<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 8-K/A No. 1
--------------------
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): September 28, 1998
CORPORATE OFFICE PROPERTIES TRUST
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 0-20047 23-2947217
-------- ------- ----------
(State or other jurisdiction of (Commission (IRS Employer
incorporation) File Number) Identification Number)
401 City Avenue, Suite 615
Bala Cynwyd, PA 19004
-------------------------
(Address of principal executive offices)
(610) 538-1800
-------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Item 5. Other Events
On September 28, 1998, Corporate Office Properties Trust (the
"Company"), through affiliates of Corporate Office Properties, L.P. (the
"Operating Partnership"), completed a number of transactions (collectively, the
"Completed Transactions") pursuant to agreements (the "Constellation
Agreements") with affiliates of Constellation Real Estate Group, Inc.
(collectively, "Constellation"), a wholly-owned indirect subsidiary of Baltimore
Gas and Electric Company, to acquire certain real property, a mortgage and
certain other assets owned by Constellation. Certain property acquisitions
covered under the agreements between the Company and Constellation as approved
by shareholders of the Company pursuant to its July 22, 1998 proxy statement and
related special meeting of shareholders were not completed on September 28,
1998.
On October 22, 1998, the Company, through affiliates of the
Operating Partnership, and pursuant to the Constellation Agreements, acquired
a newly-constructed office building located in Columbia, Maryland ("Woodlands
One"). Woodlands One was acquired at an aggregate price of $17,928,000,
including $328,000 in transaction costs, which was financed as follows: (i)
the issuance of 517,923 Common Shares of Beneficial Interest, valued at
$5,438,000 ($10.50 per share), (ii) the issuance of 72,509 non-voting Series
A Convertible Preferred Shares of Beneficial Interest, $0.01 par value $25.00
liquidation preference, valued at $1,813,000 ($25.00 per share), (iii)
$9,533,000 in assumed debt and (iv) $1,144,000 using the Company's cash
reserves. The Woodlands One property contains approximately 108,000 square
feet and is 100% leased to Green Spring Health Services, Inc. pursuant to a
lease which commenced October 22, 1998. Rental revenue under this lease as of
September 30, 1998 including estimated expense reimbursements approximates
$2,185,000 per annum or $20.23 per square foot.
On November 13, 1998, the Company, through affiliates of the
Operating Partnership, and pursuant to the Constellation Agreements, acquired
100% of the ownership interests in entities which own two office properties
currently under construction (the "Constellation Construction Properties").
The purchase price and closing costs of the Constellation Construction
Properties totaled approximately $7.2 million, including $27,000 in
transaction costs. The acquisition was completed with the assumption of
approximately $2.0 million in debt and the balance paid in cash using
proceeds from the Company's existing senior revolving credit facility with
Bankers Trust Company. The Constellation Construction Properties are located
in the Baltimore/Washington corridor, adjacent to certain other properties
acquired by the Company from Constellation. Construction is anticipated to be
completed by August 1999, at which time the two buildings will have rentable
square footage of approximately 106,000 and 93,000. As of December 11, 1998,
a lease was signed for approximately 35,000 square feet in one of the
buildings.
Certain property acquisitions covered under the agreements between the
Company and Constellation as approved by shareholders of the Company pursuant to
its July 22, 1998 proxy statement and related special meeting of shareholders
were not completed on December 11, 1998 (collectively, the "Pending
Transactions"). The Pending Transactions include the following:
(i) Acquisition of 100% of the ownership interests in an entity which
owns a newly-constructed operating office property; and
(ii) Acquisition of 100% ownership interest in an entity which owns a
retail property (on which construction is nearing completion).
2
<PAGE>
The acquisition in Item (i) above is anticipated to occur in December
1998. The acquisition described in Item (ii) above is subject to the attainment
of certain financial thresholds and other contingencies and, accordingly, may
not occur.
The property covered under the acquisition agreements between the
Company and Constellation as approved by shareholders of the Company pursuant to
its July 22, 1998 proxy statement also included a 60% ownership interest in an
entity which owns a retail property currently under construction. The agreement
to acquire this property was terminated at the election of the Company by mutual
agreement with Constellation; therefore, this acquisition will not occur.
On October 22, 1998, the Company obtained a nonrecourse loan from
Teachers Insurance and Annuity Association of America (the "TIAA Loan"). The
total commitment under the TIAA Loan is $85.0 million, of which $76.2 million
was advanced on October 22, 1998 (the "First Disbursement"). The proceeds of the
First Disbursement were used as follows: (i) $27,181,000 was used to pay off
certain of the assumed debt associated with the Constellation Transaction, (ii)
$9,533,000 was used to pay off debt associated with the acquisition of Woodlands
One, (iii) $38.5 million was used to pay down the Credit Facility, (iv) $723,000
was used to pay closing costs associated with the TIAA Loan and Woodlands One
acquisition and (v) $263,000 was applied to the Company's cash reserves. The
remaining $8.8 million of the loan commitment (the "Second Disbursement") will
be advanced upon the Company's acquisition of an additional commercial office
building from Constellation. The TIAA Loan bears interest at a fixed rate of
6.89% per annum and provides for monthly payments of principal and interest of
$533,000 prior to the Second Disbursement and $595,000 thereafter. The TIAA Loan
matures on November 1, 2008 and may not be prepaid prior to November 30, 2003.
The following schedule presents the material terms of the assumed debt
which was not repaid from the TIAA Loan proceeds as of September 30, 1998:
<TABLE>
<CAPTION>
Amount Interest Maturity
Lender Assumed Rate Terms Date
------ ------- ---- ----- ----
<S> <C> <C> <C> <C>
Security Life of Denver Insurance Co. $ 9,555,574 7.5% Monthly Principal and 10/31/05
Interest of $73,899
Bank of America 9,982,685 LIBOR + Monthly Principal of 1/15/99
2% $35,253 Plus Interest
Mercantile-Safe Deposit and Trust Co. 8,437,989 Prime + Monthly Principal and 7/01/99
1/2% Interest of $65,922
Provident Bank of Maryland 2,927,680 LIBOR + Monthly Principal of 9/01/00
----------- 1.75% $6,780 Plus Interest
$30,903,928
-----------
-----------
</TABLE>
Item 7. Financial Statements and Exhibits
(a) Financial Statements of Businesses Acquired
The financial statements of the Constellation Properties and the
Constellation Service Companies are included herein. See pages
F-15 through F-33.
3
<PAGE>
(b) Pro Forma Financial Information
The pro forma condensed consolidating financial statements of the
Company are included herein. See pages F-1 through F-14.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this Report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: December 11, 1998
CORPORATE OFFICE PROPERTIES TRUST
By: /s/ Randall M. Griffin
-----------------------
Name: Randall M. Griffin
Title: President and
Chief Operating Officer
By: /s/ Roger A. Waesche, Jr.
-------------------------
Name: Roger A. Waesche, Jr.
Title: Senior Vice President - Finance
4
<PAGE>
CORPORATE OFFICE PROPERTIES TRUST
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
I. PRO FORMA CONDENSED CONSOLIDATING FINANCIAL STATEMENTS OF THE COMPANY
Pro Forma Condensed Consolidating Balance Sheet as of September 30, 1998 F-5
Pro Forma Condensed Consolidating Statement of Operations for the Year
Ended December 31, 1997 F-6
Pro Forma Condensed Consolidating Statement of Operations for the
Nine Months Ended September 30, 1998 F-7
Notes and Management's Assumptions to Pro Forma Condensed
Consolidating Financial Information F-8
II. CONSTELLATION PROPERTIES
Report of Independent Accountants F-15
Combined Statements of Revenue and Certain Expenses from January 1,
1998 through September 27, 1998 (unaudited) and
for the Year Ended December 31, 1997 F-16
Notes to Combined Statement of Revenue and Certain Expenses F-17
III. CONSTELLATION SERVICE COMPANIES
Report of Independent Accountants F-21
Consolidated Balance Sheets as of September 27, 1998 (unaudited)
and December 31, 1997 and 1996 F-22
Consolidated Statements of Operations for the Periods Ended September
27, 1998 and September 30, 1997 (unaudited)
and for the Years Ended December 31, 1997, 1996 and 1995 F-23
Consolidated Statements of Equity from January 1, 1998 through
September 27, 1998 (unaudited) and for the Years Ended December 31,
1997, 1996 and 1995 F-24
Consolidated Statements of Cash Flows for the Periods Ended September
27, 1998 and September 30, 1997 (unaudited)
and for the Years Ended December 31, 1997, 1996 and 1995 F-25
Notes to Consolidated Financial Statements F-26
</TABLE>
F-1
<PAGE>
CORPORATE OFFICE PROPERTIES TRUST
PRO FORMA CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The following sets forth the unaudited pro forma condensed consolidating balance
sheet of Corporate Office Properties Trust and its consolidated affiliates,
including Corporate Office Properties, L.P. (the "Operating Partnership") as of
September 30, 1998, and the unaudited pro forma condensed consolidating
statements of operations for the year ended December 31, 1997 and the nine-month
period ended September 30, 1998 of the Company (as defined below). Corporate
Office Properties Trust and its consolidated affiliates, including the Operating
Partnership, are collectively referred to herein as the "Company."
In October 1997, the Operating Partnership acquired partnership interests in a
portfolio of ten properties (the "Initial Office Properties"), representing the
Mid-Atlantic suburban office operations of The Shidler Group, subject to $100
million of indebtedness (the "Term Credit Facility"). At that time, the Company
became the sole general partner of the Operating Partnership, which was formed
to acquire and hold the Initial Office Properties. In connection with the
acquisition of the Initial Office Properties, the Company issued 600,000 of its
common shares of beneficial interest ("Common Shares") and the Operating
Partnership issued (or committed to issue) 3,181,818 common partnership units
("Common Units") and 2.1 million preferred partnership units ("Preferred Units"
or "Preferred 1997 Units").
The acquisition of the Initial Office Properties is reflected in the Company's
historical consolidated balance sheet as of September 30, 1998, and is included
in the pro forma condensed consolidating statements of operations as if it
occurred on January 1, 1997.
The pro forma condensed consolidating financial information is presented as if
the following transactions had been consummated on the earlier of the actual
date of consummation or September 30, 1998 for balance sheet purposes, and at
the beginning of the period presented for purposes of the statements of
operations:
- - The consummation of a public offering (the "Offering") on April 27,
1998, in which the Company issued 7,500,000 Common Shares at $10.50 per
share and contributed all of the net proceeds to the Operating
Partnership in exchange for 7,500,000 Common Units.
- - The acquisition of nine multistory office buildings and three
office/flex buildings (the "Airport Square Properties") on April 30,
1998.
- - The acquisition of two office properties (the "Fairfield Properties")
on May 28, 1998.
- - The closing of a $100 million, two-year-senior revolving credit
facility (the "Revolving Credit Facility") on May 28, 1998 and the
borrowing of $23,750,000 under the Revolving Credit Facility to pay a
portion of the consideration for the Fairfield Properties.
- - The acquisition by the Company on September 28, 1998, from various
parties (collectively, "Constellation") of interests in (i) 10 office
and 2 retail properties (the "Constellation Properties"); (ii) a 75%
ownership interest in a real estate management services entity; and
(iii) certain equipment, furniture and other assets related to
management operations ((ii) and (iii) collectively, the "Constellation
Service Companies") for: (a) issuance by the Company of 865,566
non-voting Series A
F-2
<PAGE>
Convertible Preferred Shares of Beneficial Interest, $0.01 par value,
$25.00 liquidation preference ("Preferred Shares") and 6,182,634 Common
Shares; (b) the assumption of debt aggregating $58,085,000 (net of
$1,475,000 in debt repaid at settlement); (c) utilization of loan
proceeds from the Revolving Credit Facility of $2,100,000, and (d) the
payment of $2,485,000 in cash (including $1,475,000 of debt repaid at
settlement). The foregoing is referred to herein as the "Constellation
Transaction."
- - The acquisition by the Company on October 22, 1998, from Constellation
of an interest in a newly-constructed office property (the "Woodlands
One Property") for: (a) issuance by the Company of 72,509 Preferred
Shares and 517,923 Common Shares; (b) the assumption of debt
aggregating $9,533,000; and (c) the payment of $1,144,000 in cash.
- - The acquisition by the Company on October 13, 1998, from an unrelated
party of an interest in an office property ("Riverwood Property") for:
(a) issuance by the Company of 148,381 Common Units; and (b) the
utilization of loan proceeds from the Revolving Credit Facility of
$18,842,000.
- - The closing of an $85,000,000, ten-year nonrecourse loan (the "TIAA
Loan") on October 22, 1998 and the borrowing of $76,200,000 under this
loan.
- - The contribution by the Company of all the assets acquired in the
Constellation Transaction, including the Woodlands One Property, to the
Operating Partnership in exchange for 6,700,557 Common Units and
938,075 preferred partnership units ("Preferred Units" or "Preferred
1998 Units").
- - The acquisition by the Company on November 13, 1998, from Constellation
interests in entities which own two office properties currently under
construction (the "Constellation Construction Properties") for: (a) the
assumption of debt aggregating $2,000,000; and (b) the utilization of
loan proceeds from the Revolving Credit Facility of $5,200,000.
The accompanying pro forma condensed consolidating financial information does
not include the effects of the acquisition of one office and one retail property
(one of which is newly constructed and one of which is under construction) as
the Company has not consummated these acquisitions as of December 11, 1998.
This pro forma condensed consolidating financial information should be read in
conjunction with the historical financial statements of the Company and those of
the Initial Office Properties, the Airport Square Properties, the Fairfield
Properties, the Riverwood Property, the Constellation Properties and the
Constellation Service Companies. In management's opinion, all adjustments
necessary to reflect the effects of the consummated transactions have been made.
This pro forma condensed consolidating financial information is unaudited and is
not necessarily indicative of what the actual financial position would have been
at September 30, 1998, nor does it purport to represent the future financial
position and the results of operations of the Company.
F-3
<PAGE>
Corporate Office Properties Trust
Pro Forma Condensed Consolidating Balance Sheet
As of September 30, 1998
(Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Historical Riverwood Woodlands Retirement of
Consolidated Property One TIAA Loan Debt
(A) (B) Property(C) (D) (E)
<S> <C> <C> <C> <C> <C>
Assets
Net investments in real estate $ 434,833 $ 20,356 $ 17,928 $ - $ -
Cash and cash equivalents 1,906 - (1,144) 75,555 (75,214)
Investment in unconsolidated subsidiary, net 2,313 - - - -
Other assets 8,932 - - 645 -
--------- --------- --------- --------- ----------
Total assets $ 447,984 $ 20,356 $ 16,784 $ 76,200 $ (75,214)
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
Liabilities and shareholders' equity
Liabilities
Mortgage loans payable $ 205,338 $ 18,798 $ 9,533 $ 76,200 $ (75,214)
Other liabilities 9,659 - - - -
--------- --------- --------- --------- ----------
Total liabilities 214,997 18,798 9,533 76,200 (75,214)
--------- --------- --------- --------- ----------
Minority interests
Preferred Units 52,500 - - - -
Common Units 23,186 1,558 - - -
--------- --------- --------- --------- ----------
Total minority interests 75,686 1,558 - - -
--------- --------- --------- --------- ----------
Shareholders' equity
Preferred shares of beneficial interest 9 - 1 - -
Common shares of beneficial interest 160 - 5 - -
Additional paid in capital 163,918 - 7,245 - -
Accumulated deficit (6,786) - - - -
--------- --------- --------- --------- ----------
Total shareholders' equity 157,301 - 7,251 - -
--------- --------- --------- --------- ----------
Total liabilities and shareholders' equity $ 447,984 $ 20,356 $ 16,784 $ 76,200 $ (75,214)
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
</TABLE>
<TABLE>
<CAPTION>
Constellation
Construction
Properties Pro Forma Pro Forma
(F) Adjustments (G) Consolidated
<S> <C> <C> <C>
Assets
Net investments in real estate $ 7,200 $ - $ 480,317
Cash and cash equivalents - - 1,103
Investment in unconsolidated subsidiary, net - - 2,313
Other assets - - 9,577
---------- ---------- ---------
Total assets $ 7,200 $ - $ 493,310
---------- ---------- ---------
---------- ---------- ---------
Liabilities and shareholders' equity
Liabilities
Mortgage loans payable $ 7,200 $ - $ 241,855
Other liabilities - - 9,659
---------- ---------- ---------
Total liabilities 7,200 - 251,514
---------- ---------- ---------
Minority interests
Preferred Units - - 52,500
Common Units - (12) 24,732
---------- ---------- ---------
Total minority interests - (12) 77,232
---------- ---------- ---------
Shareholders' equity
Preferred shares of beneficial interest - - 10
Common shares of beneficial interest - - 165
Additional paid in capital - 12 171,175
Accumulated deficit - - (6,786)
---------- ---------- ---------
Total shareholders' equity - 12 164,564
---------- ---------- ---------
Total liabilities and shareholders' equity $ 7,200 $ - $ 493,310
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
See accompanying notes and management's assumptions to pro forma financial
statements
F-4
<PAGE>
Corporate Office Properties Trust
Pro Forma Condensed Consolidating Statement of Operations
For the Year Ended December 31, 1997
(Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Constellation
Transaction,
including
Woodlands One
Initial Office, Property and
Airport Square Constellation
Historical and Fairfield Construction
Consolidated(A) Properties(B) Properties(C)
<S> <C> <C> <C>
Revenues:
Base rents $ 6,122 $ 23,129 $ 14,756
Tenant reimbursements and other 496 2,815 2,308
----------- ----------- -----------
Total revenues 6,618 25,944 17,064
----------- ----------- -----------
Expenses:
Property operating 728 8,029 5,986
General and administrative 533 299 526
Interest expense 2,855 7,388 -
Depreciation and amortization 1,331 2,580 -
Termination of Advisory Agreement 1,353 - -
----------- ----------- -----------
Total expenses 6,800 18,296 6,512
----------- ----------- -----------
Equity in income (loss) of management company - - (80)
----------- ----------- -----------
Income (loss) before minority interests (182) 7,648 10,472
Minority interests
Preferred Units (720) - -
Common Units (65) - -
----------- ----------- -----------
Net income (loss) (967) 7,648 10,472
Preferred share distributions - - -
----------- ----------- -----------
Net income (loss) available to Common Shareholders $ (967) $ 7,648 $ 10,472
----------- ----------- -----------
----------- ----------- -----------
Net income (loss) per share: Basic and diluted $ (0.60)
-----------
-----------
Weighted average number of shares-Basic and diluted 1,600,807
-----------
-----------
</TABLE>
<TABLE>
<CAPTION>
Riverwood Pro Forma Pro Forma
Property(D) Adjustments Consolidated
<S> <C> <C> <C>
Revenues:
Base rents $ 1,912 $ - $ 45,919
Tenant reimbursements and other 702 201 (E) 6,522
---------- --------- -----------
Total revenues 2,614 201 52,441
---------- --------- -----------
Expenses:
Property operating 676 - 15,419
General and administrative - - 1,358
Interest expense - 7,950 (F) 18,193
Depreciation and amortization - 6,246 (G) 10,157
Termination of Advisory Agreement - (1,353)(H) -
---------- --------- -----------
Total expenses 676 12,843 45,127
---------- --------- -----------
Equity in income (loss) of management company - - (80)
---------- --------- -----------
Income (loss) before minority interests 1,938 (12,642) 7,234
Minority interests
Preferred Units - (2,692)(I) (3,412)
Common Units - (272)(I) (337)
---------- --------- -----------
Net income (loss) 1,938 (15,606) 3,485
Preferred share distributions - (1,290)(I) (1,290)
---------- --------- -----------
Net income (loss) available to Common Shareholders 1,938 $ (16,896) $ 2,195
---------- --------- -----------
---------- --------- -----------
Net income (loss) per share: Basic and diluted $ 0.13
-----------
-----------
Weighted average number of shares-Basic and diluted 16,466,640
-----------
-----------
</TABLE>
See accompanying notes and management's assumptions to pro forma financial
statements
F-5
<PAGE>
Corporate Office Properties Trust
Pro Forma Condensed Consolidating Statement of Operations
For the Nine Month Period Ended September 30, 1998
(Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Constellation
Transaction,
including
Woodlands One
Initial Office, Property and
Airport Square Constellation
Historical and Fairfield Construction
Consolidated(A) Properties(B) Properties (C)
<S> <C> <C> <C>
Revenues:
Base rents $ 20,539 $ 4,984 $ 11,706
Tenant reimbursements and other 2,640 220 1,535
------------- ----------- ------------
Total revenues 23,179 5,204 13,241
------------- ----------- ------------
Expenses:
Property operating 5,001 1,545 5,228
General and administrative 1,055 46 -
Interest expense 7,424 - -
Depreciation and amortization 4,038 - -
Reformation costs 637 - -
------------- ----------- ------------
Total expenses 18,155 1,591 5,228
------------- ----------- ------------
Equity in income (loss) of management company 17 - (293)
------------- ----------- ------------
Income (loss) before minority interests 5,041 3,613 7,720
Minority interests
Preferred Units (2,559) - -
Common Units (713) - -
------------- ----------- ------------
Net income (loss) 1,769 3,613 7,720
Preferred share distributions (10) - -
------------- ----------- ------------
Net income (loss) available to Common Shareholders $ 1,759 $ 3,613 $ 7,720
------------- ----------- ------------
------------- ----------- ------------
Net income (loss) per share: Basic and diluted $ 0.26
-------------
-------------
Weighted average number of shares: Basic 6,651,533
-------------
-------------
Weighted average number of shares: Diluted 6,737,907
-------------
-------------
</TABLE>
<TABLE>
<CAPTION>
Riverwood Pro Forma Pro Forma
Property(D) Adjustments Consolidated
<S> <C> <C> <C>
Revenues:
Base rents $ 1,451 $ - $ 38,680
Tenant reimbursements and other 536 150 (E) 5,081
------------- --------- -----------
Total revenues 1,987 150 43,761
------------- --------- -----------
Expenses:
Property operating 506 - 12,280
General and administrative - - 1,101
Interest expense - 6,205 (F) 13,629
Depreciation and amortization - 3,619 (G) 7,657
Reformation costs - (637)(H) -
------------- --------- -----------
Total expenses 506 9,187 34,667
------------- --------- -----------
Equity in income (loss) of management company - - (276)
------------- --------- -----------
Income (loss) before minority interests 1,481 (9,037) 8,818
Minority interests
Preferred Units - - (I) (2,559)
Common Units - (59)(I) (772)
------------- --------- -----------
Net income (loss) 1,481 (9,096) 5,487
Preferred share distributions - (957)(I) (967)
------------- --------- -----------
Net income (loss) available to Common Shareholders $ 1,481 $(10,053) $ 4,520
------------- --------- -----------
------------- --------- -----------
Net income (loss) per share: Basic and diluted $ 0.27
-----------
-----------
Weighted average number of shares: Basic 16,470,962
-----------
-----------
Weighted average number of shares: Diluted 16,557,336
-----------
-----------
</TABLE>
See accompanying notes and management's assumptions to pro forma financial
statements
F-6
<PAGE>
CORPORATE OFFICE PROPERTIES TRUST
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
PRO FORMA CONDENSED CONSOLIDATING
FINANCIAL INFORMATION
(Dollars in thousands, except share and per share amounts)
1. Basis of Presentation:
Corporate Office Properties Trust (the "Company") is a self-administered
Maryland real estate investment trust. As of September 30, 1998, the Company's
portfolio included 43 commercial real estate properties leased for office and
retail purposes.
These pro forma condensed consolidating financial statements should be read
in conjunction with the historical financial statements and notes thereto of
the Company, the Initial Office Properties, the Airport Square Properties,
the Fairfield Properties, the Riverwood Property, the Constellation
Properties and the Constellation Service Companies. In management's opinion,
all adjustments necessary to reflect the effects of the Offering, the
acquisitions of the Initial Office Properties, the Airport Square Properties,
the Fairfield Properties, the Riverwood Property, the Constellation
Properties, the Constellation Service Companies, the Woodlands One Property, the
Constellation Construction Properties and the closing of the TIAA Loan and
utilization of the proceeds thereof by the Company have been made.
2. Adjustments to Pro Forma Condensed Consolidating Balance Sheet:
(A) Reflects the historical consolidated balance sheet of the Company as of
September 30, 1998.
(B) Reflects the contribution of the Riverwood Property from an unrelated
party in exchange for: (i) issuance of 148,381 Common Units at a value
of $10.50 per unit ($1,558) and; (ii) the utilization of loan proceeds
from the Revolving Credit Facility of $18,798, including payment of
$348 of costs associated with the acquisition.
(C) Reflects the acquisition of the Woodlands One Property from
Constellation in exchange for: (i) issuance of 72,509 Preferred Shares
at a value equal to a liquidation preference of $25.00 per share
($1,813); (ii) issuance of 517,923 Common Shares at a value of $10.50
per share ($5,438); (iii) assumption of debt aggregating $9,533; and
(iv) utilization of cash reserves of $1,144, including payment of $328
of costs associated with the acquisition.
(D) Reflects the proceeds of the first disbursement under the TIAA Loan,
net of associated costs of $645.
(E) Reflects the application of the net proceeds of the TIAA Loan where
debt was retired of: (i) $27,181 assumed in connection with the
Constellation Transaction; (ii) $9,533 assumed in connection with the
Woodlands One Property and (iii) $38,500 of the balance of the
Revolving Credit Facility.
F-7
<PAGE>
(F) Reflects the acquisition of the Constellation Construction
Properties from Constellation in exchange for: (a) the assumption of
debt aggregating $2,000; and (b) the utilization of loan
proceeds from the Revolving Credit Facility of $5,200.
(G) Reflects the adjustment to minority interests as a result of the
transactions in connection with the Constellation Transaction, the
Woodlands One Property and the Riverwood Property. After the closings,
the Company holds a total of 14,800,557 Common Units or an 84.4%
interest in the Operating Partnership.
<TABLE>
<CAPTION>
Company Operating Partnership Consolidated
<S> <C> <C> <C> <C>
Minority interests
Common Units $ - $ 24,732 15.6% $ 24,732
Shareholders' equity (1)
Common Shares 7,303 133,809 84.4% 141,112
-------- -------- ------ ---------
$ 7,303 $158,541 100.0% $165,844
-------- -------- ------ ---------
-------- -------- ------ ---------
</TABLE>
(1) Excluding $23,452 related to the Company's Preferred Shares
3. Adjustments to Pro Forma Condensed Consolidating Statements of
Operations:
(A) Reflects the historical consolidated operations of the Company.
(B) Reflects the effects of the combined historical operations of the
Initial Office Properties, the Airport Square Properties and the
Fairfield Properties which were acquired on October 14, 1997, April 30,
1998 and May 28, 1998, respectively.
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Initial Office Airport Square Fairfield
Properties Properties Properties
through Through through
10/13/97 12/31/97 12/31/97 Combined
<S> <C> <C> <C> <C>
Revenues
Base rents $ 12,216 $ 8,524 $ 2,389 $ 23,129
Tenant reimbursements and other 1,282 295 1,238 2,815
----------- ----------- ---------- ----------
Total revenues 13,498 8,819 3,627 25,944
----------- ----------- ---------- ----------
Expenses
Property operating 2,731 3,367 1,931 8,029
General and administrative 174 41 84 299
Interest expense 7,388 - - 7,388
Depreciation and amortization 2,580 - - 2,580
----------- ----------- ---------- ----------
Total expenses 12,873 3,408 2,015 18,296
----------- ----------- ---------- ----------
Income (loss) before minority interests $ 625 $ 5,411 $ 1,612 $ 7,648
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
</TABLE>
F-8
<PAGE>
For the Nine Month Period Ended September 30, 1998
<TABLE>
<CAPTION>
Fairfield
Airport Square Properties
Initial Office Properties Historical
Properties Historical through
Historical through 4/29/98 5/27/98 Combined
<S> <C> <C> <C> <C>
Revenues
Base rents $ - $ 3,371 $ 1,613 $ 4,984
Tenant reimbursements and other - 90 130 220
----------- ----------- ---------- ----------
Total revenues - 3,461 1,743 5,204
----------- ----------- ---------- ----------
Expenses
Property operating - 1,073 472 1,545
General and administrative - 8 38 46
Interest expense - - - -
Depreciation and amortization - - - -
----------- ----------- ---------- ----------
Total expenses - 1,081 510 1,591
----------- ----------- ---------- ----------
Income (loss) before minority interests $ - $ 2,380 $ 1,233 $ 3,613
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
</TABLE>
(C) Reflects the effects of the adjusted combined historical operations of
the Constellation Properties and the Constellation Service Companies
which were acquired on September 28, 1998. Historical operations for
the Woodlands One Property and the Constellation Construction
Properties are not reflected as those properties were not operational
as of September 30, 1998
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Constellation
Constellation Service Pro Forma
Properties Companies Constellation
Historical Historical Adjustments Combined
<S> <C> <C> <C> <C>
Revenues
Base rents $ 14,756 $ - $ - $ 14,756
Tenant reimbursements and other 2,308 11,226 (11,226)(i) 2,308
----------- ---------- ---------- ---------
Total revenues 17,064 11,226 (11,226) 17,064
----------- ---------- ---------- ---------
Expenses
Property operating 5,986 - - 5,986
General and administrative 526 10,242 (10,242)(ii) 526
Interest expense - 18 (18)(iii) -
Depreciation and amortization - 225 (225)(iv) -
----------- ---------- ---------- ---------
Total expenses 6,512 10,485 (10,485) 6,512
----------- ---------- ---------- ---------
Equity in income (loss)
of management company - - (80)(v) (80)
----------- ---------- ---------- ---------
Income (loss) before income taxes
and minority interests $ 10,552 $ 741 $ (821) $ 10,472
----------- ---------- ---------- ---------
----------- ---------- ---------- ---------
</TABLE>
F-9
<PAGE>
For the Nine Month Period Ended September 30, 1998
<TABLE>
<CAPTION>
Constellation
Constellation Service
Properties Companies
Historical Historical Pro Forma
through through Constellation
9/27/98 9/27/98 Adjustments Combined
<S> <C> <C> <C> <C>
Revenues
Base rents $ 11,706 $ - $ - $ 11,706
Tenant reimbursements and other 1,535 9,111 (9,111)(i) 1,535
----------- ------------ ----------- ----------
Total revenues 13,241 9,111 (9,111) 13,241
----------- ------------ ----------- ----------
Expenses
Property operating 5,228 - - 5,228
General and administrative - 8,765 (8,765)(ii) -
Interest expense - 10 (10)(iii) -
Depreciation and amortization - 235 (235)(iv) -
----------- ------------ ----------- ----------
Total expenses 5,228 9,010 (9,010) 5,228
----------- ------------ ----------- ----------
Equity in income (loss) of management company - - (293)(v) (293)
----------- ------------ ----------- ----------
Income (loss) before income taxes
and minority interests $ 8,013 $ 101 $ (394) $ 7,720
----------- ------------ ----------- ----------
----------- ------------ ----------- ----------
</TABLE>
<TABLE>
<CAPTION>
For the Year For the Nine
Ended Month Period
December 31, Ended
1997 September 30, 1998
------------- ------------------
<S> <C> <C>
(i) Reflects the reclassification of Constellation Service
Companies' historical revenue to equity in income of
management company. $ (11,226) $ (9,111)
----------- ----------
----------- ----------
(ii) Reflects the reclassification of Constellation Service
Companies' historical operating expenses to equity in
income of management company. $ (10,242) $ (8,765)
----------- ----------
----------- ----------
(iii) Reflects the reclassification of Constellation Service
Companies' historical interest expense to equity in
income of management company $ (18) $ (10)
----------- ----------
----------- ----------
(iv) Reflects the reclassification of Constellation Service
Companies' historical depreciation and amortization to
equity in income of management company $ (225) $ (235)
----------- ----------
----------- ----------
</TABLE>
F-10
<PAGE>
<TABLE>
<CAPTION>
For the Year For the Nine
Ended Month Period
December 31, Ended
1997 September 30, 1998
------------- ------------------
<S> <C> <C>
(v) Reflects the net change in equity in income of management
company as follows:
- Reclassification of Constellation Service
Companies' historical income and expenses $ 741 $ 101
- Elimination of construction contract revenue
earned by Constellation Service Companies in
connection with operations that are not expected to
have a continuing impact on the Company (4,122) (3,084)
- Elimination of construction contract costs incurred by
Constellation Service Companies in connection with
operations that are not expected to have a continuing impact
on the Company 3,768 2,997
- Addition of net overhead costs not included in
historical costs and expected to have a continuing
impact on the Company (122) (255)
- Addition of interest expense on indebtedness
issued by an affiliate of the management company
to the Company at a rate of 10.0% per annum (201) (150)
- Depreciation expense on personal property of $583
over a 5-year useful life (116) (87)
- Adjustment to Constellation Service Companies'
historical depreciation and amortization 122 131
- To reflect income tax (expense) benefit at an
assumed rate of 40% 19 176
- To reflect minority interest in management company (116) (82)
- To reflect adjustment for purchase price of
management company to pro forma net income over 20
years (53) (40)
---------- ----------
$ (80) $ (293)
---------- ----------
---------- ----------
</TABLE>
(D) Reflects the effects of the historical operations of the Riverwood
Property which was acquired on October 13, 1998.
(E) Reflects interest income on the Company's $2,005 note receivable from
an affiliate of the management company at a rate of 10.0% per annum.
F-11
<PAGE>
(F) Represents net additional pro forma interest expense, as a result of
borrowings under the Term Credit Facility, the Revolving Credit
Facility, the debt assumed in connection with the Fairfield Properties,
the debt assumed in connection with the Constellation Transaction and
the TIAA Loan.
<TABLE>
<CAPTION>
For the Nine
For the Year Month Period
Ended Ended
December 31, September 30,
Adjustment to interest expense, net of 1997 1998
related historical amounts, as a result of: -------------- --------------
----------------------------------------------
<S> <C> <C>
Term Credit Facility, which debt bears interest at 7.5%
per annum. $ (1,511) $ -
Revolving Credit Facility, based upon a pro forma balance of
$12,200, which debt bears interest at LIBOR plus 175 basis
points, assuming a LIBOR rate of 5.75% per annum. 914 84
Revolving Credit Facility based upon a pro forma unused balance
of $87,800, which unused balance is subject to
a fee of 25 basis points per annum. 221 99
Debt assumed in connection with the acquisition of the
Fairfield Properties, which debt bears interest at a
rate of 8.29% per annum. 536 219
Debt assumed in connection with the Constellation Transaction,
based upon a pro forma aggregate balance of $30,904, which debt
bears interest at average effective rate of 7.70% per annum. 2,380 1,745
Debt assumed in connection with the acquisition of the
Constellation Construction Properties which debt bears
interest at a rate of 8.00% per annum. 160 120
TIAA Loan, based upon a pro forma balance of $76,200,
which debt bears interest at 6.89% per annum.
5,250 3,938
---------- -----------
$ 7,950 $ 6,205
---------- -----------
---------- -----------
</TABLE>
F-12
<PAGE>
(G) Pro forma depreciation expense is reflected assuming an 80% building
and 20% land allocation of the purchase price and capitalized costs
over a useful life of 40 years. Pro forma amortization expense is
reflected assuming pro forma deferred financing fees are amortized over
the life of the related loan.
<TABLE>
<CAPTION>
For the Nine
For the Year Month Period
Adjustment to depreciation and amortization Ended Ended
expense, net of related historical amounts, December 31, September 30,
as a result of: 1997 1998
---------------------------------------------- ------------ --------------
<S> <C> <C>
Depreciation expense:
Initial Office Properties $ 548 $ -
Airport Square Properties 1,452 462
Fairfield Properties 588 245
Constellation Transaction, including Woodlands One
Property 3,293 2,469
Riverwood Property 408 306
Amortization of deferred financing fees related to:
Term Credit Facility in connection with Initial Office
Properties (323) -
Revolving Credit Facility 209 87
Assumed debt in connection with Fairfield Properties 10 3
TIAA Loan 61 47
------- --------
$ 6,246 $ 3,619
------- --------
------- --------
</TABLE>
(H) Costs relating to termination of the advisory agreement and the
reformation of the Company aggregating $1,353 and $637 for the year
ended December 31, 1997 and the nine-month period ended September 30,
1998, respectively, have been excluded since such costs are not
expected to have a continuing impact on the Company.
(I) Reflects the effects of contribution of the net assets received from
the Offering, the Constellation Transaction, including the Woodlands
One Property, and the Riverwood Property to the Operating Partnership
in exchange for (i) 7,500,000 Common Units as a result of the Offering;
(ii) 938,075 Preferred 1998 Units and 6,700,557 Common Units as a
result of the Constellation Transaction, including the Woodlands One
Property; and (iii) 148,381 Common Units as a result of the Riverwood
Property.
The following table presents the calculation of the post closing percentage
ownership of Common Units in the Operating Partnership (i.e. not including
Preferred Units):
F-13
<PAGE>
<TABLE>
<CAPTION>
Company Others Total
-------------------- ------------------- -----------------
<S> <C> <C> <C>
Common Units - pre closing 600,000 2,581,818 3,181,818
Offering 7,500,000 - 7,500,000
Constellation Transaction,
including Woodlands One Property 6,700,557 - 6,700,557
Riverwood Property - 148,381 148,381
-------------------- ------------------- -----------------
Common Units - post closing 14,800,557 2,730,199 17,530,756
-------------------- ------------------- -----------------
-------------------- ------------------- -----------------
Percentage ownership 84.4% 15.6% 100.0%
-------------------- ------------------- -----------------
-------------------- ------------------- -----------------
</TABLE>
Minority interest in income (loss) has been reflected, on a pro forma
basis, in accordance with the Operating Partnership Agreement. The
holders of Preferred Units are allocated income up to 6.5% (Preferred
1997 Units) or 5.5% (Preferred 1998 Units) of their investment on a
pari passu basis with remaining income, if any, or loss allocated
between the Company (84.4%) and the remaining partners (15.6%). The
adjustments to record the income (loss) effect of the minority interest
share of income (loss) in the pro forma statements of operations were
computed as follows:
<TABLE>
<CAPTION>
For the Nine
For the Year Month Period
Ended Ended
December 31, September 30,
1997 1998
------------ -----------
<S> <C> <C>
Income before minority interests $ 7,234 $ 8,818
Less: income from the retail properties directly
owned by the Company (368) (333)
------------ -----------
Income before minority interest
- Operating Partnership 6,866 8,485
Less: Preferred 1997 Unitholders
- $52,500 @ 6.5% (3,412) (2,559)
Less: Preferred 1998 Unitholders/Shareholders
- $23,452 @ 5.5% (1,290) (967)
------------ -----------
Remaining Operating Partnership allocation 2,164 4,959
Less: Pro forma minority share
- Common Units (15.6%) (337) (772)
------------ -----------
Remaining Operating Partnership allocation (84.4%)
1,827 4,187
Add back: income from retail properties directly
owned by the Company 368 333
------------ -----------
Net income allocated to Common Shareholders $ 2,195 $ 4,520
------------ -----------
------------ -----------
</TABLE>
F-14
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Constellation Real Estate Group, Inc.
We have audited the accompanying combined statement of revenues and certain
expenses of the Constellation Properties as described in Note 1 for the year
ended December 31, 1997. This financial statement is the responsibility of the
Constellation Properties' management. Our responsibility is to express an
opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and the significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
The accompanying combined statement of revenues and certain expenses was
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission as described in Note 1, and is not intended
to be a complete presentation of the Constellation Properties' revenues and
expenses.
In our opinion, the financial statement referred to above presents fairly,
in all material respects, the combined revenues and certain expenses of the
Constellation Properties for the year ended December 31, 1997 in conformity with
generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Baltimore, Maryland
May 8, 1998
F-15
<PAGE>
CONSTELLATION PROPERTIES
COMBINED STATEMENT OF REVENUE AND CERTAIN EXPENSES
(in thousands)
<TABLE>
<CAPTION>
For the Period January 1, 1998 For the Year Ended
Through September 27, 1998 December 31, 1997
-------------------------- -----------------
(Unaudited)
<S> <C> <C>
REVENUES
Base Rents $11,706 $14,756
Recoveries from Tenants 1,444 2,095
Other Income 91 213
------- -------
13,241 17,064
------- -------
CERTAIN EXPENSES
Operating 4,147 5,071
Real Estate Taxes 668 915
General and Administrative 413 526
------- -------
5,228 6,512
------- -------
REVENUE IN EXCESS OF CERTAIN EXPENSES $8,013 $10,552
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part of this statement.
F-16
<PAGE>
Constellation Properties
Notes to Combined Statement of Revenue and Certain Expenses
(Dollars in thousands)
1. Organization and Basis of Presentation
Organization
The accompanying combined statement of revenue and certain expenses combines the
results of operations of the following 12 properties (the "Constellation
Properties") acquired from Constellation Properties, Inc. (CPI) by Corporate
Office Properties Trust, Inc. (COPT).
Browns Wharf L.P.
-----------------
1600 Block of Thames Street, Baltimore, MD
Cranberry-140 L.P.
------------------
405 North Center Street, Westminster, MD
Laurel Tower Associates L.P.
----------------------------
14502 Greenview Drive, Laurel, MD
14504 Greenview Drive, Laurel, MD
NBP-I L.P.
----------
2730 Hercules Road, Annapolis Junction, MD
NBP II L.P.
-----------
131 National Business Parkway, Annapolis Junction, MD
133 National Business Parkway, Annapolis Junction, MD
141 National Business Parkway, Annapolis Junction, MD
St. Barnabus L.P.
-----------------
6009 and 6011 Oxon Hill Road, Oxon Hill, MD
Three Centre Park Associates L.P.
---------------------------------
8815 Centre Park Drive, Columbia, MD
Constellation Properties, Inc.
------------------------------
7609 Energy Parkway, Baltimore, MD
Project T/A Tred Avon Square
----------------------------
210 Marlboro Avenue, Easton, MD
The Constellation Properties consist of 10 office properties and 2 retail
properties.
Tred Avon Square (TA) is a shopping center which has a participating mortgage
payable to Tred Lightly, LLC (TL), an entity in which CPI had a controlling
interest which was acquired by COPT. Under the terms of the mortgage with TA, TL
has virtually the same risks and rewards as those of an owner. Accordingly, TL
is presented as if TL owns TA.
Basis of Presentation
The accompanying combined statement has been prepared on the accrual basis of
accounting.
F-17
<PAGE>
Constellation Properties
Notes to Combined Statement of Revenue and Certain Expenses (Continued)
(Dollars in thousands)
The statement was prepared for the purpose of complying with the rules and
regulations of the Securities and Exchange Commission. The statement is not
representative of the actual operations for the periods presented nor indicative
of future operations as certain expenses, which are not comparable to the
expenses to be incurred in the future operations of the Constellation
Properties, have been excluded. Expenses excluded include interest,
depreciation, amortization of intangible costs, income taxes, and other costs
not directly related to the future operations of the Constellation Properties.
The combined historical statement of revenues and certain expenses and related
notes for the period January 1, 1998 through September 27, 1998 are unaudited
and reflect, in the opinion of management, all adjustments necessary for a fair
presentation of the interim statement.
2. Summary of Significant Accounting Policies
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts of revenues and expenses reported during the period. Actual
results could differ from those estimates.
Revenue Recognition
The Properties recognize rental revenue from tenants on a straight-line basis
under which contractual rent changes are recognized evenly over the lease term.
Tenant recovery income includes payments from tenants for taxes, insurance and
other property operating expenses and is recognized as revenues in the same
period as the related expenses are incurred by the Constellation Properties.
Geographic Diversity
The Constellation Properties are geographically concentrated in the
Baltimore/Washington metropolitan area.
Major Tenants
The United States Government is the sole tenant of an office property. Rental
income from this lease represents approximately 22% and 24% of base rent and 54%
and 55% of recoveries from tenants in the period ended September 27, 1998 and
the year ended December 31, 1997, respectively.
Minority Interest
CPI owned a 75% member interest in Tred Lightly, LLC (TL) which was acquired by
COPT. Under the terms of TL's operating agreement, the interest which was owned
by CPI was entitled to full allocation of TL's income up until that point in
time when CPI recovered its investment in TL plus a 10% compounding preferred
return. Since CPI had not recovered its investment and preferred return at
September 27, 1998 and December 31, 1997, no income was allocated to minority
interest.
F-18
<PAGE>
Constellation Properties
Notes to Combined Statement of Revenue and Certain Expenses (Continued)
(Dollars in thousands)
3. Leasing Activity
The Constellation Properties are leased to tenants under operating leases with
expiration dates ranging from 1998 to 2015. Future contractual minimum rentals
under noncancelable tenant leases in effect at December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998 $ 14,618
1999 13,970
2000 13,125
2001 11,584
2002 9,870
Thereafter 29,166
--------
Total $ 92,333
--------
--------
</TABLE>
The United States Government is the sole tenant of an office property. The
tenant's lease is structured as a 1 year lease commencing in 1993, with 14
consecutive automatic 1 year renewals. The lease also carries a penalty should
the tenant not renew for all 14 years. Base rent from this lease is included in
future minimum rentals disclosed above.
4. Related Party Revenue and Expenses
The Constellation Properties were owned by CPI, which is a wholly-owned
subsidiary of Constellation Real Estate Group, Inc. (CREG). CREG is a wholly
owned subsidiary of Constellation Holdings, Inc., which is wholly-owned by
Baltimore Gas and Electric Company (BGE). Constellation Real Estate, Inc.,
Corporate Realty Management, LLC, Constellation Health Services, Inc., and
Constellation Senior Services, Inc. are other affiliates of CREG. The
Constellation Properties had transactions with these related parties as
follows:
Rental Income
The Constellation Properties earned base rent and tenant recoveries on leases to
the following related parties:
<TABLE>
<CAPTION>
Period Ended Year Ended
September 27, 1998 December 31, 1997
------------------- -----------------
<S> <C> <C>
Constellation Real Estate, Inc. $ 289 $ 315
BGE 36 242
Constellation Senior Services, Inc. 29 59
Corporate Realty Management, LLC 29 -
Constellation Health Services, Inc. - 6
------- --------
Total $ 383 $ 622
------- --------
------- --------
</TABLE>
F-19
<PAGE>
Constellation Properties
Notes to Combined Statement of Revenue and Certain Expenses (Continued)
(Dollars in thousands)
Property Management
The Constellation Properties incurred property management fees under contracts
with Corporate Realty Management, LLC totaling $397 and $518 in the period ended
September 27, 1998 and the year ended December 31, 1997, respectively.
General and Administrative
Constellation Real Estate, Inc. charged the Constellation Properties for
finance, legal and corporate overhead costs totaling $412 and $526 in the period
ended September 27, 1998 and the year ended December 31, 1997, respectively.
Operating Expenses
The Constellation Properties incurred costs with BGE during the period ended
September 27, 1998 and the year ended December 31, 1997 totaling $484 and $638,
respectively. These costs were primarily for utility services provided to the
Constellation Properties.
F-20
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Constellation Real Estate Group, Inc.
We have audited the accompanying consolidated balance sheets of
Constellation Service Companies (as described in Note 1 to the accompanying
financial statements) as of December 31, 1997 and 1996, and the related
consolidated statements of operations, cash flows and equity for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Constellation Service Companies' management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Constellation
Service Companies as of December 31, 1997 and 1996, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ Coopers & Lybrand, L.L.P.
Baltimore, Maryland
May 8, 1998
F-21
<PAGE>
CONSTELLATION SERVICE COMPANIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
September 27, December 31,
1998 1997 1996
-------------- -------------- --------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ - $ 4,732 $ 5,191
Accounts receivable 863 1,158 3,622
Due from affiliates 4,435 - -
Costs and estimated profit in excess
of billings on uncompleted contracts 442 449 215
Deferred tax asset 72 86 17
Other 100 126 176
-------------- -------------- --------------
Total current assets 5,912 6,551 9,221
-------------- -------------- --------------
Property and equipment
Furniture, fixtures and equipment 2,308 1,878 1,514
Leasehold improvements 132 81 -
Accumulated depreciation (1,451) (1,257) (1,089)
-------------- -------------- --------------
Total property and equipment 989 702 425
Goodwill, net of accumulated amortization 750 791 848
Deferred tax asset 99 66 38
Restricted cash 50 - -
-------------- -------------- --------------
Total assets $ 7,800 $ 8,110 $ 10,532
-------------- -------------- --------------
-------------- -------------- --------------
LIABILITIES AND EQUITY
Current liabilities
Current portion of note payable $ 40 $ 40 $ 40
Accounts payable and accrued expenses 383 241 2,508
Checks drawn in excess of cash 3,929 - -
Billings in excess of costs and estimated
profit on uncompleted contracts 1 140 238
Accrued vacation costs 421 296 193
Due to affiliates - 4,423 4,925
Other 13 17 22
-------------- -------------- --------------
Total current liabilities 4,787 5,157 7,926
Note payable, net of current portion 80 80 120
Other 30 7 9
-------------- -------------- --------------
Total liabilities 4,897 5,244 8,055
-------------- -------------- --------------
Minority interest 172 136 115
-------------- -------------- --------------
Commitments and contingencies
Equity
Divisional equity 2,731 2,730 2,362
-------------- -------------- --------------
Total liabilities and equity $ 7,800 $ 8,110 $ 10,532
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See accompanying notes to financial statements.
F-22
<PAGE>
CONSTELLATION SERVICE COMPANIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
<TABLE>
<CAPTION>
For the Periods
1/1/98 Through 1/1/97 Through
9/27/98 9/30/97
(Unaudited) (Unaudited)
---------------- ----------------
<S> <C> <C>
Revenues
Construction, development, marketing, asset
management and finance fees - related parties $ 2,118 $ 1,856
Construction, development, marketing, asset
management and finance fees - other 456 79
Property management fees - related parties 1,486 1,313
Property management fees - other 1,799 1,437
Construction contract revenues - related parties 2,803 230
Construction contract revenues - other 281 3,383
---------------- ----------------
Total revenues 8,943 8,298
---------------- ----------------
Operating expenses
Construction contract costs 2,997 3,314
Salaries and related expenses 3,914 3,028
Overhead costs - related party 632 653
Other 1,457 1,166
---------------- ----------------
Total operating expenses 9,000 8,161
---------------- ----------------
Income from operations (57) 138
Interest income 135 69
Other income 33 51
Interest expense (10) (12)
---------------- ----------------
Income before income taxes 101 246
Income tax expense 5 73
---------------- ----------------
Income before minority interest 96 173
Minority interest 95 69
---------------- ----------------
Net income (loss) $ 1 $ 104
---------------- ----------------
---------------- ----------------
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended December 31,
1997 1996 1995
---------------- ---------------- ----------------
<S> <C> <C> <C>
Revenues
Construction, development, marketing, asset
management and finance fees - related parties $ 2,880 $ 2,531 $ 1,517
Construction, development, marketing, asset
management and finance fees - other 273 58 2
Property management fees - related parties 1,845 1,789 1,728
Property management fees - other 1,952 1,348 93
Construction contract revenues - related parties 426 943 294
Construction contract revenues - other 3,696 8,617 3,335
---------------- ---------------- ----------------
Total revenues 11,072 15,286 6,969
---------------- ---------------- ----------------
Operating expenses
Construction contract costs 3,768 9,159 3,545
Salaries and related expenses 4,412 3,750 2,242
Overhead costs - related party 901 870 615
Other 1,386 907 684
---------------- ---------------- ----------------
Total operating expenses 10,467 14,686 7,086
---------------- ---------------- ----------------
Income from operations 605 600 (117)
Interest income 101 84 66
Other income 53 42 61
Interest expense (18) (22) (2)
---------------- ---------------- ----------------
Income before income taxes 741 704 8
Income tax expense 256 251 14
---------------- ---------------- ----------------
Income before minority interest 485 453 (6)
Minority interest 117 96 -
---------------- ---------------- ----------------
Net income (loss) $ 368 $ 357 $ (6)
---------------- ---------------- ----------------
---------------- ---------------- ----------------
</TABLE>
See accompanying notes to financial statements.
F-23
<PAGE>
CONSTELLATION SERVICE COMPANIES
CONSOLIDATED STATEMENTS OF EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
Contributed Accumulated
Equity Earnings Total
-------------- -------------- --------------
<S> <C> <C> <C>
Balance, January 1, 1995 $1,590 $421 $2,011
Net Loss - (6) (6)
-------------- -------------- --------------
Balance, December 31, 1995 1,590 415 2,005
Net Income - 357 357
-------------- -------------- --------------
Balance, December 31, 1996 1,590 772 2,362
Net Income - 368 368
-------------- -------------- --------------
Balance, December 31, 1997 1,590 1,140 2,730
Net Income - 1 1
-------------- -------------- --------------
Balance, September 27, 1998 (Unaudited) $1,590 $1,141 $2,731
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See accompanying notes to financial statements.
F-24
<PAGE>
CONSTELLATION SERVICE COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
For the Periods
1/1/98 Through 1/1/97 Through
9/27/98 9/30/97
---------------- ----------------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1 $ 104
Adjustments to reconcile net income (loss) to
net cash (used in) provided by operating activities:
Depreciation and amortization 235 166
Minority interest expense 95 69
Provision for deferred income taxes (19) (80)
Changes in operating assets and liabilities:
Accounts receivable 295 1,960
Accounts payable and accrued expenses 267 (2,254)
Due to affiliates (8,858) (4,122)
Uncompleted contract asset 7 (74)
Uncompleted contract liability (139) 36
Other current assets and liabilities 22 (168)
---------------- ----------------
Net cash (used in) provided by operating activities (8,094) (4,363)
---------------- ----------------
Cash flows from investing activities:
Increase in restricted cash (50) -
Purchases of property and equipment (484) (272)
Acquisition of business, net of cash acquired - -
Other 3 -
---------------- ----------------
Net cash used in investing activities (531) (272)
---------------- ----------------
Cash flows from financing activities:
Proceeds from note payable - -
Note repayments - -
Minority interest (distribution) contribution (59) (96)
Other 23 (1)
---------------- ----------------
Net cash (used in) provided by financing activities (36) (97)
---------------- ----------------
Net (decrease) increase in cash and cash equivalents (8,661) (4,732)
Cash and cash equivalents, beginning of period 4,732 5,191
---------------- ----------------
Cash and cash equivalents, end of period $ (3,929) $ 459
---------------- ----------------
---------------- ----------------
Supplemental data:
Cash paid during the period for:
Interest $ - $ -
Income Taxes $ 16 $ 55
</TABLE>
<TABLE>
<CAPTION>
For the Years Ended December 31,
1997 1996 1995
---------------- ---------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 368 $ 357 $ (6)
Adjustments to reconcile net income (loss) to
net cash (used in) provided by operating activities:
Depreciation and amortization 225 164 98
Minority interest expense 117 96 -
Provision for deferred income taxes (97) (62) 18
Changes in operating assets and liabilities:
Accounts receivable 2,464 (1,982) (1,056)
Accounts payable and accrued expenses (2,164) 2,182 99
Due to affiliates (502) 6,409 (36)
Uncompleted contract asset (234) 697 (849)
Uncompleted contract liability (98) (1,426) 1,664
Other current assets and liabilities 45 (145) (23)
---------------- ---------------- ----------------
Net cash (used in) provided by operating activities 124 6,290 (91)
---------------- ---------------- ----------------
Cash flows from investing activities:
Increase in restricted cash - - -
Purchases of property and equipment (453) (317) (59)
Acquisition of business, net of cash acquired - (414) -
Other 8 - -
---------------- ---------------- ----------------
Net cash used in investing activities (445) (731) (59)
---------------- ---------------- ----------------
Cash flows from financing activities:
Proceeds from note payable - 200 -
Note repayments (40) (40) -
Minority interest (distribution) contribution (96) 19 -
Other (2) 7 19
---------------- ---------------- ----------------
Net cash (used in) provided by financing activities (138) 186 19
---------------- ---------------- ----------------
Net (decrease) increase in cash and cash equivalents (459) 5,745 (131)
Cash and cash equivalents, beginning of period 5,191 (554) (423)
---------------- ---------------- ----------------
Cash and cash equivalents, end of period $ 4,732 $ 5,191 $ (554)
---------------- ---------------- ----------------
---------------- ---------------- ----------------
Supplemental data:
Cash paid during the period for:
Interest $ 18 $ 22 $ 2
Income Taxes $ 88 $ 1 $ 25
</TABLE>
See accompanying notes to financial statements.
F-25
<PAGE>
Constellation Service Companies
Notes to Consolidated Financial Statements
(Dollars in thousands)
1. Organization and Basis of Presentation
Constellation Service Companies (not a legal entity) (the "Company") is a real
estate company engaged in property and asset management and building
construction and development services. The Company represents a carve-out of the
aforementioned operations of the legal entity, Constellation Real Estate, Inc.
(CRE), and its 75% owned subsidiary, Corporate Realty Management, LLC (CRM).
CRE is a real estate company engaged in property and asset management, building
construction and development and land development. CRE is a wholly owned
subsidiary of Constellation Real Estate Group, Inc. ("CREG"), which is a wholly
owned subsidiary of Constellation Holdings, Inc. (CHI), which is wholly owned by
Baltimore Gas and Electric Company (BGE). In April 1996, CRE purchased a 75%
member interest in CRM, an entity engaged in real estate property management. On
September 28, 1998, Corporate Office Properties Trust, Inc. (COPT) acquired the
assets and employees of CRE associated with property and asset management and
building construction and development services, as well as CRE's 75% member
interest in CRM.
A significant amount of the Company's activity represents services provided to
entities owned by CREG. The majority of these services are concentrated in the
Baltimore/Washington metropolitan area.
Unaudited Financial Statements
The consolidated financial statements including the note disclosures included
herein as of September 27, 1998 and September 30, 1997 and for the periods
January 1, 1998 through September 27, 1998 and January 1, 1997 through September
30, 1997 are unaudited; however, in the opinion of management, all adjustments
necessary for a fair presentation of the consolidated financial statements for
this interim period have been included. The results of the interim period are
not necessarily indicative of the results to be obtained for the full fiscal
year.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of CRM and the CRE
lines of business acquired by COPT. All material intercompany accounts and
transactions have been eliminated.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-26
<PAGE>
Constellation Service Companies
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands)
Revenue Recognition
Construction, development, marketing and financing fees predominantly represent
fees charged to real estate projects owned by CREG. Most of these fees are
recognized as revenue as labor time is incurred. Certain of these fees, however,
are recognized upon the occurrence of an event at a real estate project, such as
the signing of a tenant lease or the closing of a loan. Property management
fees, property management recovery items and asset management fees are
recognized as earned.
The Company recognizes construction, development, marketing and financing fees
charged to real estate projects owned by CREG at cost.
The Company recognizes construction contract revenues from third parties using
the percentage-of-completion method based on contract costs incurred to date
compared with total estimated contract costs. Because of inherent uncertainties
in estimating costs, it is at least reasonably possible that estimates used will
change within the near term. Changes to total estimated contract costs and
losses, if any, are recognized in the period they become known. Amounts billed
in advance of satisfying revenue recognition criteria are recorded in current
liabilities as billings in excess of costs and estimated profit on uncompleted
contracts. Costs and estimated profit in excess of amounts billed are recorded
in current assets as costs and estimated profit in excess of billings on
uncompleted contracts.
Income Taxes
Deferred income taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences and operating loss
and credit carryforwards, and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the differences between
the reported amounts of assets and liabilities and their tax basis. Deferred tax
assets are reduced by a valuation allowance when it is probable that some
portion or all of the deferred tax assets will not be realized. Deferred tax
assets and liabilities are adjusted for the effects of changes in tax laws and
rates on the date of enactment.
Cash and Cash Equivalents
Cash and cash equivalents include all cash and liquid investments with an
initial maturity of three months or less. The carrying amount approximates fair
value due to the short maturity of these investments. The Company maintains its
cash in bank deposit accounts which may exceed federally insured limits at
times. The Company has not experienced any losses in such accounts and believes
it is not exposed to any significant credit risk on cash.
Property
Property is stated at original cost less accumulated depreciation. Furniture,
fixtures and equipment are depreciated on a straight-line basis over the
estimated useful lives of the assets, which is generally 3 to 5 years. Leasehold
improvements are depreciated over the shorter of the lives of the respective
leases or the useful lives of the assets. Depreciation expense totaled $194,
$123, $168, $120 and $83 for the periods ended September 27, 1998 and September
30, 1997 and the years ended December 31, 1997, 1996 and 1995, respectively.
F-27
<PAGE>
Constellation Service Companies
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands)
Goodwill
Goodwill consists of $590 relating to the 1988 acquisition of certain assets and
employees and $414 relating to the 1996 acquisition of CRM. The 1988 goodwill is
being amortized over 40 years and the 1996 goodwill is being amortized over 10
years. Goodwill is reflected net of accumulated amortization, which totaled
$254, $213 and $156 at September 27, 1998 and December 31, 1997 and 1996,
respectively.
Minority Interest
Minority interest represents the minority partner's proportionate share of the
equity in CRM. Income is allocated to minority interest based on the minority
partner's percentage ownership.
3. Note Payable
The Company obtained a $200 unsecured note payable to KLNB, Inc. on April 16,
1996. The note matures on December 31, 2000 and bears interest at 8%. The
outstanding balance of the note totaled $120, $120 and $160 at September 27,
1998 and December 31, 1997 and 1996, respectively.
Interest expense incurred on the note totaled $7, $10, $13 and $11 during the
periods ended September 27, 1998 and September 30, 1997 and the years ended
December 31, 1997 and 1996, respectively. Debt maturities of the note
outstanding at December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998 $ 40
1999 40
2000 40
----
$ 120
----
----
</TABLE>
4. Leases
The Company had several operating leases in place during the reporting periods,
most of which are for office space. Rent expense totaled $236, $282, $451, $308
and $219 during the periods ended September 27, 1998 and September 30, 1997 and
the years ended December 31, 1997, 1996 and 1995, respectively.
Future minimum lease payments for non-cancelable operating leases at December
31, 1997 are as follows:
<TABLE>
<S> <C>
1998 $ 429
1999 382
2000 372
2001 267
-----
Total $1,450
-----
-----
</TABLE>
F-28
<PAGE>
Constellation Service Companies
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands)
5. Related Party Transactions
The Company provided construction, development, marketing, asset management and
finance services to entities owned by CREG. Fees earned from these services
totaled $2,097, $1,856, $2,686, $2,531 and $1,517 during the periods ended
September 27, 1998 and September 30, 1997 and the years ended December 31, 1997,
1996 and 1995, respectively. The Company also earned marketing fees from a CREG
affiliate totaling $21 and $194 during the period ended September 27, 1998 and
the year ended December 31, 1997, respectively.
The Company provided property management services to entities owned by CREG.
Fees earned from these services were computed predominantly based on a fixed
percentage of property income collections ranging from 3.5% to 5% and totaled
$1,055, $835, $1,272, $1,197 and $1,157 during the periods ended September 27,
1998 and September 30, 1997 and the years ended December 31, 1997, 1996 and
1995, respectively. The Company also earned property management fees from BGE
totaling $431, $478, $573, $592 and $571 during the periods ended September 27,
1998 and September 30, 1997 and the years ended December 31, 1997, 1996 and
1995, respectively. Fees were computed on the BGE management contracts based on
a rate per square foot, subject to increases and decreases for the Company's
performance in managing operating cost levels for individual projects.
The Company performed work under construction contracts with BGE, CHI and
certain entities owned by CREG. Construction contract revenue recognized on
contracts with BGE totaled $200, $200, $932 and $294 during the period ended
September 30, 1997 and the years ended December 31, 1997, 1996 and 1995,
respectively. Construction contract revenue recognized on contracts with CHI
totaled $2,797 and $178 during the period ended September 27, 1998 and the year
ended December 31, 1997, respectively. Construction contract revenue recognized
on contracts with entities owned by CREG totaled $6, $30, $48 and $11 during the
periods ended September 27, 1998 and September 30, 1997 and the years ended
December 31, 1997 and 1996, respectively.
CREG allocates certain overhead costs to all of its subsidiaries. Overhead costs
allocated from CREG to the Company totaled $632, $653, $901, $870 and $615
during the periods ended September 27, 1998 and September 30, 1997 and the years
ended December 31, 1997, 1996 and 1995, respectively.
The Company provides administrative, financial and legal support services to
certain entities owned by CREG. During the periods ended September 27, 1998 and
September 30, 1997 and the years ended December 31, 1997 and 1996, the Company
received expense reimbursements for these services totaling $184, $125, $318 and
$64, respectively.
The Company leased office space from entities owned by CREG. Expenses incurred
under these leases totaled $190, $128, $301, $240 and $219 during the periods
ended September 27, 1998 and September 30, 1997 and the years ended December 31,
1997, 1996 and 1995, respectively.
F-29
<PAGE>
Constellation Service Companies
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands)
The Company also incurred other costs for various services provided by BGE and
CHI, including electrical service, payroll processing, and computer training.
The Company had amounts due from affiliates at September 27, 1998 of $4,435. The
Company had amounts due to affiliates at December 31, 1997 and 1996 of $4,423
and $4,925, respectively. These amounts represent primarily advances to or from
the Company resulting from its participation in a centralized cash account used
by entities owned by CREG. The Company's payables to affiliates are noninterest
bearing and due on demand.
6. Pension and Other Post-Employment Benefits
Certain employees of the Company participate in the BGE noncontributory defined
benefit pension plan (the "plan"). BGE's policy is to fund annually the cost of
the Plan as determined under the projected unit credit cost method. BGE charged
the Company $63, $49, $64 and $80 during the periods ended September 27, 1998
and September 30, 1997 and the years ended December 31, 1997 and 1996,
respectively. Certain key executives also are participants in BGE's supplemental
pension plans, which provide enhanced retirement, disability and survivor
benefits. Benefits under all of these plans are generally based on age, years of
service and compensation levels. Prior service cost associated with retroactive
plan amendments is amortized on a straight-line basis over the average remaining
service period of active employees. Plan assets at December 31, 1997 consisted
primarily of marketable equity and fixed income securities and group annuity
contracts.
F-30
<PAGE>
Constellation Service Companies
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands)
Pension plan valuations are only available for CHI. The following table sets
forth CHI's combined funded status of the plans and the composition of total
pension cost:
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1996
------ ------
<S> <C> <C>
Vested benefit obligation $5,104 $4,296
Nonvested benefit obligation 291 111
------ ------
Accumulated benefit obligation 5,395 4,407
Projected benefits related to increase
in future compensation levels 2,096 769
------ ------
Projected benefit obligation 7,491 5,176
Plan assets at fair value (5,871) (3,535)
------ ------
Projected benefit obligation less
plan assets 1,620 1,641
Unrecognized prior service cost (446) (290)
Unrecognized net gain 1,091 934
Unamortized net liability from adoption
of FASB Statement No. 87 (168) (443)
------ ------
Accrued Pension Liability $2,097 $1,842
------ ------
------ ------
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Components of net pension cost
Service cost-benefits earned
during the period $ 296 $ 321 $ 188
Interest cost on projected benefit
obligation 1,149 1,179 509
Actual return on plan assets (468) (207) (542)
Net amortization and deferral (315) (481) 552
------- ------- -------
Total net pension cost $ 662 $ 812 $ 707
------- ------- -------
------- ------- -------
</TABLE>
Other Postemployment Benefits
In addition to providing pension benefits, the Company provides certain health
care and life insurance benefits for retired employees. The Company also
provides certain pay continuation payments to employees who are determined to be
disabled under the Company's Long-Term Disability Plan. The Company did not
recognize any liability at September 27, 1998 and December 31, 1997 and 1996
since there were no employees determined to be disabled.
F-31
<PAGE>
Constellation Service Companies
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands)
7. Income Taxes
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
Period Ended Year Ended December 31,
9/27/98 9/30/97 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Federal
Current $ 20 $ 126 $ 290 $ 258 ($ 3)
Deferred (16) (66) (80) (51) 15
------- ------- ------- ------- -------
4 60 210 207 12
------- ------- ------- ------- -------
State
Current $ 4 27 63 55 (1)
Deferred (3) (14) (17) (11) 3
------- ------- ------- ------- -------
1 13 46 44 2
------- ------- ------- ------- -------
$ 5 $ 73 $ 256 $ 251 $ 14
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>
The following is a reconciliation, stated as a percentage of pre-tax income, of
the U.S. statutory federal income tax rate to the Company's effective tax rate
on income from operations:
<TABLE>
<CAPTION>
Period Ended Year Ended December 31,
9/27/98 9/30/97 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Federal Statutory Rate 35.0% 35.0% 35.0% 35.0% 35.0%
Permanent Differences,
Including Goodwill and
Meals and Entertainment 43.8 1.7 1.6 1.7 135.5
State Taxes, Net of
Federal Benefit 4.5 4.5 4.5 4.5 4.5
------- ------- ------- ------- -------
Effective Tax Rate 83.3% 41.2% 41.1% 41.2% 175.0%
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>
Deferred income taxes consist of the following:
<TABLE>
<CAPTION>
Period Ended
September 27, Year Ended December 31,
1998 1997 1996
------------- -------- -------
<S> <C> <C> <C>
Bonus and Deferred
Compensation $ 198 $ 174 $ 63
Depreciation (27) (22) (8)
------------- -------- -------
Net Deferred Asset $ 171 $ 152 $ 55
------------- -------- -------
------------- -------- -------
</TABLE>
F-32
<PAGE>
Constellation Service Companies
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands)
8. Commitments and Contingencies
Legal
The Company is subject to various legal proceedings and claims that arise in the
ordinary course of business. Management believes that the final outcome of such
matters will not have a material effect on the financial position, results of
operations or liquidity of the Company.
F-33
