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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-11(c) or
Section240.14a-12
CORPORATE OFFICE PROPERTIES TRUST
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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/X/ Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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[LOGO]
July 22, 1998
Dear Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders (the
"Special Meeting") of Corporate Office Properties Trust (the "Company") to be
held on August 21, 1998, at 2:30 p.m. in The Adams Room at The Four Seasons
Hotel, One Logan Square, Philadelphia, Pennsylvania 19103.
At the Special Meeting, you will be asked to consider and vote to approve a
transaction (the "Transaction") pursuant to which certain affiliates of
Constellation Real Estate Group, Inc. (collectively, "Constellation") will
contribute certain real property, interests in entities which own certain real
property and a mortgage, and certain other assets to the Company in exchange for
cash, the assumption of certain debt, and Common Shares of Beneficial Interest
and non-voting Series A Convertible Preferred Shares of Beneficial Interest to
be issued by the Company. The Transaction is more fully described in the
accompanying Proxy Statement.
The scale of the Transaction will significantly expand the Company's
management, property, tenant and capital base. In addition, the Constellation
management team will add property development and third party property
management functions that management believes will enhance the Company's
resources and long term performance. As a result, the Board of Trustees believes
the Transaction will create shareholder value; and therefore it is in the
economic interest of all shareholders to approve the Transaction.
We urge you to review and consider carefully the accompanying Notice of
Special Meeting of Shareholders and Proxy Statement, which contain information
about the Transaction to be voted upon and certain other matters. The Board of
Trustees has unanimously approved, and recommends a vote FOR the Transaction.
The approval of the Transaction requires the affirmative vote of a majority
of the votes cast at the Special Meeting. Your vote is important to the Company.
Please complete, date and sign the enclosed proxy card and return it in the
accompanying postage-paid envelope. You are, of course, welcome to attend the
Special Meeting and vote in person, even if you have previously returned your
proxy card. Regardless of your attendance, you may revoke your proxy at any time
before it is exercised.
Thank you for your consideration of this important matter.
Sincerely,
/s/ Jay H. Shidler /s/ Clay W. Hamlin, III
Jay H. Shidler Clay W. Hamlin, III
Chairman of the Board Chief Executive Officer
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CORPORATE OFFICE PROPERTIES TRUST
ONE LOGAN SQUARE, SUITE 1105
PHILADELPHIA, PENNSYLVANIA 19103
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON AUGUST 21, 1998
Notice is hereby given that a Special Meeting of Shareholders (the "Special
Meeting") of Corporate Office Properties Trust (the "Company") will be held on
August 21, 1998, at 2:30 p.m. in The Adams Room at The Four Seasons Hotel, One
Logan Square, Philadelphia, Pennsylvania 19103, to consider and vote upon the
following matters more fully described in the accompanying Proxy Statement:
1. A proposal to approve a transaction evidenced by various agreements by and
among the Company, Corporate Office Properties, L.P. and certain
partnerships and other entities affiliated with Constellation Real Estate
Group, Inc. (collectively, "Constellation"), pursuant to which Constellation
will contribute interests in entities which own certain real property and a
mortgage, certain real property owned by Constellation, and certain other
assets owned by Constellation to the Company in exchange for a combination
of cash, the assumption of debt by the Company, and Common Shares and non-
voting Series A Convertible Preferred Shares of Beneficial Interest to be
issued by the Company; and
2. Such other business as may properly be brought before the Special Meeting or
any adjournment or postponement thereof.
The Board of Trustees has fixed the close of business on July 20, 1998 as
the record date for the determination of shareholders entitled to notice of and
to vote at the Special Meeting and any adjournment or postponement thereof. A
list of such shareholders will be available for inspection at the offices of the
Company, at One Logan Square, Suite 1105, Philadelphia, Pennsylvania 19103, at
least ten days prior to the Special Meeting.
By order of the Board of Trustees,
/s/ John D. Parsinen
John D. Parsinen
Secretary
July 22, 1998
Philadelphia, Pennsylvania
THE BOARD OF TRUSTEES APPRECIATES AND ENCOURAGES YOUR PARTICIPATION IN THE
COMPANY'S SPECIAL MEETING. WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL
MEETING, IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED. ACCORDINGLY, PLEASE
SIGN, DATE AND PROMPTLY RETURN THE ENCLOSED PROXY IN THE POSTAGE-PAID ENVELOPE
PROVIDED. IF YOU ATTEND THE SPECIAL MEETING, YOU MAY WITHDRAW YOUR PROXY, IF YOU
WISH, AND VOTE IN PERSON. YOUR PROXY IS REVOCABLE IN ACCORDANCE WITH THE
PROCEDURES SET FORTH IN THE PROXY STATEMENT.
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CORPORATE OFFICE PROPERTIES TRUST
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD AUGUST 21, 1998
PROXY STATEMENT
This Proxy Statement (the "Proxy Statement") is being furnished to holders
of Common Shares of Beneficial Interest, par value $0.01 per share, (the "Common
Shares") of Corporate Office Properties Trust, a Maryland real estate investment
trust (the "Company"), in connection with a special meeting of shareholders of
the Company (the "Special Meeting") and the solicitation of proxies in
connection therewith. The approximate date on which this Proxy Statement and
form of proxy solicited on behalf of the Board of Trustees will first be sent to
the Company's shareholders is on or about July 22, 1998. At the Special Meeting,
shareholders will be asked to consider and vote upon: (A) a transaction (the
"Transaction") in which certain affiliates of Constellation Real Estate Group,
Inc. (collectively, "Constellation") will contribute to the Company (i)
Constellation's interests in entities which own certain real property and a
mortgage, (ii) certain real property, and (iii) certain other assets owned by
Constellation, in exchange for a combination of cash, assumption of debt, and
Common Shares and non-voting Series A Convertible Preferred Shares of Beneficial
Interest to be issued by the Company; and (B) such other business as may
properly come before the Special Meeting or any adjournment thereof.
Constellation is an indirect wholly-owned subsidiary of Baltimore Gas and
Electric Company.
The close of business on July 20, 1998 has been fixed by the Board of
Trustees as the record date for the determination of shareholders entitled to
notice of and to vote at the Special Meeting and any adjournments or
postponements thereof (the "Record Date"). On the Record Date, the Company had
outstanding 9,771,083 Common Shares. The Common Shares is the Company's only
class of voting securities and each Common Share entitles the holder thereof to
one vote on all matters to come before the meeting. Approval of the Transaction
requires the affirmative vote of a majority of the votes cast at the Special
Meeting, assuming a quorum is present. There is no cumulative voting.
All of the shareholders represented at the Special Meeting by properly
executed proxies received prior to or at the Special Meeting, and not revoked,
will be voted at the Special Meeting in accordance with the instructions
thereon. If no instructions are indicated, proxies will be voted in favor of the
Transaction. Abstentions will have the effect of a vote against the Transaction.
The Company does not know of any matters, other than as described in the
Notice of Meeting, which are to come before the Special Meeting. If any other
matters are properly presented at the Special Meeting for action, the persons
named in the enclosed form of proxy and acting thereunder will have the
discretion to vote on such matters in accordance with their best judgment.
A proxy given pursuant to this solicitation may be revoked at any time
before it is voted. Proxies may be revoked (i) by filing with the Board of
Trustees of the Company at or before the Special Meeting a written notice of
revocation bearing a later date than the proxy, (ii) by duly executing a
subsequent proxy relating to the same Common Shares and delivering it to the
Board of Trustees of the Company at or before the Special Meeting or (iii) by
attending the Special Meeting and voting in person (attendance at the Special
Meeting will not in and of itself constitute revocation of a proxy). Any written
notice revoking a proxy should be delivered to the Board of Trustees, Corporate
Office Properties Trust, One Logan Square, Suite 1105, Philadelphia,
Pennsylvania 19103.
Votes cast by proxy or in person at the Special Meeting will be tabulated by
the election inspector appointed for the meeting. The election inspector will
treat abstentions as shares that are present and entitled to vote for purposes
of determining the presence of a quorum, but as unvoted for purposes of
determining the approval of any matter upon which the shareholder has abstained.
If a broker indicates on the proxy that it does not have discretionary authority
as to certain shares to vote on a particular matter, those shares will not be
considered as present and entitled to vote with respect to that matter.
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If the Special Meeting is postponed or adjourned for any reason, at any
subsequent reconvening of the Special Meeting all proxies will be voted in the
same manner as such proxies would have been voted at the original convening of
the Special Meeting (except for any proxies that have theretofore effectively
been revoked or withdrawn).
The cost of preparing, assembling and mailing the Notice of Special Meeting,
this Proxy Statement and the form of proxy, including the reimbursement of
banks, brokers and other nominees for forwarding proxy materials to beneficial
owners, will be borne by the Company. Proxies may also be solicited personally
or by telephone by Trustees and officers of the Company, who will receive no
additional compensation.
The Company's Common Shares are listed for trading on the New York Stock
Exchange ("NYSE") under the symbol OFC. On July 17, 1998, the last sale price
for the Company's Common Shares as reported on the NYSE was $9 3/4 per share.
The high and low sales price for the Company's Common Shares as reported on the
NYSE on May 14, 1998, the date preceding the public announcement of the
Transaction, was $10 15/16 and $10 1/2, respectively.
No persons have been authorized to give any information or to make any
representation other than those contained in this Proxy Statement in connection
with the solicitation of proxies hereby and, if given or made, such information
or representation must not be relied upon as having been authorized by the
Company or any other person.
This Proxy Statement is solicited on behalf of the Board of Trustees of the
Company. The date of this Proxy Statement is July 22, 1998.
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TABLE OF CONTENTS
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SUMMARY................................................................................................... 1
THE SPECIAL MEETING....................................................................................... 7
Record Date; Voting At The Meeting...................................................................... 7
Proxies................................................................................................. 7
THE TRANSACTION........................................................................................... 8
Reasons For The Transaction And Recommendation Of The Board Of Trustees................................. 8
Terms Of The Transaction................................................................................ 8
Properties and Assets to be Contributed by Constellation.............................................. 9
Consideration to be Paid by the Company............................................................... 10
Description of Common and Preferred Shares............................................................ 11
Conditions to the Transaction......................................................................... 12
Registration Rights................................................................................... 13
Transaction Costs..................................................................................... 13
Changes In Operations And Additions To Management....................................................... 14
Certain Effects Of The Transaction...................................................................... 15
Share Ownership....................................................................................... 15
Major Tenants......................................................................................... 16
Financing of Transaction.............................................................................. 16
Other................................................................................................. 17
Accounting Treatment Of The Transaction................................................................. 17
Federal Income Tax Matters.............................................................................. 17
Treatment of the Transaction.......................................................................... 17
Taxation of the Company............................................................................... 18
REIT Qualification Requirements....................................................................... 18
THE COMPANY............................................................................................... 23
General................................................................................................. 23
Recent Developments..................................................................................... 23
CAPITALIZATION............................................................................................ 25
THE CONSTELLATION PROPERTIES AND CONSTELLATION SERVICE COMPANIES.......................................... 26
The Constellation Properties............................................................................ 26
The Constellation Service Companies..................................................................... 39
Legal Proceedings Related To Constellation.............................................................. 40
SELECTED FINANCIAL DATA OF CONSTELLATION SERVICE COMPANIES................................................ 41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSTELLATION SERVICE COMPANIES' FINANCIAL CONDITION AND RESULTS
OF OPERATIONS........................................................................................... 42
SELECTED FINANCIAL DATA OF THE COMPANY.................................................................... 45
MANAGEMENT................................................................................................ 48
Executive Officers And Trustees......................................................................... 48
Certain Information Regarding The Board Of Trustees And Committees...................................... 50
SECURITY OWNERSHIP OF MANAGEMENT AND OTHERS............................................................... 51
INDEPENDENT ACCOUNTANTS................................................................................... 51
OTHER MATTERS............................................................................................. 52
EXPERTS................................................................................................... 52
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........................................................... 52
INDEX TO FINANCIAL STATEMENTS............................................................................. F-1
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SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS CONTAINED ELSEWHERE IN THIS PROXY STATEMENT
AND INCORPORATED BY REFERENCE. UNLESS THE CONTEXT OTHERWISE REQUIRES, THE
"COMPANY" REFERS TO CORPORATE OFFICE PROPERTIES TRUST, AND ITS PREDECESSORS AND,
WHERE APPLICABLE, CORPORATE OFFICE PROPERTIES, L.P., A DELAWARE LIMITED
PARTNERSHIP ("COPLP" OR THE "OPERATING PARTNERSHIP") AND ITS SUBSIDIARIES. THE
ACTUAL AMOUNTS OF CASH TO BE PAID, DEBT TO BE ASSUMED OR REPAID AND COMMON AND
PREFERRED SHARES TO BE ISSUED BY THE COMPANY CANNOT BE DETERMINED UNTIL CLOSING,
AS THEY WILL BE A FUNCTION OF CERTAIN CALCULATIONS AND ADJUSTMENTS TO BE MADE AT
THAT TIME. ACCORDINGLY, SUCH AMOUNTS INCLUDED IN THIS PROXY STATEMENT ARE
ESTIMATES, NOT EXPECTED TO VARY MATERIALLY FROM THE ACTUAL AMOUNTS.
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THE COMPANY..................... The Company is a self-administered real estate investment
trust ("REIT") which focuses principally on the ownership,
acquisition and management of suburban office properties
in strong and growing suburban submarkets in the United
States. The Company currently owns interests in 24
suburban office properties in Maryland, Pennsylvania and
New Jersey containing approximately 2.6 million rentable
square feet and seven retail properties located in the
Midwest containing approximately 370,000 rentable square
feet. As of June 1, 1998, the properties owned by the
Company were over 97% leased. In addition, the Company has
options to purchase 44.3 acres of land contiguous to
certain of its properties owned by related parties. See
"The Company."
CONSTELLATION................... Constellation Real Estate Group, Inc. (together with its
affiliates that will be party to the Transaction,
"Constellation") is a wholly owned indirect subsidiary of
Baltimore Gas and Electric Company ("BGE"), through which
BGE has engaged in the acquisition, ownership,
development, construction and management of office, retail
and other commercial properties since 1981. The Company is
acquiring from Constellation title to, or ownership of
entities that own title to, all the office and retail
operating properties owned by Constellation, and options
to purchase 91 acres of land held by Constellation for
future office and retail development. The Company is also
acquiring Constellation's 75% interest in Constellation
Realty Management, LLC ("CRM"), a real estate management
services entity, and will employ the approximately 37
employees of Constellation Real Estate, Inc. ("CRE") who
are engaged in the development, construction and asset
management of Constellation's operating properties.
Constellation will continue to be actively engaged in the
real estate business, as it is retaining substantially all
its interests in its commercial and residential land and
will continue to employ its personnel engaged in the
development and management of those properties. See
"Constellation."
DATE, PLACE & TIME OF MEETING... The Special Meeting of Shareholders of the Company is
scheduled to be held in The Adams Room at The Four Seasons
Hotel, One Logan Square, Philadelphia, Pennsylvania 19103
on August 21, 1998 at 2:30 p.m.
PURPOSE OF MEETING.............. To consider and vote upon: (i) a transaction, pursuant to
which Constellation will contribute to the Company certain
real property,
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its interests in entities which own certain real property
and a mortgage, and certain other assets owned by
Constellation in exchange for a combination of cash,
assumption of debt by the Company, and Common Shares and
non-voting Series A Convertible Preferred Shares of
Beneficial Interest to be issued by the Company (the
"Transaction"); and (ii) such other business as may
properly come before the Special Meeting.
RECORD DATE, QUORUM AND VOTE
REQUIRED...................... Approval of the Transaction requires the affirmative vote
of a majority of the votes cast at the Special Meeting,
assuming a quorum is present. A majority of the Common
Shares outstanding, represented in person or by proxy,
will constitute a quorum for the transaction of business
at the Special Meeting. The Record Date for the Special
Meeting is July 20, 1998. See "The Special Meeting--Record
Date; Voting at the Meeting."
SOLICITATION AND REVOCATION OF
PROXIES....................... All expenses of the solicitation of the shareholders of
the Company in connection with this Proxy Statement will
be borne by the Company. Any proxy given pursuant to this
solicitation may be revoked at any time prior to its
exercise by the execution of a proxy signed at a later
date or by the giving of written notice of revocation to
the Secretary of the Company at any time before the taking
of the vote at the Special Meeting. A shareholder may also
revoke a proxy by attending the Special Meeting and voting
in person. See "The Special Meeting--Proxies."
ASSETS TO BE CONTRIBUTED TO THE
COMPANY BY CONSTELLATION...... Constellation will contribute to the Company: (i) title
to, or 100% of the ownership interests in, entities which
own a total of 14 office properties and two retail
properties; (ii) controlling interests in two entities,
one of which holds a mortgage on a retail property, the
other of which owns a retail property under development;
(iii) a 75% ownership interest in CRM, a real estate
management company (the 25% minority interest is owned by
an unaffiliated third party), and (iv) certain equipment,
office furniture and other assets related to CRE. In
addition, approximately 37 employees of CRE will become
Company employees. See "The Transaction-- Terms of the
Transaction." The real property, mortgage interest and
interests in entities owning real property being
contributed by Constellation are referred to herein
collectively as the "Constellation Properties," and the
75% interest in CRM and the furniture and other CRE assets
to be contributed to the Company by Constellation are
referred to herein as the "Constellation Service
Companies."
Upon completion of the Transaction, the Company will own
interests in a total of 38 suburban office properties (as
compared to 24 currently), containing approximately 4.0
million rentable square feet (as compared to 2.6 million
currently), and 11 retail properties (as compared to seven
currently) containing 783,000 rentable square feet (as
compared to 370,000 square feet currently). The
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Company will have approximately 49 full time employees (as
compared to 12 currently).
Constellation is also granting to the Company options to
purchase up to 91 acres of land zoned for office
development, and an option to purchase a 50% interest in a
206,000 square foot office property.
CONSIDERATION TO BE EXCHANGED
WITH CONSTELLATION BY THE
COMPANY....................... In exchange for the Constellation Properties and
Constellation Service Companies, the Company will (i)
issue to Constellation an aggregate of approximately
6,928,000 Common Shares; (ii) issue to Constellation an
aggregate of approximately 969,900 non-voting Series A
Convertible Preferred Shares of Beneficial Interest, $0.01
par value, with a liquidation preference of $25.00 per
share ("Preferred Shares"); and (iii) pay cash to
Constellation and assume or repay indebtedness outstanding
against the Constellation Properties. Such cash payments
and indebtedness are estimated to total $107.6 million,
including $4.2 million of cash payments to Constellation,
$64.8 million of debt repayment and $13.0 million of
assumed indebtedness. The $25.6 million balance of the
foregoing $107.6 million cash requirement reflects the
purchase price to be paid to Constellation for two retail
properties (the "Development Properties"). The Company's
obligation to close on each of the Development Properties
is contingent on the occurrence of certain events. For
purposes of the Transaction, the Common Shares are valued
at $10.50 per share and the Preferred Shares are valued at
$25.00 per share, for a total of approximately $97.0
million. The Preferred Shares are convertible, beginning
two years after the closing of the Transaction, at the
rate of 1.8748 Common Shares for each Preferred Share into
an aggregate of approximately 1,818,300 Common Shares. See
"The Transaction-- Terms of the Transaction." Common
Shares and Preferred Shares are collectively referred to
herein as the "Shares."
CLOSING OF THE TRANSACTION...... The Transaction will be consummated at several closings,
each comprising a closing with respect to one or more of
the Constellation Properties and Constellation Service
Companies, as follows. At the initial closing (expected to
occur no sooner than September 14, 1998 or later than 45
days following the date of the Special Meeting), the
Company will acquire the Constellation Service Companies
and 12 of the Constellation Properties. The total
consideration payable at the initial closing will be
approximately $145.0 million, including approximately
$59.9 million of indebtedness assumed or repaid and
approximately $85.1 million in value of Common and
Preferred Shares. Subsequent closings will be held with
respect to six Constellation Properties currently under
construction or development. The closing on two of those
properties is to occur within 45 days after the initial
closing (total consideration of approximately $4.2 million
in cash); closing on two of those properties is to occur
on the earlier of December 31, 1998 or the date on which
certain occupancy levels are met (total consideration of
approximately $29.8 million, including
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approximately $17.9 million debt repayment and $11.9
million in Shares), and closing on the Development
Properties is to occur on the earlier of the date on which
certain net operating income levels are achieved or July
1, 1999 (total purchase price of approximately $25.6
million in cash). Neither the Company nor Constellation is
obligated to close on the Development Properties unless
certain minimum net operating income levels have been
achieved by July 1, 1999.
SOURCE OF FUNDS REQUIRED BY THE
COMPANY....................... To complete the Transaction, the Company will require a
total of approximately $98.7 million in cash, of which
approximately $64.8 million will be used to repay
indebtedness currently outstanding with respect to certain
Constellation Properties, approximately $4.2 million will
be the purchase price payable for two of the Constellation
Properties, approximately $25.6 million will be the
purchase price of the two Development Properties and
approximately $4.1 million will be required for brokerage
fees and other out of pocket expenses related to the
Transaction. The cash required to complete the
Transaction, not including the Development Properties, is
available from the Company's existing acquisition credit
facility; however, the Company and Constellation are
currently seeking to refinance certain of the
Constellation Properties at or prior to the closing of the
Transaction to fund a significant portion of the cash
requirements of the Transaction. The Company expects to be
able to obtain financing commitments sufficient to enable
it to close on each of the Development Properties prior to
the time any such closing may occur. See "The
Transaction--Certain Effects of the Transaction."
CHANGES IN OPERATIONS,
MANAGEMENT AND BOARD OF
TRUSTEES...................... Upon closing of the Transaction, certain of
Constellation's senior management personnel will be
employed by the Company in senior management positions,
and the Board of Trustees will be increased by two
members, to a total of nine, by the addition of two
Trustees designated by Constellation. The Company's
property management, development, construction and
accounting activities will be conducted from
Constellation's offices in Columbia (one of the
Constellation Properties), Maryland, and the Company's
acquisition, capital markets and financing activities will
continue to be conducted from the Company's headquarters
in Philadelphia, Pennsylvania. See "The
Transaction--Changes in Operations and Additions to
Management."
CERTAIN EFFECTS OF THE
TRANSACTION................... As a result of the Transaction: (i) Constellation will
have the right, so long as it maintains certain levels of
share ownership in the Company, to designate up to two
members of the Board of Trustees; (ii) Constellation will
own approximately 41.5% of the Company's Common Shares
outstanding upon closing of the Transaction, and as such
will have the power to prevent certain actions that
require the approval of the holders of two thirds of the
Common Shares; and (iii) Constellation, as holder of the
Preferred
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Shares, will be entitled to receive an annual preferred,
cumulative dividend payment of $1.375 per Preferred Share,
equal to a rate of 5.5% based on the $25.00 per share
liquidation preference attributable to the Preferred
Shares. Additionally, in order to fulfill its obligation
to close on the Development Properties, the Company must
obtain financing commitments prior to the date of any such
closing in amounts up to approximately $25.6 million. See
"The Transaction--Certain Effects of the Transaction."
CONDITIONS TO THE CLOSING OF THE
TRANSACTION................... Closing of the Transaction is conditioned, among other
things, upon (i) approval of the Transaction by the
Company's shareholders, (ii) the representations and
warranties of the parties contained in the agreements
related to the Transaction (the "Transaction Agreements")
being true and correct in all material respects as of the
closing of the Transaction, (iii) performance by each of
the parties of their respective obligations required to be
performed under the Transaction Agreements on or prior to
the closing of the Transaction, and (iv) receipt of the
requisite consents, opinions and approvals from certain
third parties. For a discussion of certain important
issues related, inter alia, to the Company's continued
qualification as a REIT, see "The Transaction--Conditions
to the Transaction."
FEDERAL INCOME TAX
CONSEQUENCES.................. No gain or loss will be recognized by the Company or the
holders of Common Shares upon the consummation of the
Transaction. Subsequent to the Transaction, the Company
will continue to operate as a REIT. See "The
Transaction--Federal Income Tax Matters."
SHARES OUTSTANDING AFTER
CLOSING....................... Upon closing of the Transaction, there will be
approximately 16,699,083 Common Shares outstanding. The
entities comprising Constellation, all of which are
directly or indirectly owned by BGE, will own an aggregate
of approximately 6,928,000 Common Shares, or approximately
41.5% of the Common Shares to be outstanding after the
Transaction. They will also own approximately 969,900
Preferred Shares, convertible on a basis of 1.8748 Common
Shares for each Preferred Share beginning two years
following the closing of the Transaction into a total of
approximately 1,818,300 Common Shares. The Preferred
Shares may not be converted into Common Shares if at the
time of such conversion Constellation and its affiliates
would own 45% or more of the Company's outstanding Common
Shares. See "The Transaction--Terms of the Transaction."
OWNERSHIP OF UNITS IN COPLP..... As of the date of this Proxy Statement, there are
10,399,310 Partnership Units and 1,913,545 Preferred Units
(with a preferred distribution rate of 6.5%) of COPLP
outstanding. In addition, 282,508 Partnership Units and
186,455 Preferred Units (with a preferred distribution
rate of 6.5%) are issuable in November 2000. The Company
owns 8,100,000 Partnership Units, or 75.8% of all
Partnership Units outstanding and to be issued as
aforesaid. The ownership of substantially all the
Constellation Properties and
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Constellation Service Companies will be contributed by the
Company to COPLP and its subsidiaries, in exchange for
which COPLP will issue to the Company 6,928,000
Partnership Units and 969,900 Preferred Units (with a
preferred distribution rate of 5.5%). Upon completion of
the Transaction, the Company will own 85.3% of all
Partnership Units outstanding and to be issued as
aforesaid. The Preferred Units currently held by outside
parties are convertible to Partnership Units on a basis of
3.5714 Partnership Units for each Preferred Unit beginning
October 1, 1999. The 969,900 Preferred Units to be issued
to the Company are convertible to 1,818,300 Partnership
Units on a basis of 1.8748 Partnership Units for each
Preferred Unit beginning two years after the closing of
the Transaction. The Company's Preferred Units will be so
converted automatically upon the conversion of Preferred
Shares into Common Shares--the conversion of each
Preferred Share will automatically trigger the conversion
of a Preferred Unit.
RECOMMENDATION OF THE BOARD OF
TRUSTEES...................... The Board of Trustees, including the independent Trustees,
has unanimously approved the Transaction and the terms of
the Transaction Agreements, and UNANIMOUSLY RECOMMENDS
THAT THE SHAREHOLDERS VOTE FOR APPROVAL OF THE
TRANSACTION. The Board of Trustees believes that the terms
of the Transaction are fair to, and in the best interests
of, the Company, the Operating Partnership and the
Company's shareholders. For a discussion of factors
considered by the Board of Trustees in reaching its
decision, see "The Transaction--Reasons for the
Transaction and Recommendation of the Board of Trustees."
</TABLE>
This Proxy Statement contains "forward-looking statements" relating to,
without limitation, future economic performance, plans and objectives of
management for future operations and projections of revenue and other financial
items. The Company's actual results may differ significantly from the results
discussed in such "forward-looking statements." Factors that could cause such
differences include, but are not limited to, continued occupancy of certain
major tenants, supply and demand of office properties in the Company's market
area, prevailing economic conditions in the Mid-Atlantic region of the United
States, significant expansion of the properties owned and managed by the
Company, interest rates, availability of capital, expansion of the Company's
personnel, future capital expenditure requirements, and distributions available
from the Operating Partnership.
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THE SPECIAL MEETING
At the Special Meeting, the Company's shareholders will be asked to: (i)
consider and vote upon the approval of the Transaction, and (ii) transact such
other business relating thereto as may properly come before the Special Meeting.
The Board of Trustees has determined the Transaction to be fair to, and in
the best interests of, the Company's shareholders, has unanimously approved the
Transaction and the terms of the Transaction Agreements, and unanimously
recommends that the shareholders vote "FOR" approval of the Transaction.
RECORD DATE; VOTING AT THE MEETING
On the Record Date, there were 9,771,083 Common Shares outstanding. Each
holder of record of Common Shares on the Record Date is entitled to cast one
vote per Common Share, exercisable in person or by a properly executed proxy,
upon each matter properly submitted for the vote of the shareholders at the
Special Meeting. A majority of the Common Shares outstanding, represented in
person or by proxy, will constitute a quorum for the transaction of business at
the Special Meeting. Abstentions will be treated as shares that are present and
entitled to vote for the purpose of determining a quorum.
The approval and adoption of the Transaction requires the affirmative vote
of a majority of the votes cast at the Special Meeting, assuming a quorum is
present.
Approval of postponement or adjournment of the Special Meeting requires the
affirmative vote of a majority of the Common Shares voting at the Special
Meeting. For purposes of satisfying this vote requirement, failure to vote or an
abstention from voting will have the effect of votes against postponement or
adjournment. If shareholders approve such an adjournment or postponement, the
Special Meeting could be postponed or adjourned in order to permit further
solicitation of proxies if there are not sufficient votes at the time of the
Special Meeting to approve the Transaction.
PROXIES
Common Shares represented by properly executed proxies received at or prior
to the Special Meeting that have not been revoked will be voted at the Special
Meeting in accordance with the instructions contained therein. Common Shares
represented by properly executed proxies for which no instruction is given will
be voted "FOR" approval of the Transaction. The Company's shareholders are
requested to complete, sign, date and promptly return the enclosed proxy card in
the postage prepaid envelope provided for this purpose to ensure that their
shares are voted. A shareholder may revoke a proxy any time before it is voted
by submitting at any time prior to the Special Meeting a later-dated proxy with
respect to the same shares, by delivering a written notice of revocation to the
Secretary of the Company at any time prior to such Special Meeting or by
attending the Special Meeting and voting in person. Mere attendance at the
Special Meeting will not in and of itself revoke a proxy.
If the Special Meeting is postponed or adjourned for any reason, including
further solicitation of proxies, at any subsequent reconvening of the Special
Meeting all proxies will be voted in the same manner as such proxies would have
been voted at the original convening of the Special Meeting (except for any
proxies that have theretofore effectively been revoked or withdrawn).
The Company has retained Corporate Investor Communications, Inc. (the
"Solicitation Agent") to solicit proxies. The Solicitation Agent may contact the
Company's shareholders. The Solicitation Agent will receive a fee of
approximately $5,500 for such services, plus reimbursement of out-of-pocket
expenses. The Trustees and officers of the Company and their affiliates may also
solicit proxies by telephone, telegram or personal contact, and such persons
will receive no additional compensation for such services. Copies of
solicitation materials will be furnished to fiduciaries, custodians and
brokerage houses for forwarding to beneficial owners of the Company shares held
in their name. The Company will bear the cost of preparing and mailing proxy
materials in connection with the Special Meeting, solicitation of proxies,
exchange fees, filing fees and printing costs in connection with this Proxy
Statement.
7
<PAGE>
THE TRANSACTION
REASONS FOR THE TRANSACTION AND RECOMMENDATION OF THE BOARD OF TRUSTEES
In reaching its conclusion, the Board of Trustees considered, without
assigning relative weight to, the following factors:
(i) The Transaction will provide the Company with additional experienced
management personnel and significant property management, development and
construction infrastructure, all of which will expand its business and
development capabilities in the Mid-Atlantic region of the United States. In
addition, the Company will have the option to acquire 91 acres, adjacent to
certain of the properties being acquired, suitable for development of office
properties.
(ii) The Transaction will increase the Company's asset and capital base
and diversify its sources of revenue. While increased profitability does not
necessarily result from increased size, the Board of Trustees believes the
Company's increased size should enhance its access to capital and reduce its
costs of capital.
(iii) The Transaction will give the Company a major presence in the
Baltimore/Washington market, enhancing the geographic diversity of the
Company's ownership interests and operations and the Company's goal of
becoming a significant participant in key markets in the Mid-Atlantic region
of the United States.
(iv) The Transaction is expected to be accretive, and therefore
economically advantageous to the Company's current shareholders.
(v) In addition to adding up to 18 properties to the Company's
portfolio, the Transaction will add more than 130 tenants to the Company's
tenant base, for a combined total of more than 215 tenants. This adds to the
diversity and stability of the Company's portfolio.
(vi) The addition of the CRE employees and CRM will make the Company one
of the largest property managers in its market area, and will increase the
square footage of the office properties managed by the Company to more than
17 million (including approximately four million square feet in properties
owned, or to be owned by the Company).
The terms of the Transaction were negotiated by the respective managements
of the Company and Constellation. The Company did not obtain independent
appraisals of the specific Constellation Properties or Constellation Service
Companies, nor did the Company obtain an independent appraisal, valuation or
fairness opinion with respect to the Transaction as a whole. Constellation did
obtain a fairness opinion from an independent party, solely for the benefit of
Constellation.
The Board of Trustees has unanimously agreed that the Transaction is in the
best interests of the shareholders of the Company, and has unanimously
recommended that the shareholders approve the Transaction.
THE BOARD OF TRUSTEES RECOMMENDS A VOTE
FOR APPROVAL OF THE TRANSACTION.
TERMS OF THE TRANSACTION
The following summary of the material provisions of the Transaction
Agreements is qualified in its entirety by reference to the Transaction
Agreements, copies of which have been filed with the Securities and Exchange
Commission as Exhibits to this Proxy Statement.
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<PAGE>
PROPERTIES AND ASSETS TO BE CONTRIBUTED BY CONSTELLATION
Constellation will contribute to the Company:
(i) Title to one operating office property;
(ii) 100% of the ownership interests in entities which own a total of
ten operating properties (nine office properties and one retail property);
(iii) 100% of the ownership interests in entities which own two office
properties currently under construction;
(iv) 75% of the ownership interest in one entity which holds a mortgage
on a retail property owned by persons not affiliated with either the Company
or Constellation;
(v) 100% and 60%, respectively, of the ownership interests in two
entities which own two retail properties currently under development (the
"Development Properties");
(vi) Either title to, or 100% of the ownership interests in entities
which own, two office properties on which construction recently commenced;
(vii) A 75% ownership interest in CRM; and
(viii) Certain equipment, furniture and other assets related to CRE.
Items (i)-(vi) above are referred to herein as the "Constellation Properties,"
and items (vii) and (viii) are referred to herein as the "Constellation Service
Companies." The Constellation Properties comprise, in the aggregate,
approximately 1.4 million rentable square feet of office space and approximately
400,000 rentable square feet of retail space in a total of 14 office properties
and four retail properties. The terms of the mortgage referred to in (iv) above
are such that the mortgagee has virtually the same economic risks and rewards as
if it owned the land and improvements directly.
The Company will acquire from CRE the furniture, equipment, computer
software, etc. used by CRE in connection with the operation of the Constellation
Properties. In addition, those persons employed by CRE engaged in the operation
of the Constellation Properties will become Company employees. Of the 37 CRE
employees expected to join the Company, ten are currently involved in
construction, nine in finance/ accounting, four in legal, four in development,
three in information technology, two in asset management, and five in various
corporate and administrative functions. CRM is one of the largest property
management organizations in the Baltimore/Washington market. Approximately 47%
of its revenues for the year ended December 31, 1997 were derived from
Constellation Properties and other Constellation affiliates (including BGE). The
balance of its revenues for the year were derived from unaffiliated third
parties. CRM employs 66 people, 30 of whom are building engineers and
maintenance personnel, 19 are engaged in property management and support, five
are lease administrators, nine are engaged in accounting and three are involved
in corporate activities.
In addition to the foregoing, Constellation will grant the Company an option
to purchase for cash its 50% interest in a planned suburban office development
project in Annapolis, Maryland, as well as certain options and rights of first
refusal to purchase undeveloped land totaling 91 acres in three locations
adjacent to certain of the Constellation Properties with aggregate office
development potential of approximately 1.7 million square feet.
Following closing of the Transaction, a subsidiary of the Operating
Partnership will perform certain consulting and project management services for
Constellation pursuant to an agreement that calls for Constellation to pay the
Company $250,000 per month for the first three months following the closing,
$150,000 per month for the next three months, $100,000 per month for the four
months thereafter, and $50,000 per month for the eight months thereafter.
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<PAGE>
For a more complete description of the foregoing, see "The Constellation
Properties and Constellation Service Companies."
CONSIDERATION TO BE PAID BY THE COMPANY
Pursuant to the Transaction Documents, the Company agreed to acquire the
Constellation Service Companies for Common Shares and Preferred Shares valued at
a total of $2.5 million, and the Constellation Properties for a payment of cash,
the issuance of Common Shares and Preferred Shares and the assumption of debt
valued at a total of approximately $202.1 million. The mix of cash, shares and
debt assumption cannot be determined precisely until closing on all aspects of
the Transaction have occurred. The closing on certain of the retail
Constellation Properties may be deferred until after the first quarter of 1999,
closing on the Development Properties is contingent upon the occurrence of
certain events, and it is possible that certain of the Constellation Properties
may be disposed of to third parties with the consent of both the Company and
Constellation prior to closing of the Transaction. For purposes of the
Transaction, the Company and Constellation agreed to value the Common Shares at
$10.50 per share and the Preferred Shares at $25.00 per share.
At the date of this Proxy Statement, the Company's best estimate is that in
exchange for the Constellation Properties and Constellation Service Companies,
the Company will:
(i) Pay approximately $29.8 million in cash to Constellation.
Approximately $25.6 million of this amount will be payable for the purchase
of the two Development Properties, the closings for which are not expected
to occur prior to the first quarter of 1999, and approximately $4.2 million
will be payable for two properties (134 National Business Parkway and
Woodlands Two) on which construction recently commenced, the closings for
which are expected to occur within 45 days after the initial closing of the
Transaction;
(ii) Repay a total of approximately $64.8 million of indebtedness
currently outstanding against certain of the Constellation Properties;
(iii) Assume two loans reflecting a total of approximately $13.0 million
of indebtedness outstanding against certain of the Constellation Properties.
One such obligation is approximately $9.6 million of fixed rate debt bearing
interest at 7.5% per annum. Annual principal payments for the year ended
December 31, 1998 will approximate $165,000. This debt matures in October
2020, unless the lender exercises a termination right in October 2005 and
every five years thereafter. The remaining $3.4 million of debt to be
assumed matures in September 2000 and bears interest, payable monthly, based
upon London Interbank Offered Rate (LIBOR) plus 250 basis points. LIBOR as
of June 1, 1998 was 5.69%. Scheduled annual principal payments of $82,440
are required, with the remaining balance due upon maturity in September
2000;
(iv) Issue to Constellation approximately 6,928,000 Common Shares; and
(v) Issue to Constellation approximately 969,900 Preferred Shares.
The Company has deposited with an independent Escrowee a non-transferable,
irrevocable standby letter of credit in the amount of $5 million (the "Letter of
Credit") to collateralize its obligations under the Transaction Agreements,
other than the Company's obligation to acquire the Development Properties. In
the event of a final determination that the Company has defaulted under the
terms of such Transaction Agreements, the proceeds of the Letter of Credit are
to be paid to Constellation as liquidated damages. Upon closing of the
Transaction, the Letter of Credit shall be returned to the Company.
The Transaction will be consummated at several closings, each comprising a
closing with respect to one or more of the Constellation Properties and
Constellation Service Companies, as follows. At the initial closing (expected to
occur within 30 days following the date of the Special Meeting), the Company
will
10
<PAGE>
acquire the Constellation Service Companies and 12 of the Constellation
Properties. The total consideration payable at the initial closing will be
approximately $145.0 million, including approximately $59.9 million of
indebtedness assumed or repaid and approximately $85.1 million in value of
Common and Preferred Shares. Subsequent closings will be held with respect to
six Constellation Properties currently under construction or development. The
closing on two of those properties is to occur within 45 days after the initial
closing (total consideration approximately $4.2 million in cash); closing on two
of those properties is to occur on the earlier of December 31, 1998 or the date
on which certain occupancy levels are met (total consideration approximately
$29.8 million, including approximately $17.9 million debt repayment and $11.9
million in Shares), and closing on the Development Properties is to occur on the
earlier of the date on which certain net operating income levels are achieved or
July 1, 1999 (total purchase price approximately $25.6 million in cash). Neither
the Company nor Constellation is obligated to close on the Development
Properties unless certain minimum net operating income levels have been achieved
by July 1, 1999.
DESCRIPTION OF COMMON AND PREFERRED SHARES
GENERAL. The Declaration of Trust provides that the Company may issue up to
45,000,000 Common Shares and 5,000,000 Preferred Shares. As of June 1, 1998,
there were 9,771,083 Common Shares and no Preferred Shares issued and
outstanding. As permitted by Title 8 of the Corporations and Associations
Article of the Annotated Code of Maryland, as amended (the "Maryland REIT Law"),
the Declaration of Trust contains a provision permitting the Board of Trustees,
without any action by the shareholders of the Company, to amend the Declaration
of Trust to increase or decrease the aggregate number of shares of beneficial
interest or the number of shares of any class of shares of beneficial interest
that the Company has authority to issue. The NYSE requires that the Company
obtain shareholder approval of the Transaction, since it calls for the issuance
of voting securities constituting more than 20% of the Company's outstanding
voting securities. For a discussion of certain limitations on Share ownership,
see "--Federal Tax Matters" below.
COMMON SHARES. Subject to the preferential rights of any other shares or
series of beneficial interest and to the provisions of the Declaration of Trust
regarding the restriction on transfer of Common Shares, holders of Common Shares
are entitled to receive dividends on such shares if, as and when authorized and
declared by the Board of Trustees out of assets legally available therefor and
to share ratably in the assets of the Company legally available for distribution
to its shareholders in the event of its liquidation, dissolution or winding-up
after payment of, or adequate provision for, all known debts and liabilities of
the Company.
Subject to the provisions of the Declaration of Trust regarding restrictions
on transfer of shares of beneficial interest, each outstanding Common Share
entitles the holder thereof to one vote on all matters submitted to a vote of
shareholders, including the election of Trustees, and, except as provided with
respect to any other class or series of shares of beneficial interest, the
holders of such Common Shares possess the exclusive voting power. There is no
cumulative voting in the election of Trustees, which means that the holders of a
majority of the outstanding Common Shares can elect all of the Trustees then
standing for election and the holders of the remaining shares will not be able
to elect any Trustees.
Holders of Common Shares have no preference, conversion, sinking fund,
redemption or appraisal rights and have no preemptive rights to subscribe for
any securities of the Company. Subject to the provisions of the Declaration of
Trust regarding the restriction on transfer of Common Shares, the Common Shares
have equal dividend, distribution, liquidation and other rights.
PREFERRED SHARES. In connection with the Transaction, the Board of Trustees
has authorized the Series A Convertible Preferred Shares which will constitute
the non-voting convertible preferred shares to be issued to Constellation in the
Transaction, as follows:
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VOTING RIGHTS. Except as set forth below and as required by applicable law,
the Preferred Shares do not entitle the holder thereof to any vote. If an
amendment to the Company's Declaration of Trust or a reclassification of
Preferred Shares would amend, alter or repeal any of the rights, preferences or
powers of the Preferred Shares, then the affirmative vote of holders of
two-thirds of the outstanding Preferred Shares, voting as a separate class,
would be required for its adoption. As discussed under "The Transaction--Changes
in Operation and Additions to Management," Constellation has the right to
designate up to two members of the Board of Trustees depending on
Constellation's ownership percentage of outstanding Shares. This right is set
forth as a term of the Preferred Shares, such that so long as Constellation
holds any Preferred Shares (and it owns the requisite amount of Common Shares),
Constellation will have the right to designate up to two Trustees.
DIVIDENDS. Holders of Preferred Shares will be entitled to cumulative
dividends, payable quarterly and in preference to dividends payable on Common
Shares, accruing from the date of issue, when, as and if declared by the Board
of Trustees out of funds legally available therefor, at the annual rate of
$1.375 per share, which is 5.5% of the $25.00 liquidation preference of the
Preferred Shares.
LIQUIDATION. In the event of any liquidation, dissolution or winding up of
the Company's affairs, voluntary or otherwise, holders of Preferred Shares will
be entitled to receive, out of the assets of the Company legally available for
distribution to its shareholders, the sum of $25.00 for each Preferred Share,
plus an amount equal to all dividends accrued and unpaid on each such Preferred
Share up to the date fixed for distribution, before any distribution may be made
to holders of the Company's Common Shares.
CONVERSION. The Preferred Shares are convertible, beginning two years after
the closing of the Transaction, into Common Shares on the basis of 1.8748 Common
Shares for each Preferred Share (subject to adjustment upon certain events, such
as dividends paid in Common Shares). Notwithstanding the foregoing, Preferred
Shares held by Constellation may not be converted into Common Shares if after
such conversion Constellation and its affiliates would own 45% or more of the
Company's outstanding Common Shares.
CONDITIONS TO THE TRANSACTION
Constellation's obligation to consummate the Transaction is subject to the
fulfillment of certain conditions (in most cases subject to waiver by
Constellation) by the Company including, but not limited to, the following: (i)
the Transaction shall have been approved by the Company shareholders; (ii) the
resolutions contemplated by the Transaction Agreements shall have been approved
and implemented by the Board of Trustees of the Company; (iii) the
representations and warranties of the Company contained in the Transaction
Agreements will be true and correct in all material respects as of the closing
of the Transaction; (iv) the Company will have performed all obligations
required to be performed by it under the Transaction Agreements on or prior to
the closing of the Transaction; (v) the Company shall not have taken any action
or have failed to take any action which would reasonably be expected to result
in the loss of its status as a REIT for federal income tax purposes; and (vi)
the Company shall have delivered, on or before the closing of the Transaction,
certain documents detailed in the Transaction Agreements.
The Company's obligation to consummate the Transaction is subject to the
fulfillment of certain conditions (in most cases subject to waiver by the
Company) by Constellation including, but not limited to, the following: (i) the
representations and warranties of Constellation contained in the Transaction
Agreements will be true and correct in all material respects as of the closing
of the Transaction; (ii) Constellation will have performed all obligations
required to be performed by it under the Transaction Agreements on or prior to
the closing of the Transaction; (iii) certain options to purchase and all rights
of first refusals and rights of first offer with respect to the Constellation
Properties which are held by unaffiliated third parties shall have been waived;
(iv) Constellation and the Company shall have received all requisite consents
and approvals from unaffiliated third parties; and (v) Constellation shall have
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<PAGE>
delivered, on or before the closing of the Transaction, certain documents
detailed in the Transaction Agreements.
In addition, Constellation has agreed that, among other things, prior to the
consummation of the Transaction, it will (i) operate and maintain the
Constellation Service Companies and Constellation Properties in the ordinary
course of business and use reasonable efforts to preserve for the Company its
relationships with its tenants, suppliers and others having on-going business
relationships with the Constellation Service Companies and Constellation
Properties; (ii) maintain and keep in full force the insurance policies it
currently maintains on the Constellation Service Companies and Constellation
Properties; (iii) provide to the Company and its authorized representatives all
information concerning, and reasonable access to, all its books, records, tenant
and leasing data and materials, tax returns, market studies and any other
materials of any kind owned by or in the possession of Constellation which are
or may be used in the operation of the Constellation Service Companies and
Constellation Properties at all reasonable times and upon reasonable notice;
(iv) promptly notify the Company of any notice it may have received from any
Governmental Authority concerning a violation of any environmental laws or a
discharge of contaminants; (v) complete all required construction work at the
Constellation Properties; (vi) take all commercially reasonable action to obtain
the requisite consents and approvals from its partners to consummate the
Transaction; (vii) make all required payments, and comply with all other
material conditions under any mortgage affecting the Constellation Service
Companies and Constellation Properties; (viii) not modify its ownership
structure; and (ix) enter into new leases or modification of leases or new
contracts without the consent of the Company.
REGISTRATION RIGHTS
The Company has granted certain registration rights to the entities which
are contributing the Constellation Properties and Constellation Service
Companies to the Company in exchange for Common Shares and Preferred Shares.
Within six months of the initial closing the Transaction, the Company is
obligated to file a shelf registration statement with respect to the Common
Shares issued in the Transaction, as well as those issuable upon conversion of
the Preferred Shares (the "Registrable Securities"). The Company is also
required, at the demand of holders of 10% or more of the Registrable Securities,
to register such holders' Registrable Securities, subject to the right to defer
the filing of the necessary registration statement for a period not to exceed 90
days under certain limited circumstances. This right to demand registration may
be exercised not more than three times. In addition, the Company has granted to
holders of Registrable Securities certain "piggy-back" rights. The Company has
agreed to indemnify the holders of Registrable Securities against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
The Company will pay all fees associated with these registrations, other than
underwriting discounts and commissions.
TRANSACTION COSTS
Each of the Company and Constellation has agreed to pay its own costs and
expenses incidental to the Transaction, including brokerage, legal, accounting
and other fees and expenses payable to third parties. Except as set forth in the
following paragraph, all the Company's out-of-pocket expenses are payable to
unaffiliated third parties, and no current or former officer, director, trustee
or employee of the Company is entitled to receive any payment or other
consideration in connection with the Transaction.
The Company estimates its out-of-pocket expenses in connection with the
Transaction will be approximately $4.1 million, including investigation,
brokerage, legal, accounting, printing and title insurance fees. Among the fees
to be paid by the Company is a fee to Corporate Office Services, Inc. ("OSI"),
an entity of which Antony P. Bernheim is the principal employee, for
acquisition-related services with respect to the Transaction. Mr. Bernheim
resigned his position as Vice President and Chief Investment Officer of the
Company effective April 27, 1998. OSI and other third party service providers
will perform for the Company in the future those services previously performed
by Mr. Bernheim. The fee payable to
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<PAGE>
OSI pursuant to the terms of a Consulting Services Agreement between the Company
and OSI will be approximately $745,000 in cash, and could be increased by up to
approximately $150,000 if the Company does not dispose of the retail
Constellation Properties within one year following the initial closing of the
Transaction. In addition, the Company has agreed to pay an additional fee to OSI
in an amount to be determined based principally upon the market value of the
Company's Common Shares 30 months after the closing of the Transaction.
CHANGES IN OPERATIONS AND ADDITIONS TO MANAGEMENT
Upon closing of the Transaction, the Company's Board of Trustees will be
expanded from its present composition of seven, to nine Trustees. The two new
Trustees, designated by Constellation pursuant to its right as the holder of
Preferred Shares, will be Edward A. Crooke, Chairman of Constellation
Enterprises, Inc. and Vice Chairman of BGE and Steven D. Kesler, President of
Constellation Investments, Inc. Mr. Crooke will be a Class III Trustee whose
term expires in 2001, and Mr. Kesler will be a Class II Trustee whose term
expires in 2000. If any member of the Board of Trustees designated by
Constellation shall withdraw for any reason, Constellation shall have the right
to designate such withdrawing Trustee's replacement. Thereafter, Constellation
shall be entitled to designate two Trustees as long as it owns any Preferred
Shares and at least 30% of the Company's outstanding Common Shares, and shall be
entitled to designate one Trustee as long as it owns any Preferred Shares and
less than 30% but more than 15% of the outstanding Common Shares. The foregoing
calculations are to include as outstanding the Common Shares owned by
Constellation as well as the Common Shares issuable upon conversion of Preferred
Shares owned by Constellation.
Upon closing of the Transaction, Jay H. Shidler will remain as Chairman and
Clay W. Hamlin, III will remain as Chief Executive Officer of the Company.
Randall M. Griffin, President of Constellation Real Estate Group, Inc. ("CREG"),
will become President and Chief Operating Officer of the Company. In addition,
Roger A. Waesche, Jr., Senior Vice President of Finance of CRE and John H.
Gurley, Vice President and General Counsel of CRE, as well as certain other
officers of Constellation, are expected to assume positions with the Company
similar to those held by them with Constellation.
Mr. Griffin has served as President of CREG since May 24, 1993. From 1990
through March 1993, Mr. Griffin worked as Vice President-Development for
EuroDisney Development in Paris, France. During the period 1976 to 1990, Mr.
Griffin progressed to Executive Vice President and Chief Operating Officer with
Linclay Corporation, a St. Louis based real estate development, management and
investment company. Mr. Griffin holds a Master of Business Administration from
Harvard Graduate School of Business Administration and a Bachelor of Arts from
Ohio Wesleyan University. Mr. Griffin remains active in several civic
organizations, including serving on the Board of Trustees of The National
Aquarium as its Vice Chairman and Columbia Festival of the Arts. He is a member
of the Maryland Economic Development Commission, and serves on its Executive
Committee. In addition, Mr. Griffin obtained the rank of 1st Lieutenant Infantry
in the United States Army during his service from 1966 through 1969.
Edward A. Crooke is currently Vice Chairman of BGE. Prior to May 1998, he
held the position of President and Chief Operating Officer of BGE from 1992 to
1998. Mr. Crooke presently serves as Chairman of the Board, President and Chief
Executive Officer of Constellation Enterprises, Inc., a wholly owned direct
subsidiary of BGE. Throughout his thirty-year career with BGE, Mr. Crooke
advanced through the utility from Vice-President-Finance & Accounting and
Secretary during the period 1978 through 1987 to President-Utility Operations
from 1988 to 1992. Mr. Crooke is a member of BGE's Board of Directors, a role he
has performed since 1988. Active in various civic and professional
organizations, Mr. Crooke serves as a director on First Maryland Bancorp, First
National Bank of Maryland, Goucher College and Baltimore Equitable Insurance.
Mr. Crooke possesses a Master of Business Administration in Finance from Loyola
College and a Bachelor's degree in Economics from the University of Maryland.
Prior to his employment with BGE, Mr. Crooke participated in the United States
Army Reserve from 1954 through 1964.
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Steven D. Kesler is the Chief Executive Officer and President of
Constellation Investments, Inc., and a Vice President of CREG, both wholly owned
indirect subsidiaries of BGE. In these roles, Mr. Kesler manages a corporate
investment entity, BGE's pension plan, BGE's nuclear decommissioning trust and a
portfolio of real estate assets. Mr. Kesler is currently a Director of publicly
traded insurance company and had previously served on the Board of another
insurance company. During his thirteen years with Constellation, Mr. Kesler had
also served as Treasurer and Assistant Secretary of Constellation Holdings,
Inc., the wholly owned indirect subsidiary of BGE. Prior to employment with
Constellation, Mr. Kesler was Controller of Westinghouse-Hittman Nuclear, Inc.
and Manager of budgets, planning and analysis with Maryland National
Corporation. Mr. Kesler participates in several civic and professional
organizations. He possesses a Master of Business Administration from the Wharton
Graduate School, University of Pennsylvania, a Bachelor of Science from New York
University and is a Certified Public Accountant in Maryland.
Roger A. Waesche, Jr. has been responsible for all financial operations of
CRE including treasury, accounting, budgeting and financial planning. Mr.
Waesche also has had primary responsibility for CRE's asset investment and
disposition activities. Since 1984, Mr. Waesche has managed the financial
relationships of the CRE and has sourced over $500 million of project debt.
Prior to joining CRE, Mr. Waesche was a practicing Certified Public Accountant
with Coopers & Lybrand L.L.P. Mr. Waesche has an undergraduate degree in
Accounting and a Master of Business Administration in Finance from Loyola
College.
John H. Gurley has served as Vice President and General Counsel of CRE with
responsibility for all legal matters. In this role, Mr. Gurley has managed lease
negotiations for more that 2.0 million square feet of office and retail space
and has handled all land purchases and sales, as well as financing and related
matters. Prior to his employment with CRE, Mr. Gurley spent 17 years with The
Rouse Company in which he worked eight years as Assistant General Counsel.
Before that he worked in a private practice for five years with Semmes, Bowen &
Semmes where he provided a broad spectrum of real estate related services to
various clients. He graduated from Georgetown University with honors and earned
his Juris Doctorate from University of Maryland School of Law also with honors.
He was an editor of the Maryland Law Review and clerked for the Chief Judge of
the Maryland Court of Appeals for one year after graduation. He participates in
the American Bar Association, the Maryland Bar Association and the Baltimore
City Bar Association.
Following closing of the Transaction, the Company's headquarters will remain
in Philadelphia, and acquisition, capital markets and financing activities will
be conducted out of the Philadelphia office. The Company will occupy a portion
of the space currently occupied by Constellation in Columbia, Maryland (in a
building which is one of the Constellation Properties), where the CRE personnel
who are to become Company employees will perform the Company's property
management, development, construction and accounting functions.
CERTAIN EFFECTS OF THE TRANSACTION
SHARE OWNERSHIP
As the holder of approximately 41.5% of the outstanding Common Shares,
Constellation will have significant influence on the Company. Under the Maryland
REIT Law, a Maryland real estate investment trust generally cannot amend its
declaration of trust or merge unless approved by the affirmative vote of
shareholders holding at least two-thirds of the shares entitled to vote on the
matter unless a lesser percentage (but not less than a majority of all the votes
entitled to be cast on the matter) is set forth in the real estate investment
trust's declaration of trust. The Company's Declaration of Trust provides for
approval by a majority of the votes cast by holders of Common Shares entitled to
vote on the matter in all situations permitting or requiring action by the
shareholders, except with respect to: (i) the election of Trustees (which
requires a plurality of all the votes cast at a meeting of shareholders of the
Company at
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which a quorum is present), (ii) the removal of Trustees (which requires the
affirmative vote of the holders of two-thirds of the outstanding shares of
beneficial interest of the Company entitled to vote generally in the election of
Trustees, which action can only be taken for cause by vote at a shareholder
meeting), (iii) the merger or sale (or other disposition) of all or
substantially all of the assets of the Company (which requires the affirmative
vote of the holders of two-thirds of the outstanding shares of beneficial
interest entitled to vote on the matter), (iv) the amendment of the Declaration
of Trust by shareholders (which requires the affirmative vote of two-thirds of
all the votes entitled to be cast on the matter) and (v) the termination of the
Company (which requires the affirmative vote of two-thirds of the outstanding
shares of beneficial interest entitled to be cast on the matter). As allowed
under the Maryland REIT Law, the Declaration of Trust permits (a) the Trustees
by a two-thirds vote to amend the Declaration of Trust from time to time to
qualify as a real estate investment trust under the Code or the Maryland REIT
Law without the approval of the shareholders and (b) the Trustees by a majority
vote, without any action by the shareholders of the Company, to amend the
Declaration of Trust to increase or decrease the aggregate number of shares of
beneficial interest or the number of shares of any class of shares of beneficial
interest that the Company has authority to issue.
MAJOR TENANTS
As of June 1, 1998, one major tenant accounted for approximately 23.2% of
the Company's total annualized revenue. Two major tenants accounted for
approximately 42.4% of the total annualized revenue derived from the
Constellation Properties as of June 1, 1998. One of those tenants is the federal
government which leases space for the Department of Defense and the Department
of Treasury in two of the Constellation Properties pursuant to two leases. The
Department of Defense lease, which accounts for approximately 24.4% of the total
annualized revenue of the operating Constellation Properties, is for an entire
240,336 square foot building, and extends through 2007, but may be terminated by
the tenant with one year's notice and payment of a penalty. Following the
acquisition of the Constellation Properties, two major tenants will account for
approximately 32.5% of the Company's total annualized revenue as of June 1, 1998
on a pro forma basis, one of which is the federal government as described above.
In the event one or more of these tenants experience financial difficulties, or
default on their obligation to make rental payments to the Company, or if the
Department of Defense elects to terminate its lease and the space cannot be
re-let on satisfactory terms, the Company's financial performance and ability to
make expected distributions to shareholders would be materially adversely
affected. For a tabular presentation of the Company's pro forma significant
tenants, see "The Constellation Properties and Constellation Service
Companies--The Constellation Properties."
FINANCING OF TRANSACTION
The Transaction will be consummated at several closings, as detailed
elsewhere in this Proxy Statement. The closings for substantially all the
properties and assets to be acquired other than the Development Properties are
expected to be completed within 45 to 90 days after the Special Meeting. The
closing for each of the Development Properties is contingent upon the
achievement of certain net operating income levels by July 1, 1999, and neither
closing is expected to occur in any event prior to the first quarter of 1999. As
of the date of this Proxy Statement, the Company has borrowed $23.8 million
under its recently obtained $100 million revolving credit facility. To complete
the Transaction, exclusive of the Development Properties, the Company will
require a total of approximately $73.1 million in cash, which, if other
financing is not obtained, is expected to be funded from the revolving credit
facility. The aggregate purchase price for the Development Properties is
approximately $25.6 million. Assuming that closings occur as to both Development
Properties, the Company will require financing commitments in addition to those
currently available. Management is confident it will be able to obtain such
financing, on reasonable terms, as may be necessary to close on the Development
Properties. The Company and Constellation are currently seeking to finance
certain of the Constellation Properties simultaneous with the initial closing of
the Transaction. Although management believes appropriate financing will be
available to
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the Company to complete the Transaction, there can be no assurance that such
financing will be available on acceptable terms, if at all.
OTHER
For a discussion of certain issues regarding the qualification of the
Company as a REIT, see "The Company--Federal Income Tax Matters" below.
ACCOUNTING TREATMENT OF THE TRANSACTION
The Transaction will be accounted for as a purchase. See the Company's pro
forma financial statements included elsewhere in this Proxy Statement.
FEDERAL INCOME TAX MATTERS
The Company was organized in 1988 and elected to be taxed as a REIT
commencing with its taxable year ended on December 31, 1992. The Company
believes that it was organized and has operated in a manner that permits it to
satisfy the requirements for taxation as a REIT under the applicable provisions
of the Internal Revenue Code of 1986, as amended (the "Code") and intends to
continue to operate in such a manner. No assurance can be given, however, that
such requirements have been or will continue to be met. The following is a
summary of certain federal income tax considerations that may be relevant to the
Company and its shareholders in connection with the Transaction, including the
continued treatment of the Company as a REIT for federal income tax purposes.
For purposes of this discussion of "FEDERAL INCOME TAX MATTERS" the term
"Company" refers only to Corporate Office Properties Trust and not to any other
affiliated entities.
The following discussion is based on the law existing and in effect on the
date hereof and the Company's qualification and taxation as a REIT will depend
on compliance with such law and with any future amendments or modifications to
such law. The qualification and taxation as a REIT will further depend upon the
ability to meet, on a continuing basis through actual operating results, the
various qualification tests imposed under the Code discussed below. No assurance
can be given that the Company will satisfy such tests on a continuing basis.
In brief, a corporation that invests primarily in real estate can, if it
meets the REIT provisions of the Code described below, claim a tax deduction for
the dividends it pays to its shareholders. Such a corporation generally is not
taxed on its "REIT taxable income" to the extent such income is currently
distributed to shareholders, thereby substantially eliminating the "double
taxation" (i.e., at both the corporate and shareholder levels) that generally
results from an investment in a corporation. However, as discussed in greater
detail below, such an entity remains subject to tax in certain circumstances
even if it qualifies as a REIT. Further, if the entity were to fail to qualify
as a REIT in any year, it would not be able to deduct any portion of the
dividends it paid to its shareholders and would be subject to full federal
income taxation on its earnings, thereby significantly reducing or eliminating
the cash available for distribution to its shareholders.
TREATMENT OF THE TRANSACTION
In general, the Transaction will be treated as a taxable purchase of assets
from Constellation, but will not cause the Company to recognize taxable gain or
loss. The Company will have an initial tax basis in the assets acquired from
Constellation equal to the sum of (i) the fair market value of the Common and
Preferred Shares issued to Constellation, (ii) the amount of any cash paid to
Constellation, and (iii) the principal amount of any indebtedness assumed by the
Company. This aggregate initial tax basis will be allocated among the assets
acquired from Constellation in accordance with their relative fair market
values, as determined by the Company. There can be no assurance that the
Internal Revenue Service (the "Service") will accept the allocation of basis
made by the Company.
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The Company will immediately contribute the assets and interests acquired
from Constellation, subject to indebtedness, to the Operating Partnership in
exchange for Partnership Units and Preferred Units equivalent to the Common and
Preferred Shares issued to Constellation. This contribution will be tax-free to
the Company, and the Company's tax basis in the assets will carry over to the
Operating Partnership.
TAXATION OF THE COMPANY
GENERAL. In any year in which the Company qualifies as a REIT, in general it
will not be subject to federal income tax on that portion of its REIT taxable
income or capital gain which is distributed to shareholders. The Company may,
however, be subject to tax at normal corporate rates upon any taxable income or
capital gains not distributed. Under recently enacted legislation, shareholders
are required to include their proportionate share of the REIT's undistributed
long-term capital gain in income but receive a credit for their share of any
taxes paid on such gain by the REIT.
Notwithstanding its qualification as a REIT, the Company also may be subject
to taxation in certain other circumstances. If the Company should fail to
satisfy either the 75% or the 95% gross income test (each as discussed below),
and nonetheless maintains its qualification as a REIT because certain other
requirements are met, it will be subject to a 100% tax on the greater of the
amount by which the Company fails either the 75% or the 95% test, multiplied by
a fraction intended to reflect the Company's profitability. The Company will
also be subject to a tax of 100% on net income from any "prohibited transaction"
(as described below), and if the Company has (i) net income from the sale or
other disposition of "foreclosure property" which is held primarily for sale to
customers in the ordinary course of business or (ii) other non-qualifying income
from foreclosure property, it will be subject to tax on such income from
foreclosure property at the highest corporate rate. In addition, if the Company
should fail to distribute during each calendar year at least the sum of (i) 85%
of its REIT ordinary income for such year, (ii) 95% of its REIT capital gain net
income for such year and (iii) any undistributed taxable income from prior
years, the Company would be subject to a 4% excise tax on the excess of such
required distribution over the amounts actually distributed. The Company also
may be subject to the corporate alternative minimum tax, as well as to tax in
certain situations not presently contemplated. The Company will use the calendar
year both for federal income tax purposes, as is required of a REIT, and for
financial reporting purposes.
FAILURE TO QUALIFY. If the Company fails to qualify for taxation as a REIT
in any taxable year and the relief provisions do not apply, the Company will be
subject to tax (including any applicable alternative minimum tax) on its taxable
income at regular corporate rates. Distributions to shareholders in any year in
which the Company fails to qualify as a REIT will not be deductible by the
Company, nor generally will they be required to be made under the Code. In such
event, to the extent of current and accumulated earnings and profits, all
distributions to shareholders will be taxable as ordinary income, and subject to
certain limitations in the Code, corporate distributees may be eligible for the
dividends received deduction. Unless entitled to relief under specific statutory
provisions, the Company also will be disqualified from re-electing taxation as a
REIT for the four taxable years following the year during which qualification
was lost.
REIT QUALIFICATION REQUIREMENTS
In order to qualify as a REIT, the Company must meet the following
requirements, among others:
SHARE OWNERSHIP TESTS. The Company's shares of beneficial interest (which
term, in the case of the Company, currently means the Common Shares) must be
held by a minimum of 100 persons for at least 335 days in each taxable year (or
a proportionate number of days in any short taxable year). In addition, at all
times during the second half of each taxable year, no more than 50% in value of
the outstanding shares of beneficial interest of the Company may be owned,
directly or indirectly and taking into account the effects of certain
constructive ownership rules, by five or fewer individuals, which for this
purpose includes
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certain tax-exempt entities (the "50% Limitation"). However, for purposes of
this test, any shares of beneficial interest held by a qualified domestic
pension or other retirement trust will be treated as held directly by its
beneficiaries in proportion to their actuarial interest in such trust rather
than by such trust. In addition, for purposes of the 50% Limitation, shares of
beneficial interest owned, directly or indirectly, by a corporation will be
considered as being owned proportionately by its shareholders.
In order to attempt to ensure compliance with the foregoing share ownership
tests, the Company's Declaration of Trust places certain restrictions on the
transfer of its shares of beneficial interest to prevent additional
concentration of stock ownership. Moreover, to evidence compliance with these
requirements, Treasury Regulations require the Company to maintain records which
disclose the actual ownership of its outstanding shares of beneficial interest.
In fulfilling its obligations to maintain records, the Company must and will
demand written statements each year from the record holders of designated
percentages of its shares of beneficial interest disclosing the actual owners of
such shares of beneficial interest (as prescribed by Treasury Regulations). A
list of those persons failing or refusing to comply with such demand must be
maintained as part of the Company's records. A shareholder failing or refusing
to comply with the Company's written demand must submit with his tax return a
similar statement disclosing the actual ownership of Company shares of
beneficial interest and certain other information.
As a result of the Transaction, BGE will directly or through its wholly
owned subsidiaries own approximately 41.5% of the Common Shares to be
outstanding, and will own approximately 969,900 Preferred Shares convertible,
two years after closing of the Transaction, into approximately 1,818,300 Common
Shares. Under the Company's Declaration of Trust a person is generally
prohibited from owning more than 9.8% of the aggregate outstanding Common Shares
or more than 9.8% in value of the aggregate outstanding shares of beneficial
interest unless such person makes certain representations to the Board of
Trustees and the Board of Trustees ascertains that ownership of a greater
percentage of shares will not cause the Company to violate either the 50%
Limitation or the gross income tests described below. The Board of Trustees has
exempted BGE from the 9.8% limitation set forth in the Declaration of Trust and
has determined that BGE may hold up to that number of Common Shares and
Preferred Shares to be issued in the Transaction. The Board of Trustees has
determined, based upon representations made by BGE, that this will not result in
a violation of the 50% Limitation or otherwise adversely affect the Company's
ability to qualify as a REIT for federal income tax purposes.
ASSET TESTS. At the close of each quarter of the Company's taxable year, the
Company must satisfy two tests relating to the nature of its assets (determined
in accordance with generally accepted accounting principles). First, at least
75% of the value of the Company's total assets must be represented by interests
in real property, interests in mortgages on real property, shares in other
REITs, cash, cash items, government securities and qualified temporary
investments. Second, although the remaining 25% of the Company's assets
generally may be invested without restriction, securities in this class may not
exceed (i) in the case of securities of any one non-government issuer, 5% of the
value of the Company's total assets (the "Value Test") or (ii) 10% of the
outstanding voting securities of any one such issuer (the "Voting Stock Test").
Where the Company invests in a partnership (such as the Operating Partnership),
it will be deemed to own a proportionate share of the partnership's assets, and
the partnership interest will not constitute a security for purposes of these
tests. Accordingly, the Company's investment in real properties through its
interests in the Operating Partnership (which itself holds real properties
through other partnerships) will constitute an investment in qualified assets
for purposes of the 75% asset test.
Certain of the assets to be acquired from Constellation as part of the
Transaction, such as the interest in CRM, will not constitute qualified assets
for purposes of the 75% asset test. The Company intends to transfer the interest
in CRM, as well as other management assets acquired from Constellation, to the
Operating Partnership in exchange for Partnership Units and Preferred Units. The
Operating Partnership will, in turn, transfer the interest in CRM and all or a
portion of the other management assets to a newly formed corporation to be named
Corporate Office Management, Inc. ("COMI") in exchange for indebtedness and 95%
of the capital stock to be issued by COMI. Although the Operating Partnership
will acquire
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all of the non-voting common stock to be issued by COMI, it will only acquire 1%
of the voting common stock to be issued by COMI. The Company has determined that
the acquisition of management assets from Constellation, the transfer of such
assets to COMI and the acquisition of indebtedness and common stock in COMI will
not cause the Company to violate the Voting Stock Test, the Value Test or the
75% asset test.
GROSS INCOME TESTS. There are two separate percentage tests relating to the
sources of the Company's gross income which must be satisfied for each taxable
year. For purposes of these tests, where the Company invests in a partnership,
the Company will be treated as receiving its share of the income and loss of the
partnership, and the gross income of the partnership will retain the same
character in the hands of the Company as it has in the hands of the partnership.
The two tests are described below.
THE 75% TEST. At least 75% of the Company's gross income for the taxable
year must be "qualifying income." Qualifying income generally includes: (i)
rents from real property (except as modified below); (ii) interest on
obligations secured by mortgages on, or interests in, real property; (iii) gains
from the sale or other disposition of interests in real property and real estate
mortgages, other than gain from property held primarily for sale to customers in
the ordinary course of the Company's trade or business ("dealer property"); (iv)
dividends or other distributions on shares in other REITs, as well as gain from
the sale of such shares; (v) abatements and refunds of real property taxes; (vi)
income from the operation, and gain from the sale, of property acquired at or in
lieu of a foreclosure of the mortgage secured by such property ("foreclosure
property"); and (vii) commitment fees received for agreeing to make loans
secured by mortgages on real property or to purchase or lease real property.
Rents received from a tenant will not, however, qualify as rents from real
property in satisfying the 75% gross income test (or the 95% gross income test
described below) if the Company, or an owner of 10% or more of the Company,
directly or constructively owns 10% or more of such tenant. In addition, if rent
attributable to personal property leased in connection with a lease of real
property is greater than 15% of the total rent received under the lease, then
the portion of rent attributable to such personal property will not qualify as
rents from real property. Moreover, an amount received or accrued will not
qualify as rents from real property (or as interest income) for purposes of the
75% and 95% gross income tests if it is based in whole or in part on the income
or profits of any person, although an amount received or accrued generally will
not be excluded from "rents from real property" solely by reason of being based
on a fixed percentage or percentages of receipts or sales. Finally, for rents
received to qualify as rents from real property for purposes of the 75% and 95%
gross income tests, the Company generally must not operate or manage the
property or furnish or render services to customers, other than through an
"independent contractor" from whom the Company derives no income, except that
the "independent contractor" requirement does not apply to the extent that the
services provided by the Company are "usually or customarily rendered" in
connection with the rental of space for occupancy only, and are not otherwise
considered "rendered to the occupant for his convenience." In addition, under
recently enacted legislation, beginning with its taxable year ending December
31, 1998, the Company may directly perform a DE MINIMIS amount of non-customary
services.
THE 95% TEST. In addition to deriving 75% of its gross income from the
sources listed above, at least 95% of the Trust's gross income for the taxable
year must be derived from the above-described qualifying income or from
dividends, interest, or gains from the sale or other disposition of stock or
other securities that are not dealer property. Dividends and interest on any
obligations not collateralized by an interest in real property are included for
purposes of the 95% test, but not for purposes of the 75% test. The Company
intends to monitor closely its non-qualifying income and anticipates that
non-qualifying income from its other activities will not result in the Company
failing to satisfy either the 75% or 95% gross income test.
For purposes of determining whether the Company complies with the 75% and
the 95% gross income tests, gross income does not include income from prohibited
transactions. A "prohibited transaction" is a
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sale of dealer property (excluding foreclosure property); however, a sale of
property will not be a prohibited transaction if such property is held for at
least four years and certain other requirements (relating to the number of
properties sold in a year, their tax bases and the cost of improvements made
thereto) are satisfied.
Even if the Company fails to satisfy one or both of the 75% and 95% gross
income tests for any taxable year, it may still qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. These relief
provisions will generally be available if: (i) the Company's failure to comply
is due to reasonable cause and not to willful neglect; (ii) the Company reports
the nature and amount of each item of its income included in the tests on a
schedule attached to its tax return; and (iii) any incorrect information on this
schedule is not due to fraud with intent to evade tax. If these relief
provisions apply, however, the Company will nonetheless be subject to a 100% tax
on the greater of the amount by which it fails either the 75% or 95% gross
income test, multiplied by a fraction intended to reflect the Company's
profitability.
COMPLIANCE WITH INCOME TESTS. For the year following the closing of the
Transaction, BGE or affiliates in which BGE has a 10% or greater interest are
obligated as tenants to pay rent of approximately $1,020,000 with respect to
properties held by the Company through the Operating Partnership. Rental income
paid by such affiliates will not constitute qualifying rental income for
purposes of the 75% and 95% gross income tests. Constellation has represented to
the Company that the remainder of the rental income payable under the existing
leases on the properties it is transferring to the Company will constitute
qualifying income for purposes of the 75% and 95% gross income tests.
The Company expects, based on current rent levels, as per the Pro Forma
Schedule of Lease Expirations, that its annual gross income following the
Transaction will be at least $52,500,000. Accordingly, the Company estimates
that it can earn up to $2,625,000 of non-qualifying income per year without
violating the 95% gross income test. Aside from the rental income to be paid by
affiliates of BGE, the Company does not expect that it will earn material
amounts of non-qualifying income from either the Constellation Properties or its
existing properties. Based on the foregoing, the Company has determined that it
will continue to satisfy the 75% and 95% gross income tests following the
Transaction. The fact that affiliates of BGE will be paying substantial amounts
of non-qualifying income may, however, restrict the ability of the Company and
the Operating Partnership to acquire additional properties that generate non-
qualifying income.
As described above under "The Transaction--Terms of the Transaction,"
Constellation has agreed to pay fees to the Company (or its affiliates)
aggregating $2,000,000 for certain consulting and project management services to
be rendered over the 18 month period following closing of the Transaction.
Constellation is also selling the Company its 75% interest in CRM, a limited
liability company which earns management fees. To avoid a violation of the 95%
gross income test as a result of the fees paid by BGE or earned through CRM, the
75% interest in CRM and all or a portion of the other management assets to be
acquired from Constellation will be transferred to COMI, a new corporation to be
formed by the Operating Partnership and certain officers of the Company and
COMI. The Operating Partnership will hold indebtedness issued by COMI and 95% of
the aggregate amount of voting and non-voting common stock to be issued by COMI,
but will only hold 1% of the aggregate amount of voting common stock to be
issued by COMI. As discussed above, to satisfy the Voting Stock Test the Company
may not directly or indirectly hold 10% or more of the voting stock of COMI. In
addition to holding the 75% interest in CRM, COMI will, either directly or
through subsidiaries, provide management and development services to BGE, the
Operating Partnership and potentially unrelated parties.
The management fee income earned by COMI as a result of its ownership
interest in CRM, or as a result of management or development services performed
by COMI or its subsidiaries, will not be treated as non-qualifying income earned
by the Company for purposes of the 95% or 75% gross income tests. Any interest
or dividends paid or distributed by COMI to the Operating Partnership will be
considered as
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qualifying income for purposes of the 95% test, but will not be considered
qualifying income for purposes of the 75% gross income test. To the extent that
COMI earns net taxable income from its activities, it will be required to pay
federal and state income taxes, which will reduce the amount of dividends it is
able to pay to the Operating Partnership and its other shareholders.
The Company intends to monitor its operations in the context of these
standards so as to continue to satisfy the 75% and 95% gross income tests. The
Operating Partnership or its affiliate will provide certain services at the
properties in which the Company owns interests and possibly at any newly
acquired properties. The Company believes that for purposes of the 75% and 95%
gross income tests the services provided at such properties and any other
services and amenities provided by the Operating Partnership or its agents with
respect to such properties will be of the type usually or customarily rendered
in connection with the rental of space for occupancy only and not rendered to
the occupants of such properties. The Company intends that services that cannot
be provided directly by the Operating Partnership or other agents will be
performed by independent contractors.
ANNUAL DISTRIBUTION REQUIREMENTS. In order to qualify as a REIT, the Company
is required to distribute dividends to its shareholders each year in an amount
at least equal to (A) the sum of (i) 95% of the Company's REIT taxable income
(computed without regard to the dividends received deduction and the Company's
net capital gain) and (ii) 95% of the net income (after tax), if any, for
foreclosure property, minus (B) the sum of certain items of non-cash income.
Such distributions must be paid in the taxable year to which they relate, or in
the following taxable year if declared before the Company timely files its tax
return for such year and if paid on or before the first regular dividend payment
after the declaration. To the extent that the Company does not distribute all of
its net capital gain or distributes at least 95%, but less than 100%, of its
REIT taxable income, as adjusted, it will be subject to tax on the undistributed
amount at regular capital gain or ordinary corporate tax rates, as the case may
be.
The Company intends to make timely distributions sufficient to satisfy the
annual distribution requirements described in the first sentence of the
preceding paragraph. In this regard, the Operating Partnership Agreement
authorizes the Company in its capacity as General Partner to take such steps as
may be necessary to cause the Operating Partnership to distribute to its
partners an amount sufficient to permit the Company to meet the distribution
requirements. It is possible that the Company may not have sufficient cash or
other liquid assets to meet the 95% distribution requirement, due to timing
differences between the actual receipt of income and actual payment of expenses
on the one hand, and the inclusion of such income and deduction of such expense
in computing the Company's REIT taxable income on the other hand; or for other
reasons. The Company will monitor closely the relationship between its REIT
taxable income and cash flow and, if necessary, intends to borrow funds (or
cause the Operating Partnership or other affiliates to borrow funds) in order to
satisfy the distribution requirement. However, there can be no assurance that
such borrowing would be available at such time.
If the Company fails to meet the 95% distribution requirement as a result of
an adjustment to the Company's tax return by the Service, the Company may
retroactively cure the failure by paying a "deficiency dividend" (plus
applicable penalties and interest) within a specified period.
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THE COMPANY
GENERAL
The Company is a self-administered REIT, headquartered in Philadelphia,
Pennsylvania, which focuses principally on the ownership, acquisition and
management of suburban office properties in high growth submarkets in the United
States. The Company owns interests in 24 suburban office buildings in Maryland,
Pennsylvania and New Jersey containing approximately 2.6 million rentable square
feet and seven retail properties located in the Midwest containing approximately
370,000 rentable square feet. As of June 1, 1998, the Company's properties were
over 97% leased. In addition, the Company has options to purchase 44.27 acres of
land owned by related parties contiguous to certain of the office properties.
The Company was formed in 1988 as Royale Investments, Inc. to own and
acquire net lease retail properties and subsequently became an externally
advised REIT. On October 14, 1997, the Company, as part of a series of
transactions, acquired the Mid-Atlantic suburban office operations of The
Shidler Group, a national real estate firm, relocated its headquarters from
Minneapolis to Philadelphia and became self-administered. At that time, Jay H.
Shidler became the Company's Chairman of the Board and Clay W. Hamlin, III
became the Company's President and Chief Executive Officer.
On January 1, 1998, the Company changed its name to Corporate Office
Properties Trust, Inc. On March 16, 1998, the Company was reformed as a Maryland
real estate investment trust and changed its name to Corporate Office Properties
Trust. The Company has operated and will continue to operate as a REIT under
Sections 856 through 860 of the Code. Under such provisions, the Company must
distribute at least 95% of its taxable income to its shareholders and meet
certain other asset and income tests. As a REIT, the Company generally is not
subject to federal income tax.
RECENT DEVELOPMENTS
On April 27, 1998, the Company completed a public offering which generated
$74.4 million of net proceeds from the issuance of 7,500,000 Common Shares (the
"1998 Offering"). The Company contributed all of the net proceeds to the
Operating Partnership in exchange for additional Partnership Units. These
7,500,000 additional Partnership Units increased the Company's interest in the
Operating Partnership to approximately 75.8%.
On April 30, 1998, the Company acquired nine multistory office buildings and
three office/flex buildings known as Airport Square, for approximately $72
million of the proceeds from the 1998 Offering. The properties, totaling
approximately 813,000 square feet, are located in the Baltimore/Washington
corridor in Anne Arundel County, Maryland. Acquisition of the Airport Square
properties was accounted for as a purchase. This purchase was accomplished
through a combination of (i) the purchase of the debt encumbering these
properties from the former mortgage lender, and (ii) the purchase of all the
partnership interests in the partnership that previously owned the Airport
Square properties. The Airport Square properties were 97% leased as of June 1,
1998.
On May 28, 1998, COPLP acquired two properties in Fairfield, New Jersey for
a total purchase price of $28.8 million, including the assumption of
approximately $6.47 million in existing debt collateralized by one of the
properties. The properties consist of two multistory office buildings totaling
approximately 263,000 square feet. The properties were 84% leased as of June 1,
1998.
In May 1998, the Company obtained a $100 million Senior Secured Revolving
Credit Facility (the "Revolving Credit Facility") from lenders led by Bankers
Trust Company ("BT"). BT is also the lead lender of the Company's $100 million
Senior Secured Term Credit Facility (the "Term Credit Facility") obtained in
October 1997.
The Revolving Credit Facility is a two year facility to be used to refinance
existing indebtedness, to fund acquisitions and new development projects and for
general working capital purposes, including
23
<PAGE>
capital expenditures and tenant improvements. Maximum borrowings under the
Revolving Credit Facility are the lesser of $100 million or 65% of the appraised
values of the office properties in the borrowing base. COPLP is the borrower and
the Company is the guarantor of all advances under the Revolving Credit
Facility, and borrowings will be cross-collateralized with the Term Credit
Facility. The Revolving Credit Facility bears interest at LIBOR plus 175 basis
points, payable interest only on a monthly basis. A 25 basis point fee per annum
on the unused portion of the Revolving Credit Facility is payable quarterly in
arrears. As of the date of this Proxy Statement, borrowings outstanding under
the Revolving Credit Facility were approximately $23.8 million.
The Company is engaged in an active acquisition program, and is presently
identifying, negotiating and seeking to consummate acquisitions of entities,
portfolios and individual properties.
Additional information concerning the Company is included in the documents
incorporated by reference in this Proxy Statement. See "Incorporation of Certain
Documents by Reference."
24
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company on a
historical basis and a pro forma basis assuming the following as of March 31,
1998: (i) the issuance of 7.5 million Common Shares in a public offering
completed on April 27, 1998, including the application of the net proceeds
thereof, (ii) the acquisition of the Airport Square properties in Maryland,
(iii) the acquisition of two properties in Fairfield, New Jersey, (iv) the
consummation of the Company's $100 million Revolving Credit Facility, and (v)
the closing of the Transaction. For further information about each of items
(i)-(v), see "The Company-- Recent Developments." The information set forth in
the following table should be read in conjunction with the following: (i) the
consolidated financial statements of the Company and the notes thereto
incorporated by reference in this Proxy Statement, (ii) the consolidated
financial statements and the notes thereto of the Constellation Service
Companies included elsewhere in this Proxy Statement, (iii) the combined
statement of revenue and certain expenses for the year ended December 31, 1997
and the notes thereto for the real property being acquired by the Company in the
Transaction (the "Constellation Properties") included elsewhere in this Proxy
Statement, (iv) the pro forma financial information of the Company and the notes
and management assumptions thereto which appear elsewhere in this Proxy
Statement, and (v) other financial information included elsewhere in this Proxy
Statement.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
(IN THOUSANDS)
-----------------------
<S> <C> <C>
PRO FORMA HISTORICAL
----------- ----------
Debt:
Mortgage notes payable.................................................................... $ 230,649 $ 114,301
Minority Interest--Preferred Units (1).................................................... 52,500 52,500
Minority Interest--Partnership Units (1).................................................. 12,111 12,111
Shareholders' equity:
Preferred Shares, $0.01 par value per share, 5,000,000 shares authorized.No shares
issued and outstanding on an historical basis. 969,900 shares of Series A Convertible
Preferred Shares, $25.00 liquidation preference per share, 5.5% annual dividend issued
and outstanding as of March 31, 1998, on a pro forma basis............................ 10 --
Common Shares, $0.01 par value per share, 45,000,000 shares authorized, 2,271,083 issued
and outstanding on an historical basis as of March 31, 1998 and 16,699,083 shares
issued and outstanding on a pro forma basis as of March 31, 1998 (1).................. 167 23
Additional paid-in capital.............................................................. 185,656 16,647
Accumulated deficit..................................................................... (5,819) (5,819)
----------- ----------
Total shareholders' equity.............................................................. 180,014 10,851
----------- ----------
Total capitalization...................................................................... $ 475,274 $ 189,763
----------- ----------
----------- ----------
</TABLE>
- ------------------------
(1) Does not include the effects of 10,196,758 Common Shares that may be issued
upon conversion or redemption of certain Partnership Units and certain
Preferred Units of COPLP partnership interest or upon exercise of options
under the Company's Option Plan. Such conversion will also eliminate
Minority Interest.
25
<PAGE>
THE CONSTELLATION PROPERTIES AND CONSTELLATION SERVICE COMPANIES
Constellation has been an active participant in the real estate industry
since 1981. Based in Columbia, Maryland, the Constellation entities comprise a
full-service diversified real estate company. In addition to property
management, Constellation specializes in the planning and development of
multi-use business parks and the construction, leasing and sale of office
buildings and retail centers. Through investment, development and
acquisition/disposition, Constellation has assembled a real estate portfolio of
approximately 1.8 million square feet, consisting of high quality suburban
office (77%) and retail (23%) properties located in an area spanning from
Baltimore to Northern Virginia.
THE CONSTELLATION PROPERTIES
The Constellation Properties comprise 18 properties: ten operating office
properties, two operating retail properties, one of which is based on an
interest in a mortgage (Tred Avon), two office properties under construction
which are expected to be completed by the end of 1998 (135 National Business
Parkway and Woodlands One), two office properties on which construction has
recently commenced (134 National Business Parkway and Woodlands Two), and two
retail properties under construction which are expected to be completed early in
1999 (Piney Orchard Marketplace and Springfield Commons), if certain conditions
are met. The total square footage of the Constellation Properties is
approximately 1.8 million square feet.
The operating office properties comprise a total of approximately one
million rentable square feet, ranging from approximately 38,513 to 240,336
rentable square feet. The two operating retail properties contain approximately
241,749 rentable square feet. As of June 1, 1998, the operating Constellation
Properties had a weighted average occupancy rate of approximately 92% and were
leased to 126 tenants. As of June 1, 1998, only one tenant, occupying 100% of
one operating property with approximately 240,336 net rentable square feet,
represented more than 10% of the aggregate contractual annualized base rent of
the operating Constellation Properties. The two office properties which have
been under construction since September 1997 comprise approximately 193,110
rentable square feet. A tenant is committed to occupy 100% of one of the office
properties under construction, with approximately 106,278 net rentable square
feet, and will likely represent more than 10% of the aggregate contractual
annual base rent of the Constellation Properties.
The Constellation Properties are located in Maryland and Northern Virginia,
with a concentration of properties in Anne Arundel County (five operating
properties comprising approximately 524,000 square feet and two properties under
construction consisting of approximately 177,000 square feet and one development
property comprising 53,000 square feet); Prince George's County (three operating
properties comprising approximately 322,000 square feet); and Howard County (one
operating property comprising approximately 54,000 square feet and two
properties under construction comprising approximately 212,000 square feet).
Generally, each property has landscaped sites, common areas, and on-site
parking. The Constellation Properties are managed by CRM.
The Constellation Properties are leased to a variety of U.S. government
entities, service sector employers, high tech firms as well as a large number of
professional firms and national and international firms. Major office tenants
include, among others, the U.S. Department of Defense, e.spire Communications,
U.S. Department of Treasury, Stanford Telecommunications, Lockheed Martin
Technical, TASC, Inc. and JHPIEGO Corporation. Major retail tenants include
Giant Food, Staples, Inc., Acme Markets and Rite-Aid.
Leases for the operating properties are typically structured with terms
ranging from one to five years, with the major exception of one lease
representing 24.4% of the aggregate contractual annualized rent which contains
automatic annual renewal options for the remaining ten years of its fifteen year
term, unless terminated at the option of the tenant, the U.S. Department of
Defense, upon 12 months notice and payment of a penalty. Generally all leases
provide for annual contractual rent escalations over the lease
26
<PAGE>
term. A typical lease requires (i) payment of base rent, (ii) payment of the
tenant's proportionate share of real estate taxes, utilities and common area and
other operating expense escalations over a base year, and (iii) payment of
overtime HVAC and electrical use. Under these leases, the landlord is typically
responsible for certain structural repairs. A few properties are leased to one
or more tenants on a triple net basis. Under these leases, the respective
tenant(s) are responsible for paying all or a proportionate share of all real
estate taxes, utilities and operating expenses; under some leases, the tenant
directly contracts and pays for such costs. Additionally, some of the leases
provide renewal options or provisions of varying durations which extend the
original lease terms, typically at either market rents or negotiated rental
rates set forth in the leases.
THE OFFICE PROPERTIES
ANALYSIS OF THE BALTIMORE METROPOLITAN AREA: Comprised of both the
Washington, D.C. and Baltimore communities, the Baltimore metropolitan region
contained approximately 36.6 million square feet of office property as of
December 1997. The office property market in the Baltimore metropolitan region
realized improvements in 1997 as space began to tighten after a five year lull.
In 1997, suburban office construction activity commenced on or completed 1.2
million square feet of property in the region. As of December 1997, Class A
space comprised 41% and Class B space contained 59% of the 530 office buildings
in the area. The overall region's vacancy rate decreased from 13.9% in 1996 to
12.1% in 1997 with 4.4 million square feet of available space. This vacancy
statistic is a mixture of the 16.9% vacancy rate in the downtown market with the
9.3% vacancy rate in the suburban markets.
The reduction in the overall vacancy rate is attributed to an 8.87% increase
in employment experienced by the region during the period from 1992 to 1997. Job
growth has been forecasted as steady with employment opportunities in financial
services, telecommunications, data processing, engineering and architectural
services as well as research and development companies in the region. Management
believes that the Baltimore metropolitan region will continue to improve as
businesses continue to migrate from the urban to the suburban markets, the
latter of which is experiencing 900,000 square feet of new construction, 78% of
which is located in submarkets with Class A vacancy rates below 5%.
27
<PAGE>
BALTIMORE METROPOLITAN AREA / JANUARY 1, 1997--DECEMBER 31, 1997
OFFICE MARKET STATISTICAL OVERVIEW
<TABLE>
<CAPTION>
TOTAL TOTAL TOTAL TOTAL VACANCY FUTURE
BUILDINGS SIZE AVAILABLE ABSORBED RATE AVAILABLE* UNDER
12/97 12/97 12/97 YTD 1997 12/97 12/97 CONSTRUCTION
------------- --------- --------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
SUBMARKET TOTALS
DOWNTOWN
"A" Tier....................... 10 3,602,293 310,229 108,711 8.61% 42,710 --
"A-2" Tier..................... 15 3,527,010 489,587 55,740 13.88% -- --
--- --------- --------- ----------- ----- ----------- -------------
Total "A" Tier................. 25 7,129,303 799,816 164,451 11.22% 42,710 --
"B" Tier....................... 75 6,524,118 1,501,248 (95,184) 23.01% 300,038 177,130
TOTAL DOWNTOWN................. 100 13,653,421 2,301,064 69,267 16.85% 342,748 177,130
SUBURBAN NORTH
"A" Tier....................... 42 4,449,940 583,322 (143,066) 13.11% 162,642 --
"B" Tier....................... 112 5,500,636 532,557 10,060 9.68% 181,564 22,000
TOTAL SUBURBAN NORTH........... 154 9,950,576 1,115,879 (133,006) 11.21% 344,206 22,000
SUBURBAN SOUTH
"A" Tier....................... 8 959,077 32,621 22,267 3.40% -- --
"B" Tier....................... 47 2,648,827 316,234 245,701 11.94% 130,800 130,800
TOTAL SUBURBAN SOUTH........... 55 3,607,904 348,855 267,968 9.67% 130,800 130,800
HOWARD COUNTY
PERIMETER
"A" Tier....................... 8 703,893 24,516 -- 3.48% 292,749 292,749
"B" Tier....................... 90 2,839,736 152,583 36,509 5.37% -- --
TOTAL HOWARD COUNTY PERIMETER.. 98 3,543,629 177,099 36,509 5.00% 292,749 292,749
HOWARD COUNTY
TOWN CENTER
"A" Tier....................... 5 641,254 12,338 (3,570) 1.92% -- --
"B" Tier....................... 23 1,285,138 77,782 22,405 6.05% -- --
TOTAL HOWARD COUNTY TOWN
CENTER....................... 28 1,926,392 90,120 18,835 4.68% -- --
TOTAL HOWARD COUNTY............ 126 5,470,021 267,219 55,344 4.89% 292,749 292,749
SUBURBAN WEST
"A" Tier....................... 11 1,190,979 15,737 (2,723) 1.32% 158,100 111,416
"B" Tier....................... 84 2,765,214 380,354 251,748 13.75% 65,000 180,000
TOTAL SUBURBAN WEST............ 95 3,956,193 396,091 249,025 10.01% 223,100 291,416
MARKET TOTALS
DOWNTOWN....................... 100 13,653,421 2,301,064 69,267 16.85% 342,748 177,130
"A" Tier....................... 25 7,129,303 799,816 164,451 11.22% 42,710 --
"B" Tier....................... 75 6,524,118 1,501,248 (95,184) 23.01% 300,038 177,130
SUBURBAN MARKETS............... 430 22,984,694 2,128,044 439,331 9.26% 990,855 736,965
"A" Tier....................... 74 7,945,143 668,534 (127,092) 8.41% 613,491 404,165
"B" Tier....................... 356 15,039,551 1,459,510 566,423 9.70% 377,364 332,800
METROPOLITAN AREA.............. 530 36,638,115 4,429,108 508,598 12.09% 1,333,603 914,095
"A" Tier....................... 99 15,074,446 1,468,350 37,359 9.74% 656,201 404,165
"B" Tier....................... 431 21,563,669 2,960,758 471,239 13.73% 677,402 509,930
<CAPTION>
COMPLETED
CONSTRUCTION
YTD 1997
-------------
<S> <C>
DOWNTOWN
"A" Tier....................... --
"A-2" Tier..................... --
-------------
Total "A" Tier................. --
"B" Tier....................... --
TOTAL DOWNTOWN................. --
SUBURBAN NORTH
"A" Tier....................... --
"B" Tier....................... 89,200
TOTAL SUBURBAN NORTH........... 89,200
SUBURBAN SOUTH
"A" Tier....................... --
"B" Tier....................... --
TOTAL SUBURBAN SOUTH........... --
HOWARD COUNTY
PERIMETER
"A" Tier....................... --
"B" Tier....................... 40,000
TOTAL HOWARD COUNTY PERIMETER.. 40,000
HOWARD COUNTY
TOWN CENTER
"A" Tier....................... --
"B" Tier....................... --
TOTAL HOWARD COUNTY TOWN
CENTER....................... --
TOTAL HOWARD COUNTY............ 40,000
SUBURBAN WEST
"A" Tier....................... 300,000
"B" Tier....................... 50,000
TOTAL SUBURBAN WEST............ 350,000
DOWNTOWN....................... --
"A" Tier....................... --
"B" Tier....................... --
SUBURBAN MARKETS............... 479,200
"A" Tier....................... 300,000
"B" Tier....................... 179,200
METROPOLITAN AREA.............. 479,200
"A" Tier....................... 300,000
"B" Tier....................... 179,200
</TABLE>
- ------------------------
* Source: Colliers Pinkard, 1997 Office and Industrial Market Review.
* Future Available includes under Construction square footage and indicates
space not currently vacant, but becoming available after December 31, 1997.
28
<PAGE>
SUBURBAN SOUTH MARKET: As of December 1997, the Suburban South Market
contained approximately 3.6 million square feet of office space. The submarket
stretches from the Baltimore/Washington International Airport ("BWI") to
Maryland Route 32. Absorption of office space in this submarket in the last year
was almost 268,000 square feet of space. Rental rates have increased by 10% to
20% over the last year and a half. Class A renewals are achieving $18.75 per
square foot, full service, with new office space being offered at $21.00 per
square foot. Office space greater than 10,000 square feet is limited.
Speculative office development has commenced in the BWI/Anne Arundel section of
this submarket. Seven of the Constellation Properties are located in this
submarket, six of which are located in Annapolis Junction, Maryland.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Total Buildings........................................ 55 56 57
Total Square Feet...................................... 3,607,904 3,595,699 3,802,845
A Tier Vacancy Rate.................................... 3.40% 5.72% 11.67%
B Tier Vacancy Rate.................................... 11.94% 17.90% 18.61%
Market Vacancy Rate.................................... 9.67% 14.65% 16.86%
Net Absorption......................................... 267,968 24,894 88,627
Under Construction..................................... 130,800 90,000 277,233
SOURCE: COLLIERS PINKARD, 1997 OFFICE AND INDUSTRIAL MARKET REVIEW, 1996 OFFICE AND
INDUSTRIAL MARKET REVIEW, AND 1995 OFFICE AND INDUSTRIAL MARKET REVIEW.
</TABLE>
THE NATIONAL BUSINESS PARK: The National Business Park (the "Park"), a
175-acre business park, is located at the crossroads of the Baltimore/Washington
Parkway and Maryland Route 32 at the mid-point of the Baltimore/Washington
corridor. The Park is owned by affiliates of CREG, a Constellation entity, and
contains a mixture of mid-rise office buildings with low-rise tech buildings.
The Park also contains 85 acres of undeveloped land on which the Company will
hold, after closing of the Transaction, purchase options and rights of first
refusal. As of June 1, 1998, approximately 485,196 square feet of office space
has been constructed in the Park:
<TABLE>
<CAPTION>
NUMBER
NAME SQUARE FEET OF STORIES DATE OF CONSTRUCTION
- ------------------------------------------------------- ----------- ------------- --------------------------------
<S> <C> <C> <C>
One National Business Park............................. 240,336 12 1990
131 National Business Parkway.......................... 69,230 2 1990
141 National Business Parkway.......................... 86,964 2 1990
133 National Business Parkway.......................... 88,666 3 1997
135 National Business Parkway.......................... 86,832 3 Scheduled for completion by
September 1998
134 National Business Parkway.......................... 90,000 4 Commenced Summer 1998
</TABLE>
One National Business Park is 100% leased by the U.S. Department of Defense
through September 30, 2008. The tenant has the right to terminate this lease
with one year's notice and payment of a penalty. 135 National Business Parkway
is 81.75% pre-leased to Credit Management Solutions, Inc. ("CMSI") for 70,982
square feet. Other tenants in the Park include Lockheed Martin Technical,
Electronic Data Systems Corporation ("E.D.S."), General Dynamics, Intel
Corporation, Harris Data Services Corp., and TASC, Inc.
BRANDON I: Brandon I is a 38,513 square foot flex building located in
Brandon Woods Business Park, in Riviera Beach, Maryland. It is multi-tenanted
flex building with an office to warehouse ratio of
29
<PAGE>
approximately one to one. This property is located near I-695 and adjacent to
major parts of the Baltimore metropolitan region.
HOWARD COUNTY SUBURBAN MARKET: As of December 1997, the Howard County
Suburban Market contained 5,470,000 square feet of office space with the lowest
vacancy rate in the entire Baltimore metropolitan region equal to 4.89%. As the
submarket has tightened, office rental rates have exceeded $20 per square foot
for Class A space, supporting new construction. Three of the Constellation
Properties are located in this submarket.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Total Buildings....................................... 98 96 90
Total Square Feet..................................... 3,543,629 3,467,049 3,324,586
A Tier Vacancy Rate................................... 3.48% 3.45% 9.67%
B Tier Vacancy Rate................................... 5.37% 7.29% 9.03%
Market Vacancy Rate................................... 5.00% 6.51% 9.17%
Net Absorption........................................ 36,509 207,703 152,754
Under Construction.................................... 292,749 -- --
SOURCE: COLLIERS PINKARD, 1997 OFFICE AND INDUSTRIAL MARKET REVIEW, 1996 OFFICE AND
INDUSTRIAL MARKET REVIEW, AND 1995 OFFICE AND INDUSTRIAL MARKET REVIEW.
</TABLE>
THREE CENTRE PARK: Three Centre Park is a four-story office building
located in the Columbia North submarket between Maryland Routes 108 and 100, in
Columbia, Maryland. Three Centre Park contains 53,669 square feet of office
space and is Constellation's headquarters building.
WOODLANDS ONE: Woodlands One is a four-story, 106,278 square foot Class A
office building, located Columbia Gateway Corporate Center at the intersection
of Maryland Route 175 and Interstate 95 in Columbia, Maryland. Construction on
Woodlands One began in September 1997 and is expected to be completed and
occupied by August 1998. It has been 100% pre-leased to Green Spring Health
Services, Inc. for its national headquarters.
WOODLANDS TWO: This property, to be located adjacent to Woodlands One, is
planned as a four-story, 106,000 square foot office building. Construction
commenced in June 1998.
NORTHERN PRINCE GEORGE'S COUNTY MARKET, LAUREL SUBMARKET: As of December
1997, the Laurel submarket within the Northern Prince George's County Market,
contained 22 buildings and 1,450,000 square feet of office space and experienced
an 11.18% vacancy rate which was lower than the 14.8% overall Northern Prince
George's County Market. Rents are increasing, but at a slower rate than adjacent
30
<PAGE>
market areas, with rental rates ranging from $15 to $22 per square foot. Two of
the Constellation Properties are located in this market.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Total Buildings....................................... 22 22 21
Total Square Feet..................................... 1,450,600 1,448,473 1,418,116
A Tier Vacancy Rate................................... .57% .46% 1.90%
B Tier Vacancy Rate................................... 18.46% 22.61% 35.53%
Market Vacancy Rate................................... 11.18% 13.58% 21.53%
Net Absorption........................................ 34,539 282,094 (137,445)
Under Construction.................................... -- -- --
SOURCE: COLLIERS PINKARD, 1997 OFFICE AND INDUSTRIAL MARKET REVIEW, 1996 OFFICE AND
INDUSTRIAL MARKET REVIEW, AND 1995 OFFICE AND INDUSTRIAL MARKET REVIEW.
</TABLE>
LAKEVIEW AT THE GREENS I & II: Lakeview at the Greens I & II are twin,
five-story office buildings, with a total of 141,062 square feet, located
minutes from the Baltimore/Washington Parkway in Laurel, Maryland.
SOUTHERN PRINCE GEORGE'S COUNTY SUBURBAN MARKET: The Southern Prince
George's County Suburban Market contains approximately 2,530,000 square feet of
office space within 45 buildings. The vacancy rate for the first quarter of 1998
was 15.2%. Options for office space over 10,000 square feet are limited. The
overall market absorption during the first quarter of 1998 was a negative 2,300
square feet. Rental rates have been stable over the last 18 months despite the
availability of space and a lack of net absorption in the market. Rental rates
average $19 per square foot for Class A buildings and $15 per square foot for
Class B buildings. One of the Constellation Properties is located in this
submarket.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Total Buildings....................................... 45 46 44
Total Square Feet..................................... 2,531,712 2,728,729 2,418,646
A Tier Vacancy Rate................................... 10.2% 2.7% 1.8%
B Tier Vacancy Rate................................... 8.8% 9.6% 11.0%
Market Vacancy Rate................................... 15.1% 13.3% 15.3%
Net Absorption........................................ (48,941) 41,851 8,378
Under Construction.................................... -- -- --
SOURCE: GRUBB & ELLIS RESEARCH SERVICES, SUBURBAN MARYLAND OFFICE MARKET STATISTICS,
FOURTH QUARTER 1997; FOURTH QUARTER 1996, AND FOURTH QUARTER 1995.
</TABLE>
ONE CONSTELLATION CENTRE: One Constellation Centre is comprised of 178,198
square foot, Class A office building with a two-story atrium lobby and a
three-story covered parking deck and a 3,038 square foot, free standing building
occupied by a bank. The Centre is within view of the Potomac River at Exit 4 off
of the Capital Beltway (Maryland Route 495) in Prince George's County, Maryland.
FELLS POINT, BALTIMORE, MARYLAND: Although statistically part of the
downtown Baltimore market, the Brown's Wharf property is located near the Inner
Harbor in the historic Fells Point section of Baltimore,
31
<PAGE>
Maryland which has a reputation for its entertainment and amenities. The
following table presents information relating to the downtown Baltimore market.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Total Buildings.................................... 100 98 100
Total Square Feet.................................. 13,653,421 13,545,785 13,892,017
A Tier Vacancy Rate................................ 11.22% 13.80% 17.49%
B Tier Vacancy Rate................................ 23.01% 27.32% 24.10%
Market Vacancy Rate................................ 16.85% 20.24% 20.78%
Net Absorption..................................... 69,267 145,284 (157,337)
Under Construction................................. 177,130 -- --
SOURCE: COLLIERS PINKARD, 1997 OFFICE AND INDUSTRIAL MARKET REVIEW, 1996 OFFICE AND
INDUSTRIAL MARKET REVIEW, AND 1995 OFFICE AND INDUSTRIAL MARKET REVIEW.
</TABLE>
BROWN'S WHARF: Brown's Wharf combines 75,998 square feet of office space
with 27,672 square feet of retail space. The lead office tenant is JHPIEGO
Corporation, an affiliate of The Johns Hopkins University. The property had an
occupancy rate of 100% as of June 1, 1998.
THE RETAIL PROPERTIES
WESTMINSTER, MARYLAND RETAIL MARKET: An upward trend in housing starts and
economic growth has caused the Westminster, Maryland Retail Market to demand
additional retail development while simultaneously keeping overall market
vacancy rates below 5% with steadily increasing rental rates. Estimates of the
county's population will exceed 200,000 by the year 2000. This represents an
annual 12% growth rate. One of the Constellation Properties is located in this
market.
CRANBERRY SQUARE: Cranberry Square contains 112,609 square feet of retail
space, comprised of a 56,139 square foot Giant Food store, a Staples store, Toy
Works and small shops, and 27,000 square feet of retail space under construction
which will allow for the expansion of the Staples store and the addition of
Factory Card Outlet and Pier One Imports. Regionally located contiguous to
Cranberry Mall at Maryland Routes 27 and 140 in Westminster, Cranberry Square is
100% leased and serves more than 93,000 people located within a ten mile radius
of the square. In 1997, the number of households within a ten mile radius of
this property totaled 33,917 with an average household income of $60,499.
EASTON, MARYLAND RETAIL MARKET: Growth in the Easton, Maryland Retail
Market remains stable in all sectors of commercial development. Residential
growth continues to occur at a steady 3% annual rate. Vacancy rates are 3-4%
with gradually increasing rental rates. Easton includes major employers such as
Black and Decker, Cadmus, Journal Services, Allen Family Foods and The Memorial
Hospital, all of which provide basic employment to this market. One of the
Constellation Properties is located in this market.
TRED AVON: Tred Avon is a 129,140 square foot shopping center, located at
the heart of the Central Shopping District at Maryland Route 322 and Marlboro
Road in Easton, Maryland. This shopping center contains four anchor stores,
consisting of Acme Markets, Peebles, Rite-Aid and JoAnn Fabrics, and 19 other
tenants. An extensive refurbishment of the exterior has recently been completed
to update the design of the shopping center. In addition, Acme Markets is
planning a 21,000 square foot expansion. Constellation holds an interest in the
mortgage on this property. In 1996, the number of households within a ten mile
radius of this property totaled 15,324 with an average household income of
$55,838.
32
<PAGE>
THE DEVELOPMENT PROPERTIES
The Company has agreed to acquire the Development Properties for cash, as to
each such property upon the earlier of the achievement of certain net operating
income levels or July 1, 1999. Notwithstanding the foregoing, if certain minimum
net operating income levels are not achieved by July 1, 1999, either the Company
or Constellation has the right to terminate the agreement to purchase such
property.
PINEY ORCHARD MARKETPLACE: Located within the 2,000-acre planned unit
development of Piney Orchard in Odenton, Maryland, Piney Orchard Marketplace
will be a 52,781 square foot retail center. Construction on this property
commenced in April 1998 and is expected to be completed by November 1998. Piney
Orchard Marketplace will contain a mixture of convenience retail stores,
anchored by Food Lion, Inc. service retail, and restaurants on 8.77 acres. As of
June 1, 1998, 42,781 square feet, or approximately 81%, was pre-leased, the
primary amount of which has been pre-leased to Food Lion, Inc. In 1996, the
number of households within a five mile radius of this property totaled 22,387
with an average household income of $60,385.
SPRINGFIELD COMMONS: Springfield Commons will be a 119,099 square foot
regional shopping center located at Fairfax County Parkway and Frontier Drive in
Springfield, Virginia. Construction commenced on this retail center in April
1998 and is anticipated to be completed before the end of 1998. Springfield
Commons was 66.85% pre-leased as of June 1, 1998 to Borders, Inc., Staples,
Inc., Pier One Imports and other tenants. Constellation holds a 60% interest in
this property with the remaining 40% held by Fried Companies, Inc., an
unaffiliated entity. In 1997, the number of households within a five mile radius
of this property totaled 122,308 with an average household income of $83,969.
33
<PAGE>
THE CONSTELLATION PROPERTIES
The following tables set forth certain historical information relating to
each of the Constellation Properties as of June 1, 1998.
<TABLE>
<CAPTION>
PERCENTAGE
YEAR LEASED OR PRE-
BUILT/ RENTABLE LEASED AS OF TOTAL RENTAL
PROPERTY LOCATIONS RENOVATED SQ. FT. JUNE 1, 1998(1) REVENUE (2)
- ---------------------------------------- --------- --------- --------------- ------------
<S> <C> <C> <C> <C>
OFFICE PROPERTIES
1. One National Business Park (5) 1990 240,336 100.00% $ 4,523,256
2. 131 National Business Parkway 1990 69,230 99.52% 1,178,776
3. 133 National Business Parkway 1996 88,666 90.60% 1,683,725
4. 141 National Business Parkway 1990 86,964 98.42% 1,434,318
5. One Constellation Centre 1988-1989 181,236 69.27% 2,420,901
6. Lakeview at the Greens I 1986 69,192 73.40% 841,261
7. Lakeview at the Greens II 1988 71,870 95.94% 1,128,521
8. Three Centre Park 1987 53,669 95.65% 899,873
9. Brandon I 1982 38,513 94.49% 208,297
10. Brown's Wharf (7) 1989 103,670 100.00% 1,603,168
--------- ------- ------------
TOTAL OFFICE PROPERTIES 1,003,346 90.89% $15,922,096
--------- ------- ------------
<CAPTION>
PERCENTAGE OF
TOTAL RENTAL
REVENUE OF TOTAL RENTAL
OCCUPIED REVENUE PER MAJOR TENANTS
PROPERTY LOCATIONS SPACE (3) OCCUPIED SQ. FT. (4) (10% OR MORE RENTAL SQ. FT.)
- ---------------------------------------- ------------- -------------------- ----------------------------------------
<S> <C> <C> <C>
OFFICE PROPERTIES
1. One National Business Park (5) 24.40% $18.82 U.S. Department of Defense (100%)
2. 131 National Business Parkway 6.36% 17.11 e.spire Communications (35%)
TASC, Inc. (28%)
Lockheed Martin Technical (23%)
Intel Corporation (13%)
3. 133 National Business Parkway 9.08% 20.96 e.spire Communications (67%)
Applied Signal Technology (24%)
4. 141 National Business Parkway 7.74% 16.76 Stanford Telecommunications (35%)
J.G. Van Dyke & Associates (20%)
Harris Data Services Corp. (14%)(6)
E.D.S. (10%)
5. One Constellation Centre 13.05% 19.28 U.S. Department of Treasury (47%)
NRL Federal Credit Union (10%)
6. Lakeview at the Greens I 4.54% 16.56 Great West Life & Annuity (17%)
Laurel Consulting Group (15%)
Moore USA, Inc. (11%)
7. Lakeview at the Greens II 6.09% 16.37 Sky Alland Research, Inc. (22%)
Greeman-Pedersen, Inc. (15%)
Metcalf & Eddy (11%)
8. Three Centre Park 4.85% 17.53 CRE/CRM (34%)
N.A.C.M. (20%)
Reap/REMAX, Inc. (16%)
H.C. Copeland Associates, Inc. (11%)
9. Brandon I 1.12% 5.72 Rapid Response (50%)
BGE Environmental (19%)
10. Brown's Wharf (7) 8.65% 15.46 JHIEPGO Corporation (27%)
Lista's (10%)
------ ------
TOTAL OFFICE PROPERTIES 85.88% $17.46
------ ------
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE
YEAR LEASED OR PRE-
BUILT/ RENTABLE LEASED AS OF TOTAL RENTAL
PROPERTY LOCATIONS RENOVATED SQ. FT. JUNE 1, 1998(1) REVENUE (2)
- ---------------------------------------- --------- --------- --------------- ------------
<S> <C> <C> <C> <C>
RETAIL PROPERTIES
11. Cranberry Square 1991 112,609 100.00% $ 1,871,836
12. Tred Avon 1977/1997 129,140 92.09% 747,325
--------- ------- ------------
TOTAL RETAIL PROPERTIES 241,749 95.77% $ 2,619,161
--------- ------- ------------
TOTAL OPERATING PROPERTIES (8) 1,245,095 91.83% $18,541,257
--------- ------- ------------
PROPERTIES UNDER CONSTRUCTION
13. 135 National Business Parkway 1998 86,832 81.75% 1,277,676
14. Woodlands One 1998 106,278 100.00% 2,168,071
15. 134 National Business Parkway (10) N/A 90,000 0% 0
16. Woodlands Two (10) N/A 106,000 0% 0
DEVELOPMENT PROPERTIES
17. Piney Orchard Marketplace (11) N/A 52,781 81.05% 265,000(12)
18. Springfield Commons (11) N/A 119,099 66.85% 1,750,363(12)
--------- ------- ------------
TOTAL CONSTELLATION PROPERTIES 1,806,085 78.61% $24,002,367
--------- ------- ------------
--------- ------- ------------
<CAPTION>
PERCENTAGE OF
TOTAL RENTAL
REVENUE OF TOTAL RENTAL
OCCUPIED REVENUE PER MAJOR TENANTS
PROPERTY LOCATIONS SPACE (3) OCCUPIED SQ. FT. (4) (10% OR MORE RENTAL SQ. FT.)
- ---------------------------------------- ------------- -------------------- ----------------------------------------
<S> <C> <C> <C>
RETAIL PROPERTIES
11. Cranberry Square 10.10% $16.62 Giant Food (50%)
Staples, Inc. (15%)
Toy Works (11%)
12. Tred Avon 4.02% 6.28 Peebles (27%)
Acme Markets (22%)
------ ------
TOTAL RETAIL PROPERTIES 14.12% $11.31
------ ------
TOTAL OPERATING PROPERTIES (8) 100.00% $16.22
------ ------
PROPERTIES UNDER CONSTRUCTION
13. 135 National Business Parkway N/A 18.00 CMSI (81.75%) (9)
14. Woodlands One N/A 20.40 Green Spring Health Services, Inc.
(100%) (9)
15. 134 National Business Parkway (10) N/A N/A N/A
16. Woodlands Two (10) N/A N/A N/A
DEVELOPMENT PROPERTIES
17. Piney Orchard Marketplace (11) N/A 6.19 Food Lion, Inc. (72%)
18. Springfield Commons (11) N/A 21.99 Borders, Inc. (23%) and Staples, Inc.
(20%)
------ ------
TOTAL CONSTELLATION PROPERTIES -- $16.91
------ ------
------ ------
</TABLE>
- ------------------------
(1) The percentage is based upon all leases signed as of June 1, 1998.
(2) Total Rental Revenue is the monthly contractual base rent as of June 1,
1998 multiplied by 12 plus the estimated annualized expense reimbursements
under existing leases.
(3) The percentage is based on the property's rental revenue to Constellation
Properties' Total Rental Revenue excluding properties numbered 13-18
listed on the table above.
(4) This represents the property's annualized base rent divided by the
respective property's leased square feet as of June 1, 1998.
(5) This property is triple net leased. The tenant reimburses Constellation
for $1,090,452 of annualized operating expenses included in rental revenue
noted.
(6) Harris Data Services Corp. is a subtenant for GTE Government Systems.
(7) This property contains 75,998 square feet of office space and 27,672 feet
of retail space.
(8) Total Rental Revenue per rentable square foot excludes the Development
Properties' square feet and the four properties under construction.
(9) CMSI has pre-leased 70,982 square feet for $18.00 per square foot (net of
electric cost) upon occupancy. Green Springs Health Services, Inc. has
pre-leased 106,278 square feet for $20.40 per square foot upon occupancy.
(10) The Company exercised its options for these two properties on May 28,
1998. These properties commenced in Summer 1998 and no pre-leasing
activity has occurred. The Rentable Square Foot figures are estimates as
of June 1, 1998 as a result of their development stages.
(11) The purchase commitment by the Company is the earlier of achievement of
certain operating results or July 1, 1999. The Rentable Square Foot
figures are estimates as of June 1, 1998 as a result of their development
stages.
(12) Total Rental Revenue does not include pro rata operating expenses since
these expense reimbursements have not yet been determined.
N/A Not applicable as property not operational as of June 1, 1998.
35
<PAGE>
CONSTELLATION'S SIGNIFICANT TENANTS
The following table sets forth a schedule of Constellation's ten largest
tenants, for the twelve operating properties, as of June 1, 1998, based upon
annualized contractual base rents for the month of June 1998 plus annualized
operating expense reimbursements. This schedule excludes $350,695 of rental
revenue for 21,502 square feet in two different buildings which were occupied by
CRE/CRM as of June 1, 1998.
<TABLE>
<CAPTION>
PERCENTAGE
REMAINING PERCENTAGE OF
LEASE OF AGGREGATE AGGREGATE
NUMBER TERM TOTAL RENT TOTAL LEASED LEASED SQ.
NAME EXP. DATE OF LEASES (MONTHS) REVENUE (1) REVENUE SQ. FT. FT.
- -------------------------------- -------------- ---------- --------- ----------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
OFFICE TENANTS:
U.S. Department of Defense
(2)......................... September 2008 1 124 $4,523,256 24.40% 240,336 21.02%
e.spire Communications (3).... -- 2 -- 1,763,769 9.51% 83,800 7.33%
U.S. Department of Treasury... April 2003 1 58 1,564,362 8.44% 85,253 7.46%
Stanford Telecommunications... August 2003 1 63 640,690 3.46% 39,880 3.49%
JHPIEGO Corporation........... October 2008 1 125 385,574 2.08% 27,541 2.41%
NRL Federal Credit Union...... December 2003 1 67 343,305 1.85% 17,901 1.57%
Applied Signal Technology..... May 2004 1 71 332,054 1.79% 20,783 1.82%
TASC, Inc..................... April 2001 1 35 327,188 1.76% 19,550 1.71%
Lockheed Martin Technical..... July 1998 1 2 286,532 1.55% 15,807 1.38%
RETAIL TENANTS:
Giant Food.................... April 2016 1 215 768,573 4.15% 56,139 4.91%
--- --- ----------- ----- --------- -----
TOTALS:....................... 11 -- $10,935,302 58.98% 606,990 53.09%
--- --- ----------- ----- --------- -----
--- --- ----------- ----- --------- -----
</TABLE>
- ------------------------
(1) Total Rental Revenue is the monthly contractual base rent as of June 1, 1998
multiplied by 12 plus the estimated annualized expense reimbursements under
existing leases.
(2) Property occupied under a triple net lease agreement, pursuant to which the
tenant reimburses Constellation for all building operating expenses. Lease
provides tenant with annual automatic renewal options which commenced in
October 1994.
(3) e.spire Communications occupies space in two different buildings with 59,545
square feet expiring in March 2003 and 24,255 square feet expiring in
January 2005.
Constellation has pre-leased properties under construction to the following
significant tenants. Green Spring Health Services, Inc. has pre-leased 106,278
square feet of Woodlands One for a five-year term, which will generate
$2,168,071 of annual rental revenue upon occupancy. In 135 National Business
Parkway, CMSI has leased 70,982 square feet under a seven-year lease which will
generate $1,277,676 of annual rental revenue upon occupancy. Food Lion, Inc. has
leased 37,981 square feet for a twenty-year term, which will generate $184,000
of annual rental revenue upon occupancy for the Piney Orchard Marketplace
property. Springfield Commons has been pre-leased to Borders, Inc. for 27,608
square feet for a twenty-year term and Staples, Inc. for 24,000 square feet for
a fifteen-year term, which will generate $604,891 and $432,000 of annual rental
revenue on occupancy, respectively.
36
<PAGE>
CONSTELLATION PROPERTIES
SCHEDULE OF LEASE EXPIRATIONS
The following table sets forth a schedule of the lease expirations for the
operating Constellation Properties beginning June 1, 1998 and annually
thereafter, assuming that none of the tenants exercises renewal options:
<TABLE>
<CAPTION>
SQUARE TOTAL RENTAL
FOOTAGE OF TOTAL RENTAL REVENUE OF PERCENTAGE OF
NUMBER OF LEASES PERCENTAGE OF REVENUE OF EXPIRING LEASES TOTAL RENTAL
YEAR OF LEASES EXPIRING TOTAL LEASED EXPIRING PER RENTABLE REVENUE
EXPIRATION EXPIRING (1) SQUARE FEET LEASES (2) SQUARE FEET (2) EXPIRING (2)
- -------------------------------- ------------- ----------- ------------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
June 1, 1998-
December 31, 1998............... 15 58,021 5.07% $ 778,393 $ 13.42 4.20%
1999............................ 29 75,222 6.58% 1,107,648 14.73 5.97%
2000............................ 21 99,453 8.70% 1,418,525 14.26 7.65%
2001............................ 19 152,959 13.38% 2,262,091 14.79 12.20%
2002............................ 9 65,466 5.73% 684,858 10.46 3.70%
2003............................ 20 267,031 23.35% 4,899,731 18.35 26.43%
2004............................ 6 59,447 5.20% 928,196 15.61 5.01%
2005............................ 1 24,255 2.12% 412,097 16.99 2.22%
2006............................ 1 12,330 1.08% 150,601 12.21 .81%
2007............................ -- -- --% -- -- --%
2008............................ 2 267,877(1) 23.43% 4,908,830 18.32 26.48%
2009 and thereafter............. 3 61,311 5.36% 990,287 16.15 5.33%
--- ----------- ------ ------------- ------ ------
TOTALS:......................... 126 1,143,372 100.00% $ 18,541,257 $ 16.22 100.00%
--- ----------- ------ ------------- ------ ------
--- ----------- ------ ------------- ------ ------
</TABLE>
- ------------------------
(1) One tenant occupying 240,336 square feet and remitting $4,523,256 of
annualized June 1, 1998 total rental revenue leases space under a one year
lease with 14 consecutive automatic one year renewals. The lease has been
reflected as expiring in the year 2008 in the above table.
(2) Total Rental Revenue is the monthly contractual base rent as of June 1, 1998
multiplied by 12 plus the estimated annualized expense reimbursements under
existing leases.
37
<PAGE>
PRO FORMA SIGNIFICANT TENANTS
The following table sets forth a pro forma schedule of the Company's ten
largest tenants, including the 12 operating Constellation Properties and the
Company (including the Airport Square properties and the properties in
Fairfield, New Jersey) based upon annualized contractual rents as of June 1,
1998 plus annualized operating expense reimbursements.
<TABLE>
<CAPTION>
REMAINING
NUMBER LEASE TERM TOTAL RENT PERCENTAGE OF AGGREGATE
NAME EXP. DATE OF LEASES (MONTHS) REVENUE(1) TOTAL REVENUE LEASED SQ. FT.
- ------------------------------------ ----------- --------- ---------- ----------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
OFFICE TENANTS:
Unisys(2)......................... July 2009 4 133 $ 8,943,060 17.03% 954,937
U.S. Department of Defense(3)..... -- 7 -- 6,580,059 12.53% 450,041
IBM(4)............................ March 2002 1 46 3,255,778 6.20% 170,000
Teleport Communications(5)........ -- 2 -- 2,603,324 4.96% 172,385
Ciena Corporation(6).............. -- 3 -- 1,987,569 3.78% 182,183
e.spire Communications(7)......... -- 2 -- 1,763,769 3.35% 83,800
U.S. Department of Treasury....... April 2003 1 58 1,564,362 2.98% 85,253
First Annapolis Consulting........ August 2005 1 74 766,413 1.46% 49,446
RETAIL TENANTS:
Giant Food........................ April 2016 1 215 768,573 1.46% 56,139
Fleming Companies, Inc.(8)........ -- 3 -- 729,621 1.39% 128,320
--- --- ----------- ----- --------------
TOTALS:....................... 25 $28,962,528 55.14% 2,332,504
--- ----------- ----- --------------
--- ----------- ----- --------------
<CAPTION>
PERCENTAGE OF
AGGREGATE
NAME LEASED SQ. FT.
- ------------------------------------ --------------
<S> <C>
OFFICE TENANTS:
Unisys(2)......................... 23.86%
U.S. Department of Defense(3)..... 11.24%
IBM(4)............................ 4.25%
Teleport Communications(5)........ 4.30%
Ciena Corporation(6).............. 4.55%
e.spire Communications(7)......... 2.09%
U.S. Department of Treasury....... 2.13%
First Annapolis Consulting........ 1.23%
RETAIL TENANTS:
Giant Food........................ 1.40%
Fleming Companies, Inc.(8)........ 3.21%
-----
TOTALS:....................... 58.26%
-----
-----
</TABLE>
- ------------------------
(1) Total Rental Revenue is the monthly contractual base rent as of June 1,
1998 multiplied by 12 plus the estimated annualized expense reimbursements
under existing leases.
(2) Merck subleases from Unisys 109,109 square feet and has exercised its option
to lease an additional 109,109 square feet commencing January 1, 1999.
(3) U.S. Department of Defense occupies space in seven different buildings with
240,336 square feet expiring September 2008; 96,636 square feet expiring
September 1998; 73,572 square feet expiring May 1999; 12,333 square feet
expiring June 2005; 15,776 square feet expiring June 1999; 10,308 square
feet expiring September 1998; and 1,080 square feet expiring October 1998.
(4) Teleport Communications recently agreed to lease 143,072 square feet at this
location through March 31, 2009. Teleport Communications will sublease this
space from IBM through March 31, 2002 and thereafter will lease this space
directly from the Company.
(5) Teleport Communications leases 142,385 square feet which expires June 2008
and 30,000 square feet which expires December 2006. The 30,000 square feet
space is subleased from IBM through March 2002.
(6) Ciena Corporation leases 57,140 square feet which expires August 2002;
67,903 square feet which expires February 2008; and 57,140 square feet which
expires June 2002.
(7) e.spire Communications leases 59,545 square feet which expires March 2003
and 24,255 square feet which expires January 2005.
(8) Fleming Companies, Inc. has three leases consisting of 36,248 square feet
expiring October 2010; 39,272 square feet expiring May 2014; and 52,800
square feet expiring November 2014.
38
<PAGE>
\
PRO FORMA SCHEDULE OF LEASE EXPIRATIONS
The following table sets forth a pro forma schedule of the lease expirations
for the 12 operating Constellation Properties and the Company (including the
Airport Square properties and the properties in Fairfield, New Jersey) as of
June 1, 1998:
<TABLE>
<CAPTION>
TOTAL RENTAL
NUMBER SQUARE TOTAL RENTAL REVENUE OF PERCENTAGE OF
OF FOOTAGE OF PERCENTAGE OF REVENUE OF EXPIRING LEASES TOTAL RENTAL
YEAR OF LEASES LEASES TOTAL LEASED EXPIRING PER RENTABLE REVENUE
EXPIRATION EXPIRING EXPIRING SQUARE FEET LEASES (2) SQUARE FEET (2) EXPIRING (2)
- ----------------------------- ----------- ---------- ------------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
June 1, 1998 -
December 31, 1998.......... 23 183,456 4.58% $ 2,029,497 $ 11.06 3.86%
1999......................... 39 307,219 7.68% 4,280,784 13.93 8.15%
2000......................... 32 156,000 3.90% 2,310,740 14.81 4.40%
2001......................... 35 384,304 9.60% 5,972,535 15.54 11.37%
2002......................... 27 353,389 8.83% 4,441,873 12.57 8.46%
2003......................... 24 284,368 7.10% 5,213,900 18.34 9.93%
2004......................... 8 86,481 2.16% 1,407,075 16.27 2.68%
2005......................... 3 86,034 2.15% 1,379,369 16.03 2.63%
2006......................... 3 109,840 2.74% 1,256,281 11.44 2.39%
2007......................... 3 53,812 1.34% 984,083 18.29 1.87%
2008......................... 12 838,241(1) 20.94% 10,980,417 13.10 20.91%
2009 and
thereafter................. 7 1,159,320 28.98% 12,262,390 10.58 23.35%
--- ---------- ------ ------------- ------ ------
TOTALS:...................... 216 4,002,464 100.00% $ 52,518,944 $ 13.12 100.00%
--- ---------- ------ ------------- ------ ------
--- ---------- ------ ------------- ------ ------
</TABLE>
- ------------------------
(1) One tenant occupying 240,336 square feet and remitting $4,523,256 of
annualized June 1, 1998 total rental revenue leases space under a one-year
lease with 14 consecutive automatic one-year renewals. The lease has been
reflected as expiring in the year 2008 in the above table.
(2) Total Rental Revenue is the monthly contractual base rent as of June 1, 1998
multiplied by 12 plus the estimated annualized expense reimbursements under
existing leases.
THE CONSTELLATION SERVICE COMPANIES
The Constellation Service Companies consist of certain assets and personnel
of CRE and a 75% interest in CRM.
CONSTELLATION REAL ESTATE, INC.
CRE provides comprehensive design/build, construction, development and asset
management service to entities affiliated with Constellation. Most of
Constellation's activities in the real estate business have been conducted on
its behalf by CRE and its employees. CRE's strategy in the office property
business has been to develop or acquire high quality office properties in
suburban markets where it is, or can become, a prominent market force, or in
markets where it identifies specific real estate investment opportunities
CRE management includes: Randall M. Griffin, President; Roger A. Waesche,
Jr., Senior Vice President of Finance; John H. Gurley, Vice President and
General Counsel; Stanley A. Link, Senior Vice President of Construction; and
Dwight S. Taylor, Senior Vice President of Marketing and Leasing. These
39
<PAGE>
individuals manage the operations including development, construction, leasing,
asset management, acquisition and disposition of the company owned, and
affiliated entities' properties. Each of them is expected to join the Company in
a senior management position following closing of the Transaction.
CONSTELLATION REALTY MANAGEMENT, LLC
CRM is engaged in management of income producing real estate and corporate
facilities management. Approximately 47% of CRM's revenues for the year ended
December 31, 1997 were derived from Constellation Properties and other
affiliates of Constellation, and the balance of its income was derived from
unaffiliated third parties. As of June 1, 1998, CRM managed approximately 14.8
million square feet of real estate, comprising more than 146 properties. Of
these totals, approximately 1.8 million square feet in 16 properties were owned
by entities affiliated with Constellation, including BGE. The balance, 13.0
million square feet in over 130 properties, is owned by unaffiliated clients of
CRM.
CRM is active in all facets of commercial real estate, including commercial,
office, retail and corporate facilities projects. CRM's list of clients includes
pension fund managers, Fortune 500 companies, financial institutions,
partnerships and individuals. Its clients include:
<TABLE>
<S> <C>
- - LaSalle Advisors - ERE Yarmouth
- - Westmark Realty Advisers - AMB Institutional RealtyAdvisers
- - GE Capital Investment Advisers
</TABLE>
CRM maintains its headquarters at Three Centre Park in Columbia, Maryland,
with offices in Towson, Maryland, Woodlawn, Maryland, Annapolis Junction,
Maryland, Calverton, Maryland, Columbia, Maryland, Linthicum, Maryland, and
Wilmington, Delaware. CRE owns 75% of the outstanding membership interests of
CRM, which was formed on April 1, 1996. The remaining 25% interest is held by
KLNB, Inc., an unaffiliated entity. CRM is operated under the direction of
Michael D. Kaiser, President and Steven J. Willats, Vice President. CRM employs
66 people, 30 of whom are building engineers, 19 are property managers, five are
lease administrators, nine are engaged in accounting and three are involved in
corporate activities.
The 75% interest in CRM and other management assets to be acquired by the
Company from Constellation will be transferred by the Company to the Operating
Partnership, which will, in turn, transfer such assets to COMI. In exchange for
such assets, the Operating Partnership will receive (i) indebtedness issued by
COMI in the principal amount of $2,005,000, (ii) cash of approximately $24,750,
(iii) 18,800 shares of non-voting common stock, representing all of the
non-voting common stock to be issued by COMI and (iv) 10 shares of voting common
stock, representing 1% of the voting common stock to be issued by COMI.
Individual shareholders, including Jay H. Shidler, Clay W. Hamlin, III,
executive officers of COMI and perhaps others, will purchase 990 shares of
voting common stock (representing 99% of the outstanding voting stock and 5% of
the aggregate outstanding stock) in exchange for a cash capital contribution of
$24,750. Due to federal income tax requirements, the REIT may not directly or
indirectly own 10% or more of the outstanding voting securities of COMI.
LEGAL PROCEEDINGS RELATED TO CONSTELLATION
To the Company's knowledge, there are no material legal proceedings pending
or threatened against Constellation, any of the Constellation Properties or the
Constellation Service Companies, other than routine litigation arising out of
the ordinary course of business, and which are covered by liability insurance.
40
<PAGE>
SELECTED FINANCIAL DATA OF
CONSTELLATION SERVICE COMPANIES
The following selected financial data of the Constellation Service Companies
as of and for the three months ended March 31, 1998 and 1997; and as of December
31, 1995, 1994 and 1993 and for the years ended December 31, 1994 and 1993, have
been derived from the Constellation Service Company's unaudited financial
statements, which in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the unaudited periods. The selected financial data of
Constellation Service Companies as of December 31, 1997 and 1996 and for the
years ended December 31, 1997, 1996 and 1995 has been derived from and should be
read in conjunction with the Constellation Service Companies' audited financial
statements and notes thereto for those periods included elsewhere in this Proxy
Statement. This information should also be read in conjunction with
"Management's Discussion and Analysis of Constellation Service Companies'
Financial Condition and Results of Operations" included elsewhere in this Proxy
Statement.
SELECTED FINANCIAL DATA OF CONSTELLATION SERVICE COMPANIES
(Dollars in Thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
-------------------------- --------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1998 1997 1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ---------- ---------- ----------
OPERATING DATA:
Total revenue.............. $ 3,717 $ 3,314 $ 11,226 $ 15,412 $ 7,096 $ 3,467 $ 3,308
Total expenses............. 3,755 3,043 10,485 14,708 7,088 3,401 3,769
Minority interest.......... 26 47 117 96 -- -- --
Income tax expense
(benefit)................ (23) 91 256 251 14 26 (189)
------------ ------------ ------------ ------------ ---------- ---------- ----------
Net Income (loss)........ $ (41) $ 133 $ 368 $ 357 $ (6) $ 40 $ (272)
------------ ------------ ------------ ------------ ---------- ---------- ----------
------------ ------------ ------------ ------------ ---------- ---------- ----------
BALANCE SHEET DATA:
Cash and cash
equivalents.............. $ 5,944 $ 5,733 $ 4,732 $ 5,191 $ (554) $ (423) $ (1,113)
Due from affiliates........ -- -- -- -- 1,484 1,448 2,637
Other assets............... 4,151 5,886 3,378 5,341 3,284 1,395 992
------------ ------------ ------------ ------------ ---------- ---------- ----------
Total assets............. $ 10,095 $ 11,619 $ 8,110 $ 10,532 $ 4,214 $ 2,420 $ 2,516
------------ ------------ ------------ ------------ ---------- ---------- ----------
------------ ------------ ------------ ------------ ---------- ---------- ----------
Due to affiliates.......... $ 6,051 $ 7,529 $ 4,423 $ 4,925 $ -- $ -- $ --
Other liabilities.......... 1,193 1,433 821 3,130 2,209 409 545
------------ ------------ ------------ ------------ ---------- ---------- ----------
Total liabilities........ $ 7,244 $ 8,962 5,244 $ 8,055 $ 2,209 $ 409 $ 545
Minority interest.......... $ 162 $ 162 $ 136 $ 115 -- -- --
Stockholder's equity....... 2,689 2,495 2,730 2,362 2,005 2,011 1,971
------------ ------------ ------------ ------------ ---------- ---------- ----------
Total liabilities and
stockholder's equity..... $ 10,095 $ 11,619 $ 8,110 $ 10,532 $ 4,214 $ 2,420 $ 2,516
------------ ------------ ------------ ------------ ---------- ---------- ----------
------------ ------------ ------------ ------------ ---------- ---------- ----------
SQUARE FEET UNDER
MANAGEMENT................. 13,576,000 11,278,000 14,203,000 10,863,000 2,245,000 1,594,000 1,372,000
------------ ------------ ------------ ------------ ---------- ---------- ----------
------------ ------------ ------------ ------------ ---------- ---------- ----------
</TABLE>
41
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSTELLATION SERVICE COMPANIES'
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following should be read in conjunction with the consolidated financial
statements of Constellation Service Companies and the notes thereto, appearing
elsewhere in this Proxy Statement.
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO MARCH 31, 1997
NET INCOME: Net income decreased by $174,000 from $133,000 to a $41,000 loss for
the three month period ended March 31, 1998 as compared to the same period in
1997. This change resulted from reduction in CRM's profit by 44.7% from $188,000
in 1997 to $104,000 in 1998 as expenses increased 12.5% from $827,000 to
$930,000 but the property management fees only increased 1.9% from $1,015,000 in
1997 to $1,034,000 in 1998 for the three month period ended March 31, 1998
compared to the same period in 1997. The remaining decrease of $120,000 resulted
from the reduction in profit recognized on the construction contract services
due to the increase in related party transactions for which no profit was
realized.
REVENUES: Total revenues increased by 12.3% or $.4 million from $3.3 million to
$3.7 million for the three months ended March 31, 1998 compared to the same
period in 1997. This increase resulted principally from commencement of certain
construction contract services during the first quarter of 1998 which
represented new services, causing a 12.9% or $.2 million increase from $1.7
million to $1.9 million for the first quarter of 1998 compared to 1997. The
remaining $.2 million increase in revenues was generated from increased
construction, development, marketing, asset management and finance fees.
OPERATING EXPENSES: Total operating expenses increased by $.7 million or 23.4%
from $3.0 million to $3.7 million for the three months ended March 31, 1998 and
1997, respectively. Construction contract costs increased by $.3 million or
22.2% from $1.5 million to $1.8 million from 1997 to 1998 as a result of the
commencement of new construction contract services. Another $.3 million or 27.0%
increase from $1.0 million to $1.3 million in salaries and related expenses was
caused by the hiring of new employees to service the growth in the property
management business coupled with normal wage increases to the existing
employees.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
NET INCOME: Net income was relatively unchanged level for the year ended
December 31, 1997 compared to the same period in 1996 due to the offsetting
effects of decreases in revenues and decreases in operating expenses.
REVENUES: Total revenues decreased by 27.6% or $4.2 million from $15.3 to $11.1
million for the years ended December 31, 1996 and 1997, respectively. This
decrease resulted principally from reduced levels of certain construction
contract services from 1996 to 1997, causing a $5.4 million decrease. Property
management fees increased $.7 million or 21.0% due to higher volume of square
feet managed. Construction, development, marketing, asset management fees and
finance fees increased by 21.8% or $.5 million from $2.6 million in 1996 to $3.1
million in 1997, primarily due to increased marketing fees associated with new
projects of $.4 million.
OPERATING EXPENSES: Total operating expenses decreased by $4.2 million or 15.2%
from $14.7 to $10.5 million for the year ended December 31, 1997 compared to the
same period in 1996. This decrease, similar to the decline in revenues,
principally resulted from completion of certain construction contract services
during 1996 which represented non-recurring services in 1997 or a $5.4 million
decrease. An increase of $.7 million or 17.7% in salaries and related expenses
resulted from the hiring of ten new employees due to CRM's growth coupled with
wage increases for existing employees. Other expenses increased by $.5 million
or 52.8% over the prior year and consist primarily of $.3 million in consulting
advisory services and $.1 million of additional rental expense due to the
overall growth in the business.
42
<PAGE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
NET INCOME: Net income increased by $.4 million from a breakeven in 1995 to a
$.4 million profit in 1996 due to the $.3 million pre-tax improvement in
construction contract profit. The growth of $1.3 million in property management
fees due to additional square feet under management coupled with the $1.1
million increase in construction, development, marketing, asset management and
finance fees offset the additional $1.5 million in salaried expenses required to
service this growth.
REVENUES: Total revenues increased by $8.3 million or 119.3% from $7.0 million
to $15.3 million for the year ended December 31, 1996 compared to the same
period in 1995. This increase resulted principally from growth in certain
construction contract services during 1996 which did not exist in 1995, causing
a $5.9 million increase. Property management fees increased by 72.3% or $1.3
million from $1.8 million to $3.1 million as a result of the purchase of a 75%
member interest in CRM by CRE, effective in April 1996. Construction,
development, marketing, asset management fees and finance fees increased by
70.4% or $1.1 million from $1.5 million to $2.6 million in 1995 and 1996,
respectively, due to the increased leasing commissions and increased fees
associated with the growth in the construction contract services.
OPERATING EXPENSES: Total operating expenses increased by 107.0% or $7.6 million
from $7.1 million to $14.7 million for the year ended December 31, 1996 compared
to the same period in 1995. This increase, similar to the increased operating
revenues, principally resulted from growth in certain construction contract
services during 1996 which did not exist in 1995, causing a $5.6 million
increase. An increase of 67.3% or $1.5 million in salaries and related expenses
primarily resulted from the purchase of the 75% member interest in CRM in which
approximately 19 new employees were hired. Overhead costs of related party
increased 41.5% or $255,000 over the prior year because the total allocable
costs from related party comprised a larger portion of the related party's
business as compared to other lines of business in 1996. Other expenses
increased 32.6% or $.2 million from $.7 million in 1995 to $.9 million in 1996
as rent and depreciation expense increased from new CRM satellite offices.
MINORITY INTEREST: Minority interest expense increased by $96,000 as a result of
the formation of CRM in April 1996. KLNB, Inc., the minority interest holder,
shares in 25% of the earnings from CRM.
LIQUIDITY AND CAPITAL RESOURCES
Generally, cash provided from operations represents the primary source of
liquidity to fund operating expenses. To the extent necessary, borrowings from
affiliates and lending institutions provide other sources of liquidity. The
Constellation Service Companies have generated cash from operations to fund
distributions to the minority interest holder, as required, and from all sources
to satisfy its debt service obligations.
The Constellation Service Companies use a centralized cash management system
for Constellation affiliates owned by CREG. As a result, if historical cash
flows from operating activities were insufficient to fund operating expenses and
costs, the Constellation Service Companies received advances from its
affiliates. These advances are then repaid from available cash flow.
Working capital as of March 31, 1998 was $406,000 as compared to $1,460,000
as of March 31, 1997. This decrease of $1,054,000 was principally caused by a
$2,954,000 reduction in accounts receivable offset by a $1,478,000 reduction in
due to affiliates. Cash flows from operating activities increased by $1,591,000
from $650,000 for the three-month period March 31, 1997 to $2,241,000 for the
three-month period March 31, 1998 principally as a result of a $2,208,000
increase in accounts payable and accrued expenses offset by the $976,000
reduction in borrowings from affiliates. Cash flows from investing activities
decreased by $950,000 due to the $1,000,000 escrowed deposit related to a
contract to acquire loans collaterialized by the Airport Square properties. Cash
flows from (used in) financing activities increased by $29,000 from a $1,000
deficit for the three-month period March 31, 1998 to $28,000 for the three-month
period March 31, 1997.
43
<PAGE>
Working capital as of December 31, 1997 was $1,400,000 as compared to
$1,300,000 as of December 31, 1996. The $100,000 increase was principally caused
by the $2,464,000 reduction in the outstanding accounts receivable balances
partially offset by the $2,164,000 reduction in accounts payable.
Cash flows from (used in) operating activities for the years ended December
31, 1997, 1996 and 1995 were $124,000, $6,290,000, and $(91,000), respectively.
Although net income realized for the year ended December 31, 1997 remained level
compared to 1996, cash flows from operating activities decreased by $6,166,000
from $6,290,000 in 1996 to $124,000 in 1997 principally as a result of the
operating advances from affiliates. In 1997, the Constellation Service Companies
repaid $502,000 of advances from affiliates as compared to the $6,409,000
borrowed from affiliates in 1996. In 1996, although net income improved by
$363,000 as compared to 1995, cash flows from (used in) operating activities
increased by $6,381,000 from $(91,000) in 1995 to $6,290,000 in 1996 principally
as a result of $6,409,000 advanced from affiliates. This advance provided cash
to fund operations as liquidity was strained by the $1,982,000 increase in
accounts receivable from 1995 to 1996 coupled with a $2,182,000 increase in
accounts payable from 1995 to 1996. Net cash used in operating activities for
the year ended December 31, 1995 was $(91,000) caused primarily by the $(6,000)
net loss combined with a net decrease of $200,000 in current assets and
liabilities from 1994 to 1995.
Cash flows used in investing activities, which primarily relate to
investment in fixed assets, for the years ended December 31, 1997, 1996 and 1995
were $(445,000), $(731,000), and $(59,000), respectively. In 1996, cash flows
from investing activities included the $414,000 acquisition of the 75% member
interest in CRM.
Cash flows from (used in) financing activities, which include the annual
principal repayments to KLNB, Inc. on the outstanding note payable and any
distribution or contributions to CRM's minority interest holder, for the years
ended December 31, 1997, 1996 and 1995 were $(138,000), $186,000, and $19,000,
Annual scheduled principal payments of $40,000 were paid to KLNB from the
$200,000 promissory note assumed in 1996 upon the acquisition of the 75% member
interest in CRM in 1996. A $96,000 distribution was provided to the minority
interest holder in 1997. In 1996, the minority interest holder contributed
$19,000.
INFLATION
Inflation has generally not significantly impacted the periods presented for
the Constellation Service Companies due to the relatively low inflation rates in
their market. In addition, average salaries and related expenses historically
have not exceeded 10% annually in the same market.
44
<PAGE>
SELECTED FINANCIAL DATA OF THE COMPANY
The following tables set forth certain financial data on a consolidated
historical and pro forma basis for the Company. The financial data should be
read in conjunction with the Company's financial statements and the notes
thereto incorporated by reference in this Proxy Statement, Constellation
Properties' combined statement of revenue and certain expenses for the year
ended December 31, 1997 and the notes thereto, and the Constellation Service
Companies' consolidated financial statements and the notes thereto included
elsewhere in this Proxy Statement. The consolidated historical financial data of
the Company as of and for the fiscal years ended December 31, 1993 through 1997
have been derived from and should be read in conjunction with the audited
financial statements for those years. The financial data of the Company as of
and for the three months ended March 31, 1998 and 1997 have been derived from
unaudited financial statements, which, in the opinion of management, include all
adjustments, necessary for a fair statement of the results for the unaudited
interim periods. This information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" of the Company incorporated by reference in this Proxy Statement.
The unaudited pro forma financial and operating data for the three months
ended March 31, 1998 and for the year ended December 31, 1997, is presented as
if the completion of the Transaction, the Airport Square property acquisition,
the acquisition of properties in Fairfield, New Jersey, and the 1998 Offering,
all occurred as of January 1, 1998 for the March 31, 1998 pro forma data and as
of January 1, 1997 for the December 31, 1997 pro forma data. The acquisition of
the Shidler Group's Mid-Atlantic operations is reflected in the Company's
historical consolidated balance sheet at December 31, 1997 and March 31, 1997
and is included in the pro forma condensed consolidating statements of
operations as if it occurred on January 1, 1997. The unaudited pro forma balance
sheet as of March 31, 1998 is presented as if the foregoing, except for the
Shidler transaction, occurred as of March 31, 1998.
The pro forma information is based upon certain assumptions that are
included in the notes to the pro forma financial statements included elsewhere
in this Proxy Statement. The pro forma information is unaudited and is not
necessarily indicative of what the financial position and results of operations
of the Company would have been as of and for the periods indicated, nor does it
purport to represent the future financial position and results of operations for
future periods.
45
<PAGE>
SELECTED CONSOLIDATED HISTORICAL AND
PRO FORMA FINANCIAL DATA OF THE COMPANY
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
------------------------------------- -------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PRO FORMA HISTORICAL PRO FORMA HISTORICAL
----------- ------------------------ ----------- ------------------------------------------
<CAPTION>
1998 1998 1997 1997 1997 1996 1995 1994
----------- ----------- ----------- ----------- --------- --------- --------- ---------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue:
Rental income.............. $ 12,109 $ 4,919 $ 626 $ 44,007 $ 6,122 $ 2,477 $ 2,436 $ 2,038
Tenant recoveries and other
income................... 1,260 606 7 5,619 496 32 48 217
----------- ----------- ----------- ----------- --------- --------- --------- ---------
Total revenue.............. 13,369 5,525 633 49,626 6,618 2,509 2,484 2,255
----------- ----------- ----------- ----------- --------- --------- --------- ---------
Expenses:
Interest................... 4,281 2,159 308 17,226 2,855 1,246 1,267 1,098
Depreciation and
amortization............. 2,484 1,041 142 9,907 1,331 567 567 476
Property expenses.......... 3,460 899 79 14,743 728 31 42 43
General and
administrative........... 465 299 13 1,358 533 372 336 337
Reformation costs (1)...... -- 637 -- -- -- -- -- --
Termination of Advisory
Agreement (2)............ -- -- -- -- 1,353 -- -- --
----------- ----------- ----------- ----------- --------- --------- --------- ---------
Total expenses............. 10,690 5,035 542 43,234 6,800 2,216 2,212 1,954
----------- ----------- ----------- ----------- --------- --------- --------- ---------
Equity in income of
management company......... (159) -- -- 55 -- -- -- --
----------- ----------- ----------- ----------- --------- --------- --------- ---------
Income (loss) before minority
interests.................. 2,520 490 91 6,447 (182) 293 272 301
Income allocated to minority
interests.................. (1,033) (989) -- (3,608) (785) -- -- --
Preferred Share
distributions.............. (333) -- -- (1,334) -- -- -- --
----------- ----------- ----------- ----------- --------- --------- --------- ---------
Net income (loss)............ $ 1,154 $ (499) $ 91 $ 1,505 $ (967) $ 293 $ 272 $ 301
----------- ----------- ----------- ----------- --------- --------- --------- ---------
----------- ----------- ----------- ----------- --------- --------- --------- ---------
Net income (loss) per common
share...................... $ 0.07 $ (0.22) $ 0.06 $ 0.09 $ (0.60) $ 0.21 $ 0.19 $ 0.21
----------- ----------- ----------- ----------- --------- --------- --------- ---------
----------- ----------- ----------- ----------- --------- --------- --------- ---------
Cash dividends/ distributions
declared................... $ 1,276 $ 177 $ 816 $ 710 $ 710 $ 1,207
----------- ----------- --------- --------- --------- ---------
----------- ----------- --------- --------- --------- ---------
Cash dividends/ distributions
per share.................. $ 0.15 $ 0.12 $ 0.50 $ 0.50 $ 0.50 $ 0.85
----------- ----------- --------- --------- --------- ---------
----------- ----------- --------- --------- --------- ---------
BALANCE SHEET DATA (AS OF
PERIOD END):
Real estate investments, net
of accumulated
depreciation............... $ 469,850 $ 187,730 $ 22,931 $ 188,625 $ 23,070 $ 23,624 $ 24,179
Total assets................. 478,167 192,656 24,044 193,534 24,197 24,779 25,647
Mortgages payable............ 230,649 114,301 14,579 114,375 14,658 14,916 15,153
Total liabilities............ 233,542 117,194 14,959 117,008 15,026 15,191 15,620
Minority interests........... 64,611 64,611 -- 64,862 -- -- --
Shareholders' equity......... 180,014 10,851 9,085 11,664 9,171 9,588 10,026
<CAPTION>
<S> <C>
1993
---------
<S> <C>
OPERATING DATA:
Revenue:
Rental income.............. $ 1,073
Tenant recoveries and other
income................... 70
---------
Total revenue.............. 1,143
---------
Expenses:
Interest................... 461
Depreciation and
amortization............. 256
Property expenses.......... 63
General and
administrative........... 183
Reformation costs (1)...... --
Termination of Advisory
Agreement (2)............ --
---------
Total expenses............. 963
---------
Equity in income of
management company......... --
---------
Income (loss) before minority
interests.................. 180
Income allocated to minority
interests.................. --
Preferred Share
distributions.............. --
---------
Net income (loss)............ $ 180
---------
---------
Net income (loss) per common
share...................... $ 0.17
---------
---------
Cash dividends/ distributions
declared................... $ 923
---------
---------
Cash dividends/ distributions
per share.................. $ 0.88
---------
---------
BALANCE SHEET DATA (AS OF
PERIOD END):
Real estate investments, net
of accumulated
depreciation............... $ 15,110
Total assets................. 18,882
Mortgages payable............ 7,450
Total liabilities............ 7,950
Minority interests........... --
Shareholders' equity......... 10,932
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
------------------------------------- -------------------------------------------------------
PRO FORMA HISTORICAL PRO FORMA HISTORICAL
----------- ------------------------ ----------- ------------------------------------------
1998 1998 1997 1997 1997 1996 1995 1994
----------- ----------- ----------- ----------- --------- --------- --------- ---------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Cash flows provided (used
in):
Operating activities....... (3) $ 956 $ 223 (3) $ 3,216 $ 840 $ 678 $ 690
Investing activities....... (3) (682 ) 0 (3) 973 127 (551) (9,511)
Financing activities....... (3) (1,323 ) (256 ) (3) (1,052) (967) (1,001) 6,357
Funds from operations (4).... 1,246 229 1,718 847 827 768
Weighted average shares
outstanding (in
thousands)................. 16,699 2,268 1,420 16,699 1,601 1,420 1,420 1,420
PROPERTY DATA (AS OF PERIOD
END):
Number of properties owned... 49 17 7 49 17 7 7 7
Total rentable square feet
owned (in thousands)....... 4,734 1,852 370 4,734 1,852 370 370 370
<CAPTION>
1993
---------
<S> <C>
OTHER DATA:
Cash flows provided (used
in):
Operating activities....... $ 358
Investing activities....... (5,461)
Financing activities....... 7,829
Funds from operations (4).... 437
Weighted average shares
outstanding (in
thousands)................. 1,065
PROPERTY DATA (AS OF PERIOD
END):
Number of properties owned... 4
Total rentable square feet
owned (in thousands)....... 215
</TABLE>
- ------------------------
(1) Reflects a nonrecurring expense of $637 associated with the reformation of
the Company on March 16, 1998.
(2) Reflects a nonrecurring expense of $1,353 associated with the termination of
the Advisory Agreement on October 14, 1997, which was paid in the form of
Common Stock.
(3) Pro forma information relating to cash flows from operating, investing and
financing activities has not been included because management believes that
the information would not be meaningful due to the number of assumptions
required in order to calculate this information.
(4) The White Paper on Funds from Operations ("FFO") approved by the Board of
Governors of NAREIT in March 1995 defines FFO as net income (loss) (computed
in accordance with GAAP), excluding gains (or losses) from debt
restructuring and sales of properties, plus real estate related depreciation
and amortization and after adjustments for unconsolidated partnerships and
joint ventures. The Company believes that FFO is helpful to investors as a
measure of the financial performance of an equity REIT because, along with
cash flow from operating activities, financing activities and investing
activities, it provides investors with an indication of the ability of the
Company to incur and service debt, to make capital expenditures and to fund
other cash needs. The Company computes FFO in accordance with standards
established by NAREIT which may not be comparable to FFO reported by other
REITs that do not define the term in accordance with the current NAREIT
definition or that interpret the current NAREIT definition differently than
the Company. FFO does not represent cash generated from operating activities
determined in accordance with GAAP and should not be considered as an
alternative to net income (determined in accordance with GAAP) as an
indication of the Company's financial performance or to cash flow from
operating activities (determined in accordance with GAAP) as a measure of
the Company's liquidity, nor is it indicative of funds available to fund the
Company's cash needs, including its ability to make cash distributions.
47
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND TRUSTEES
Set forth below is certain information as of the date of this Proxy
Statement for (i) the Trustees of the Company, (ii) the executive officers of
the Company and (iii) the Trustees and executive officers of the Company as a
group.
<TABLE>
<CAPTION>
NAME AGE OFFICE CLASS
- ------------------------------------------------- --- ------------------------------------------------- -----
<S> <C> <C> <C>
Jay H. Shidler................................... 52 Chairman of the Board of Trustees III
Clay W. Hamlin, III.............................. 53 Chief Executive Officer and Trustee III
Vernon R. Beck................................... 56 Vice President and Vice Chairman of the Board of I
Trustees
Kenneth D. Wethe................................. 56 Trustee II
Allen C. Gehrke.................................. 63 Trustee I
William H. Walton................................ 45 Trustee II
Kenneth S. Sweet, Jr............................. 65 Trustee III
Thomas D. Cassel................................. 39 Vice President, Finance and Treasurer
John D. Parsinen................................. 55 Secretary
</TABLE>
- ------------------------
* Upon closing of the Transaction, Mr. Griffin will become President of the
Company and Messrs. Crooke and Kesler will become Trustees of the Company.
In addition, Messrs. Waesche and Gurley will become executive officers of
the Company. For biographies of each of the five aforementioned persons, see
the "The Transaction--Changes in Operations and Additions to Management."
JAY H. SHIDLER has been Chairman of the Board of Trustees since October
1997. Mr. Shidler is the Founder and Managing Partner of The Shidler Group. A
nationally acknowledged expert in the field of real estate investment and
finance, Mr. Shidler has over 25 years of experience in real estate investment
and has been directly involved in the acquisition and management of over 1,000
properties in 40 states and Canada totaling over $4 billion in aggregate value.
Mr. Shidler is a founder and current Chairman of the Board of Trustees of First
Industrial Realty Trust, Inc. and is a founder and former director and Co-
Chairman of TriNet Corporate Realty Trust, Inc. Mr. Shidler is also founder and
Chairman of the Board of Trustees of CGA Group, Ltd., a holding company whose
subsidiary is a AAA-rated financial guarantor based in Bermuda. Mr. Shidler
serves on the boards of directors of several companies and is active as a
Trustee of several charitable organizations, including The Shidler Family
Foundation. Mr. Shidler holds a bachelor's degree in Business Administration
from the University of Hawaii.
CLAY W. HAMLIN, III has been a Trustee and President and Chief Executive
Officer of the Company since October 1997. Upon consummation of the Transaction,
Mr. Hamlin will relinquish the role of President to Randall M. Griffin. See "The
Transaction--Changes in Operations and Additions to Management." Mr. Hamlin
joined The Shidler Group in May 1989, as Managing Partner of The Shidler Group's
Mid-Atlantic regional office and acquired, managed and leased over four million
square feet of commercial property with a value in excess of $300 million. A
resident of Philadelphia for over 30 years, Mr. Hamlin has been active in the
real estate business for 25 years. Mr. Hamlin is an attorney, a CPA and holds an
MBA from The Wharton School of Business and an undergraduate degree from the
University of Pennsylvania. Mr. Hamlin served as a Lieutenant J.G. in the U.S.
Navy, and is active in many professional and charitable organizations. Mr.
Hamlin is a founding shareholder of both TriNet Corporate Realty Trust, Inc. and
First Industrial Realty Trust, Inc. His professional affiliations include the
Urban Land Institute, NAREIT, the American Institute of CPAs and the American
Bar Association.
VERNON R. BECK is Vice Chairman of the Board of Trustees and a Vice
President of the Company. Mr. Beck was elected a Trustee of the Company in
January 1990. From 1988 to 1997, Mr. Beck served as President of the Company and
as President of Crown Advisors, Inc., the Company's former external
48
<PAGE>
advisors. Since 1976, Mr. Beck has also been President of Vernon Beck &
Associates, Inc., a commercial mortgage banking and real estate development
firm, which has developed and financed numerous commercial real estate projects.
Mr. Beck is a former commercial loan officer with IDS Mortgage Corporation and
senior analyst with Northwestern National Life Insurance Company.
KENNETH D. WETHE has been a Trustee of the Company since January 1990. Since
1990, Mr. Wethe has been the owner and principal officer of Wethe & Associates,
a Dallas-based firm providing independent risk management, insurance and
employee benefit services to school districts and governmental agencies. Mr.
Wethe's background includes over 26 years experience in the group insurance and
employee benefits area. He is a certified public accountant and holds an MBA
from Pepperdine University.
ALLEN C. GEHRKE has been a Trustee of the Company since 1995. Prior to
becoming a private investor in 1995, Mr. Gehrke served for 35 years in various
key positions at Fleming Companies, Inc. As Senior Vice President of Corporate
Development, Mr. Gehrke's responsibilities included management of company
physical assets, market research, lease negotiations and real estate financing.
Prior to his employment with Fleming Companies, Inc., Mr. Gehrke spent seven
years with Midwest Contractors and L.A. Construction Co. of Milwaukee. Mr.
Gehrke is a former director of United Cerebral Palsy and several other community
organizations.
WILLIAM H. WALTON has been a Trustee of the Company since October 1997. Mr.
Walton is a Managing Principal of Westbrook Partners, LLC ("Westbrook") which he
co-founded in April of 1994. With offices in Dallas, New York, San Francisco and
Florida, Westbrook is a fully integrated real estate investment management
company. Westbrook is the sponsor of Westbrook Real Estate Fund and Westbrook
Real Estate Fund II, which together control approximately $4 billion of real
estate assets including investments in: real estate companies and securities;
offices, retail and industrial properties; apartments; hotels; and residential
developments. Prior to co-founding Westbrook, Mr. Walton was a Managing Director
of Morgan Stanley Realty. Mr. Walton holds an AB from Princeton University and
an MBA from Harvard Business School.
KENNETH S. SWEET, JR. has been a Trustee of the Company since October 1997.
Mr. Sweet is the Managing Director of Gordon Stuart Associates, Inc., which he
founded in 1991. In 1971, Mr. Sweet founded K.S. Sweet Associates which
specialized in real estate and venture capital investments. From 1957 to 1971,
he served in increasingly responsible positions at The Fidelity Mutual Life
Insurance Company. Currently the Managing General Partner of fifteen venture
capital and real estate partnerships with assets of over $300 million, Mr. Sweet
has over 37 years of experience in real estate investments, management,
development and venture capital transactions. Mr. Sweet is active in community
affairs and serves as a director, chairman of the real estate committee and a
member of the finance committee of the Main Line Health and the Philadelphia
Chapter of the Nature Conservancy and is on the Advisory Committee of the Arthur
Ashe Youth Tennis Center. Mr. Sweet holds a BA degree from the Lafayette College
and attended The Wharton School of Business.
THOMAS D. CASSEL has been Vice President, Finance and Treasurer of the
Company since October 1997. Mr. Cassel is a Certified Public Accountant with
over 18 years experience in real estate accounting, finance, acquisitions and
management. From 1995 until he joined the Company, Mr. Cassel was Vice President
and Chief Financial Officer of Delancey Investment Group, Inc., a Philadelphia
based real estate investment and management company of commercial and
residential properties. Prior to Delancey, he was a real estate consulting
manager for Arthur Andersen, LLP for four years and Kenneth Leventhal & Co. for
two years. As a consultant, he performed strategic planning, capital markets,
valuation and acquisition analyses for a variety of real estate companies,
including real estate investment trusts. Mr. Cassel received his bachelor's
degree in Finance with a major in Accounting from the Wharton School at the
University of Pennsylvania. He is active in several professional and charitable
organizations.
JOHN PARSINEN has been Secretary of the Company since January 1990. Mr.
Parsinen has over 31 years of experience in commercial real estate. Mr. Parsinen
has developed and owns various real estate projects.
49
<PAGE>
Mr. Parsinen has been a senior attorney at Parsinen Kaplan Levy Rosberg &
Gotlieb, P.A., Minneapolis, Minnesota, since it was formed in 1982. Mr. Parsinen
owns 50% of Guaranty Title, Inc., a Minneapolis-based real estate title
insurance company. Mr. Parsinen was a general partner of Earle Brown Commons
Limited Partnership II, which owned and operated an elderly housing facility in
Brooklyn Center, Minnesota. In 1994, the limited partnership initiated a Chapter
11 bankruptcy reorganization proceeding to restructure certain tax and debt
obligations. The bankruptcy was dismissed in 1995 and the project was sold.
CERTAIN INFORMATION REGARDING THE BOARD OF TRUSTEES AND COMMITTEES
THE BOARD OF TRUSTEES. The business and affairs of the Company are managed
under the direction of the Board of Trustees. Pursuant to the terms of the
Declaration of Trust, the Trustees are divided into three classes. Class I will
hold office for a term expiring at the annual meeting of shareholders to be held
in 1999, Class II will hold office for a term expiring at the annual meeting of
shareholders to be held in 2000, and Class III will hold office for a term
expiring at the annual meeting of shareholders to be held in 2001. At each
annual meeting of shareholders of the Company, the successors to the class of
Trustees whose terms expire at the meeting will be elected to hold office for a
term continuing until the annual meeting of shareholders held in the third year
following the year of their election and the election and qualification of their
successors. Upon closing of the Transaction, the Board of Trustees will be
expanded from seven to nine members, as discussed under "The
Transaction--Changes in Operation and Additions to Management."
COMMITTEES. The Board of Trustees has Audit, Compensation and Investment
Committees. The Audit Committee, which currently consists of Messrs. Wethe,
Gehrke and Beck, reviews, recommends and reports to the Board of Trustees on (1)
the engagement of independent auditors and range of audit fees, (2) the quality
and effectiveness of internal controls, (3) engagement or discharge of the
independent auditors, (4) professional services provided by the independent
auditors and (5) the review and approval of major changes in the Company's
accounting principles and practices. The Compensation Committee, which currently
consists of Messrs. Sweet and Walton, determines all executive compensation,
administers stock option plans and other incentive plans and approves employment
contracts. The Investment Committee, which consists of Messrs. Shidler, Sweet
and Wethe, must approve all investments and acquisitions. Investments of less
than $25 million may be made with Investment Committee approval only, and
investments in excess of that amount must also be approved by the Board of
Trustees. The Board of Trustees presently acts as its own Nominating Committee.
COMPENSATION OF TRUSTEES. Independent Trustees (Messrs. Gehrke, Sweet,
Walton and Wethe) each receive an annual fee of $15,000. Trustees incurring
travel expenses in connection with their duties as Trustees of the Company are
reimbursed in full. Each Trustee is eligible to participate in the Incentive
Plan. The Compensation Committee intends to grant to each Trustee who is not an
employee of the Company, upon initial election or appointment, an option to
purchase 5,000 Common Shares, at the then fair market value of the Common
Shares.
50
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT AND OTHERS
The following table contains certain information as of June 1, 1998
regarding the beneficial ownership of Common Shares by (i) each person known by
the Company to own beneficially more than 5% of the Common Shares, (ii) each
current Trustee and executive officer of the Company, and (iii) the current
Trustees and executive officers as a group. Any shares which are subject to an
option or a warrant exercisable within 60 days are reflected in the following
table and are deemed to be outstanding for the purpose of computing the
percentage of Common Shares owned by the option or warrant holder but are not
deemed to be outstanding for the purpose of computing the percentage of Common
Shares owned by any other person. Unless otherwise noted, each person identified
below possesses sole voting and investment power with respect to such shares.
<TABLE>
<CAPTION>
NUMBER OF
COMMON PERCENT OF
SHARES ALL
BENEFICIALLY COMMON
OWNED(1) SHARES
----------- -------------
<S> <C> <C>
Jay H. Shidler......................................................................... 300,000 3.1%
Clay W. Hamlin, III.................................................................... 300,000 3.1
Vernon R. Beck......................................................................... 151,793(2) 1.6
John Parsinen.......................................................................... 151,965(3) 1.6
Allen C. Gehrke........................................................................ 7,750(4) *
Kenneth S. Sweet, Jr................................................................... 10,000 *
William H. Walton...................................................................... 0 --
Kenneth D. Wethe....................................................................... 12,724(2) *
Thomas D. Cassel....................................................................... 660 *
All Trustees and Executive Officers as a Group (9 persons)............................. 934,892(5) 9.4%
</TABLE>
- ------------------------
* Represents less than one percent.
(1) Shares Beneficially Owned by a person are determined in accordance with the
definition of "beneficial ownership," as set forth in the regulations of the
Commission and, accordingly, may include securities owned by or for, among
others, the spouse, children or certain other relatives of such person, as
well as other shares as to which the person has or shares voting or
investment power or has the option or right to acquire Common Shares within
60 days.
(2) Includes 12,500 Common Shares issuable upon exercise of presently
exercisable options.
(3) Includes 10,000 Common Shares issuable upon exercise of presently
exercisable options. Includes 3,000 shares owned by Mr. Parsinen's wife.
(4) Includes 7,500 Common Shares issuable upon exercise of presently exercisable
options.
(5) Includes 42,500 Common Shares issuable upon exercise of presently
exercisable options.
INDEPENDENT ACCOUNTANTS
Representatives of PricewaterhouseCoopers LLP (formerly Coopers & Lybrand
L.L.P.) are expected to be present at the Special Meeting to respond to
questions from shareholders and to make a statement if they so desire.
51
<PAGE>
OTHER MATTERS
As of the date of this Proxy Statement, neither the Board of Trustees nor
management knows of other matters which will be presented for consideration at
the Special Meeting. However, if any other business should properly come before
the Special Meeting, the persons named in the enclosed proxy (or their
substitutes) will have discretionary authority to take such action as shall be
in accordance with their best judgment.
EXPERTS
The consolidated financial statements of the Constellation Services
Companies as of December 31, 1997 and 1996 and for each of the years in the
three-year period ended December 31, 1997 and the combined statement of revenues
and certain expenses of the Constellation Properties for the year ended December
31, 1997 have been included herein in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
that firm as experts in accounting and auditing.
The consolidated financial statements of the Company as of December 31, 1997
and 1996 and for each of the years in the three-year period ended December 31,
1997, incorporated by reference in this Proxy Statement, have been incorporated
by reference herein in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
The combined statement of revenue and certain expenses of the properties
known as Airport Square (Airport Square Acquisition Properties) for the year
ended December 31, 1997 have been incorporated herein in reliance on the report
of PricewaterhouseCoopers LLP, independent accountants, given on the authority
of that firm as experts in accounting and auditing.
The combined statement of revenue and certain expenses of the properties in
Fairfield, New Jersey (Wagman Acquisition Properties) for the year ended
December 31, 1997 have been incorporated herein in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
that firm as experts in accounting and auditing.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, filed by the Company with the Commission pursuant
to Section 13 of the Securities Exchange Act of 1934 (the "Exchange Act") (File
No.1-13274), are incorporated herein by reference: (i) the Annual Report on Form
10-K for the year ended December 31, 1997, (ii) the Quarterly Report on Form
10-Q for the quarter ended March 31, 1998, (iii) the Current Reports on Forms
8-K and 8-K/A filed May 14, 1998, May 29, 1998, June 10, 1998, and July 7, 1998,
(iv) the Proxy Statement/ Prospectus dated February 11, 1998, and (v) the
Prospectus dated April 22, 1998.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Proxy Statement and
prior to the date of the Special Meeting shall be deemed to be incorporated by
reference herein from the date of filing such documents.
Any statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Proxy Statement to the extent that a statement contained
herein or in any subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Proxy Statement.
Also incorporated by reference herein are the Transaction Agreements, copies
of which have been filed with the Securities and Exchange Commission as Exhibits
to this Proxy Statement.
52
<PAGE>
TO THE EXTENT THAT THIS PROXY STATEMENT INCORPORATES DOCUMENTS BY REFERENCE
WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS, EXCEPT
THE EXHIBITS TO SUCH DOCUMENTS (UNLESS SUCH EXHIBITS ARE SPECIFICALLY
INCORPORATED BY REFERENCE IN SUCH DOCUMENTS), ARE AVAILABLE ON REQUEST. REQUESTS
FOR SUCH COPIES SHOULD BE DIRECTED TO JANET POINT, ONE LOGAN SQUARE, SUITE 1105,
PHILADELPHIA, PA 19103 OR BY TELEPHONE AT (215) 567-1800. IN ORDER TO ENSURE
TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY AUGUST 7, 1998.
By order of the Board of Trustees,
/s/ John D. Parsinen
John D. Parsinen
Secretary
Date: July 22, 1998
Philadelphia, Pennsylvania
53
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C> <C>
I. PRO FORMA CONDENSED CONSOLIDATING FINANCIAL STATEMENTS OF THE COMPANY
Pro forma Condensed Consolidating Balance Sheet as of March 31, 1998.................................. F-4
Pro forma Condensed Consolidating Statements of Operations for the Three Months
Ended March 31, 1998 and for the Year Ended December 31, 1997....................................... F-5
Notes and Management's Assumptions to Pro Forma Condensed
Consolidating Financial Information................................................................. F-7
II. CONSTELLATION PROPERTIES
Report of Independent Accountants..................................................................... F-16
Combined Historical Statements of Revenue and Certain Expenses for the Three Months
Ended March 31, 1998 (unaudited) and for the Year Ended December 31, 1997........................... F-17
Notes to Combined Historical Statement of Revenue and Certain Expenses................................ F-18
III. CONSTELLATION SERVICE COMPANIES
Report of Independent Accountants..................................................................... F-22
Consolidated Balance Sheets as of March 31, 1998 and 1997 (unaudited) and
December 31, 1997 and 1996.......................................................................... F-23
Consolidated Statements of Operations for the Three Months Ended March 31, 1998 and
1997 (unaudited) and for the Years Ended December 31, 1997, 1996, and 1995.......................... F-24
Consolidated Statements of Equity for the Three Months Ended March 31, 1998 and 1997 (unaudited) and
for the Years Ended December 31, 1997, 1996, and 1995............................................... F-25
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1998 and
1997 (unaudited) and for Years Ended December 31, 1997 and 1996, and 1995........................... F-26
Notes to Consolidated Financial Statements............................................................ F-27
</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 March 31, 1998, and the unaudited pro forma condensed
consolidating statements of operations for the year ended December 31, 1997 and
the three-month period ended March 31, 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
("Partnership Units") and 2.1 million preferred partnership units ("Preferred
Units").
The acquisition of the Initial Office Properties is reflected in the
Company's historical consolidated balance sheet as of December 31, 1997, 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 March 31, 1998 for balance
sheet purposes, and at the beginning of the period presented for purposes of the
statements of operations:
- The completion of a public offering (the "Offering") 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
Partnership Units.
- The acquisition of nine multistory office buildings and three office/flex
buildings (the "Airport Square Properties").
- The acquisition of two office properties (the "Fairfield Properties").
- The closing of a $100 million, two-year-senior revolving credit facility
(the "Revolving Credit Facility") 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 from various parties (collectively,
"Constellation") of interests in (i) 14 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") in exchange for: (a)
issuance by the Company of 969,900 non-voting Series A Convertible
Preferred Shares of Beneficial Interest, $0.01 par value, $25.00
liquidation preference ("Preferred Shares") and 6,928,000 Common Shares;
(b) the assumption of debt aggregating $12,990,000; and (c) the payment of
$69,038,000 in cash. The foregoing is referred to herein as the
"Transaction."
- The borrowing of $73,143,000 under the Revolving Credit Facility to pay
for certain of the cash requirements of the Transaction.
- The contribution by the Company of all the assets acquired in the
Transaction to the Operating Partnership in exchange for Partnership Units
and Preferred Units.
F-2
<PAGE>
The accompanying pro forma condensed consolidating financial information
does not include the effects of the acquisition of two retail properties (the
"Development Properties"), as the Company's obligation to complete such
acquisitions is contingent on the occurrence of certain events.
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 Constellation Properties and the Constellation Service
Companies, which are incorporated by reference or included elsewhere herein. In
management's opinion, all adjustments necessary to reflect the effects of the
transactions to be consummated 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 March 31,
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 MARCH 31, 1998
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
OFFERING,
COMPANY AIRPORT SQUARE
HISTORICAL AND FAIRFIELD PRO FORMA PRO FORMA
(A) PROPERTIES (B) ADJUSTMENTS (C) CONSOLIDATED
---------- -------------- --------------- ------------
<S> <C> <C> <C> <C>
ASSETS
Net investments in real estate........................ $ 187,730 $ 102,073 $ 180,047(D) $ 469,850
Cash and cash equivalents............................. 2,346 386 -- 2,732
Deferred costs, net................................... 793 505 -- 1,298
Investment in management company...................... -- -- 2,500(D) 2,500
Other assets.......................................... 1,787 -- -- 1,787
---------- -------------- --------------- ------------
Total assets.................................... $ 192,656 $ 102,964 $ 182,547 $ 478,167
---------- -------------- --------------- ------------
---------- -------------- --------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Mortgage loans payable............................ $ 114,301 $ 30,215 $ 86,133(E) $ 230,649
Other liabilities................................. 2,893 -- -- 2,893
---------- -------------- --------------- ------------
Total liabilities............................... 117,194 30,215 86,133 233,542
---------- -------------- --------------- ------------
Minority interests
Preferred Units................................... 52,500 -- -- 52,500
Partnership Units................................. 12,111 -- -- 12,111
---------- -------------- --------------- ------------
Total minority interests........................ 64,611 -- -- 64,611
---------- -------------- --------------- ------------
Shareholders' equity
Preferred shares of beneficial interest........... -- -- 10(F) 10
Common shares of beneficial interest.............. 23 75 69(G) 167
Additional paid in capital........................ 16,647 72,674 96,335(H) 185,656
Accumulated deficit............................... (5,819) -- -- (5,819)
---------- -------------- --------------- ------------
Total shareholders' equity...................... 10,851 72,749 96,414 180,014
---------- -------------- --------------- ------------
Total liabilities and shareholders' equity...... $ 192,656 $ 102,964 $ 182,547 $ 478,167
---------- -------------- --------------- ------------
---------- -------------- --------------- ------------
</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>
OFFERING,
INITIAL
OFFICE,
COMPANY AIRPORT SQUARE
HISTORICAL AND FAIRFIELD PRO FORMA PRO FORMA
(A) PROPERTIES (B) ADJUSTMENTS (C) CONSOLIDATED
------------- -------------- --------------- ------------
<S> <C> <C> <C> <C>
REVENUES:
Base rents....................................... $ 6,122 $ 23,129 $ 14,756(D) $ 44,007
Tenant reimbursements............................ 434 2,795 2,095(D) 5,324
Other............................................ 62 20 213(D) 295
------------- ------- ------- ------------
Total revenues................................. 6,618 25,944 17,064 49,626
------------- ------- ------- ------------
EXPENSES:
Property operating............................... 728 8,029 5,986(D) 14,743
General and administrative....................... 533 299 526(D) 1,358
Interest expense................................. 2,855 8,194 6,177(D) 17,226
Depreciation and amortization.................... 1,331 5,059 3,517(D) 9,907
Termination of Advisory Agreement................ 1,353 -- (1,353)(E) --
------------- ------- ------- ------------
Total expenses................................. 6,800 21,581 14,853 43,234
------------- ------- ------- ------------
Equity in income of management company............. -- -- 55(D) 55
------------- ------- ------- ------------
Income (loss) before minority interests............ (182) 4,363 2,266 6,447
Minority interests
Preferred Units.................................. (720) -- (2,692)(F) (3,412)
Partnership Units................................ (65) -- (131)(F) (196)
------------- ------- ------- ------------
Net income (loss).................................. (967) 4,363 (557) 2,839
Preferred share distributions...................... -- -- (1,334)(F) (1,334)
------------- ------- ------- ------------
Net income (loss) available to Common
Shareholders..................................... $ (967) $ 4,363 $ (1,891) $ 1,505
------------- ------- ------- ------------
------------- ------- ------- ------------
Net income (loss) per share: Basic and diluted..... $ (0.60) $ 0.09
------------- ------------
------------- ------------
Weighted average number of Common Shares........... 1,600,807 16,699,083
------------- ------------
------------- ------------
</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 THREE MONTH PERIOD ENDED MARCH 31, 1998
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
OFFERING,
HISTORICAL AIRPORT SQUARE
CONSOLIDATED AND FAIRFIELD PRO FORMA PRO FORMA
(A) PROPERTIES (B) ADJUSTMENTS (C) CONSOLIDATED
--------------- --------------- --------------- -------------
<S> <C> <C> <C> <C>
REVENUES:
Base rents............................... $ 4,919 $ 3,496 $ 3,694(D) $ 12,109
Tenant reimbursements.................... 553 142 426(D) 1,121
Other.................................... 53 4 82(D) 139
--------------- ------ ------ -------------
Total revenues......................... 5,525 3,642 4,202 13,369
--------------- ------ ------ -------------
EXPENSES:
Property operating....................... 899 1,088 1,473(D) 3,460
General and administrative............... 299 29 137(D) 465
Interest expense......................... 2,159 579 1,543(D) 4,281
Depreciation and amortization............ 1,041 564 879(D) 2,484
Reformation costs........................ 637 -- (637)(E) --
--------------- ------ ------ -------------
Total expenses......................... 5,035 2,260 3,395 10,690
--------------- ------ ------ -------------
Equity in income of management company..... -- -- (159)(D) (159)
--------------- ------ ------ -------------
Income (loss) before minority interests.... 490 1,382 648 2,520
Minority interests
Preferred Units.......................... (853) -- -- (F) (853)
Partnership Units........................ (136) -- (44)(F) (180)
--------------- ------ ------ -------------
Net income (loss).......................... (499) 1,382 604 1,487
Preferred share distributions.............. -- -- (333)(F) (333)
--------------- ------ ------ -------------
Net income (loss) available to Common
Shareholders............................. $ (499) $ 1,382 $ 271 $ 1,154
--------------- ------ ------ -------------
--------------- ------ ------ -------------
Net income (loss) per share: Basic and
diluted.................................. $ (0.22) $ 0.07
--------------- -------------
--------------- -------------
Weighted average number of Common Shares... 2,268,333 16,699,083
--------------- -------------
--------------- -------------
</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 March 31, 1998, the Company's
portfolio included 17 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 Constellation Properties and the Constellation Service
Companies, incorporated by reference or included elsewhere herein. In
management's opinion, all adjustments necessary to reflect the effects of the
Offering and the acquisitions of the Initial Office Properties, the Airport
Square Properties, the Fairfield Properties, the Constellation Properties and
the Constellation Service Companies 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
March 31, 1998.
(B) Reflects the effects of the Offering and the acquisitions of the Airport
Square Properties and the Fairfield Properties.
<TABLE>
<CAPTION>
AIRPORT SQUARE
PROPERTIES FAIRFIELD
OFFERING(I) (II) PROPERTIES(III) COMBINED
----------- -------------- ------------- ----------
<S> <C> <C> <C> <C>
ASSETS
Net investments in real estate................................ $ -- $ 72,668 $ 29,405 $ 102,073
Cash and cash equivalents..................................... 72,749 (72,668) 305 386
Deferred costs, net........................................... -- -- 505 505
----------- -------------- ------------- ----------
TOTAL ASSETS.............................................. $ 72,749 $ -- $ 30,215 $ 102,964
----------- -------------- ------------- ----------
----------- -------------- ------------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Mortgage loans payable...................................... $ -- $ -- $ 30,215 $ 30,215
----------- -------------- ------------- ----------
TOTAL LIABILITIES......................................... -- -- 30,215 30,215
----------- -------------- ------------- ----------
Shareholders' equity
Common shares of beneficial interest........................ 75 -- -- 75
Additional paid in capital.................................. 72,674 -- -- 72,674
----------- -------------- ------------- ----------
TOTAL SHAREHOLDERS' EQUITY................................ 72,749 -- -- 72,749
----------- -------------- ------------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................ $ 72,749 $ -- $ 30,215 $ 102,964
----------- -------------- ------------- ----------
----------- -------------- ------------- ----------
</TABLE>
(i) Reflects the proceeds of the Offering of $78,750 based upon an offering
of 7,500,000 Common Shares at an offering price of $10.50 per share, net
of underwriting discounts and offering expenses of approximately $6,001.
F-7
<PAGE>
CORPORATE OFFICE PROPERTIES TRUST
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
PRO FORMA CONDENSED CONSOLIDATING
FINANCIAL INFORMATION (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
2. ADJUSTMENTS TO PRO FORMA CONDENSED CONSOLIDATING BALANCE SHEET: (CONTINUED)
(ii) Reflects the Company's acquisition of the Airport Square Properties
based upon the purchase price of $71,479 plus closing costs of $1,189
paid in cash.
(iii) Reflects the Company's acquisition of the Fairfield Properties based
upon the purchase price of $28,800 plus closing costs of $605 paid
through the Company's assumption of debt of $6,465 and initial funding
proceeds of $23,750 from the Revolving Credit Facility, net of loan fees
totaling $505 in connection with the Revolving Credit Facility and the
debt assumed.
(C) The accompanying pro forma condensed consolidating financial information
does not include the effects of the acquisition of the Development
Properties (estimated purchase price of $25,594), as the Company's
obligation to complete such acquisitions is contingent on the occurrence of
certain events.
(D) Reflects the contribution of the Constellation Properties and Constellation
Service Companies in exchange for: (i) issuance of 969,900 Preferred Shares
at a value equal to a liquidation preference of $25.00 per share ($24,248);
(ii) issuance of 6,928,000 Common Shares at a value of $10.50 per share
($72,744); (iii) assumption of debt aggregating $12,990; and (iv)
utilization of loan proceeds from the Revolving Credit Facility of $72,565,
including payment of $3,527 of costs associated with the acquisition. The
total contribution is recorded as follows:
<TABLE>
<S> <C>
Net investments in real estate........................................ $180,047
Investment in management company...................................... 2,500
---------
Total investments from Transaction.................................... $182,547
---------
---------
</TABLE>
The Company will be acquiring from Constellation an interest in the
Constellation Service Companies for $2,500 which the Company will contribute
to a newly formed company in exchange for indebtedness and stock. As this
investment will be accounted for under the equity method of accounting, the
pro forma adjustments reflect the income (loss) from this investment as
equity in income of management company.
F-8
<PAGE>
CORPORATE OFFICE PROPERTIES TRUST
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
PRO FORMA CONDENSED CONSOLIDATING
FINANCIAL INFORMATION (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
2. ADJUSTMENTS TO PRO FORMA CONDENSED CONSOLIDATING BALANCE SHEET: (CONTINUED)
(E) Reflects the net increase in mortgage loans payable as follows:
<TABLE>
<S> <C>
Net proceeds from the Revolving Credit Facility in connection with the
Transaction................................................................... $73,143
Assumption of mortgages in connection with the Transaction..................... 12,990
---------
Net increase in mortgage loans payable....................................... $86,133
---------
---------
(F) Reflects the issuance of 969,900 Preferred Shares, $0.01 par value............ $10
---------
---------
(G) Reflects the issuance of 6,928,000 Common Shares, $0.01 par value.............. $69
---------
---------
(H) Reflects increase in additional paid in capital as follows:
Issuance of 969,900 Preferred Shares, excess of $25.00 over par................ $24,238
Issuance of 6,928,000 Common Shares, excess of $10.50 over par................. 72,675
Less: costs in connection with the Transaction................................. (578)
---------
Net increase in additional paid in capital................................... $96,335
---------
---------
</TABLE>
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 adjusted 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 PRO FORMA
10/13/97 12/31/97 12/31/97 ADJUSTMENTS COMBINED
-------------- -------------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
REVENUES
Base rents.................................. $12,216 $8,524 $2,389 $-- $23,129
Tenant reimbursements....................... 1,282 275 1,238 -- 2,795
Other....................................... -- 20 -- -- 20
------- ------ ---------- ----------- --------
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 -- -- 806(i) 8,194
Depreciation and amortization............... 2,580 -- -- 2,479(ii) 5,059
------- ------ ---------- ----------- --------
TOTAL EXPENSES.......................... 12,873 3,408 2,015 3,285 21,581
------- ------ ---------- ----------- --------
INCOME (LOSS) BEFORE MINORITY INTERESTS....... $ 625 $5,411 $1,612 $(3,285) $ 4,363
------- ------ ---------- ----------- --------
------- ------ ---------- ----------- --------
</TABLE>
F-9
<PAGE>
CORPORATE OFFICE PROPERTIES TRUST
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
PRO FORMA CONDENSED CONSOLIDATING
FINANCIAL INFORMATION (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
3. ADJUSTMENTS TO PRO FORMA CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS:
(CONTINUED)
FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
FAIRFIELD
INITIAL AIRPORT SQUARE PROPERTIES
OFFICE PROPERTIES HISTORICAL
PROPERTIES HISTORICAL THROUGH PRO FORMA
HISTORICAL THROUGH 3/31/98 3/31/98 ADJUSTMENTS COMBINED
------------- --------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
REVENUES
Base rents.................................. $ -- $ 2,528 $ 968 $ -- $ 3,496
Tenant reimbursements....................... -- 64 78 -- 142
Other....................................... -- 4 -- -- 4
------ ------ ----------- ----------- -----------
TOTAL REVENUES.......................... -- 2,596 1,046 -- 3,642
------ ------ ----------- ----------- -----------
EXPENSES
Property operating.......................... -- 805 283 -- 1,088
General and administrative.................. -- 6 23 -- 29
Interest expense............................ -- -- -- 579(i) 579
Depreciation and amortization............... -- -- -- 564(ii) 564
------ ------ ----------- ----------- -----------
TOTAL EXPENSES.......................... -- 811 306 1,143 2,260
------ ------ ----------- ----------- -----------
INCOME (LOSS) BEFORE MINORITY INTERESTS....... $ -- $ 1,785 $ 740 $ (1,143) $ 1,382
------ ------ ----------- ----------- -----------
------ ------ ----------- ----------- -----------
</TABLE>
(i) Reflects the net increase in interest expense resulting from:
<TABLE>
<CAPTION>
FOR THE THREE
FOR THE YEAR MONTH PERIOD
ENDED ENDED
DECEMBER 31, 1997 MARCH 31, 1998
----------------- -----------------
<S> <C> <C>
The Term Credit Facility, for the period January 1, 1997 through
October 13, 1997, the date on which the loan originated, which
debt bears interest at 7.5% per annum, net of historical interest
expense of the Initial Office Properties.......................... $ (1,511) $ --
The debt assumed in connection with the acquisition of the Fairfield
Properties which debt bears interest at 8.29% per annum........... 536 134
The borrowing on the Revolving Credit Facility of $23,750 in
connection with the acquisition of the Fairfield Properties (which
debt bears interest at LIBOR plus 175 basis points) assuming a
LIBOR rate of 5.75%............................................... 1,781 445
------- -----
$ 806 $ 579
------- -----
------- -----
</TABLE>
F-10
<PAGE>
CORPORATE OFFICE PROPERTIES TRUST
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
PRO FORMA CONDENSED CONSOLIDATING
FINANCIAL INFORMATION (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
3. ADJUSTMENTS TO PRO FORMA CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS:
(CONTINUED)
(ii) Reflects the net increase in depreciation and amortization expense
resulting from:
<TABLE>
<CAPTION>
FOR THE THREE
FOR THE YEAR MONTH PERIOD
ENDED ENDED
DECEMBER 31, 1997 MARCH 31, 1998
----------------- -----------------
<S> <C> <C>
Depreciation of buildings acquired over a 40-year useful
life................................................................ $ 2,588 $ 511
Reduction in amortization of deferred financing fees related to
loans held by previous owners of the Initial Office Properties
($515), net of amortization of deferred financing debt related to
Term Credit Facility held by the Company on Initial Office
Properties ($192)................................................. (323) --
Amortization of deferred financing fees related to debt assumed in
connection with the Fairfield Properties.......................... 10 2
Amortization of deferred financing fees related to the Revolving
Credit Facility................................................... 204 51
------ -----
$ 2,479 $ 564
------ -----
------ -----
</TABLE>
(C) Consistent with the pro forma condensed consolidating balance sheet, the pro
forma statements of operations do not reflect the operations of the
Development Properties.
(D) Reflects the effects of the combined adjusted historical operations of the
Constellation Properties and Constellation Service Companies.
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
CONSTELLATION CONSTELLATION PRO FORMA
PROPERTIES SERVICE COMPANIES CONSTELLATION
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
------------ ----------------- ------------ -----------
<S> <C> <C> <C> <C>
REVENUES
Base rents....................................... $ 14,756 $ -- $ -- $ 14,756
Tenant reimbursements............................ 2,095 -- -- 2,095
Other............................................ 213 11,226 (11,226)(i) 213
------------ ------- ------------ -----------
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 6,159 iii 6,177
Depreciation and amortization.................... -- 225 3,292 (iv 3,517
------------ ------- ------------ -----------
TOTAL EXPENSES............................... 6,512 10,485 (791) 16,206
------------ ------- ------------ -----------
Equity in income of management company............. -- -- 55(v) 55
------------ ------- ------------ -----------
Income before income taxes and minority
interests........................................ $ 10,552 $ 741 $ (10,380) $ 913
------------ ------- ------------ -----------
------------ ------- ------------ -----------
</TABLE>
F-11
<PAGE>
CORPORATE OFFICE PROPERTIES TRUST
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
PRO FORMA CONDENSED CONSOLIDATING
FINANCIAL INFORMATION (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
3. ADJUSTMENTS TO PRO FORMA CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS:
(CONTINUED)
FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
CONSTELLATION CONSTELLATION PRO FORMA
PROPERTIES SERVICE COMPANIES CONSTELLATION
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
------------- ----------------- ------------- --------
<S> <C> <C> <C> <C>
REVENUES
Base rents........................................... $3,694 --$ $-- $3,694
Tenant reimbursements................................ 426 -- -- 426
Other................................................ 82 3,717 (3,717)(i) 82
------ ----- ------------- --------
TOTAL REVENUES................................... 4,202 3,717 (3,717) 4,202
------ ----- ------------- --------
EXPENSES
Property operating................................... 1,473 -- -- 1,473
General and administrative........................... 137 3,685 (3,685)(ii) 137
Interest expense..................................... -- 3 1,540(iii) 1,543
Depreciation and amortization........................ -- 67 812(iv) 879
------ ----- ------------- --------
TOTAL EXPENSES................................... 1,610 3,755 (1,333) 4,032
------ ----- ------------- --------
Equity in income of management company................. -- -- (159)(v) (159)
------ ----- ------------- --------
Income (loss) before income taxes and minority
interests............................................ $2,592 $ (38) $(2,543) $ 11
------ ----- ------------- --------
------ ----- ------------- --------
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE
FOR THE YEAR MONTH PERIOD
ENDED ENDED
DECEMBER 31, 1997 MARCH 31, 1998
----------------- --------------
<S> <C> <C> <C>
(i) Reflects the reclassification of Constellation Service Companies'
historical revenue to equity in income of management company..... $(11,226) $(3,717)
-------- -------
-------- -------
(ii) Reflects the reclassification of Constellation Service Companies'
historical operating expenses to equity in income of management
company.......................................................... $(10,242) $(3,685)
-------- -------
-------- -------
</TABLE>
F-12
<PAGE>
CORPORATE OFFICE PROPERTIES TRUST
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
PRO FORMA CONDENSED CONSOLIDATING
FINANCIAL INFORMATION (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
3. ADJUSTMENTS TO PRO FORMA CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS:
(CONTINUED)
<TABLE>
<CAPTION>
FOR THE THREE
FOR THE YEAR MONTH PERIOD
ENDED ENDED
DECEMBER 31, 1997 MARCH 31, 1998
----------------- --------------
<S> <C> <C> <C>
(iii) Reflects the net changes in interest expense as follows:
The borrowing on the Revolving Credit Facility of $73,143 in
connection with the Transaction (which debt bears interest at
LIBOR plus 175 basis points) assuming a LIBOR rate of 5.75%,
net of interest on $4,217 in debt associated with properties
under construction............................................. $ 5,168 $ 1,291
The fee of 25 basis points per annum on the unused portion of the
Revolving Credit Facility of $3,107............................ 8 2
The debt of $9,581 assumed in connection with the acquisition of
the Constellation Properties which debt bears interest at a
fixed rate of 7.5% per annum................................... 720 180
The debt of $3,409 assumed in connection with the acquisition of
the Constellation Properties which debt bears interest at a
fixed rate of 8.25% per annum.................................. 281 70
Reclassification of Constellation Service Companies' historical
interest expense to equity in income of management company..... (18) (3)
-------- -------
$ 6,159 $ 1,540
-------- -------
-------- -------
(iv) Reflects the net change in depreciation and amortization expense
as follows:
Depreciation of buildings acquired from Constellation over a
40-year useful life............................................ $ 3,517 $ 879
Reclassification of Constellation Service Companies' historical
depreciation and amortization to equity in income of management
company........................................................ (225) (67)
-------- -------
$ 3,292 $ 812
-------- -------
-------- -------
</TABLE>
F-13
<PAGE>
CORPORATE OFFICE PROPERTIES TRUST
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
PRO FORMA CONDENSED CONSOLIDATING
FINANCIAL INFORMATION (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
3. ADJUSTMENTS TO PRO FORMA CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS:
(CONTINUED)
<TABLE>
<CAPTION>
FOR THE THREE
FOR THE YEAR MONTH PERIOD
ENDED ENDED
DECEMBER 31, 1997 MARCH 31, 1998
----------------- --------------
<S> <C> <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 $ (38)
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) (1,889)
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 1,852
Addition of net overhead costs not included in historical costs
and expected to have a continuing impact on the Company........ (122) (177)
Depreciation expense on personal property of $405 over a 5-year
useful life.................................................... (81) (20)
Adjustment to Constellation Service Companies' historical
depreciation and amortization.................................. 122 42
To reflect income tax (expense) benefit at an assumed rate of
40%............................................................ (42) 111
To reflect minority interest in management company............... (124) (19)
To reflect adjustment for purchase price of management company to
pro forma net income over 20 years............................. (85) (21)
-------- -------
$ 55 $ (159)
-------- -------
-------- -------
</TABLE>
(E) 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 three-month period ended March 31, 1998, respectively, have
been excluded since such costs are not expected to have a continuing impact
on the Company.
(F) Reflects the effects of contribution of the net assets received from the
Offering and the Transaction to the Operating Partnership in exchange for
7,500,000 Partnership Units as a result of the Offering and for 969,900
Preferred Units and 6,928,000 Partnership Units as a result of the
Transaction.
F-14
<PAGE>
CORPORATE OFFICE PROPERTIES TRUST
NOTES AND MANAGEMENT'S ASSUMPTIONS TO
PRO FORMA CONDENSED CONSOLIDATING
FINANCIAL INFORMATION (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
3. ADJUSTMENTS TO PRO FORMA CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS:
(CONTINUED)
The following table presents the calculation of the post closing percentage
ownership of Partnership Units in the Operating Partnership (i.e. not including
Preferred Units):
<TABLE>
<CAPTION>
COMPANY OTHERS TOTAL
------------ ---------- ------------
<S> <C> <C> <C>
Partnership Units--pre closing...................................... 600,000 2,581,818 3,181,818
Offering............................................................ 7,500,000 -- 7,500,000
Transaction......................................................... 6,928,000 -- 6,928,000
------------ ---------- ------------
Partnership Units--post closing..................................... 15,028,000 2,581,818 17,609,818
------------ ---------- ------------
------------ ---------- ------------
Percentage ownership................................................ 85.3% 14.7% 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% or 5.5% of their investment on a PARI
PASSU basis with remaining income, if any, or loss allocated between the Company
(85.3%) and the remaining partners (14.7%). 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 THREE
FOR THE YEAR MONTH PERIOD
ENDED ENDED
DECEMBER 31, 1997 MARCH 31, 1998
----------------- ---------------
<S> <C> <C>
Income before minority interests......................................... $ 6,447 $ 2,520
Less: income from the retail properties directly owned by the Company.... (368) (104)
------ ------
Income before minority interest
- Operating Partnership................................................ 6,079 2,416
Preferred Unitholders
- $52,500 @ 6.5%....................................................... 3,412 853
Preferred Unitholders/Shareholders
- $24,248 @ 5.5%....................................................... 1,334 333
------ ------
Remaining Operating Partnership allocation............................... 1,333 1,230
Pro forma minority share
- Partnership Units (14.7%)............................................ 196 180
------ ------
Remaining Operating Partnership allocation (85.3%)....................... 1,137 1,050
Add back: income from retail properties directly owned by the Company.... 368 104
------ ------
Net income allocated to Common Shareholders.............................. $ 1,505 $ 1,154
------ ------
------ ------
</TABLE>
F-15
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Constellation Real Estate Group, Inc.
We have audited the accompanying combined historical 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 historical statement of revenues and certain
expenses as discussed in Note 1 was prepared for the purpose of complying with
the rules and regulations of the Securities and Exchange Commission for
inclusion in the proxy of Corporate Office Properties Trust and is not intended
to be a complete presentation of the Constellation Properties' revenue and
expenses.
In our opinion, the financial statement referred to above presents fairly,
in all material respects, the 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-16
<PAGE>
CONSTELLATION PROPERTIES
COMBINED HISTORICAL STATEMENT OF REVENUE AND CERTAIN EXPENSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE YEAR ENDED
ENDED MARCH 31, 1998 DECEMBER 31, 1997
-------------------- ------------------
UNAUDITED
<S> <C> <C>
REVENUES
Base Rents...................................... $3,694 $14,756
Recoveries from Tenants......................... 426 2,095
Other Income.................................... 82 213
------ -------
4,202 17,064
------ -------
CERTAIN EXPENSES
Operating....................................... 1,229 5,071
Real Estate Taxes............................... 244 915
General and Administrative...................... 137 526
------ -------
1,610 6,512
------ -------
REVENUE IN EXCESS OF CERTAIN EXPENSES............. $2,592 $10,552
------ -------
------ -------
</TABLE>
See accompanying notes to financial statements.
F-17
<PAGE>
CONSTELLATION PROPERTIES
NOTES TO COMBINED HISTORICAL STATEMENT OF REVENUE AND CERTAIN EXPENSES
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
The combined historical statement of revenue and certain expenses combines
the results of operations of the following 12 properties (the "Properties") to
be acquired from Constellation Properties, Inc. (CPI) by Corporate Office
Properties Trust (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 Properties consist of 9 office properties, 2 retail properties and 1
flex office/warehouse property.
Tred Avon Square (TA) is a shopping center which has a participating
mortgage payable to Tred Lightly, LLC (TL), an entity in which CPI has a
controlling interest which is being 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.
F-18
<PAGE>
CONSTELLATION PROPERTIES
NOTES TO COMBINED HISTORICAL STATEMENT OF REVENUE AND CERTAIN EXPENSES
(DOLLARS IN THOUSANDS) (CONTINUED)
1. ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
BASIS OF PRESENTATION
The statement has been prepared on the accrual basis of accounting.
The statement is not representative of the actual operations for the periods
presented, as certain expenses, which are not comparable to the expenses to be
incurred in the future operations of the 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 Properties. Management is not aware of any material factors
relating to these properties which would cause the reported financial
information not to be necessarily indicative of future operating results.
The combined historical statement of revenues and certain expenses and
related notes for the three months ended March 31, 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 Properties.
GEOGRAPHIC DIVERSITY
The 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 23% and 24% of base rent
and 46% and 55% of recoveries from tenants in the three months ended March 31,
1998 and the year ended December 31, 1997, respectively.
MINORITY INTEREST
CPI owns a 75% member interest in Tred Lightly, LLC (TL). Under the terms of
TL's operating agreement, the interest owned by CPI is entitled to full
allocation of TL's income up until that point in time when CPI recovers its
investment in TL plus a 10% compounding preferred return. Since CPI had not
recovered its investment and preferred return at March 31, 1998 and December 31,
1997, no income was allocated to minority interest.
F-19
<PAGE>
CONSTELLATION PROPERTIES
NOTES TO COMBINED HISTORICAL STATEMENT OF REVENUE AND CERTAIN EXPENSES
(DOLLARS IN THOUSANDS) (CONTINUED)
3. LEASING ACTIVITY
The 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 Properties are 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., Constellation Realty
Management, LLC, Constellation Health Services, Inc., and Constellation Senior
Services, Inc. are other affiliates of CREG. The Properties had transactions
with these related parties as follows:
RENTAL INCOME
The Properties earned base rent and tenant recoveries on leases to the
following related parties:
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 1998 DECEMBER 31, 1997
--------------------- -------------------
<S> <C> <C>
Constellation Real Estate, Inc........................................... $ 85 $ 315
Baltimore Gas and Electric Co............................................ 9 242
Constellation Senior Services, Inc....................................... 34 59
Constellation Health Services, Inc....................................... -- 6
----- -----
Total.................................................................. $ 128 $ 622
----- -----
----- -----
</TABLE>
PROPERTY MANAGEMENT
The Properties incurred property management fees under contracts with
Constellation Realty Management, LLC (CRM) totaling $126 and $518 in the three
months ended March 31, 1998 and the year ended December 31, 1997, respectively.
F-20
<PAGE>
CONSTELLATION PROPERTIES
NOTES TO COMBINED HISTORICAL STATEMENT OF REVENUE AND CERTAIN EXPENSES
(DOLLARS IN THOUSANDS) (CONTINUED)
4. RELATED PARTY REVENUE AND EXPENSES (CONTINUED)
GENERAL AND ADMINISTRATIVE
Constellation Real Estate, Inc. charged the Properties for finance, legal
and corporate overhead costs totaling $137 and $526 in the three months ended
March 31, 1998 and the year ended December 31, 1997, respectively.
OPERATING EXPENSES
The Properties incurred costs with BGE during the three months ended March
31, 1998 and the year ended December 31, 1997 totaling $181 and $638,
respectively. These costs were primarily for utility services provided to the
Properties.
F-21
<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 include 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-22
<PAGE>
CONSTELLATION SERVICE COMPANIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, --------------------
1998 1997 1996
----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.................................... $ 5,944 $ 4,732 $ 5,191
Accounts receivable.......................................... 1,186 1,158 3,622
Costs and estimated profit in excess of billings on
uncompleted contracts...................................... 265 449 215
Deferred tax asset........................................... 45 86 17
Other........................................................ 95 126 176
----------- --------- ---------
Total current assets....................................... 7,535 6,551 9,221
----------- --------- ---------
Property and equipment
Furniture, fixtures and equipment............................ 1,935 1,878 1,514
Leasehold improvements....................................... 81 81 --
Accumulated depreciation..................................... (1,310) (1,257) (1,089)
----------- --------- ---------
Total property and equipment............................... 706 702 425
Goodwill, net of accumulated amortization...................... 777 791 848
Deferred tax asset............................................. 77 66 38
Restricted cash................................................ 1,000 -- --
----------- --------- ---------
Total assets................................................... $ 10,095 $ 8,110 $ 10,532
----------- --------- ---------
----------- --------- ---------
LIABILITIES AND EQUITY
Current liabilities
Current portion of note payable.............................. $ 40 $ 40 $ 40
Accounts payable and accrued expenses........................ 502 241 2,508
Billings in excess of costs and estimated profit on
uncompleted contracts...................................... 192 140 238
Accrued vacation costs....................................... 328 296 193
Due to affiliates............................................ 6,051 4,423 4,925
Other........................................................ 16 17 22
----------- --------- ---------
Total current liabilities.................................. 7,129 5,157 7,926
Note payable, net of current portion........................... 80 80 120
Other.......................................................... 35 7 9
----------- --------- ---------
Total liabilities.............................................. 7,244 5,244 8,055
----------- --------- ---------
Minority interest.............................................. 162 136 115
----------- --------- ---------
Commitments and contingencies
Equity
Divisional equity............................................ 2,689 2,730 2,362
----------- --------- ---------
Total liabilities and equity................................... $ 10,095 $ 8,110 $ 10,532
----------- --------- ---------
----------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-23
<PAGE>
CONSTELLATION SERVICE COMPANIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE YEAR ENDED
ENDED MARCH 31, DECEMBER 31,
<S> <C> <C> <C> <C> <C>
1998 1997 1997 1996 1995
----------- ----------- --------- --------- ---------
<CAPTION>
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues
Construction, development, marketing, asset
management and finance fees--related parties....... $ 735 $ 598 $ 2,880 $ 2,531 $ 1,517
Construction, development, marketing, asset
management and finance fees--other................. 33 -- 273 58 2
Property management fees--related parties............ 442 571 1,845 1,789 1,728
Property management fees--other...................... 592 444 1,952 1,348 93
Construction contract revenues--related parties...... 1,848 139 426 943 294
Construction contract revenues--other................ 41 1,534 3,696 8,617 3,335
----------- ----------- --------- --------- ---------
Total revenues..................................... 3,691 3,286 11,072 15,286 6,969
----------- ----------- --------- --------- ---------
Operating expenses
Construction contract costs.......................... 1,852 1,516 3,768 9,159 3,545
Salaries and related expenses........................ 1,243 979 4,412 3,750 2,242
Overhead costs--related party........................ 271 225 901 870 615
Other................................................ 386 320 1,386 907 684
----------- ----------- --------- --------- ---------
Total operating expenses........................... 3,752 3,040 10,467 14,686 7,086
----------- ----------- --------- --------- ---------
Income from operations................................. (61) 246 605 600 (117)
Interest income........................................ 18 21 101 84 66
Other income........................................... 8 7 53 42 61
Interest expense....................................... (3) (3) (18) (22) (2)
----------- ----------- --------- --------- ---------
Income before income taxes............................. (38) 271 741 704 8
Income tax expense (benefit)........................... (23) 91 256 251 14
----------- ----------- --------- --------- ---------
Income before minority interest........................ (15) 180 485 453 (6)
Minority interest...................................... 26 47 117 96 --
----------- ----------- --------- --------- ---------
Net income (loss)...................................... $ (41) $ 133 $ 368 $ 357 $ (6)
----------- ----------- --------- --------- ---------
----------- ----------- --------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-24
<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 Loss..................................................................... -- (41) (41)
----------- ------ ---------
Balance, March 31, 1998 (Unaudited).......................................... $ 1,590 $ 1,099 $ 2,689
----------- ------ ---------
----------- ------ ---------
</TABLE>
See accompanying notes to financial statements.
F-25
<PAGE>
CONSTELLATION SERVICE COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE YEARS ENDED DECEMBER
ENDED, MARCH 31, 31,
------------------------ -------------------------------
1998 1997 1997 1996 1995
----------- ----------- --------- --------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................... $ (41) $ 133 $ 368 $ 357 $ (6)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization........... 67 55 225 164 98
Minority interest expense............... 26 47 117 96 --
Provision for deferred income taxes..... 30 11 (97) (62) 18
Changes in operating assets and
liabilities:
Accounts receivable..................... (28) (518) 2,464 (1,982) (1,056)
Accounts payable and accrued expenses... 293 (1,915) (2,164) 2,182 99
Due to affiliates....................... 1,628 2,604 (502) 6,409 (36)
Uncompleted contract asset.............. 184 (84) (234) 697 (849)
Uncompleted contract liability.......... 52 220 (98) (1,426) 1,664
Other current assets and liabilities.... 30 97 45 (145) (23)
----------- ----------- --------- --------- ---------
Net cash provided by (used in) operating
activities................................ 2,241 650 124 6,290 (91)
----------- ----------- --------- --------- ---------
Cash flows from investing activities:
Increase in restricted cash............... (1,000) -- -- -- --
Purchases of property and equipment....... (57) (107) (453) (317) (59)
Acquisition of business, net of cash
acquired................................ -- -- -- (414) --
Other..................................... -- -- 8 -- --
----------- ----------- --------- --------- ---------
Net cash used in investing activities....... (1,057) (107) (445) (731) (59)
----------- ----------- --------- --------- ---------
Cash flows from financing activities:
Proceeds from note payable................ -- -- -- 200 --
Note repayments........................... -- -- (40) (40) --
Minority interest (distribution)
contribution............................ -- -- (96) 19 --
Other..................................... 28 (1) (2) 7 19
----------- ----------- --------- --------- ---------
Net cash provided by (used in) financing
activities................................ 28 (1) (138) 186 19
----------- ----------- --------- --------- ---------
Net increase (decrease) in cash and cash
equivalents............................... 1,212 542 (459) 5,745 (131)
Cash and cash equivalents, beginning of
period.................................... 4,732 5,191 5,191 (554) (423)
----------- ----------- --------- --------- ---------
Cash and cash equivalents, end of period.... $ 5,944 $ 5,733 $ 4,732 $ 5,191 $ (554)
----------- ----------- --------- --------- ---------
----------- ----------- --------- --------- ---------
Supplemental data:
Cash paid during the period for:
Interest.................................. $ 3 $ 3 $ 18 $ 22 $ 2
Income Taxes.............................. $ 16 -- $ 88 $ 1 $ 25
</TABLE>
See accompanying notes to financial statements.
F-26
<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, Constellation 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. In May 1998, Corporate Office Properties Trust (COPT) entered into a
contract to acquire 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 March 31, 1998 and 1997 and for the three months ended
March 31, 1998 and 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 being 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.
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.
F-27
<PAGE>
CONSTELLATION SERVICE COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION (CONTINUED)
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 $53, $40, $168, $120 and $83 for the three months ended March 31, 1998
and 1997 and the years ended December 31, 1997, 1996 and 1995, respectively.
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 $227, $213 and $156 at March 31, 1998 and December 31, 1997 and
1996, respectively.
F-28
<PAGE>
CONSTELLATION SERVICE COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 March 31, 1998
and December 31, 1997 and 1996, respectively.
Interest expense incurred on the note totaled $2, $3, $13 and $11 during the
three months ended March 31, 1998 and 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 $79, $69,
$451, $308 and $219 during the three months ended March 31, 1998 and 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>
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 $714, $598, $2,686, $2,531 and $1,517 during the three months ended
March 31, 1998 and 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 three months ended March 31, 1998 and the year
ended December 31, 1997, respectively.
F-29
<PAGE>
CONSTELLATION SERVICE COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
5. RELATED PARTY TRANSACTIONS (CONTINUED)
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
$315, $284, $1,272, $1,197 and $1,157 during the three months ended March 31,
1998 and 1997 and the years ended December 31, 1997, 1996 and 1995,
respectively. The Company also earned property management fees from BGE totaling
$127, $287, $573, $592 and $571 during the three months ended March 31, 1998 and
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 $132, $200, $932 and $294 during the three months
ended March 31, 1997 and the years ended December 31, 1997, 1996 and 1995,
respectively. Construction contract revenue recognized on contracts with CHI
totaled $1,842 and $178 during the three months ended March 31, 1998 and the
year ended December 31, 1997, respectively. Construction contract revenue
recognized on contracts with entities owned by CREG totaled $6, $7, $48 and $11
during the three months ended March 31, 1998 and 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 $271, $225, $901, $870 and $615
during the three months ended March 31, 1998 and 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 three months ended March 31, 1998 and
1997 and the years ended December 31, 1997 and 1996, the Company received
expense reimbursements for these services totaling $89, $55, $318 and $64,
respectively.
The Company leased office space from entities owned by CREG. Expenses
incurred under these leases totaled $78, $62, $301, $240 and $219 during the
three months ended March 31, 1998 and 1997 and the years ended December 31,
1997, 1996 and 1995, respectively.
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 to affiliates at March 31, 1998 and December 31,
1997 and 1996 of $6,051, $4,423 and $4,925, respectively. These payables
represent primarily advances to 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 $20, $16, $64 and $80 during the three months ended March
31, 1998 and 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,
F-30
<PAGE>
CONSTELLATION SERVICE COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
6. PENSION AND OTHER POST-EMPLOYMENT BENEFITS (CONTINUED)
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.
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 March 31, 1998 and 1997 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>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
<S> <C> <C> <C> <C> <C>
1998 1997 1997 1996 1995
--------- --------- --------- --------- ---------
Federal
Current............................................ $ (44) $ 67 $ 290 $ 258 $ (3)
Deferred........................................... 25 8 (80) (51) 15
--- --------- --------- --------- ---
(19) 75 210 207 12
--- --------- --------- --------- ---
State
Current............................................ (9) 14 63 55 (1)
Deferred........................................... 5 2 (17) (11) 3
--- --------- --------- --------- ---
(4) 16 46 44 2
--- --------- --------- --------- ---
$ (23) $ 91 $ 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>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
<S> <C> <C> <C> <C> <C>
1998 1997 1997 1996 1995
--------- --------- --------- --------- ---------
Federal Statutory Rate.......................... (35.0%) 35.0% 35.0% 35.0% 35.0%
Permanent Differences, Including Goodwill and
Meals and Entertainment....................... 3.6 1.1 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.............................. (35.9%) 40.6% 41.1% 41.2% 175.0%
--------- --- --- --- ---------
--------- --- --- --- ---------
</TABLE>
Deferred income taxes consist of the following:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED DECEMBER
MARCH 31, 31,
--------------- --------------------
<S> <C> <C> <C>
1998 1997 1996
--------------- --------- ---------
Bonus and Deferred Compensation............................... $ 146 $ 174 $ 63
Depreciation.................................................. (24) (22) (8)
----- --------- ---
Net Deferred Asset............................................ $ 122 $ 152 $ 55
----- --------- ---
----- --------- ---
</TABLE>
F-32
<PAGE>
CONSTELLATION SERVICE COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
8. COMMITMENTS AND CONTINGENCIES
CONTRACT TO ACQUIRE LOANS
In March 1998, the Company entered into a contract to acquire loans
collateralized by 12 commercial real estate properties from Aetna Life Insurance
Company for $65,300. In connection with the contract, the Company had $1,000 in
escrow as a deposit on the contract at March 31, 1998. In April 1998, the
Company assigned its rights under the contract to COPT in exchange for a fee.
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
<PAGE>
APPENDIX
PROXY PROXY
CORPORATE OFFICE PROPERTIES TRUST
SPECIAL MEETING OF SHAREHOLDERS
AUGUST 21, 1998
THIS PROXY IS SOLICITED ON BEHALF OF
THE COMPANY'S BOARD OF TRUSTEES
The undersigned hereby (i) acknowledges receipt of the Notice of Special
Meeting of Shareholders (the "Special Meeting") of Corporate Office Properties
Trust (the "Company") and the accompanying Proxy Statement dated July 22, 1998
(the "Proxy Statement"), and (ii) appoints Jay H. Shidler and Clay W. Hamlin,
III, and each of them individually, lawful attorneys-in-fact and proxies of the
undersigned, with full power of substitution for and in the name, place, and
stead of the undersigned, to vote upon and act with respect to all of the Common
Shares of Beneficial Interest of the Company standing in the name of the
undersigned, or with respect to which the undersigned is entitled to vote and
act, at the Special Meeting and at any adjournments or postponements thereof.
The Company's Board of Trustees recommends a vote "for" item 1 set forth on
this proxy card. The shares represented by this proxy will be voted as
specified. IF NO DIRECTION IS GIVEN IN THE SPACE PROVIDED THIS PROXY WILL BE
VOTED "FOR" ITEM 1.
The undersigned directs that this proxy be voted as follows:
1. To consider and vote upon a proposal for the Company to enter into
and perform the transaction with certain partnerships and other
entities affiliated with Constellation Real Estate Group, Inc.
(collectively, "Constellation"), pursuant to which the Company will
acquire from Constellation interests in entities, an interest in a
mortgage, title to certain real property (the foregoing collectively
representing up to 18 properties) and certain other assets in
exchange for a combination of cash, the assumption of debt by the
Company, and Common Shares and non-voting Series A Convertible
Preferred Shares Of Beneficial Interest to be issued by the Company,
all as more particularly described in the Proxy Statement.
FOR / / AGAINST / / ABSTAIN / /
<PAGE>
2. In their discretion, the Proxies are authorized to vote upon such
other business as may properly come before the meeting or any
adjournment thereof and matters incident to the conduct of the
meeting.
The undersigned hereby revokes any proxy heretofore given to vote or act
with respect to the Common Stock and hereby ratifies and confirms all that the
proxies, their substitutes, or any of them may lawfully do by virtue hereof.
PLEASE SIGN EXACTLY AS THE NAME
APPEARS HEREON. WHEN SHARES ARE
HELD BY JOINT TENANTS, BOTH SHOULD
SIGN. WHEN SIGNING AS ATTORNEY,
EXECUTOR, ADMINISTRATOR, TRUSTEE OR
GUARDIAN, PLEASE GIVE FULL TITLE AS
SUCH. IF A CORPORATION, PLEASE SIGN
IN FULL CORPORATE NAME BY PRESIDENT
OR OTHER AUTHORIZED OFFICER AND
AFFIX CORPORATE SEAL. IF A
PARTNERSHIP, PLEASE SIGN IN
PARTNERSHIP NAME BY THE GENERAL
PARTNER.
Date: ____________________________
___________________________________
Signature
___________________________________
Signature
PLEASE MARK, SIGN, DATE AND RETURN
THIS PROXY CARD PROMPTLY USING THE
ENCLOSED ENVELOPE.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Proxy Statement of our reports dated May 8,
1998 on our audits of: (1) the consolidated financial statements of the
Constellation Service Companies and (2) the combined statement of revenues and
certain expenses of the Constellation Properties. We also consent to the
reference to our firm under the caption "EXPERTS."
/s/ PRICEWATERHOUSECOOPERS LLP
Baltimore, MD
July 20, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Proxy Statement of our
reports dated February 24, 1998 on our audits of the consolidated financial
statements and financial statement schedules of Corporate Office Properties
Trust. We also consent to the reference to our firm under the caption "EXPERTS."
/s/ PRICEWATERHOUSECOOPERS LLP
Philadelphia, PA
July 20, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Proxy Statement of our
report dated May 20, 1998 on our audits of the combined statement of revenues
and certain expenses of the Airport Square Acquisition Properties. We also
consent to the reference to our firm under the caption "EXPERTS."
/s/ PRICEWATERHOUSECOOPERS LLP
Philadelphia, PA
July 20, 1998
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Proxy Statement of our
report dated March 18, 1998 on our audits of the combined statement of
revenues and certain expenses of the Wagman Acquisition Properties. We also
consent to the reference to our firm under the caption "EXPERTS."
/s/ PRICEWATERHOUSECOOPERS LLP
Philadelphia, PA
July 20, 1998
