<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FORM 10-K/A
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
------------------------
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:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS: NAME OF EACH EXCHANGE ON WHICH REGISTERED:
- ---------------------------------------------- ----------------------------------------------
<S> <C>
Common Stock, no par value New York Stock Exchange
Dusseldorf Stock Exchange
Frankfurt Stock Exchange
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. /X/
EXPLANATORY NOTE
Pursuant to Rule 12b-5 under the Securities Exchange Act of 1934, as
amended, Cornerstone Properties Inc. (the "Company") hereby amends the Company's
Annual Report on Form 10-K as filed with the Securities and Exchange Commission
on March 31, 1999, to add the financial statement schedule required by Item 14
of Form 10-K.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART III
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See the Financial Statements included as a part hereof.
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
Schedule III................................................................ F-27 to F-30
</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.
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.
52
<PAGE>
(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>
- ------------------------
* Previously filed.
. 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 amendment 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: April 29, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
amendment 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
- ------------------------------ Executive Vice President
Rodney C. Dimock and Director
Senior Vice President and
/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>
<TABLE>
<C> <S>
/s/ JOHN S.
MOODY
- ------------------------------
* By John S. Moody, as Attorney-in-Fact for the persons
indicated
</TABLE>
DATED: April 29, 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/A present fairly, in all
material respects, the financial position of Cornerstone Properties Inc. and
subsidiaries (the "Company") 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. In addition, in our opinion, the financial statement schedule listed
in the index appearing under Item 14(a)(i) of this Form 10-K/A presents fairly,
in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule 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 (Dollar amounts in thousands).
<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 expenses. 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>
CORNERSTONE PROPERTIES INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
SCHEDULE III
DECEMBER 31, 1998
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------------------------------------- ------------- ------------------------ ------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
COST
CAPITALIZED
SUBSEQUENT TO GROSS AMOUNT AT WHICH CARRIED
INITIAL COST TO COMPANY ACQUISITION AT CLOSE OF PERIOD
------------------------ ------------- -----------------------------------
(DOLLAR AMOUNTS IN THOUSANDS) BUILDING & LAND & BUILDING &
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS TOTAL
- -------------------------------------- ------------- --------- ------------- ------------- --------- ------------- ---------
Boston, Massachusetts
Sixty State Street.................. $ 87,627 $ -- $ 221,568 $ 5,842 $ -- $ 227,410 $ 227,410
500 Boylston Street................. 45,132 181,574 62 45,132 181,636 226,768
222 Berkeley Street................. 29,262 118,180 438 29,262 118,618 147,880
125 Summer Street................... 50,000 15,750 89,250 6,037 15,750 95,287 111,037
One Memorial Drive.................. 22,500 90,873 (96) 22,500 90,777 113,277
San Mateo County, California
Bayhill (4 buildings)............... 59,071 26,353 105,412 -- 26,353 105,412 131,765
Peninsula Office Park (7
buildings)........................ 60,242 25,426 101,705 4 25,426 101,709 127,135
Seaport Centre...................... 58,000 23,530 94,119 82 23,530 94,201 117,731
Seaport Plaza land.................. 10,720 -- -- 10,720 -- 10,720
Bay Park Plaza (2 buildings)........ 13,139 52,556 -- 13,139 52,556 65,695
One Bay Plaza....................... 9,125 36,499 29 9,125 36,528 45,653
Belmont Shores...................... 9,839 6,459 25,838 -- 6,459 25,838 32,297
1300 South El Camino................ 4,007 4,351 17,406 -- 4,351 17,406 21,757
66 Bovet............................ 3,939 1,626 6,505 -- 1,626 6,505 8,131
East Bay, California
Corporate Centre (2 buildings)...... 18,600 9,808 39,233 -- 9,808 39,233 49,041
ADP Plaza (2 buildings)............. 13,400 10,278 41,110 -- 10,278 41,110 51,388
PeopleSoft Plaza.................... 10,025 40,100 36 10,025 40,136 50,161
Norris Tech Center (3 buildings).... 16,392 7,223 28,893 -- 7,223 28,893 36,116
Golden Bear Center.................. 15,753 6,426 25,705 -- 6,426 25,705 32,131
2700 Ygnacio Valley Road............ 5,035 2,375 9,498 23 2,375 9,521 11,896
Park Plaza.......................... 4,940 2,673 10,693 -- 2,673 10,693 13,366
1600 South Main..................... 5,038 2,501 10,003 -- 2,501 10,003 12,504
Foothill Corporate Center........... 1,967 7,867 -- 1,967 7,867 9,834
Atlanta, Georgia
191 Peachtree Street................ 40,110 228,962 3,580 40,110 232,542 272,652
200 Galleria........................ 120,000(B) 11,994 48,443 2,193 12,727 49,903 62,630
<CAPTION>
COLUMN A COLUMN F COLUMN G COLUMN H COLUMN I
- -------------------------------------- ------------ ----------- ----------- --------------
<S> <C> <C> <C> <C>
LIFE ON WHICH
DEPRECIATION
IN
(UNAUDITED) (UNAUDITED) LATEST INCOME
(DOLLAR AMOUNTS IN THOUSANDS) ACCUMULATED YEAR DATE STATEMENTS IS
DESCRIPTION DEPRECIATION CONSTRUCTED ACQUIRED COMPUTED (A)
- -------------------------------------- ------------ ----------- ----------- --------------
Boston, Massachusetts
Sixty State Street.................. $ (5,653) 1979 12/31/97 40
500 Boylston Street................. (5,339) 1988 10/27/97 40
222 Berkeley Street................. (3,490) 1991 10/27/97 40
125 Summer Street................... (9,345) 1989 11/1/95 40
One Memorial Drive.................. (1,570) 1985 4/28/98 40
San Mateo County, California
Bayhill (4 buildings)............... (110) 1982-1987 12/16/98 40
Peninsula Office Park (7
buildings)........................ (105) 1971-1998 12/16/98 40
Seaport Centre...................... (98) 1988 12/16/98 40
Seaport Plaza land.................. -- N/A 12/16/98 N/A
Bay Park Plaza (2 buildings)........ (54) 1985-1998 12/16/98 40
One Bay Plaza....................... (38) 1979 12/16/98 40
Belmont Shores...................... (26) 1983 12/16/98 40
1300 South El Camino................ (18) 1986 12/16/98 40
66 Bovet............................ (7) 1968 12/16/98 40
East Bay, California
Corporate Centre (2 buildings)...... (41) 1985-1987 12/16/98 40
ADP Plaza (2 buildings)............. (43) 1987-1989 12/16/98 40
PeopleSoft Plaza.................... (42) 1984 12/16/98 40
Norris Tech Center (3 buildings).... (30) 1984-1998 12/16/98 40
Golden Bear Center.................. (27) 1986 12/16/98 40
2700 Ygnacio Valley Road............ (10) 1984 12/16/98 40
Park Plaza.......................... (11) 1986 12/16/98 40
1600 South Main..................... (10) 1983 12/16/98 40
Foothill Corporate Center........... (8) 1982 12/16/98 40
Atlanta, Georgia
191 Peachtree Street................ (7,176) 1991 10/27/97 40
200 Galleria........................ (1,590) 1985 10/27/97 40
</TABLE>
F-27
<PAGE>
CORNERSTONE PROPERTIES INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
SCHEDULE III (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------------------------------------- ------------- ------------------------ ------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
COST
CAPITALIZED
SUBSEQUENT TO GROSS AMOUNT AT WHICH CARRIED
INITIAL COST TO COMPANY ACQUISITION AT CLOSE OF PERIOD
------------------------ ------------- -----------------------------------
(DOLLAR AMOUNTS IN THOUSANDS) BUILDING & LAND & BUILDING &
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS TOTAL
- -------------------------------------- ------------- --------- ------------- ------------- --------- ------------- ---------
Seattle, Washington
Washington Mutual Tower (3
buildings)........................ $ 79,100 $ 21,167 $ 43,153 $ 153,578 $ 21,173 $ 196,725 $ 217,898
110 Atrium Place.................... 21,838 7,810 31,242 -- 7,810 31,242 39,052
Island Corporate Center............. 13,294 3,751 15,004 3 3,751 15,007 18,758
Santa Clara, California
Pruneyard Office (3 buildings)...... 49,384 11,896 47,583 198 11,896 47,781 59,677
10 Almaden.......................... 33,885 14,306 57,223 1 14,306 57,224 71,530
Pruneyard Shopping Center........... 8,491 33,966 -- 8,491 33,966 42,457
Embarcadero Place (4 buildings)..... 26,061 11,728 46,913 -- 11,728 46,913 58,641
Pruneyard Inn (C)................... 3,057 12,228 -- 3,057 12,228 15,285
First American Plaza................ 3,415 13,658 7 3,415 13,665 17,080
490 California...................... 1,562 6,248 -- 1,562 6,248 7,810
Denver, Colorado
One Norwest Center.................. 98,252 2,900 15,486 147,564 3,211 162,739 165,950
San Francisco, California
120 Montgomery Street............... 46,930 16,427 65,709 155 16,427 65,864 82,291
201 California Street............... 33,071 11,350 46,040 -- 11,350 46,040 57,390
188 Embarcadero..................... 9,135 4,718 18,871 -- 4,718 18,871 23,589
Minneapolis, Minnesota
Norwest Center...................... 110,000 18,000 33,613 154,733 18,000 188,346 206,346
Washington, D.C./Alexandria, Virginia
Market Square (2 buildings)......... (B) 50,199 201,084 420 50,199 201,504 251,703
99 Canal Center..................... 4,551 18,380 291 4,551 18,671 23,222
TransPotomac Plaza 5................ 65,000(B) 2,124 8,577 292 2,124 8,869 10,993
11 Canal Center..................... 2,326 9,394 303 2,326 9,697 12,023
Suburban Chicago, Illinois
Corporate 500 Centre (4
buildings)........................ 89,765 30,000 120,163 603 30,000 120,766 150,766
One Lincoln Centre.................. 65,000(B) 2,192 47,758 1,717 2,192 49,475 51,667
Santa Monica/West Los Angeles,
California
West Wilshire (2 buildings)......... 17,301 7,492 29,970 -- 7,492 29,970 37,462
Wilshire Palisades.................. 29,902 12,650 52,247 414 12,650 52,661 65,311
Janss Court (D)..................... 18,723 7,274 29,098 -- 7,274 29,098 36,372
Searise Office Tower................ 11,864 6,043 24,172 7 6,043 24,179 30,222
Commerce Park....................... 2,653 10,613 -- 2,653 10,613 13,266
429 Santa Monica.................... 10,176 3,899 15,595 6 3,899 15,601 19,500
<CAPTION>
COLUMN A COLUMN F COLUMN G COLUMN H COLUMN I
- -------------------------------------- ------------ ----------- ----------- -------------------
<S> <C> <C> <C> <C>
LIFE ON WHICH
DEPRECIATION IN
(UNAUDITED) (UNAUDITED) LATEST INCOME
(DOLLAR AMOUNTS IN THOUSANDS) ACCUMULATED YEAR DATE STATEMENTS IS
DESCRIPTION DEPRECIATION CONSTRUCTED ACQUIRED COMPUTED (A)
- -------------------------------------- ------------ ----------- ----------- -------------------
Seattle, Washington
Washington Mutual Tower (3
buildings)........................ $ (80,601) 1988 5/1/88 40
110 Atrium Place.................... (33) 1981 12/16/98 40
Island Corporate Center............. (16) 1987 12/16/98 40
Santa Clara, California
Pruneyard Office (3 buildings)...... (50) 1971-1999 12/16/98 40
10 Almaden.......................... (60) 1989 12/16/98 40
Pruneyard Shopping Center........... (35) 1970s 12/16/98 40
Embarcadero Place (4 buildings)..... (49) 1984 12/16/98 40
Pruneyard Inn (C)................... (13) 1989 12/16/98 40
First American Plaza................ (14) 1971 12/16/98 40
490 California...................... (7) 1985 12/16/98 40
Denver, Colorado
One Norwest Center.................. (76,410) 1983 1/1/84 40
San Francisco, California
120 Montgomery Street............... (71) 1955 12/16/98 40
201 California Street............... (671) 1969 6/3/98 40
188 Embarcadero..................... (20) 1980 12/16/98 40
Minneapolis, Minnesota
Norwest Center...................... (80,241) 1988 7/1/88 40
Washington, D.C./Alexandria, Virginia
Market Square (2 buildings)......... (855) 1990 11/1/98 40
99 Canal Center..................... (560) 1986 10/27/97 40
TransPotomac Plaza 5................ (280) 1983 10/27/97 40
11 Canal Center..................... (301) 1986 10/27/97 40
Suburban Chicago, Illinois
Corporate 500 Centre (4
buildings)........................ (2,826) 1986/1990 1/28/98 40
One Lincoln Centre.................. (2,862) 1986 11/8/96 40
Santa Monica/West Los Angeles,
California
West Wilshire (2 buildings)......... (31) 1960-1976 12/16/98 40
Wilshire Palisades.................. (773) 1981 6/3/98 40
Janss Court (D)..................... (30) 1989 12/16/98 40
Searise Office Tower................ (25) 1975 12/16/98 40
Commerce Park....................... (11) 1977 12/16/98 40
429 Santa Monica.................... (16) 1982 12/16/98 40
</TABLE>
F-28
<PAGE>
CORNERSTONE PROPERTIES INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
SCHEDULE III (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------------------------------------- ------------- ------------------------ ------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
COST
CAPITALIZED
SUBSEQUENT TO GROSS AMOUNT AT WHICH CARRIED
INITIAL COST TO COMPANY ACQUISITION AT CLOSE OF PERIOD
------------------------ ------------- -----------------------------------
(DOLLAR AMOUNTS IN THOUSANDS) BUILDING & LAND & BUILDING &
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS TOTAL
- -------------------------------------- ------------- --------- ------------- ------------- --------- ------------- ---------
Orange County, California
Bixby Ranch......................... $ 20,243 $ 9,681 $ 38,723 $ 10 $ 9,681 $ 38,733 $ 48,414
18301 Von Karman.................... 10,647 8,052 32,206 7 8,052 32,213 40,265
2677 South Main..................... 10,774 5,696 22,786 -- 5,696 22,786 28,482
Charlotte, North Carolina
Charlotte Plaza..................... (B) 15,474 62,495 1,969 15,474 64,464 79,938
Arizona
Gateway (2 buildings)............... 8,679 4,811 19,243 -- 4,811 19,243 24,054
Scottsdale Centre................... 7,745 4,992 19,969 1 4,992 19,970 24,962
Biltmore Lakes...................... 11,468 4,586 18,342 -- 4,586 18,342 22,928
San Diego, California
Centerside II....................... 13,818 7,524 30,094 -- 7,524 30,094 37,618
Crossroads.......................... 7,339 3,207 12,828 105 3,207 12,933 16,140
Los Angeles, California
700 North Brand..................... 18,108 8,112 32,450 -- 8,112 32,450 40,562
Tri-Center Plaza.................... 4,276 17,104 -- 4,276 17,104 21,380
Warner Park Center.................. 5,213 1,746 6,986 8 1,746 6,994 8,740
New York City, New York
527 Madison Avenue.................. (B) 21,440 46,643 1,612 21,440 48,255 69,695
Tower 56............................ 17,548 5,528 25,203 9,234 5,528 34,437 39,965
Conejo Valley (Ventura), California
Westlake Spectrum (2 buildings)..... 9,277 3,510 14,038 -- 3,510 14,038 17,548
Agoura Hills........................ 12,328 3,821 15,284 -- 3,821 15,284 19,105
Other
U.S. West (Murray, Utah)............ 3,311 13,245 -- 3,311 13,245 16,556
Exposition Centre (Sacramento,
CA)............................... 5,200 1,772 7,089 -- 1,772 7,089 8,861
------------- --------- ------------- ------------- --------- ------------- ---------
Grand Total........................... $ 1,518,951 $ 728,273 $ 3,120,708 $ 490,418 $ 729,323 $ 3,611,126 $4,340,449
------------- --------- ------------- ------------- --------- ------------- ---------
------------- --------- ------------- ------------- --------- ------------- ---------
<CAPTION>
COLUMN A COLUMN F COLUMN G COLUMN H COLUMN I
- -------------------------------------- ------------ ----------- ----------- -------------------
<S> <C> <C> <C> <C>
LIFE ON WHICH
DEPRECIATION IN
(UNAUDITED) (UNAUDITED) LATEST INCOME
(DOLLAR AMOUNTS IN THOUSANDS) ACCUMULATED YEAR DATE STATEMENTS IS
DESCRIPTION DEPRECIATION CONSTRUCTED ACQUIRED COMPUTED (A)
- -------------------------------------- ------------ ----------- ----------- -------------------
Orange County, California
Bixby Ranch......................... $ (40) 1987 12/16/98 40
18301 Von Karman.................... (34) 1991 12/16/98 40
2677 South Main..................... (24) 1987 12/16/98 40
Charlotte, North Carolina
Charlotte Plaza..................... (1,787) 1982 10/27/97 40
Arizona
Gateway (2 buildings)............... (20) 1984-1985 12/16/98 40
Scottsdale Centre................... (21) 1985 12/16/98 40
Biltmore Lakes...................... (19) 1982 12/16/98 40
San Diego, California
Centerside II....................... (32) 1987 12/16/98 40
Crossroads.......................... (13) 1983 12/16/98 40
Los Angeles, California
700 North Brand..................... (34) 1981 12/16/98 40
Tri-Center Plaza.................... (18) 1990 12/16/98 40
Warner Park Center.................. (7) 1986 12/16/98 40
New York City, New York
527 Madison Avenue.................. (2,310) 1986 2/14/97 40
Tower 56............................ (2,335) 1983 4/24/96 40
Conejo Valley (Ventura), California
Westlake Spectrum (2 buildings)..... (15) 1990 12/16/98 40
Agoura Hills........................ (16) 1987 12/16/98 40
Other
U.S. West (Murray, Utah)............ (14) 1985 12/16/98 40
Exposition Centre (Sacramento,
CA)............................... (7) 1984 12/16/98 40
------------
Grand Total........................... $ (288,448)
------------
------------
</TABLE>
- ----------------------------------
(A) The life to compute depreciation on Buildings is 40 years. The life to
compute depreciation on Building Improvements is 3 to 40 years.
(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. In addition,
the $181.0 million first mortgage loan on Market Square, which the Company
purchased from PGGM in 1997, has been pledged as collateral for the $120.0
million 200 Galleria loan.
(C) The Pruneyard Inn is a 118-room hotel. The Property is currently undergoing
a 25,000-square foot expansion, which will create 54 new rooms.
(D) In addition to 92,000 square feet of retail and office space, Janss Court
contains 32 apartments comprising 33,000 rentable square feet of residential
space.
F-29
<PAGE>
CORNERSTONE PROPERTIES INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
SCHEDULE III
DECEMBER 31, 1998
(CONTINUED)
Reconciliation of "Real Estate and Accumulated Depreciation"
<TABLE>
<CAPTION>
1998 1997 1996
---------------- ---------------- --------------
<S> <C> <C> <C>
INVESTMENT IN REAL ESTATE
Balance, beginning of period................................ $ 1,947,272 $ 799,662 $ 676,258
Additions during period:
Acquisitions............................................ 2,410,427 1,135,629 80,681
Improvements............................................ 30,690 12,468 44,032
Deductions during period:
Properties disposed of.................................. (47,940) -- --
Retirements and writeoffs............................... -- (487) (1,309)
---------------- ---------------- --------------
Balance, end of period...................................... $ 4,340,449 $ 1,947,272 $ 799,662
---------------- ---------------- --------------
---------------- ---------------- --------------
ACCUMULATED DEPRECIATION
Balance, beginning of period................................ $ 229,652 $ 198,686 $ 175,167
Additions during period:
Depreciation............................................ 59,278 30,978 24,317
Deductions during period:
Properties disposed of.................................. (478) -- --
Retirements and writeoffs............................... (4) (12) (798)
---------------- ---------------- --------------
Balance, end of period...................................... $ 288,448 $ 229,652 $ 198,686
---------------- ---------------- --------------
---------------- ---------------- --------------
</TABLE>
F-30
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Cornerstone Properties Inc. and subsidiaries (the "Company") on Form S-3 (File
No.'s 333-72449, 333-18303, 333-47149, 333-59259, 333-77139) and Form S-8 (File
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/A.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
New York, New York
April 30, 1999
