- ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------- FORM 8-K/A No. 1 ---------------- CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): May 28, 1998 CORPORATE OFFICE PROPERTIES TRUST (Exact name of registrant as specified in its charter) Maryland 0-20047 23-2947217 (State or other jurisdiction of (Commission (IRS Employer incorporation) File Number) Identification Number) One Logan Square, Suite 1105 Philadelphia, PA 19103 (Address of principal executive offices) (Zip Code) (215) 567-1800 (Registrant's telephone number, including area code) - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ Item 2. Acquisition or Disposition of Assets. On May 28, 1998, Corporate Office Properties Trust (the "Company") through Corporate Office Properties, L.P. (the "Operating Partnership"), acquired Fairfield Corporate Center, two multistory office buildings (the "Acquired Properties") located in Fairfield, NJ, from 695 Rt. 46 Realty LLC and 710 Rt. 46 Realty LLC, unrelated parties. The purchase price of the Acquired Properties aggregated approximately $28.8 million including $6.5 million of assumed debt (the "Assumed Debt"). The balance of the purchase price was paid in cash. Life Investors Insurance Company of America is the lender on the Assumed Debt. The Assumed Debt bears interest at a fixed rate of 8.29% per annum and provides for monthly payments of principal and interest totaling $56,402. This debt matures on May 1, 2007. Concurrent with the acquisition, the Company closed on a $100 million, two-year, senior revolving credit facility with Bankers Trust Company (the "Credit Facility"). The Credit Facility will be used to refinance existing indebtedness, fund acquisitions and new development projects, and for general working capital purposes, including capital expenditures and tenant improvements. The Credit Facility is recourse to the Company and the Operating Partnership and will be secured by, among other items, first mortgage liens on certain of the office properties owned by the Operating Partnership. The Credit Facility is a variable rate loan, bears interest at LIBOR plus 175 basis points and provides for monthly payments of interest only. A fee of 25 basis points per annum on the unused amount of the Credit Facility will be payable quarterly, in arrears. On May 28, 1998, the Company borrowed as the initial funding proceeds, approximately $23.8 million. The Company used the loan proceeds primarily for the acquisition of the Acquired Properties, including costs associated with the acquisition. The Acquired Properties, located on Rt. 46 in Fairfield, NJ, total approximately 262,000 square feet. As of June 1, 1998, the Acquired Properties were approximately 84% leased to 25 tenants. Major tenants include the United Health Care Services and Pearson Inc., under leases aggregating approximately 34,000 and 24,000 square feet, respectively, representing 13% and 9% of the Acquired Properties' aggregate square feet. 2 The following table sets forth a summary schedule of the lease expirations for the Acquired Properties, for leases in place as of June 1, 1998, assuming that none of the tenants exercise renewal options.
Year of Lease Number of Square Percentage of Total Rental Total Rental Percentage of Expiration Leases Footage of Total Leased Revenue of Revenue of Total Rental Expiring Expiring Square Feet Expiring Expiring Leases Revenue Leases Leases ($000) per Rentable Expiring (1) (1) Square Foot (1) 6/1/98 -- 1 8,257 3.77% $ 134,095 $ 16.24 3.44% 12/31/98 (2) 1999 2 21,191 9.68 347,338 16.39 8.92 2000 3 6,208 2.83 110,373 17.63 2.83 2001 7 75,177 34.34 1,276,210 17.78 32.75 2002 4 10,932 5.00 203,007 16.98 5.21 2003 4 17,337 7.92 314,169 18.57 8.06 2004 2 27,034 12.34 478,879 17.71 12.29 2005 - - - - - - 2006 - - - - - - 2007 1 18,648 8.52 400,377 21.47 10.28 2008 1 34,163 15.60 632,016 18.50 16.22 2009 and - - - - - - thereafter --- -------- -------- ------------- -------- -------- Total/Average 25 218,947 100.00% $ 3,896,464 $17.80 100.00% -- -------- -------- ------------- -------- -------- -- -------- -------- ------------- -------- --------
(1) Total Rental Revenue is the monthly contractual charge as of June 1, 1998 multiplied by 12 including any operating expense reimbursements. (2) Excludes 43,053 vacant square feet as of June 1, 1998. Item 5 Other Events. See Item 2 above for a description of the Company's Credit Facility closed on May 28, 1998. Item 7. Financial Statements, Pro Forma Financial Information and Exhibits (a) Financial Statements of Businesses Acquired The combined financial statements of the Acquired Properties are included herein. See pages F-15 through F-19. (b) Pro Forma Financial Information The pro forma condensed consolidating financial statements of the Company are included herein. See pages F-2 through F-14. (c) Exhibits 3
Exhibit Number Description 10.6* Purchase and Sale Agreement dated as of March 4, 1998 between 695 Rt. 46 Realty, LLC, 710 Rt. 46 Realty, LLC and COPT Acquisitions, Inc. 10.7* Letter Amendment to Purchase and Sale Agreement dated as of March 26, 1998 between 695 Rt. 46 Realty, LLC, 710 Rt. 46 Realty, LLC and COPT Acquisitions, Inc. 10.8* Secured Promissory Note dated as of April 29, 1997 between 710 Rt. 46 Realty, LLC and Life Investors Insurance Company of America 10.9* Mortgage and Security Agreement dated as of April 29, 1997 between 710 Rt. 46 Realty, LLC and Life Investors Insurance Company of America 10.10* Senior Secured Revolving Credit Agreement dated as of May 28, 1998 between Corporate Office Properties, L.P., Corporate Office Properties Trust, Any Mortgaged Property Subsidiary and Bankers Trust Company
Exhibits and Schedules have been omitted based on rule 601 (b) (2). Such exhibits and schedules are described in the agreements. The registrant hereby agrees to furnish to the Commission upon its request any or all such omitted exhibits or schedules. * As previously filed with the Current Report on Form 8-K filed June 10, 1998. 4 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this Report to be signed on its behalf by the undersigned hereunto duly authorized. Dated: July 6, 1998 CORPORATE OFFICE PROPERTIES TRUST By: /s/ Clay W. Hamlin, III ------------------------------ Name: Clay W. Hamlin, III Title: President and Chief Executive Officer By: /s/ Thomas D. Cassel ------------------------------- Name: Thomas D. Cassel Title: Vice President Finance 5 INDEX TO FINANCIAL STATEMENTS
I. UNAUDITED 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. WAGMAN ACQUISITION PROPERTIES Report of Independent Accountants F-15 Combined Statement of Revenue and Certain Expenses for the Year Ended December 31, 1997 F-16 Notes to Combined Statement of Revenue and Certain Expenses F-17 Combined Statement of Revenue and Certain Expenses for the Three Months Ended March 31, 1998 (unaudited) F-19
F-1 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: o 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. o The acquisition of nine multistory office buildings and three office/flex buildings (the "Airport Square Properties"). As reported in the Company's Current Report on Form 8-K filed May 14, 1998 and as amended on Current Report on Form 8-K/A filed July 7, 1998, the Company closed on this acquisition on April 30, 1998 and the purchase price totaled approximately $72 million. o The acquisition of two office properties (the "Fairfield Properties"). As reported in the Company's Current Report on Form 8-K filed June 10, 1998 and as amended on this Current Report on Form 8-K/A filed July 7, 1998, the Company closed on this acquisition on May 28, 1998 and the purchase price totaled $28.8 million, including $6.5 million of assumed debt with the balance paid in cash. o 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. F-2 o 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 reported in the Company's Preliminary Proxy Statement filed on Schedule 14A on June 26, 1998 and is referred to herein as the "Transaction." o The borrowing of $73,143,000 under the Revolving Credit Facility to pay for certain of the cash requirements of the Transaction. o 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. The accompanying pro forma condensed consolidating financial information does not include the effects of the acquisition of two retail properties (the "Development Properties") in connection with the Transaction, 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. In management's opinion, all adjustments necessary to reflect the effects of the foregoing transactions have been made. This pro forma condensed consolidating financial information is unaudited and is not necessarily indicative of what the actual financial position would have been at March 31, 1998, nor does it purport to represent the future financial position and the results of operations of the Company. F-3 Corporate Office Properties Trust Pro Forma Condensed Consolidating Balance Sheet As of March 31, 1998 (Unaudited) (Dollars in thousands, except per share data)
Offering, Company Airport Square Historical and Fairfield Pro Forma Pro Forma (A) Properties (B) Adjustments (C) Consolidated --------- -------------- --------------- ------------ 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 --------- --------- --------- --------- --------- --------- --------- ---------
See accompanying notes and management's assumptions to pro forma financial statements F-4 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)
Offering, Initial Office, Company Airport Square Historical and Fairfield Pro Forma Pro Forma (A) Properties (B) Adjustments (C) Consolidated ---------- --------------- ---------------- ------------ 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 shares 1,600,807 16,699,083 ----------- ----------- ----------- -----------
See accompanying notes and management's assumptions to pro forma financial statements F-5 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)
Offering, Historical Airport Square Consolidated and Fairfield Pro Forma Pro Forma (A) Properties (B) Adjustments (C) Consolidated ------------ --------------- --------------- ------------- 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 shares 2,268,333 16,699,083 ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
See accompanying notes and management's assumptions to pro forma financial statements F-6 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. 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.
Airport Square Fairfield Offering(i) Properties (ii) Properties(iii) Combined ----------- --------------- --------------- -------- 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 -------- -------- -------- -------- -------- -------- -------- --------
F-7 (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. (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: o Net investments in real estate $ 180,047 o Investment in management company 2,500 ------------- Total investments from Transaction $ 182,547 ------------- -------------
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. (E) Reflects the net increase in mortgage loans payable as follows: o Net proceeds from the Revolving Credit Facility in connection with the Transaction $ 73,143 o 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 ------------- -------------
F-8 (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: o Issuance of 969,900 Preferred Shares, excess of $ 24,238 $25.00 over par o Issuance of 6,928,000 Common Shares, excess of $10.50 over par 72,675 o Less: costs in connection with the Transaction (578) -------- Net increase in additional paid in capital $ 96,335 -------- --------
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
Initial Office Fairfield Properties Airport Square Properties through Properties through Pro Forma 10/13/97 through 12/31/97 12/31/97 Adjustments Combined -------------- ---------------- ---------- ----------- -------- 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 ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
F-9 For the Three-Month Period Ended March 31, 1998
Fairfield Airport Square Properties Initial Office Properties Historical Properties Historical through Pro Forma Historical through 3/31/98 3/31/98 Adjustments Combined -------------- --------------- ---------- ----------- -------- 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 ------------ ------- ------- ------- ------- ------------ ------- ------- ------- -------
(i) Reflects the net increase in interest expense resulting from:
For the Three For the Year Month Period Ended Ended December 31, 1997 March 31, 1998 ----------------- -------------- o 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) $ -- o The debt assumed in connection with the acquisition of the Fairfield Properties which debt bears interest at 8.29% per 536 134 annum o 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 ------- ------- ------- -------
(ii) Reflects the net increase in depreciation and amortization expense resulting from:
For the Three For the Year Month Period Ended Ended December 31, 1997 March 31, 1998 ----------------- -------------- o Depreciation of buildings acquired over a 40-year useful life $ 2,588 $ 511
F-10
For the Three For the Year Month Period Ended Ended December 31, 1997 March 31, 1998 ----------------- -------------- o 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) - o Amortization of deferred financing fees related to debt assumed in connection with the Fairfield Properties 10 2 o Amortization of deferred financing fees related to the Revolving Credit Facility 204 51 ----------------- ------------- $ 2,479 $ 564 ----------------- ------------- ----------------- -------------
(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
Constellation Constellation Pro Forma Properties Service Companies Constellation Historical Historical Adjustments Combined ------------- ----------------- ------------- --------- 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 -------- -------- -------- -------- -------- -------- -------- --------
F-11 For the Three-Month Period Ended March 31, 1998
Constellation Constellation Pro Forma Properties Service Companies Constellation Historical Historical Adjustments Combined ------------- ----------------- ------------- --------- 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 ------- ------- ------- ------- ------- ------- ------- -------
For the Three For the Year Month Period Ended Ended December 31, 1997 March 31, 1998 (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) -------- ------- -------- ------- (iii) Reflects the net changes in interest expense as follows: o 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 o The fee of 25 basis points per annum on the unused portion of the Revolving Credit Facility of $3,107 8 2 o 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 o 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 o Reclassification of Constellation Service Companies' historical interest expense to equity in income of management company (18) (3) -------- ------- $6,159 $1,540 -------- ------- -------- -------
F-12
For the Three For the Year Month Period Ended Ended December 31, 1997 March 31, 1998 ----------------- -------------- (iv) Reflects the net change in depreciation and amortization expense as follows: o Depreciation of buildings acquired from Constellation over a 40-year useful life $ 3,517 $ 879 o Reclassification of Constellation Service Companies' historical depreciation and amortization to equity in income of management company (225) (67) ------------- ------------ $ 3,292 $ 812 ------------- ------------ ------------- ------------ (v) Reflects the net change in equity in income of management company as follows: o Reclassification of Constellation Service Companies' historical income and expenses $ 741 ($ 38) o 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) o 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 o Addition of net overhead costs not included in historical costs and expected to have a continuing impact on the Company (122) (177) o Depreciation expense on personal property of $405 over a 5-year useful life (81) (20) o Adjustment to Constellation Service Companies' historical depreciation and amortization 122 42 o To reflect income tax (expense) benefit at an assumed rate of 40% (42) 111 o To reflect minority interest in management company (124) (19) o To reflect adjustment for purchase price of management company to pro forma net income over 20 years (85) (21) ------------- ------------ $ 55 $ (159) ------------- ------------ ------------- ------------
(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-13 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):
Company Others Total --------------------- ------------------- ----------------- 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% --------------- ---------------- --------------- --------------- ---------------- ---------------
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:
For the Three For the Year Month Period Ended Ended December 31, 1997 March 31, 1998 ----------------- -------------- 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 ------------- -------------- ------------- --------------
F-14 Coopers & Lybrand L.L.P. Coopers &Lybrand a professional services firm Report of Independent Accountants To Corporate Office Properties Trust: We have audited the accompanying combined statement of revenue and certain expenses of the Wagman Acquisition Properties (the "Properties") as described in Note 1 for the year ended December 31, 1997. This financial statement is the responsibility of the 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 significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. The accompanying combined statement of revenue and certain expenses was prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission as described in Note 2, and is not intended to be a complete presentation of the Properties' revenues and expenses. In our opinion, the financial statement referred to above presents fairly, in all material respects, the combined revenues and certain expenses as described in Note 2, of the Properties for the year ended December 31, 1997 in conformity with generally accepted accounting principles. /s/Coopers & Lybrand L.L.P. - --------------------------- 2400 Eleven Penn Center Philadelphia, Pennsylvania March 18, 1998 F-15 WAGMAN ACQUISITION PROPERTIES Combined Statement of Revenue and Certain Expenses for the year ended December 31, 1997
Revenue: Base rents $ 2,388,864 Tenant reimbursements 1,237,901 -------------- Total revenue 3,626,765 Certain expenses: Property operating 517,975 Maintenance 1,165,408 Real estate taxes 247,908 General and administrative 84,056 -------------- Total certain expenses 2,015,347 -------------- Revenue in excess of certain expenses $ 1,611,418 -------------- --------------
See accompanying notes to this financial statement. F-16 WAGMAN ACQUISITION PROPERTIES Notes to Combined Statements of Revenue and Certain Expenses 1. Business: The accompanying combined statement of revenue and certain expenses relates to the operations of Wagman Acquisition Properties (the "Properties"), consisting of the revenues and certain expenses of 710 and 695 Rt. 46 buildings, office buildings located in Fairfield , New Jersey (the "Properties"). 2. Summary of Significant Accounting Policies: Basis of Presentation: The accompanying combined statement of revenue and certain expenses was prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission. The statement is not representative of the actual operations of the Properties for the period presented nor indicative of future operations as certain expenses, primarily depreciation, amortization and interest expense, which may not be comparable to the expenses expected to be incurred by Corporate Office Properties Trust in future operations of the Properties, have been excluded. Revenue and Expense Recognition: Revenue is recognized on a straight-line basis over the terms of the related leases. Expenses are recognized in the period in which they are incurred. Use of Estimates: The preparation of the combined statement of revenue and certain expenses in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. 3. Rentals: The Properties have entered into tenant leases that provide for tenants to share in the operating and real estate taxes on a pro rata basis, as defined in the leases, with expiration dates ranging from 1998 to 2003. Future minimum rentals to be received under tenant leases in effect at December 31, 1997 are as follows: F-17 Notes to Combined Statements of Revenue and Certain Expenses, Continued 3. Rentals, continued: 1998 $ 3,563,508 1999 3,285,466 2000 2,890,270 2001 2,143,450 2002 1,118,083 2003 and thereafter 191,148 ------------- Total $ 13,191,925 ------------- -------------
At December 31, 1997, there are two leases that comprise 29% of base rent revenue. F-18 WAGMAN ACQUISITION PROPERTIES Combined Statement of Revenue and Certain Expenses for the three months ended March 31, 1998 (Unaudited)
Revenue: Base rents $ 968,535 Tenant reimbursements 77,904 ---------- Total revenue 1,046,439 Certain expenses: Property operating 185,486 Maintenance 35,847 Real estate taxes 62,102 General and administrative 23,213 ---------- Total certain expenses 306,648 ---------- Revenue in excess of certain expenses $ 739,791 ---------- ----------
F-19