFOLIO.............................. 20,935,774 96%
Minority Interest Adjustment (Q)............. (684,784)
------------- ---
CORNERSTONE PORTFOLIO........................ 20,250,990 95%
------------- ---
------------- ---
</TABLE>
18
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- ------------------------
(A) Unless noted below, cash flow and residual proceeds will be distributed to
Cornerstone according to its percentage interest.
(B) On December 31, 1997, the Company purchased the second mortgage on Sixty
State Street. The mortgage is a cash flow mortgage through which all the
economic benefits/risks (subject to the first mortgage) inure to the
Company. The Company controls all major decisions regarding management and
leasing. The total purchase price for the second mortgage was $131.5
million. The $78.4 million first mortgage on the Property was originally
recorded by the Company as an $89.6 million liability due to its
above-market interest rate.
The second mortgage, which the Company holds, is collateralized only by the
improvements on Sixty State Street. Title to the improvements is owned by
Sixty State Street Trust, the ground lessee under a ground lease that
expires on December 28, 2067. The lease payments on the ground lease are
$398,896 per annum throughout the term.
(C) On April 28, 1998, the Company purchased One Memorial Drive in Cambridge,
Massachusetts. The total purchase price for the Property was approximately
$112.5 million, approximately $23.5 million of which was paid in cash,
approximately $29.0 million of which was paid in UPREIT Units valued at
$17.50 per unit and approximately $60.0 million of which was paid in Common
Stock valued at $17.50 per share.
(D) 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 (collectively, "the PGGM Portfolio"). The Company
acquired the PGGM Portfolio for a purchase price of approximately $1.06
billion, consisting of approximately 34.2 million shares of Common Stock
valued and recorded at $16.00 per share, approximately $260.0 million in
cash and $250.0 million in promissory notes. The cash portion of the
acquisition was financed with proceeds from the Company's Initial Public
Offering in April 1997 and $54.0 million from its Revolving Credit Facility.
(E) Property was acquired as a result of the Wilson Acquisition in December
1998. After receiving stockholder approval on December 14, 1998, the Company
acquired substantially all of the properties and real estate operations of
WW&A. As part of the Wilson Acquisition, the Company acquired interests in
69 Class A office Properties, comprising approximately 9.2 million rentable
square feet primarily in the San Francisco Bay Area and in Southern
California, a shopping center consisting of approximately 252,000 rentable
square feet in Santa Clara, California, a hotel consisting of 90,000 square
feet in Santa Clara, California and 12.8 acres of developable land in the
San Francisco Bay Area.
The Company acquired WW&A for a purchase price of approximately $1.8 billion,
consisting of approximately 14.9 million shares of Common Stock valued at
$17.25 per share (recorded at $16.25 per share for GAAP purposes),
approximately 16.2 million UPREIT Units valued at $17.25 per unit (recorded
at $16.25 per unit for GAAP purposes), approximately $465.0 million in cash
and the assumption of approximately $760.0 million of property and
construction related debt (recorded at $773.7 million for GAAP purposes).
The cash portion of the transaction was financed primarily from the
Company's Revolving Credit Facility and the sale of $200.0 million of Common
Stock to PGGM, an approximate 33.6% stockholder prior to the Wilson
Acquisition, priced at $17.25 per share.
(F) While the Company's stated interest in the partnership that owns 191
Peachtree Street is 80.0%, its economic interest is significantly larger
since it has acquired the first mortgage note on the Property in the amount
of $145.0 million, which earns interest at 9.375% and will receive a
priority distribution on its acquired capital base. In 1997 and 1998, the
partner in the transaction, CH Associates, Ltd.,
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<PAGE>
received an annual Incentive Distribution (as defined) of $250,000, which
the Company expects it will continue to receive under the partnership
agreement through February 28, 2000, with the Company
receiving the remainder of the cash flow of the Property.
The partnership that owns 191 Peachtree Street leases a portion of the land
upon which the project is located pursuant to a ground lease agreement. The
agreement requires annual payments of $5,000 through January 31, 1998,
$45,000 through January 31, 2002 and $75,000 through January 31, 2008.
Thereafter, the annual rent increases $2,500 per year until the expiration
date of January 31, 2087. The partnership records ground rental expense
relating to this agreement on a straight-line basis. The ground lease is
renewable for an additional 99 years.
(G) While the Company's stated interest in the partnership that owns Washington
Mutual Tower is 50.0%, its economic interest in the Property is
significantly larger due to priority distributions it receives on its
invested capital base. For the year ended December 31, 1998, the Company
received 100% of the cash distributions from the partnership that owns
Washington Mutual Tower.
(H) Pruneyard Place is under construction with an expected completion date of
April 1999. The building is 100% pre-leased. The building will be six
stories and contain approximately 120,000 square feet of net rentable area.
(I) The Pruneyard Inn is a 118-room, three-story hotel. The Property is
currently undergoing a 25,000-square foot expansion, which will add 54 new
rooms.
(J) On June 3, 1998, the Company purchased 201 California Street and Wilshire
Palisades. The total purchase price for the Properties was approximately
$121.5 million, approximately $29.5 million of which was paid in cash,
approximately $29.1 million of which was paid in UPREIT Units valued at
$17.50 per unit and approximately $62.9 million of assumed debt (recorded at
$64.6 million for GAAP purposes).
(K) While the Company's stated interest in the partnership that owns Norwest
Center is 50.0%, its economic interest in the Property is significantly
larger due to priority distributions it receives on its invested capital
base. For the year ended December 31, 1998, the Company's share of earnings
and cash distributions from the partnership that owns Norwest Center was
77.9%.
(L) During 1998, through a series of transactions, the Company acquired
partnership interests with a stated interest of approximately 70.0% in the
partnerships that own Market Square. The Company's economic interest is
significantly larger since it has acquired the first mortgage note on the
Property in the amount of $181.0 million which earns interest at 9.75% and
will receive a priority distribution on its acquired capital base. In
addition, the Company acquired a "buffer loan", with accrued principal and
interest of $49.0 million at purchase, which accrues interest at a rate of
Prime plus 1.25% and is payable from cash flow, refinancing or sales
proceeds in excess of the first mortgage. During the year ended December 31,
1998, the Company received 100% of the cash flow from the Property.
(M) On January 28, 1998, the Company purchased Corporate 500 Centre in
Deerfield, Illinois. This Property consists of four Class A office buildings
with approximately 679,000 rentable square feet. The consideration paid for
this Property was approximately $135.0 million in cash and approximately
$15.0 million in UPREIT Units valued at $18.50 per unit, for a total
purchase price of approximately $150.0 million. The Company financed a
portion of the purchase price with an $80.0 million mortgage loan from
Bankers Trust Company; this mortgage was subsequently refinanced in October
1998.
(N) Janss Court is a seven-story, 125,000-square foot Class A mixed-use
building. In addition to 92,000 square feet of retail and office space,
Janss Court offers 32 apartments for a total of 33,000 rentable square feet
of residential space.
(O) The Property is subject to a ground lease agreement. The agreement requires
annual payments of $115,000 through March 31, 2002 and $121,000 from April
1, 2002 through March 31, 2007. The lease
20
<PAGE>
payment increases every ten years thereafter according to a formula based on
the Consumer Price Index. The ground lease expires on March 31, 2041.
(P) On January 5, 1998, the Company purchased for approximately $5.5 million,
the remaining participation rights in the cash flow and residual value of
Tower 56 from the former participants for 307,692 shares of Common Stock. As
a result, all of the cash flow and the residual value of Tower 56 inure to
the Company.
(Q) Rentable square feet includes an adjustment for the interest of a joint
venture or minority partner. Calculations are based on the partners'
percentage interest in the cash flows of the property.
None of the above Properties had either (i) net book values equal to 10.0%
or more of the Company's total assets as of December 31, 1998 or (ii) gross
revenues equal to 10.0% or more of the Company's consolidated gross revenues for
the year ended December 31, 1998.
JOINT VENTURE PROPERTIES
This section describes the Properties in which the Company has an interest
through joint venture or other ownership arrangement.
NORWEST CENTER
Norwest Center is a 55-story, granite and glass office tower containing
approximately 1,118,000 square feet of net rentable area and a 340-vehicle
underground parking facility. Norwest Center is located at the center of
downtown Minneapolis, at the intersection of Seventh Street South and Marquette
Avenue. The main business entrance to the building is on Seventh Street South,
opposite the IDS Center, a prominent landmark in the Twin Cities. Pedestrian
access is also available from Sixth Street South and Marquette Avenue; a grand
ceremonial entrance to the building on Sixth Street South incorporates a rotunda
and retail banking function.
THE PARTNERSHIP
Norwest Center is owned by NWC Limited Partnership ("NWC"), a partnership in
which the Company owns a 50.0% general partnership interest through a
wholly-owned subsidiary of the Operating Partnership. Sixth and Marquette
Limited Partnership ("S&M") owns a 49.0% managing general partnership interest
and a 1.0% limited partnership interest in NWC. The managing general partner of
NWC is currently S&M. The Company has the right, at its sole discretion, to
become the managing general partner of NWC. Due to the above factors, the
Company consolidates NWC. Norwest Center is managed by Hines Interests Limited
Partnership ("Hines").
Under the partnership agreement governing NWC, the managing general partner
has the right to manage and operate NWC's business. Until certain cash flow
levels have been achieved for two consecutive years (the "NWC Preference
Period"), S&M and the Company each hold a 50.0% interest in NWC. After the NWC
Preference Period ends, the Company will be entitled to hold a 60.0% interest
(subject to increases in the Company's interest that may result from early
termination of the NWC Preference Period), and S&M a 40.0% interest. The Company
does not expect the NWC Preference Period to end in the foreseeable future.
During the NWC Preference Period, the Company is entitled to receive an
annual preference return (the "NWC Preference Return") equal to 7.0% of its
capital base, which was $92.3 million as of December 31, 1998. The NWC
Preference Return is cumulative, and if operating revenues (after payment of
operating costs, capital expenditures and debt service) are not sufficient to
fund the distribution of any NWC Preference Return then due, the amount of such
deficiency shall accumulate and shall bear interest at the rate of 7.0%,
compounded annually. Currently, there is no accrued deficiency outstanding on
the NWC Preference Return.
21
<PAGE>
Subject to the preferential distributions to the Company described above,
all of NWC's operating revenues remaining after making payments required for the
operations of NWC and Norwest Center and the payment of debt service will be
distributed 50.0% to the Company and 50.0% to S&M during the NWC Preference
Period.
WASHINGTON MUTUAL TOWER
Washington Mutual Tower is a 55-story, granite and glass office tower
containing approximately 1,155,000 square feet of net rentable area (including
the Galland and Seneca Buildings described below). Washington Mutual Tower is
located in the heart of the downtown Seattle CBD, at 1201 Third Avenue, with
unobstructed views of Puget Sound. The project site ("Project Site") is
comprised of Washington Mutual Tower and Block 6 ("Block 6") which consists of a
6-level underground parking garage 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 Cornerstone.
THE PARTNERSHIP
The Project Site is owned by Third Partnership. The Company owns, through a
wholly-owned subsidiary of the Operating Partnership, a 50.0% general
partnership interest in Third Partnership. 1212 Second Avenue Limited
Partnership, a Washington limited partnership ("1212 Partnership"), currently
holds a 49.0% managing general partnership interest and a 1.0% limited
partnership interest in Third Partnership. Third Partnership is the successor in
interest as lessee under a lease, expiring in 2005, of the Galland and Seneca
Buildings.
The Company holds the right, at its sole discretion, to elect to become the
managing general partner of Third Partnership. Due to the above factors, the
Company consolidates Third Partnership. 1212 Partnership was originally the only
general partner and is now the managing general partner with the obligation to
manage and operate Third Partnership's business.
Until certain cash flow levels have been achieved for two consecutive years
(the "Washington Preference Period"), all of Third Partnership's operating
revenues remaining after making payments required for: (i) the operations of
Third Partnership and Washington Mutual Tower; (ii) net Block 6 costs; (iii) the
payment of debt service; and (iv) the Washington Preference Returns (defined
below), will be distributed 50.0% to the Company and 50.0% to 1212 Partnership.
The Washington Preference Period is expected to continue for the foreseeable
future. During the Washington Preference Period, the Company is also entitled to
receive an annual preference return (the "Washington Preference Return") equal
to 8.0% of its capital base, which was $100.0 million as of December 31, 1998.
The Washington Preference Return is cumulative, and if operating revenues,
adjusted for payment of operating costs, capital expenditures and debt service
are insufficient to fund the distribution of any Washington Preference Return
then due, the amount of such deficiency shall accumulate and shall bear interest
at the rate of 8.0%, compounded annually. As of December 31, 1998, the Company
is due a cumulative preference deficit, including accrued interest, of
approximately $9.7 million, which will be reduced as cash flow becomes
available. On a priority basis to the Washington Preference Return described
above, the Company also receives a 9.53% return on an additional equity
investment of $47.0 million made in September 1995. The Company is entitled to
receive this return through September 30, 2003, at which time the rate of return
will adjust based on conditions in the interest rate markets.
22
<PAGE>
191 PEACHTREE STREET
191 Peachtree Street, located in downtown Atlanta, is a 50-story
multi-tenant office building containing approximately 1,215,000 square feet of
net rentable area. The Property was completed in 1991 and designed by John
Burgee Architects and Philip Johnson. Attached to the building is a 16-story
parking deck with 1,386 spaces. 191 Peachtree Street was developed on
approximately 2 acres of land, of which approximately 1.5 acres is owned and
approximately one-half acre under the parking facility is leased for a 99-year
term expiring in 2087 with a 99-year renewal option.
191 Peachtree Street is located in the heart of Atlanta's CBD, also referred
to as Downtown. Peachtree Street is a major corridor through the CBD from which
development radiates. The property is located on the east side of Peachtree
Street between Ellis Street and International Boulevard, and extends to
Peachtree Center Avenue. The topography of the site slopes down to the east,
with both the Peachtree Street and Peachtree Center Avenue entrances at street
grade.
OWNERSHIP STRUCTURE
THE MORTGAGE. Cornerstone holds the first mortgage on the Property in the
amount of $145.0 million. The mortgage earns interest at a rate of 9.375% and
matures on February 28, 2008. The loan was interest only through March 1, 1998
and has since required principal payments based on a 30-year amortization
schedule.
THE PARTNERSHIP. Cornerstone has an 80.0% interest in One Ninety One
Peachtree Associates, the partnership which owns the Property. The Company's
interest in One Ninety One Peachtree Associates is consolidated for accounting
purposes, as the Company has substantial control over major decisions, as well
as the right to become managing general partner. Through February 28, 2000, the
minority partner in the transaction, C-H Associates, Ltd, will receive an
Incentive Distribution (as defined) of $250,000 per annum. This payment will be
made out of net cash flow after the payment of the first mortgage loan described
above. Cornerstone will receive the remaining cash flow up to the amount of an
Undistributed Preferred Return, defined in the partnership agreement for the
Property. Should cash flow be insufficient to repay the Undistributed Preferred
Return, the remainder will earn interest at a rate increasing over the next
eight years from 7.25% to 11.5%; at December 31, 1998, the cumulative
Undistributed Preferred Return was approximately $162.9 million. Through a
buy-sell agreement that becomes effective in 2002, either the Company or the
minority partner will have the right to withdraw from the partnership by
offering to the other its entire interest in the partnership, or if such offer
is not accepted, the right to buy the other partner's entire interest in the
partnership and gain full control of the asset.
THE GROUND LEASE. A small portion of the site that is below the parking
structure is subject to a long-term ground lease from the Ritz-Carlton Hotel
(see above). As part of the ground lease agreement, the Ritz-Carlton Hotel has
its ballroom located in the basement of 191 Peachtree Street.
500 BOYLSTON STREET
500 Boylston Street, a 25-story, Class A office building containing a total
rentable area of approximately 715,000 square feet, was designed by the team of
John Burgee Architects and Philip Johnson. The project shares a full city block
with 222 Berkeley Street, and together, the two buildings are considered the
premier buildings in the Back Bay submarket of Boston. 500 Boylston Street is
comprised of 642,000 square feet of office area on floors three through
twenty-five, 8,000 square feet of storage space, and 65,000 square feet of
retail area on floors one and two. Parking for 1,000 cars is shared with 222
Berkeley Street and is located on three levels below grade. The 500 Boylston
Street site contains approximately 137,000 square feet of land area or 3.15
acres, with approximately 500 feet of frontage on Boylston Street.
The 500 Boylston Street and 222 Berkeley Street complex occupies a city
block bound by Boylston Street on the north, St. James Avenue on the south,
Clarendon Street on the west and Berkeley Street on
23
<PAGE>
the east. Development of the Back Bay has historically been subject to
restrictive zoning ordinances, aimed at preserving the character of the area and
concentrating commercial development along the "High Spine", of which Boylston
Street is the center.
THE PARTNERSHIP
Cornerstone has a 91.5% interest in Five Hundred Boylston West Venture, the
partnership which owns the fee simple title to the Property. The remaining 8.5%
interest is owned by Boylston West 1986 Associates Limited Partnership
("Boylston West"). Cash flow, excess financing and sales proceeds are shared on
a pro rata basis between the partners with respect to each partnership interest.
The Company consolidates its investment in the partnership which owns 500
Boylston Street. In addition, through buy-sell agreements that become effective
in 2007 with respect to each partner, either the Company or Boylston West will
have the right to withdraw from the partnership by offering to the other its
entire share in the partnership, or if such offer is not accepted, the right to
buy the other partner's entire interest in the partnership and gain full control
in the underlying asset. The Property is managed by Hines under a long-term
management agreement.
222 BERKELEY STREET
222 Berkeley Street is a 22-story Class A office building containing
approximately 531,000 square feet of net rentable area. Its floor plates range
from approximately 40,000 square feet on floors one through six to approximately
14,000 square feet on floors twenty through twenty-two. The main lobby has
inlaid marble patterned floors, marble and painted walls and upper level mill
worked interior windows. Designed by Robert A.M. Stern Architects, the building
is clad in brick and uses natural cast stone for trim and detailing. This design
approach blends the historic flavor of the Back Bay area architecture with that
of a modern office building. The retail area of 46,000 square feet is located on
the first and second floors. Completed in 1991, 222 Berkeley Street was designed
as the second phase of a full block development and is therefore physically
attached to 500 Boylston Street. The two buildings have interconnecting garage
and retail areas. A reciprocal easement agreement has been established to permit
the operation of these shared facilities.
The site is bound by Berkeley Street on the east, St. James Avenue on the
south, the 500 Boylston Street building on the west and Boylston Street on the
north. The office tower fronts Berkeley Street and is turned at a ninety degree
angle to the tower of 500 Boylston Street, providing views from the tower
towards downtown Boston and the Charles River.
THE PARTNERSHIP
Cornerstone has a 91.5% interest in Two Twenty Two Berkeley Venture, the
partnership which owns the fee simple title to the Property. The remaining 8.5%
interest is owned by Hines 222 Berkeley Limited Partnership ("Hines LP"). Cash
flow, excess financing and sales proceeds are shared on a pro rata basis between
the partners with respect to each partnership interest. The Company consolidates
its investment in the partnership which owns 222 Berkeley Street. In addition,
through buy-sell agreements that become effective in 2007 with respect to each
partner, either the Company or Hines LP will have the right to withdraw from the
partnership by offering to the other its entire share in the partnership, or if
such offer is not accepted, the right to buy the other partner's entire interest
in the partnership and gain full control in the underlying asset. The Property
is managed by Hines under a long-term management agreement.
SIXTY STATE STREET
Sixty State Street, a 38-story, Class A office building containing a total
rentable area of approximately 823,000 square feet, was designed by Skidmore,
Owings, & Merrill Architects. The project is located on the northeast corner of
State and Congress Streets and is considered one of the premier office buildings
in
24
<PAGE>
Boston's Financial District. The exterior facade consists of granite and
reflective glass. The building's irregular shape yields 11 sides and thus,
substantial window-office space. Built in 1978 on a 1.35-acre site, the building
has three levels of below grade parking capable of accommodating 215 vehicles.
The project is well located and convenient to all forms of public
transportation and scores of cultural attractions. Most notably, the building
overlooks the adjacent Faneuil Hall Market Place and the Government Center
Transit Station. In addition, its location provides convenient commuter access
from Boston's suburbs.
The ground under Sixty State Street is leased to the leasehold owner, Sixty
State Street Trust, through December 28, 2067. The lease payments on the ground
lease are $398,896 per annum throughout the term.
OWNERSHIP STRUCTURE
On December 31, 1997, Cornerstone purchased the second mortgage on Sixty
State Street. The mortgage is a cash flow mortgage through which all the
economic benefits/risks (subject to the first mortgage) inure to the Company.
The Company controls all major decisions regarding management and leasing. The
total purchase price for the second mortgage was $131.5 million and is
consolidated in land and building due to the above factors. The $78.4 million
first mortgage on the property was originally recorded by the Company as an
$89.6 million liability as a result of its above-market interest rate.
MARKET SQUARE
Market Square, located at 701 and 801 Pennsylvania Avenue, N.W., in
Washington, D.C., comprises two freestanding buildings which are mirror images
of each other. Each building contains eight floors of office space, a plaza and
a concourse level, plus four floors of condominium residential units. The
condominium units are not owned by the Company. The total rentable area of
Market Square is approximately 689,000 square feet and the project has a four
level below grade parking garage with 777 spaces. Of this total area, 621,000
square feet is office space, 58,000 square feet is retail and concourse space
and 10,000 square feet is storage space. Designed by Hartman Cox, the project
won a competition to be the backdrop for the U.S. Navy Memorial plaza.
Market Square is located midway between the White House and the Capitol on
Pennsylvania Avenue, a prominent address in Washington, D.C. Pennsylvania Avenue
is wide, thereby providing the project with open city views, including the White
House, the Capitol and the Washington Monument. In addition, the Archives-Navy
Memorial Metro stop is located in the U.S. Navy Memorial Plaza in front of the
building.
OWNERSHIP STRUCTURE
THE MORTGAGE. Cornerstone holds the first mortgage on the property in the
amount of $181.0 million. The mortgage earns interest at a rate of 9.75% and
matures with a balloon payment on November 15, 2007. The loan requires principal
payments based on a 30-year amortization schedule. The remaining balance of the
mortgage as of December 31, 1998 was approximately $178.5 million. In addition,
Cornerstone acquired a "buffer loan", with accrued principal and interest of
$49.0 million at purchase, which accrues interest at a rate of Prime plus 1.25%
and is payable from cash flow, refinancing or sales proceeds from Market Square
in excess of the first mortgage.
THE PARTNERSHIP. During 1998, through a series of transactions, the Company
acquired partnership interests with a stated interest of approximately 70.0% in
AALP, the partnership that owns Market Square. The remaining 30.0% partnership
interest is owned by Western Associates Limited Partnership. The Company's
interest in AALP is consolidated for accounting purposes at December 31, 1998.
The income statement has been consolidated since November 1, 1998, as the
Company is managing general partner and has substantial control over major
decisions as of such date. Cash flow from AALP is distributed to pay the debt
service on the first mortgage note described above. Remaining cash flow is used
to pay a series of
25
<PAGE>
preference returns and "buffer loans" (as described above). Refinancing or sales
proceeds would be used to pay the first mortgage, preference returns and
outstanding "buffer loans". The unpaid preference return and "buffer loans"
through December 31, 1998 totaled approximately $75.5 million. During the year
ended December 31, 1998, the Company received 100% of the cash flow from the
Property.
120 MONTGOMERY STREET
120 Montgomery Street is a 25-story Class A office building in San
Francisco, California, containing approximately 411,000 rentable square feet.
Completed in 1955, this building set the standard of quality for all succeeding
high-rise office buildings. Today, it continues to offer its tenants access to
the business resources and market exposure commensurate with a downtown business
district address. The building is of steel frame construction, with an exterior
surface of polished granite panels and stainless-steel mullions. 120 Montgomery
Street is apportioned into low-rise and high-rise sections, and is separated by
a roof garden on the sixteenth floor, a rare amenity for a downtown high-rise.
Located at the northeast corner of Montgomery and Sutter Streets, and
directly across the street from the world headquarters of Charles Schwab & Co.,
120 Montgomery Street provides tenants with a high profile location and ease of
access. Situated one block off Market Street and adjacent to a subterranean
entrance to the Montgomery BART station, the property is well located with
respect to all major forms of transportation in San Francisco's Financial
District.
OWNERSHIP STRUCTURE
Cornerstone has a 66.7% interest in 120 Montgomery Associates, LLC, the
company which owns the fee simple title to the building. The remaining 33.3%
interest is owned by Sansome Partners III, L.P. Cash flow, excess financing and
sales proceeds are shared on a pro rata basis between the members with respect
to each member's interest. The Company makes all operating decisions and
consolidates its investment in 120 Montgomery Associates, LLC. Cornerstone
manages and leases the Property.
ONE POST
One Post is a 38-story, Class A office building located at One Post Street
in the San Francisco CBD. The building was built in 1969 and offers
approximately 390,000 rentable square feet of office and retail space. The
building has the distinction of being one of the first modern high-rise
buildings to be built in San Francisco and is the corporate headquarters for
McKesson Corporation, a tenant since 1970.
A two-level plaza in front of the building is comprised of approximately
20,000 square feet of public space bordered by Market and Montgomery Streets.
The lower plaza has 6,000 square feet of retail shops and an 18,000 square foot
fitness center. This lower plaza provides tenants and visitors with direct
access to the regional subway and city rail lines.
OWNERSHIP STRUCTURE
The Property is owned through a co-tenancy agreement whereby the Company and
Crocker Plaza Company ("Crocker") each owns an undivided 50% fee simple
interest. Distributions of cash flows and sales proceeds are shared in
proportion to the co-tenant's respective interest. The Company accounts for its
investment in One Post under the equity method of accounting. The Company and
Crocker co-manage and lease the Property.
26
<PAGE>
DEBT SCHEDULE
The following table sets forth certain information regarding the
consolidated debt obligations of the Company as of December 31, 1998, including
mortgage obligations relating to the Properties. All of this debt, with the
exception of the Convertible Promissory Note due 2001, is nonrecourse to the
Company. However, notwithstanding the nonrecourse indebtedness, the lender may
have the right to recover deficiencies from the Company in certain
circumstances, including fraud, misappropriation of funds and environmental
liabilities.
<TABLE>
<CAPTION>
MATURITY
PROPERTY AMORTIZATION INTEREST RATE (A) DATE 12/31/98 12/31/97
- -------------------------------- --------------------- ------------------------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C>
188 Embarcadero................. 25 year 6.90% Jun-99 $ 9,135,000 $ --
One and Two Gateway............. 25 year 6.90% Dec-99 8,679,000 --
Seaport Centre.................. Interest only LIBOR plus 1.50% Dec-99 58,000,000 --
The Pruneyard................... 24 year LIBOR plus 2.00% Mar-00 49,384,000 --
18301 Von Karman................ 25 year 6.90% Apr-00 10,647,000 --
Centerside II................... 25 year 6.90% Jun-00 13,818,000 --
Scottsdale Centre............... 25 year 6.90% Jul-00 7,745,000 --
TransPotomac Plaza 5 and
Charlotte Plaza (B)........... Interest only 7.28% Oct-00 65,000,000 65,000,000
1600 South Main................. 25 year 6.90% Dec-00 5,038,000 --
Convertible Promissory Note due
2001 (C)...................... Interest only 8.11% max(D) Jan-01 12,926,000 12,926,000
Biltmore Lakes.................. 25 year 6.90% Apr-01 11,468,000 --
Belmont Shores.................. 25 year 6.90% Apr-01 9,839,000 --
700 North Brand................. 25 year 6.90% May-01 18,108,000 --
2677 North Main................. 25 year 6.90% May-01 10,774,000 --
2700 Ygnacio Valley Road........ 25 year 6.90% Aug-01 5,035,000 --
Westlake Spectrum............... 25 year 6.90% Aug-01 3,993,000 --
Park Plaza...................... 25 year 6.90% Oct-01 4,940,000 --
Warner Park Center.............. 25 year 6.90% Dec-01 5,213,000 --
West Wilshire Office and
Medical....................... 25 year 6.90% Jan-02 17,301,000 --
Searise Office Tower............ 25 year 6.90% Jan-02 11,864,000 --
Golden Bear Center.............. 25 year 6.90% Mar-02 15,753,000 --
Exposition Centre............... 25 year 6.90% May-02 5,200,000 --
Bixby Ranch..................... 25 year 6.90% May-02 20,243,000 --
Wilshire Palisades.............. 22 year 6.70% Jul-02 29,902,000 --
120 Montgomery Street........... 24 year LIBOR plus 1.40% Nov-02 46,930,000 --
1300 South El Camino............ 23 year 6.90% Dec-02 4,007,000 --
125 Summer Street............... Interest only (E) 7.20% Jan-03 50,000,000 50,000,000
429 Santa Monica................ 25 year 6.90% Mar-03 10,176,000 --
Crossroads...................... 25 year 6.90% Mar-03 7,339,000 --
Westlake Spectrum II............ 25 year 6.90% Mar-03 5,284,000 --
Tower 56........................ 30 year 7.67% May-03 17,548,000 17,742,000
Two ADP Plaza................... Interest only 6.90% Dec-03 13,400,000 --
Two Corporate Centre............ Interest only 6.90% Dec-03 18,600,000 --
Norris Tech Center.............. 25 year LIBOR plus 1.65% Dec-03 16,392,000 --
Peninsula Office Park 4......... 25 year 6.90% Feb-04 5,436,000 --
Peninsula Office Park 1,3,5,6,8
& 9........................... 25 year 6.90% Feb-04 54,806,000 --
110 Atrium Place................ 30 year 6.90% Mar-04 21,838,000 --
10 Almaden...................... 25 year 6.90% Apr-04 33,885,000 --
Embarcadero Place............... 20 year 6.90% Apr-04 26,061,000 --
527 Madison Avenue and One
Lincoln Centre (B)............ Interest only 7.47% Oct-04 65,000,000 65,000,000
Sixty State Street.............. 30 year 6.84% Jan-05 87,627,000 89,630,000
201 California Street........... 30 year 6.70% Mar-05 33,071,000 --
Island Corporate Center......... 30 year 6.90% Apr-05 13,294,000 --
Washington Mutual Tower......... Interest only 7.53% Nov-05 79,100,000 79,100,000
Norwest Center.................. Interest only 8.74% Dec-05 110,000,000 110,000,000
Agoura Hills.................... 25 year 6.90% Dec-05 12,328,000 --
Janss Court..................... 30 year 6.90% Dec-05 18,723,000 --
Bayhill 4,5,6 & 7............... 25 year 6.90% Dec-06 59,071,000 --
66 Bovet........................ 22 year 6.90% Apr-07 3,939,000 --
Market Square (F) and 200
Galleria (B).................. Interest only 7.54% Oct-07 120,000,000 120,000,000
One Norwest Center (G).......... 30 year 6.90% Oct-08 98,252,000 96,780,000
Corporate 500 Centre (H)........ 25 year 6.66% Nov-08 89,765,000 --
Other loans..................... Various Various Various 597,000 --
------------------------- ----------- -------------- --------------
Total Cornerstone Debt before
adjustments................... 7.20%(I) 6.7yrs (I) $1,532,474,000 $ 706,178,000
Adjustments:
One Post (J).................... 25 year 6.90% Dec-02 17,250,000 --
120 Montgomery Street (K) 24 year LIBOR plus 1.40% Nov-02 (15,646,000) --
Norwest Center (K).............. Interest only 8.74% Dec-05 (24,310,000) (24,310,000)
------------------------- ----------- -------------- --------------
Total Cornerstone Share of
Debt.......................... 7.17%(I) 6.6yrs (I) $1,509,768,000 $ 681,868,000
------------------------- ----------- -------------- --------------
------------------------- ----------- -------------- --------------
</TABLE>
27
<PAGE>
- ------------------------
(A) The interest rate is the stated interest rate (for Cornerstone originated
debt) or the prevailing market rate at the time of acquisition (for debt
assumed as part of an acquisition).
(B) The three notes arising from the acquisition of several properties from PGGM
are cross-collateralized, having the effect of forming a "collateral pool"
for the underlying notes.
(C) 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.
(D) Lesser of 30-day LIBOR plus 0.5% or 8.11%.
(E) Interest only payments through January 1, 2001, with a 25-year amortization
schedule thereafter.
(F) The collateral for this loan is a pledge of the $181.0 million first
mortgage loan on Market Square that the Company purchased from PGGM.
(G) On September 25, 1998, the Company completed the refinancing of the $96.1
million mortgage on One Norwest Center with CIGNA and Mass Mutual. As a
result of the refinancing, the principal balance was increased to $98.5
million, the term of the loan was extended from three years to ten years and
the interest rate was reduced from 7.50% to 6.90%.
(H) On October 9, 1998, the Company completed the refinancing of the $80.0
million mortgage on Corporate 500 Centre with Teachers Insurance and Annuity
Association. As a result of the refinancing, the principal balance was
increased to $90.0 million, the term of the loan was extended from 4.5 years
to ten years and the interest rate was increased by three basis points to
6.66%.
(I) Weighted-average interest rate and maturity of the Company's long-term debt.
(J) Amount relates to the Company's share of property debt as this Property is
accounted for under the equity method of accounting.
(K) Amounts relate to the joint venture or minority partners' portion of the
total debt. Calculations are based on the partners' 1998 percentage
participation in the cash flow of such Property.
The combined aggregate amount of maturities for all long-term borrowings for
1999 through 2003 are $75,814,000, $151,632,000, $82,296,000, $151,200,000 and
$138,739,000, respectively.
REVOLVING CREDIT FACILITY
The Company has a $550.0 million Revolving Credit Facility with a syndicate
of 17 banks led by Bankers Trust Company, The Chase Manhattan Bank and
NationsBank for acquisitions and general working capital purposes as well as the
issuance of letters of credit. The interest rate on the facility depends on the
Company's ratio of total debt to asset value (as defined) at the time of
borrowing and will be at a spread of 1.10% to 1.40% over the applicable LIBOR
rate or the Prime Rate at the borrower's option. The letters of credit will be
priced at the applicable Eurodollar credit spread. The Revolving Credit Facility
expires on November 3, 2001. As of December 31, 1998, $465.0 million of the
facility was outstanding at a rate of approximately 6.9%. In addition, at
December 31, 1998, there was a $5.0 million letter of credit outstanding at a
rate of 1.40%. The Revolving Credit Facility contains certain restrictive
covenants including: (i) a limitation on the Company's dividend to 90.0% of FFO
and 110.0% of funds available for distribution, both as defined in the
agreement; (ii) the percentage of total liabilities to total property asset
value (as defined) cannot exceed 55.0%; (iii) the ratio of adjusted EBITDA to
interest expense may not be less than 2.00 to 1.00 through July 1, 1999 and 2.25
to 1.00 thereafter; (iv) fixed charge coverage may not be less than 1.75 to
1.00; and (v) the ratio of total property asset value (as defined) to secured
indebtedness may not be less than 2.50 to 1.00.
28
<PAGE>
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 December 31, 1998, information concerning the ten largest tenants
(ranked by Full Service Straight-Line Rent, adjusted for the interest of a joint
venture or minority partner, as of that date) occupying the Properties. "Full
Service Straight-Line Rent" is Straight-Line Rent plus annual operating expense
recoveries. "Straight-Line Rent" means the annual average of all actual rent
required to be paid through the term of the lease, calculated in accordance with
GAAP. "Expense Recoveries" are the actual recovery of operating expenses in net
lease buildings or the actual recovery of operating expense escalations in gross
lease buildings. Full Service Straight-Line Rent does not reflect the cost of
any leasing commissions or tenant improvements.
<TABLE>
<CAPTION>
FULL SERVICE
STRAIGHT-LINE EXPENSE STRAIGHT-LINE PERCENT SCHEDULED RENTABLE SQUARE
TENANT RENT RECOVERIES RENT OF TOTAL EXPIRATION FEET EXPIRING
- --------------------------------------------- ------------ ----------- ------------ ------------- ----------- ---------------
<C> <S> <C> <C> <C> <C> <C> <C>
Norwest Corporation [Wells
(1)(3)(4) Fargo].......................... $19,006,195 $ 9,742,586 $28,748,781 5% Mar-99 14,659
Aug-01 7,200
Oct-01 1,796
Mar-02 12,898
Feb-03 13,191
Jul-03 143,103
Aug-04 29,810
Oct-04 5,007
Jul-13 401,735
Aug-18 351,391
---------------
980,790
Massachusetts Financial
(1)(4) Services........................ 9,015,212 4,195,090 13,210,302 2% Feb-03 328,540
(1) Wachovia Bank..................... 9,061,416 3,333,240 12,394,656 2% Sep-03 7,730
Dec-08 380,442
---------------
388,172
(1) Hale & Dorr....................... 7,957,404 3,992,607 11,950,011 2% Jun-13 296,028
(1) King & Spalding................... 8,168,292 2,760,336 10,928,628 2% Mar-06 305,267
(1) Deloitte & Touche................. 7,643,072 1,730,572 9,373,644 2% Feb-99 15,064
Oct-99 129,614
Jun-08 84,947
---------------
229,625
(1)(4) The New England Life.............. 4,730,957 2,547,352 7,278,309 1% Sep-08 199,055
(2) Perkins Coie...................... 6,378,103 503,193 6,881,296 1% Dec-99 10,436
Jul-03 6,811
Jul-04 23,775
Dec-11 199,110
---------------
240,132
(2) First Union....................... 6,188,976 71,808 6,260,784 1% Mar-99 23,190
Jun-00 27,210
Aug-00 22,884
Mar-01 22,520
Aug-01 46,097
Feb-02 23,421
Sep-02 22,366
Aug-08 46,072
Mar-09 23,105
Mar-10 46,768
Mar-11 47,542
Apr-14 3,905
---------------
355,080
(1)(4) Houghton Mifflin.................. 3,162,483 2,916,682 6,079,165 1% Feb-07 225,883
--
------------ ----------- ------------ ---------------
Total Top 10 Tenants.............. $81,312,110 $31,793,466 1$13,105,576 20% 3,548,572
--
--
------------ ----------- ------------ ---------------
------------ ----------- ------------ ---------------
(4) Total Portfolio................... 4$55,603,405 $103,878,253 5$59,481,658 19,233,939
------------ ----------- ------------ ---------------
------------ ----------- ------------ ---------------
</TABLE>
- ------------------------------
(1) Net Lease.
(2) Gross Lease.
(3) Norwest Corporation [Wells Fargo] includes all space associated with
Norwest Corporation, Norwest Bank Denver N.A. and Wells Fargo Bank.
(4) Straight-Line Rent and rentable square feet include an adjustment for the
interest of a joint venture or minority partner. Calculations are based on
the partners' 1998 percentage participation in the cash flows of the
Property.
29
<PAGE>
LEASE EXPIRATIONS
The following table sets forth certain categories of information relating to
lease expirations for all of the Properties owned as of December 31, 1998.
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 2004
-------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Portfolio--All
Properties
Total(7) Square feet 1,814,970 sf 1,774,550 sf 1,928,531 sf 2,751,615 sf 3,169,786 sf 1,450,354 sf
expiring(1)....
Full service $ 46,086,712 $ 43,611,395 $ 56,969,565 $ 72,182,531 $ 94,702,701 $ 40,798,457
St-Line
rent(2)........
Minority
Interest
Adjustment
(3) Square feet 53,851 sf 50,166 sf 27,798 sf 60,148 sf 150,589 sf 49,256 sf
expiring (1)...
Full service $ 1,441,303 $ 1,375,946 $ 801,132 $ 1,571,496 $ 4,869,422 $ 1,585,446
St-Line
rent(2)........
Cornerstone
Portfolio Square feet 1,761,119 sf 1,724,384 sf 1,900,733 sf 2,691,467 sf 3,019,197 sf 1,401,098 sf
expiring(1)(3)..
Full service $ 44,645,410 $ 42,235,449 $ 56,168,433 $ 70,611,035 $ 89,833,279 $ 39,213,010
St-Line
rent(2)(3).....
Full service 25.35 24.49 29.55 26.24 29.75 27.99
St-Line rent
per sq. ft.....
% Full service 7.98% 7.55% 10.04% 12.62% 16.06% 7.01%
St-Lined rent..
No. of tenant 343 317 303 299 321 117
leases
expiring(4)....
Asking market $ 34.70
rent per sq.
ft.(5).........
Operating $ 10.24
Expenses per
sq. ft.(6).....
<CAPTION>
2009 AND
2005 2006 2007 2008 BEYOND TOTAL
-------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Portfolio--All
Properties
Total(7) 669,892 sf 1,113,593 sf 1,159,709 sf 1,466,471 sf 2,609,658 sf 19,909,129 sf
$ 23,182,656 $ 37,645,521 $ 32,924,199 $ 47,801,926 $ 85,116,419 $ 581,022,082
Minority
Interest
Adjustment
(3) 6,288 sf 638 sf 126,249 sf 27,291 sf 122,916 sf 675,190 sf
$ 210,635 $ 14,580 $ 3,569,374 $ 1,008,960 $ 5,092,130 $ 21,540,424
Cornerstone
Portfolio 663,604 sf 1,112,955 sf 1,033,460 sf 1,439,180 sf 2,486,742 sf 19,233,939 sf
$ 22,972,021 $ 37,630,941 $ 29,354,826 $ 46,792,966 $ 80,024,288 $ 559,481,658
34.62 33.81 28.40 32.51 $ 32.18 29.09
4.11% 6.73% 5.25% 8.36% 14.30% 100.00%
53 31 47 45 46 1,922
</TABLE>
- ----------------------------------
(1) The Total square footage expiring in any particular year.
(2) Full Service Straight-line rent is the annual average of all lease payments
required to be made through the term of the lease required under Generally
Accepted Accounting Principles plus the annualized recovery of operating
expenses.
(3) Full Service Straight-line rent and square feet expiring include an
adjustment for the interest of a joint venture or minority partner.
Calculations are based on the partners' 1998 percentage participation in the
cash flows of the Property.
(4) The number of tenant leases expiring in each year.
(5) Asking market rent is the average initially quoted rent to prospective
tenants in each building. All market rents shown are on full service basis.
(6) Operating Expenses are the projected recoverable expenses quoted to
prospective tenants in each building.
(7) The Pruneyard Inn (90,000sf) is not included.
30
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
In the ordinary course of business, the Company is subject to tenant and
property related claims and other litigation. It is the opinion of management,
after consultation with outside counsel, that the resolution of these claims
will not have a material effect on the consolidated financial condition or
results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
A special meeting of stockholders of the Company was held on December 14,
1998 for the purpose of considering and voting upon the following matters.
(1) a proposal to approve the issuance of up to 39,000,000 shares of Cornerstone
Common Stock (directly and upon redemption of UPREIT Units) in connection
with the Wilson Acquisition (the "Wilson Issuance");
(2) a proposal to approve the issuance of 11,594,203 shares of Cornerstone
Common Stock to PGGM (the "PGGM Investment"); and
(3) a proposal to approve the amendment and restatement of the Cornerstone
Properties Inc. 1998 Long-Term Incentive Plan to increase the number of
shares of Cornerstone Common Stock reserved for issuance thereunder and to
permit the granting of stock options and other awards to non-employee
directors of Cornerstone (the "Amendment").
The holders of record of the Company's Common Stock at the close of business
on November 9, 1998 (the "Record Date") were entitled to vote at the Special
Meeting. On the Record Date, there were 101,636,864 shares of Common Stock
outstanding, each of which was entitled to one vote with respect to each
proposal. Approval of the Wilson Issuance, the PGGM Investment and the Amendment
required the affirmative vote of a majority of the votes cast, provided that, in
the case of the Wilson Issuance and the PGGM Investment, the total votes cast
represented over 50.0% of the outstanding shares of Common Stock on the Record
Date. All of the proposals were approved. The following table sets forth the
voting results with respect to each proposal:
<TABLE>
<CAPTION>
NO. OF VOTES NO. OF VOTES NO. OF NO. OF BROKER
PROPOSAL CAST FOR CAST AGAINST ABSTENTIONS NON-VOTES
- ---------------------------------------------------------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C>
Wilson Issuance........................................... 66,114,206 107,675 122,837 9,624,512
PGGM Investment........................................... 66,049,294 172,386 123,038 9,624,512
Amendment................................................. 74,104,797 1,736,960 127,473 N/A
</TABLE>
31
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS.
The shares of Common Stock of the Company are traded on the New York,
Frankfurt and Dusseldorf Stock Exchanges. Quotations of the Common Stock in New
York are made in United States Dollars. Quotations in Dusseldorf and Frankfurt
are made in Deutsche Marks. On April 21, 1997, Cornerstone completed its initial
U.S. public offering of 16.1 million shares of common stock at $14.00 per share.
The high and low sales prices of the Common Stock on the New York Stock Exchange
for each quarter of 1997 in which the Company was listed and 1998 were as
follows:
SALES PRICE
<TABLE>
<CAPTION>
1997 HIGH LOW
- ------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
2nd Quarter.................................................................... $ 15.38 $ 14.25
3rd Quarter.................................................................... $ 19.50 $ 15.25
4th Quarter.................................................................... $ 20.00 $ 17.69
1998
- -------------------------------------------------------------------------------
1st Quarter.................................................................... $ 19.63 $ 17.25
2nd Quarter.................................................................... $ 18.38 $ 16.19
3rd Quarter.................................................................... $ 18.00 $ 13.38
4th Quarter.................................................................... $ 16.00 $ 14.06
</TABLE>
The high and low sales prices of the Common Stock on the Frankfurt Stock
Exchange for each quarter of 1997 and 1998 were as follows:
SALES PRICE
<TABLE>
<CAPTION>
1997 HIGH LOW
- ------------------------------------------------------------------------ ----------- -----------
<S> <C> <C>
1st Quarter............................................................. DM28.25 DM23.90
2nd Quarter............................................................. DM27.50 DM24.80
3rd Quarter............................................................. DM33.80 DM26.20
4th Quarter............................................................. DM34.50 DM29.00
1998
- ------------------------------------------------------------------------
1st Quarter............................................................. DM35.00 DM31.50
2nd Quarter............................................................. DM33.60 DM28.80
3rd Quarter............................................................. DM32.00 DM23.00
4th Quarter............................................................. DM26.80 DM23.00
</TABLE>
32
<PAGE>
The high and low sales prices of the Common Stock on the Dusseldorf Stock
Exchange for each quarter of 1997 and 1998 were as follows:
SALES PRICE
<TABLE>
<CAPTION>
1997 HIGH LOW
- ------------------------------------------------------------------------ ----------- -----------
<S> <C> <C>
1st Quarter............................................................. DM28.20 DM23.40
2nd Quarter............................................................. DM26.70 DM24.70
3rd Quarter............................................................. DM33.60 DM26.40
4th Quarter............................................................. DM34.50 DM29.50
1998
- ------------------------------------------------------------------------
1st Quarter............................................................. DM35.00 DM31.50
2nd Quarter............................................................. DM33.60 DM28.10
3rd Quarter............................................................. DM32.20 DM23.50
4th Quarter............................................................. DM26.10 DM23.00
</TABLE>
The closing quotation of the Company's common stock on March 24, 1999 was
U.S. 14.63 on the New York Stock Exchange, DM 24.74 on the Frankfurt Stock
Exchange and DM 24.74 on the Dusseldorf Stock Exchange.
As of March 24, 1999, there were approximately 200 holders of record of the
Common Stock.
For 1997, Cornerstone paid distributions to its stockholders of $0.60 per
share on January 31, 1997 (to stockholders of record as of December 30, 1996);
$0.30 per share on April 30, 1997 (to stockholders of record as of March 21,
1997); $0.30 per share on July 31, 1997 (to stockholders of record as of June
20, 1997); $0.30 per share on October 31, 1997 (to stockholders of record as of
September 19, 1997); and $0.14 per share on November 26, 1997 (to stockholders
of record as of October 31, 1997).
For 1998, Cornerstone paid distributions to its stockholders and unitholders
of $0.30 per share/unit on February 27, 1998 (to stockholders and unitholders of
record as of January 30, 1998); $0.30 per share/unit on May 28, 1998 (to
stockholders and unitholders of record as of April 30, 1998); $0.30 per
share/unit on August 31, 1998 (to stockholders and unitholders of record as of
July 31, 1998); and $0.30 per share/unit on November 30, 1998 (to stockholders
and unitholders of record as of October 30, 1998).
The Company intends to continue to pay cash distributions to its
stockholders and unitholders. It is expected that distributions will be made on
a quarterly basis in 1999 and, in accordance with the Company's qualification as
a REIT, will be equal to at least 95% of the Company's REIT taxable income
(excluding any net capital gain). 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. 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 of Directors deem
relevant.
The Revolving Credit Facility contains certain restrictive covenants
including a limitation on the Company's dividend to 90.0% of FFO and 110.0% of
funds available for distribution, both as defined in the agreement.
On February 27, 1998, May 29, 1998, August 31, 1998 and November 30, 1998,
through a dividend reinvestment plan, the Company issued 109,007, 98,487, 94,610
and 95,300 shares of Common Stock and received proceeds of approximately
$2,010,000, $1,761,000, $1,476,000 and $1,456,000, respectively.
On January 5, 1998, the Company purchased the participation rights in the
cash flow and residual value of Tower 56 from the former participants for
307,692 shares of Common Stock.
33
<PAGE>
On February 6, 1998, Cornerstone completed a secondary public offering of
14,375,000 shares of Common Stock at $18.25 per share. The shares were placed in
the U.S. through a syndicate of seven investment banks led by Merrill Lynch &
Co. Net proceeds to the Company were approximately $247.9 million (approximately
$262.3 million gross proceeds less an underwriting discount of approximately
$13.7 million and expenses of approximately $0.7 million). The net proceeds were
used to repay the Company's Revolving Credit Facility and for working capital
purposes.
On April 28, 1998, the Company issued 3,428,571 shares of Common Stock to
Prudential Insurance Company of America ("Prudential') and 1,657,426 UPREIT
Units to certain other persons as partial consideration for the acquisition of
One Memorial Drive. Such securities were not registered under the Securities Act
of 1933, as amended (the "Securities Act") and were issued in an exempt
transaction pursuant to Section 4(2) of the Securities Act. The Company has
filed a Registration Statement on Form S-3 (No. 333-59259) to register under the
Securities Act the resale by Prudential of such shares of Common Stock.
On May 20, 1998, the Company increased the number of authorized Preferred
Stock from 15,000,000 shares to 65,000,000 shares.
On June 3, 1998, the Operating Partnership issued a total of 1,665,663
UPREIT Units to certain persons in connection with the acquisition of 201
California Street and the Wilshire Palisades building. Such securities were not
registered under the Securities Act and were issued in an exempt transaction
pursuant to Section 4(2) of the Securities Act.
On December 16, 1998, as part of the consideration paid by the Company in
connection with the Wilson Acquisition, the Company issued 14,884,417 shares of
Common Stock and the Operating Partnership issued 16,187,724 UPREIT Units to the
former owners of WW&A. See "Recent Developments-- Wilson Acquisition." Such
securities were not registered under the Securities Act and were offered and
sold in a private offering pursuant to Section 4(2) of the Securities Act and
Regulation D promulgated thereunder. The Company has filed a Registration
Statement on Form S-3 (No. 333-72449) to register under the Securities Act the
resale by the holders thereof of the 14,884,417 shares of Common Stock issued in
connection with the Wilson Acquisition and 16,187,724 shares of Common Stock
issuable upon redemption of the UPREIT Units issued in connection with the
Wilson Acquisition.
On December 16, 1998, in connection with the Wilson Acquisition, the Company
issued 11,594,203 shares of Common Stock to PGGM. See "Recent
Developments--Wilson Acquisition." Such shares were not registered under the
Securities Act and were offered and sold to PGGM in a private offering pursuant
to Section 4(2) of the Securities Act.
34
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data has been derived from, and should be read in
conjunction with the related audited consolidated financial statements.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------------ ------------ ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
BALANCE SHEET DATA:
Real estate investments before accumulated
depreciation................................ $ 4,371,949 $ 2,187,525 $ 799,662 $ 706,988 $ 571,831
Total assets.................................. 4,281,984 2,051,481 766,180 586,089 477,996
Long-term debt................................ 1,532,474 706,178 400,142 369,600 130,500
Credit facility............................... 465,000 187,000 -- -- 236,467
Total liabilities............................. 2,138,309 940,062 442,375 403,927 400,640
Redeemable preferred stock.................... $ -- $ -- $ 162,743 $ -- $ --
OPERATING DATA:
Revenues...................................... $ 359,486 $ 173,911 $ 116,908 $ 92,387 $ 85,574
Expenses...................................... 262,173 134,041 106,646 90,427 88,084
Loss on sale of real estate assets............ 2,076 -- -- -- --
Minority interest............................. 7,469 2,368 1,519 3,417 3,899
Gain (loss) on interest rate swap............. -- 99 4,278 (7,672) --
Extraordinary loss............................ 4,303 54 3,925 4,445 581
Net income (loss)............................. $ 83,465 $ 37,547 $ 9,096 $ (13,574) $ (6,990)
Net income per common share, basic and
diluted..................................... $ 0.80 $ 0.63 $ 0.19 $ (0.94) $ (0.53)
Dividends declared per common share........... $ 1.50 $ 1.04 $ 1.20 $ 1.16 $ 1.16
OTHER DATA:
Cash Flow from:
Operations.................................. $ 182,797 $ 65,922 $ 34,522 $ 20,036 $ 28,968
Investing................................... (823,082) (462,837) (57,259) (135,527) (1,762)
Financing................................... 677,424 306,842 129,800 110,725 (33,141)
Funds From Operations (1)..................... $ 155,915 $ 68,308 $ 34,719 $ 21,424 $ 15,562
</TABLE>
- ------------------------
(1) FFO is a calculation which is defined by the National Association of Real
Estate Investment Trusts ("NAREIT") and is not indicative of either net
income or cash flow from operations as calculated in accordance with GAAP as
a measure of performance or liquidity. As disclosed in ITEM 7 of this Form
10-K, the Company makes certain additional adjustments to FFO which are not
contemplated in the NAREIT definition.
See ITEM 7 below for a discussion of the selected financial data.
35
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the Selected Consolidated
Financial Data set forth above and the Consolidated Financial Statements and
Notes included herein.
When used in the following discussion, the words "believes", "anticipates",
and similar expressions are intended to identify "forward-looking statements".
Such statements are subject to certain risks and uncertainties, which could
cause actual results to differ materially from those projected. Readers are
cautioned not to place undue reliance on these "forward-looking statements",
which speak only as of the date hereof. The Company undertakes no obligation to
publicly release the result of any revisions of these "forward-looking
statements", which may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
RESULTS OF OPERATIONS
Cornerstone's principal source of income is rental revenues received through
its investment in 87 fee simple investments, six real estate partnerships, one
limited liability company, one co-tenancy agreement and one mortgage. NWC
Limited Partnership ("NWC"), Third and University Limited Partnership ("Third
Partnership"), One Ninety One Peachtree Associates ("191 Peachtree"), Two Twenty
Two Berkeley Associates ("222 Berkeley"), Five Hundred Boylston West Venture
("500 Boylston") and Avenue Associates Limited Partnership ("AALP") (since
November 1, 1998) have been consolidated because Cornerstone has the majority
interest in the economic benefits and is or has the right to become managing
general partner at its sole discretion. 120 Montgomery Associates, LLC ("120
Montgomery") has been consolidated because the Company has the majority interest
in the economic benefits and control of the major decisions of the limited
liability company. The Company has accounted for its investment in AALP (from
February 1, 1998 through October 31, 1998) and One Post using the equity method
of accounting because it does not have sufficient control of the day to day
operations of the investment.
PROPERTY RESULTS. For the years ended December 31, 1998, 1997, and 1996
property results can be summarized as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Office and Parking Rentals.............................. $ 338,515 $ 159,828 $ 111,494
Less:
Building Operating Expenses........................... 75,663 35,962 24,578
Real Estate Taxes..................................... 46,760 25,560 19,610
Depreciation and Amortization......................... 59,278 30,978 24,317
-------- -------- --------
Total Operating Expenses................................ 181,701 92,500 68,505
-------- -------- --------
Total Property Income................................... $ 156,814 $ 67,328 $ 42,989
-------- -------- --------
-------- -------- --------
</TABLE>
The increase in property income from 1997 to 1998 of $89.5 million was due
in part to the additional property income of $54.8 million derived from the PGGM
Portfolio (as defined hereinafter) which was acquired in October 1997. The five
single property transactions during 1998 and the Wilson Acquisition (as defined
hereinafter), which occurred in December 1998, added $29.0 million and $4.3
million, respectively of additional property income. At the properties held
during both periods, property income at Norwest Center increased $0.2 million
due to an increase in net rental income. Property income at Washington Mutual
Tower increased $1.6 million due to higher office rental revenue of $1.2
million, an increase in net parking rental income of $0.2 million, a decrease of
$0.1 million in real estate tax expense, a decrease of $0.7 million in
depreciation and amortization expense offset by a decrease of $0.4 million in
expense recovery income and an increase of $0.2 million in building operating
expenses. Property income at 125 Summer Street increased $0.6 million due to
increased rental rates and the lease up of the former Gadsby
36
<PAGE>
and Hannah space which was vacant during the same period in 1997. Property
income at 527 Madison Avenue increased $0.9 million mainly because its 1997
results reflected only the period after it was purchased in February 1997. These
increases were offset by a reduction in property income of $1.3 million at the
Frick Building which was due to the sale of this building in April 1998 and an
increase of $0.6 million of depreciation and amortization on acquisition costs.
The increase in property income from 1996 to 1997 of $24.3 million was due
to an increase in office and parking rentals at One Norwest Center due to lease
buyouts of $0.7 million and higher net rentals of $0.6 million; an increase of
$2.2 million in property income at Norwest Center due to increased real estate
tax recoveries; an increase of $0.8 million in property income at Washington
Mutual Tower due to higher garage income and lower depreciation; an increase of
$0.6 million due to a full year of operations for Tower 56 as compared to
approximately eight months in 1996; an increase of $3.4 million due to a full
year of operations for One Lincoln Centre as compared to approximately two
months in 1996, an increase of $1.8 million due to a full year of operations for
the Frick Building as compared to approximately two months in 1996; and
increased property income of $4.9 million and $10.7 million due to the
acquisition of 527 Madison Avenue in February and the acquisition of the PGGM
Portfolio (as defined hereinafter) in October, respectively. These amounts are
partially offset by a decrease of $1.4 million in property income for 125 Summer
Street due to lower net rentals, higher real estate taxes and higher
depreciation.
EARNINGS IN REAL ESTATE JOINT VENTURES. The earnings in real estate joint
ventures of approximately $11.4 million in 1998 was mainly due to the
acquisition of the partnership interest in Market Square in January 1998. The
investment in Market Square was accounted for under the equity method of
accounting from February 1998 through October 1998 due to the lack of sufficient
control of the day to day operations of the investment. In November 1998, the
Company gained sufficient control of the investment and began consolidating this
investment. The amount attributable to Market Square of $11.3 million is
comprised of approximately $17.1 million of interest earned on the loans which
was offset by an equity in loss of approximately $5.8 million. The remaining
$0.1 million of earnings in real estate joint ventures is comprised of equity
earnings from the Company's investments in One Post and WCP Services, Inc.
INTEREST AND OTHER INCOME. Interest and other income was $9.6 million in
1998, $14.1 million in 1997 and $5.4 million in 1996. These amounts primarily
consist of interest earned from short-term investments, tenant alteration income
in 1998, lease cancellation income, interest earned on a mortgage note
receivable, a note receivable from a partner, management fee income and income
from advisory contracts in 1997.
The 1998 decrease in interest and other income of $4.5 million from 1997 is
due to a reduction in interest income of $5.6 million on short-term investments
due to the Company having excess cash in 1997 from its Preferred Stock placement
that occurred in November 1996 as well as its IPO in April 1997. Also adding to
the decrease was a reduction of $1.6 million of interest income on the mortgage
note on Market Square due to two and a half months of interest in 1997 versus
one month in 1998. In addition, a reduction of $0.9 million due to the
expiration of certain advisory contracts in 1997, a reduction of $0.1 million in
interest received from the note receivable from a partner due to the reduction
in principal and a reduction of $0.2 million in lease cancellation income
further added to the decrease. These amounts were offset by an increase of $2.5
million in tenant alteration income, a $0.9 million increase in management fee
income and an increase of $0.5 million in other income.
The 1997 increase in interest and other income of $8.7 million from 1996 is
due to the increase in interest earned on notes receivable of approximately $2.5
million due to the purchase of the first mortgage note and "buffer loan" on
Market Square, increased advisory fees of $0.3 million, increased other income
of $0.3 million and larger working capital balances available for short-term
investment causing interest income on short-term investments to increase by $5.6
million.
INTEREST EXPENSE. Interest expense incurred by Cornerstone was $67.5
million, $34.0 million and $31.7 million for 1998, 1997, and 1996, respectively.
The increase in 1998 from 1997 of approximately $33.5 million is due to an
increase of $15.2 million in interest expense on the purchase money loans from
PGGM as a result of a full year's expense in 1998
37
<PAGE>
versus two and a half months in 1997, an increase of approximately $2.7 million
of interest expense on the Revolving Credit Facility due to increased borrowings
under the facility, an increase of $0.6 million in amortization of deferred
costs and an increase in interest expense due to the following loans that were
originated or assumed during 1998: Sixty State Street ($6.1 million), Corporate
500 Centre ($5.1 million), 201 California Street ($1.3 million), Wilshire
Palisades ($1.2 million) and loans assumed as part of the Wilson Acquisition
($2.0 million). These increases were offset by a decrease of $0.4 million in
Term Loan interest and a decrease of $0.3 million due to the 1998 refinancing of
the One Norwest Center loan, both as discussed below.
The increase in 1997 from 1996 of approximately $2.3 million is primarily
due to an increase of $0.4 million due to a full year of interest expense on the
Tower 56 debt in 1997 as compared to approximately eight months in 1996, the
$250.0 million of purchase money loans associated with the purchase of the PGGM
Portfolio (as defined hereinafter) giving rise to $3.2 million of interest
expense, increased borrowings under the Company's Revolving Credit Facility
giving rise to $0.9 million of increased expense, and increased amortization of
$0.4 million. These increases are partially offset by a decrease in interest
expense on the Term Loan due to repayment in March of $1.2 million, a reduction
in other interest expense of $0.5 million and interest expense savings resulting
from the 1996 refinancing of the One Norwest Center debt of $0.9 million.
GENERAL AND ADMINISTRATIVE EXPENSES. The aggregate amount of Cornerstone's
general and administrative expenses increased to $12.9 million in 1998 from $7.6
million in 1997 and $6.4 million in 1996. The increase of $5.3 million in 1998
from 1997 is due to the additional employees, space, systems and other support
necessary to manage the substantial growth in assets of the Company during the
most recent fifteen-month period. The increase of $1.2 million in 1997 from 1996
is due to a $0.16 million increase in staff salaries, a $0.16 million increase
in incentive compensation, a $0.1 million increase in profit sharing and a $0.14
million increase in the cost of producing the annual report. The remaining
variance of $0.64 million is due to variances in numerous miscellaneous expense
items all of which are less than $0.1 million in size.
LOSS ON SALE OF REAL ESTATE ASSETS. On March 31, 1998, the Company sold the
Dearborn Land (an undeveloped parcel of land in Chicago that was acquired as
part of the acquisition of the PGGM Portfolio in October 1997) for gross
proceeds of approximately $19.0 million, resulting in a loss of approximately
$0.2 million.
On April 29, 1998, the Company sold the Frick Building, located in
Pittsburgh, Pennsylvania, for gross proceeds of approximately $26.7 million,
resulting in a loss of approximately $2.1 million.
On December 29, 1998, AALP sold a condominium unit in Market Square, located
in Washington D.C., for gross proceeds of approximately $0.3 million, resulting
in a gain of approximately $0.2 million.
MINORITY INTEREST. The increase in minority interest from 1997 to 1998 of
$5.1 million is due to the allocation of the Company's income to the unitholders
due to the formation of the UPREIT in 1998 and the purchase of partnership
interests in 500 Boylston, 222 Berkeley, 191 Peachtree and 120 Montgomery.
The increase in minority interest from 1996 to 1997 of $0.8 million is due
to an increase of $0.4 million at Norwest Center due to higher earnings and $0.4
million on the PGGM Portfolio (as defined hereinafter).
NET GAIN ON INTEREST RATE SWAPS. The Company does not trade in derivative
instruments, but uses interest rate swap agreements to hedge the interest rate
risk on its financings with the intention of obtaining the lowest effective
interest cost on its indebtedness. During 1998, the Company had entered into an
$80.0 million interest rate swap to protect it from interest rate fluctuations
that could have affected its floating rate debt on Corporate 500 Centre. The
swap effectively fixed the interest rate on the $80.0 million loan at 6.63%.
This agreement was terminated in August 1998 (in advance of the loan being
refinanced) at no cost to the Company. The swap was considered a hedge for
federal income tax purposes.
38
<PAGE>
The net gain of $4.3 million in 1996 represents an unrealized mark-to-market
gain of $7.4 million on the forward interest rate swap partially offset by an
extraordinary loss of $3.9 million. $3.1 million of the realized extraordinary
loss is due to the termination of a swap relating to the refinancing of One
Norwest Center. The remainder of the realized extraordinary loss of $0.8 million
in 1996 is due to certain write-offs of deferred financing costs and other costs
relating to the refinancing of One Norwest Center. Effective January 16, 1997,
the forward swap agreement was terminated for a total cost of $170,000, giving
rise to $99,000 of income in 1997.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW (DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED
CASH FLOW PROVIDED BY (USED IN): DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
- -------------------------------------------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
Operating activities.................................... $ 182,797 $ 65,922 $ 34,522
Investing activities.................................... (823,082) (462,837) (57,259)
Financing activities.................................... 677,424 306,842 129,800
Earnings to fixed charges ratio......................... 2.02 1.62 1.11
</TABLE>
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Cash provided by operating activities increased to approximately $182.8
million for 1998 from approximately $65.9 million for 1997. The increase is
primarily due to the cash flows from the interests in 87 properties acquired
since the end of the third quarter of 1997.
Cash used in investing activities increased to approximately $823.1 million
for 1998 from approximately $462.8 million for 1997 due mainly to the following
acquisitions for approximately $375.6 million (net of any shares or units issued
and debt assumed): Corporate 500 Centre; One Memorial Drive; 201 California
Street and Wilshire Palisades; Market Square; and the Wilson Acquisition.
Further adding to the increase is the Company's net investment in real estate
joint ventures of approximately $31.4 million and an increase in deferred costs
of approximately $0.6 million. These investments were partially offset by the
approximate $18.8 million, approximate $26.7 million and approximate $0.3
million in proceeds from the sale of the Dearborn Land, the Frick Building and
the Market Square condominium, respectively. In addition, these investments were
partially offset by the receipt of approximately $1.5 million from the repayment
of notes receivable. During 1997, the Company invested approximately $67.0
million in 527 Madison Avenue, approximately $260.0 million in the PGGM
Portfolio (as defined hereinafter), approximately $131.5 million in Sixty State
Street and approximately $5.6 million in other property investments. These
investments were slightly offset by the receipt of approximately $1.3 million
from the repayment of notes receivable.
Cash provided by financing activities increased to approximately $677.4
million for 1998 from approximately $306.8 million for 1997. The increase was
mainly due to the proceeds from the Company's public offering of Common Stock in
February 1998 of approximately $262.3 million and the additional stock purchase
by PGGM of $200.0 million compared to approximately $225.4 million received from
the Company's IPO in 1997, an increase in mortgage borrowings of approximately
$92.4 million and an increase in Revolving Credit Facility borrowings versus
Revolving Credit Facility repayments of approximately $91.0 million. Further
adding to the increase was a decrease in loan repayments of approximately $30.2
million and a decrease in preferred distributions of approximately $6.7 million.
These amounts were offset by a decrease of approximately $4.4 million in
proceeds from the dividend reinvestment plan, an increase in net swap
termination and debt prepayment costs of approximately $1.6 million, an increase
in restricted cash of approximately $9.7 million, an increase of approximately
$0.1 million in stock and debt issuance costs, an increase in distributions to
minority partners of approximately $9.8 million and an increase in distributions
to common stockholders paid of approximately $61.0 million.
39
<PAGE>
The ratio of earnings to fixed charges and dividends on preferred stock
increased to 2.02 times at December 31, 1998 from 1.62 times at December 31,
1997 due to the conversion of the Cumulative Convertible Preferred Stock into
approximately 11,300,000 shares of Common Stock in July 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
The increase in cash provided by operating activities of $31.4 million is
mainly due to the $28.4 million increase in net income. The $28.4 million
increase in net income is due to the following changes described in the captions
above in more detail: an increase in total property income of $24.3 million and
an increase in interest and other income of $8.7 million; these amounts are
partially offset by an increase in interest expense of $2.2 million; an increase
in general and administrative expenses of $1.2 million; a decrease in gain on
interest rate swaps and extraordinary losses of $0.4 million; and an increase in
minority interest of $0.8 million.
Other factors contributing to the increase in cash provided by operating
activities were a $7.0 million increase in depreciation and amortization due to
the acquisition of additional properties, plus a $4.3 million decrease in the
unrealized gain on interest rate swaps due to the unwind of the swap in 1997, a
$6.3 million increase in the change in interest payable, a $0.8 million increase
in minority interest and a $4.6 million increase in the change in accounts
payable. These amounts are offset by a $3.9 million reduction in extraordinary
losses due to the refinancing of One Norwest Center, a $1.6 million reduction in
the change in prepaid rent and a $14.5 million reduction due to the change in
tenant receivables.
The increase in cash used in investing activities is due to the net cash
investment in the PGGM Portfolio (as defined hereinafter), 527 Madison Avenue
and Sixty State Street as compared to the acquisition of One Lincoln Centre
being the only cash acquisition in 1996.
The increase in cash provided by financing activities of $177.0 million is
due to the following: common equity offering in 1997 providing $225.4 million in
net proceeds; $187.0 million of borrowings under the Revolving Credit Facility
in 1997; the repayment of $97.3 million of debt in 1996 in excess of 1997 due to
the refinancing of the One Norwest Center mortgage; the receipt of $7.1 million
more proceeds under the dividend reinvestment plan in 1997 than 1996; a
reduction in swap termination payments of $6.6 million; and a decrease in
restricted cash of $2.5 million due to an escrow deposit for the benefit of a
mortgage holder arising from the prepayment of rent by a major tenant in 1996.
These amounts are offset by the $140.0 million preferred offering in 1996; the
$32.5 million repayment of the Term Loan; the $116.0 million of mortgage
proceeds received from One Norwest Center and Tower 56 in 1996; increased
minority distributions of $0.2 million due to the additional partnership
investments; increased issuance costs of $15.6 million; and increased
distributions to stockholders of $44.6 million.
The ratio of earnings to fixed charges and dividends on preferred stock
increased to 1.62 times at December 31, 1997 from 1.11 times at December 31,
1996 due to the reduction of the percentage of liabilities to total assets
described above.
CAPITAL STOCK TRANSACTIONS
On August 31, 1996, through a dividend reinvestment plan, Cornerstone
received proceeds of approximately $4.0 million and issued an additional 300,589
shares of Common Stock to stockholders.
On November 8, 1996, through a merger of subsidiaries, the Company issued
$66.5 million (458,621 shares) of 8% Cumulative Convertible Preferred Stock,
Series A, in exchange for $40.0 million in cash and the Frick Building. The
preferred shares were converted in July 1997 into the Company's Common Stock at
a conversion price of $14.50 per share. The proceeds were used to acquire One
Lincoln Centre.
On November 22, 1996, the Company issued $100.0 million (689,655 shares) of
8% Cumulative Convertible Preferred Stock. The preferred shares were converted
in July 1997 into the Company's Common Stock at a conversion price of $14.50 per
share. Portions of the proceeds were used to acquire 527 Madison Avenue on
February 14, 1997 and to repay the Term Loan as discussed below.
40
<PAGE>
On January 31, 1997, through a dividend reinvestment plan, Cornerstone
received proceeds of approximately $3.7 million and issued an additional 243,907
shares of Common Stock to stockholders.
On April 21, 1997, the Company received $225.4 million in gross proceeds
from the public offering of 16,100,000 new shares of Common Stock at a price of
$14.00 per share and listed on the New York Stock Exchange through underwriters
led by Merrill Lynch & Co. The net proceeds were used as partial consideration
for the purchase of the PGGM Portfolio (as defined hereinafter).
On April 30, 1997, through a dividend reinvestment plan, Cornerstone
received proceeds of approximately $2.2 million and issued an additional 141,733
shares of Common Stock to stockholders.
On July 31, 1997, through a dividend reinvestment plan, Cornerstone received
proceeds of approximately $2.6 million and issued an additional 175,796 shares
of Common Stock to stockholders.
On October 27, 1997, the Company increased the authorized shares from
115,000,000 shares of capital stock, without par value, to 265,000,00 shares of
capital stock, without par value, of which 15,000,000 shares are preferred stock
and 250,000,000 shares are common stock.
On October 27, 1997, as consideration for the acquisition of the PGGM
Portfolio (as defined hereinafter), Cornerstone issued 34,185,500 shares of
Common Stock to PGGM as compensation for the acquisition of interests in nine
Class A office buildings and an undeveloped parcel of land (the "PGGM
Portfolio").
On October 31, 1997, through a dividend reinvestment plan, Cornerstone
received proceeds of approximately $2.5 million and issued an additional 134,577
shares of Common Stock to stockholders.
On January 5, 1998, the Company purchased for approximately $5.5 million the
participation rights in the cash flow and residual value of Tower 56 from the
former participants for 307,692 shares of Common Stock.
On February 6, 1998, Cornerstone completed a secondary public offering of
14,375,000 shares of Common Stock at $18.25 per share. The shares were placed in
the U.S. through a syndicate of seven investment banks led by Merrill Lynch &
Co. Net proceeds to the Company were approximately $247.9 million (approximately
$262.3 million in gross proceeds less an underwriting discount of approximately
$13.7 million and expenses of approximately $0.7 million). The net proceeds were
used to repay outstanding borrowings under the Revolving Credit Facility and for
working capital purposes.
On February 27, 1998, through a dividend reinvestment plan, Cornerstone
received proceeds of approximately $2.0 million and issued an additional 109,007
shares of Common Stock to stockholders.
On April 28, 1998, the Company issued 3,428,571 shares of Common Stock to
the Prudential Insurance Company of America ("Prudential") and 1,657,426 UPREIT
Units to certain other persons as partial consideration for the acquisition of
One Memorial Drive. Such securities were not registered under the Securities Act
of 1933, as amended (the "Securities Act") and were issued in an exempt
transaction pursuant to Section 4(2) of the Securities Act. The Company has
filed a Registration Statement on Form S-3 (No. 333-59259) to register under the
Securities Act the resale by Prudential of such shares of Common Stock.
On May 20, 1998, the Company increased the number of authorized Preferred
Stock from 15,000,000 shares to 65,000,000 shares.
On May 29, 1998, through a dividend reinvestment plan, Cornerstone received
proceeds of approximately $1.8 million and issued an additional 98,487 shares of
Common Stock to stockholders.
On June 3, 1998, the Operating Partnership issued a total of 1,665,663
UPREIT Units to certain persons in connection with the acquisition of 201
California Street and the Wilshire Palisades building. Such securities were not
registered under the Securities Act and were issued in an exempt transaction
pursuant to Section 4(2) of the Securities Act.
41
<PAGE>
On August 31, 1998, through a dividend reinvestment plan, Cornerstone
received proceeds of approximately $1.5 million and issued an additional 94,610
shares of Common Stock to stockholders.
On November 30, 1998, through a dividend reinvestment plan, Cornerstone
received proceeds of approximately $1.5 million and issued an additional 95,300
shares of Common Stock to stockholders.
On December 16, 1998, as part of the consideration paid by the Company in
connection with the Wilson Acquisition, the Company issued 14,884,417 shares of
Common Stock and the Operating Partnership issued 16,187,724 UPREIT Units to the
former owners of WW&A and the Wilson Properties. See "Recent
Developments--Wilson Acquisition." Such securities were not registered under the
Securities Act and were offered and sold in a private offering pursuant to
Section 4(2) of the Securities Act and Regulation D promulgated thereunder. The
Company has filed a Registration Statement on Form S-3 (No. 333-72449) to
register under the Securities Act the resale by the holders thereof of the
14,884,417 shares of Common Stock issued in connection with the Wilson
Acquisition and 16,187,724 shares of Common Stock issuable upon redemption of
the UPREIT Units issued in connection with the Wilson Acquisition.
On December 16, 1998, in connection with the Wilson Acquisition, the Company
issued 11,594,203 shares of Common Stock to PGGM. See "Recent
Developments--Wilson Acquisition." Such shares were not registered under the
Securities Act and were offered and sold to PGGM in a private offering pursuant
to Section 4(2) of the Securities Act.
FUNDS FROM OPERATIONS
The Company calculates Funds from Operations ("FFO") based upon guidance
from the National Association of Real Estate Investment Trusts ("NAREIT"). FFO
is defined as net income, excluding gains or losses from debt restructuring and
sales of property, plus depreciation and amortization and after adjustments for
unconsolidated joint ventures. The Company has adjusted 1997 and 1996 FFO by the
net gain on interest rate swaps due to the non-cash nature of these items.
Industry analysts generally consider FFO to be an appropriate measure of
performance of a REIT such as Cornerstone. 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 a substitute for cash flow from
operations as a measure of liquidity calculated in accordance with GAAP.
The Company believes that FFO is helpful to investors as a measure of the
performance of an equity REIT because, along with cash flows from operating
activities, financing activities and investing activities, it provides investors
an understanding of the ability of the Company to generate earnings from its
recurring operations, after the payment of all administrative costs and interest
expense. For cash flows from operating, financing, and investing activities in
accordance with GAAP see the Consolidated Statements of Cash Flows included in
the Consolidated Financial Statements which are part of this report.
The Company no longer reports free and deferred rental income as an
adjustment to FFO because this is not part of the industry standard. Therefore,
included in FFO for 1998, 1997, and 1996 are $14.5 million, $2.7 million and
$1.0 million, respectively, for free and deferred rental income (after
adjustment for minority interest).
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The table below sets forth the adjustments which were made to the net income
of the Company in the calculation of FFO for the last three years (amounts in
thousands):
<TABLE>
<CAPTION>
FUNDS FROM OPERATIONS (1)
---------------------------------
<S> <C> <C> <C>
1998 1997 1996
---------- ---------- ---------
Net income..................................................................... $ 83,465 $ 37,547 9,096
NAREIT adjustments:
Depreciation and amortization (2)............................................ 59,278 30,978 24,317
Minority adjustments......................................................... (2,120) (1,551) (2,011)
Unconsolidated depreciation.................................................. 4,054 -- --
Realized/unrealized gain..................................................... -- (99) (4,278)
Loss on sale of real estate assets........................................... 2,076 -- --
Extraordinary losses......................................................... 4,303 54 3,925
Other adjustments:
Amortization on rent notes................................................... 1,531 1,379 1,242
Severance payments........................................................... 478 -- --
Minority interest allocated to unitholders................................... 2,850 -- --
Real estate tax adjustment................................................... -- -- 2,428
---------- ---------- ---------
Funds from operations.......................................................... 155,915 68,308 34,719
---------- ---------- ---------
Preferred dividends............................................................ (3,500) (10,160) (5,153)
---------- ---------- ---------
Funds from operations
available for common shares.................................................. $ 152,415 $ 58,148 $ 29,566
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
- ------------------------
(1) 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.
(2) The depreciation and amortization adjustment does not include amortization
of deferred financing costs and depreciation of non-real estate assets in
accordance with guidance from NAREIT. Depreciation and amortization includes
$170,000 of amortization relating to certain intangible assets purchased as
part of the Wilson Acquisition.
The increase in FFO from 1997 to 1998 of approximately $87.6 million is due
to the $45.9 million increase in net income due to the following changes
described in the captions above in more detail: an increase in total property
income of $89.5 million and an increase in earnings in real estate joint
ventures of $11.4 million; these amounts are partially offset by a decrease in
interest and other income of $4.5 million; an increase in interest expense of
$33.5 million; an increase in general and administrative expenses of $5.4
million; an increase in loss on sale of real estate assets of $2.1 million; an
increase in minority interest of $5.1 million; a decrease in gain on interest
rate swaps of $0.1 million; and an increase in extraordinary losses of $4.3
million.
The following factors also contributed to the increase in FFO: a $28.3
million increase in depreciation and amortization due to new property
acquisitions, plus a $4.1 million increase in unconsolidated depreciation, plus
a $0.1 million reduction in realized/unrealized gain on interest rate swaps,
plus a $2.1 million increase in loss on sale of real estate assets, plus a $4.2
million increase in extraordinary loss, plus a $0.6 million increase in
amortization on rent notes and severance payments and a $2.9 million increase in
minority interest allocated to unitholders. These amounts are partially offset
by the $0.6 million decrease in minority interest adjustments.
The increase in FFO from 1996 to 1997 of approximately $33.6 million is due
to the $28.4 million increase in net income due to the following changes
described in the captions above in more detail: an increase in total property
income of $24.3 million and an increase in interest and other income of
43
<PAGE>
$8.7 million; these amounts are partially offset by an increase in interest
expense of $2.3 million; an increase in general and administrative expenses of
$1.2 million; a decrease in gain on interest rate swaps and extraordinary losses
of $0.3 million; and an increase in minority interest of $0.8 million.
The following factors also contributed to the increase: a $6.7 million
increase in depreciation and amortization due to new property acquisitions, plus
a $4.2 million reduction in realized/unrealized gain on interest rate swaps,
plus a $0.5 million reduction in minority adjustments and a $0.1 million
increase in amortization on rent notes. These amounts are partially offset by
the $3.9 million decrease in extraordinary losses from refinancing One Norwest
Center and the $2.4 million real estate tax adjustment relating to Norwest
Center in 1996.
The Company will seek to continue increasing FFO and the value of its
property portfolio by acquiring and developing additional properties that the
Company believes will produce favorable returns. As part of its ongoing
business, the Company periodically engages in discussions with public and
private real estate entities regarding possible portfolio or asset acquisitions
or business combinations.
MORTGAGE INDEBTEDNESS
On August 2, 1996, the Company refinanced its $98.0 million Interest-Bearing
Notes, collateralized by One Norwest Center, by entering into a $98.0 million
Deed of Trust and Mortgage Notes with Massachusetts Mutual Life Insurance
Company, Connecticut General Life Insurance Company and American General Life
Insurance Company. The Mortgage Notes bear interest at a rate of 7.50% and
mature on July 1, 2001. Additionally, the Company is required to make payments
of principal based upon a 30-year amortization schedule. Upon the closing of the
mortgage debt, Cornerstone paid a prepayment penalty of approximately $2.0
million (extraordinary loss) to the Interest-Bearing Noteholders. Unamortized
Interest-Bearing Notes financing costs of approximately $0.2 million
(extraordinary loss) were written-off in connection with the refinancing. This
loan was refinanced on September 25, 1998 (as discussed below).
Cornerstone was obligated to pay to Deutsche Bank New York Branch, for an
interest rate swap agreement used to fix the interest rates on the
Interest-Bearing Notes, an amount equal to 0.752% on a notional amount of $107.0
million throughout the term of the Interest-Bearing Notes. This amount was
treated as a yield adjustment on the long-term debt and has been included in
interest expense. On August 2, 1996, this swap was terminated at an approximate
cost of $1.5 million, which was treated as an extraordinary loss.
As protection against market interest rates rising prior to the maturity of
the Interest-Bearing Notes, on September 29, 1993, Cornerstone entered into a
forward interest rate swap agreement with Deutsche Bank AG. The interest rate
swap agreement was revised as part of the refinancing of One Norwest Center. The
forward interest rate swap agreement was for a fixed rate of 7.14% on a notional
amount of $92.8 million for a period of five years beginning July 1, 2001.
Effective January 16, 1997, this forward swap was terminated.
On October 27, 1997, the Company entered into three mortgage loans with PGGM
as purchase money financing for the PGGM Portfolio. The mortgages, which are
cross-collateralized, encumber TransPotomac Plaza 5, Charlotte Plaza, 527
Madison Avenue, One Lincoln Centre, 200 Galleria and the first mortgage note on
Market Square. These mortgages total $250.0 million and are interest only with
no prepayment rights. The first loan has a $65.0 million principal balance,
bears interest at a rate of 7.28% and matures in October 2000. Upon repayment of
this loan, PGGM will release the liens on TransPotomac Plaza 5 and Charlotte
Plaza. The second loan has a $65.0 million principal balance, bears interest at
a rate of 7.47% and matures in October 2004. Upon repayment of this loan, PGGM
will release the liens on 527 Madison Avenue and One Lincoln Centre. The third
loan has a $120.0 million principal balance, bears interest at a rate of 7.54%
and matures in October 2007. Upon repayment of this loan, PGGM will release the
liens on 200 Galleria and Market Square.
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<PAGE>
On December 31, 1997, the Company purchased the second mortgage on Sixty
State Street in Boston, Massachusetts. The property has a first mortgage in the
amount of approximately $78.4 million, which matures in January 2005. The loan
requires amortization based on a 30-year schedule and bears interest at a rate
of 9.5%. While the face amount of the first mortgage is $77.9 million, and the
interest rate is 9.5%, the Company is carrying the debt at $87.6 million, which
is the market value of the loan at the time of the closing, less the
amortization of principal and premium since closing, based upon a market
interest rate for similar quality loans of 6.84%.
On January 28, 1998, the Company entered into an $80.0 million first
mortgage on Corporate 500 Centre with Bankers Trust Company. The loan bears
interest at a rate of LIBOR plus 1.0% and matures in July 2002. The Company had
entered into a $80.0 million interest rate swap to protect it from interest rate
fluctuations that could have affected its floating rate debt on Corporate 500
Centre. The swap effectively fixed the interest rate on the $80.0 million loan
at 6.63%. This agreement was terminated in August 1998 at no cost to the
Company. On October 9, 1998, the Company completed the refinancing of the $80.0
million mortgage on Corporate 500 Centre with Teachers Insurance and Annuity
Association. As a result of the refinancing, the principal balance was increased
to $90.0 million, the term of the loan was extended from 4.5 years to 10 years
and the interest rate was increased by three basis points to 6.66%.
On June 3, 1998, the Company assumed the mortgage on 201 California Street
in San Francisco, California. The loan requires amortization based on a 30-year
schedule and bears interest at a rate of 6.9%. While the face amount of the loan
is $32.8 million, and the interest rate is 6.9%, the Company is carrying the
debt at $33.1 million, which is the market value of the loan at the time of the
closing, less the amortization of principal and premium since closing, based
upon a market interest rate for similar quality loans of 6.7%.
On June 3, 1998, the Company assumed the mortgage on Wilshire Palisades in
Santa Monica, California. The loan requires amortization based on a 22-year
schedule and bears interest at a rate of 8.04%. While the face amount of the
loan is $28.8 million, and the interest rate is 8.04%, the Company is carrying
the debt at $29.9 million, which is the market value of the loan at the time of
the closing, less the amortization of principal and premium since closing, based
upon a market interest rate for similar quality loans of 6.7%.
On September 25, 1998, the Company completed the refinancing of the $96.1
million mortgage on One Norwest Center with the Connecticut General Life
Insurance Company ("CIGNA") and the Massachusetts Mutual Life Insurance Company
("Mass Mutual"). As a result of the refinancing, the principal balance was
increased to $98.5 million, the term of the loan was extended from three years
to ten years and the interest rate was reduced from 7.50% to 6.90%.
On December 16, 1998, the Company assumed various mortgages totaling
approximately $760.0 million as part of the Wilson Acquisition. The loans have
various amortization periods and interest rates. Certain assumed loans were
prepaid subsequent to the closing but prior to year end. While the face amount
of the loans at December 31, 1998 is approximately $660.6 million, the Company
is carrying the debt at $674.3 million, which is the market value of the loans
at the time of the closing, less the amortization of principal and premium since
closing, based upon a market interest rate for similar quality loans of 6.9%.
OTHER INDEBTEDNESS
On August 8, 1995, the existing $32.5 million term loan (the "Term Loan")
was extended through December 31, 2003 and assigned to Deutsche Bank AG London
at an interest rate of 5.0%. The Term Loan had a $32.5 million balance at
December 31, 1996. The loan was prepaid on March 18, 1997, since, under its
terms, it was required to be prepaid upon Cornerstone's initial public offering
in the United States.
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<PAGE>
Effective January 1, 1996, in connection with the acquisition of the 10%
minority interest in Norwest Center, the Company entered into a $12.9 million
convertible promissory note payable to Hines Colorado Limited ("HCL"). The note
payable pays monthly interest only at the lesser of 8.11% or LIBOR plus 50 basis
points. The note is convertible at the option of HCL into shares of common stock
at $14.30 per share after January 1, 1997. At maturity of the note on January 1,
2001, Cornerstone has the right to redeem the note in exchange for common shares
of the Company at the lower of the market price or $14.30 per share.
At December 31, 1996, Cornerstone had a $10.0 million revolving line of
credit with Bankers Trust Company. The line was available for general corporate
and acquisition purposes at a rate equivalent to an adjusted Eurodollar rate.
The line was also available for the issuance of standby letters of credit at a
rate of 0.15% and expired on November 7, 1997. At December 31, 1996, none of the
credit line had been drawn upon.
On October 27, 1997, the Company entered into a three-year, $350.0 million
acquisition line of credit syndicated by Bankers Trust Company and The Chase
Manhattan Bank. The line bore interest at a rate of LIBOR plus 1.10% to 1.40%
depending on the Company's then current leverage ratio (as defined). Borrowings
under the facility at December 31, 1997 were $187.0 million at an average
interest rate of 8.12%. The line was also available for the issuance of standby
letters of credit. The facility was amended and restated on November 3,
1998--see below.
On November 3, 1998, a syndicate of 17 banks led by Bankers Trust Company,
The Chase Manhattan Bank and NationsBank provided the Company with a $550.0
million line of credit for acquisitions and general working capital purposes
(the "Revolving Credit Facility"). The facility is also available for the
issuance of letters of credit. The interest rate on the Revolving Credit
Facility depends on the Company's ratio of total debt to total asset value (as
defined) at the time of borrowing and will be at a spread of 1.10% to 1.40% over
the applicable LIBOR rate. The facility contains the same terms as the Company's
previous $350.0 million facility, which was retired at the closing of the new
facility. The Revolving Credit Facility expires on November 3, 2001. Borrowings
under the facility at December 31, 1998 were $465.0 million at an average
interest rate of approximately 6.9%. In addition, at December 31, 1998, there
was a $5.0 million letter of credit outstanding at a rate of approximately
1.40%.
The Company holds debt instruments that are sensitive to changes in interest
rates. The maturity, weighted average interest rates and fair values are
presented in the Consolidated Financial Statements which are part of this
report.
In the normal course of business, the Company also faces risks that are
either non-financial or non-qualitative. Such risks principally include credit
risks and legal risks and are not included in the aforementioned notes.
STOCKHOLDERS' AND UNITHOLDERS' DISTRIBUTIONS
Cornerstone intends to distribute at least 95.0% of its taxable income to
maintain its qualification as a REIT. The Company anticipates that cash flow
will exceed taxable income for the foreseeable future. Cornerstone's
distribution policy is to pay distributions based upon cash flow, less prudent
reserves. The Company paid distributions of $0.30 per share/unit to all
stockholders and unitholders on February 27, 1998 (to stockholders and
unitholders of record as of January 30, 1998). The Company paid distributions of
$0.30 per share/unit to all stockholders and unitholders on May 29, 1998 (to
stockholders and unitholders of record as of April 30, 1998). The Company paid
distributions of $0.30 per share/unit to all stockholders and unitholders on
August 31, 1998 (to stockholders and unitholders of record as of July 31, 1998).
The Company paid distributions of $0.30 per share/unit to all stockholders and
unitholders on November 30, 1998 (to stockholders and unitholders of record as
of October 30, 1998). On December 7, 1998, in connection with the Wilson
Acquisition, the Company declared a distribution of $0.15 per share/ unit to all
stockholders and unitholders of record as of December 15, 1998 and a
distribution of $0.15 per share/unit to all stockholders and unitholders of
record as of January 29, 1999. Both distributions were paid on February 26,
1999.
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<PAGE>
The Revolving Credit Facility contains certain restrictive covenants
including a limitation on the Company's dividend to 90.0% of FFO and 110.0% of
funds available for distribution, both as defined in the agreement.
At the present time, the Company is current in the payment of all preferred
dividends.
LIQUIDITY
At December 31, 1998, the Company had approximately $61.9 million in cash
and cash equivalents and approximately $9.1 million in restricted cash.
Restricted cash includes security deposits for some of the Company's office
properties and escrow and reserve funds for real estate taxes, property
insurance, capital improvements, tenant improvements and leasing costs. These
funds were established pursuant to certain mortgage and construction financing
arrangements. Cornerstone also had available $80.0 million under its Revolving
Credit Facility for general corporate purposes. In addition, Cornerstone
anticipates it will receive distributions from its real estate partnerships,
rental income from its fee owned properties and interest income from its
mortgages on a monthly basis which will be used to cover normal operating
expenses and pay distributions to its stockholders and unitholders. Based upon
its cash reserves and other sources of funds including its $550.0 million
Revolving Credit Facility, management believes Cornerstone has sufficient
liquidity to meet its cash requirements for the remainder of 1999.
OTHER MATTERS
General
The Company is not aware of any environmental issues at any of its
Properties that would have a material adverse impact on the Company's operating
results or financial condition. The Company believes it has sufficient insurance
coverage at each of its Properties. A majority of the Company's leases with the
majority of its tenants require the tenants to pay most operating expenses and
increases in common area maintenance expenses, which reduces the Company's
exposure to increases in costs and operating expenses resulting from inflation.
Concentration of Risk
Approximately 6.3 million of the Company's 20.9 million rentable square feet
is located in the San Francisco metropolitan market, accounting for
approximately 30% of the Company's total assets at December 31, 1998. In
addition, five of the Company's 96 office Properties are located in the Downtown
Boston market, accounting for approximately 31.9% of the Company's office and
parking revenues for the year ended December 31, 1998. This concentration of
assets makes the Company particularly vulnerable to adverse changes in economic
conditions in the San Francisco and Boston metropolitan areas. A significant
decline in these economic conditions could have a material adverse effect on the
Company.
Norwest Corporation and its subsidiary, Norwest Bank Denver N.A., tenants of
the Company, provided approximately 9.5%, 20.0% and 26.0% of office and parking
rental income for the years ended December 31, 1998, 1997 and 1996,
respectively. Included in deferred tenant receivables is approximately $33.9
million and $31.3 million due from Norwest Corporation at December 31, 1998 and
1997, respectively.
Recently Issued Accounting Standards
During 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 1999. SFAS 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. In addition, the Accounting Standards Executive Committee
of the American
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Institute of Certified Public Accountants issued Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities" ("SOP 98-5") and Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" ("SOP 98-1"), which are effective for fiscal years
beginning after December 15, 1998. SOP 98-5 requires that certain costs incurred
in conjunction with start-up and organizational activities be expensed. SOP 98-1
provides guidance on whether the costs of computer software developed or
obtained for internal use should be capitalized or expensed. Management believes
that when adopted, SFAS 133, SOP 98-5 and SOP 98-1 will not have a significant
effect on the Company's financial statements.
During the first quarter of 1998, the Company adopted the FASB's Emerging
Issues Task Force's release Issue No. 97-11, "Accounting for Internal Costs
Relating to Real Estate Property Acquisitions" ("EITF 97-11"). EITF 97-11
requires that the internal pre-acquisition costs of identifying and acquiring
operating property be expensed as incurred. The adoption of EITF 97-11 did not
have a material effect on the Company's financial statements.
During the first quarter of 1998, the Company also adopted the FASB's
Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 specifies the presentation and disclosure
requirements for comprehensive income which includes those items which have been
formerly reported as a component of stockholders' equity. The adoption of SFAS
130 did not have a significant effect on the Company's financial statements.
The Company has adopted Statement of Financial Accounting Standard No. 131
("SFAS 131"), which establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to stockholders. See the
Notes to the Consolidated Financial Statements which are part of this report for
further discussion.
Year 2000 Compliance
GENERAL
The Year 2000 compliance issue concerns the inability of computerized
information systems to accurately calculate, store or use a date after December
31, 1999. This could result in a system failure or miscalculations causing
disruptions of operations. The Year 2000 issue affects virtually all companies
and all organizations. Management recognizes the importance of ensuring that its
business and operational systems are not disrupted as a result of Year 2000
issues.
READINESS
Cornerstone Properties Inc. has created a Year 2000 task force to evaluate
and take the appropriate actions regarding Year 2000 compliance. The Company's
plan is divided into three major sections: (i) compliance of information systems
at the corporate offices in New York and Atlanta ("Home Office"); (ii)
compliance of information and real estate operating systems at the corporate
offices in California and the Wilson Projects ("Wilson"); and (iii) assessment
of compliance of significant service providers including third party managers
and the buildings they manage, vendors and customers ("External Agents"). The
plan covers the following major tasks: (i) inventory of all systems; (ii)
analysis of inventory including assessment of risk; (iii) verification of
compliance of inventory with vendors; (iv) testing of critical equipment and
processes; and (v) replacement or modification of systems.
The first section of the plan, Home Office, is complete. The Wilson and
External Agents sections of the plan are proceeding according to schedule with
expected completions before December 31, 1999. The plan also includes
questionnaires that will be sent to tenants in order to attempt to determine the
effect of Year 2000 on their businesses and ultimately the Company's income
stream.
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COST
The total historical and anticipated remaining costs for the Year 2000
remediation are estimated to be immaterial to the Company's financial condition.
The costs to date consist of recurring systems upgrades and replacements,
immaterial internal staff costs and other expenses such as telephone and mailing
costs. The information and real estate operating systems that have thus far been
identified as non-compliant are at or approaching the end of their useful lives
and have been or will be replaced or upgraded as a part of the normal operations
of the Company.
RISKS AND CONTINGENCY PLANS
The Company does not anticipate significant delays in finalizing the first
two sections of its Year 2000 remediation plan. However, External Agents having
a material relationship with the Company (e.g., property managers, utilities,
financial institutions, governmental agencies, municipalities and major tenants)
may be a potential risk based on their individual Year 2000 preparedness, which
may not be within the Company's reasonable control. The Company is in the
process of identifying, reviewing and logging the Year 2000 preparedness of
critical External Agents.
While the Company is not aware of any matters with regard to its major
tenants which could give rise to a material default, there may be a potential
risk with regard to their Year 2000 preparedness which may be outside the
Company's reasonable control. The Company is currently in the process of
surveying its tenants to try to predetermine the risk of defaults due to Year
2000 issues.
Currently, there has been no indication or expectation of material risks in
the compliance of the first two sections of the plan. Pending unfavorable
results, the Company will determine what course of action and contingencies will
need to be made. There can be no assurance that external Year 2000 issues will
be resolved. Noncompliance of External Agents as well as the Company's major
tenants could have a material adverse impact on the Company's business,
operating results and financial condition.
YEAR 2000 COMPLIANCE DETAIL
Home Office
I. Inventory of all systems: The Company has inventoried all information
systems at its corporate offices in New York and Atlanta. The hardware
systems primarily consist of desktop and laptop computers, server
computers, printers, phone systems and local area and wide area network
infrastructures. The software applications primarily consist of
commercial off the shelf software ("COTS") products for spreadsheet
analysis, word processing, accounting, cash flow analysis and other
office automation tasks.
II. Analysis of inventory and assessment of risk: The systems inventory has
been analyzed as to its compliance via vendor certifications. All of the
Home Office systems are Year 2000 compliant.
III. Verification of compliance with vendors: The Company has verified
compliance of systems through systems' documentation, mail
correspondences and vendor web sites.
IV. Testing of critical equipment and processes: The Home Office primarily
uses COTS products and does not significantly rely on any proprietary or
customized systems. The Company has performed no testing and has relied
upon vendor certifications and vendor internal testing processes.
V. Replacement or modification of systems: The Company has replaced or
modified non-compliant systems in the ordinary course of business.
Wilson
I. Inventory of all systems: The Company continues to inventory all
information and real estate operating systems at its offices and
Properties, the majority of which are located in California. The
information systems primarily consist of desktop and laptop computers,
server computers,
49
<PAGE>
printers, phone systems, local area and wide area network
infrastructures, and COTS products for spreadsheet analysis, word
processing, accounting, cash flow analysis and other office automation
tasks. The real estate operating systems primarily consist of heating
ventilation and air conditioning ("HVAC") systems, elevator systems,
electrical systems, fire and life safety systems and security control
systems.
II. Analysis of inventory and assessment of risk: The systems inventory has
been analyzed as to its compliance via vendor certifications.
Substantially all of the information and real estate operating systems
are Year 2000 compliant. Those systems identified as non-compliant will
be upgraded or replaced in the normal course of business by December 31,
1999. A component of the accounting system used by Wilson has been
identified as non-compliant. An upgrade has been purchased and will be
installed by the end of the second quarter of 1999. The cost of the
upgrade was approximately $10,000.
III. Verification of compliance with vendors: The Company has verified
compliance of systems through systems' documentation, mail
correspondences and vendor web sites.
IV. Testing of critical equipment and processes: Wilson primarily uses COTS
products and does not significantly rely on any proprietary or
customized systems. The Company has performed no testing and has relied
upon vendor certifications and vendor internal testing processes.
V. Replacement or modification of systems: The Company has and will
continue to replace or modify non-compliant systems in the ordinary
course of business.
External Agents
As part of the Company's Year 2000 compliance plan, significant service
providers, vendors and customers have been identified and steps are being
undertaken to reasonably ascertain their stage of Year 2000 readiness. Through
questionnaires, web sites, interviews, on site visits and other available means,
the Company is assessing the Year 2000 risk of its third party property
managers, financial institutions, significant tenants and other significant
business partners.
Of the External Agents, the Company has focused attention on assessing the
Year 2000 risk of its third party property managers and the associated real
estate operating systems (HVAC systems, elevator systems, electrical systems,
fire and life safety systems and security control systems). Currently, through
the process of surveys, interviews and on site visits, there has been no
indication of material Year 2000 risks at the Company's third-party property
managers. Non-compliant systems will be upgraded or replaced in the normal
course of business before December 31, 1999 or will be addressed with a
contingency plan.
There can be no assurance that external Year 2000 issues will be resolved.
Should non-compliance of External Agents not be discovered, such non-compliance
could have a material adverse impact on the Company's business, operating
results and financial condition. Where possible, the Company will terminate any
vendor relationships should it find any material Year 2000 issues with that
vendor.
Development Project
On April 15, 1998, the Company entered into an agreement to purchase a
927,000 square-foot Class A office building, currently under development, in
downtown Minneapolis, Minnesota. Approximately $36.9 million has been spent as
of December 31, 1998 on the construction. The project is scheduled to be
completed in the year 2000 and is approximately 50% pre-leased. The development
is being financed through a construction loan by U.S. Bank. Upon completion, the
Company will retire the construction loan and acquire the property from the
developer for an amount to be determined by applying a negotiated formula to
in-place net operating income.
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SUBSEQUENT EVENTS
On January 4, 1999, in connection with the Wilson Acquisition, the Company
prepaid the notes on Two ADP Plaza and Two Corporate Centre. The balances of the
two loans at the time of prepayment were $13.4 million and $18.6 million,
respectively.
During January 1999, the Company entered into four interest rate swap
agreements with major financial institutions. The swaps effectively fix the
LIBOR rate on $250.0 million of the amount outstanding on the Company's credit
facility at approximately 5.1%. The swap agreements expire on November 3, 2001
coterminous with the Revolving Credit Facility.
A cash dividend and unitholder distribution of $0.15 per share/unit was
declared for the first half of the fourth quarter of 1998 and paid on February
26, 1999, to common stockholders and unitholders of record as of December 15,
1998. A cash dividend and unitholder distribution of $0.15 per share/unit was
declared for the second half of the fourth quarter of 1998 and paid on February
26, 1999, to common stockholders and unitholders of record as of January 29,
1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As of December 31, 1998, the Company had approximately $649.1 million of
variable rate debt outstanding. The Company does not believe that the interest
rate risk represented by its floating rate debt is material as of that date in
relation to the approximately $2.0 billion of total debt outstanding and
approximately $4.2 billion market capitalization of the Company.
The Company was not a party to any hedging agreements with respect to its
variable rate debt as of December 31, 1998. The Company will consider entering
into hedging agreements with respect to all or a portion of its floating rate
debt and during January 1999 entered into four hedging agreements with major
financial institutions for a total amount of approximately $250.0 million.
Although hedging agreements would enable the Company to convert variable rate
liabilities to fixed rate liabilities, they would expose the Company to the risk
that the counterparties to such hedge agreements may not perform, which could
increase the Company's exposure to rising interest rates. Generally, however,
the counterparties to hedging agreements that the Company would enter into would
be major financial institutions. The Company may borrow additional money with
variable rates in the future. Increases in interest rates, or loss of benefits
of any hedging agreements that the Company may enter into in the future, would
increase the Company's interest expense, which could affect cash flow and the
ability of the Company to service its debt. If the Company enters into any
hedging agreements in the future, decreases in interest rates thereafter would
increase the Company's interest expense as compared to the underlying variable
rate debt and could result in the Company making payments to unwind such
agreements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See the Financial Statements included as a part hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
51
<PAGE>
PART III
The information required to be included in Form 10-K in response to the
following items is to be included in the Company's Proxy Statement for its
Annual Meeting to be held on May 25, 1999, to be filed pursuant to Regulation
14A, and pursuant to applicable rules is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
The following documents are filed as part of this annual report:
(A) FINANCIAL STATEMENTS:
<TABLE>
<CAPTION>
PAGE NUMBER
-------------
<S> <C>
(i) The Company: F-1
The following financial statements and report of independent accountants are
filed herewith at the pages indicated:
Report of Independent Accountants............................................ F-2
Consolidated Balance Sheets at December 31, 1998 and 1997.................... F-3
Consolidated Statements of Income for the years ended December 31, 1998, 1997
and 1996................................................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended December
31, 1998, 1997 and 1996.................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1998,
1997 and 1996.............................................................. F-6
Notes to Consolidated Financial Statements................................... F-7 to F-26
</TABLE>
(B) REPORTS ON FORM 8-K:
1. Form 8-K dated December 1, 1998
Item 5-- Other Events. Cornerstone Properties Inc. closes $550.0
million Revolving Credit Facility.
Item 7-- Financial Statements and Exhibits. Press release
announcing the closing of the $550.0 Revolving Credit
Facility. Second Amended and Restated Revolving Credit
Guaranty Agreement dated November 3, 1998.
2. Form 8-K dated December 16, 1998
Item 2-- Acquisition or Disposition of Assets. Cornerstone
Properties Inc. completes its acquisition of William
Wilson & Associates and its related entities.
Item 5-- Other Events. Matters related to the Wilson Acquisition.
52
<PAGE>
Item 7-- Financial Statements, Pro Forma Financial Information
and Exhibits. The required pro forma financial statements
will be filed on Form 8-K/A within 60 days of this
filing.
3. Form 8-K/A filed March 1, 1999
Item 7-- Financial Statements, Pro Forma Financial Information
and Exhibits. Pro forma financial statements regarding
the Wilson Acquisition as of and for the period ending
September 30, 1998.
(C) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
2.4 Contribution Agreement and Agreement and Plan of Merger, dated as of June 22, 1998, as amended, by
and among Cornerstone Properties Inc., Cornerstone Properties Limited Partnership, William Wilson &
Associates and the entities listed on Schedule 1 thereto, incorporated by reference to Annex A of the
Company's definitive Proxy Statement on Schedule 14A dated November 13, 1998.
3.1(a) Restated Articles of Incorporation of Cornerstone Properties, Inc., as of March 12, 1996,
incorporated by reference to Exhibit 3.1 of the Company's Annual Report on Form 10-K for the year
ended December 31, 1996.
3.1(b) Certificate of Amendment of Restated Articles of Incorporation of the Company, dated October 27,
1997, incorporated by reference to Exhibit 4.2(b) of the Company's Registration Statement on Form S-3
filed March 2, 1998 (Registration Statement No. 333-47149).
3.5 Amended and Restated Bylaws of Cornerstone Properties Inc., incorporated by reference to Exhibit 3.1
of the Company's Current Report on Form 8-K dated December 16, 1998.
4.1 Specimen Common Stock Certificate, incorporated by reference to Exhibit 4.1 of the Company's
Registration Statement on Form S-3 filed March 2, 1998 (Registration Statement No. 333-47149).
4.2 Certificate of Voting Powers, Designations, Preferences, Limitations, Restrictions and Relative
Rights of 7% Cumulative Convertible Preferred Stock of the Company, incorporated by reference to
Exhibit 10.57 of the Company's Annual Report on Form 10-K for the year ended December 31, 1995.
10.1 Loan Sale Agreement, dated as of November 21, 1995, between The Sakura Bank, LTD. and Cornerstone
Properties Inc., incorporated by reference to Exhibit 10.56 of the Company's Annual Report on Form
10-K for the year ended December 31, 1995.
10.2 Convertible Promissory Note dated January 1, 1996 made by Cornerstone Properties Inc., with Hines
Colorado Limited in the amount of $12,925,976.48, incorporated by reference to Exhibit 10.63 of the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
10.3 Stock Purchase Agreement between DIHC, as seller, and Cornerstone Properties Inc., as purchaser,
dated as of August 18, 1997, incorporated by reference to Annex I to the Company's definitive Proxy
Statement on Schedule 14A, filed September 23, 1997.
10.4 Loan Purchase Agreement between PGGM, as seller, and Cornerstone Properties Inc., as purchaser, dated
August 18, 1997, incorporated by reference to Annex II to the Company's definitive Proxy Statement on
Schedule 14A, filed September 23, 1997.
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.5 Agreement of Limited Partnership of Cornerstone Properties Limited Partnership dated as of December
23, 1997, incorporated by reference to Exhibit 10.118 of the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
10.6* First Amendment to Agreement of Limited Partnership of Cornerstone Properties Limited Partnership.
10.7* Second Amendment to Agreement of Limited Partnership of Cornerstone Properties Limited Partnership.
10.8* Third Amendment to Agreement of Limited Partnership of Cornerstone Properties Limited Partnership.
10.9* Fourth Amendment to Agreement of Limited Partnership of Cornerstone Properties Limited Partnership.
10.10* Employment Agreement dated December 16, 1998 between Cornerstone Properties Inc. and Cornerstone
Properties Limited Partnership and William Wilson III.
10.11* Employment Agreement dated December 16, 1998 between Cornerstone Properties Inc. and Cornerstone
Properties Limited Partnership and John S. Moody.
10.12 Amended and Restated Cornerstone Properties Inc. 1998 Long-Term Incentive Plan, incorporated by
reference to Annex D of the Company's definitive Proxy Statement on Schedule 14A dated November 13,
1998.
10.13* Form of Retention Agreement for executive officers of the Company.
10.14 Second Amended and Restated Revolving Credit and Guaranty Agreement dated November 3, 1998 among
Cornerstone Properties Inc. and Cornerstone Properties Limited Partnership (the "Borrowers"), the
subsidiaries of the Borrowers (the "Guarantors"), the Lenders, Bankers Trust Company and The Chase
Manhattan Bank and NationsBank, N.A., incorporated by reference to Exhibit 99.2 of the Company's
Current Report on Form 8-K dated December 1, 1998.
10.15 Stockholders' Agreement, dated as of November 22, 1996, by and among Cornerstone Properties Inc., and
the New York State Teachers' Retirement System together with any other purchasers of 8% Preferred
Stock, incorporated by reference to Exhibit 20.1 of the Company's Report on Form 8-K as of December
12, 1996, incorporated by reference to Exhibit 20.1 of the Company's Annual Report on Form 10-K for
the year ended December 31, 1996.
10.16 Stockholders' Agreement, dated as of November 7, 1996, by and between Cornerstone Properties Inc. and
Hexalon Real Estate, Inc., and together with any other purchasers of 8% Preferred Stock, Series A,
incorporated by reference to Exhibit 20.2 of the Company's Report on Form 8-K as of December 12,
1996, incorporated by reference to Exhibit 20.2 of the Company's Annual Report on Form 10-K for the
year ended December 31, 1996.
10.17* Amended and Restated Registration Rights and Voting Agreement dated as of December 16, 1998 among
PGGM, DIHC and Cornerstone Properties Inc.
10.18 Registration Rights and Lockup Agreement dated as of December 16, 1998 by and among Cornerstone
Properties Inc. and the investors listed therein, incorporated by reference to Annex B of the
Company's definitive Proxy Statement on Schedule 14A dated November 13, 1998.
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
12.1* Statement of Computation of Earnings to Fixed Charges and Preferred Stock Dividend Requirements.
21* List of Subsidiaries.
23* Consent of PricewaterhouseCoopers LLP.
24.1* Powers of Attorney.
27* For EDGAR filing purposes only, this report contains Exhibit 27, Financial Data Schedule.
</TABLE>
- ------------------------
* Filed herewith.
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CORNERSTONE PROPERTIES INC.
(Registrant)
/s/ JOHN S. MOODY
----------------------------------------------------------------
John S. Moody, President & CEO
DATED: March 24, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<C> <S>
/s/ WILLIAM WILSON III
- ------------------------------ Chairman of the Board and
William Wilson III Director
Chief Executive Officer,
/s/ JOHN S. MOODY President and Director
- ------------------------------ (Principal Executive
John S. Moody Officer)
/s/ RODNEY C. DIMOCK
- ------------------------------ Chief Operating Officer
Rodney C. Dimock and Director
/s/ KEVIN P. MAHONEY Chief Financial Officer
- ------------------------------ (Principal Financial and
Kevin P. Mahoney Accounting Officer)
*/s/ CECIL D. CONLEE
- ------------------------------ Director
Cecil D. Conlee
*/s/ BLAKE EAGLE
- ------------------------------ Director
Blake Eagle
- ------------------------------ Director
Dr. Karl-Ludwig Hermann
*/s/ HANS C. MAUTNER
- ------------------------------ Director
Hans C. Mautner
</TABLE>
55
<PAGE>
<TABLE>
<C> <S>
*/s/ DR. LUTZ MELLINGER
- ------------------------------ Director
Dr. Lutz Mellinger
*/s/ CRAIG R. STAPLETON
- ------------------------------ Director
Craig R. Stapleton
- ------------------------------ Director
Michael J.G. Topham
- ------------------------------ Director
Dick van den Bos
- ------------------------------ Director
Jan van der Vlist
*/s/ DONALD G. FISHER
- ------------------------------ Director
Donald G. Fisher
*/s/ RANDALL A. HACK
- ------------------------------ Director
Randall A. Hack
</TABLE>
- ------------------------
* By John S. Moody, as Attorney-in-Fact for the persons indicated
DATED: March 24, 1999
56
<PAGE>
CORNERSTONE PROPERTIES INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND 1997
AND FOR THE YEARS ENDED
DECEMBER 31, 1998, 1997 AND 1996
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Cornerstone Properties Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(i) of this Form 10-K present fairly, in all material
respects, the financial position of Cornerstone Properties Inc. and Subsidiaries
at December 31, 1998 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
New York, New York
February 24, 1999, except for Notes 8 and 20 for which the
date is February 26, 1999
F-2
<PAGE>
CORNERSTONE PROPERTIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Investments, at cost:
Land.................................................................................... $ 729,323 $ 260,542
Buildings, leasehold interests and improvements......................................... 3,466,288 1,559,085
Investment in real estate joint ventures................................................ 31,500 240,253
Deferred lease costs.................................................................... 144,838 127,645
--------- ---------
4,371,949 2,187,525
Less: Accumulated depreciation and amortization......................................... 288,448 229,652
--------- ---------
Total investments..................................................................... 4,083,501 1,957,873
Cash and cash equivalents................................................................. 61,869 24,730
Restricted cash........................................................................... 9,114 1,903
Other deferred costs, net of accumulated amortization of $762 and $1,998.................. 6,153 5,728
Deferred tenant receivables............................................................... 53,802 38,531
Tenant and other receivables, net......................................................... 10,557 7,584
Note receivable........................................................................... 134 1,652
Other assets, net......................................................................... 56,854 13,480
--------- ---------
TOTAL ASSETS.............................................................................. $4,281,984 $2,051,481
--------- ---------
--------- ---------
LIABILITIES
Long-term debt, inclusive of $25,031 and $11,209 of unamortized premium................... $1,532,474 $ 706,178
Credit facility........................................................................... 465,000 187,000
Accrued interest.......................................................................... 10,933 4,134
Accrued real estate taxes................................................................. 16,395 13,401
Accounts payable and accrued expenses..................................................... 51,454 18,363
Common stockholders' distributions payable................................................ 38,163 --
Unearned revenue and other liabilities.................................................... 23,890 10,986
--------- ---------
TOTAL LIABILITIES......................................................................... 2,138,309 940,062
--------- ---------
MINORITY INTEREST
Minority interest in operating partnership................................................ 283,388 --
Minority interest in real estate joint ventures........................................... 23,420 15,420
--------- ---------
TOTAL MINORITY INTEREST................................................................... 306,808 15,420
--------- ---------
Commitments and contingencies
Redeemable preferred stock; 344,828 shares authorized;
0 shares issued and outstanding......................................................... -- --
STOCKHOLDERS' EQUITY
7% Cumulative convertible preferred stock, $16.50 stated value; 65,000,000 shares
authorized; 3,030,303 shares issued and outstanding..................................... 50,000 50,000
Common stock, no par value; 250,000,000 shares authorized; (1998-128,210,784;
1997-83,191,819) shares issued and outstanding
Paid-in capital........................................................................... 1,788,567 1,048,187
Retained earnings (deficit)............................................................... -- --
Deferred compensation..................................................................... (1,700) (2,188)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY................................................................ 1,836,867 1,095,999
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................................................ $4,281,984 $2,051,481
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
CORNERSTONE PROPERTIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES
Office and parking rentals................................................. $ 338,515 $ 159,828 $ 111,494
Earnings in real estate joint ventures..................................... 11,420 -- --
Interest and other income.................................................. 9,551 14,083 5,414
---------- ---------- ----------
TOTAL REVENUES........................................................... 359,486 173,911 116,908
---------- ---------- ----------
EXPENSES
Building operating expenses................................................ 75,663 35,962 24,578
Real estate taxes.......................................................... 46,760 25,560 19,610
Interest expense........................................................... 67,533 33,977 31,734
Depreciation and amortization.............................................. 59,278 30,978 24,317
General and administrative................................................. 12,939 7,564 6,407
---------- ---------- ----------
TOTAL EXPENSES........................................................... 262,173 134,041 106,646
---------- ---------- ----------
97,313 39,870 10,262
---------- ---------- ----------
OTHER INCOME (EXPENSES)
Loss on sale of real estate assets......................................... (2,076) -- --
Minority interest.......................................................... (7,469) (2,368) (1,519)
Net gain on interest rate swaps............................................ -- 99 4,278
---------- ---------- ----------
Income before extraordinary item............................................. 87,768 37,601 13,021
Extraordinary loss........................................................... (4,303) (54) (3,925)
---------- ---------- ----------
NET INCOME................................................................... $ 83,465 $ 37,547 $ 9,096
---------- ---------- ----------
---------- ---------- ----------
INCOME APPLICABLE TO PREFERRED STOCK......................................... $ (3,500) $ (10,160) $ (5,153)
---------- ---------- ----------
INCOME APPLICABLE TO COMMON STOCK............................................ $ 79,965 $ 27,387 $ 3,943
---------- ---------- ----------
---------- ---------- ----------
INCOME BEFORE EXTRAORDINARY ITEM PER COMMON SHARE............................ $ 0.84 $ 0.63 $ 0.39
---------- ---------- ----------
---------- ---------- ----------
EXTRAORDINARY LOSS PER COMMON SHARE.......................................... $ (0.04) $ -- $ (0.20)
---------- ---------- ----------
---------- ---------- ----------
BASIC NET INCOME PER COMMON SHARE............................................ $ 0.80 $ 0.63 $ 0.19
---------- ---------- ----------
---------- ---------- ----------
DILUTED NET INCOME PER COMMON SHARE.......................................... $ 0.80 $ 0.63 $ 0.19
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
CORNERSTONE PROPERTIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
---------------------- ---------------------- RETAINED
OUTSTANDING PAID-IN OUTSTANDING PAID-IN EARNINGS DEFERRED
SHARES CAPITAL SHARES CAPITAL (DEFICIT) COMPENSATION TOTAL
----------- --------- ----------- --------- ----------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996................. 19,959,515 $ 181,477 3,030,303 $ 50,000 $ (39,885) $ (2,236) $ 189,356
Common stock issued for 10% partnership
purchase............................... 349,650 5,000 -- -- -- -- 5,000
Restricted stock grant vesting........... -- -- -- -- -- 988 988
Net income............................... -- -- -- -- 9,096 -- 9,096
Dividend reinvestment, net of $212 in
stock issuance costs................... 300,589 3,804 -- -- -- -- 3,804
Preferred stock distributions............ -- (5,153) -- -- -- -- (5,153)
Common stock distributions ($1.20/shr)... -- (24,551) -- -- -- -- (24,551)
----------- --------- ----------- --------- ----------- ------- ---------
BALANCE, DECEMBER 31, 1996............... 20,609,754 $ 160,577 3,030,303 $ 50,000 $ (30,789) $ (1,248) $ 178,540
Common stock proceeds, net of $17,204 in
stock issuance costs................... 16,100,000 208,196 -- -- -- -- 208,196
Preferred stock conversion............... 11,482,760 162,515 -- -- -- -- 162,515
Dividend reinvestment, net of $296 in
stock issuance costs................... 696,013 10,808 -- -- -- -- 10,808
PGGM stock............................... 34,185,500 547,000 -- -- -- -- 547,000
Restricted stock grants.................. 107,292 1,761 -- -- -- (1,868) (107)
Restricted stock grant vesting........... -- -- -- -- -- 928 928
Net income............................... -- -- -- -- 37,547 -- 37,547
Option exercise.......................... 10,500 150 -- -- -- -- 150
Preferred stock distributions............ -- (3,402) -- -- (6,758) -- (10,160)
Common stock distributions ($1.04/shr)... -- (39,418) -- -- -- -- (39,418)
----------- --------- ----------- --------- ----------- ------- ---------
BALANCE, DECEMBER 31, 1997............... 83,191,819 $1,048,187 3,030,303 $ 50,000 $ -- $ (2,188) $1,095,999
Common stock proceeds, net of $14,463 in
stock issuance costs................... 25,969,203 447,881 -- -- -- -- 447,881
Dividend reinvestment, net of $410 in
stock issuance costs................... 397,404 6,294 -- -- -- -- 6,294
Tower 56 residual purchase............... 307,692 5,500 -- -- -- -- 5,500
Restricted stock grants.................. 31,678 577 -- -- -- (577) --
Restricted stock grant vesting........... -- -- -- -- -- 1,065 1,065
Net income............................... -- -- -- -- 83,465 -- 83,465
Minority adjustment...................... -- 49,219 -- -- -- -- 49,219
Preferred stock distributions............ -- -- -- (3,500) -- (3,500)
Common stock distributions ($1.50/shr)... -- (70,963) -- -- (79,965) -- (150,928)
One Memorial acquisition................. 3,428,571 60,000 -- -- -- -- 60,000
Wilson Acquisition....................... 14,884,417 241,872 -- -- -- -- 241,872
----------- --------- ----------- --------- ----------- ------- ---------
BALANCE, DECEMBER 31, 1998............... 128,210,784 $1,788,567 3,030,303 $ 50,000 $ -- $ (1,700) $1,836,867
----------- --------- ----------- --------- ----------- ------- ---------
----------- --------- ----------- --------- ----------- ------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
CORNERSTONE PROPERTIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................... $ 83,465 $ 37,547 $ 9,096
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization.......................................... 58,980 31,826 24,801
Deferred compensation amortization..................................... 1,065 928 988
Share of net loss in real estate joint ventures........................ 5,670 -- --
Net gain on interest rate swap......................................... -- (99) (4,278)
Extraordinary loss..................................................... 4,303 54 3,925
Unbilled rental revenue................................................ (13,712) (3,015) (1,408)
Increase (decrease) in accrued interest................................ 6,799 3,052 (3,245)
Minority interest share of income...................................... 7,469 2,368 1,519
Loss on sale of real estate assets..................................... 2,076 -- --
Increase in tenant and other receivables and other assets.............. (6,833) (16,920) (2,461)
Increase in accounts payable, accrued expenses and other liabilities... 33,515 10,181 5,585
----------- ----------- ----------
Total adjustments...................................................... 99,332 28,375 25,426
----------- ----------- ----------
Net cash provided by operating activities.............................. 182,797 65,922 34,522
----------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to investment property......................................... (797,181) (464,096) (58,501)
Other investments........................................................ (41,893) -- --
Repayment of note receivable............................................. 1,518 1,259 1,242
Investments in real estate joint ventures................................ (31,391) -- --
Proceeds from sale of real estate assets................................. 45,865 -- --
----------- ----------- ----------
Net cash used in investing activities.................................. (823,082) (462,837) (57,259)
----------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from common stock offering...................................... 462,344 225,400 --
Proceeds from preferred stock offering................................... -- -- 140,000
Borrowings under mortgage loans.......................................... 92,377 -- 116,000
Borrowings under credit facility......................................... 567,500 187,000 --
Repayments under credit facility......................................... (289,500) -- --
Repayment of term loan................................................... -- (32,500) --
Repayments under mortgage loans.......................................... (3,426) (1,094) (98,384)
Proceeds from dividend reinvestment plan................................. 6,704 11,104 4,016
Net payments for swap terminations and debt prepayment costs............. (1,762) (216) (6,804)
(Increase) decrease in restricted cash................................... (7,211) 2,524 (33)
Stock and debt issuance costs............................................ (20,813) (20,715) (5,154)
Distributions to minority partners....................................... (12,524) (2,717) (2,503)
Distributions to preferred stockholders.................................. (3,500) (10,160) (5,153)
Distributions to common stockholders..................................... (112,765) (51,784) (12,185)
----------- ----------- ----------
Net cash provided by financing activities.............................. 677,424 306,842 129,800
----------- ----------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................... 37,139 (90,073) 107,063
CASH AND CASH EQUIVALENTS, beginning of period............................. 24,730 114,803 7,740
----------- ----------- ----------
CASH AND CASH EQUIVALENTS, end of period................................... $ 61,869 $ 24,730 $ 114,803
----------- ----------- ----------
----------- ----------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
CORNERSTONE PROPERTIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
1. NATURE OF COMPANY'S BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF THE COMPANY'S BUSINESS
Cornerstone Properties Inc. (together with its subsidiaries, "Cornerstone"
or the "Company") is a self-administered equity real estate investment trust
("REIT") which owns, through subsidiaries, interests in 96 Class A office
buildings comprising nearly 21 million rentable square feet, a shopping center,
a hotel and developable land (collectively, the "Properties," and each interest,
a "Property"). The Properties are primarily located in twelve major metropolitan
areas throughout the United States: Atlanta, Boston, Charlotte, suburban
Chicago, Denver, Minneapolis, New York City, Phoenix, San Francisco Bay Area,
Seattle, Southern California and Washington, D.C. and surrounding suburbs. The
Company's strategy is to own Class A office properties in prime Central Business
District locations and major suburban office markets in U.S. metropolitan areas.
Class A office properties are generally considered to be those that have the
most favorable locations and physical attributes, command premium rents and
experience the highest tenant retention rates within their markets. In January
1998, Cornerstone converted its corporate structure into an umbrella limited
partnership REIT ("UPREIT"). Under the UPREIT structure, Cornerstone owns all of
its properties and conducts all of its business through Cornerstone Properties
Limited Partnership, a Delaware limited partnership (the "Operating
Partnership"), of which the Company is the sole general partner. As of December
31, 1998, Cornerstone owned, directly or indirectly, approximately 86.3% of the
common units of partnership interest ("UPREIT Units") in the Operating
Partnership.
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of Cornerstone,
its wholly-owned qualified REIT subsidiary, the Operating Partnership and
controlled partnerships. The Company has consolidated the following partnerships
because it has a majority interest in the economic benefits and is or has the
right to become the managing general partner at its sole discretion: the
Operating Partnership; NWC Limited Partnership ("NWC"); Third and University
Limited Partnership ("Third Partnership"); Two Twenty Two Berkeley Venture ("222
Berkeley"); Five Hundred Boylston West Venture ("500 Boylston"); One Ninety One
Peachtree Associates ("191 Peachtree"); Avenue Associates Limited Partnership
("Market Square"); and 120 Montgomery Associates, LLC ("120 Montgomery"). The
Company's investments in the One Post Property and WCP Services, Inc. are
accounted for as equity investments (see Note 4). All significant intercompany
balances and transactions have been eliminated in consolidation.
INVESTMENT PROPERTY
The costs of the buildings, garages, leasehold interests and improvements
are being depreciated using the straight-line method over their estimated useful
lives, ranging from 20 years for electrical and mechanical installations to 40
years for structural components. Tenant improvements are being amortized over
the terms of the related leases.
Cornerstone and the controlled partnerships hold the Properties for
long-term investment and such investments are carried at cost less accumulated
depreciation. Whenever events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable (such as a significant adverse
action by a regulator or a significant physical change in the property), the
Company's policy is to assess any impairment in value by making a comparison of
the current and projected cash flows of each property over its remaining useful
life (undiscounted and without interest charges) to the carrying amount of each
property. Such carrying amount would be adjusted, if necessary, to estimated
fair value to reflect the
F-7
<PAGE>
impairment in value of the property. No significant adjustments have been made
in the accompanying financial statements.
Costs directly related to the acquisition and development of rental
properties are capitalized. Capitalized development costs include interest,
property taxes, insurance and other project costs incurred during the period of
construction. Ordinary repairs and maintenance are expensed as incurred; major
replacements and betterments, which improve or extend the life of the asset, are
capitalized and depreciated over their estimated useful lives.
REAL ESTATE HELD FOR SALE
Included in Investments is Charlotte Plaza, which was held for sale by the
Company as of November 1, 1998. The Property is valued at approximately $77.6
million, the lower of the carrying amount or the fair value less estimated cost
to sell. Beginning on November 1, 1998, the Company discontinued the recognition
of depreciation on Charlotte Plaza.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include
investments with original maturities of three months or less from the date of
purchase. At December 31, 1998 and 1997, Cornerstone had on deposit with major
financial institutions substantially all of its cash and cash equivalents which
balances at times exceed federally insurable limits. Cornerstone believes it
mitigates its risk by investing in or through major financial institutions.
Recoverability of investments is dependent upon the performance of the issuer.
DEFERRED LEASE COSTS
As an inducement to execute a lease, incentives are sometimes offered which
may include cash and/or other allowances. These incentives and other lease
costs, such as commissions, which are directly related to specific leases, are
deferred and amortized over the terms of the related leases.
OTHER DEFERRED COSTS
Costs incurred in the underwriting and issuance of long-term debt, revolving
lines of credit and investigating investments in real estate partnerships have
been deferred. The costs incurred in connection with the long-term debt are
being amortized over the term of the debt. As part of the acquisition of the
PGGM Portfolio (see Note 2), the Company purchased several management contracts
to which Stichting Pensioenfonds Voor de Gezondheid Geestelijke en
Maatschappelijke Belangen ("PGGM") was a party. The price paid for these
contracts is being amortized over four years.
OTHER ASSETS
Included in Other Assets is the purchase price for the intangible management
and development company assets that were acquired as part of the Wilson
Acquisition (see Note 2). These assets are being amortized over 10 years.
Accumulated amortization was $170,000 and $0 as of December 31, 1998 and 1997,
respectively.
The Company records costs incurred for potential investments as Other
Assets. Upon consummation of an investment, the Company capitalizes all such
costs as an adjustment to the purchase price and depreciates these costs over
the useful life of the asset. All such costs are expensed at the time it is
determined that a potential investment will not be consummated. In addition,
during the first quarter of 1998, the Company adopted EITF 97-11 and in
accordance therewith, the Company expenses all internal acquisition costs.
F-8
<PAGE>
MINORITY INTEREST
Minority interest in the Operating Partnership relates to the interest in
the Operating Partnership that the Company does not own, which as of December
31, 1998 amounted to 13.7%. The Company allocates income to the minority
interest in the Operating Partnership based on the weighted-average percentage
ownership in the Operating Partnership through the year. Persons who contributed
assets to the Operating Partnership received UPREIT Units, shares of
Cornerstone's common stock (the "Common Stock"), cash or a combination thereof.
At the request of a unitholder, the Company will be obligated to redeem each
UPREIT Unit held by such unitholder for one share of Common Stock or, at the
option of the Company, cash equal to the fair market value of one share of
Common Stock at the time of redemption. Such redemptions will cause the
Company's percentage ownership in the Operating Partnership to increase. As of
December 31, 1998, the number of issued and outstanding UPREIT Units held by
unitholders other than the Company was 20,333,607 and as of such date, no UPREIT
Units have been exchanged for shares of Common Stock.
Minority interest in real estate joint ventures represents the minority
partner's or venturer's capital account balances in NWC, Third Partnership, 222
Berkeley, 500 Boylston, 191 Peachtree, Market Square and 120 Montgomery. Debit
balances in certain of these capital accounts originated through special cash
distributions in excess of the partner's share of income in accordance with
certain provisions of the respective partnership and joint venture agreements.
Realizability of the debit balances is continually monitored by calculating pro
forma sales proceeds under the respective agreements.
REVENUE RECOGNITION
Rental revenue is recognized ratably as earned over the terms of the leases.
Deferred tenant receivables result from rental revenues which have been earned
but will be received in future periods as a result of rent concessions provided
to tenants and scheduled future rent increases. Deferred tenant receivables were
approximately $53,802,000 and $38,531,000 at December 31, 1998 and 1997,
respectively. Expense reimbursement and escalation income for the years ended
December 31, 1998, 1997 and 1996 was approximately $77,821,000, $36,990,000 and
$28,230,000, respectively.
An allowance for doubtful accounts of approximately $253,000 and $268,000
has been recorded at December 31, 1998 and 1997, respectively, relating to
tenant and other receivables. Bad debt expense totaled approximately $232,000
and $221,000 during 1998 and 1997, respectively.
INTEREST RATE SWAP AGREEMENTS
The Company accounts for its interest rate swap agreements as hedges if the
swap is designated as a hedge and effectively reduces the Company's exposure to
market interest rate changes. Changes in the market value of these interest rate
swap agreements are deferred and recognized in income at the expiration or
termination of the underlying debt. Forward interest rate swap agreements that
do not meet hedge criteria are accounted for using mark-to-market accounting,
recognizing any unrealized gain or loss on the instrument in the period in which
it is outstanding. When swaps are extinguished at the same time as the
underlying debt instrument, the cost to extinguish the swap is treated as
extraordinary gain or loss. When a swap remains in place after the underlying
instrument matures, it is accounted for on a mark-to-market basis. The swap
termination is accounted for as ordinary gain or loss when it is extinguished
with no underlying debt instrument in place.
F-9
<PAGE>
FEDERAL INCOME TAXES
No provision for United States Federal income taxes has been made in the
accompanying financial statements. Cornerstone has elected to be taxed as a REIT
under Sections 856-859 of the United States Internal Revenue Code (the "Code").
Under these sections of the Code, Cornerstone is permitted to deduct dividends
paid to stockholders in computing its taxable income. All taxable earnings and
profits of Cornerstone since inception have been distributed to the
stockholders.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 1998
financial statement presentation.
RECENTLY ISSUED ACCOUNTING STANDARDS
During 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 1999. SFAS 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. In addition, the Accounting Standards Executive Committee
of the American Institute of Certified Public Accountants issued Statement of
Position 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5") and
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"), which are effective for
fiscal years beginning after December 15, 1998. SOP 98-5 requires that certain
costs incurred in conjunction with start-up and organizational activities be
expensed. SOP 98-1 provides guidance on whether the costs of computer software
developed or obtained for internal use should be capitalized or expensed.
Management believes that when adopted, SFAS 133, SOP 98-5 and SOP 98-1 will not
have a significant effect on the Company's financial statements.
During the first quarter of 1998, the Company adopted the FASB's Emerging
Issues Task Force's release Issue No. 97-11, "Accounting for Internal Costs
Relating to Real Estate Property Acquisitions" ("EITF 97-11"). EITF 97-11
requires that the internal pre-acquisition costs of identifying and acquiring
operating property be expensed as incurred. The adoption of EITF 97-11 did not
have a material effect on the Company's financial statements.
During the first quarter of 1998, the Company also adopted the FASB's
Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 specifies the presentation and disclosure
requirements for comprehensive income which includes those items which have been
formerly reported as a component of stockholders' equity. The adoption of SFAS
130 did not have a significant effect on the Company's financial statements.
ESTIMATES AND RISKS
The preparation of financial statements in conformity with generally
accepted accounting principles ("GAAP") requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The most significant risks, estimates and assumptions are
related to the recoverability and depreciable lives of investment property, the
recoverability of deferred tenant receivables, unforeseen Year 2000 risks and
the qualification of the Company as a REIT. Actual results could differ from
those estimates.
F-10
<PAGE>
2. PROPERTIES
The following table summarizes Cornerstone's interest in real estate
investments at December 31, 1998:
<TABLE>
<CAPTION>
TOTAL CORNERSTONE
MARKET NAME RENTABLE INTEREST
PROPERTY SQUARE FEET (A) YEAR CONSTRUCTED OCCUPANCY NOTES
- ----------------------------------------------------- ------------- ----------- ---------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED) (UNAUDITED)
BOSTON, MASSACHUSETTS
Sixty State Street................................. 823,014 100.0% 1978 99% B
500 Boylston Street................................ 714,636 91.5% 1988 100% D
222 Berkeley Street................................ 531,184 91.5% 1991 100% D
125 Summer Street.................................. 463,691 100.0% 1989 97%
One Memorial Drive................................. 352,764 100.0% 1985 100% C
------------- -----------
MARKET TOTAL....................................... 2,885,289 99%
SAN MATEO COUNTY, CALIFORNIA
Bayhill (4 buildings).............................. 513,910 100.0% 1982-1987 88% E
Peninsula Office Park (7 buildings)................ 493,214 100.0% 1971-1998 98% E
Seaport Centre..................................... 463,142 100.0% 1988 65% E
Bay Park Plaza (2 buildings)....................... 257,058 100.0% 1985-1998 97% E
One Bay Plaza...................................... 176,533 100.0% 1979 93% E
Belmont Shores..................................... 141,643 100.0% 1983 97% E
1300 South El Camino............................... 84,441 100.0% 1986 100% E
66 Bovet........................................... 43,968 100.0% 1968 87% E
------------- -----------
MARKET TOTAL....................................... 2,173,909 88%
EAST BAY, CALIFORNIA
Corporate Centre (2 buildings)..................... 329,604 100.0% 1985-1987 97% E
ADP Plaza (2 buildings)............................ 299,591 100.0% 1987-1989 93% E
PeopleSoft Plaza................................... 279,931 100.0% 1984 99% E
Norris Tech Center (3 buildings)................... 260,513 100.0% 1984-1998 96% E
Golden Bear Center................................. 160,587 100.0% 1986 96% E
2700 Ygnacio Valley Road........................... 103,214 100.0% 1984 96% E
Park Plaza......................................... 87,040 100.0% 1986 86% E
1600 South Main.................................... 83,277 100.0% 1983 95% E
Foothill Corporate Center.......................... 70,355 100.0% 1982 98% E
------------- -----------
MARKET TOTAL....................................... 1,674,112 96%
ATLANTA, GEORGIA
191 Peachtree Street............................... 1,215,288 80.0% 1991 98% D,F
200 Galleria....................................... 432,698 100.0% 1985 95% D
------------- -----------
MARKET TOTAL....................................... 1,647,986 97%
SEATTLE, WASHINGTON
Washington Mutual Tower (3 buildings).............. 1,154,560 50.0% 1988 99% G
110 Atrium Place................................... 213,854 100.0% 1981 97% E
Island Corporate Center............................ 100,075 100.0% 1987 96% E
------------- -----------
MARKET TOTAL....................................... 1,468,489 99%
</TABLE>
F-11
<PAGE>
<TABLE>
<CAPTION>
TOTAL CORNERSTONE
MARKET NAME RENTABLE INTEREST
PROPERTY SQUARE FEET (A) YEAR CONSTRUCTED OCCUPANCY NOTES
- ----------------------------------------------------- ------------- ----------- ---------------- ----------- ---------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
SANTA CLARA COUNTY, CALIFORNIA
Pruneyard Office (3 buildings)..................... 354,005 100.0% 1971-1999 99% E,H
10 Almaden......................................... 293,685 100.0% 1989 100% E
Pruneyard Shopping Center.......................... 252,210 100.0% 1970s 95% E
Embarcadero Place (4 buildings).................... 192,108 100.0% 1984 100% E
Pruneyard Inn...................................... 90,000 100.0% 1989 E,I
First American Plaza............................... 82,596 100.0% 1971 98% E
490 California..................................... 24,539 100.0% 1985 100% E
------------- -----------
MARKET TOTAL....................................... 1,289,143 99%
DENVER, COLORADO
One Norwest Center................................. 1,187,752 100.0% 1983 97%
------------- -----------
MARKET TOTAL......................................... 1,187,752 97%
SAN FRANCISCO, CALIFORNIA
120 Montgomery Street.............................. 410,902 66.7% 1955 95% E
One Post........................................... 389,660 50.0% 1969 99% E
201 California Street.............................. 240,230 100.0% 1980 100% J
188 Embarcadero.................................... 85,209 100.0% 1985 99% E
------------- -----------
MARKET TOTAL....................................... 1,126,001 98%
MINNEAPOLIS, MINNESOTA
Norwest Center..................................... 1,118,062 50.0% 1988 100% K
------------- -----------
MARKET TOTAL....................................... 1,118,062 100%
WASHINGTON, D.C./ALEXANDRIA, VIRGINIA
Market Square (2 buildings)........................ 688,709 70.0% 1990 96% D,L
99 Canal Center.................................... 137,945 100.0% 1986 98% D
TransPotomac Plaza 5............................... 92,980 100.0% 1983 96% D
11 Canal Center.................................... 70,365 100.0% 1986 95% D
------------- -----------
MARKET TOTAL....................................... 989,999 96%
SUBURBAN CHICAGO, ILLINOIS
Corporate 500 Centre (4 buildings)................. 678,885 100.0% 1986/1990 97% M
One Lincoln Centre................................. 297,067 100.0% 1986 90%
------------- -----------
MARKET TOTAL....................................... 975,952 95%
SANTA MONICA/WEST LOS ANGELES, CALIFORNIA
West Wilshire (2 buildings)........................ 235,781 100.0% 1960-1976 90% E
Wilshire Palisades................................. 186,714 100.0% 1981 99% J
Janss Court........................................ 125,556 100.0% 1989 97% E,N
Searise Office Tower............................... 122,292 100.0% 1975 94% E
Commerce Park...................................... 94,252 100.0% 1977 79% E,O
429 Santa Monica................................... 81,414 100.0% 1982 81% E
------------- -----------
MARKET TOTAL....................................... 846,009 92%
</TABLE>
F-12
<PAGE>
<TABLE>
<CAPTION>
TOTAL CORNERSTONE
MARKET NAME RENTABLE INTEREST
PROPERTY SQUARE FEET (A) YEAR CONSTRUCTED OCCUPANCY NOTES
- ----------------------------------------------------- ------------- ----------- ---------------- ----------- ---------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
ORANGE COUNTY, CALIFORNIA
Bixby Ranch........................................ 277,289 100.0% 1987 98% E
18301 Von Karman................................... 219,537 100.0% 1991 64% E
2677 North Main.................................... 212,542 100.0% 1987 81% E
------------- -----------
MARKET TOTAL....................................... 709.368 82%
CHARLOTTE, NORTH CAROLINA
Charlotte Plaza.................................... 612,728 100.0% 1982 99% D
------------- -----------
MARKET TOTAL....................................... 612,728 99%
ARIZONA
Gateway (2 buildings).............................. 212,222 100.0% 1984-1985 92% E
Scottsdale Centre.................................. 164,469 100.0% 1985 94% E
Biltmore Lakes..................................... 207,489 100.0% 1982 96% E
------------- -----------
MARKET TOTAL....................................... 584,180 94%
SAN DIEGO, CALIFORNIA
Centerside II...................................... 286,941 100.0% 1987 94% E
Crossroads......................................... 133,950 100.0% 1983 99% E
------------- -----------
MARKET TOTAL....................................... 420,891 95%
LOS ANGELES, CALIFORNIA
700 North Brand.................................... 202,785 100.0% 1981 94% E
Tri-Center Plaza................................... 141,946 100.0% 1990 96% E
Warner Park Center................................. 58,798 100.0% 1986 98% E
------------- -----------
MARKET TOTAL....................................... 403,529 95%
NEW YORK CITY, NEW YORK
527 Madison Avenue................................. 215,332 100.0% 1986 94%
Tower 56........................................... 163,633 100.0% 1983 99% P
------------- -----------
MARKET TOTAL....................................... 378,965 96%
CONEJO VALLEY (VENTURA), CALIFORNIA
Westlake Spectrum (2 buildings).................... 118,990 100.0% 1990 100% E
Agoura Hills....................................... 115,265 100.0% 1987 88% E
------------- -----------
MARKET TOTAL....................................... 234,255 94%
OTHER REGIONS
U.S. West (Murray, Utah)........................... 136,608 100.0% 1985 86% E
Exposition Centre (Sacramento, California)......... 72,547 100.0% 1984 65% E
------------- -----------
MARKET TOTAL....................................... 209,155 79%
------------- -----------
TOTAL PORTFOLIO.................................... 20,935,774 96%
Minority Interest Adjustment (Q)................... (684,784)
------------- -----------
CORNERSTONE PORTFOLIO.............................. 20,250,990 95%
------------- -----------
------------- -----------
</TABLE>
- ------------------------
(A) Unless noted below, cash flow and residual proceeds will be distributed to
Cornerstone according to its percentage interest.
F-13
<PAGE>
(B) On December 31, 1997, the Company purchased the second mortgage on Sixty
State Street. The mortgage is a cash flow mortgage through which all the
economic benefits/risks (subject to the first mortgage) inure to the
Company. The Company controls all major decisions regarding management and
leasing. The total purchase price for the second mortgage was $131.5 million
and is consolidated in buildings due to the above factors. The $78.4 million
first mortgage on the Property was originally recorded by the Company as an
$89.6 million liability due to its above-market interest rate.
The second mortgage, which the Company holds, is collateralized only by the
improvements on Sixty State Street. Title to the improvements is owned by
Sixty State Street Trust, the ground lessee under a ground lease that
expires on December 28, 2067. The lease payments on the ground lease are
$398,896 per annum throughout the term.
(C) On April 28, 1998, the Company purchased One Memorial Drive in Cambridge,
Massachusetts. The total purchase price for the Property was approximately
$112.5 million, approximately $23.5 million of which was paid in cash,
approximately $29.0 million of which was paid in UPREIT Units valued at
$17.50 per unit and approximately $60.0 million of which was paid in Common
Stock valued at $17.50 per share.
(D) 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 (collectively, "the PGGM Portfolio"). The Company
acquired the PGGM Portfolio for a purchase price of approximately $1.06
billion, consisting of approximately 34.2 million shares of Common Stock
valued and recorded at $16.00 per share, approximately $260.0 million in
cash and $250.0 million in promissory notes. The cash portion of the
acquisition was financed with proceeds from the Company's Initial Public
Offering in April 1997 and $54.0 million from its Revolving Credit Facility.
(E) Property was acquired as a result of the Wilson Acquisition in December
1998. After receiving stockholder approval on December 14, 1998, the Company
acquired substantially all of the properties and real estate operations of
William Wilson & Associates and related entities ("WW&A") (the "Wilson
Acquisition"). As part of the Wilson Acquisition, the Company acquired
interests in 69 Class A office Properties, comprising approximately 9.2
million rentable square feet primarily in the San Francisco Bay Area and in
Southern California, a shopping center consisting of approximately 252,000
rentable square feet in Santa Clara, California, a hotel consisting of
90,000 square feet in Santa Clara, California and 12.8 acres of developable
land.
The Company acquired WW&A for a purchase price of approximately $1.8
billion, consisting of approximately 14.9 million shares of Common Stock
valued at $17.25 per share (recorded at $16.25 per share for GAAP purposes),
approximately 16.2 million UPREIT Units valued at $17.25 per unit (recorded
at $16.25 per unit for GAAP purposes), approximately $465.0 million in cash
and the assumption of approximately $760.0 million of property and
construction related debt (recorded at $773.7 million for GAAP purposes).
The price of $16.25 represents the fair value based upon the market price
for a reasonable period before and after the date the terms of the
acquisition were agreed to and announced. The cash portion of the
transaction was financed primarily from the Company's Revolving Credit
Facility and the sale of $200.0 million of Common Stock to PGGM, an
approximate 33.6% stockholder prior to the Wilson Acquisition, priced at
$17.25 per share.
(F) While the Company's stated interest in the partnership that owns 191
Peachtree Street is 80.0%, its economic interest is significantly larger
since it has acquired the first mortgage note on the Property in the amount
of $145.0 million, which earns interest at 9.375% and will receive a
priority distribution on its acquired capital base. In 1997 and 1998, the
partner in the transaction, CH Associates, Ltd., received an annual
Incentive Distribution (as defined) of $250,000, which the Company expects
it will continue to receive under the partnership agreement through February
28, 2000, with the Company receiving the remainder of the cash flow of the
Property.
F-14
<PAGE>
The partnership that owns 191 Peachtree Street leases a portion of the land
upon which the project is located pursuant to a ground lease agreement. The
agreement requires annual payments of $5,000 through January 31, 1998,
$45,000 through January 31, 2002 and $75,000 through January 31, 2008.
Thereafter, the annual rent increases $2,500 per year until the expiration
date of January 31, 2087. The partnership records ground rental expense
relating to this agreement on a straight-line basis. The ground lease is
renewable for an additional 99 years.
(G) While the Company's stated interest in the partnership that owns Washington
Mutual Tower is 50.0%, its economic interest in the Property is
significantly larger due to priority distributions it receives on its
invested capital base. For the year ended December 31, 1998, the Company
received 100% of the cash distributions from the partnership that owns
Washington Mutual Tower.
(H) Pruneyard Place is under construction with an expected completion date of
April 1999. The building is 100% pre-leased. The building will be six
stories and contain approximately 120,000 square feet of net rentable area.
The Company has commitments for approximately $8.2 million related to this
construction.
(I) The Pruneyard Inn is a 118-room, three-story hotel. The Property is
currently undergoing a 25,000-square foot expansion, which will add 54 new
rooms. The Company has commitments for approximately $3.2 million related to
this construction.
(J) On June 3, 1998, the Company purchased 201 California Street and Wilshire
Palisades. The total purchase price for the Properties was approximately
$121.5 million, approximately $29.5 million of which was paid in cash,
approximately $29.1 million of which was paid in UPREIT Units valued at
$17.50 per unit and approximately $62.9 million of assumed debt (recorded at
$64.6 million for GAAP purposes).
(K) While the Company's stated interest in the partnership that owns Norwest
Center is 50.0%, its economic interest in the Property is significantly
larger due to priority distributions it receives on its invested capital
base. For the year ended December 31, 1998, the Company's share of earnings
and cash distributions from the partnership that owns Norwest Center was
77.9%.
(L) During 1998, through a series of transactions, the Company acquired
partnership interests with a stated interest of approximately 70.0% in the
partnerships that own Market Square. The Company's economic interest is
significantly larger since it has acquired the first mortgage note on the
Property in the amount of $181.0 million which earns interest at 9.75% and
will receive a priority distribution on its acquired capital base. In
addition, the Company acquired a "buffer loan", with accrued principal and
interest of $49.0 million at purchase, which accrues interest at a rate of
Prime plus 1.25% and is payable from cash flow, refinancing or sales
proceeds in excess of the first mortgage. During the year ended December 31,
1998, the Company received 100% of the cash flow from the Property. On
November 4, 1998, the Company purchased an additional interest in the
partnerships that own Market Square which enabled it to gain sufficient
control in order to consolidate the investment.
(M) On January 28, 1998, the Company purchased Corporate 500 Centre in
Deerfield, Illinois. This Property consists of four Class A office buildings
with approximately 679,000 rentable square feet. The consideration paid for
this Property was approximately $135.0 million in cash and approximately
$15.0 million in UPREIT Units valued at $18.50 per unit, for a total
purchase price of approximately $150.0 million. The Company financed a
portion of the purchase price with an $80.0 million mortgage loan from
Bankers Trust Company; this mortgage was subsequently refinanced in October
1998.
(N) Janss Court is a seven-story, 125,000-square foot Class A mixed-use
building. In addition to 92,000 square feet of retail and office space,
Janss Court offers 32 apartments for a total of 33,000 rentable square feet
of residential space.
F-15
<PAGE>
(O) The Property is subject to a ground lease agreement. The agreement requires
annual payments of $115,000 through March 31, 2002 and $121,000 from April
1, 2002 through March 31, 2007. The lease payment increases every ten years
thereafter according to a formula based on the Consumer Price Index. The
ground lease expires on March 31, 2041.
(P) On January 5, 1998, the Company purchased for approximately $5.5 million,
the remaining participation rights in the cash flow and residual value of
Tower 56 from the former participants for 307,692 shares of Common Stock. As
a result, all of the cash flow and the residual value of Tower 56 inure to
the Company.
(Q) Rentable square feet includes an adjustment for the interest of a joint
venture or minority partner. Calculations are based on the partners'
percentage interest in the cash flows of the property.
On March 31, 1998, the Company sold the Dearborn Land (an undeveloped parcel
of land in Chicago that was acquired as part of the acquisition of the PGGM
Portfolio in October 1997) for gross proceeds of approximately $19,000,000,
resulting in a loss of $212,228.
On April 29, 1998, the Company sold the Frick Building, located in
Pittsburgh, Pennsylvania, for gross proceeds of approximately $26,748,000,
resulting in a loss of $2,111,540.
On December 29, 1998, Avenue Associates Limited Partnership sold a
condominium unit in Market Square, located in Washington D.C., for gross
proceeds of $326,154, resulting in a gain of $247,972.
The future minimum lease payments to be received by the Company under
noncancellable operating leases as of December 31, 1998 are as follows (Dollar
amounts in thousands):
<TABLE>
<S> <C>
1999............................................................ $ 399,589
2000............................................................ 376,413
2001............................................................ 352,484
2002............................................................ 302,511
2003............................................................ 242,140
Thereafter...................................................... 957,109
---------
Total........................................................... $2,630,246
---------
---------
</TABLE>
3. RESTRICTED CASH
Restricted cash includes security deposits for some of the Company's office
properties and escrow and reserve funds for real estate taxes, property
insurance, capital improvements, tenant improvements and leasing costs. These
funds were established pursuant to certain mortgage and construction financing
arrangements.
4. INVESTMENT IN REAL ESTATE JOINT VENTURES
Investment in real estate joint ventures represents the Company's two
investments that are accounted for using the equity method of accounting. The
first investment is the Company's 50.0% interest in a co-tenancy agreement with
Crocker Plaza Company for One Post, a 38-story, Class A office tower in San
Francisco, California. The Company and Crocker co-manage and lease the Property.
The second equity investment is the Company's 5.0% interest in WCP Services,
Inc., which provides property management and tenant construction supervision
services to third parties. WCP Services, Inc. also provides tenant construction
supervision services to tenants in Properties owned by Cornerstone.
F-16
<PAGE>
5. LONG-TERM DEBT
The following table sets forth certain information regarding the
consolidated debt obligations of the Company as of December 31, 1998, including
mortgage obligations relating to the Company's Properties. All of this debt,
with the exception of the Convertible Promissory Note due 2001, is nonrecourse
to the Company. However, notwithstanding the nonrecourse indebtedness, the
lender may have the right to recover deficiencies from the Company in certain
circumstances, including fraud, misappropriation of funds and environmental
liabilities (Dollar amounts in thousands).
<TABLE>
<CAPTION>
MATURITY
PROPERTY AMORTIZATION INTEREST RATE (A) DATE 12/31/98 12/31/97
- ----------------------------------- ------------------- ---------------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
188 Embarcadero.................... 25 year 6.90% Jun-1999 $ 9,135 $ --
One and Two Gateway................ 25 year 6.90% Dec-1999 8,679 --
Seaport Centre..................... Interest only LIBOR plus 1.50% Dec-1999 58,000 --
The Pruneyard...................... 24 year LIBOR plus 2.00% Mar-2000 49,384 --
18301 Von Karman................... 25 year 6.90% Apr-2000 10,647 --
Centerside II...................... 25 year 6.90% Jun-2000 13,818 --
Scottsdale Centre.................. 25 year 6.90% Jul-2000 7,745 --
TransPotomac Plaza 5 and Charlotte
Plaza (B)........................ Interest only 7.28% Oct-2000 65,000 65,000
1600 South Main.................... 25 year 6.90% Dec-2000 5,038 --
Convertible Promissory Note due
2001 (C)......................... Interest only 8.11%max (D) Jan-2001 12,926 12,926
Biltmore Lakes..................... 25 year 6.90% Apr-2001 11,468 --
Belmont Shores..................... 25 year 6.90% Apr-2001 9,839 --
700 North Brand.................... 25 year 6.90% May-2001 18,108 --
2677 North Main.................... 25 year 6.90% May-2001 10,774 --
2700 Ygnacio Valley Road........... 25 year 6.90% Aug-2001 5,035 --
Westlake Spectrum.................. 25 year 6.90% Aug-2001 3,993 --
Park Plaza......................... 25 year 6.90% Oct-2001 4,940 --
Warner Park Center................. 25 year 6.90% Dec-2001 5,213 --
West Wilshire Office and Medical... 25 year 6.90% Jan-2002 17,301 --
Searise Office Tower............... 25 year 6.90% Jan-2002 11,864 --
Golden Bear Center................. 25 year 6.90% Mar-2002 15,753 --
Exposition Centre.................. 25 year 6.90% May-2002 5,200 --
Bixby Ranch........................ 25 year 6.90% May-2002 20,243 --
Wilshire Palisades................. 22 year 6.70% Jul-2002 29,902 --
120 Montgomery Street.............. 24 year LIBOR plus 1.40% Nov-2002 46,930 --
1300 South El Camino............... 23 year 6.90% Dec-2002 4,007 --
125 Summer Street.................. Interest only (E) 7.20% Jan-2003 50,000 50,000
429 Santa Monica................... 25 year 6.90% Mar-2003 10,176 --
Crossroads......................... 25 year 6.90% Mar-2003 7,339 --
Westlake Spectrum II............... 25 year 6.90% Mar-2003 5,284 --
Tower 56........................... 30 year 7.67% May-2003 17,548 17,742
Two ADP Plaza...................... Interest only 6.90% Dec-2003 13,400 --
Two Corporate Centre............... Interest only 6.90% Dec-2003 18,600 --
Norris Tech Center................. 25 year LIBOR plus 1.65% Dec-2003 16,392 --
Peninsula Office Park 4............ 25 year 6.90% Feb-2004 5,436 --
Peninsula Office Park 1,3,5,6,8 &
9................................ 25 year 6.90% Feb-2004 54,806 --
110 Atrium Place................... 30 year 6.90% Mar-2004 21,838 --
10 Almaden......................... 25 year 6.90% Apr-2004 33,885 --
Embarcadero Place.................. 20 year 6.90% Apr-2004 26,061 --
527 Madison Avenue and One Lincoln
Centre (B)....................... Interest only 7.47% Oct-2004 65,000 65,000
Sixty State Street................. 30 year 6.84% Jan-2005 87,627 89,630
201 California Street.............. 30 year 6.70% Mar-2005 33,071 --
Island Corporate Center............ 30 year 6.90% Apr-2005 13,294 --
Washington Mutual Tower............ Interest only 7.53% Nov-2005 79,100 79,100
Norwest Center..................... Interest only 8.74% Dec-2005 110,000 110,000
Agoura Hills....................... 25 year 6.90% Dec-2005 12,328 --
Janss Court........................ 30 year 6.90% Dec-2005 18,723 --
Bayhill 4,5,6 & 7.................. 25 year 6.90% Dec-2006 59,071 --
66 Bovet........................... 22 year 6.90% Apr-2007 3,939 --
Market Square (F) and 200 Galleria
(B).............................. Interest only 7.54% Oct-2007 120,000 120,000
</TABLE>
F-17
<PAGE>
<TABLE>
<CAPTION>
MATURITY
PROPERTY AMORTIZATION INTEREST RATE (A) DATE 12/31/98 12/31/97
- ----------------------------------- ------------------- ---------------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
One Norwest Center (G)............. 30 year 6.90% Oct-2008 98,252 96,780
Corporate 500 Centre (H)........... 25 year 6.66% Nov-2008 89,765 --
Other loans........................ Various Various Various 597 --
---------------------- --------- --------- ---------
Total Debt......................... 7.20(I) 6.7 yrs.(I) $1,532,474 $ 706,178
---------------------- --------- --------- ---------
---------------------- --------- --------- ---------
</TABLE>
- ------------------------------
(A) The interest rate is the stated interest rate (for Cornerstone originated
debt) or the prevailing market rate at the time of acquisition (for debt
assumed as part of an acquisition).
(B) The three notes arising from the acquisition of several properties from PGGM
(a major stockholder and related party) are cross-collateralized, having the
effect of forming a "collateral pool" for the underlying notes.
(C) 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.
(D) Lesser of 30-day LIBOR plus 0.5% or 8.11%.
(E) Interest only payments through January 1, 2001, with a 25-year amortization
schedule thereafter.
(F) The collateral for this loan is a pledge of the $181.0 million first
mortgage loan on Market Square that the Company purchased from PGGM.
(G) On September 25, 1998, the Company completed the refinancing of the $96.1
million mortgage on One Norwest Center with Connecticut General Life
Insurance Company and Massachusetts Mutual Life Insurance Company. As a
result of the refinancing, the principal balance was increased to $98.5
million, the term of the loan was extended from three years to ten years and
the interest rate was reduced from 7.50% to 6.90%.
(H) On October 9, 1998, the Company completed the refinancing of the $80.0
million mortgage on Corporate 500 Centre with Teachers Insurance and Annuity
Association. As a result of the refinancing, the principal balance was
increased to $90.0 million, the term of the loan was extended from 4.5 years
to ten years and the interest rate was increased by three basis points to
6.66%.
(I) Weighted-average interest rate and maturity of the Company's long-term debt.
The combined aggregate amount of maturities for all long-term borrowings for
1999 through 2003 are $75,814,000, $151,632,000, $82,296,000, $151,200,000 and
$138,739,000, respectively.
Since most of the long-term debt is property related, there are restrictive
covenants that limit the total amount of indebtedness that can be placed on
individual properties.
6. REVOLVING CREDIT FACILITY
The Company has a $550.0 million Revolving Credit Facility with a syndicate
of 17 banks led by Bankers Trust Company, The Chase Manhattan Bank and
NationsBank for acquisitions and general working capital purposes as well as the
issuance of letters of credit (the "Revolving Credit Facility"). The interest
rate on the facility depends on the Company's ratio of total debt to asset value
(as defined) at the time of borrowing and will be at a spread of 1.10% to 1.40%
over the applicable LIBOR rate or the Prime Rate at the borrower's option. The
letters of credit will be priced at the applicable Eurodollar credit spread. The
Revolving Credit Facility expires on November 3, 2001. As of December 31, 1998,
$465.0 million of the facility was outstanding at a rate of approximately 6.9%.
In addition, at December 31, 1998 there was a $5.0 million letter of credit
outstanding at a rate of 1.40%. The Revolving Credit Facility contains certain
restrictive covenants including: (i) a limitation on the Company's dividend to
90.0% of funds from operations and 110.0% of cash available for distribution,
both as defined in the agreement; (ii) the percentage of total liabilities to
total property asset value (as defined) cannot exceed 55.0%; (iii) the ratio of
adjusted EBITDA to interest expense may not be less than 2.00 to 1.00 through
July 1, 1999 and 2.25 to 1.00 thereafter; (iv) the fixed charge coverage ratio
may not be less than 1.75 to 1.00; and (v) the ratio of total property asset
value (as defined) to secured indebtedness may not be less than 2.50 to 1.00.
Through an amendment and restatement, this Revolving Credit Facility replaces
the Company's $350.0 million facility entered into during 1997.
F-18
<PAGE>
7. STOCKHOLDERS' EQUITY
The 7% Cumulative Convertible Preferred Stock is convertible into Common
Stock at $16.50 per share at any time after August 4, 2000.
On April 21, 1997, Cornerstone completed its initial public offering in the
United States of 16,100,000 shares of Common Stock at a price of $14.00 per
share. The shares were listed on the New York Stock Exchange through
underwriters led by Merrill Lynch & Co.
On February 6, 1998, Cornerstone completed a secondary public offering of
14,375,000 shares of Common Stock at a price of $18.25 per share. The shares
were placed in the U.S. through a syndicate of seven investment banks led by
Merrill Lynch & Co. Net proceeds to the Company were approximately $247.9
million (approximately $262.3 million gross proceeds less an underwriting
discount of approximately $13.7 million and expenses of approximately $0.7
million). The net proceeds were used to repay outstanding borrowings under the
Revolving Credit Facility and for working capital purposes.
The following tables summarize the stock options and restricted stock grants
for certain officers of the Company as of December 31, 1998:
STOCK OPTIONS
<TABLE>
<CAPTION>
EXERCISE
OPTIONS GRANTED PRICE OPTIONS OPTIONS
DATE OF GRANT (NO. OF SHARES) (PER SHARE) VESTING (A) EXERCISABLE EXERCISED
- -------------------------------- --------------- ------------- ----------------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
August, 1995.................... 637,500 $ 14.30 33.3%/yr, 10yr term 637,500 0
October, 1995................... 150,000 $ 14.30 33.3%/yr, 10yr term 150,000 10,500
March, 1997..................... 880,000 $ 14.50 33.3%/yr, 10yr term 293,333 0
November, 1997.................. 70,000 $ 18.44 33.3%/yr, 10yr term 23,333 0
February, 1998.................. 70,000 $ 18.13 33.3%/yr, 10yr term 0 0
February, 1998.................. 595,000 $ 18.25 33.3%/yr, 10yr term 0 0
March, 1998..................... 200,000 $ 18.25 33.3%/yr, 10yr term 0 0
December, 1998.................. 3,000,000 $ 17.25 33.3%/yr, 10yr term 0 0
</TABLE>
The weighted average fair value of options granted during 1998 and 1997 was
$0.28 per share and $2.00 per share, respectively. There were no options granted
during 1996. The weighted average life of options outstanding at December 31,
1998 was approximately 9.1 years.
RESTRICTED STOCK GRANTS
<TABLE>
<CAPTION>
SHARES GRANTED
(NO. OF VALUE AT GRANT DATE
DATE OF GRANT SHARES) (PER SHARE) VESTING (B)
- ------------------ -------------- ------------------- ---------------------------------------------------------
<S> <C> <C> <C>
August, 1995...... 167,622 $ 14.30 The grant will fully vest with respect to 13.333% on June
30, 1996, 1997, 1998, 1999 and with respect to
46.668% on June 30, 2000.
March, 1997....... 100,000 $ 16.40 The grant will fully vest with respect to 13.333% on June
30, 1998, 1999, 2000, 2001 and with respect to
46.668% on June 30, 2002.
November, 1997.... 12,500 $ 18.44 The grant will fully vest with respect to 13.333% on June
30, 1998, 1999, 2000, 2001 and with respect to
46.668% on June 30, 2002.
March, 1998....... 12,500 $ 18.13 The grant will fully vest with respect to 13.333% on
March 15, 1999, 2000, 2001, 2002 and with respect to
46.668% on March 15, 2003.
March, 1998....... 19,178 $ 18.25 The grant will fully vest with respect to 13.333% on
March 15, 1999, 2000, 2001, 2002 and with respect to
46.668% on March 15, 2003.
</TABLE>
- ------------------------
(A) The vesting schedule for the options was amended from 20%/yr, 10yr term
to 33.3%/yr, 10yr term on February 4, 1998.
(B) Deferred compensation of approximately $4,842,000 is being amortized
according to the respective amortization schedule for each vesting period
noted above, with the unamortized balance shown as a deduction from
stockholders' equity. Regular distributions are paid on restricted stock.
F-19
<PAGE>
The Company has adopted the disclosure-only provision of Statement of
Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"). Accordingly, no compensation cost has been recognized for the
options described above since the exercise price equaled the fair value at the
grant date. Had compensation cost for these options been determined based on the
fair value at the grant date consistent with the provisions of SFAS 123, the
Company's net income and net income per common share would have been reduced to
the following pro forma amounts (Dollar amounts in thousands, except per share
amounts):
<TABLE>
<CAPTION>
BASIC AND DILUTED
NET INCOME PER
NET INCOME COMMON SHARE
----------- -------------------
<S> <C> <C>
Year ended December 31, 1998....................................................... $ 81,561 $ 0.78
Year ended December 31, 1997....................................................... $ 36,887 $ 0.61
Year ended December 31, 1996....................................................... $ 8,673 $ 0.17
</TABLE>
The Company has computed the value of all stock options using the
Black-Scholes option pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
ASSUMPTIONS 1998 1997 1996
- ----------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Risk-free interest rate................................................ 5.31% 6.56% 6.31%
Assumed dividend yield................................................. 7.50% 7.50% 7.50%
Expected term.......................................................... 6 years 6 years 6 years
Assumed volatility..................................................... 10.00% 10.00% 10.00%
</TABLE>
8. STOCKHOLDERS' AND UNITHOLDERS' DISTRIBUTIONS
A cash dividend and unitholder distribution of $0.30 per share/unit was
declared for the first quarter of 1998 and paid on February 27, 1998, to
stockholders and unitholders of record as of January 30, 1998. A cash dividend
and unitholder distribution of $0.30 per share/unit was declared for the second
quarter of 1998 and paid on May 29, 1998, to stockholders and unitholders of
record as of April 30, 1998. A cash dividend and unitholder distribution of
$0.30 per share/unit was declared for the third quarter of 1998 and paid on
August 31, 1998, to stockholders and unitholders of record as of July 31, 1998.
A cash dividend and unitholder distribution of $0.30 per share/unit was declared
for the fourth quarter of 1998 and paid on November 30, 1998, to stockholders
and unitholders of record as of October 30, 1998.
On December 7, 1998, in connection with the Wilson Acquisition, the Company
declared a distribution of $0.15 per share/unit to all stockholders and
unitholders of record as of December 15, 1998 and a distribution of $0.15 per
share/unit to all stockholders and unitholders of record as of January 29, 1999.
Both dividends were paid on February 26, 1999.
9. EXTRAORDINARY LOSS
Extraordinary loss represents the write off of the unamortized deferred
financing costs and prepayment fees paid in connection with the refinancing of
the One Norwest Center mortgage in the amount of approximately $2,269,000; the
write off of the unamortized balance of Corporate 500 Centre mortgage deferred
financing costs at the time of the refinancing of that Property's mortgage in
the amount of approximately $354,000; and the write off of the unamortized
balance of deferred financing costs related to the $350.0 million Revolving
Credit Facility at the time that the new $550.0 million Revolving Credit
Facility was entered into in the amount of approximately $1,680,000. See Notes 5
and 17 for more information about the two mortgage refinancings.
F-20
<PAGE>
10. NET INCOME PER COMMON SHARE
The table below sets forth the calculation of income per common share for
1998, 1997 and 1996 (Dollar amounts in thousands, except per share amounts):
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- ---------------------- --------------------
BASIC DILUTED BASIC DILUTED BASIC DILUTED
---------- ---------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Proceeds upon exercise of options.................... -- $ 23,871 -- $ 25,162 -- $ 12,334
Market price of shares average for the respective
year............................................... -- $ 16.80 -- $ 17.13 -- $ 14.36
Treasury shares that could be repurchased
(options).......................................... -- 1,421 -- 1,469 -- 859
Option shares outstanding............................ -- 1,657 -- 1,727 -- 863
Weighted common stock equivalent shares (excess
shares under option over treasury shares that could
be repurchased).................................... -- 236 -- 236 -- 4
Weighted average common shares outstanding........... 100,319 100,319 43,572 43,572 20,411 20,411
---------- ---------- ---------- ---------- --------- ---------
Adjusted weighted average common shares
outstanding........................................ 100,319 100,555 43,572 43,808 20,411 20,415
Net income for the period............................ $ 83,465 $ 83,465 $ 37,547 $ 37,547 $ 9,096 $ 9,096
Income applicable to preferred stock................. $ (3,500) $ (3,500) $ (10,160) $ (10,160) $ (5,153) $ (5,153)
---------- ---------- ---------- ---------- --------- ---------
Net income applicable to common stock................ $ 79,965 $ 79,965 $ 27,387 $ 27,387 $ 3,943 $ 3,943
Net income per common share.......................... $ 0.80 $ 0.80 $ 0.63 $ 0.63 $ 0.19 $ 0.19
</TABLE>
The stock options issued in November 1997, February 1998, March 1998 and
December 1998 were not included in the calculation of diluted earnings per share
as such options were anti-dilutive during the period. The 7% Cumulative
Preferred Stock issued in August 1995 and the Convertible Promissory Note due
2001 entered into January 1996 were not included in the calculation of diluted
earnings per share as such instruments were anti-dilutive during the period. In
addition, the Company will be obligated to redeem each UPREIT Unit held by such
unitholder for one share of Common Stock or, at the option of the Company, cash
equal to the fair market value of one share of Common Stock at the time of
redemption.
11. RETIREMENT PLANS
Effective July 1, 1995, the eligible employees of the Company participate in
a noncontributory age-weighted profit sharing plan. The Company's cash
contribution to such plan was approximately $100,000 and $91,400 for the years
ended December 31, 1998 and 1997, respectively.
Effective July 1, 1995, the eligible employees of the Company also
participate in a 401(k) contributory savings plan. Under the plan, the Company
matches contributions made by eligible employees based on a percentage of the
employee's salary. The Company will match 100% of contributions up to 5.0% of
such employee's salary with an annual maximum matching contribution of $4,000
per employee. The Company's matching contribution was approximately $69,600 and
$52,600 for the years ended December 31, 1998 and 1997, respectively.
The Company has adopted the Cornerstone Properties Inc. 1998 Long-Term
Incentive Plan (the "Incentive Plan") to provide incentives to attract and
retain officers and key employees. Under the Incentive Plan as amended and
restated on December 14, 1998, the number of shares available for option grant
are approximately 7,400,000. As of December 31, 1998, options on approximately
3,000,000 shares of Common Stock at an exercise price of $17.25 per share have
been granted under the plan.
F-21
<PAGE>
12. CONCENTRATION OF RISK
Approximately 6.3 million of the Company's 20.9 million rentable square feet
is located in the San Francisco metropolitan market, accounting for
approximately 30% of the Company's total assets at December 31, 1998. In
addition, five of the Company's 96 office Properties are located in the Downtown
Boston market, accounting for approximately 31.9% of the Company's office and
parking revenues for the year ended December 31, 1998. This concentration of
assets makes the Company particularly vulnerable to adverse changes in economic
conditions in the San Francisco and Boston metropolitan areas. A significant
decline in these economic conditions could have a material adverse effect on the
Company.
Norwest Corporation and its subsidiary, Norwest Bank Denver N.A., tenants of
the Company, provided approximately 9.5%, 20.0% and 26.0% of office and parking
rental income for the years ended December 31, 1998, 1997 and 1996,
respectively. Included in deferred tenant receivables is approximately $33.9
million and $31.3 million due from Norwest Corporation at December 31, 1998 and
1997, respectively.
13. RELATED PARTY TRANSACTIONS
The Company has entered into $250.0 million of mortgage debt with one of its
major stockholders, PGGM, as further described in Note 5. Certain key employees
of the Company own an interest in third-party properties for which WCP Services,
Inc. provides property management, development and tenant construction services.
14. COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company is subject to tenant and
property related claims and other litigation. It is the opinion of management,
after consultation with outside counsel, that the resolution of these claims
will not have a material effect on the financial statements of the Company.
The Company has entered into an agreement to purchase a 927,000 square-foot
Class A office building, currently under development, in downtown Minneapolis,
Minnesota. Approximately $36.9 million has been spent on the construction. The
project is scheduled to be completed in the year 2000 and is approximately 50.0%
pre-leased. The development is being financed through a construction loan by
U.S. Bank. Upon completion, the Company will retire the construction loan and
acquire the property from the developer for an amount to be determined by
applying a negotiated formula to in-place net operating income.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
Cornerstone is required to disclose the fair value of financial instruments
for which it is practicable to estimate that value. Except for the items noted
below, the fair value of the Company's financial instruments approximates their
carrying values at December 31, 1998 and 1997:
NOTES RECEIVABLE
The fair value of the note receivable at December 31, 1997 is approximately
$1,564,000 based on the present value of expected future note payments using a
market discount rate of 6.57%.
F-22
<PAGE>
LONG-TERM DEBT
The Company determines the fair value based on discounting future cash flows
at a rate that approximates the Company's effective current borrowing rate (see
also Note 5) (Dollar amounts in thousands):
<TABLE>
<CAPTION>
12/31/98 12/31/98 12/31/97 12/31/97
FAIR VALUE CARRYING VALUE FAIR VALUE CARRYING VALUE
---------- -------------- ---------- --------------
<S> <C> <C> <C> <C>
TransPotomac Plaza 5 and Charlotte Plaza................. $ 65,775 $ 65,000 $ 66,671 $ 65,000
Wilshire Palisades....................................... 29,722 29,902 -- --
125 Summer Street........................................ 50,529 50,000 50,842 50,000
Tower 56................................................. 18,046 17,548 18,507 17,742
527 Madison Avenue and One Lincoln Centre................ 67,057 65,000 68,070 65,000
Sixty State Street....................................... 87,495 87,627 89,630 89,630
201 California Street.................................... 32,751 33,171 -- --
Washington Mutual Tower.................................. 81,834 79,100 82,423 79,100
Norwest Center........................................... 121,986 110,000 123,701 110,000
Market Square and 200 Galleria........................... 125,500 120,000 127,915 120,000
One Norwest Center....................................... 98,335 98,252 99,504 96,780
Corporate 500 Centre..................................... 88,468 89,765 -- --
</TABLE>
16. PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The following consolidated pro forma financial information of the Company
shown below gives effect to (i) the Wilson Acquisition; (ii) the acquisition of
the PGGM Portfolio; (iii) the public offerings of Common Stock in April 1997 and
February 1998; (iv) the conversion of 8% Preferred Stock into Common Stock in
July 1997; (v) the Company's repayment of a $32.5 million term loan from
Deutsche Bank in March 1997; and (vi) the acquisition of 527 Madison, Tower 56,
Corporate 500 Centre, One Memorial Drive, 201 California Street and Wilshire
Palisades and sale of the Frick building in 1997 and 1998 as if they occurred on
January 1, 1998 and 1997, respectively. The pro forma financial information is
presented for informational purposes only and may not be indicative of results
that would have actually occurred had the aforementioned transactions been
consummated at the dates indicated. Also, they may not be indicative of the
results that may be achieved in the future.
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997
- ------------------------------------------------------------- -------------- --------------
<S> <C> <C>
Pro forma total revenues..................................... $ 580,905,000 $ 544,753,000
Pro forma net income before extraordinary items.............. 96,616,000 83,986,000
Pro forma net income......................................... 92,313,000 83,932,000
Pro forma basic and diluted net income per common share...... $ 0.69 $ 0.63
</TABLE>
F-23
<PAGE>
17. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest was approximately $60,992,000, $30,204,000 and
$34,590,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
NON-CASH INVESTING AND FINANCING ACTIVITIES
On October 27, 1997, the Company acquired the PGGM Portfolio for a purchase
price of approximately $1.06 billion, consisting of approximately 34.2 million
shares of Common Stock valued and recorded at $16.00 per share, approximately
$260.0 million in cash and $250.0 million in promissory notes. The Company also
recorded a minority interest of $33.2 million in connection with this
acquisition.
On January 5, 1998, the Company purchased for approximately $5.5 million,
the participation rights in the cash flow and residual value of Tower 56 from
the former participants for 307,692 shares of Common Stock.
On January 28, 1998, the Company purchased Corporate 500 Centre. As part of
the total purchase price of approximately $150.0 million, the Company issued
822,794 UPREIT Units valued at $18.50 per unit.
On April 28, 1998, the Company purchased One Memorial Drive. As part of the
total purchase price of approximately $112.5 million, the Company issued
3,428,571 shares of common stock and 1,657,426 UPREIT Units, both valued at
$17.50.
On June 3, 1998, the Company purchased 201 California Street and Wilshire
Palisades. As part of the total purchase price for the Properties of
approximately $121.5 million, the Company assumed $64.6 million in debt and
issued 1,665,663 UPREIT Units valued at $17.50 per unit.
On September 25, 1998, in conjunction with the refinancing of the One
Norwest Center mortgage, the Company incurred an extraordinary loss of
approximately $2,269,000, which represents the unamortized deferred financing
costs and prepayment fees on the previous One Norwest Center mortgage at the
time of the refinancing.
On October 9, 1998, in conjunction with the refinancing of the Corporate 500
Centre mortgage, the Company incurred an extraordinary loss of $354,717, which
represents the unamortized deferred financing costs on the previous Corporate
500 Centre mortgage at the time of the refinancing.
On November 3, 1998, the Company obtained a $550.0 million Revolving Credit
Facility from a syndicate of 17 banks led by Bankers Trust Company, The Chase
Manhattan Bank and NationsBank. In conjunction with obtaining this new Revolving
Credit Facility, the Company incurred an extraordinary loss of $1,680,016, which
represents the unamortized deferred financing costs related to the previous
$350.0 million facility, which was extinguished at the time that the new
Revolving Credit Facility was obtained.
On December 16, 1998, the Company consummated the Wilson Acquisition for a
purchase price of approximately $1.8 billion, consisting of approximately 14.9
million shares of Common Stock valued at $17.25 per share (recorded at $16.25
per share for GAAP purposes), approximately 16.2 million UPREIT Units valued at
$17.25 per unit (recorded at $16.25 for GAAP purposes), approximately $465.0
million in cash and the assumption of approximately $760.0 million of property
and construction related debt (recorded at $773.7 million for GAAP purposes).
The Company also recorded a minority interest of $241.0 million in connection
with this acquisition.
F-24
<PAGE>
18. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(Dollar amounts in thousands except per share amounts):
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------
DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31
------------ ------------ --------- -----------
<S> <C> <C> <C> <C>
1998
Revenues....................................................... $ 102,402 $ 89,038 $ 86,490 $ 81,556
Income before extraordinary item............................... 24,535 21,227 19,252 22,754
Extraordinary loss............................................. (2,034) (2,269) -- --
Net income..................................................... 22,501 18,958 19,252 22,754
Per share data:
Income before extraordinary item............................. 0.22 0.20 0.18 0.24
Basic and diluted net income per common share................ 0.20 0.18 0.18 0.24
1997
Revenues....................................................... $ 62,242 $ 38,414 $ 38,268 $ 34,987
Income before extraordinary item............................... 15,881 8,076 8,008 5,636
Extraordinary loss............................................. -- -- (28) (26)
Net income..................................................... 15,881 8,076 7,980 5,610
Per share data:
Income before extraordinary item............................. 0.26 0.18 0.12 0.07
Basic and diluted net income per common share................ 0.26 0.18 0.12 0.07
</TABLE>
19. SEGMENT REPORTING
The Company has adopted Statement of Financial Accounting Standard No. 131
("SFAS 131"), which establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to stockholders.
The Company has one reportable segment--real estate. The Company provides
leasing, management, acquisition, development, construction and tenant-related
services for its portfolio. The Company does not have any foreign operations.
The accounting policies of the segment are the same as those described in Note
1. See Note 12 for information regarding concentration of risk.
F-25
<PAGE>
The Company evaluates performance based on net operating income from the
individual properties in the segment.
<TABLE>
<CAPTION>
CORPORATE & COMPANY
TOTAL SEGMENT OTHER(A) TOTAL
------------- ------------ ------------
<S> <C> <C> <C>
Total revenues (B):
1998............................................... $ 354,145 $ 5,341 $ 359,486
1997............................................... 160,490 13,421 173,911
1996............................................... 112,109 4,799 116,908
Total operating and interest expense (C):
1998............................................... $ 122,423 $ 80,472 $ 202,895
1997............................................... 61,522 41,541 103,063
1996............................................... 44,188 38,141 82,329
Net operating income (D):
1998............................................... $ 231,722 $ (75,131) $ 156,591
1997............................................... 98,968 (28,120) 70,848
1996............................................... 67,921 (33,342) 34,579
Total long-lived assets (E):
1998............................................... $ 4,137,302 $ 54,782 $ 4,192,084
1997............................................... 1,996,404 9,147 2,005,551
1996............................................... 635,723 3,819 639,542
Total assets:
1998............................................... $ 4,198,099 $ 83,885 $ 4,281,984
1997............................................... 1,757,372 294,109 2,051,481
1996............................................... 623,934 142,245 766,179
</TABLE>
- ------------------------------
(A) Corporate and Other represents all corporate-level items (including interest
income, interest expense and general and administrative expenses) as well as
intercompany eliminations necessary to reconcile to consolidated Company
totals.
(B) Total revenues represents all revenues during the period (including the
Company's earnings in real estate joint ventures). All interest income is
excluded from the segment amounts and is classified in Corporate and Other
for all periods.
(C) Total operating and interest expense represents the sum of building
operating expenses, real estate taxes, interest expense and general and
administrative. All interest expense (including property level mortgages) is
excluded from the segment amounts and is classified in Corporate and Other
for all periods. Amounts presented exclude depreciation and amortization of
$59,278,000, $30,978,000 and $24,317,000 in 1998, 1997 and 1996,
respectively.
(D) Net operating income represents total revenues (as defined in note (B)
above) less total operating and interest expense (as defined in note (C)
above) for the period.
(E) Long-lived assets is composed of total investments, other deferred costs,
deferred tenant receivables and certain other assets.
20. SUBSEQUENT EVENTS
On January 4, 1999, in connection with the Wilson Acquisition, the Company
prepaid the notes on Two ADP Plaza and Two Corporate Centre. The balances of the
two loans at the time of prepayment were $13.4 million and $18.6 million,
respectively.
During January 1999, the Company entered into four interest rate swap
agreements with major financial institutions. The swaps effectively fix the
LIBOR rate on $250.0 million of the amount outstanding on the Company's credit
facility at approximately 5.1%. The swap agreements expire on November 3, 2001
coterminous with the Revolving Credit Facility.
A cash dividend and unitholder distribution of $0.15 per share/unit was
declared for the first half of the fourth quarter of 1998 and paid on February
26, 1999, to common stockholders and unitholders of record as of December 15,
1998. A cash dividend and unitholder distribution of $0.15 per share/unit was
declared for the second half of the fourth quarter of 1998 and paid on February
26, 1999, to common stockholders and unitholders of record as of January 29,
1999.
F-26
<PAGE>
Exhibit 10.6
FIRST AMENDMENT TO
AGREEMENT OF LIMITED PARTNERSHIP
OF
CORNERSTONE PROPERTIES LIMITED PARTNERSHIP
THIS FIRST AMENDMENT TO AGREEMENT OF LIMITED PARTNERSHIP OF
CORNERSTONE PROPERTIES LIMITED PARTNERSHIP (this "AMENDMENT"), dated as of
January 29, 1997, is entered into by CORNERSTONE PROPERTIES INC., a Nevada
corporation, as general partner (the "GENERAL PARTNER") of Cornerstone
Properties Limited Partnership (the "PARTNERSHIP"), for itself and on behalf of
the Limited Partners of the Partnership, and CONTRIBUTORS' PARTNERS (as defined
below).
WITNESSETH:
WHEREAS, on the date hereof, Corporate 500, Phase I, an
Illinois limited partnership ("PHASE I OWNER"), and Corporate 500, Phase II, an
Illinois limited partnership ("PHASE II OWNER"; Phase I Owner and Phase II Owner
collectively hereafter referred to as "CONTRIBUTORS"), have made a Capital
Contribution to the Partnership and are entitled to receive an aggregate of
822,794 Class A Partnership Common Units of limited partnership interest in the
Partnership (the "OP UNITS") in exchange for the Phase I Property and the Phase
II Property (each as more specifically defined in the Contribution Agreement
dated as of December 11, 1997 by and among Contributors and General Partner (the
"CONTRIBUTION AGREEMENT")) pursuant to a closing under the Contribution
Agreement;
WHEREAS, Pursuant to the Contribution Agreement, Contributors
have delivered written instructions to the Partnership on the date hereof (the
"WRITTEN INSTRUCTIONS") to distribute the OP Units to Myron Levin, Arvin Rieger,
Steven Levin, Marla Pierson and Terry Levin Smith (collectively, the
"CONTRIBUTORS' PARTNERS") in such manner as is set forth in such Written
Instructions;
WHEREAS, pursuant to the authority granted to the General
Partner under the Agreement of Limited Partnership of Cornerstone Properties
Limited Partnership dated as of December 23, 1997 (the "PARTNERSHIP AGREEMENT"),
the General Partner desires to amend the Partnership Agreement to reflect the
admission of each Contributors' Partner as an Additional Limited Partner and
holder of a certain number of OP Units and certain other matters described
herein; and
WHEREAS, each Contributors' Partner desires to become a party
to the Partnership Agreement as Limited Partner and to be bound by all terms,
conditions and other provisions of this Amendment and the Partnership Agreement.
NOW THEREFORE, in consideration of the premises and for other
good and valuable consideration, the receipt and sufficiency of which hereby are
acknowledged, the General Partner hereby amends the Partnership Agreement as
follows:
1. ADMISSION OF CONTRIBUTORS' PARTNERS. Each Contributors'
Partner is hereby admitted as an Additional Limited Partner in accordance with
SECTION 12.2 of the Partnership Agreement holding such number of OP Units as is
set forth on EXHIBIT A. Each Contributors' Partner hereby agrees to become a
party to the Partnership Agreement as a Limited Partner and to be bound by all
the terms, conditions and other provisions of the Partnership Agreement,
including but not limited to the power of attorney set forth in SECTION 2.4 of
the Partnership Agreement. Pursuant to SECTION 12.2.B of the Partnership
Agreement, the General Partner hereby consents to the
<PAGE>
admission of each Contributors' Partner as an Additional Limited Partner of the
Partnership. The admission of each Contributors' Partner shall become effective
as of the date of this Amendment, which shall also be the date on which the name
of each Contributors' Partner is recorded on the books and records of the
Partnership.
2. RESTATEMENT OF EXHIBIT A. EXHIBIT A to the Partnership
Agreement is amended and restated by replacing such EXHIBIT A with EXHIBIT A
attached to this Amendment. Notwithstanding anything to the contrary set forth
in the Partnership Agreement, on the date hereof the Percentage Interest in
Partnership of each Contributors' Partner shall be as set forth on EXHIBIT A.
3. ALLOCATIONS. Notwithstanding anything to the contrary
set forth in the Partnership Agreement, General Partner and Partners'
Contributors agree that for purposes of Section 704(c) of the Code, the 704(c)
Value of the Phase I Property and Phase II Property will be allocated among the
various components of the Phase I Property and Phase II Property in a manner to
be reasonably agreed upon by the General Partner and Partners' Contributors
within ninety (90) days after the date hereof. Notwithstanding the provisions of
SECTION 2.C of EXHIBIT C to the Partnership Agreement, for purposes of
allocating items of income, gain, loss and deduction with respect to the Phase I
Property and the Phase II Property in the manner required by Section 704(c) of
the Code, the Partnership will employ, and shall cause any entity controlled by
the Partnership which holds title to the Phase I Property or Phase II Property
to employ, the "traditional method" (without curative allocations) as set forth
in Regulation Section 1.704-3(b)(1).
4. MAINTENANCE OF NONRECOURSE DEBT. The Partnership shall
keep outstanding, and shall cause any entity controlled by the Partnership which
holds title to the Phase I Property and the Phase II Property to keep
outstanding, a nonrecourse loan secured by the Phase I Property and the Phase II
Property, which loan shall meet all the requirements necessary to constitute
"qualified nonrecourse financing" pursuant to Section 465(b)(6) of the Code, in
an aggregate principal amount of at least $80,000,000 (the "LOAN") until the
earlier of (the "END DATE") (i) January 29, 2008, and (ii) the date on which
less than 205,699 OP Units issued pursuant to this Amendment are held, in the
aggregate, by the Contributors' Partners.
5. DISPOSITION OF PHASE I AND PHASE II PROPERTIES.
Notwithstanding anything to the contrary set forth in the Partnership Agreement,
the Partnership agrees not to sell, transfer, exchange or otherwise dispose of,
and shall cause any entity controlled by Partnership not to sell, transfer,
exchange or otherwise dispose of, the Land and the Improvements (as such terms
are defined in the Contribution Agreement) prior to the End Date, without the
prior written consent of the Contributors' Partners then holding any of the OP
Units issued pursuant to this Amendment, except in connection with a like-kind
exchange under Section 1031 of the Code or other disposition that pursuant to a
nonrecognition provision in the Code does not result in the current recognition
of any gain to said holders of the OP Units.
6. MERGER; CONSOLIDATION. Notwithstanding anything to the
contrary set forth in the Partnership Agreement, if as a result of a merger,
consolidation or other combination of the Company or the Partnership with or
into another Person, the Contributors' Partners then holding OP Units shall
suffer an adverse federal or state income tax consequence, the Partnership shall
either (i) not consummate such transaction without the prior written consent of
the Contributors' Partners then holding any of the OP Units issued pursuant to
this Amendment, or (ii) consummate such transaction but Company and Partnership
shall indemnify such Contributors' Partners from and against the after-tax
present value of the detriment incurred by the Contributors' Partners as a
result of such transaction, taking into account the detriment suffered,
including the timing and character of taxable income recognized by Contributors'
Partners as a result of such transaction. For purposes of calculating the
indemnification amount, the Contributors' Partners tax rate shall be deemed to
be equal to the maximum individual federal and Illinois income tax rates (taking
into account the character of the income received and the deductibility of state
taxes against federal taxes) and the present value discount rate shall be 8%.
7. DEFINITIONS; FULL FORCE AND EFFECT. All capitalized
terms used in this Amendment and
<PAGE>
not otherwise defined herein shall have the meanings assigned to them in the
Partnership Agreement. Except as modified herein, all terms and conditions of
the Partnership Agreement shall remain in full force and effect, which terms and
conditions the General Partner and the Contributors' Partners hereby ratify and
affirm. The rights and obligations of Contributor's Partners and General Partner
shall inure to the benefit of and be binding upon the parties hereto and their
respective successors and permitted assigns and transferees in accordance with
the provisions of Article 11 of the Partnership Agreement.
8. COUNTERPARTS. To facilitate execution, this Amendment
may be executed in as many counterparts as may be required; and it shall not be
necessary that the signatures of, or on behalf of, each party, or that the
signatures of all persons required to bind any party, appear on each
counterpart; but it shall be sufficient that the signature of, or on behalf of,
each party, or that the signatures of the persons required to bind any party,
appear on one or more of the counterparts. All counterparts shall collectively
constitute a single agreement. It shall not be necessary in making proof of this
Amendment to produce or account for more than a number of counterparts
containing the respective signatures of, or on behalf of, all of the parties
hereto.
9. NO TRANSFERS TO HOLDERS OF NONRECOURSE LIABILITIES. No
transfer of any Partnership Units may be made to a lender to the Partnership or
any Person who is related (within the meaning of Section 1.752-4(b) of the
Regulations) to any lender to the Partnership with respect to the Phase I
Property or the Phase II Property whose loan constitutes a Nonrecourse
Liabilitiy.
10. DISTRIBUTIONS. Notwithstanding anything to the contrary
set forth in the Partnership Agreement, the General Partner agrees to make full
distributions out of Available Cash pursuant to Section 5.1 of the Partnership
Agreement to Contributors' Partners who are Partners on a Partnership Record
Date, WITHOUT any proration of such distributions based on the portion of the
distribution period that such Units held by such Contributors' Partners were
outstanding.
IN WITNESS WHEREOF, the undersigned has executed this
Amendment as of the date first set forth above.
CORNERSTONE PROPERTIES INC.,
a Nevada corporation, as General Partner of
Cornerstone Properties Limited Partnership and on
behalf of existing Limited Partners
By:
---------------------------------------
Name:
Title:
By:
---------------------------------------
Name:
Title:
CONTRIBUTORS' PARTNERS
------------------------------------------
Myron Levin
------------------------------------------
Arvin Rieger
------------------------------------------
Steven Levin
------------------------------------------
Marla Pierson
------------------------------------------
Terry Levin Smith
<PAGE>
AMENDMENT TO FIRST AMENDMENT TO
AGREEMENT OF LIMITED PARTNERSHIP
OF
CORNERSTONE PROPERTIES LIMITED PARTNERSHIP
THIS AMENDMENT TO FIRST AMENDMENT TO AGREEMENT OF LIMITED
PARTNERSHIP OF CORNERSTONE PROPERTIES LIMITED PARTNERSHIP (this "AMENDMENT"),
dated as of January 29, 1998, is entered into by CORNERSTONE PROPERTIES INC., a
Nevada corporation, as general partner (the "GENERAL PARTNER") of Cornerstone
Properties Limited Partnership (the "PARTNERSHIP"), for itself and on behalf of
the Limited Partners of the Partnership, and CONTRIBUTORS' PARTNERS (as defined
below).
WITNESSETH:
WHEREAS, on the date hereof, Myron Levin, Arvin Rieger, Steven
Levin, Marla Pierson and Terry Levin Smith (collectively, the "CONTRIBUTORS'
PARTNERS") and the General Partner entered into that certain First Amendment to
Agreement of Limited Partnership of Cornerstone Limited Partnership (the "FIRST
AMENDMENT") pursuant to the authority granted to the General Partner under the
Agreement of Limited Partnership of Cornerstone Properties Limited Partnership
dated as of December 23, 1997 (the "PARTNERSHIP AGREEMENT"); and
WHEREAS, the General Partner and each Contributors' Partner
desires to correct a provision of the First Amendment;.
NOW THEREFORE, in consideration of the premises and for other
good and valuable consideration, the receipt and sufficiency of which hereby are
acknowledged, the First Amendment is hereby amended as follows:
1. Section 9 of the First Amendment is hereby deleted in
its entirety and the following is hereby substituted in lieu thereof:
" 9. NO TRANSFERS TO HOLDERS OF NONRECOURSE LIABILITIES.
No transfer of any Partnership Units may be made to a lender
to the Partnership or any Person who is related (within the
meaning of Section 1.752-4(b) of the Regulations) to any
lender to the Partnership with respect to the Phase I Property
or the Phase II Property whose loan constitutes a Nonrecourse
Liability, unless such lender or Person would not be deemed to
be a partner in the Partnership under Section 1.752-2(d)(1) of
the Regulations."
2. DEFINITIONS; FULL FORCE AND EFFECT. All capitalized
terms used in this Amendment and not otherwise defined herein shall have the
meanings assigned to them in the Partnership Agreement. Except as modified
herein, all terms and conditions of the Partnership Agreement shall remain in
full force and effect, which terms and conditions the General Partner and the
Contributors' Partners hereby ratify and affirm. The rights and obligations of
Contributor's Partners and General Partner shall inure to the benefit of and be
binding upon the parties hereto and their respective successors and permitted
assigns and transferees in accordance with the provisions of Article 11 of the
Partnership Agreement.
3. COUNTERPARTS. To facilitate execution, this Amendment
may be executed in as many counterparts as may be required; and it shall not be
necessary that the signatures of, or on behalf of, each party, or
<PAGE>
that the signatures of all persons required to bind any party, appear on each
counterpart; but it shall be sufficient that the signature of, or on behalf of,
each party, or that the signatures of the persons required to bind any party,
appear on one or more of the counterparts. All counterparts shall collectively
constitute a single agreement. It shall not be necessary in making proof of this
Amendment to produce or account for more than a number of counterparts
containing the respective signatures of, or on behalf of, all of the parties
hereto. Delivery of executed counterparts by telefax shall constitute sufficient
delivery and shall be effective as an original counterpart.
IN WITNESS WHEREOF, the undersigned has executed this
Amendment as of the date first set forth above.
CORNERSTONE PROPERTIES INC.,
a Nevada corporation, as General Partner of
Cornerstone Properties Limited Partnership and on
behalf of existing Limited Partners
By:
---------------------------------------
Name:
Title:
By:
---------------------------------------
Name:
Title:
CONTRIBUTORS' PARTNERS
------------------------------------------
Myron Levin
------------------------------------------
Arvin Rieger
------------------------------------------
Steven Levin
------------------------------------------
Marla Pierson
------------------------------------------
Terry Levin Smith
<PAGE>
EXHIBIT 10.7
SECOND AMENDMENT TO
AGREEMENT OF LIMITED PARTNERSHIP
OF
CORNERSTONE PROPERTIES LIMITED PARTNERSHIP
THIS SECOND AMENDMENT TO AGREEMENT OF LIMITED PARTNERSHIP OF
CORNERSTONE PROPERTIES LIMITED PARTNERSHIP (this "AMENDMENT"), dated as of April
28, 1998, is entered into by CORNERSTONE PROPERTIES INC., a Nevada corporation,
as general partner (the "GENERAL PARTNER") of Cornerstone Properties Limited
Partnership (the "PARTNERSHIP"), for itself and on behalf of the Limited
Partners of the Partnership, and CONTRIBUTOR (as defined below).
WITNESSETH:
WHEREAS, on the date hereof, One Memorial Drive Limited
Partnership ("CONTRIBUTOR"), a Massachusetts limited partnership, has made a
Capital Contribution to the Partnership and is entitled to receive Class A
Partnership Common Units in the Partnership (the "OP UNITS") in exchange for the
Property (as defined in the Agreement to Contribute dated as of the date hereof
by and among Contributor, Partnership and others (the "CONTRIBUTION AGREEMENT"))
pursuant to a closing under the Contribution Agreement;
WHEREAS, Contributor hereby instructs the Partnership to
distribute the OP Units to (i) Memeno - 1787 Corp. ("Memeno"), (ii) The Congress
Group, Inc. ("CGI"), (iii) Elohssa Realty Limited Partnership ("ELOHSSA"), (iv)
New Memorial Drive, Inc. (which has simultaneously transferred all of its OP
Units to Gardner and is no longer a "Distributee" for purposes hereof, (v) David
A. Gardner ("GARDNER"), (vi) Wynken Corp. ("WYNKEN") and (vii) DFS Holdings LLC
("DFS") (Memeno, CGI, Elohssa, Gardners, Wynken and DFS, collectively, the
"DISTRIBUTEES") in the allocation set forth on EXHIBIT A;
WHEREAS, pursuant to the authority granted to the General
Partner under the Agreement of Limited Partnership of Cornerstone Properties
Limited Partnership dated as of December 23, 1997, as amended by that certain
First Amendment to Agreement of Limited Partnership of Cornerstone Properties
Limited Partnership, dated as of January 29, 1997 [sic] and that certain
Amendment to such First Amendment, dated as of January 29, 1998 (as amended, the
"PARTNERSHIP AGREEMENT"), the General Partner desires to amend the Partnership
Agreement to reflect the admission of each Distributee as an Additional Limited
Partner and holder of a certain number of OP Units and certain other matters
described herein; and
WHEREAS, each Distributee desires to become a party to the
Partnership Agreement as Limited Partner and to be bound by all terms,
conditions and other provisions of this Amendment and the Partnership Agreement.
NOW THEREFORE, in consideration of the premises and for other
good and valuable consideration, the receipt and sufficiency of which hereby are
acknowledged, the General Partner hereby amends the Partnership Agreement as
follows:
1. ADMISSION OF DISTRIBUTEES. Each Distributee is hereby
admitted as an Additional Limited Partner in accordance with SECTION 12.2 of the
Partnership Agreement holding such number of OP Units as is set forth on EXHIBIT
A. Each Distributee hereby agrees to become a party to the Partnership Agreement
as a Limited Partner and to be bound by all the terms, conditions and other
provisions of the Partnership Agreement, including but not limited to the power
of attorney set forth in SECTION 2.4 of the Partnership Agreement. Pursuant to
<PAGE>
SECTION 12.2.B of the Partnership Agreement, the General Partner hereby consents
to the admission of each Distributee as an Additional Limited Partner of the
Partnership. The admission of each Distributee shall become effective as of the
date of this Amendment, which shall also be the date on which the name of each
Distributee is recorded on the books and records of the Partnership.
2. RESTATEMENT OF EXHIBIT A. EXHIBIT A to the Partnership
Agreement is amended and restated by replacing such EXHIBIT A with EXHIBIT A
attached to this Amendment. Notwithstanding anything to the contrary set forth
in the Partnership Agreement, on the date hereof the Percentage Interest in
Partnership of each Distributee shall be as set forth on EXHIBIT A.
3. FURTHER DISTRIBUTION AND ASSIGNMENT BY DISTRIBUTEES.
The General Partner Acknowledges and agrees that any Distributee which is not an
individual shall have the right to assign all but not less than all of its OP
Units to the holders of the beneficial interest therein, consisting of David A.
Gardner, Dean F. Stratouly and/or Edward Barry, provided such holders comply
with clauses (i), (ii), (iii), (iv) and (v) of Section 1.2 of the Contribution
Agreement and Subsections (C), (D) and (E) of Section 11.3 of the Partnership
Agreement. Additionally, the General Partner further acknowledges and agrees
that each holder of an OP Unit shall have the right to assign all but not less
than all of its OP Units to another OP Unit holder, provided such assignee
complies with clauses (i), (ii), (iii), (iv) and (v) of Section 1.2 of the
Contribution Agreement and Subsections (C), (D) and (E) of Section 11.3 of the
Partnership Agreement. Upon each such assignment, the assignee of the applicable
OP Units shall be admitted as an Additional Limited Partner in accordance with
SECTION 12.2 of the Partnership Agreement and shall constitute a "Distributee"
under this Amendment, and the terms of this Amendment shall be applicable as if
such Distributee had been an original party to this Amendment.
4. ALLOCATIONS. Notwithstanding the provisions of
SECTION 2.C of EXHIBIT C to the Partnership Agreement, for purposes of
allocating items of income, gain, loss and deduction with respect to the
Property in the manner required by Section 704(c) of the Code, the Partnership
will employ, and shall cause any entity controlled by the Partnership which
holds title to the Property to employ, the "traditional method" (without
curative allocations) as set forth in Regulation Section 1.704-3(b)(1).
5. DEFINITIONS; FULL FORCE AND EFFECT. All capitalized
terms used in this Amendment and not otherwise defined herein shall have the
meanings assigned to them in the Partnership Agreement. Except as modified
herein, all terms and conditions of the Partnership Agreement shall remain in
full force and effect, which terms and conditions the General Partner and the
Distributees hereby ratify and affirm. The rights and obligations of
Distributees and General Partner shall inure to the benefit of and be binding
upon the parties hereto and their respective successors and permitted assigns
and transferees in accordance with the provisions of Article 11 of the
Partnership Agreement.
6. COUNTERPARTS. To facilitate execution, this Amendment
may be executed in as many counterparts as may be required; and it shall not be
necessary that the signatures of, or on behalf of, each party, or that the
signatures of all persons required to bind any party, appear on each
counterpart; but it shall be sufficient that the signature of, or on behalf of,
each party, or that the signatures of the persons required to bind any party,
appear on one or more of the counterparts. All counterparts shall collectively
constitute a single agreement. It shall not be necessary in making proof of this
Amendment to produce or account for more than a number of counterparts
containing the respective signatures of, or on behalf of, all of the parties
hereto.
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this
Amendment as of the date first set forth above.
GENERAL PARTNER:
CORNERSTONE PROPERTIES INC.,
a Nevada corporation, as General Partner of
Cornerstone Properties Limited Partnership and on
behalf of existing Limited Partners
By: /s/ Frank H. Shields, Jr.
---------------------------------------
Name: Frank H. Shields, Jr.
Title: Vice President
By: /s/ Barry J. McGowan
---------------------------------------
Name: Barry J. McGowan
Title: Vice President
CONTRIBUTOR:
ONE MEMORIAL DRIVE LIMITED
PARTNERSHIP
By: One Memorial Operating Limited Partnership
By: The Congress Group, Inc., General
Partner
By: /s/ Dean F. Stratouly
-------------------------------
Dean F. Stratouly
Vice President
<PAGE>
DISTRIBUTEES:
/s/ David A. Gardner
------------------------------------------
David A. Gardner
NEW MEMORIAL DRIVE, INC.
By:
---------------------------------------
David A. Gardner
President
<PAGE>
THE CONGRESS GROUP, INC.
By: /s/ Dean F. Stratouly
-------------------------------
Dean F. Stratouly
Vice President
ELOHSSA REALTY LIMITED
PARTNERSHIP
By: /s/ Edward F. Barry, Jr.
-------------------------------
Edward F. Barry, Jr., its sole
general partner
WYNKEN CORP.
By: /s/ Dean F. Stratouly
-------------------------------
Dean F. Stratouly
President
DFS HOLDINGS LLC
By: /s/ Dean F. Stratouly
-------------------------------
Dean F. Stratouly
Its President
MEMENO - 1987 CORP, A _______
CORPORATION
By: /s/ Edward F. Barry, Jr.
-------------------------------
Name: Edward F. Barry, Jr.
Title: President
<PAGE>
Exhibit 10.8
THIRD AMENDMENT TO
AGREEMENT OF LIMITED PARTNERSHIP
OF
CORNERSTONE PROPERTIES LIMITED PARTNERSHIP
THIS THIRD AMENDMENT TO AGREEMENT OF LIMITED PARTNERSHIP OF CORNERSTONE
PROPERTIES LIMITED PARTNERSHIP (this "AMENDMENT") dated as of June 3, 1998, is
entered into by CORNERSTONE PROPERTIES INC., a Nevada corporation, as general
partner (the "COMPANY" or "GENERAL PARTNER") of Cornerstone Properties Limited
Partnership (the "PARTNERSHIP"), for itself and on behalf of the Limited
Partners of the Partnership, and the New Partners executing this Amendment.
W I T N E S S E T H:
WHEREAS, on the date hereof, certain of the New Partners identified as
"Contributors" on the Signature Page hereto ("CONTRIBUTORS") have made Capital
Contributions to the Partnership in exchange for an aggregate of 2,626,913 Class
A Partnership Common Units of limited partnership interest in the Partnership
(the "UNITS"), all in accordance with the provisions of the Closing Agreement,
dated as of June 3, 1998, by and between Partnership Contributors and certain
other parties (the "CLOSING AGREEMENT");
WHEREAS, pursuant to the authority granted to the General Partner under the
Agreement of Limited Partnership of Cornerstone Properties Limited Partnership
dated as of December 23, 1997, as amended from time to time (the "PARTNERSHIP
AGREEMENT"), the General Partner desires to amend the Partnership Agreement to
(i) reflect the admission of the Contributors as Additional Limited Partners
holding the number of Units set forth on SCHEDULE 1 hereto, (ii) the
distribution of Units immediately upon receipt thereof by Tele/Tac Associates
("TELE/TAC") in the number and to the parties (the "DISTRIBUTEES") identified on
SCHEDULE 1 hereto, and upon completion of such transfers, the retirement of
Tele/Tac as Additional Limited Partner and the admission as Substitute Limited
Partners of the Distributees of Tele/Tac identified on SCHEDULE 1 hereto, each
holding the number of Units set forth opposite its name on Schedule 1 hereto,
(iii) the immediate redemption for cash by Boron-Westcoast B.V. of the number of
Units indicated as redeemed by it on SCHEDULE 1 attached hereto, (iv) after the
completion of the foregoing, the distribution of Units following receipt thereof
by California/Front Building Company ("CAL/FRONT") in the number and to the
Distributees identified on Schedule 1 hereto, and upon completion of such
transfers, the retirement of Cal/Front as Additional Limited Partner and the
admission as Substitute Limited Partners of the Distributees of Cal/Front
identified on Schedule 1 hereto each holding the number of Units set forth
opposite its name on Schedule 1 hereto, (v) the redemption immediately following
such distribution for cash by Noro-Hibernia Holding Company B.V. of the number
of Units indicated as redeemed by it on Schedule 1 attached hereto, and (vi)
certain other matters described herein; and
WHEREAS, the Contributors and Distributees (each, for so long as it is an
Additional Limited Partner or Substitute Limited Partner, a "NEW PARTNER" and,
collectively, the "NEW PARTNERS") desire to become parties to the Partnership
Agreement as Limited Partners and to be bound by all terms, conditions and other
provisions of this Amendment and the Partnership Agreement.
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NOW THEREFORE, in consideration of the premises and for other
good and valuable consideration, the receipt of which hereby are acknowledged,
General Partner hereby amends the Partnership Agreement as follows:
1. ADMISSION OF NEW PARTNERS.
(a) Each Contributor is hereby admitted as an Additional Limited
Partner in accordance with SECTION 12.2 of the Partnership Agreement and, upon
retirement of Tele/Tac and Cal/Front as Additional Limited Partners, each of the
Distributees is hereby admitted as a Substitute Limited Partner. Each New
Partner agrees that, effective as of the date hereof, it has become a party to
the Partnership Agreement as a Limited Partner and to be bound by all terms,
conditions and other provisions of the Partnership Agreement, including, but not
limited to, the power of attorney set forth in SECTION 2.4 of the Partnership
Agreement. Pursuant to SECTION 12.2.B of the Partnership Agreement, General
Partner hereby consents to the aforesaid admissions, transfers and
substitutions. The admission of each New Partner shall become effective as of
the date of this Amendment, which shall also be the date on which the name of
each New Partner is recorded on the books and records of the Partnership.
Exhibit A annexed hereto sets forth the New Partners and their respective Units
upon and as of completion of all of the admissions, transfers and substitutions
described above. Notwithstanding anything to the contrary set forth in the
Partnership Agreement, but subject to the terms of SECTION 12.2A of the
Partnership Agreement and SECTION 1(B) below, the General Partner agrees to
consent to the admission as Additional Limited Partners of Permitted Assignees
of the New Partners. For purposes of this Amendment, a "PERMITTED ASSIGNEE"
means any Person (i) to whom a Unit Holder has assigned all or a portion of its
Units, (ii) (A) who complies with SUBSECTIONS (C), (D) and (E) of SECTION 11.3
of the Partnership Agreement, (B) except with respect to the parties identified
on SCHEDULE 2, who is an "accredited investor" within the meaning of Rule 501 of
the Securities Act of 1933, as in effect from time to time, and all applicable
rules and regulations thereunder (the "SECURITIES ACT"), (C) who makes the
investment representations set forth as an Exhibit to the Closing Agreement
(provided that in the case of any party identified on Schedule 2, it is not a
condition that such party is an "accredited investor" as referred to above) and
(D) who delivers a prospective subscriber questionnaire in the form attached as
an Exhibit to the Closing Agreement (provided that in the case of any party
identified on Schedule 2, it is not a condition that such party is an
"accredited investor" as referred to above) and (iii) who is a New Partner, an
Affiliate of a New Partner, a Person who holds a direct or indirect interest in
a New Partner and is set forth on SCHEDULE 2; and if any of the foregoing is a
natural person, any spouse, lineal descendant, sibling or ancestor of such
natural person or any trust, family limited partnership or family limited
liability company which has any such person, spouse, lineal descendant, sibling
or ancestor as its primary beneficiaries, partners or members or to a charitable
organization or to a trust of which a charitable organization is a beneficiary
who satisfies clause (ii) of this Paragraph. The New Partners and each Permitted
Assignee who holds Units issued pursuant to this Amendment and is admitted as
Limited Partner pursuant hereto are collectively referred to in this Amendment
as "UNIT HOLDERS."
(b) Notwithstanding anything to the contrary contained in PARAGRAPH
1(A) above, if any permitted assignment of Units by a Unit Holder to a Permitted
Assignee would increase the number of Unit Holders to a number greater than
twenty-six (26), the Permitted Assignee who is the transferee ("TRANSFEREE") of
such Units shall not be admitted as a Limited Partner until such time as the
total number of Unit Holders, upon admission of Transferee, shall not exceed
twenty-six (26); provided, however, at the time of admission the Transferee
satisfies the requirements of clauses (i) through (iii) of PARAGRAPH 1(A). A
Permitted Assignee who is not admitted as a Limited Partner shall be an Assignee
until admitted or until its Units are further assigned.
(c) Upon a Person becoming a Unit Holder or Assignee hereunder, such
Person shall be deemed to represent and warrant to the Partnership that none of
the matters set forth in clauses (iv), (v) or (vi) of SECTION 11.3D of the
Partnership Agreement have or will occur as a result of such Person becoming a
Unit Holder or Assignee.
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2. RESTATEMENT OF EXHIBIT A. EXHIBIT A to the Partnership Agreement is
amended and restated by replacing such EXHIBIT A with EXHIBIT A attached to this
Amendment.
3. MAINTENANCE OF DEBT. The Partnership shall not prepay, and shall not
permit any Affiliate of the Partnership (each a "HOLDING COMPANY") that holds a
direct or indirect interest in fee title to either of (i) the property commonly
known as 1299 Ocean Avenue, Santa Monica, California (the "PALISADES Property"),
or (ii) the property commonly known as 201 California Street, San Francisco,
California (the "201 PROPERTY"), the Palisades Property and the 201 Property are
each a "PROPERTY" and collectively the "PROPERTIES") to prepay (except to the
extent required under the applicable loan documents in the event of a casualty
or condemnation of such Property) (i) that certain loan in the stated principal
amount of $33,000,000 (principal balance as of the date hereof being
$32,945,728) from Northwestern Mutual Life Insurance Company to California/Front
Building Company, which loan is secured by a deed of trust on the 201 Property
and (ii) that certain loan in the stated principal amount of $
32,000,000(current principal balance as of the date hereof being $29,966,642
from Lincoln Life Insurance Company to 1299 Ocean LLC, Alameda Associates and
Commerce Way Associates and secured by a deed of trust on the Palisades Property
outstanding on the date hereof (each, a "MORTGAGE LOAN") until the maturity date
of such Mortgage Loan, and shall not permit any Person to become personally
liable for repayment thereof (except for customary nonrecourse carve-outs);
provided, however, nothing contained herein shall limit or prohibit the
Partnership from refinancing any Mortgage Loan in an amount not less than its
then outstanding principal balance provided no Person is personally liable for
repayment thereof (except customary non-recourse carve-outs) and any such
refinancing loan shall be considered a "Mortgage Loan"). The General Partner
shall not consent under SECTION 11.3E of the Partnership Agreement to a transfer
of Partnership Units to the lenders of such Mortgage Loans or any Person who is
related (within the meaning of Section 1.752-4(b) of the Regulations) to any
such lender if such lender or related Person would be deemed to be a greater
than ten percent (10%) partner in the Partnership for purposes Section
1.752-2(d)(1) of the Regulations. If the Partnership becomes aware of any reason
why the Mortgage Loans may be decreased prior to maturity or no longer meet all
requirements necessary to constitute "qualified nonrecourse financing" pursuant
to Section 465(b)(6) of the Code and the Regulations thereunder, with respect to
which no Partner or a related person is considered to bear the economic risk of
loss within the meaning of Regulation Section 1.752-2(c)(1), it shall promptly
notify the Unit Holders.
For purposes of determining the Unit Holders' shares of the portion of each
Mortgage Loan allocable under Regulations Section 1.752-3(a)(3) ("TIER III
PORTION"), the Partnership shall take into account the excess ("ADDITIONAL
704(C) GAIN") of (a) the unit Holders' 704(c) Gain (defined in PARAGRAPH 7
below) with respect to each Property, over (b) the amount of the Unit Holders'
704(c) Gain that is taken into account in allocating to the Unit Holders a
portion of each Mortgage Loan under Regulations Section 1.752-3(a)(2) ("MINIMUM
704(C) GAIN"), by allocating to the Unit Holders the percentage of the Tier III
Portion of each Mortgage Loan equal to (x) the Additional 704(c) Gain with
respect to each Property as of the date hereof, divided by (y) the excess of (i)
the 704(c) Value of such Property as of the date hereof, over (ii) the Minimum
704(c) Gain as of the date hereof. The remaining Tier III Portion of the
Mortgage Loan shall be allocated by the General Partner in accordance with each
Partner's respective Percentage Interest in the Partnership. As of the date
hereof, the Unit Holders shall be allocated the respective shares of such
Mortgage Loans shown on SCHEDULE 3 attached to this Amendment.
4. DISPOSITION OF PROPERTIES. Notwithstanding anything to the contrary set
forth in the Partnership Agreement, the Partnership agrees not to sell,
transfer, exchange or otherwise dispose of, and shall cause any Holding Company
not to sell, transfer, exchange or otherwise dispose of, all or any portion of
the Palisades Property, 201 Property or an interest in a Holding Company, or any
property acquired in exchange therefor pursuant to the succeeding sentence of
this PARAGRAPH 4 (each a "DISPOSITION"), until the earlier of (the "END DATE")
(i) the tenth anniversary of the date of this Amendment, and (ii) the date on
which the Partnership gives notice to the Unit Holders confirming that less than
One Hundred Sixty-Six Thousand Five Hundred Sixty-Six (166,566) of the Units
issued pursuant to this Amendment are held, in the aggregate, by Unit Holders.
Notwithstanding the preceding sentence, the Partnership may make a Disposition
by way of a like-kind exchange under Section 1031 of the Code
<PAGE>
that does not result in the recognition of any taxable income or gain to a Unit
Holder, or other Disposition that pursuant to a nonrecognition provision of the
Code does not result in the recognition of any taxable income or gain to a Unit
Holder under the United States federal income tax law and California tax law. If
the Partnership breaches the foregoing, the Partnership shall pay, in accordance
with PARAGRAPH 6, each Unit Holder other than Noro (as hereinafter defined),
Permitted Assignee thereof and each direct and indirect partner, member or
shareholder of such Unit Holder or Permitted Assignee, if such partner, member
or shareholder is required to take any such income or gain into account in
determining his Taxes ("INDEMNITEE"), liquidated damages in an amount equal to
the Tax Liability of each Indemnitee attributable to such Disposition.
After the End Date, Partnership agrees to give, and shall cause any Holding
Company to give, at least thirty (30) days prior written notice to the Unit
Holders before commencing to actively market the Palisades Property, the 201
Property or an interest in a Holding Company, or a property acquired in a tax
deferred exchange therefor prior to the End Date, and notwithstanding SECTION
7.1E of the Partnership Agreement, agrees to use good faith efforts, and shall
cause any Holding Company to use good faith efforts, to structure the
Disposition of such Properties or Holding Company interest in such manner that
would not result in the recognition to Unit Holders of any taxable income or
gain under the United States federal income tax law and California tax law,
including, but not limited to, pursuant to a tax-deferred, like-kind exchange
under Section 1031 of the Code, or a distribution of the Properties or other
assets by the Partnership to the Unit Holders on a tax-free basis to the Unit
Holders in exchange for Units, provided that the fair market values of the
Properties or other assets to be distributed by the Partnership in exchange for
the Units are mutually agreed upon by the Partnership and the Unit Holders
requesting such distribution, and if the aggregate fair market value of such
Properties or other assets (as reduced by any debt to which they are subject) is
greater than the value of the Units, such Unit Holders shall pay such difference
in cash. Nothing herein shall be construed to require that the Partnership agree
to the distribution of any of its then-existing assets to the Unit Holders, or
that the Unit Holders agree to accept any such assets. With respect to any
Disposition after the End Date in violation of Partnership's good faith efforts
covenant set forth in this PARAGRAPH 4, if the Partnership fails to use said
good faith efforts, it shall pay the Indemnitees, in accordance with PARAGRAPH
6, liquidated damages in an amount equal to the Tax Liability attributable to
the Disposition; provided, however, that in such case (i) the aggregate amount
of any and all damages, including liquidated damages, recoverable by the
Indemnitees shall in no event exceed $5,000,000 in the aggregate (and if the
aggregate amount would otherwise exceed $5,000,000, the $5,000,000 shall be
prorated among the Indemnitees according to the amount of their relative Tax
Liabilities), and (ii) the Indemnitees hereby waive their right to pursue
injunctive or other equitable relief in connection with any such Disposition of
the Properties.
5. MERGER; CONSOLIDATION. Notwithstanding anything to the contrary set
forth in the Partnership Agreement, if as a result of a merger, consolidation or
other combination of the Company or the Partnership with or into another Person
prior to the End Date, the Unit Holders would incur any Taxes (as defined
below), the Company and the Partnership shall, at the Company's and
Partnership's election, either (i) not consummate such transaction without the
prior written consent of (A) Unit Holders other than Noro-Hibernia Holding
Company B.V., Boron-Westcoast B.V., Noro-Wilshire Holding Company B.V., and
Noro-Palisades Holding Company B.V., (and their successors and assigns,
collectively, "NORO") holding more than fifty percent (50%) of the then
outstanding Units issued pursuant to this Amendment other than to Noro, (B)
Noro, for so long as it owns not fewer than 166,566 of the Units issued
hereunder, and (C) William L Tooley, so long as he directly or indirectly owns
not fewer than 166,566 Units issued hereunder, or (ii) consummate such
transaction and pay each of the Indemnitees liquidated damages in an amount
equal to the Tax Liability to such Indemnitee resulting therefrom.
6. LIQUIDATED DAMAGES. IN THE EVENT OF A BREACH BY THE GENERAL PARTNER, THE
PARTNERSHIP OR A HOLDING COMPANY OF ITS OBLIGATIONS UNDER PARAGRAPH 3, 4, 5 or 9
HEREOF, THE PARTIES AGREE THAT IT WOULD BE IMPRACTICAL AND EXTREMELY DIFFICULT
TO ESTIMATE THE AMOUNT OF MONETARY DAMAGES WHICH THE INDEMNITEES WOULD SUFFER
THEREFROM. THEREFORE, THE PARTIES
<PAGE>
DO HEREBY AGREE THAT A REASONABLE ESTIMATE OF THE MONETARY DAMAGES THAT THE
INDEMNITEES WOULD SUFFER IN THE EVENT THAT THE GENERAL PARTNER, THE PARTNERSHIP
OR A HOLDING COMPANY DEFAULTS AND FAILS TO PERFORM ITS OBLIGATIONS UNDER
PARAGRAPH 3, 4, 5 or 9 IS AND SHALL BE AN AMOUNT EQUAL TO THE TAX LIABILITY (AS
DEFINED BELOW) RESULTING FROM SUCH BREACH; PROVIDED, HOWEVER, THAT IF SUCH
BREACH IS THE PARTNERSHIP'S OR HOLDING COMPANY'S DISPOSITION AFTER THE END DATE
IN VIOLATION OF THE PARTNERSHIP'S OR HOLDING COMPANY'S GOOD FAITH EFFORTS
COVENANT SET FORTH IN PARAGRAPH 4, THE $5,000,000 LIMITATION SPECIFIED IN THE
LAST SENTENCE OF PARAGRAPH 4 SHALL APPLY. THE AMOUNT OF SAID TAX LIABILITY SHALL
BE THE FULL, AGREED AND LIQUIDATED DAMAGES FOR A BREACH THEREOF. THE PARTNERSHIP
SHALL PAY THE TAX LIABILITY AMOUNT AT THE TIME AND IN THE MANNER PROVIDED IN
THAT CERTAIN TAX REIMBURSEMENT AGREEMENT, OF EVEN DATE HEREWITH, BY AND BETWEEN
THE PARTNERSHIP AND THE NEW PARTNERS ("TAX REIMBURSEMENT AGREEMENT"). SAID
PAYMENT SHALL BE AN EXPENSE OF THE PARTNERSHIP AND SHALL NOT BE CONSIDERED A
DISTRIBUTION TO THE UNIT HOLDERS OR INDEMNITEES. NOTHING CONTAINED IN THIS
PARAGRAPH 6 SHALL LIMIT THE INDEMNITEES' RIGHT TO RECEIVE REIMBURSEMENT FOR
COSTS AND EXPENSES PURSUANT TO PARAGRAPH 13, NOR WAIVE OR AFFECT PARTNERSHIP'S
OBLIGATIONS UNDER ANY OTHER PROVISION OF THIS AMENDMENT OR THE PARTNERSHIP
AGREEMENT. THE PARTNERSHIP MAY MAKE PAYMENT TO A UNIT HOLDER OF THE TAX
LIABILITY AMOUNT PAYABLE TO SUCH UNIT HOLDER AND ANY INDEMNITEE CLAIMING BY,
THROUGH OR UNDER SUCH UNIT HOLDER AND THE PARTNERSHIP SHALL HAVE NO OBLIGATION
OR LIABILITY TO ACCOUNT FOR THE FURTHER DISTRIBUTION BY UNIT HOLDERS OF AMOUNTS
TO INDEMNITEES CLAIMING BY, THROUGH OR UNDER SUCH UNIT HOLDER.
-------------------------------
Parties' Initials
For purposes of this amendment, "TAX LIABILITY" means an amount equal to
the Taxes and the amount of any Taxes resulting from the payment of all amounts
pursuant to the Tax Liability payment obligation hereunder; and "TAXES" means
any tax, levy or other assessment imposed on an Indemnitee, including, without
limitation, any income tax or California franchise tax based on or measured by
income or gain, any alternative or add-on minimum tax, together with any
interest, penalty, addition to tax or other additional amount imposed thereon if
same is attributable to the Partnership's breach or its failure to (a) timely
perform its Tax Liability payment obligation, or (b) provide a Unit Holder with
accurate information to allow such Unit Holder and its Indemnitees to timely
comply with their reporting and payment obligations with respect to Taxes,
imposed by any governmental authority, domestic or foreign, having jurisdiction
over the imposition, assessment, determination, or collection of any of the
foregoing. The amount of an Indemnitee's Tax Liability and Taxes with respect to
a transaction or breach hereof shall be calculated based on the maximum tax
rates applicable to such Indemnitee, and as if such Indemnitee had no other
items of income, gain, loss, deduction or credit, other than the allowable
federal tax deduction, if any, for the amount of Taxes, other then federal
taxes, imposed with respect to such transaction. During the period through the
End Date, the Partnership's Tax Liability payment obligation hereunder shall be
further subject to the terms of a Tax Reimbursement Agreement.
7. 704(C) VALUE AND GAIN. Notwithstanding any provisions to the contrary in
the Partnership Agreement, for purposes of allocating items of income, gain,
loss and deduction with respect to the Palisades Property and the 201 Property
in the manner required by Section 704(c) of the Code, the Partnership will
employ, and shall cause the Holding Companies to employ, the "traditional
method" (without curative allocations) as set forth in Regulation Section
1.704-3(b)(1). For purposes of this Amendment, the "704(C) GAIN" with respect to
a Property means an amount equal to the excess of the 704(c) Value of such
Property over the adjusted tax basis of such Property as of the date hereof. The
704(c) Value of the Palisades Property is $63,250,000; and the 704(c) Value of
the 201 Property is
<PAGE>
$56,750,000, inclusive of the land whose 704(c) Value is $6,500,000. The
Contributors represent and warrant to the Partnership that the estimated
adjusted tax basis of the Palisades Property and the 201 Property shown on
Exhibit B to the Tax Reimbursement Agreement is a reasonable estimate of the
amount of the adjusted tax basis set forth in the Contributor's books and
records, including its tax returns, subject to interim adjustments not yet
reflected in said books and records.
8. DEPRECIATION LIFE. The Partnership and the Contributors acknowledge and
agree pursuant to Regulation Section 1.704-1(b)(2)(iv)(g)(3) that the recovery
period of the portion of the Palisades Property that has a zero adjusted tax
basis shall be thirty-nine (39) years.
9. DEFICIT RESTORATION OBLIGATION. Each of the Unit Holders other than Noro
shall have an option exercisable by written notice to the Partnership, which
notice shall be irrevocable, to (a) elect to be listed on the recourse debt
schedule attached to the Partnership Agreement as EXHIBIT E and to specify the
amount of recourse debt that may be maintained by the Partnership from time to
time to be allocated to such Unit Holder (for which such Unit Holder shall be
personally liable for repayment on a recourse basis in accordance with the
provisions of the Partnership Agreement), and (b) if such Unit Holder has
previously been listed on EXHIBIT E, to elect to increase the amount of such
recourse debt. Each such election shall be by written notice to the Partnership
and may not be given by any Unit Holder more frequently than once in any
calendar year. In no event shall any Unit Holder have the right to reduce the
amount of recourse debt allocated to such Unit Holder. The recourse debt
allocation to any Unit Holder pursuant hereto shall be binding upon successive
transferees of such Unit Holder. A Unit Holder or Assignee shall cease to be
personally liable for repayment of the recourse debt allocated to such Unit
Holder on EXHIBIT E ninety (90) days after the date of the redemption by the
Partnership or acquisition by the Company of all Units held by such Unit Holder
or Assignee pursuant to the Redemption Right of Section 8.6 of the Partnership
Agreement, unless at the time of, or during the six (6) month period following
such redemption or acquisition, there has been:
(i) any entry of a decree or order for relief in respect of the
Partnership by a court having jurisdiction over a substantial part of the
Partnership's assets, or the appointment of a receiver, liquidator,
assignee, custodian, trustee, sequestrator (or other similar official) of
the Partnership or of any substantial part of its property, or ordering the
winding up or liquidation of the Partnership's affairs, in an involuntary
case under the federal bankruptcy laws, as now or hereafter constituted, or
any other applicable federal or state bankruptcy, insolvency or other
similar law, or
(ii) the commencement against the Partnership of an involuntary case
under the federal bankruptcy laws, as now or hereafter constituted, or any
other applicable federal or state bankruptcy, insolvency or other similar
law; or
(iii) the commencement by the Partnership of a voluntary case under
the federal bankruptcy laws, as now or hereafter constituted, or any other
applicable federal or state bankruptcy, insolvency or other similar law, or
the consent by it to the entry of an order for relief in an involuntary
case under any such law or the consent by it to the appointment of or
taking possession by a receiver, liquidator, assignee, custodian, trustee,
sequestrator (or other similar official) of the Partnership or of any
substantial part of its property, or the making by it of a general
assignment for the benefit of creditors, or the failure of Partnership
generally to pay its debts as such debts become due or the taking of any
action in furtherance of any of the foregoing;
provided that, after the passage of such ninety (90) days, the Unit Holder or
Assignee shall cease to be obligated with respect to the recourse debt, at the
first time, if any, that all of the conditions set forth in (i) through (iii)
above are no longer in existence.
The maximum aggregate amount of recourse debt ("RECOURSE DEBT MAXIMUM")
which may be specified by the Unit Holders is TWENTY-FIVE MILLION DOLLARS
($25,000,000). The maximum
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amount of recourse debt which may be specified by any Unit Holder (the "MAXIMUM
HOLDER RECOURSE DEBT AMOUNT") shall be equal to (A) the lesser of (t) the
Recourse Debt Maximum, or (u) the sum of three million dollars ($3,000,000) plus
the excess of (1) the total amount of the Mortgage Loans allocated under
PARAGRAPH 3 as of the date hereof as set forth in SCHEDULE 3 attached hereto
with respect to the Units held by such Unit Holder, over (2) the total amount of
the Mortgage Loans allocable to such Unit Holder on the date of determination,
multiplied by (B) a fraction, the numerator of which is the number of Units
issued to such Unit Holder (or which were issued to such Unit Holder's
predecessor-in-interest and transferred to Unit Holder), and the denominator of
which is the total number of Units issued pursuant to this Amendment other than
to Noro. The Recourse Debt Percentage of each Unit Holder who exercises his
option under this PARAGRAPH 9 shall be determined from time to time and shall be
equal to a fraction expressed as a percentage, the numerator of which is the
amount of recourse debt specified by such Unit Holder, and the denominator of
which is the total recourse debt of the Partnership, subject to the Maximum
Holder Recourse Debt Amount. For purposes of PARAGRAPH 13.3 of the Partnership
Agreement, such Unit Holder's Limited Partner Recourse Debt Percentage shall be
determined as of the first day of the calendar year in which a Liquidating Event
occurs. If and to the extent the Partnership's inability to pay in full all
recourse debt of the Partnership following a Liquidating Event is attributable
to an earthquake, the Unit Holder's obligation to contribute cash to the capital
of the Partnership pursuant to PARAGRAPH 13.3 shall be reduced PRO TANTO. The
Partnership agrees that so long as One Hundred Sixty-Six Thousand Five Hundred
Sixty-Six (166,566) or more of the Units issued pursuant to this Amendment are
held by Unit Holders, it shall, from and after the third (3rd) anniversary of
the date hereof, maintain a sufficient amount of recourse debt to permit the
Unit Holders to have recourse debt allocable to such Unit Holders in an
aggregate amount equal to the amount specified by such Unit Holders on said
EXHIBIT E; provided, however, that upon the Disposition of the Property (or, if
such Disposition is pursuant to a tax deferred like-kind exchange under Section
1031 of the Code prior to the End Date, then upon the occurrence of the End
Date), the Partnership shall not be required to maintain any recourse debt with
respect to Unit Holders who hold or held Units issued in exchange for such
Property. In no event shall the Partnership be liable to any Unit Holder for any
Tax Liability attributable to the fact that the amount specified by such Unit
Holder on Exhibit E of the Partnership Agreement is insufficient to avoid the
incurrence of such Tax Liability.
10. NO RIGHT OF OFFSET. The Partnership shall have no right to offset
against any distribution or other amount that may otherwise be payable to a Unit
Holder by the Partnership any amount that may be due from such Unit Holder
pursuant to the Closing Agreement or any other obligation.
11. SPECIAL REDEMPTION PROVISIONS FOR SPECIFIED UNIT HOLDERS. The Units
identified on SCHEDULE 4 shall not be subject to the limitation against
redemption of Units prior to the first (1st) anniversary hereof set forth in
SECTION 8.6A of the Partnership Agreement. Notwithstanding anything to the
contrary contained in SECTION 8.6A, the "CASH AMOUNT" with respect to each Unit
identified on SCHEDULE 1 as being redeemed, all of which are being redeemed on
the date hereof, is $17.50. Notwithstanding anything to the contrary contained
in SECTION 8.6A of the Partnership Agreement, but without limiting SECTION 8.6C
thereof., from the date hereof until the date which is eighteen (18) months
after the date hereof, if Noro elects to exercise its redemption Right the
Partnership shall not redeem the Noro Partnership Units and the Company shall
purchase Noro's Partnership Units by paying the REIT Shares Amount pursuant to
and in accordance with SECTION 8.6B; provided, however, at the time of Noro's
exercise of its Redemption Right, the Company shall be satisfied that the
purchase by the Company of Noro's Partnership Units pursuant to and in
accordance with SECTION 8.6B (i) would not require the filing of a registration
statement under the Securities Act of 1933 or violate any federal or state
securities laws applicable to the Partnership or the Company, and (ii) would not
adversely affect the ability of the Company to continue to qualify as a REIT or
subject the Company to any additional taxes under Section 857 or Section 4981 of
the Code.
12. MISCELLANEOUS. With respect to the Unit Holders, in no event shall the
provisions of SECTION 7.3 of the Partnership Agreement be deemed to permit any
action which in form or effect would be in contravention of any of the
provisions specified in SECTION 14.1(C) or SECTION 14.1(D) of the Partnership
Agreement.
<PAGE>
13. ATTORNEYS' FEES. Should any litigation be commenced between the parties
hereto concerning any provision of this Amendment or the rights and duties of
any Person in relation thereto, the party or parties prevailing in such
litigation shall be entitled, in addition to such other relief as may be
granted, to an award of all actual attorneys' fees and costs incurred in such
litigation, without regard to any schedule or rule of court purporting to
restrict such an award.
14. DEFINITIONS; FULL FORCE AND EFFECT. All capitalized terms not otherwise
defined herein shall have the meanings assigned to them in the Partnership
Agreement. The terms of this Amendment shall apply notwithstanding anything to
the contrary in the Partnership Agreement. Except as modified herein, all terms
and provisions of the Partnership Agreement shall remain in full force and
effect, which terms and provisions the General Partner and the New Partners
hereby ratify and affirm. The rights and obligations of the New Partners, the
Partnership and General Partner shall inure to the benefit of and be binding
upon the parties hereto and their respective permitted successors, including the
Unit Holders and the provisions hereof shall inure to the benefit of the
Indemnitees. Without limiting the General Partner's right to amend Exhibit A to
the Partnership Agreement in accordance with Section 14.1E of the Partnership
Agreement, the terms of this Amendment may only be modified in writing by
agreement of the General Partner and (i) Noro, so long as Noro owns not fewer
than 100,000 Units issued to it hereunder, (ii) William L. Tooley, so long as he
directly and indirectly owns not less than 100,000 Units issued to him hereunder
and, (iii) Unit Holders other than Noro holding more than fifty percent (50%) of
the then outstanding Units issued pursuant to this Amendment other than to Noro.
15. COUNTERPARTS. To facilitate the execution, this Amendment may be
executed in as many counterparts as may be required; and it shall not be
necessary that the signature of, or on behalf of, each party, or that the
signatures of all persons required to bind any party, appear on each
counterpart; but it shall be sufficient that the signature of, or on behalf of
each party, or that the signatures of the persons required to bind any party,
appear on one or more of the counterparts. All counterparts shall collectively
constitute a single agreement. It shall not be necessary in making proof of this
Amendment to produce an account for more than a number of counterparts
containing the respective signatures of, or on behalf of, all of the parties
hereto.
IN WITNESS WHEREOF, the undersigned has executed this Amendment as of the
date first set forth above.
"GENERAL PARTNER "CORNERSTONE PROPERTIES INC.,
a Nevada corporation, as General Partner of
Cornerstone Properties Limited Partnership and on
behalf of existing Limited Partners
By: /s/ Thomas A. Nye
-------------------------------------
Name: Thomas A. Nye
Title:Vice President
By: /s/ Peter S. Smichenko
-------------------------------------
Name: Peter S. Smichenko
Title: Vice President
<PAGE>
"CONTRIBUTORS"
CALIFORNIA/FRONT BUILDING COMPANY, a
California limited partnership
By: 201 California, Inc., a California corporation
Its: General Partner
By: /s/ William L. Tooley
-------------------------------------
William L. Tooley
Its: President
TELE/TAC ASSOCIATES,
a California limited partnership
By: Noro-Palisades Holding Company B.V., a
Netherlands corporation
Its: General Partner
By: /s/ Michael R. Raffety
-------------------------------------
Michael R. Raffety, not individually, but
solely as its attorney-in-fact pursuant to
Power of Attorney dated August 9, 1989
"NEW PARTNERS"
/s/ William L. Tooley
--------------------------------------------
WILLIAM L. TOOLEY
C.L. PECK, CONTRACTOR,
a California corporation
By: /s/ Margo Ryan Peck
-------------------------------------
Margo Ryan Peck
Its: Authorized Signatory
<PAGE>
NORO-HIBERNIA HOLDING COMPANY B.V., a
Netherlands corporation
By: /s/ Michael R. Raffety
-------------------------------------
Michael R. Raffety, not individually, but
solely as its attorney-in-fact pursuant to
Power of Attorney dated July 20, 1993
201 CALIFORNIA, INC., a California corporation
By: /s/ William L. Tooley
-------------------------------------
William L. Tooley
Its: President
BORON-WESTCOAST B.V.,
a Netherlands corporation
By: /s/ Michael R. Raffety
-------------------------------------
Michael R. Raffety, not individually, but
solely as its attorney-in-fact pursuant to
Power of Attorney dated August 22, 1994
TOOLEY CALIFORNIA/FRONT ASSOCIATES, a
California limited partnership
By: /s/ William L. Tooley
-------------------------------------
William L. Tooley
Its: General Partner
<PAGE>
PECK CALIFORNIA/FRONT ASSOCIATES, a California
limited partnership
By: Clair L. Peck, Jnr. Family Trust
Its: General Partner
By: /s/ Margo Ryan Peck
---------------------------------
Margo Ryan Peck
Its Co-Trustee
NORO-PALISADES HOLDING COMPANY B.V., a Netherlands
corporation
By: /s/ Michael R. Raffety
-------------------------------------
Michael R. Raffety, not individually, but
solely as its attorney-in-fact pursuant to
Power of Attorney dated August 9, 1989
NORO-WILSHIRE HOLDING COMPANY B.V., a
Netherlands corporation
By: /s/ Michael R. Raffety
-------------------------------------
Michael R. Raffety, not individually, but
solely as its attorney-in-fact pursuant to
Power of Attorney dated April 18, 1988
PALISADES ASSOCIATES,
a California limited partnership
By: /s/ William L. Tooley
-------------------------------------
William L. Tooley
Its: General Partner
ALAMEDA ASSOCIATES, LTD.,
a California Limited Partnership
By: 2525 Associates, Inc.,
a California corporation
Its: General Partner
By: /s/ William L. Tooley
---------------------------------
William L. Tooley
Its: President
<PAGE>
COMMERCE WAY ASSOCIATES, L.P.,
a California limited partnership
By: Commerce Way Associates, Inc., a California
corporation
Its: General Partner
By: /s/ William L. Tooley
---------------------------------
William L. Tooley
Its: President
<PAGE>
EXHIBIT 10.9
FOURTH AMENDMENT TO AGREEMENT OF LIMITED
PARTNERSHIP OF CORNERSTONE PROPERTIES LIMITED PARTNERSHIP
THIS FOURTH AMENDMENT TO AGREEMENT OF LIMITED PARTNERSHIP OF
CORNERSTONE PROPERTIES LIMITED PARTNERSHIP (this "AMENDMENT") is made and
entered into as of the 16th of December, 1998, by CORNERSTONE PROPERTIES INC., a
Nevada corporation, as general partner (the "GENERAL PARTNER") of Cornerstone
Properties Limited Partnership (the "PARTNERSHIP"), for itself and on behalf of
the Limited Partners of the Partnership, and the New Partners admitted to the
Partnership pursuant to this Amendment under the following circumstances:
WHEREAS, the Partnership was formed by the filing of that certain
Certificate of Limited Partnership with the Delaware Secretary of State on
December 23, 1997 and is organized pursuant to the provisions of the Delaware
Revised Uniform Limited Partnership Act and pursuant to that certain Agreement
of Limited Partnership of Cornerstone Properties Limited Partnership, dated as
of December 23, 1997, as amended by First Amendment to Agreement of Limited
Partnership of Cornerstone Properties Limited Partnership, dated as of January
29, 1997 [sic], by Amendment to First Amendment to Agreement of Limited
Partnership of Cornerstone Properties Limited Partnership, dated as of January
29, 1998, by Second Amendment to Agreement of Limited Partnership of Cornerstone
Properties Limited Partnership, dated as of April 28, 1998, and by Third
Amendment to Agreement of Limited Partnership dated as of June 3, 1998 (the
"PARTNERSHIP AGREEMENT");
WHEREAS, on even date herewith, the parties identified as "New
Partners" on the signature page hereto (the "NEW PARTNERS") have made Capital
Contributions to the Partnership in exchange for an aggregate of 16,213,009
Class A Partnership Common Units of limited partnership interest in the
Partnership;
WHEREAS, each New Partner desires to become a party to the Partnership
Agreement as a Limited Partner and to be bound by all terms, conditions and
other provisions of this Amendment and the Partnership Agreement; and
WHEREAS, the parties desire to amend the Partnership Agreement to
reflect the admission of each New Partner as an Additional Limited Partner and
holder of a certain number of Units and certain other matters as herein
provided;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained and other good and valuable consideration, the receipt,
adequacy and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. DEFINITIONS. The terms used in this Amendment with an initial
capital letter or letters shall have the same meanings in this Amendment as the
meanings ascribed thereto in the Partnership Agreement.
2. ADMISSION OF NEW PARTNERS. Each New Partner is hereby admitted as
an Additional Limited Partner in accordance with Section 12.2 of the Partnership
Agreement holding such number of Units as is set forth on EXHIBIT A. Each New
Partner hereby agrees to become a party to the Partnership Agreement as a
Limited Partner and to be bound by all the terms, conditions and other
provisions of the Partnership Agreement, including but not limited to the power
of attorney set forth in Section 2.4 of the Partnership Agreement. Pursuant to
Section 12.2.B of the Partnership Agreement, the General Partner hereby consents
to the admission of each New Partner as an Additional Limited Partner of the
Partnership. The admission of each New Partner shall become effective as of the
date of this Amendment, which shall also be the date on which the name of each
New Partner is recorded on the books and records of the Partnership.
3. RESTATEMENT OF EXHIBIT A. EXHIBIT A to the Partnership Agreement
is hereby amended and restated by replacing EXHIBIT A with EXHIBIT A attached to
this Amendment.
<PAGE>
4. EXTRAORDINARY TRANSACTION. Section 1 of the Partnership Agreement
is hereby amended by deleting clause (i) of the definition of "Extraordinary
Transaction" in its entirety and substituting the following in its place:
"(i) a merger (including a triangular merger), consolidation
or other combination into another Person if, as the result of
which, the Company is not the surviving Person, unless such
merger (including a triangular merger), consolidation or other
combination into such other Person where the Company is not the
surving Person is effected solely to change the domicile or state
of incorporation of the Company;"
5. VALUE. Section 1 of the Partnership Agreement is hereby amended
by deleting the definition of "Value" in its entirety and substituting the
following in its place:
"VALUE" means, with respect to a REIT Share, the average of
the daily market price for the ten (10) consecutive trading days
immediately preceding the Valuation Date. The Market for each
such trading day shall be: (i) if the REIT Shares are listed or
admitted to trading on the New York Stock Exchange ("NYSE"), the
closing price on the NYSE on such day, or if no such sale takes
place on such day, the average of the closing bid and asked
prices, regular way, on such day; (ii) if the REIT Shares are not
listed on the NYSE but are listed or admitted to trading on any
other securities exchange or the Nasdaq National Market System,
the General Partner shall designate one of such exchanges or the
Nasdaq National Market System, and the market price shall be the
closing price on such exchange so designated by the General
Partner on such day, or if no such sale takes place on such day,
the average of the closing bid and asked prices on such day;
(iii) if the REIT Shares are not listed or admitted to trading on
any securities exchange or the Nasdaq National Market System, the
last reported sale price on such day or, if no sale takes place
on such day, the average of the closing bid and asked prices on
such day, as reported by a reliable quotation source designated
by the General Partner; or (iv) if the REIT Shares are not listed
or admitted to trading on any securities exchange or the Nasdaq
National Market System and no such last reported sale price or
closing bid and asked prices are available, the average of the
reported high bid and low asked prices on such day, as reported
by a reliable quotation source designated by the General Partner,
or if there shall be no bid and asked prices on such day, the
average of the high bid and low asked prices, as so reported, on
the most recent day (not more than ten (10) days prior to the
date in question) for which prices have been so reported,
PROVIDED that if there are no bid and asked prices reported
during the ten (10) days prior to the date in question, the Value
of the REIT Shares shall be determined by the General Partner
acting in good faith on the basis of such quotations and other
information as it considers, in its reasonable judgment,
appropriate. In the event the REIT Shares Amount includes Rights,
then the Value of such Rights shall be determined by the General
Partner acting in good faith on the basis of such quotations and
other information as it considers, in its reasonable judgment,
appropriate, PROVIDED that the Value of any Rights issued
pursuant to a 'Shareholder Rights Plan' shall be deemed to have
no value unless a 'triggering event' shall have occurred (I.E.,
if the Rights issued pursuant thereto are no longer 'attached' to
the REIT Shares and are able to trade independently)."
6. TERM. Section 2.5 of the Partnership Agreement is hereby amended
by inserting the following immediately following the date "December 31, 2096,":
-2-
<PAGE>
". . . unless the General Partner, in its sole and absolute
discretion, and on as many occasions as the General Partner may
elect, extends such date by written notice to the Limited
Partners given prior to such date, or . . ."
7. DISTRIBUTIONS. Section 5.1 of the Partnership Agreement is hereby
deleted in its entirety and the following substituted in its place:
"SECTION 5.1 REQUIREMENT AND CHARACTERIZATION OF DISTRIBUTIONS
The General Partner shall cause the Partnership to distribute
at least quarterly all or a portion of Available Cash generated by the
Partnership during such quarter or shorter period, in such amounts as
the General Partner shall determine in its sole and absolute
discretion; PROVIDED, HOWEVER, that all such distributions shall be
made to the Partners who are Partners on the Partnership Record Date
with respect to such quarter or shorter period in the following order:
(1) first, at the time and in the manner set forth in the
applicable Partnership Unit Designation, to each holder of Partnership
Interests of a class or series that is entitled to a preference in
distribution, in accordance with the rights of such class or series of
Partnership Interests (and, within such class or series, pro rata in
proportion to the respective Partnership Interests on such Partnership
Record Date); and
(2) second, to the extent the amount of Available Cash which
the General Partner has determined to distribute exceeds the amount
required for payment of any preference in distribution under the
foregoing clause (1), such excess shall be distributed to the holders
of Partnership Interests that are not entitled to any preference in
distribution, pro rata to each class or series in accordance with the
terms of such class or series (and within each class or series pro rata
in proportion to their respective Percentage Interests on such
Partnership Record Date).
Unless otherwise expressly provided for herein or in an
agreement at the time a new class or series of Partnership Interests is
created in accordance with ARTICLE 4, no Partnership Interest shall be
entitled to a distribution in preference to any other Partnership
Interests. Unless otherwise specifically agreed to by the General
Partner, distributions payable with respect to any Partnership Units
that were not outstanding during the entire quarterly or shorter period
in respect of which distribution is made shall be prorated based on the
portion of the period that such Units were outstanding. Notwithstanding
anything to the contrary contained herein, in no event shall a Partner
receive a distribution out of Available Cash with respect to a
Partnership Unit if such Partner is entitled to receive a distribution
out of such Available Cash with respect to a REIT Share for which such
Partnership Unit has been exchanged or redeemed.
The General Partner shall take such reasonable efforts, as
determined by it in its sole and absolute discretion and consistent
with the Company's qualification as a REIT, to distribute Available
Cash (a) to the Limited Partners so as to preclude any such
distribution or portion thereof from being treated as part of a sale of
property to the Partnership by a Limited Partner under Section 707 of
the Code or the Regulations thereunder; PROVIDED that the General
Partner and the Partnership shall not have liability to a Limited
Partner under any circumstances as a result of any distribution to a
Limited Partner being so treated and (b) to the Company in amounts
sufficient to enable the Company to pay shareholder dividends that will
(1) satisfy the requirements for qualifying or reelecting as a REIT
under the Code and Regulations and (2) avoid any federal income or
excise tax liability for the Company; PROVIDED, HOWEVER, that the
General Partner may in its sole discretion from time to time elect not
to cause the Partnership to distribute sufficient amounts to enable the
Company to pay shareholder dividends that will avoid any federal income
or excise tax liability of the Company so long as to do so would not be
disadvantageous to the Limited Partners. Except as set forth in the
immediately preceding sentence, nothing contained herein shall require
the General Partner to cause the Partnership to distribute any
particular portion of Available Cash. The Partners acknowledge that the
Partnership expects in the future to undertake the construction and
development of property, to acquire additional property through
purchase for cash, debt and equity
-3-
<PAGE>
securities, issuance of indebtedness, merger or other means, to make
other investments utilizing, inter alia, income and gain of the
Partnership, and to establish reserves for the purpose of making such
future expenditures, thereby reducing the amounts of Available Cash
that would otherwise be available for distribution to the Partners."
8. DEFICIT MAKE-UP; TAX ALLOCATIONS. The Partnership Agreement is
hereby amended in the following respects:
(a) A new Section 6.1.E is hereby added to the Partnership
Agreement immediately following Section 6.1.D thereof as follows:
"E. ELECTION TO UNDERTAKE DEFICIT RESTORATION LIABILITY. A
Limited Partner who wishes to bear the economic risk of loss as
to a portion of the Partnership's recourse indebtedness by
undertaking the obligation to restore a portion of its negative
Capital Account balance upon liquidation of such Partner's
interest in the Partnership, as provided in SECTION 13.3 hereof,
shall provide a written notice to the General Partner specifying
the dollar amount of recourse debt of the Partnership as to which
such Limited Partner agrees to bear the economic risk of loss by
undertaking a deficit capital account restoration obligation of
the same amount (the "RECOURSE DEBT AMOUNT"). The total of such
dollar amounts elected by all Limited Partners shall equal the
"AGGREGATE RECOURSE DEBT AMOUNT" and shall be set forth on
EXHIBIT E, as amended from time to time. Such election shall
become effective upon the receipt thereof by the General Partner
unless the General Partner reasonably determines, based on the
advice of its tax advisors and after consulting with the Limited
Partner and its tax advisors, that the amount specified in a
Limited Partner's election substantially exceeds the amount
necessary to cause the Limited Partner to be allocated sufficient
Partnership debt under Section 752 of the Code (taking into
account the effect of anticipated reductions in Partnership debt
on such Partner's allocable share of debt) to cover such
Partner's negative tax capital account and reasonably projected
changes therein. Upon becoming effective, such election shall be
irrevocable, cannot be reduced, and shall be binding upon
successive transferees of the Limited Partner except as provided
in the final paragraph of SECTION 13.3 hereof."
(b) Paragraphs (4) and (5) of Section 6.1.B of the Partnership
Agreement are hereby deleted in their entirety and the following
substituted in their place:
"(4) Fourth, to the General Partner until the General
Partner's Adjusted Capital Account Deficit is equal to
the excess, if any, of the aggregate recourse
liabilities of the Partnership at the end of the fiscal
year for which such allocation is being made over the
Aggregate Recourse Debt Amount as set forth on EXHIBIT
E, as appropriately amended from time to time;
(5) Fifth, to the Limited Partners listed on EXHIBIT E in
proportion to their respective `Recourse Debt
Percentages' (such percentages being derived, in the
case of each Limited Partner, by dividing such Limited
Partner's Recourse Debt Amount by the Aggregate
Recourse Debt Amount), until the sum of such Limited
Partners' Adjusted Capital Account Deficits equals the
Aggregate Recourse Debt Amount; and"
(c) Section 1 of the Partnership Agreement is hereby amended by
deleting the definition of "RECOURSE DEBT AMOUNT" in its entirety and
adding new definitions of "RECOURSE DEBT AMOUNT" and "AGGREGATE
RECOURSE DEBT AMOUNT" as follows:
"AGGREGATE RECOURSE DEBT AMOUNT" has the meaning set forth
in SECTION 6.1.E."
"RECOURSE DEBT AMOUNT" has the meaning set forth in SECTION
6.1.E."
-4-
<PAGE>
(d) Exhibit E of the Partnership Agreement is hereby amended by
adding the phrase "(Aggregate Recourse Debt Amount)" immediately after
the word "Total."
9. GENERAL PARTNER ACTION TO MAINTAIN REIT STATUS OR AVOID TAXATION
OF COMPANY. Section 7.9.D of the Partnership Agreement is hereby amended by
deleting clause (iii) thereof in its entirety and substituting the following in
its place:
". . . (iii) to ensure that the Partnership at all times
satisfies the 90% qualifying income exception of Section 7704(c) of
the Code, unless the Partnership obtains an opinion of counsel to the
effect that the Partnership is not properly classified as a `publicly
traded partnership' under Section 7704(b) of the Code, is expressly
authorized under this Agreement and is deemed approved by all of the
Limited Partners. . . ."
10. REDEMPTION RIGHT. The first sentence of Section 8.6.A is hereby
amended to read as follows:
"A. GENERAL. Subject to SECTION 8.6.B and 8.6.C, at any time
(i) on or after the day following the first (1st) anniversary of the
date of issuance of a Partnership Unit to a Limited Partner pursuant to
ARTICLE 4, or, in the case of Partnership Units issued to an Additional
Limited Partner admitted to the Partnership pursuant to the Fourth
Amendment to Agreement of Limited Partnership of the Partnership dated
as of December 16, 1998, at any time on or after the day following the
first to occur of (a) the first (1st) anniversary of the date of
issuance of a Partnership Unit to such Limited Partner pursuant to
ARTICLE 4, or (b) a "CHANGE IN CONTROL" of the Company (as such term is
defined in the Registration Rights and Lock-up Agreement, dated as of
the date of this Amendment, by and among the Company and the parties
set forth in Exhibit A thereto), or (ii) on or after such date prior to
the date determined in accordance with the foregoing clause (i) as the
General Partner, in its sole and absolute discretion, designates with
respect to any Units then outstanding, each Limited Partner (other than
the Company) shall have the right (the "REDEMPTION RIGHT") to require
the Partnership to redeem on a Special Redemption Date all or a portion
of the Partnership Units held by such Limited Partner at a redemption
price per Unit equal to and in the form of the Cash Amount to be paid
by the Partnership."
11. TAX-EXEMPT LIMITED PARTNERS. A new Section 10.6 is hereby added
to the Partnership Agreement immediately following Section 10.5 as follows:
"SECTION 10.6 NOTIFICATION OF TAX-EXEMPT STATUS
Any Limited Partner that is a tax-exempt organization shall, upon
its admission to the Partnership, notify the Partnership of such
status, the provision of the Code under which such Limited Partner
claims tax-exempt status and whether the Limited Partner is a
'qualified organization' under Section 514(c)(9)(C) of the Code, and
shall promptly notify the Partnership of any change in such status."
12. TRANSFER RESTRICTIONS. Section 11.3.D of the Partnership
Agreement is hereby amended in the following respects:
(A) Section 11.3.D of the Partnership Agreement is hereby amended
by inserting the following at the end of clause (i) thereof:
". . . PROVIDED, HOWEVER, that the General Partner may, in its
sole discretion, waive such restriction on proposed transfers that
cause a tax termination of the Partnership if the General Partner
otherwise determines that such transfers are in the best interest of
the Partnership; . . ."
(B) Section 11.3.D of the Partnership Agreement is hereby amended
by inserting the following at the end of clause (iii) thereof:
-5-
<PAGE>
". . . PROVIDED, HOWEVER, that the foregoing restriction shall
not prohibit a transfer in connection with the exercise of a Limited
Partner's Redemption Right; . . ."
(C) Section 11.3.D of the Partnership Agreement is hereby amended
by adding a new clause (vii) as follows:
". . . ; or (vii) such transfer would cause the Partnership or
the Company to be treated as deriving rents from a related party
tenant described in Section 856(d)(2)(B) of the Code, taking into
account the applicable constructive ownership rules. . "
13. COMPLIANCE WITH TIMING REQUIREMENTS OF REGULATIONS. Section 13.3
of the Partnership Agreement is hereby amended and restated in its entirety as
follows:
"SECTION 13.3 COMPLIANCE WITH TIMING REQUIREMENTS OF REGULATIONS
In the event the Partnership is "liquidated" within the meaning
of Treasury Regulations Section 1.704-1(b)(2)(ii)(g), distributions
shall be made pursuant to this ARTICLE 13 to the General Partner and
Limited Partners who have positive Capital Accounts in compliance with
Treasury Regulations Section 1.704-1(b)(2)(ii)(b)(2). In that event,
(i) if the General Partner has a deficit balance in its Capital
Account (after giving effect to all contributions, distributions and
allocations for all Partnership Years or portions thereof, including
the year during which such liquidation occurs), the General Partner
shall contribute to the capital of the Partnership the amount
necessary to restore such deficit balance to zero in compliance with
Treasury Regulations Section 1.704-1(b)(2)(ii)(b)(3); and (ii) if any
Limited Partner has a deficit balance in its Capital Account (after
giving effect to all contributions, distributions and allocations for
all Partnership Years or portions thereof, including the year during
which such liquidation occurs) and has been allocated a Limited
Partner Recourse Debt Percentage, each such Limited Partner shall be
obligated to contribute cash to the capital of the Partnership in an
amount equal to the lesser of (A) the amount required to increase its
Capital Account balance as of such date to zero or (B) such Limited
Partner's Recourse Debt Amount. Any such contribution required of a
Partner hereunder shall be made on or before the later of (i) the end
of the Partnership Year in which the interest of such Partner is
liquidated or (ii) the ninetieth (90th) day following the date of such
liquidation. Notwithstanding any provision hereof to the contrary, all
amounts so contributed by a Limited Partner to the capital of the
Partnership shall, upon liquidation of the Partnership under ARTICLE
13, be paid only to any then creditors of the Partnership, including
Partners that are Partnership creditors (in the order provided in
SECTION 13.2), and shall not be distributed to the other Partners then
having positive balances in their respective Capital Accounts.
If a Limited Partner's interest in the Partnership is
"liquidated" within the meaning of Treasury Regulations Section
1.704-1(b)(2)(ii)(g) (other than in connection with a liquidation of
the Partnership), which term shall include a redemption by the
Partnership of such Limited Partner's interest upon exercise of a
Redemption Right, then the Limited Partner shall be required to
contribute cash to the capital of the Partnership equal to the lesser
of (i) the amount required to increase its Capital Account balance as
of such date to zero, or (ii) such Limited Partner's Recourse Debt
Amount. For this purpose, (i) the Limited Partner's deficit Capital
Account shall be determined by taking into account all contributions,
distributions and allocations for the portion of the Partnership Year
ending on the date of the liquidation or redemption, and (ii) solely
for purposes of determining such Limited Partner's Capital Account
balance, the General Partner shall redetermine the Carrying Value of
the Partnership's assets on such date based on the principles set
forth in SECTION 1.D(3) and (4) of EXHIBIT B hereto, and shall take
into account the Limited Partner's allocable share of any Unrealized
Gain or Unrealized Loss resulting from such redetermination in
determining the balance of its Capital Account. The amount of any
payment required hereunder shall be due and payable within the time
periods specified in the penultimate sentence of the preceding
paragraph.
After the death of a Limited Partner, the executor of the estate
of such Limited Partner may elect to reduce (or eliminate) the deficit
Capital Account restoration obligation of such Limited Partner
pursuant to this SECTION 13.3. Such elections may be made by such
executor by delivering to the General Partner
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<PAGE>
within two hundred seventy (270) days of the death of such Limited
Partner a written notice setting forth the maximum deficit balance in
its Capital Account that such executor agrees to restore under SECTION
13.3, if any. If such executor does not make a timely election
pursuant to this SECTION 13.3 (whether or not the balance in its
Capital Account is negative at such time), then such Limited Partner's
estate (and the beneficiaries thereof who receive distributions of
Partnership Interests therefrom) shall be deemed to have a deficit
Capital Account restoration obligation as set forth pursuant to the
terms of SECTION 13.3. Any Limited Partner which is itself a
partnership may likewise elect, after the date of its respective
partner's death, to reduce (or eliminate) its deficit Capital Account
restoration obligation pursuant to SECTION 13.3 by delivering a
similar written notice to the General Partner within the time period
specified herein. Any such partnership that does not make any such
timely election shall similarly be deemed to have a deficit Capital
Account restoration obligation as set forth pursuant to the terms of
SECTION 13.3."
14. ALLOCATION OF NONRECOURSE DEDUCTIONS. Section 1.D of Exhibit C to
the Partnership Agreement is hereby amended by inserting the words ". . .in the
Partnership . . . " at the end of the first sentence thereof.
15. MISCELLANEOUS. This Amendment shall be binding upon and inure to
the benefit of the parties hereto and their respective successors and assigns.
The Partners hereby ratify and confirm the Partnership Agreement, as amended by
this Amendment. This Amendment shall be governed by and construed in conformity
with the laws of the State of Delaware. This Amendment may be executed in
counterparts, each of which shall be an original, and all of which shall
constitute one and the same instrument.
CORNERSTONE PROPERTIES INC.
By: /s/ Rodney C. Dimock
----------------------------
Rodney C. Dimock
Chief Operating Officer
By: /s/ Thomas A. Nye
----------------------------
Thomas A. Nye
Vice President
-7-
<PAGE>
Alameda Associates
Boron Westcoast B.V.
201 California Inc.
C.L. Peck Contractor
Commerce Way Associates
The Congress Group, Inc.
DFS Holdings LLC
Elohssa Realty Limited Partnership
David A. Gardner
Myron Levin
Steven Levin
Memeno - 1789 Corporation
Noro-Hibernia Holding B.V.
Noro-Palisades Holding Company B.V.
Noro-Wilshire Holding Company B.V.
Palisades Associates
Peck California/Front Associates
Marla Pierson
Arvin Rieger
Terry Levin Smith
William L. Tooley
Tooley California/Front Associates
Wynken Corp.
Corpro Real Estate Management, Inc.
BY: CORNERSTONE PROPERTIES INC.,
pursuant to the Consent of the Limited Partners approving the
amendment of the Partnership Agreement as set forth in the
Amendment
By: /s/ Rodney C. Dimock
----------------------------
Rodney C. Dimock
Chief Operating Officer
By: /s/ Thomas A. Nye
----------------------------
Thomas A. Nye
Vice President
-8-
<PAGE>
The "New Partners" set forth on Schedule 1
By: WW Holdings, LLC a California limited liability company,
as attorney-in-fact pursuant to separate powers of attorney
By: /s/ Lee Van Boven
----------------------------
Name: Lee Van Boven
Title: Manager
-9-
<PAGE>
EXHIBIT 10.10
[Cornerstone Properties Inc. letterhead]
December 16, 1998
Mr. William Wilson III
2929 Campus Dr., #450
San Mateo, CA 94403
Re: Employment
Dear Bill,
We are pleased to welcome you as a Director and Chairman of the Board
of Cornerstone Properties Inc. (the "Corporation") and to confirm your
employment by Cornerstone Properties Limited Partnership (the "Partnership" and
together with the Corporation, "Cornerstone").
1. POSITION AND TERM. You will serve as the Chairman of the Board of
Directors of the Corporation for a term of three years from the date of this
letter in accordance with the Amended and Restated Bylaws of the Corporation.
You will not be separately compensated for your service as Chairman of the
Board.
You will also serve as the head of the western region operations of
Cornerstone, with the additional title of President, Wilson-Cornerstone, and as
an officer of the Corporation and the Partnership with such high level executive
responsibilities in addition to those described in this letter as you and the
Board of Directors of the Corporation (the "Board") may from time to time agree.
The positions described in this Paragraph 1 will also be for a term of three
years from the date of this letter.
As an officer of Cornerstone, you will serve on all internal management
committees in which you elect to participate, including the Executive Committee
and Investment Committee and all other committees dealing with Cornerstone
investments, capital markets, financing, personnel reviews of executives,
compensation of executives, and incentive compensation; it being agreed that
management decisions in these areas which are not considered in one or more of
these committees will be made after consultation between you and the Chief
Executive Officer of Cornerstone, Mr. John Moody. In addition, it is expected
that you will play a leading role in Cornerstone's efforts to create national
capabilities in real estate development, leasing and property management
comparable to those formerly provided by William Wilson & Associates on a
regional basis.
You will also serve as an officer and director of one or more
affiliates of Cornerstone as you and the Board may agree from time to time. You
will receive no additional salary compensation for your services in connection
with these affiliates, though Cornerstone may fairly allocate your compensation
among these affiliates and the Partnership.
2. COMPENSATION. You will receive an annual salary of at least
$400,000. Your annual salary will be reviewed each year beginning with calendar
year 2000 and may be adjusted upward as the Board of Directors or its
compensation committee may deem appropriate. You will participate in
Cornerstone's executive bonus and incentive programs, including stock option and
restricted stock programs, in a manner comparable to other senior executives of
Cornerstone as from time to time determined by the Board's Compensation
Committee, though we understand that you will not accept any stock option grants
made in connection with the initial grants to be made in at or about the time of
the closing of the Cornerstone merger with William Wilson & Associates.
3. BENEFITS. You will be entitled to the Partnership's health, life,
disability and other insurance benefits and sick leave as are generally
applicable to its senior executives, and you will be entitled to participate in
<PAGE>
all of the Partnership's employee benefit plans in which senior executives are
allowed to participate generally. You will be entitled to five weeks vacation
each year in addition to the Partnership's regular paid holidays.
4. REIMBURSEMENT OF BUSINESS EXPENSES AND TRAVEL. Cornerstone will
reimburse you for your reasonable travel and other business-related expenses
incurred in connection with Cornerstone business and the performance of your
duties under this agreement, including travel, hotel, meals and entertainment.
Reimbursement procedures will be in accordance with the Partnership's policies
as to senior executives. You will not be required to relocate from San Mateo,
California.
5. TIME AND OTHER COMMITMENTS. You will devote such time as may
reasonably be required to fulfill your duties under this agreement. It is
expected and agreed that you will spend reasonable amounts of time on
educational, charitable and public service activities, in service on boards of
directors of companies that do not compete with Cornerstone, and in the
management of your personal passive investments. In addition, you agree to abide
by the terms of Sections 8.1(e) and 8.1(f) of the Contribution Agreement dated
June 22, 1998, as amended, between William Wilson & Associates and others (the
"Contribution Agreement").
Nothing in this agreement or the Contribution Agreement will preclude
you from holding or making, and you may make and hold, new passive real estate
investments not exceeding $5 million where the active management is by members
of your immediate family and which do not compete with or involve properties of
a type competitive with those of Partnership.
6. TERMINATION. Your employment will terminate upon your death or
Permanent Disability. For this purpose your "Permanent Disability" means that by
reason of injury, physical or mental illness or other disability you are unable
to satisfactorily perform your duties as an employee under this agreement, as
determined in the reasonable judgment of the Board based upon competent medical
advice and the Board reasonably determines that your condition has continued for
at least ninety (90) consecutive days and satisfies the definition of "long-term
disability" (or comparable term) as used for the disability insurance policy or
policies in effect with respect to employees of Cornerstone as of the onset of
the condition.
Apart from your death or Permanent Disability, you may be terminated
only for Cause. "Cause" means (1) any intentional act of dishonesty or fraud by
you in the performance of your duties as an employee; (2) any willful failure to
carry out your material duties as assigned by the Board of Directors which
continues after notice and a reasonable opportunity to cure; or (3) you are
convicted of or plead guilty or NOLO CONTENDERE to a felony involving dishonesty
or moral turpitude.
7. MISCELLANEOUS. All notices under this agreement will be in writing
and may be (i) presented personally or by private courier service, (ii) sent by
facsimile transmission, or (iii) sent via a nationally recognized overnight
delivery service (e.g., FedEx, DHL). This agreement will be governed by and
interpreted according to the substantive laws of the State of California without
regard to California's conflicts laws principles. In the event of any breach of
the agreement that results in arbitration or litigation between the parties, the
prevailing party shall be entitled to its reasonable attorneys' fees, expert
witness fees and costs of such suit or arbitration (or the enforcement of any
related award or decision). The prevailing party shall be determined, based upon
an assessment of which party's major arguments or positions taken in the
proceedings could fairly be said to have prevailed over the other party's major
arguments or positions on major disputed issues in the court's or arbitrator's
decision.
This agreement is not intended to obviate or modify any provision of
the Contribution Agreement or the Retention Agreement dated as of the date
hereof between you and the Partnership, except as otherwise expressly stated.
The unenforceability of all or any part of any provision of this agreement in
any jurisdiction will in that jurisdiction be ineffective to the extent of the
unenforceability without invalidating the remaining provisions of this
agreement, but this unenforceability will not invalidate the same provision in
any other jurisdiction. To the extent permitted by law, the parties waive any
provision of law which renders such provision prohibited or unenforceable in any
respect.
<PAGE>
We are pleased to have you join Cornerstone and look forward to a
mutually successful endeavor.
Sincerely,
CORNERSTONE PROPERTIES, INC.,
a Nevada corporation
By: ,
----------------------------------
Its:
-------------------------
By: ,
----------------------------------
Its:
-------------------------
<PAGE>
CORNERSTONE PROPERTIES
LIMITED PARTNERSHIP, L.P.
a Delaware limited partnership
By: CORNERSTONE PROPERTIES, INC.,
a Nevada corporation
Its: General Partner
By: ,
----------------------------------
Its:
-------------------------
By: ,
----------------------------------
Its:
-------------------------
Read and Agreed:
- ---------------------------
William Wilson III
<PAGE>
EXHIBIT 10.11
[CORNERSTONE PROPERTIES INC. LETTERHEAD]
December 16, 1998
Mr. John S. Moody
126 East 56th Street
New York, New York 10022
Re: Employment
Dear John,
We are pleased to confirm your employment as President and Chief
Executive Officer of Cornerstone Properties Inc. (the "Corporation") and to
confirm your employment by Cornerstone Properties Limited Partnership (the
"Partnership" and together with the Corporation, "Cornerstone").
16. POSITION AND TERM. You will serve as the President and Chief
Executive Officer of the Corporation for a term of three years from the date of
this letter in accordance with the Amended and Restated Bylaws of the
Corporation. You will also serve as an officer and director of one or more
affiliates of Cornerstone as you and the Board may agree from time to time. You
will receive no additional salary compensation for your services in connection
with these affiliates, though Cornerstone may fairly allocate your compensation
among these subsidiaries and the Partnership.
2. COMPENSATION. You will receive an annual salary of at least
$350,000. Your annual salary will be reviewed each year beginning with calendar
year 2000 and may be adjusted upward as the Board of Directors or its
compensation committee may deem appropriate. You will participate in
Cornerstone's executive bonus and incentive programs, including stock option and
restricted stock programs, in a manner comparable to other senior executives of
Cornerstone as from time to time determined by the Board's Compensation
Committee.
3. BENEFITS. You will be entitled to the Partnership's health, life,
disability and other insurance benefits and sick leave as are generally
applicable to its senior executives, and you will be entitled to participate in
all of the Partnership's employee benefit plans in which senior executives are
allowed to participate generally. You will be entitled to five weeks vacation
each year in addition to the Partnership's regular paid holidays.
4. REIMBURSEMENT OF BUSINESS EXPENSES AND TRAVEL. Cornerstone will
reimburse you for your reasonable travel and other business-related expenses
incurred in connection with Cornerstone business and the performance of your
duties under this agreement, including travel, hotel, meals and entertainment.
Reimbursement procedures will be in accordance with the Partnership's policies
as to senior executives.
5. TIME AND OTHER COMMITMENTS. You will devote such time as may
reasonably be required to fulfill your duties under this agreement. It is
expected and agreed that you will spend reasonable amounts of time on
educational, charitable and public service activities, in service on boards of
directors of companies that do not compete with Cornerstone, and in the
management of your personal passive investments. For a period of one year
following the termination of your employment with Cornerstone, you shall not,
either on your own behalf or in the service or on behalf of others, (i) initiate
solicitation of employment of or hire any employee who is employed by the
Partnership at the time of the termination of your employment, (ii) induce an
employee to terminate his or her employment with Cornerstone prior to such
employee's termination with a view to soliciting such employee thereafter. For
the purposes of this paragraph, the general posting or placement of job openings
and descriptions on newspapers, magazines, intranet or internet websites,
bulletin boards, with search agencies or any other form of
<PAGE>
Mr. John S. Moody
December 16, 1998
Page 2
advertisement or announcement not targeted specifically at such employees, or
through such other general method of solicitation will not be deemed to be an
act of initiating solicitation.
6. TERMINATION. Your employment will terminate upon your death or
Permanent Disability. For this purpose your "Permanent Disability" means that by
reason of injury, physical or mental illness or other disability you are unable
to satisfactorily perform your duties as an employee under this agreement, as
determined in the reasonable judgment of the Board based upon competent medical
advice and the Board reasonably determines that your condition has continued for
at least ninety (90) consecutive days and satisfies the definition of "long-term
disability" (or comparable term) as used for the disability insurance policy or
policies in effect with respect to employees of Cornerstone as of the onset of
the condition.
Apart from your death or Permanent Disability, you may be terminated
prior to the end of the three-year term prescribed herein only for Cause.
"Cause" means (1) any intentional act of dishonesty or fraud by you in the
performance of your duties as an employee; (2) any willful failure to carry out
your material duties as assigned by the Board of Directors which continues after
notice and a reasonable opportunity to cure; or (3) you are convicted of or
plead guilty or NOLO CONTENDERE to a felony involving dishonesty or moral
turpitude.
7. MISCELLANEOUS. All notices under this agreement will be in writing
and may be (i) presented personally or by private courier service, (ii) sent by
facsimile transmission, or (iii) sent via a nationally recognized overnight
delivery service (e.g., FedEx, DHL). This agreement will be governed by and
interpreted according to the substantive laws of the State of New York without
regard to New York's conflicts laws principles. In the event of any breach of
the agreement that results in arbitration or litigation between the parties, the
prevailing party shall be entitled to its reasonable attorneys' fees, expert
witness fees and costs of such suit or arbitration (or the enforcement of any
related award or decision). The prevailing party shall be determined, based upon
an assessment of which party's major arguments or positions taken in the
proceedings could fairly be said to have prevailed over the other party's major
arguments or positions on major disputed issues in the court's or arbitrator's
decision.
This agreement is not intended to obviate or modify any provision of
any other agreement between you and the Partnership or the Corporation,
including, without limitation, the employment letter agreement regarding
supplemental pension and other matters, dated October 31, 1995, between you and
the Corporation, and the Retention Agreement dated as of March 28, 1998, between
you and the Partnership, except as otherwise expressly stated. The
unenforceability of all or any part of any provision of this agreement in any
jurisdiction will in that jurisdiction be ineffective to the extent of the
unenforceability without invalidating the remaining provisions of this
agreement, but this unenforceability will not invalidate the same provision in
any other jurisdiction. To the extent permitted by law, the parties waive any
provision of law which renders such provision prohibited or unenforceable in any
respect.
<PAGE>
Mr. John S. Moody
December 16, 1998
Page 3
Please indicate your agreement to the terms of your employment set
forth herein by signing this letter in the space indicated below, whereupon this
letter shall become a binding agreement of the parties.
Sincerely,
CORNERSTONE PROPERTIES INC.,
a Nevada corporation
By: ,
----------------------------------
Its:
-------------------------
By: ,
----------------------------------
Its:
-------------------------
CORNERSTONE PROPERTIES LIMITED
PARTNERSHIP, L.P.
a Delaware limited partnership
By: ,
----------------------------------
Its:
-------------------------
By: ,
----------------------------------
Its:
-------------------------
Read and Agreed:
- -----------------------
John S. Moody
<PAGE>
EXHIBIT 10.13
CORNERSTONE PROPERTY INC.
126 EAST 56TH STREET
NEW YORK, NY 10022
TELEPHONE (212) 605-7100 FACSIMILE (212) 605-7199
[Date]
[Employee]
[Address]
RETENTION AGREEMENT
Dear [Employee]:
Cornerstone Properties Inc., a Nevada corporation (the "COMPANY"),
considers it essential to the best interests of its stockholders to take
reasonable steps to retain key management personnel. Further, the Board of
Directors of the Company (the "BOARD") recognizes that the uncertainty and
questions which may arise among management in the context of a change in control
of the Company could result in the departure or distraction of management
personnel to the detriment of the Company and its stockholders.
The Board has determined, therefore, that appropriate steps should be
taken to reinforce and encourage the continued attention and dedication of
members of the management of the Company and its subsidiaries, including
yourself, to their assigned duties without distraction in the face of
potentially disturbing circumstances arising from any possible change in control
of the Company.
In order to induce you to remain in the employ of the Company, the
Company has determined to enter into this letter agreement (this "AGREEMENT")
which addresses the terms and conditions of your employment in the event of a
change in control of the Company. Capitalized terms which are not otherwise
defined herein shall have the meanings assigned to such terms in Section 6 of
this Agreement.
SECTION 1. SEVERANCE PAYMENTS. In the event of your Involuntary
Termination during the Change in Control Period, the Company shall pay you the
following amounts, in one lump sum cash payment, promptly following your
Involuntary Termination:
(a) the full amount of any earned but unpaid base salary through
the Date of Termination at the rate in effect at the time of the
Notice of Termination;
(b) a payment (calculated on the basis of our Reference Salary)
for all unused vacation time which you may have accrued as of the Date
of Termination;
<PAGE>
(c) a pro rata portion of the annual bonus for the year in which
your involuntary Termination occurs, calculated on the basis of your
target bonus for that year and on the assumption that all performance
targets have been or will be achieved; and
(d) an amount (the "SEVERANCE PAYMENT") equal to three times your
Annual Compensation.
Your right to receive the Severance Payment shall be conditioned upon
your execution of a release in favor of the Company which is in a form
reasonably acceptable to the Company and which is not revoked by you within the
revocation period provided therein (if any). The Severance Payment shall be
reduced by any amount of severance payable under any other plan, arrangement or
agreement under which you are entitled to receive cash severance payments from
the Company.
SECTION 2. BENEFIT CONTINUATION; RETIREMENT BENEFITS.
(a) CONTINUATION. In the event of your Involuntary Termination
during the Change in Control Period, you and your eligible dependents
shall continue to be eligible to participate during the Benefit
Continuation Period in the medical, dental, health, life and other
fringe benefit plans and arrangements applicable to you immediately
prior to your Involuntary Termination on the same terms and conditions
in effect for your and your dependents immediately prior to such
Involuntary Termination.
(b) RETIREMENT BENEFITS. This Agreement and any amounts
payable to you hereunder shall in no way limit or impair the amount of
any tax qualified or nonqualified pension or retirement benefits you
are entitled to receive from the Company under any Company plan or
arrangement in which you participate or under any contract or agreement
with the Company to which you are a party. Any such pension and
retirement benefits shall be in addition to any amounts payable to you
under this Agreement.
SECTION 3. DATE AND NOTICE OF TERMINATION. Any termination of
your employment by the Company or by you during the Change in Control Period
shall be communicated by a notice of termination to the other party hereto (the
"NOTICE OF TERMINATION"). The Notice of Termination shall indicate the specific
termination provision in this Agreement relied upon and shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of your employment under the provision so indicated. The date of
your termination of employment with the Company and its subsidiaries (the "DATE
OF TERMINATION") shall be determined as follows: (1) if your employment is
terminated for Disability, 30 days after a Notice of Termination is given
(provided that you shall not have returned to the full-time performance of your
duties during such 30-day period), (ii) if your employment is terminated by the
Company in an Involuntary Termination, five days after the date the Notice of
Termination is received by you and (iii) if your employment is terminated by the
Company for Cause, the date specified in the Notice of Termination, PROVIDED,
that the events or circumstances cited by the Company as constituting Cause are
not cured by you during the cure period in accordance with the terms hereof. If
the basis for your Involuntary Termination is your resignation for Good Reason,
the Date of Termination shall be ten days after the date your Notice of
Termination is received by the Company, provided that the events or
circumstances cited by you as constituting Good Reason are not cured by the
Company during such period in accordance with the terms hereof. The Date of
Termination for a resignation of employment other than for Good Reason shall be
the date set forth in the applicable notice, which shall be no earlier than ten
days after the date such notice is received by the Company, unless waived by the
Company.
SECTION 4. NO MITIGATION OR OFFSET. You shall not be required
to mitigate the amount of any payment provided for herein by seeking other
employment or otherwise, nor shall the amount of any payment or
23
<PAGE>
benefit provided for herein be reduced by any compensation earned by you as the
result of employment by another employer, except as specifically provided in
clause (ii) of the definition of "Benefit Continuation Period."
SECTION 5. SUCCESSORS; BINDING AGREEMENT.
(a) ASSUMPTION BY SUCCESSOR. The Company will require any
successor (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business or assets of the Company
expressly to assume and to agree to perform its obligations under this Agreement
in the same manner and to the same extent that the Company would be required to
perform such obligations if no such succession had taken place; PROVIDED,
HOWEVER, that no such assumption shall relieve the Company of its obligations
hereunder. As used herein, the "COMPANY" shall mean the Company as hereinbefore
defined and any successor to its business and/or assets as aforesaid which
assumes and agrees to perform its obligations by operation of law or otherwise.
(b) ENFORCEABILITY; BENEFICIARIES. This Agreement shall be
binding upon and inure to the benefit of you (and your personal representatives
and heirs) and the Company and any organization which succeeds to substantially
all of the business or assets of the Company, whether by means of merger,
consolidation, acquisition of all or substantially all of the assets of the
Company or otherwise, including, without limitation, as a result of a Change in
Control or by operation of law. This Agreement shall inure to the benefit of and
be enforceable by your personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If you
should die while any amount would still be payable to you hereunder if you had
continued to live, all such amounts, unless otherwise provided herein, shall be
paid in accordance with the terms of this Agreement to your devisee, legatee or
other designee or, if there is no such designee, to your estate.
SECTION 6. DEFINITIONS. For purposes of this Agreement, the
following capitalized terms have the meanings set forth below:
"ANNUAL COMPENSATION" shall mean the sum of your Reference
Salary and Reference Bonus.
"BENEFIT CONTINUATION PERIOD" means the period beginning on
the Date of Termination and ending on the earlier to occur of (i) the third
anniversary of the Date of Termination and (ii) the date that you and your
dependents are eligible and elect coverage under the plans of a subsequent
employer which provide substantially equivalent or greater benefits to you and
your dependents.
"CAUSE" shall mean (a) your felony conviction, (b) your
willful disclosure of material trade secrets or other material confidential
information related to the business of the Company and its subsidiaries or (c)
your willful and continued failure to substantially perform your duties with the
Company (other than any such failure resulting from your incapacity due to
physical or mental illness or any such actual or anticipated failure resulting
from your resignation for Good Reason) after a written demand for substantial
performance is delivered to you by the Board, which demand specifically
identifies the manner in which the Board believes that you have not
substantially performed your duties, and which performance is not substantially
corrected by you within ten days of receipt of such demand. For purposes of the
previous sentence, no act or failure to act on your part shall be deemed
"willful" unless done, or omitted to be done, by you not in good faith and
without reasonable belief that your action or omission was in the best interest
of the Company.
"CHANGE IN CONTROL" shall mean a change in control of the
Company of a nature that would be required to be reported in response to Item
6(e) of Schedule 14A of Regulation 14A promulgated under the Exchange Act,
whether or not the Company is then subject to such reporting requirement;
PROVIDED, that without limitation, a Change in Control shall be deemed to have
occurred if:
24
<PAGE>
(a) any individual, partnership, firm, corporation,
association, trust, unincorporated organization or other entity or
person, or any syndicate or group deemed to be a person under Section
14(d)(2) of the Exchange Act (other than the Company or any of its
subsidiaries or any trustee or other fiduciary holding securities under
an employee benefit plan of the Company or of any of its subsidiaries),
is or becomes the "beneficial owner" (as defined in Rule 13d-3 of the
General Rules and Regulations under the Exchange Act), directly or
indirectly, of securities of the Company representing 25% or more of
the combined voting power of the Company's then outstanding securities
entitled to vote in the election of directors of the Company; or
(b) during any period of two consecutive years, individuals
who at the beginning of such period constituted the Board and any new
directors, whose election by the Board or nomination for election by
the Company's stockholders was approved by a vote of at least
three-quarters of the directors then still in office who either were
directors at the beginning of the period or whose selection or
nomination for election was previously so approved (but excluding, for
this purpose, any such individual whose initial assumption of office
occurs as a result of an actual or threatened election contest with
respect to the election or removal of directors or other actual or
threatened solicitation of proxies or consents by or on behalf of a
person other than the Board), cease for any reason to constitute a
majority thereof; or
(c) there occurs a reorganization, merger, consolidation or
other corporate transaction involving the Company, in each case with
respect to which the stockholders of the Company immediately prior to
such transaction do not, immediately after such transaction, own more
than 50% of the combined voting power of the Company or other
corporation resulting from such transaction; or
(d) all or substantially all of the assets of the Company are
sold, liquidated or distributed;
PROVIDED, FURTHER, that an event described above shall not be deemed to be a
Change in Control for purposes of this Agreement if the Board has approved such
event prior to either (x) the occurrence of any of the events described in the
foregoing clauses (a) and (b) or (y) the commencement by any person other than
the Company of a tender offer for the Common Stock.
"CHANGE IN CONTROL DATE" shall mean the date on which a Change
in Control occurs.
"CHANGE IN CONTROL PERIOD" shall mean the two-year period
commencing on the Change in Control Date; PROVIDED, HOWEVER, that if your
employment with the Company and its subsidiaries terminates prior to the Change
in Control Date but on or after a Potential Change in Control Date, and it is
reasonably demonstrated that your termination of employment (a) was at the
request of a third party who has taken steps reasonably calculated to effect a
Change in Control or (b) otherwise arose in connection with or in anticipation
of a Change in Control, then the "Change in Control Period" shall mean, as
applied to you, the two-year period beginning on the date immediately prior to
the date of your termination of employment.
"CODE" shall mean the Internal Revenue Code of' 1986, as
amended, and any successor provisions thereto.
"DATE OF TERMINATION" has the meaning assigned thereto in
Section 4.
25
<PAGE>
"DISABILITY" shall mean (a) your incapacity due to physical or
mental illness which causes you to be absent from the full-time performance of
your duties with the Company for six consecutive months and (b) your failure to
return to full-time performance of your duties for the Company within 30 days
after written Notice of Termination due to Disability is given to you. Any
question as to the existence a Disability upon which you and the Company cannot
agree shall be determined by a qualified independent physician selected by you
(or, if your are unable to make such selection, such selection shall be made by
any adult member of your immediate family), and approved by the Company. The
determination of such physician made in writing to the Company and to you shall
be final and conclusive for all purposes hereunder.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934,
as amended, and any successor provisions thereto.
"GOOD REASON" shall mean the occurrence of any of the
following during the Change in Control Period:
(a) A meaningful and detrimental alteration in your position,
titles, or nature or status of responsibilities (including reporting
responsibilities) from those in effect immediately prior to the Change
in Control Date;
(b) A reduction by the Company in your annual base salary as
in effect immediately prior to the Change in Control Date or as the
same may be increased from time to time thereafter; or a reduction in
your target annual bonus (expressed as a percentage of base salary)
below the target in effect for you prior to the Change in Control Date;
(c) The relocation of the office of the Company where you are
employed immediately prior to the Change in Control Date (the "CIC
LOCATION") to a location which is more than 25 miles away from the CIC
Location or the Company's requiring you to be based more than 25 miles
away from the CIC Location (except for required travel on the Company's
business to an extent substantially consistent with your customary
business travel obligations in the ordinary course of business prior to
the Change in Control Date);
(d) The failure by the Company to continue to provide you with
benefits at least as favorable in the aggregate to those enjoyed by you
under the Company's savings, life insurance, medical, health and
accident, disability, and fringe benefit plans and arrangements in
which you were participating immediately prior to the Change in Control
Date; or the failure by the Company to provide you with the number of
paid vacation days to which you are entitled on the basis of years of
service with the Company in accordance with the Company's normal
vacation policy in effect immediately prior to the Change in Control;
(e) The failure of the Company to obtain an agreement from any
successor to assume and agree to perform the Company's obligations
under this Agreement, as contemplated in Section 6(a) hereof,
(f) Any termination of your employment which is not effected
pursuant to the terms of this Agreement; or
(g) A material breach by the Company of the provisions of this
Agreement;
PROVIDED, HOWEVER, that an event described above in clause (a), (b), (d) or (g)
shall not constitute Good Reason unless it is communicated by you to the Company
in writing and is not corrected by the Company in a manner which
26
<PAGE>
is reasonably satisfactory to you (including full retroactive correction with
respect to any monetary matter) within ten days of the Company's receipt of
such written notice from you.
"INVOLUNTARY TERMINATION" shall mean (a) your termination of
employment by the Company and its subsidiaries during the Change in Control
Period other than for Cause or Disability or (b) your resignation of employment
with the Company and its subsidiaries during the Change in Control Period for
Good Reason.
"NOTICE OF TERMINATION" has the meaning assigned thereto in
Section 4.
"POTENTIAL CHANGE IN CONTROL" shall mean the earliest to occur
of (a) the date on which the Company executes an agreement or letter of intent,
the consummation of the transactions described in which would result in the
occurrence of a Change in Control, (b) the date on which the Board approves a
transaction or series of transactions, the consummation of which would result in
a Change in Control, or (c) the date on which a tender offer for the Company's
voting stock is publicly announced, the completion of which would result in a
Change in Control; PROVIDED, that no such event shall be a "Potential Change in
Control" unless it is followed by a Change in Control on or prior to the first
anniversary of the Potential Change in Control Date.
"POTENTIAL CHANGE IN CONTROL DATE" shall mean the date on
which a Potential Change in Control occurs.
"REFERENCE BONUS" shall mean the greatest of (a) the average
of the three annual bonuses paid to you prior to the Date of Termination, (b)
the average of the three annual bonuses paid to you prior to the Change in
Control Date and (c) your target annual bonus under the Company's annual
incentive compensation plan for the year in which the Date of Termination
occurs. If you have been eligible to receive fewer than three bonuses prior to
such Date of Termination or the Change in Control Date, as applicable, the
amounts described in clauses (a) and (b) hereof shall be calculated using such
lesser number of annual bonuses.
"REFERENCE SALARY" shall mean the greater of (a) the annual
rate of your base salary from the Company and its subsidiaries in effect
immediately prior to the date of your Involuntary Termination and (b) the annual
rate of your base salary from the Company and its subsidiaries in effect
immediately prior to the Change in Control Date.
<PAGE>
SECTION 7. TREATMENT OF PARACHUTE PAYMENTS. Notwithstanding
anything in this Agreement to the contrary, if any amounts due to you under this
Agreement and any other plan or program of the Company constitute a "parachute
payment" (as such term is defined in Section 28OG(b)(2) of the Code), and the
amount of the parachute payment, reduced by all federal, state, and local taxes
applicable thereto, including the excise tax imposed pursuant to Section 4999 of
the Code, is less than the amount you would receive if you were paid three times
your "base amount" (as defined Section 28OG(b)(3) of the Code, less $1.00)
reduced by all federal, state and local taxes applicable thereto, then the
aggregate of the amounts constituting the parachute payment shall be reduced to
an amount that will equal three times your base amount less $1.00. The
determination to be made with respect to this paragraph shall be made by a
national accounting firm jointly selected by the executives who have entered
into this Agreement and paid by the Company, and which may be the Company's
independent auditors. The provisions of this Section 7 may be effected only by
reducing amounts payable to you under this Agreement and not by causing you to
forego any amounts payable to you under any other Company plan, program,
arrangement or agreement.
SECTION 8. NOTICE. For the purpose of this Agreement, notices
and all other communications provided for in this Agreement shall be in writing
and shall be deemed to have been duly given when delivered or mailed by United
States registered mail, return receipt requested, postage prepaid, addressed to
27
<PAGE>
the Cornerstone Properties Inc., Tower 56, 126 East 56th Street, New York, NY
10022, Attn: Secretary of the Company, or to you at the address set forth on the
first page of this Agreement or to such other address as either party may have
furnished to the other in writing in accordance herewith, except that notice of
change of address shall be effective only upon receipt.
SECTION 9. MISCELLANEOUS.
(a) AMENDMENTS, WAIVERS, ETC. No provision of this Agreement
may be modified, waived or discharged unless such waiver, modification or
discharge is agreed to in writing. No waiver by either party hereto at any time
of any breach by the other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provisions or conditions at the same or at any
prior or subsequent time. No agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have been made by
either party which are not expressly set forth in this Agreement and this
Agreement shall supersede all prior agreements, negotiations, correspondence,
undertakings and communications of the parties, oral or written, with respect to
the subject matter hereof, PROVIDED, HOWEVER that any employment agreement
between you and the Company shall remain in full force and effect, subject to
the last sentence of Section 1.
(b) VALIDITY. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, which shall remain in full force and
effect.
(c) COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
(d) NO CONTRACT OF EMPLOYMENT.Nothing in this Agreement shall
be construed as giving you any right to be retained in the employ of the Company
or shall affect the terms and conditions of your employment with the Company
prior to the commencement of the Change in Control Period.
(e) WITHHOLDING. Amounts paid to you hereunder shall be
subject to all applicable federal, state and local withholding taxes.
(f) SOURCE OF PAYMENTS. All payments provided under this
Agreement shall be paid in cash from the general funds of the Company, and no
special or separate fund shall be pal established, and no other segregation of
assets made, to assure payment. You will have no right, title or interest
whatsoever in or to any investments which the Company may make to aid it in
meeting its obligations hereunder. To the extent that any person acquires a
right to receive payments from the Company hereunder, such night shall be no
greater than the right of an unsecured creditor of the Company.
(g) HEADINGS. The headings contained in this Agreement are
intended solely for convenience of reference and shall not affect the rights of
the parties to this Agreement.
If this letter sets forth our agreement on the subject matter hereof,
kindly sign and return to the Company the enclosed copy of this letter which
will then constitute our agreement on this subject.
Sincerely,
CORNERSTONE PROPERTIES INC.
28
<PAGE>
BY:
----------------------------------------
NAME: Rodney C. Dimock
TITLE: President & Chief Operating Officer
BY:
----------------------------------------
NAME: Thomas P. Loftus
TITLE: Chief Administrative Officer
Agreed to as of this ___ day of _______, 1998
- -----------------------------------
[Employee]
29
<PAGE>
Exhibit 10.17
AMENDED AND RESTATED
REGISTRATION RIGHTS AND VOTING AGREEMENT
THIS AMENDED AND RESTATED REGISTRATION RIGHTS AND VOTING
AGREEMENT (this "Agreement"), is made and entered into as of this 16th day of
December, 1998, by and between CORNERSTONE PROPERTIES INC., a Nevada corporation
(the "Company"), DUTCH INSTITUTIONAL HOLDING COMPANY, INC., a Delaware
corporation ("DIHC"), and STICHTING PENSIOENFONDS VOOR DE GEZONDHEID,
GEESTELIJKE EN MAATSCHAPPELIJKE BELANGEN, a stichting formed according to the
laws of The Netherlands ("PGGM").
W I T N E S S E T H:
--------------------
WHEREAS, pursuant to the terms of that certain Stock Purchase
Agreement (the "Purchase Agreement"), dated as of August 18, 1997, between the
Company and DIHC, and that certain Loan Purchase Agreement (the "Loan
Agreement") dated as of August 18, 1997, between the Company and PGGM, the
Company acquired certain shares of capital stock, partnership interests and
loans from DIHC and PGGM and issued shares of its Common Stock (as defined
below) to DIHC and PGGM; and
WHEREAS, in connection with the Purchase Agreement, the Company,
DIHC and PGGM entered into a Registration Rights and Voting Agreement, dated as
of October 27, 1997 (the "Registration Rights Agreement"), which provided (I)
for the registration under the Securities Act of 1933, as amended, of certain
shares of Common Stock (II) for the nomination and election of certain persons
to serve on the Board of Directors of the Company, (III) for certain
restrictions regarding the transfer of shares of Common Stock and (IV) for
certain covenants regarding the operation of the Company's business; and
WHEREAS, pursuant to the terms of that certain Stock Purchase
Agreement (the "Stock Purchase Agreement"), dated as of June 22, 1998, as
amended, between the Company and PGGM, the Company is issuing additional shares
of its Common Stock to PGGM; and
WHEREAS, in connection with the Stock Purchase Agreement, the
parties desire to amend and restate the Registration Rights Agreement on the
terms set forth herein;
NOW, THEREFORE, the parties agree as follows:
1. CERTAIN OTHER DEFINITIONS. Capitalized terms not otherwise defined
herein shall
<PAGE>
have the meanings ascribed to them in the Purchase Agreement. The capitalized
terms set forth below (in their singular and plural forms as applicable) shall
have the following meanings:
1.1 "AFFILIATE" means, with respect to any specified Person, any other
Person that directly, or indirectly through one or more intermediaries,
controls, is controlled by, or is under common control with, such specified
Person.
1.2 "BUSINESS COMBINATION" means any one of the following
transactions:
(i) Any merger or consolidation of the Company or any subsidiary
thereof with any other Person (other than the Company);
(ii) Any sale, lease, exchange, mortgage, pledge, transfer or
other disposition by the Company (in one transaction or a series of
transactions) to or with any Person of all or a substantial portion of
the assets of the Company and its subsidiaries taken as a whole;
(iii) The adoption of any plan or proposal for the liquidation or
dissolution of the Company proposed by or on behalf of any Holder or its
Affiliates that together own 25% or more of the issued and outstanding
Common Stock; or
(iv) Any reclassification of securities (including any reverse
stock split), recapitalization of the Company, or any merger or
consolidation of the Company with any subsidiary thereof or any other
transaction to which the Company is a party which has the effect,
directly or indirectly, of increasing the Holder Interest of such Holder
or its Affiliates that together own 25% or more of the issued and
outstanding Common Stock (whether or not with or into or otherwise
involving such Holder or any of its Affiliates).
1.3 "CLOSING DATE" has the meaning specified in Section 2.04 of the
Purchase Agreement.
1.4 "COMMISSION" shall mean the United States Securities and Exchange
Commission and any successor federal agency having similar powers.
1.5 "COMMON STOCK" shall mean the common stock without par value of
the Company.
1.6 "CONTROL" (including the terms "CONTROLLED BY" and "UNDER COMMON
CONTROL WITH"), with respect to the relationship between or among two or more
Persons, means the possession, directly or indirectly or as trustee, personal
representative or executor, of the power to direct or cause the direction of the
affairs or management of a Person, whether through the ownership of voting
securities, as trustee, personal representative or executor, by contract or
otherwise, including, without limitation, the ownership, directly or indirectly,
of securities having the power to elect a majority of the board of directors or
similar body governing the
<PAGE>
affairs of such Person.
1.7 "CURRENT MARKET PRICE" of each share of Common Stock shall mean
(I) the average of the closing prices of the Common Stock for the five New York
Stock Exchange trading days immediately preceding the day in question as
reported by THE WALL STREET JOURNAL under the New York Stock Exchange Composite
Transactions quotation system (or under any successor quotation system) or, if
the Common Stock is no longer traded on the New York Stock Exchange under the
quotation system under which such closing prices are reported or, if THE WALL
STREET JOURNAL no longer reports such closing prices, such closing prices as
reported by a newspaper or trade journal selected by the Company or (II) if no
such closing prices are available on such dates, the fair market value as
determined in good faith by the Board of Directors of the Company.
1.8 "DEMAND OFFERING" shall mean a offering required to be effected
pursuant to Section 3.3 hereof.
1.9 "DEMAND PROSPECTUS" shall mean the prospectus included in the
Shelf Registration Statement, including any preliminary prospectus, and any
amendment or supplement thereto, including any supplement relating to the terms
of the offering of any portion of the Demand Offering Securities covered by the
Demand Prospectus, and in each case including all material incorporated by
reference therein.
1.10 "DEMAND OFFERING SECURITIES" shall mean the Shares held by DIHC
and PGGM or any subsequent Holder to whom this Agreement has, or rights to cause
the Company to register Shares in accordance with Section 3 have, been assigned
pursuant to Section 9, excluding (I) Shares that have been disposed of under the
Shelf Registration Statement or any other effective registration statement, (II)
Shares sold or otherwise transferred pursuant to Rule 144 under the Securities
Act, and (III) those Shares held by any single Holder if such Holder holds less
than 1% of the issued and outstanding shares of Common Stock and all of such
Shares are eligible for sale pursuant to Rule 144 under the Securities Act and
all of such Holder's Shares could be sold by such Holder in a single transaction
under Rule 144 under the Securities Act.
1.11 "DEMAND OFFERING EXPENSES" shall mean any and all expenses
incurred by the Company in connection with Demand Offerings, including, without
limitation: (I) all Commission, stock exchange and National Association of
Securities Dealers, Inc. ("NASD") registration and filing fees, (II) all fees
and expenses incurred in connection with compliance with state securities or
"blue sky" laws (including reasonable fees and disbursements of counsel in
connection with qualification of any of the Demand Offering Securities under any
state securities or blue sky laws and the preparation of a blue sky memorandum)
and compliance with the rules of the NASD, (III) all expenses of any Persons in
preparing or assisting in preparing, word processing, printing and distributing
any Demand Prospectus, certificates and other documents relating to the
performance of and compliance with this Agreement, (IV) all fees and expenses
incurred in connection with the listing, if any, of any of the Demand Offering
Securities on any U.S. securities exchange or exchanges, and (V) the fees and
disbursements of counsel for
<PAGE>
the Company and of the independent public accountants of the Company, including
the expenses of any special audits or "cold comfort" letters required by or
incident to such performance and compliance. Demand Offering Expenses shall
specifically exclude Selling Expenses and the fees and expenses of counsel
representing the Holders, all of which shall be borne by the Holders in all
cases.
1.12 "DEMAND OFFERING REQUEST" shall have the meaning set forth in
Section 3.3(a) hereof.
1.13 "DIHC" shall have the meaning set forth in the Preamble.
1.14 "ENCUMBRANCE" means any security interest, pledge, mortgage, lien
(including, without limitation, environmental and tax liens), charge,
encumbrance, adverse claim, preferential arrangement, or restriction of any
kind, including, without limitation, any restriction on the use, voting,
transfer, receipt of income or other exercise of any attributes of ownership.
1.15 "EQUITY SECURITY" means any (I) Common Stock, (II) securities of
the Company convertible into or exchangeable for Common Stock, and (III)
options, rights, warrants and similar securities issued by the Company to
acquire Common Stock.
1.16 "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended from time to time.
1.17 "HOLDER" shall mean DIHC and PGGM (and their respective
transferees of Shares as permitted by this Agreement to whom this Agreement has,
or rights to cause the Company to register Shares in accordance with Section 3
have, been assigned pursuant to Section 9).
1.18 "HOLDER INTEREST" means, with respect to any Holder, the
percentage of issued and outstanding Common Stock represented by the shares of
Common Stock owned by such Holder and its Affiliates; PROVIDED, HOWEVER, that
shares of Common Stock indirectly owned through an intermediary (I) of which
such Holder owns less than 1% of the issued and outstanding common shares or
(II) in connection with which Holder has no right to direct the vote of shares
of the Company shall not be included in the Holder Interest of such Holder.
1.19 "INDEBTEDNESS" means, with respect to any Person, (a) all
indebtedness of such Person, whether or not contingent, for borrowed money, (b)
all obligations of such Person for the deferred purchase price of property or
services, (c) all obligations of such Person evidenced by notes, bonds,
debentures or other similar instruments, (d) all indebtedness created or arising
under any conditional sale or other title retention agreement with respect to
property acquired by such Person (even though the rights and remedies of the
seller or lender under such agreement in the event of default are limited to
repossession or sale of such property), (e) all obligations of such Person as
lessee under leases that have been or should be, in accordance with U.S. GAAP,
recorded as capital leases, (f) all obligations, contingent or otherwise, of
such
<PAGE>
Person under acceptance, letter of credit or similar facilities, (g) all
obligations of such Person to purchase, redeem, retire, defease or otherwise
acquire for value any capital stock of such Person or any warrants, rights or
options to acquire such capital stock, valued, in the case of redeemable
preferred stock, at the greater of its voluntary or involuntary liquidation
preference plus accrued and unpaid dividends, (h) the greater of (I) the
principal amount and (II) the redemption value of any perpetual preferred stock
issued by such Person, (i) all Indebtedness of others referred to in clauses (a)
through (f) above guaranteed directly or indirectly in any manner by such
Person, or in effect guaranteed directly or indirectly by such Person through an
agreement (I) to pay or purchase such Indebtedness or to advance or supply funds
for the payment or purchase of such Indebtedness, (II) to purchase, sell or
lease (as lessee or lessor) property, or to purchase or sell services, primarily
for the purpose of enabling the debtor to make payment of such Indebtedness or
to assure the holder of such Indebtedness against loss, (III) to supply funds to
or in any other manner invest in the debtor (including any agreement to pay for
property or services irrespective of whether such property is received or such
services are rendered) or (IV) otherwise to assure a creditor against loss, and
(j) all Indebtedness referred to in clauses (a) through (f) above secured by (or
for which the holder of such Indebtedness has an existing right, contingent or
otherwise, to be secured by) any Encumbrance on property (including, without
limitation, accounts and contract rights) owned by such Person, even though such
Person has not assumed or become liable for the payment of such Indebtedness.
1.20 "INCUMBENT DIRECTORS" shall mean (I) all of the individuals
constituting the board of directors of the Company on the date hereof, (II) all
individuals hereafter designated as nominees to the board of directors by the
New York State Teachers' Retirement System pursuant to a letter agreement dated
November 22, 1996, (III) all individuals hereafter designated as nominees to the
board of directors by Hexalon Real Estate, Inc. pursuant to a letter agreement
dated November 7, 1996, (IV) one individual at any time hereafter designated by
Deutsche Bank AG as a nominee to the board of directors, and (V) Messrs. William
Wilson III, Donald G. Fisher and Randall A. Hack as nominees to the board of
directors pursuant to an agreement dated as of June 22, 1998, as amended.
1.21 "INITIAL PERCENTAGE" means the percentage of issued and
outstanding Common Stock represented immediately after the Closing by the shares
issued pursuant to the Purchase Agreement and the Loan Agreement.
1.22 "LEVERAGE RATIO" shall mean the ratio of the Company's
Indebtedness to the Company's Total Market Capitalization.
1.23 "MAXIMUM NUMBER" shall having the meaning set forth in Section
3.3(e) hereof.
1.24 "PERMITTED TRANSFEREE" means any (I) mutual fund company, pension
fund, insurance company, investment company, any state, city, or county, or any
agency or instrumentality of a state, city, or county, or any state university
or state college, and any retirement system for the benefit of employees of any
of the foregoing, any religious or
<PAGE>
educational organization or other passive institutional investor or (II) any
non-U.S. Person (as defined in Section 9.02 of the Charter Amendment) that is
not controlled by U.S. Persons (as defined in the Charter Amendment).
1.25 "PERSON" means any individual, partnership, firm, corporation,
association, trust, unincorporated organization or other entity, as well as any
syndicate or group that would be deemed to be a person under Section 13(d)(3) of
the Exchange Act.
1.26 "PGGM" shall have the meaning set forth in the Preamble.
1.27 "PIGGYBACK REGISTRATION" shall have the meaning set forth in
Section 3.6(a) hereof.
1.28 "PIGGYBACK REGISTRATION REQUEST" shall have the meaning set forth
in Section 3.6(a) hereof.
1.29 "PUBLIC OFFERING" means a public offering of Common Stock pursuant
an effective registration statement under the Securities Act.
1.30 The terms "REGISTER", "REGISTERED" and "REGISTRATION" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act and the declaration or ordering of the
effectiveness of such registration statement by the Commission.
1.31 "SECURITIES ACT" means the Securities Act of 1933, as amended.
1.32 "SELLING EXPENSES" shall mean all underwriting discounts and
selling commissions and transfer taxes applicable to the sale of Shelf
Registrable Securities or Demand Offering Securities and disbursements of
underwriters.
1.33 "SHARES" shall mean (a) the shares of Common Stock issued
pursuant to the Purchase Agreement, the Loan Agreement and the Stock Purchase
Agreement and (b) shares of Common Stock or any other securities which are
hereafter issued with respect to the shares referred to in Section 1.33(a) by
way of conversion, exchange, reclassification, dividend or distribution, whether
or not such securities have been offered and sold to the public.
1.34 "SHELF PROSPECTUS" shall mean the prospectus included in the
Shelf Registration Statement, including any preliminary prospectus, and any
amendment or supplement thereto, including any supplement relating to the terms
of the offering of any portion of the Shelf Registrable Securities covered by
the Shelf Registration Statement, and in each case including all material
incorporated by reference therein.
1.35 "SHELF REGISTRATION" shall mean the registration required to be
effected pursuant to Section 3.1 hereof.
<PAGE>
1.36 "SHELF REGISTRABLE SECURITIES" shall mean the Shares held by DIHC
and PGGM or any subsequent Holder to whom this Agreement has, or rights to cause
the Company to register Shares in accordance with Section 3 have, been assigned
pursuant to Section 9, excluding (I) Shares that have been disposed of under the
Shelf Registration Statement or any other effective registration statement, (II)
Shares sold or otherwise transferred pursuant to Rule 144 under the Securities
Act, and (III) those Shares held by any single Holder if such Holder holds less
than 1% of the issued and outstanding shares of Common Stock and all of such
Shares are eligible for sale pursuant to Rule 144 under the Securities Act and
all of such Holder's Shares could be sold by such Holder in a single transaction
under Rule 144 under the Securities Act.
1.37 "SHELF REGISTRATION EXPENSES" shall mean any and all expenses
incident to performance of or compliance with this Agreement, including, without
limitation: (I) all Commission, stock exchange and NASD registration and filing
fees, (II) all fees and expenses incurred in connection with compliance with
state securities or "blue sky" laws (including reasonable fees and disbursements
of counsel in connection with qualification of any of the Shelf Registrable
Securities under any state securities or blue sky laws and the preparation of a
blue sky memorandum) and compliance with the rules of the NASD, (III) all
expenses of any Persons in preparing or assisting in preparing, word processing,
printing and distributing the Shelf Registration Statement, any Shelf
Prospectus, certificates and other documents relating to the performance of and
compliance with this Agreement, (IV) all fees and expenses incurred in
connection with the listing, if any, of any of the Shelf Registrable Securities
on any securities exchange or exchanges, and (V) the fees and disbursements of
counsel for the Company and of the independent public accountants of the
Company, including the expenses of any special audits or "cold comfort" letters
required by or incident to such performance and compliance. Shelf Registration
Expenses shall specifically exclude Selling Expenses and the fees and
disbursements of counsel representing the Holders, all of which shall be borne
by the Holders in all cases.
1.38 "SHELF REGISTRATION NOTICE" shall have the meaning set forth in
Section 3.2(b) hereof.
1.39 "SHELF REGISTRATION STATEMENT" shall mean each registration
statement of the Company (and any other entity required to be a registrant with
respect to such registration statement pursuant to the requirements of the
Securities Act) that covers all of the Shelf Registrable Securities to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act, or any similar rule that may be adopted by the Commission, and
all amendments (including post-effective amendments) to such registration
statement, and all exhibits thereto and materials incorporated by reference
therein.
1.40 "STANDSTILL PERIOD" means, with respect to any Holder, a period
of time commencing on the Closing Date and terminating on October 27, 2000 (the
date three years after the Closing Date).
<PAGE>
1.41 "TOTAL MARKET CAPITALIZATION" shall mean the sum of (I) the
Company's total Indebtedness, plus (II) the product of (x) the number of issued
and outstanding shares of Common Stock, PLUS the number of shares of Common
Stock issuable upon conversion of issued and outstanding preferred stock (other
than convertible preferred stock subject to redemption at the option of the
holder) and issued and outstanding Units TIMES (y) the Current Market Price.
1.42 "U.S. GAAP" means United States generally accepted accounting
principles and practices in effect from time to time applied consistently
throughout the periods involved.
1.43 "UNITS" means units of limited partnership in Cornerstone
Properties Limited Partnership, a Delaware limited partnership.
2. RESTRICTIONS ON TRANSFER.
2.1 REPRESENTATIONS AND WARRANTIES OF PGGM. (a) PGGM and DIHC hereby
represent, acknowledge, covenant and agree as follows: (I) the Shares are being
acquired for PGGM's and DIHC's own account for investment and not with a view to
any distribution or public offering within the meaning of the Securities Act or
any state securities law; (II) the Shares have not been registered under the
Securities Act or any state securities law; (III) PGGM and DIHC is each an
"accredited investor" within the meaning of Rule 501 promulgated by the
Commission pursuant to the Securities Act; (IV) PGGM and DIHC have been
furnished with all information that PGGM or DIHC has requested for purposes of
evaluating the Company and each has had an opportunity to ask questions of and
receive answers from the Company regarding its business, assets, results of
operations, and financial condition; and (V) PGGM and DIHC will not sell or
otherwise transfer any of the Shares except upon the terms and conditions
specified herein.
2.2 LEGENDS. Except as provided in Section 2.4, each certificate
representing the Shares issued to PGGM and DIHC or transferred to a subsequent
Holder pursuant to Section 2.3 shall include, in addition to the legends
relating to provisions of the Company's articles of incorporation, legends in
substantially the following form, PROVIDED that the first such legend shall not
be required if such transfer is being made in connection with a sale that is (I)
pursuant to a Public Offering or (II) exempt from registration pursuant to Rule
144 under the Securities Act or if the opinion of counsel referred to in Section
2.3 is to the further effect that such legend is not required in order to ensure
compliance with the Securities Act; PROVIDED FURTHER, that the second such
legend shall not be required if Sections 7.6 and 8 hereof do not apply to such
subsequent Holder:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE
SECURITIES ACT AND MAY NOT BE SOLD OR TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION OR AN
<PAGE>
EXEMPTION THEREFROM.
SUCH SHARES MAY BE TRANSFERRED ONLY IN COMPLIANCE WITH THE
CONDITIONS SPECIFIED IN THE AMENDED AND RESTATED
REGISTRATION RIGHTS AND VOTING AGREEMENT DATED AS OF
DECEMBER 16, 1998, AMONG THE ISSUER AND THE OTHER
PARTY(IES) NAMED THEREIN, A COMPLETE AND CORRECT COPY OF
WHICH IS AVAILABLE FOR INSPECTION AT THE PRINCIPAL OFFICE
OF THE ISSUER AND WILL BE FURNISHED TO THE HOLDER HEREOF
UPON WRITTEN REQUEST AND WITHOUT CHARGE.
2.3 NOTICE OF TRANSFER. Prior to any proposed assignment, transfer or
sale of any Shares, the Holder of such Shares shall give written notice to the
Company of Holder's intention to effect such assignment, transfer or sale, which
notice shall set forth the date of such proposed assignment, transfer or sale.
Holder shall also furnish to the Company a written agreement by the transferee
that it is taking and holding the same subject to the terms and conditions
specified in this Agreement and, except in transfers pursuant to a Public
Offering or under Rule 144 or Regulation S under the Securities Act, a written
opinion of Holder's counsel, in form reasonably satisfactory to the Company, to
the effect that the proposed transfer may be effected without registration under
the Securities Act.
2.4 TERMINATION OF RESTRICTIONS. The restrictions set forth in this
Section 2 shall terminate and cease to be effective with respect to any of the
Shares (I) upon the sale of any such Shares which has been registered under the
Securities Act or is made pursuant to Rule 144 under the Securities Act or (II)
upon receipt by the Company of an opinion of counsel, which counsel and which
opinion are reasonably satisfactory to the Company, to the effect that
compliance with such restrictions is not necessary in order to comply with the
Securities Act with respect to the sale of the Shares. The restrictions with
respect to a Holder set forth in Sections 7.5 and 8 hereof shall terminate upon
the end of the Standstill Period. Whenever such restrictions shall so terminate,
the Holder of such Shares shall be entitled to receive from the Company, without
expense (other than transfer taxes, if any), certificates for such Shares not
bearing the respective legends set forth in Section 2.2.
3. REGISTRATION UNDER SECURITIES ACT.
3.1 SHELF REGISTRATION.
(a) Within 20 days after the date hereof and upon the request of PGGM,
the Company will use its commercially reasonable efforts to cause to be filed a
Shelf Registration Statement, which, in accordance with Rule 429 under the
Securities Act, shall include a form of Shelf Prospectus for use with respect to
the Shelf Registrable Securities included in the
<PAGE>
Registration Statement on Form S-3 (Registration No. 333-47149) filed by the
Company with the Commission on March 2, 1997, providing for the sale by the
Holders of all of the Shelf Registrable Securities in accordance with the terms
hereof and will use its commercially reasonable efforts to cause such Shelf
Registration Statement to be declared effective by the Commission as soon as
practicable thereafter. The Company agrees to use its commercially reasonable
efforts to keep the Shelf Registration Statement with respect to the Shelf
Registrable Securities continuously effective so long as Holder holds Shelf
Registrable Securities. Subject to Section 3.2(b) and Section 3.2(i), the
Company further agrees to amend the Shelf Registration Statement if and as
required by the rules, regulations or instructions applicable to the
registration form used by the Company for such Shelf Registration Statement or
by the Securities Act or any rules and regulations thereunder; PROVIDED,
HOWEVER, that the Company shall not be deemed to have used its commercially
reasonable efforts to keep the Shelf Registration Statement effective during the
applicable period if it voluntarily takes any action that would result in the
Holders not being able to sell Shelf Registrable Securities covered thereby
during that period, unless such action is required under applicable law or the
Company has filed a post-effective amendment to the Shelf Registration Statement
and the Commission has not declared it effective or except as otherwise
permitted by the last six sentences of Section 3.2(b). The Holders will provide
information reasonably requested by the Company in connection with the Shelf
Registration Statement as promptly as practicable after receipt of such request.
The "Plan of Distribution" section of the Shelf Registration Statement shall
permit negotiated purchases, secondary distributions, block trades, ordinary
brokerage transactions or a combination of such methods of sale, PROVIDED,
HOWEVER, that the Company's obligations under Sections 3.1 and 3.2 hereof shall
not include participation in underwritten offerings or other organized
distributions of securities, which obligations are limited to registrations
under Section 3.3 and 3.6 hereof.
(b) EXPENSES. The Company shall pay all Shelf Registration Expenses in
connection with the registration pursuant to Section 3.1(a). The Holders shall
pay all Selling Expenses and the fees and disbursements of counsel representing
the Holders, relating to the sale or disposition of such Shelf Registrable
Securities pursuant to the Shelf Registration Statement.
3.2 SHELF REGISTRATION PROCEDURES. In connection with the obligations
of the Company with respect to the Shelf Registration Statement contemplated by
Section 3.1 hereof, the Company shall:
(a) prepare and file with the Commission, within the time period set
forth in Section 3.1(a) hereof, the Shelf Registration Statement, which Shelf
Registration Statement shall comply as to form in all material respects with the
requirements of the applicable form and include all financial statements
required by the Commission to be filed therewith;
(b) subject to the last six sentences of this Section 3.2(b) and Section
3.2(i) hereof, (I) prepare and file with the Commission such amendments to such
Shelf Registration Statement as may be necessary to keep such Shelf Registration
Statement effective throughout the applicable period; (II) cause the Shelf
Prospectus to be amended or supplemented as required and to be filed as required
by Rule 424 or any similar rule that may be adopted under the
<PAGE>
Securities Act; and (III) respond as promptly as practicable to any comments
received from the Commission with respect to the Shelf Registration Statement or
any amendment thereto. Notwithstanding anything to the contrary contained
herein, the Company shall not be required to take any of the actions described
in clauses (i), (ii) or (iii) in this Section 3.2(b), Section 3.2(d) or Section
3.2(i) with respect to the Shelf Registrable Securities (x) to the extent that
(I) in the reasonable opinion of the Company (A) securities laws applicable to
such sale would require the Company to disclose material non-public information
("Non-Public Information") and (B) the disclosure of such Non-Public Information
would materially adversely affect the Company; (II) such sale would occur during
the measurement period for determining the amount of Common Stock, or the amount
of any other consideration the amount of which will be based on the price of the
Common Stock, in connection with the acquisition of a business or assets by the
Company (a "Measurement Period"); OR (III) the Company is contemplating an
underwritten Public Offering of its securities and in the reasonable opinion of
the underwriters such sale would interfere materially with such Public Offering
by the Company (a "Financing Period"); and the Company delivers written notice
to the Holders to the effect that the Holders may not make offers or sales under
the Shelf Registration Statement for a period not to exceed 45 days from the
date of such notice; PROVIDED, HOWEVER, that the Company may deliver only four
such notices under this Section 3.2(b) and Section 3.4(a) within any
twelve-month period, PROVIDED, FURTHER, that the Company may deliver only two
such notices under this Section 3.2(b) and Section 3.4(a) within the
twelve-month period immediately following the expiration of the six-month period
referred to in Section 3.3(f)(i) hereof and (y) unless and until the Company has
received a written notice (a "Shelf Registration Notice") from any Holder that
such Holder intends to make offers or sales under the Shelf Registration
Statement as specified in such Shelf Registration Notice; PROVIDED, HOWEVER,
that the Company shall have ten business days to prepare and file any such
amendment or supplement after receipt of the Shelf Registration Notice. The
Measurement Period and Financing Period are collectively referred to herein as
the "Restricted Period." In the event the sale by the Holders of Shelf
Registrable Securities is deferred because of the existence of Non-Public
Information, the Company will notify the Holders promptly upon such Non-Public
Information being included by the Company in a filing with the Commission, being
otherwise disclosed to the public (other than through the actions of any
Holder), or ceasing to be material to the Company, and upon such notice being
given by the Company, the Holders shall again be entitled to sell Shelf
Registrable Securities as provided herein. In the event the sale by the Holders
of Shelf Registrable Securities is deferred because it is proposed to be made
during a Restricted Period, the Company shall specify, in notifying the Holders
of the deferral of its sale, when the Restricted Period will end, at which time
the Holders shall again be entitled to sell Shelf Registrable Securities as
provided herein. If the Restricted Period is thereafter changed, the Company
will promptly notify the Holders of such change and upon the end of the
Restricted Period as so changed, the Holders will again be entitled to sell
Shelf Registrable Securities as provided herein. If an agreement to which such
Restricted Period relates is terminated prior to the end of the Restricted
Period, the deferral period hereunder shall end immediately and the Company
shall promptly notify the Holders of the end of the deferral period;
(c) promptly furnish the Holders after a Holder has delivered a Shelf
<PAGE>
Registration Notice to the Company, without charge, as many copies of each Shelf
Prospectus and any amendment or supplement thereto in order to facilitate the
public sale or other disposition of the Shelf Registrable Securities; the
Company consents to the use of the Shelf Prospectus and any amendment or
supplement thereto by the Holders of Shelf Registrable Securities in connection
with the offering and sale of the Shelf Registrable Securities covered by the
Shelf Prospectus or amendment or supplement thereto;
(d) use its commercially reasonable efforts to register or qualify the
Shelf Registrable Securities by the time the Shelf Registration Statement is
declared effective by the Commission under all applicable state securities or
blue sky laws of such jurisdictions in the United States and its territories and
possessions as the Holders shall reasonably request in writing, keep each such
registration or qualification effective during the period such Shelf
Registration Statement is required to be kept effective or during the period
offers or sales are being made by the Holders after a Holder has delivered a
Shelf Registration Notice to the Company, whichever is shorter; PROVIDED,
HOWEVER, that in connection therewith, the Company shall not be required to (I)
qualify as a foreign corporation to do business or to register as a broker or
dealer in any such jurisdiction where it would not otherwise be required to
qualify or register but for this Section 3.2(d), (II) subject itself to taxation
in any such jurisdiction, or (III) file a general consent to service of process
in any such jurisdiction;
(e) notify the Holders promptly and, if requested by a Holder, confirm
in writing, (I) when the Shelf Registration Statement and any post-effective
amendments thereto have become effective, (ii) when any amendment or supplement
to the Shelf Prospectus has been filed with the Commission, (III) of the
issuance by the Commission or any state securities authority of any stop order
suspending the effectiveness of the Shelf Registration Statement or any part
thereof or the initiation of any proceedings for that purpose, (IV) if the
Company receives any notification with respect to the suspension of the
qualification of the Shelf Registrable Securities for offer or sale in any
jurisdiction or the initiation of any proceeding for such purpose, and (V) of
the happening of any event during the period the Shelf Registration Statement is
effective as a result of which (A) such Shelf Registration Statement contains
any untrue statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading or (B) the Shelf Prospectus as then amended or supplemented contains
any untrue statement of a material fact or omits to state any material fact
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading;
(f) use its reasonable best efforts to obtain the withdrawal of any
order suspending the effectiveness of the Shelf Registration Statement or any
part thereof as promptly as possible;
(g) promptly furnish to the Holders after a Holder has delivered a Shelf
Registration Notice to the Company, without charge, at least one conformed copy
of the Shelf Registration Statement and any post-effective amendment thereto
(without documents incorporated therein by reference or exhibits thereto, unless
requested);
<PAGE>
(h) cooperate with the Holders to facilitate the timely preparation and
delivery of certificates representing Shelf Registrable Securities to be sold
and not bearing any Securities Act legend; and enable certificates for such
Shelf Registrable Securities to be issued for such numbers of shares as the
Holders may reasonably request at least two business days prior to any sale of
Shelf Registrable Securities;
(i) subject to the last six sentences of Section 3.2(b) hereof, upon the
occurrence of any event contemplated by clause (v) of Section 3.2(e) hereof, use
its reasonable best efforts promptly to prepare and file an amendment or a
supplement to the Shelf Prospectus or any document incorporated therein by
reference or prepare, file and obtain effectiveness of a post-effective
amendment to the Shelf Registration Statement, or file any other required
document, in any such case to the extent necessary so that, as thereafter
delivered to the purchasers of the Shelf Registrable Securities, such Shelf
Prospectus as then amended or supplemented will not contain any untrue statement
of a material fact or omit to state any material fact necessary in order to make
the statements therein, in the light of the circumstances under which they are
made, not misleading;
(j) make available for inspection by the Holders after a Holder has
provided a Shelf Registration Notice to the Company and any counsel, accountants
or other representatives retained by the Holders all financial and other
records, material corporate documents and properties of the Company and cause
the officers, directors and employees of the Company to supply all such material
records, documents or information reasonably requested by the Holders, counsel,
accountants or representatives in connection with the Shelf Registration
Statement; PROVIDED, HOWEVER, that such records, documents or information which
the Company determines in good faith to be confidential and notifies the
Holders, counsel, accountants or representatives in writing that such records,
documents or information are confidential shall not be disclosed by the Holders,
counsel, accountants or representatives unless (I) such disclosure is ordered
pursuant to a subpoena or other order from a court of competent jurisdiction, or
(II) such records, documents or information become generally available to the
public other than through a breach of this Agreement;
(k) a reasonable time prior to the filing of the Shelf Registration
Statement or any amendment thereto, or any Shelf Prospectus or any amendment or
supplement thereto, provide copies of such document (not including any documents
incorporated by reference therein unless requested) to the Holders; and
(l) use its reasonable best efforts to cause all Shelf Registrable
Securities to be listed on the New York Stock Exchange from and after the time
the Shelf Registration Statement is declared effective.
The Company may require the Holders to furnish to the Company in writing
such information regarding the proposed distribution by the Holders as the
Company may from time to time reasonably request in writing.
<PAGE>
In connection with and as a condition to the Company's obligations with
respect to the Shelf Registration Statement pursuant to Section 3.1 hereof and
this Section 3.2, the Holders covenant and agree that (I) they will not offer or
sell any Shelf Registrable Securities under the Shelf Registration Statement
until a Holder has provided a Shelf Registration Notice pursuant to Section
3.2(b) and have received copies of the Shelf Prospectus as then amended or
supplemented as contemplated by Section 3.2(c) and notice from the Company that
the Shelf Registration Statement and any post-effective amendments thereto have
become effective as contemplated by Section 3.2(e); (II) upon receipt of any
notice from the Company contemplated by Section 3.2(b) or Section 3.2(e) (in
respect of the occurrence of an event contemplated therein), the Holders shall
not offer or sell any Shelf Registrable Securities pursuant to the Shelf
Registration Statement until the Holders receive copies of the supplemented or
amended Shelf Prospectus contemplated by Section 3.2(i) hereof and receive
notice that any post-effective amendment has become effective, and, if so
directed by the Company, the Holders will deliver to the Company (at the expense
of the Company) all copies in its possession, other than permanent file copies
then in the Holders' possession, of the Shelf Prospectus as amended or
supplemented at the time of receipt of such notice; (III) upon the expiration of
60 days after the first date on which offers or sales can be made pursuant to
clause (i) above, the Holders will not offer or sell any Shelf Registrable
Securities under the Shelf Registration Statement until they have again complied
with the provisions of clause (i) above; (iv) each Holder and any of such
Holder's partners, officers, directors or Affiliates, if any, will comply with
the provisions of Regulation M under the Exchange Act as applicable to them in
connection with sales of Shelf Registrable Securities pursuant to the Shelf
Registration Statement; (V) each Holder and any of such Holder's partners,
officers, directors or Affiliates, if any, will comply with the prospectus
delivery requirements of the Securities Act as applicable to them in connection
with sales of Shelf Registrable Securities pursuant to the Shelf Registration
Statement; and (VI) each Holder and any of such Holder's partners, officers,
directors or Affiliates, if any, will enter into such written agreements as the
Company shall reasonably request to ensure compliance with clauses (iv) and (v)
above.
3.3 DEMAND OFFERINGS.
(a) REQUESTS FOR DEMAND OFFERING. PGGM, DIHC or a Holder or Holders
owning a majority of the Demand Offering Securities (the "Demand Initiating
Holder") may request the offering under the Securities Act of all or any portion
of the Demand Offering Securities held by such Holders for sale in the manner
specified in such request, including an underwritten offering. Upon receipt of
such request, the Company will promptly, but in any event within 20 days, give
written notice of such requested registration to all Holders of Demand Offering
Securities, and thereupon, in accordance with Section 3.4 hereof, the Company
will use its reasonable best efforts to effect the registration and sale of:
(i) the Demand Offering Securities which the Company has been so
requested to register by such Demand Initiating Holder;
(ii) all other Demand Offering Securities which the Company has
been
<PAGE>
requested to register by the other Holders thereof by written request
delivered to the Company within 15 days after the giving of such written
notice by the Company, and
(iii) all shares of Common Stock which the Company may elect to
register for its own account or for the account of others in connection
with the offering of Demand Offering Securities pursuant to this Section
3.3.
Each initial request for a offering pursuant to this Section 3.3 shall
specify the number of Demand Offering Securities requested to be sold by the
Demand Initiating Holder, the method of disposition to be employed and the
Current Market Price of the Common Stock as of the date of such request. Any
request for an offering pursuant to this Section 3.3(a) shall be referred to
herein as a "Demand Offering Request" and all registrations requested pursuant
to this Section 3.3 are referred to herein as "Demand Offerings."
(b) NUMBER OF DEMAND OFFERINGS. The Company shall not be required under
this Section 3.3 to effect more than eight Demand Offerings in the aggregate.
Notwithstanding anything to the contrary contained herein, if such method of
disposition is a firm commitment underwritten public offering, a registration
shall count as a Demand Offering only when all such Demand Offering Securities
shall have been sold pursuant thereto; PROVIDED, HOWEVER, that if a Demand
Prospectus filed by the Company pursuant to a Demand Offering Request shall be
abandoned or withdrawn at the behest of the Demand Initiating Holder, then,
unless the Holders shall, promptly upon receipt of a request by the Company
therefor supported by an invoice setting forth the expenses in reasonable
detail, reimburse the Company for the Demand Offering Expenses in respect of
such prospectus attributable to the Holders, the Company shall be deemed to have
effected a Demand Offering.
(c) MINIMUM OFFERING AMOUNT. The Company shall not be required to comply
with this Section 3.3 unless the aggregate Current Market Price of all Demand
Offering Securities covered by the Demand Offering Request and the Demand
Offering Securities described in Section 3.3(a)(ii) shall be $75 million or more
(unless and to the extent the Demand Initiating Holder shall hold less than $75
million of Demand Offering Securities, in which case such minimum offering
amount shall be equal to the amount of Demand Offering Securities so held).
(d) SELECTION OF UNDERWRITERS. If the method of disposition specified by
the Demand Initiating Holder shall be an underwritten public offering, the
Company may designate the managing underwriter of such offering, subject to the
approval of the Demand Initiating Holder which approval shall not be
unreasonably withheld.
(e) PRIORITY ON DEMAND OFFERINGS. The Company shall be entitled to
include in any offering referred to in this Section 3.3, for sale in accordance
with the method of disposition specified by the Demand Initiating Holder shares
of Common Stock to be sold by the Company for its own account or by other
shareholders of the Company for their account. Nonetheless, whether or not the
Company desires to include any such additional shares in a
<PAGE>
Demand Offering, if the managing underwriters advise the Company in writing that
in their opinion the number of securities requested to be included in such
offering exceeds the maximum number which can be included in such offering
without adversely affecting the marketability of the offering (the "Maximum
Number"), then the Company will limit the number of shares included in such
offering to the Maximum Number, and the shares offered shall be selected in the
following order of priority: (I) first, Demand Offering Securities covered by
the Demand Offering Request and the Demand Offering Securities described in
Section 3.3(a)(ii), subject to the proviso set forth in clause (iii) below, (II)
second, securities the Company proposes to sell and (III) third, securities
requested to be included in such registration pursuant to (A) the Stockholders'
Agreement, dated as of November 22, 1996, by and among the Company and the New
York State Teachers' Retirement System, (B) the Stockholders' Agreement, dated
as of November 7, 1996, by and between the Company and Hexalon Real Estate,
Inc., and (C) the Registration Rights and Lockup Agreement, dated as of December
16, 1998, by and among the Company and the parties named therein (the "Wilson
Registration Rights Agreement") pro rata among the holders thereof on the basis
of the number of shares requested to be included in such registration; PROVIDED
that the securities requested to be included pursuant to clauses (A) and (B)
shall not be reduced to less than one-third of the total number of shares in
such offering, and (IV) fourth, other securities requested to be included in
such registration.
(f) EXCEPTION. Anything in this Section 3.3 to the contrary
notwithstanding, the Company shall not be required to file a Demand Prospectus
in connection with a Demand Offering (I) within twelve months after the closing
date of a Demand Offering or within six months after the effective date of any
registration statement (other than pursuant to Section 3.1 or a registration
statement on Form S-8 with respect to an employee benefit plan or a registration
statement on Form S-4 relating to securities to be issued in a merger or in
exchange for securities or assets of another Person) of the Company or (II) if
counsel for the Company, reasonably acceptable to the Demand Initiating Holder
shall deliver an opinion to the Holders to the effect that, pursuant to Rule 144
under the Securities Act or otherwise, the Holders can publicly offer and sell
the Demand Offering Securities as to which sale has been requested without
registration under the Securities Act.
3.4 DEMAND OFFERING PROCEDURES. If and whenever the Company is
required by the provisions of Section 3.3 hereof to use its reasonable best
efforts to effect the sale of any of the Demand Offering Securities under the
Securities Act, the Company shall use its reasonable best efforts to effect the
registration and sale of the Demand Offering Securities in accordance with the
intended method of disposition thereof and will, as expeditiously as possible:
(a) within 45 days after receiving a request for a Demand Offering,
prepare and file with the Commission a Demand Prospectus as a supplement to the
Shelf Registration Statement with respect to such Demand Offering Securities.
Notwithstanding anything to the contrary contained herein, the filing of such
Demand Prospectus may be delayed for a period not to exceed 45 days if (I) any
of the events specified in clause (x)(iii) of Section 3.2(b) hereof shall have
occurred, or (II) the Company is engaged in any program for the repurchase of
Common Stock or other securities of the Company and the Company provides written
notice to the
<PAGE>
Demand Initiating Holder; PROVIDED, HOWEVER, that the Company may deliver only
four notices under this Section 3.4(a) and 3.2(b) hereof within any twelve-month
period; PROVIDED, FURTHER, that the Company may deliver only two such notices
under this Section 3.4(a) and Section 3.2(b) within the twelve-month period
immediately following the expiration of the six-month period referred to in
Section 3.3(f)(i) hereof.
(b) prior to the filing described in paragraph (a) above, furnish to the
Holders copies of the Demand Prospectus and any amendments or supplements
thereto, which documents shall be subject to the approval of the Holders only
with respect to any statement in the Demand Prospectus which relates to the
Holders;
(c) notify the Holders promptly and, if requested by the Holders,
confirm in writing, (I) when the Demand Prospectus has been filed with the
Commission, (II) when any amendment or supplement to the Demand Prospectus has
been filed with the Commission, (III) of the issuance by the Commission or any
state securities authority of any stop order suspending the effectiveness of the
Shelf Registration Statement or any part thereof or the initiation of any
proceedings for that purpose, (IV) if the Company receives any notification with
respect to the suspension of the qualification of the Demand Offering Securities
for offer or sale in any jurisdiction or the initiation of any proceeding for
such purpose, and (V) of the happening of any event during the period of the
offering pursuant to the Demand Prospectus as a result of which (A) such Shelf
Registration Statement contains any untrue statement of a material fact or omits
to state any material fact required to be stated therein or necessary to make
the statements therein not misleading or (B) the Demand Prospectus as then
amended or supplemented contains any untrue statement of a material fact or
omits to state any material fact necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading;
(d) make every reasonable effort to obtain the withdrawal of any order
suspending the effectiveness of the Shelf Registration Statement or any part
thereof as promptly as possible;
(e) furnish to the Holders after delivery of a Demand Offering Request
to the Company, without charge, at least one conformed copy of the Shelf
Registration Statement and any post-effective amendment thereto (without
documents incorporated therein by reference or exhibits thereto, unless
requested);
(f) prepare and file with the Commission such amendments and supplements
to such Shelf Registration Statement and the Demand Prospectus used in
connection therewith as may be necessary and comply with the provisions of the
Securities Act with respect to the disposition of all Demand Offering Securities
covered by such Demand Prospectus in accordance with the Holders' intended
method of disposition set forth in such Demand Prospectus for such period;
(g) furnish to the Holders and to each underwriter such number of copies
of the Shelf Registration Statement and the Demand Prospectus included therein
(including each
<PAGE>
preliminary prospectus) and such other documents, as such persons may reasonably
request in order to facilitate the public sale or other disposition of the
Demand Offering Securities covered by such Demand Prospectus;
(h) use its reasonable best efforts to register or qualify the Demand
Offering Securities covered by such Demand Prospectus under the securities or
blue sky laws of such jurisdictions as the Holders or, in the case of an
underwritten public offering, the managing underwriter, shall reasonably
request;
(i) provide a transfer agent and registrar, which may be a single
entity, for all Demand Offering Securities;
(j) use its reasonable best efforts to cause all Demand Offering
Securities to be listed on the New York Stock Exchange;
(k) furnish on the date that Demand Offering Securities are delivered to
the underwriters for sale pursuant to such registration: (I) an opinion dated
such date of counsel representing the Company for the purposes of such
registration, addressed to the underwriters, stating that the Shelf Registration
Statement has become effective under the Securities Act and that (A) to the best
knowledge of such counsel, no stop order suspending the effectiveness thereof
has been issued and no proceedings for that purpose have been instituted or are
pending or contemplated under the Securities Act, (B) the Shelf Registration
Statement, the related Demand Prospectus, and each amendment or supplement
thereto, comply as to form in all material respects with the requirements of the
Securities Act and the applicable rules and regulations of the Commission
thereunder and that such counsel does not believe that any such Shelf
Registration Statement, Demand Prospectus, amendment or supplement contains a
misstatement of a material fact or an omission to state a material fact required
to be stated therein or necessary to make the statements made therein, in light
of the circumstances under which they were made, not misleading (except that
such counsel need express no opinion as to financial statements or financial or
statistical data contained therein) and (C) to such other effects as may
reasonably be requested by counsel for the underwriters or by the Holders or
their counsel, and (II) a "cold comfort" letter dated such date from the
independent public accountants retained by the Company, addressed to the
underwriters, stating that they are independent public accountants within the
meaning of the Securities Act and that, in the opinion of such accountants, the
financial statements of the Company included in the Shelf Registration Statement
or the Demand Prospectus, or any amendment or supplement thereto, comply as to
form in all material respects with the applicable accounting requirements of the
Securities Act, and such letter shall additionally cover such other financial
matters (including information as to the period ending no more than five
business days prior to the date of such letter) with respect to the registration
in respect of which such letter is being given as such underwriters may
reasonably request; and
(l) make available for inspection by the Holders after the Demand
Initiating Holder has provided a Demand Offering Request to the Company and any
counsel, accountants or other representatives retained by the Holders all
financial and other material records, pertinent
<PAGE>
corporate documents and properties of the Company and cause the officers,
directors and employees of the Company to supply all such material records,
documents or information reasonably requested by the Holders, counsel,
accountants or representatives in connection with the Demand Prospectus;
PROVIDED, HOWEVER, that such records, documents or information which the Company
determines in good faith to be confidential and notifies the Holders, counsel,
accountants or representatives in writing that such records, documents or
information are confidential shall not be disclosed by Holders, counsel,
accountants or representatives unless (I) such disclosure is ordered pursuant to
a subpoena or other order from a court of competent jurisdiction, or (II) such
records, documents or information become generally available to the public other
than through a breach of this Agreement.
For purposes of paragraphs (a) and (f) of this Section 3.4, the period of
distribution of Demand Offering Securities in a firm commitment underwritten
public offering shall be deemed to be that period during which the underwriters
in such offering require in an underwriting agreement in the form customarily
used by such underwriters for comparable transactions that the Company keep a
registration statement effective to permit each underwriter to complete the
distribution of all securities purchased by it, and the period of distribution
of Demand Offering Securities in any other registration shall be deemed to
extend until the earlier of the sale of all Demand Offering Securities covered
thereby or nine months after the effective date thereof.
In connection with each registration hereunder, each Holder will furnish
to the Company in writing such information with respect to itself and the
proposed distribution by itself as shall be reasonably necessary in order to
assure compliance with federal and applicable state securities laws. Reasonable
compliance with the obligation to furnish such information shall be a condition
to the rights afforded such Holder hereunder. In addition, each Holder and any
of its partners, officers, directors or Affiliates, if any, (I) will comply with
the provisions of Regulation M as applicable to them in connection with sales of
Demand Offering Securities pursuant to the Demand Prospectus; (II) will comply
with the prospectus delivery requirements of the Securities Act as applicable to
them in connection with sales of Demand Offering Securities pursuant to the
Demand Prospectus; and (III) will enter into such written agreements as the
Company shall reasonably request to ensure compliance therewith.
In connection with each registration pursuant to Section 3.3 hereof
covering an underwritten public offering, the Company agrees to enter into a
written agreement with the managing underwriter selected in the manner herein
provided in such form and containing such provisions as are customary in the
securities business for such an arrangement between major underwriters and
companies of the Company's size and investment stature; PROVIDED that such
agreement shall not contain any such provision applicable to the Company which
is inconsistent with the provisions hereof; PROVIDED, FURTHER that the time and
place of the closing under said agreement shall be as mutually agreed upon
between the Company and such managing underwriter.
3.5 DEMAND OFFERING EXPENSES. In connection with any Demand Offering,
the Company shall pay all Demand Offering Expenses and the Holders shall pay all
Selling
<PAGE>
Expenses applicable to the shares sold by the Holders.
3.6 PIGGYBACK REGISTRATIONS.
(a) RIGHT TO PIGGYBACK. In the event that a Holder is not permitted to
effect sales under the Shelf Registration Statement under Section 3.2(b)(x)(iii)
hereof or the Holders are not permitted to effect Demand Offering due to Section
3.4(a)(i), Holders shall become entitled to the rights of this Section 3.6. The
Company will promptly (but in any event within 30 days) give written notice to
the Holders of its intention to effect such registration and a description of
any underwriting agreement to be entered into with respect thereto and will
include in such registration all Shelf Registrable Securities or Demand Offering
Securities with respect to which the Company has received written requests for
inclusion within 15 days after the receipt of the Company's notice (a "Piggyback
Registration Request"); PROVIDED, HOWEVER, that the Company shall not be
required to include Shelf Registrable Securities or Demand Offering Securities
in the securities to be registered pursuant to a registration statement on any
form which limits the amount of securities which may be registered by the issuer
and/or selling security holders if, and to the extent that, such inclusion would
make the use of such form unavailable. In the event that any Piggyback
Registration shall be, in whole or in part, an underwritten public offering of
Common Stock, the Holders shall agree that such Demand Offering Securities or
Shelf Registrable Securities are to be included in the underwriting on the same
terms and conditions as the shares of Common Stock otherwise being sold through
underwriters under such registration.
(b) PRIORITY ON PRIMARY REGISTRATIONS. If a Piggyback Registration is an
underwritten primary registration on behalf of the Company, and the managing
underwriters advise the Company in writing that in their opinion the number of
shares requested to be included in such registration exceeds the Maximum Number,
the Company will limit the number of shares included in such registration to the
Maximum Number, and the shares registered shall be selected in the following
order of priority: (I) first, securities the Company proposes to sell, subject
to the proviso set forth in clause (ii) below, (II) second, (A) Shelf
Registrable Securities or Demand Offering Securities covered by Piggyback
Registration Requests, (B) securities requested to be included in such
registration pursuant to the Wilson Registration Rights Agreement, and (C)
securities requested to be included in such registration pursuant to (x) the
Stockholders' Agreement, dated as of November 22, 1996, by and among the Company
and the New York State Teachers' Retirement System and (y) the Stockholders'
Agreement, dated as of November 7, 1996, by and between the Company and Hexalon
Real Estate, Inc., pro rata among the holders thereof on the basis of the number
of shares requested to be included in such registration; PROVIDED that the
securities requested to be included pursuant to clauses (x) and (y) shall not be
reduced to less than one-third of the total number of shares in such offering
and (III) third, other securities requested to be included in such registration.
(c) PRIORITY ON SECONDARY REGISTRATIONS. If a Piggyback Registration is
an underwritten secondary registration on behalf of holders of the Company's
securities, and the managing underwriters advise the Company in writing that in
their opinion the number of securities requested to be included in such
registration exceeds the Maximum Number, the
<PAGE>
Company will include in such registration the shares requested to be included
therein by the holders requesting such registration and the Shelf Registrable
Securities and Demand Offering Securities covered by Piggyback Registration
Requests and any other securities requested to be included in such registration,
pro rata among the holders thereof on the basis of the number of shares
requested to be included in such registration; PROVIDED, HOWEVER, that if the
holders requesting registration are doing so pursuant to demand registration
rights of such holders, such holders' shares shall take priority over any Shelf
Registrable Securities and Demand Offering Securities and any other securities
requested to be included, which shall be included on a pro rata basis, subject
to the proviso set forth in Section 3.6(b)(ii)(C).
3.7 INDEMNIFICATION.
(a) INDEMNIFICATION BY THE COMPANY. To the extent permitted by law, the
Company shall indemnify and hold harmless the seller of any Shares covered by
any registration statement filed pursuant to Section 3, its directors, trustees
and officers, each other person who participates as an underwriter in the
offering or sale of such securities and each other person, if any, who controls
such seller or any such underwriter within the meaning of the Securities Act
against any losses, claims, damages, liabilities or expenses, joint or several,
to which such seller or any such director, trustee or officer or participating
or controlling person may become subject under the Securities Act or otherwise,
insofar as such losses, claims, damages, liabilities or expenses (or related
actions or proceedings) arise out of or are based upon (X) any untrue statement
or alleged untrue statement of any material fact contained in any registration
statement under which such securities were registered under the Securities Act,
any preliminary prospectus, final prospectus or summary prospectus contained in
such registration statement, or any amendment or supplement to such registration
statement, or any document incorporated by reference in such registration
statement, or (Y) any omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, and the Company will reimburse such seller, and each such
director, trustee, officer, participating person and controlling person for any
legal or any other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, liability, action or
proceeding, PROVIDED that the Company shall not be liable in any such case (1)
to the extent that any such loss, claim, damage, liability or expense (or action
or proceeding in respect thereof) arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
such registration statement, any such preliminary prospectus, final prospectus,
summary prospectus, amendment or supplement in reliance upon and in conformity
with written information furnished to the Company through an instrument duly
executed by such seller or any such director, trustee, officer, participating
person or controlling person specifically stating that it is for use in the
preparation of such registration statement or (2) to the extent any amount paid
in settlement of any such loss, claim, damage, liability or action of such
settlement is effected without the written consent of the Company (which consent
shall not be unreasonably withheld). Such indemnity shall remain in full force
and effect regardless of any investigation made by or on behalf of such seller
or any such director, trustee, officer, participating person or controlling
person and shall survive the transfer of such securities by such seller. The
Company shall agree to make provision for contribution
<PAGE>
relating to such indemnity as shall be reasonably requested by any seller of
Shares or the underwriters.
(b) INDEMNIFICATION BY THE SELLERS. The Company may require, as a
condition to including any Shares in any registration statement filed pursuant
to Section 3, that the Company shall have received an undertaking satisfactory
to it from each prospective seller of such securities, severally and not
jointly, to indemnify and hold harmless (in the same manner and to the same
extent as set forth in Section 3.6(a)) the Company, each director of the
Company, each officer of the Company who shall sign such registration statement
and each other person, if any, who controls the Company within the meaning of
the Securities Act, with respect to any untrue statement in or omission from
such registration statement, any preliminary prospectus, final prospectus or
summary prospectus included in such registration statement, or any amendment or
supplement to such registration statement, of a material fact if such statement
or omission was made in reliance upon and in conformity with written information
furnished to the Company through an instrument duly executed by such seller
specifically stating that it is for use in the preparation of such registration
statement, preliminary prospectus, final prospectus, summary prospectus,
amendment or supplement. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of the Company or any such
director, officer or controlling person and shall survive the transfer of such
securities by such seller.
(c) INDEMNIFICATION PROCEDURE. Promptly after receipt by any party
entitled to indemnification pursuant to Section 3.7(a) or 3.7(b) of this
Agreement (an "Indemnified Party") of notice by a third party of any complaint
or the commencement of any action or proceeding with respect to which
indemnification is being sought hereunder, such Indemnified Party shall notify
the party obligated to provide such indemnification (the "Indemnifying Party")
of such complaint or of the commencement of such action or proceeding; PROVIDED,
HOWEVER, that the failure to so notify the Indemnifying Party shall not relieve
the Indemnifying Party from liability for such claim arising otherwise than
under this Agreement, and such failure to so notify the Indemnifying Party shall
relieve the Indemnifying Party from liability which the Indemnifying Party may
have hereunder with respect to such claim if, but only if, and only to the
extent that, such failure to notify the Indemnifying Party results in the
forfeiture by the Indemnifying Party of material rights and defenses otherwise
available to the Indemnifying Party with respect to such claim. The Indemnifying
Party shall have the right, upon written notice to the Indemnified Party, to
assume the defense of such action or proceeding, including the employment of
counsel reasonably satisfactory to the Indemnified Party and the payment of the
fees and disbursements of such counsel. In the event, however, that the
Indemnifying Party declines or fails to assume the defense of the action or
proceeding or to employ counsel reasonably satisfactory to the Indemnified
Party, in either case in a timely manner, then such Indemnified Party may employ
counsel to represent or defend it in any such action or proceeding and the
Indemnifying Party shall pay the reasonable fees and disbursements of such
counsel as incurred; PROVIDED, HOWEVER, that the Indemnifying Party shall not be
required to pay the fees and disbursements of more than one counsel for all
Indemnified Parties in any jurisdiction in any single action or proceeding. In
any action or proceeding with respect to which indemnification is being sought
hereunder, the Indemnified Party or the Indemnifying Party, whichever is not
assuming the defense of such
<PAGE>
action, shall have the right to participate in such litigation and to retain its
own counsel at such party's own expense. The Indemnifying Party or the
Indemnified Party, as the case may be, shall at all times use reasonable best
efforts to keep the Indemnifying Party or the Indemnified Party, as the case may
be, reasonably apprised of the status of the defense of any action, the defense
of which it is maintaining and to cooperate in good faith with the Indemnifying
Party or the Indemnified Party, as the case may be, with respect to the defense
of any such action.
No Indemnified Party may settle or compromise any claim or consent to
the entry of any judgment with respect to which indemnification is being sought
hereunder without the prior written consent of the Indemnifying Party, unless
such settlement, compromise or consent includes an unconditional release of the
Indemnifying Party from all liability arising out of such claim. An Indemnifying
Party may not, without the prior written consent of the Indemnified Party,
settle or compromise any claim or consent to the entry of any judgment with
respect to which indemnification is being sought hereunder unless such
settlement, compromise or consent includes an unconditional release of the
Indemnified Party from all liability arising out of such claim and does not
contain any equitable order, judgment or term which in any manner affects,
restrains or interferes with the business of the Indemnified Party or any of the
Indemnified Party's affiliates.
In the event an Indemnified Party shall claim a right to payment
pursuant to this Agreement, such Indemnified Party shall send written notice of
such claim to the appropriate Indemnifying Party. Such notice shall specify the
basis for such claim. As promptly as possible after the Indemnified Party has
given such notice, such Indemnified Party and the appropriate Indemnifying Party
shall establish the merits and amount of such claim (by mutual agreement or
otherwise) and, within five business days of the final determination of the
merits and amount of such claim, the Indemnifying Party shall deliver to the
Indemnified Party immediately available funds in an amount equal to such claim
as determined hereunder.
If for any reason the indemnification provided for in this Section 3.7
is unavailable to an Indemnified Party or is insufficient to hold it harmless as
contemplated by this Section 3.7, then the Indemnifying Party shall contribute
to the amount paid or payable by the Indemnified Party as a result of such loss,
claim, damage or liability in such proportion as is appropriate to reflect the
relative fault of the Indemnified Party and the Indemnifying Party, as well as
any other relevant equitable considerations; PROVIDED that in no event shall the
liability of any Holder for such contribution and indemnification exceed, in the
aggregate, the dollar amount of the proceeds received by such Holder upon the
sale of Shares giving rise to such indemnification and contribution obligations.
The obligations of the parties under this Section 3.7 shall be in
addition to any liability which any party may otherwise have to any other party.
3.8 LIMITATIONS ON REGISTRATION RIGHTS OF OTHERS. The Company
represents and warrants that, except pursuant to this Agreement and pursuant to
rights granted pursuant to the agreements set forth on Exhibit A hereto, it has
not granted to any Person the right to request
<PAGE>
or require the Company to register any securities issued by the Company.
4. RULE 144. The Company shall comply with the requirements of Rule
144 under the Securities Act, as such Rule may be amended from time to time (or
any similar rule or regulation hereafter adopted by the Commission), regarding
the availability of current public information to the extent required to enable
any Holder of Shares to sell Shares without registration under the Securities
Act pursuant to Rule 144 (or any similar rule or regulation). Upon the request
of any Holder of Shares, the Company will deliver to such Holder a written
statement as to whether it has complied with such requirements.
5. AMENDMENTS AND WAIVERS. This Agreement may be amended and the
Company may take any action herein prohibited, or omit to perform any act herein
required to be performed by it, only if the Company shall have obtained the
written consent to such amendment, action or omission to act, of the Holder or
Holders of a majority of the Shares (and, in the case of any amendment, action
or omission to act which adversely affects any specific Holder of Shares or a
specific group of Holders of Shares, the written consent of each such Holder or
Holders of a majority of the Shares held by such group). Each Holder of any
Shares at the time shall be bound by any consent authorized by this Section 5.
6. NOMINEES FOR BENEFICIAL OWNERS. In the event that any Shares are held
by a nominee for the beneficial owner thereof, the beneficial owner thereof
may, at its election, be treated as the Holder of such Shares for purposes of
any request or other action by any Holder or Holders of Shares pursuant to
this Agreement or any determination of any number or percentage of shares of
Shares held by any Holder or Holders of Shares contemplated by this
Agreement. If the beneficial owner of any Shares so elects, the Company may
require assurances reasonably satisfactory to it of such owner's beneficial
ownership of such Shares.
7. COVENANTS OF THE PARTIES.
7.1 BOARD OF DIRECTORS.
(a) So long as PGGM and DIHC and their respective Affiliates own in the
aggregate 5% or more of the issued and outstanding shares of Common Stock, the
Company shall take all action necessary to nominate for election to the board of
directors of the Company (the "Board") at any annual or special meeting of
stockholders at which directors are being elected (or in connection with a
written consent in lieu of a meeting pursuant to which directors are proposed to
be elected) two individuals designated by PGGM ("PGGM Directors").
(b) From the date hereof until the earlier to occur of (I) the date as
of which PGGM and DIHC and their respective Affiliates own in the aggregate less
than 25% of the issued and outstanding shares of Common Stock or (II) October
31, 2002:
(i) the Company shall take all action necessary to ensure that one
PGGM Director is appointed to the board affairs committee of the Board
(the "Committee").
<PAGE>
(ii) All nominees for election as directors of the Company by the
Board (other than Incumbent Directors and PGGM Directors nominated
pursuant to Section 7.1(a) who are employees, officers or directors of
PGGM or DIHC) shall be persons not affiliated with PGGM or DIHC or any of
their respective Affiliates and shall be made with the unanimous approval
of the Committee;
(iii) PGGM and DIHC shall vote (or provide written consent with
respect to) all shares of Common Stock over which it exercises voting
authority in favor of the persons nominated as PGGM Directors pursuant to
Section 7.1(a) and all nominees nominated in accordance with Section
7.1(b)(ii) and all Incumbent Directors nominated for election as
directors of the Company by the Board;
(iv) In the event of any vacancy on the Board, whether caused by a
director's resignation, removal, death or otherwise, the Company shall
take all action necessary to ensure that the successor to the director
whose absence from the Board caused such vacancy shall be a PGGM Director
if the director who caused such vacancy was a PGGM Director; and
(v) The Company shall not increase the number of directors
constituting the full Board without the unanimous approval of the
Committee.
(c) So long as PGGM and DIHC and their respective Affiliates own in the
aggregate 2.5% or more of the issued and outstanding shares of Common Stock, the
Company shall not without the prior written consent of PGGM modify the policy of
the Company with respect to its interest in One Norwest Center, Denver,
Colorado, adopted at a meeting of the Board on August 13, 1997.
(d) From the date of adoption of the Amended and Restated Bylaws of the
Company in the form attached hereto as Annex A (the "Amended Bylaws") until the
third anniversary of such date:
(i) PGGM and DIHC shall vote (or provide written consent with
respect to) all shares of Common Stock over which it exercises voting
authority in favor of the persons nominated as Wilson Directors (as
defined in the Amended Bylaws) pursuant to Section 3.03(a) of the Amended
Bylaws and approved by the Committee as set forth in Section 3.02 of the
Amended Bylaws; and
(ii) PGGM and DIHC shall use commercially reasonable efforts to
cause the PGGM Directors, in considering the nominees proposed by Wilson
III (or the Wilson III Designee) (as defined in the Amended Bylaws) for
inclusion in the Board's list of nominees for election as director to
approve in all cases Wilson III, and in considering other persons
nominated as Wilson Directors, not to unreasonably withhold their
approval.
<PAGE>
7.2 LEVERAGE RATIO. So long as PGGM and DIHC and their respective
Affiliates own in the aggregate 2.5% or more of the issued and outstanding
shares of Common Stock, the Company shall at all times maintain a Leverage Ratio
not in excess of 0.45 to 1; PROVIDED, HOWEVER, THAT NOTWITHSTANDING THE
FOREGOING, (I) THE COMPANY MAY AT ANY TIME INCUR INDEBTEDNESS IN AN AMOUNT WHICH
DOES NOT EXCEED THE PRINCIPAL AMOUNT OF OUTSTANDING INDEBTEDNESS OF THE COMPANY
EXTENDED, REFINANCED, RENEWED OR REPLACED WITH THE PROCEEDS THEREOF, PLUS ANY
COSTS ASSOCIATED WITH THE EXTENSION REFINANCING, RENEWAL OR REPLACEMENT, EVEN IF
SUCH INCURRENCE CAUSES THE LEVERAGE RATIO TO EXCEED 0.45 TO 1, (II) THE COMPANY
MAY INCUR INDEBTEDNESS IF, AS OF THE DATE ON WHICH THE COMPANY ENTERS INTO A
BINDING COMMITMENT WITH RESPECT TO SUCH INDEBTEDNESS, THE LEVERAGE RATIO
INCLUDING SUCH INDEBTEDNESS DID NOT EXCEED 0.45 TO 1 AND (III) WITH RESPECT TO
LINES OF CREDIT, THE COMPANY MAY INCUR INDEBTEDNESS UNDER SUCH LINE, IF, AS OF
THE DATE THE COMPANY ENTERS INTO THE LINE OF CREDIT, THE LEVERAGE RATIO
INCLUDING THE ENTIRE AMOUNT OF INDEBTEDNESS AVAILABLE UNDER SUCH LINE DID NOT
EXCEED 0.45 TO 1.
7.3 DOMESTIC REIT STATUS. So long as PGGM and DIHC and their
respective Affiliates own in the aggregate 2.5% or more of the issued and
outstanding shares of Common Stock, the Company shall not issue any Equity
Securities in connection with any Public Offering or other sale to any Non-U.S.
Person (as defined in Section 9.02 of the Charter Amendment), other than in
connection with stock splits or stock dividends or under the Company's dividend
reinvestment plan or stock option or management incentive compensation plans;
PROVIDED, HOWEVER, that the Company, in connection with any Public Offering of
Equity Securities, may issue and sell up to 15% of the securities issued in such
offering to Non-U.S. Persons.
7.4 HOLDBACK AGREEMENTS. Each Holder agrees, if so requested prior to
December 31, 1998, by the managing underwriter in any Public Offering by the
Company, not to effect any sale or distribution of Common Stock (other than as
part of such Public Offering) within such periods prior to and after the
effective date of such registration statement as the managing underwriter may
request and as may be required of executive officers and directors of the
Company after the effective date of such registration statement; PROVIDED that
no Holder shall be required to enter into more than one such agreement. After
December 31, 1998, each Holder will consider entering into such agreements if so
requested.
7.5 RESTRICTIONS ON TRANSFER. During the Standstill Period, any Holder
and its Affiliates owning 25% or more of the issued and outstanding shares of
Common Stock, shall not assign, transfer or sell any Shares to any Person or
such Person's Affiliates (other than a Permitted Transferee that agrees in
writing to be bound by the provisions of this Agreement) in any single
transaction or series of related transactions if, after such transaction or
transactions, such Person and such Person's Affiliates would own more than 10%
of the then issued and outstanding shares of Common Stock other than transfers
of shares from DIHC to PGGM.
7.6 OWNERSHIP LIMIT. The Company has taken and will continue to take
all action necessary to ensure that issuance of the Shares to DIHC, DIHC Market
Square, Inc. and PGGM pursuant to the Purchase Agreement and the Loan Agreement
shall not be deemed a
<PAGE>
violation of Article 8 of the Company's articles of incorporation. Whenever PGGM
or DIHC (or DIHC Market Square, Inc.) proposes to transfer any Shares to any
Person, in accordance with the provisions of Section 8.03 of the articles of
incorporation of the Company, the Board shall determine whether the proposed
transfer would jeopardize the Company's status as a real estate investment trust
(a "REIT") under Section 856 of the Internal Revenue Code of 1986, as amended.
If the Board determines that it would not so jeopardize the Company's REIT
status, or if it receives an opinion of counsel, which counsel and opinion are
reasonably satisfactory to the Board, to the effect that such proposed transfer
will not jeopardize the Company's status as a REIT, the Board shall determine
that such transferee will not be treated as a "Person" within the meaning of
Section 8.03(b) of the Company's articles of incorporation and therefore the
ownership of Shares by such transferee will be exempt from the restrictions
imposed by Article 8 of the Company's articles of incorporation. If the Board
determines that the proposed transfer would jeopardize the Company's REIT
status, the Company shall provide a written explanation to DIHC and PGGM of the
basis for its determination and shall provide reasonable access to information
regarding the Company's shareholders to DIHC and PGGM.
7.7 TRANSFERS TO PGGM. The Company shall take all action necessary to
ensure that any transfer of Shares from DIHC or DIHC Market Square, Inc. to PGGM
shall not be deemed a violation of Article 8 or Section 9.01 of the Company's
articles of incorporation.
7.8 SHARE REPURCHASES. So long as DIHC and PGGM and their respective
Affiliates own in the aggregate 25% or more of the issued and outstanding shares
of Common Stock, in the event the Company proposes to repurchase any shares of
Common Stock from any holder thereof owning together with its Affiliates 5% or
more of the issued and outstanding shares of Common Stock, DIHC and PGGM shall
have the right to require the Company to repurchase a number of shares of Common
Stock held by DIHC and PGGM equal to the product of (I) the total number of
shares proposed to be repurchased and (II) a fraction, the numerator of which is
(A) the number of Shares owned by DIHC and PGGM and their respective Affiliates
and the denominator of which is (B) the sum of the number of shares of Common
Stock owned by such holder plus the number of Shares owned by DIHC and PGGM and
their respective Affiliates.
7.9 AMENDED AND RESTATED BYLAWS. From the date of adoption of the
Amended Bylaws until the third anniversary of such date, PGGM and DIHC agree not
to vote, and to use their commercially reasonable efforts to cause the PGGM
Directors not to vote, to repeal or amend the Amended Bylaws, where such
amendment is covered by Section 10.01(b) of such Amended Bylaws, unless such
amendment is approved by the Wilson Directors (as defined in the Amended
Bylaws).
8. STANDSTILL. During the Standstill Period, any Holder that together
with its Affiliates owns 25% or more of the issued and outstanding shares of
Common Stock shall not:
(a) directly or indirectly, purchase or otherwise acquire, or propose or
offer to purchase or otherwise acquire, any Equity Securities whether by tender
offer, market purchase,
<PAGE>
privately negotiated purchase, Business Combination or otherwise, if,
immediately after such purchase or acquisition, the Holder Interest of such
Holder would equal or exceed the Initial Percentage;
(b) directly or indirectly propose to the Company or any Person a
Business Combination;
(c) make, or in any way participate, directly or indirectly, in any
"solicitation" of "proxies" to vote (as such terms are used in the rules
promulgated by the Commission under Section 14(a) of the Exchange Act) or seek
to advise, encourage or influence any person or entity with respect to the
voting of any shares of capital stock of the Company, initiate, propose or
otherwise solicit stockholders of the Company for the approval of one or more
stockholder proposals or induce or attempt to induce any other Person to
initiate any stockholder proposal; or
(d) deposit any Equity Securities into a voting trust or subject any
Equity Securities to any arrangement or agreement with respect to the voting of
such securities or form, join or in any way participate in a "group" (within the
meaning of Section 13(d)(3) of the Exchange Act) with respect to any Equity
Securities, other than as expressly set forth in Section 7 hereof.
Nothing in this Section 8 shall limit the ability of PGGM Directors to
function in their capacities as members of the Board. The provisions of this
Section 8 may be waived by the Company only upon the approval of a majority of
the Board, excluding all PGGM Directors and shall not be applicable to actions
approved by the majority of the Board, excluding all PGGM Directors in
circumstances in which the PGGM Directors are "interested directors" under
Section 78.140 of the Nevada General Corporation Law.
9. ASSIGNMENT. This Agreement shall not be assignable by the parties
hereto, except (I) by PGGM, DIHC or any Holder pursuant to a transfer of
Shares permitted hereunder to a Permitted Transferee that agrees in writing
to be bound by the terms hereof (including, without limitation, Section 7.5
and 8, if applicable) and (II) the rights to cause the Company to register
Shares pursuant to Section 3 may be assigned by PGGM, DIHC or any Holder, but
only together with all obligations of Holders under Section 3 and Section
7.4, to a transferee of Shares representing at least 1% of the issued and
outstanding shares of Common Stock, PROVIDED that, within a reasonable time
after such transfer, the Company is furnished with written notice of the name
and address of such transferee or assignee and the securities with respect to
which such registration rights are being assigned. Notwithstanding any
transfer of Shares in connection with an assignment permitted by this Section
9, the transferor shall comply with the obligations set forth in Section 2
hereof.
10. MISCELLANEOUS. This Agreement constitutes the sole understanding of the
parties hereto with respect to the subject matter hereof; PROVIDED, HOWEVER,
that this provision is not intended to abrogate any other written agreement
between or among the parties executed with or after this Agreement or any
written agreement pertaining to another subject matter. No
<PAGE>
amendment of this Agreement shall be binding unless made in writing and duly
executed by the parties hereto. This Agreement shall be construed in accordance
with and governed by the laws of the State of New York without regard to
conflict of laws principles thereof. No provision of this Agreement shall be
construed against or interpreted to the disadvantage of any party hereto by any
court or other governmental or judicial authority or by any board of arbitrators
by reason of such party or its counsel having or being deemed to have structured
or drafted such provision. Unless otherwise expressly provided herein, all
references in this Agreement to Section(s) shall refer to the Section(s) of this
Agreement. The headings in this Agreement are for purposes of reference only and
shall not limit or otherwise affect the meaning of this Agreement. This
Agreement may be executed in any number of counterparts, each of which shall be
an original, but all of which together shall constitute one instrument.
11. NOTICES. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given or made (and
shall be deemed to have been duly given or made upon receipt) by delivery in
person, by courier service, by cable, by telecopy, by telegram, by telex or
by registered or certified mail (postage prepaid, return receipt requested)
to the respective parties at the following addresses (or at such other
address for a party as shall be specified in a notice given in accordance
with this Section 11):
(a) IF TO PGGM: Pensioenfonds PGGM
Kroostweg-Noord 149
3704 DV Zeist
The Netherlands
P. O. Box 117
3700 AC Zeist
The Netherlands
Telecopy: 011 (31.30) 696-3388
Attention: Mr. Jan van der Vlist
Ms. Anneke C. van de Puttelaar
WITH A COPY TO: Richards & O'Neil, LLP
885 Third Avenue
New York, New York 10022-4873
Telecopy: (212) 750-9022
Attention: Robert M. Safron, Esq.
(b) IF TO DIHC: 200 Galleria Parkway, NW
Suite 2000
Atlanta, Georgia 30339
Telecopy: (770) 951-9349
Attention: Mr. Craig Johnston
WITH A COPY TO: Richards & O'Neil, LLP
885 Third Avenue
<PAGE>
New York, New York 10022-4873
Telecopy: (212) 750-9022
Attention: Robert M. Safron, Esq.
(c) IF TO THE COMPANY: 126 East 56th Street
New York, New York 10022
Telecopy: (212) 605-7199
Attention: Mr. John S. Moody
WITH A COPY TO: King & Spalding
191 Peachtree Street, NE
Atlanta, Georgia 30303
Telecopy: (404) 572-5148
Attention: William B. Fryer, Esq.
(d) If to any other Holder to the address set forth in the notice
referred to in Section 9 hereof.
12. REMEDY. In the event that the Company materially breaches its
obligations to PGGM under Sections 7.1 and 7.2 hereof and such breach continues
for a period of 30 days after PGGM gives the Company written notice of such
breach, the obligations of PGGM under Sections 7.4, 7.5 and 8 shall thereafter
be suspended for such period of time as such breach continues; PROVIDED,
HOWEVER, that upon any such breach being cured by the Company or waived by PGGM,
PGGM shall again be obligated to comply with the provisions of Sections 7.4, 7.5
and 8.
13. THIRD PARTY BENEFICIARY. The parties to this Agreement agree and
acknowledge that Wilson III or the Wilson Designee are intended beneficiaries of
the provisions of Sections 7.1(d) and 7.9 of this Agreement, and Wilson III and
the Wilson Designee shall have the rights of intended beneficiaries to enforce
such provisions.
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered as of the date first above written.
CORNERSTONE PROPERTIES INC.
By:
-------------------------------------
Name:
Title:
DUTCH INSTITUTIONAL HOLDING
COMPANY, INC.
By:
-------------------------------------
Name:
Title:
STICHTING PENSIOENFONDS VOOR DE
GEZONDHEID, GEESTELIJKE EN
MAATSCHAPPELIJKE BELANGEN
By:
-------------------------------------
Name:
Title:
By:
-------------------------------------
Name:
Title:
[Signature Page to Amended and Restated Registration Rights and
Voting Agreement]
<PAGE>
EXHIBIT A
---------
TO
AMENDED AND RESTATED
REGISTRATION RIGHTS AND VOTING AGREEMENT
Stockholders' Agreement dated November 22, 1996, between the Company and New
York State Teachers' Retirement System.
Stockholders' Agreement dated November 7, 1996, between the Company and Hexalon
Real Estate, Inc.
Letter Agreement dated July 10, 1995 between the Company and Deutsche Bank AG.
Registration Rights Agreement dated June 3, 1998, by and between the Company and
the parties named therein.
Registration Rights Agreement dated as of January 29, 1998, among the Company
and the Holders identified therein.
Registration Rights Agreement dated as of April 28, 1998, among the Company and
the Holders identified therein.
Registration Rights Agreement dated as of April 28, 1998, among the Company and
The Prudential Insurance Company of America.
Registration Rights and Lockup Agreement dated December 16, 1998, by and between
the Company and the parties named therein.
<PAGE>
EXHIBIT 12.1
STATEMENT OF COMPUTATION OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK
DIVIDEND REQUIREMENTS
FOR THE TWELVE MONTH PERIODS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
FOR THE TWELVE MONTHS ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
Net income................................................................. $ 83,465 $ 37,547
Interest expense........................................................... 67,533 33,977
-------- -------
Earnings before interest................................................... 150,998 71,524
Interest expense........................................................... 71,169 33,977
Interest portion of rentals................................................ 150 --
Preferred dividends........................................................ 3,500 10,160
-------- -------
Fixed charges.............................................................. 74,819 44,137
Earnings to fixed charges and preferred stock dividend requirements........ 2.02 1.62
-------- -------
-------- -------
</TABLE>
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
<TABLE>
<CAPTION>
NAME OF COMPANY STATE OF ORGANIZATION
--------------- ---------------------
<S> <C>
Corpro Real Estate Management, Inc. Delaware
Cornerstone Properties Limited Partnership Delaware
ARICO Denver, Inc. Delaware
1700 Lincoln, Inc. Delaware
Cornerstone Aviation, LLC Delaware
Cornerstone Holdings, LLC Delaware
Cornerstone Bayhill Holdings, LLC Delaware
Cornerstone Commerce Park Holdings, LLC Delaware
Bayhill Associates California
Second and Main Associates Utah
Cornerstone Denver LLC Delaware
Cornerstone Oakbrook LLC Delaware
125 Summer Street Cornerstone LLC Delaware
Cornerstone New York LLC Delaware
Cornerstone 527 Madison LLC Delaware
Cornerstone Charlotte Plaza LLC Delaware
Cornerstone TransPotomac Plaza LLC Delaware
Cornerstone 99 Canal LLC Delaware
Cornerstone 11 Canal Center LLC Delaware
Cornerstone Deerfield LLC Delaware
One Memorial Cornerstone LLC Delaware
60 State Street Cornerstone LLC Delaware
Cornerstone Dearborn LLC Delaware
222 Berkeley Cornerstone LLC Delaware
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
NAME OF COMPANY STATE OF ORGANIZATION
--------------- ---------------------
<S> <C>
Cornerstone 200 Galleria LLC Delaware
Cornerstone Minneapolis LLC Delaware
Cornerstone Seattle LLC Delaware
Cornerstone Market Square LLC Delaware
Cornerstone Market Square II LLC Delaware
500 Boylston Cornerstone LLC Delaware
Cornerstone Peachtree LLC Delaware
Cornerstone Wilshire-Cal LLC Delaware
Cornerstone Dearborn LLC Delaware
Agoura Hills Business Park Associates, LLC California
Ten Almaden Associates, LLC California
18301 Associates, L.P. California
110 Atrium Place Associates, LLC California
Bay Park Plaza Associates, L.P. California
Biltmore Lakes Associates, L.P. California
Bixby Office Park Associates, LLC California
66 Bovet Associates, LLC California
490 California Associates, LLC California
Centerside Associates, L.P. California
2300 CR Associates, LLC California
2000 Crow Canyon Associates, L.P. California
2010 Crow Canyon Associates, L.P. California
1300 El Camino Associates, L.P. California
188 Embarcadero Associates, L.P. California
Embarcadero Place Associates, LLC California
Gateway Phoenix Associates, L.P. California
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
NAME OF COMPANY STATE OF ORGANIZATION
--------------- ---------------------
<S> <C>
GBC-University Associates, L.P. California
Hacienda Plaza Associates, LLC California
Island Corporate Center Associates, LLC California
Janss Promenade Associates, LLC California
2677 Main Street Associates, LLC Delaware
4550 NCR Associates, LLC California
4600 NCR Associates, LLC California
700 North Brand Associates, L.P. California
1737 North First Street Associates, L.P. California
Office Opportunity Associates, LLC California
One Bay Plaza Associates, L.P. California
One Post Associates, LLC California
Park Plaza Associates, LLC California
Pruneyard Associates, LLC California
429 Santa Monica Associates, LLC California
7373 Scottsdale Associates, L.P. California
Seaport Centre Associates, LLC California
Seaport Plaza Associates, LLC California
5990 Sepulveda Associates, L.P. California
1301 Shoreway Associates, L.P. California
5300 South Associates, LLC California
1600 South Main Associates, L.P. California
5820 Stoneridge Associates, L.P. California
Warner Park Associates, LLC California
West Wilshire Associates, LLC California
Westlake Spectrum Associates, LLC California
Westlake Spectrum Two Associates, LLC California
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
NAME OF COMPANY STATE OF ORGANIZATION
--------------- ---------------------
<S> <C>
1320 Willow Pass Associates, L.P. California
1390 Willow Pass Associates, L.P. California
2700 Ygnacio Associates, LLC California
</TABLE>
33
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Cornerstone Properties Inc.
and Subsidiaries (the "Company") Registration Statements on Form S-3 (Reg. No.
333-72449, 333-18303, 333-47149, 333-59259) and the Company's Registration
Statement on Form S-8 (Reg. No. 333-59923) of our report dated February 24,
1999, except for Notes 8 and 20 for which the date is February 26, 1999, on our
audits of the consolidated financial statements of the Company as of December
31, 1998 and 1997, and for the years ended December 31, 1998, 1997 and 1996,
which report is included in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
New York, New York
March 30, 1999
<PAGE>
EXHIBIT 24.1
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
THAT I, Cecil D. Conlee, a director of Cornerstone Properties Inc. (the
"Company"), do hereby constitute and appoint John S. Moody, Kevin P. Mahoney and
Thomas P. Loftus, and each of them, my true and lawful attorneys-in-fact and
agents, to do any and all acts and things and to execute any and all instruments
which said attorney and agent may deem necessary or advisable to enable the
Company to comply with the Securities Exchange Act of 1934, as amended, and any
rules, regulations and requirements of the Securities and Exchange Commission in
respect thereof, in connection with the filing under the said Securities
Exchange Act of the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998 (the "Annual Report"), including specifically, but
without limiting the generality of the foregoing, the power and authority to
sign for, on behalf of and in the name of the undersigned as a director of the
Company, such Annual Report and any amendments thereto filed with the Securities
and Exchange Commission and any instrument or document filed as part of, an
exhibit to, or in connection with said Annual Report or amendments thereto; and
the undersigned does hereby ratify and confirm as his own act and deed all that
said attorneys-in-fact and agents shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has subscribed these presents,
effective as of the 22nd day of March, 1999.
/s/ Cecil D. Conlee
-------------------
Cecil D. Conlee
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
THAT I, Blake Eagle, a director of Cornerstone Properties Inc. (the
"Company"), do hereby constitute and appoint John S. Moody, Kevin P. Mahoney and
Thomas P. Loftus, and each of them, my true and lawful attorneys-in-fact and
agents, to do any and all acts and things and to execute any and all instruments
which said attorney and agent may deem necessary or advisable to enable the
Company to comply with the Securities Exchange Act of 1934, as amended, and any
rules, regulations and requirements of the Securities and Exchange Commission in
respect thereof, in connection with the filing under the said Securities
Exchange Act of the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998 (the "Annual Report"), including specifically, but
without limiting the generality of the foregoing, the power and authority to
sign for, on behalf of and in the name of the undersigned as a director of the
Company, such Annual Report and any amendments thereto filed with the Securities
and Exchange Commission and any instrument or document filed as part of, an
exhibit to, or in connection with said Annual Report or amendments thereto; and
the undersigned does hereby ratify and confirm as his own act and deed all that
said attorneys-in-fact and agents shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has subscribed these presents,
effective as of the 22nd day of March, 1999.
/s/ Blake Eagle
---------------
Blake Eagle
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
THAT I, Hans C. Mautner, a director of Cornerstone Properties Inc. (the
"Company"), do hereby constitute and appoint John S. Moody, Kevin P. Mahoney and
Thomas P. Loftus, and each of them, my true and lawful attorneys-in-fact and
agents, to do any and all acts and things and to execute any and all instruments
which said attorney and agent may deem necessary or advisable to enable the
Company to comply with the Securities Exchange Act of 1934, as amended, and any
rules, regulations and requirements of the Securities and Exchange Commission in
respect thereof, in connection with the filing under the said Securities
Exchange Act of the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998 (the "Annual Report"), including specifically, but
without limiting the generality of the foregoing, the power and authority to
sign for, on behalf of and in the name of the undersigned as a director of the
Company, such Annual Report and any amendments thereto filed with the Securities
and Exchange Commission and any instrument or document filed as part of, an
exhibit to, or in connection with said Annual Report or amendments thereto; and
the undersigned does hereby ratify and confirm as his own act and deed all that
said attorneys-in-fact and agents shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has subscribed these presents,
effective as of the 22nd day of March, 1999.
/s/ Hans C. Mautner
-------------------
Hans C. Mautner
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
THAT I, Lutz Mellinger, a director of Cornerstone Properties Inc. (the
"Company"), do hereby constitute and appoint John S. Moody, Kevin P. Mahoney and
Thomas P. Loftus, and each of them, my true and lawful attorneys-in-fact and
agents, to do any and all acts and things and to execute any and all instruments
which said attorney and agent may deem necessary or advisable to enable the
Company to comply with the Securities Exchange Act of 1934, as amended, and any
rules, regulations and requirements of the Securities and Exchange Commission in
respect thereof, in connection with the filing under the said Securities
Exchange Act of the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998 (the "Annual Report"), including specifically, but
without limiting the generality of the foregoing, the power and authority to
sign for, on behalf of and in the name of the undersigned as a director of the
Company, such Annual Report and any amendments thereto filed with the Securities
and Exchange Commission and any instrument or document filed as part of, an
exhibit to, or in connection with said Annual Report or amendments thereto; and
the undersigned does hereby ratify and confirm as his own act and deed all that
said attorneys-in-fact and agents shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has subscribed these presents,
effective as of the 22nd day of March, 1999.
/s/ Lutz Mellinger
------------------
Lutz Mellinger
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
THAT I, Craig R. Stapleton, a director of Cornerstone Properties Inc.
(the "Company"), do hereby constitute and appoint John S. Moody, Kevin P.
Mahoney and Thomas P. Loftus, and each of them, my true and lawful
attorneys-in-fact and agents, to do any and all acts and things and to execute
any and all instruments which said attorney and agent may deem necessary or
advisable to enable the Company to comply with the Securities Exchange Act of
1934, as amended, and any rules, regulations and requirements of the Securities
and Exchange Commission in respect thereof, in connection with the filing under
the said Securities Exchange Act of the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998 (the "Annual Report"), including
specifically, but without limiting the generality of the foregoing, the power
and authority to sign for, on behalf of and in the name of the undersigned as a
director of the Company, such Annual Report and any amendments thereto filed
with the Securities and Exchange Commission and any instrument or document filed
as part of, an exhibit to, or in connection with said Annual Report or
amendments thereto; and the undersigned does hereby ratify and confirm as his
own act and deed all that said attorneys-in-fact and agents shall do or cause to
be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has subscribed these presents,
effective as of the 22nd day of March, 1999.
/s/ Craig R. Stapleton
----------------------
Craig R. Stapleton
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
THAT I, Donald G. Fisher, a director of Cornerstone Properties Inc.
(the "Company"), do hereby constitute and appoint John S. Moody, Kevin P.
Mahoney and Thomas P. Loftus, and each of them, my true and lawful
attorneys-in-fact and agents, to do any and all acts and things and to execute
any and all instruments which said attorney and agent may deem necessary or
advisable to enable the Company to comply with the Securities Exchange Act of
1934, as amended, and any rules, regulations and requirements of the Securities
and Exchange Commission in respect thereof, in connection with the filing under
the said Securities Exchange Act of the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998 (the "Annual Report"), including
specifically, but without limiting the generality of the foregoing, the power
and authority to sign for, on behalf of and in the name of the undersigned as a
director of the Company, such Annual Report and any amendments thereto filed
with the Securities and Exchange Commission and any instrument or document filed
as part of, an exhibit to, or in connection with said Annual Report or
amendments thereto; and the undersigned does hereby ratify and confirm as his
own act and deed all that said attorneys-in-fact and agents shall do or cause to
be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has subscribed these presents,
effective as of the 22nd day of March, 1999.
/s/ Donald G. Fisher
--------------------
Donald G. Fisher
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
_________THAT I, Randall A. Hack, a director of Cornerstone Properties Inc. (the
"Company"), do hereby constitute and appoint John S. Moody, Kevin P. Mahoney and
Thomas P. Loftus, and each of them, my true and lawful attorneys-in-fact and
agents, to do any and all acts and things and to execute any and all instruments
which said attorney and agent may deem necessary or advisable to enable the
Company to comply with the Securities Exchange Act of 1934, as amended, and any
rules, regulations and requirements of the Securities and Exchange Commission in
respect thereof, in connection with the filing under the said Securities
Exchange Act of the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998 (the "Annual Report"), including specifically, but
without limiting the generality of the foregoing, the power and authority to
sign for, on behalf of and in the name of the undersigned as a director of the
Company, such Annual Report and any amendments thereto filed with the Securities
and Exchange Commission and any instrument or document filed as part of, an
exhibit to, or in connection with said Annual Report or amendments thereto; and
the undersigned does hereby ratify and confirm as his own act and deed all that
said attorneys-in-fact and agents shall do or cause to be done by virtue hereof.
_________IN WITNESS WHEREOF, the undersigned has subscribed these presents,
effective as of the 22nd day of March, 1999.
/s/ Randall A. Hack
----------------------------------
Randall A. Hack
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 61,869
<SECURITIES> 0
<RECEIVABLES> 64,493
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 81,674
<PP&E> 4,195,611
<DEPRECIATION> 288,448
<TOTAL-ASSETS> 4,281,984
<CURRENT-LIABILITIES> 116,945
<BONDS> 0
0
50,000
<COMMON> 1,788,567
<OTHER-SE> (1,700)
<TOTAL-LIABILITY-AND-EQUITY> 4,281,984
<SALES> 0
<TOTAL-REVENUES> 359,486
<CGS> 0
<TOTAL-COSTS> 262,173
<OTHER-EXPENSES> 9,545
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 67,533
<INCOME-PRETAX> 87,768
<INCOME-TAX> 0
<INCOME-CONTINUING> 87,768
<DISCONTINUED> 0
<EXTRAORDINARY> 4,303
<CHANGES> 0
<NET-INCOME> 83,465
<EPS-PRIMARY> 0.80
<EPS-DILUTED> 0.80
</TABLE>
