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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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CORPORATE OFFICE PROPERTIES TRUST
(Exact name of Registrant as specified in its charter)
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Maryland 23-2947217
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
8815 Centre Park Drive
Suite 400
Columbia, Maryland 21045
(410) 730-9092
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
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CLAY W. HAMLIN, III
Chief Executive Officer
Corporate Office Properties Trust
8815 Centre Park Drive
Suite 400
Columbia, MD 21045
(410) 730-9092
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
Alan Singer, Esq. John H. Gurley
Morgan, Lewis & Bockius LLP Senior Vice President & General Counsel
1701 Market Street Corporate Office Properties Trust
Philadelphia, PA 19103 8815 Centre Park Drive, Suite 400
(215) 963-5224 Columbia, MD 21045
(410) 992-7247
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to
time after the effective date of this Registration Statement.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH
SECTION 8(a), MAY DETERMINE.
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If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box: / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: / /______
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / /______
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box: [ ]
CALCULATION OF REGISTRATION FEE
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Amount Proposed Maximum Proposed Maximum
to be Offering Price Aggregate Offering Amount of
Title of Shares to be Registered Registered Per Unit (1) Price (1) Registration Fee
-------------------------------- ---------- ---------------- ------------------ ----------------
Common Shares of Beneficial
Interest, $0.01 par value 310,342 $ 12.95 $ 4,018,929 $ 961.00
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(1) Estimated solely for the purpose of computing the registration fee,
pursuant to Rule 457(a) under the Securities Act, and, in accordance with
Rule 457(c) under the Securities Act, based on the average of the high and
low reported sale prices of the common shares of beneficial interest of
Corporate Office Properties Trust on the New York Stock Exchange on March
26, 2002.
CORPORATE OFFICE PROPERTIES TRUST
310,342 COMMON SHARES OF BENEFICIAL INTEREST
(PAR VALUE $.01 PER SHARE)
This is an offering of Common Shares of Corporate Office Properties Trust.
Corporate Office Properties Trust is referred to in this prospectus as "we,"
"us" or "COPT." The Common Shares covered by this prospectus may be sold by
certain selling shareholders identified in this prospectus. The selling
shareholders may acquire the 310,342 Common Shares covered by this prospectus by
redeeming limited partnership interests which they own in our operating
partnership, Corporate Office Properties, L.P., in exchange for Common Shares.
You may find information pertaining to these shareholders and their ownership of
certain Common Shares of COPT, and their ownership of certain limited
partnership interests in our operating partnership, under the heading "The
Selling Shareholders" in this prospectus.
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BEFORE INVESTING IN THE COMMON SHARES, YOU SHOULD REVIEW THE SECTION TO
THIS PROSPECTUS ENTITLED "RISK FACTORS" BEGINNING ON PAGE 4.
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Our Common Shares are listed on the New York Stock Exchange under the
symbol "OFC." To ensure that we maintain our qualification as a real estate
investment trust, ownership by any person is limited to 9.8% of the lesser of
the number or value of outstanding Common Shares, with certain exceptions.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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We are registering these shares as required under the terms of certain
agreements between the selling shareholders and us to make the Common Shares
freely tradable. Registration of these Common Shares does not necessarily mean
that any of the shares will be offered or sold by the selling shareholders. We
will receive no proceeds of any sales of these Common Shares, but will incur
expenses in connection with the offering.
The selling shareholders from time to time may offer and sell the shares
held by them directly or through agents or broker-dealers on terms to be
determined at the time of sale. To the extent required, the names of any agent
or broker-dealer and applicable commissions or discounts and any other required
information with respect to any particular offer will be set forth in a
prospectus supplement which will accompany this prospectus. The prospectus
supplement also may add, update or change information contained in this
prospectus.
The date of this prospectus is_____________, 2002
TABLE OF CONTENTS
SUMMARY.............................................................3
OUR COMPANY.........................................................3
FORWARD-LOOKING STATEMENTS..........................................3
RISK FACTORS........................................................4
THE SELLING SHAREHOLDERS...........................................11
DESCRIPTION OF SHARES..............................................12
FEDERAL INCOME TAX MATTERS.........................................22
PLAN OF DISTRIBUTION...............................................32
EXPERTS............................................................33
LEGAL MATTERS......................................................33
WHERE YOU CAN FIND MORE INFORMATION................................33
2
SUMMARY
THIS PROSPECTUS SUMMARY CALLS YOUR ATTENTION TO SELECTED INFORMATION IN
THIS DOCUMENT, BUT IT DOES NOT CONTAIN ALL THE INFORMATION THAT IS IMPORTANT TO
YOU. TO UNDERSTAND US AND THE SECURITIES THAT MAY BE OFFERED THROUGH THIS
PROSPECTUS, YOU SHOULD READ THIS ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE
SECTION CALLED "RISK FACTORS," AND THE DOCUMENTS TO WHICH WE REFER YOU IN THE
SECTION CALLED "WHERE YOU CAN FIND MORE INFORMATION" IN THIS PROSPECTUS.
OUR COMPANY
GENERAL. We are a fully-integrated and self-managed real estate investment
trust ("REIT") that focuses principally on the ownership, management, leasing,
acquisition and development of suburban office buildings located in select
submarkets in the Mid-Atlantic region of the United States. As of December 31,
2001, we:
- owned 98 office properties in Maryland, Pennsylvania, New Jersey and
Virginia containing approximately 7.8 million rentable square feet
(including two properties owned through joint ventures) plus
developable land;
- achieved a 96% occupancy rate on our properties; and
- had construction underway on six new buildings totaling 532,000
square feet that were 54.9% pre-leased (excluding the construction
activities of two joint ventures).
We conduct almost all of our operations through our operating partnership,
Corporate Office Properties, L.P., a Delaware limited partnership, for which we
are the managing general partner. Our Operating Partnership owns real estate
both directly and through subsidiaries. The Operating Partnership also owns
Corporate Office Management, Inc. ("COMI") (together with its subsidiaries
defined as the "Service Companies"). COMI has three subsidiaries: Corporate
Realty Management, LLC ("CRM"), Corporate Development Services, LLC ("CDS") and
Martin G. Knott and Associates, LLC ("MGK"). CRM manages our properties and also
provides corporate facilities management for third parties. CDS provides
construction and development services predominantly to us. MGK provides heating
and air conditioning installation, maintenance and repair services. COMI owns
100% of CRM and CDS and 80% of MGK.
Interests in our Operating Partnership are in the form of Common and
Preferred Units. As of December 31, 2001, we owned approximately 66% of the
outstanding Common Units and approximately 81% of the outstanding Preferred
Units. The remaining Common and Preferred Units in our Operating Partnership
were owned by third parties, which included certain of our officers and
Trustees.
We believe that we are organized and have operated in a manner that permits
us to satisfy the requirements for taxation as a REIT under the Internal Revenue
Code of 1986, as amended, and we intend to continue to operate in such a manner.
If we qualify for taxation as a REIT, we generally will not be subject to
Federal income tax on our taxable income that is distributed to our
shareholders. A REIT is subject to a number of organizational and operational
requirements, including a requirement that it currently distribute to its
shareholders at least 90% of its annual taxable income (excluding net capital
gains).
Our executive offices are located at 8815 Centre Park Drive, Suite 400,
Columbia, Maryland 21045 and our telephone number is (410) 730-9092.
FORWARD-LOOKING STATEMENTS
THIS PROSPECTUS CONTAINS "FORWARD-LOOKING" STATEMENTS, AS DEFINED IN THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, THAT ARE BASED ON OUR CURRENT
EXPECTATIONS, ESTIMATES AND PROJECTIONS ABOUT FUTURE EVENTS AND FINANCIAL TRENDS
AFFECTING THE FINANCIAL CONDITION OF OUR BUSINESS. STATEMENTS THAT ARE NOT
HISTORICAL FACTS, INCLUDING STATEMENTS ABOUT OUR BELIEFS AND EXPECTATIONS, ARE
FORWARD-LOOKING STATEMENTS. THESE STATEMENTS ARE NOT GUARANTEES OF FUTURE
PERFORMANCE, EVENTS OR RESULTS AND INVOLVE POTENTIAL RISKS AND UNCERTAINTIES.
ACCORDINGLY, ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE ADDRESSED IN THE
FORWARD-LOOKING STATEMENTS. WE UNDERTAKE NO OBLIGATION TO PUBLICLY UPDATE
FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE
EVENTS OR OTHERWISE.
IMPORTANT FACTORS THAT MAY AFFECT THESE EXPECTATIONS, ESTIMATES OR
PROJECTIONS INCLUDE, BUT ARE NOT LIMITED TO: OUR ABILITY TO BORROW ON FAVORABLE
TERMS; GENERAL ECONOMIC AND BUSINESS CONDITIONS, WHICH WILL, AMONG OTHER THINGS,
AFFECT OFFICE PROPERTY DEMAND AND RENTS, TENANT CREDITWORTHINESS, INTEREST RATES
AND FINANCING AVAILABILITY; ADVERSE CHANGES IN THE REAL ESTATE MARKETS
INCLUDING, AMONG OTHER THINGS, INCREASED COMPETITION WITH OTHER COMPANIES; RISKS
OF REAL ESTATE ACQUISITION AND DEVELOPMENT; GOVERNMENTAL ACTIONS AND INITIATIVES
AND ENVIRONMENTAL REQUIREMENTS. FOR FURTHER INFORMATION ON FACTORS THAT COULD
IMPACT THE COMPANY AND THE STATEMENTS CONTAINED HEREIN, YOU SHOULD REFER TO THE
"RISK FACTORS" SECTION OF THIS PROSPECTUS.
3
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS AND UNCERTAINTIES DESCRIBED BELOW
BEFORE PURCHASING OUR COMMON SHARES. OUR MOST SIGNIFICANT RISKS AND
UNCERTAINTIES ARE DESCRIBED BELOW; HOWEVER, THEY ARE NOT THE ONLY ONES THAT WE
FACE. IF ANY OF THE FOLLOWING ACTUALLY OCCURS, OUR BUSINESS, FINANCIAL CONDITION
OR OPERATING RESULTS COULD BE MATERIALLY HARMED, THE TRADING PRICE OF OUR COMMON
SHARES COULD DECLINE AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT. YOU SHOULD
CAREFULLY CONSIDER EACH OF THE RISKS AND UNCERTAINTIES BELOW AND ALL OF THE
INFORMATION IN THIS PROSPECTUS AND THE DOCUMENTS WE REFER YOU TO IN THE SECTION
IN THIS PROSPECTUS CALLED "WHERE YOU CAN FIND MORE INFORMATION."
WE MAY SUFFER ADVERSE CONSEQUENCES AS A RESULT OF OUR RELIANCE ON RENTAL
REVENUES FOR OUR INCOME. We earn income from renting our properties. Our
operating costs do not necessarily fluctuate in relation to changes in our
rental revenue. This means our costs will not necessarily decline even if our
revenues do. Also, our operating costs may increase while our revenues do not.
For new tenants or upon lease expiration for existing tenants, we generally
must make improvements and pay other tenant-related costs for which we may not
receive increased rents. We also make building-related capital improvements for
which tenants may not reimburse us.
If our properties do not generate income sufficient to meet our operating
expenses and capital costs, we may have to borrow additional amounts to cover
these costs. In such circumstances, we would likely have lower profits or
possibly incur losses. We may also find in such circumstances that we are unable
to borrow to cover such costs. Moreover, there may be less or no cash available
for distributions to our shareholders.
ADVERSE DEVELOPMENTS CONCERNING SOME OF OUR KEY TENANTS COULD HAVE A
NEGATIVE IMPACT ON OUR REVENUE. As of December 31, 2001, ten tenants accounted
for 41.8% of our total annualized rental revenue. Three of these tenants
accounted for approximately 24.2% of our total annualized rental revenue. Our
largest tenant is the United States Federal government, two agencies of which
lease space in 14 of our office properties. These leases represented
approximately 12.1% of our total annualized rental revenue as of December 31,
2001. Generally, these government leases provide for one-year terms or provide
for early termination rights. The government may terminate its leases if, among
other reasons, the Congress of the United States fails to provide funding. The
Congress of the United States has appropriated funds for these leases through
September 2002. Our second largest tenant, AT&T Local Services, which combined
with its affiliates represented 6.4% of our total annualized rental revenue as
of December 31, 2001, occupies space in five of our properties. The third
largest tenant, Unisys Corporation, represented 5.7% of our total annualized
rental revenue as of December 31, 2001, occupying space in three of our
properties. If any of our three largest tenants fail to make rental payments to
us, or if the Federal government elects to terminate several of its leases and
the space cannot be re-leased on satisfactory terms, our financial performance
and ability to make expected distributions to shareholders would be materially
adversely affected.
WE RELY ON THE ABILITY OF OUR TENANTS TO PAY RENT, AND WOULD BE HARMED BY
THEIR INABILITY TO DO SO. Our performance depends on the ability of our tenants
to fulfill their lease obligations by paying their rental payments in a timely
manner. As previously discussed, we also rely on a few major tenants for a large
percentage of our total rental revenue. If one of our major tenants or a number
of our smaller tenants were to experience financial difficulties, including
bankruptcy, insolvency or general downturn of business, our financial
performance and ability to make expected distributions to shareholders could be
materially adversely affected.
OUR PROPERTIES ARE GEOGRAPHICALLY CONCENTRATED IN THE MID-ATLANTIC REGION,
AND WE MAY THEREFORE SUFFER ECONOMIC HARM AS A RESULT OF ADVERSE CONDITIONS IN
THAT REGION. All of our properties are located in the Mid-Atlantic region of the
United States, and as of December 31, 2001, our properties located in the
Baltimore/Washington Corridor accounted for 65.1% of our annualized rental
revenue. Consequently, we do not have a broad geographic distribution of our
properties. As a result, a decline in the real estate market or economic
conditions generally in the Mid-Atlantic region, and particularly in the
Baltimore/Washington Corridor, could have a materially adverse effect on our
operations and financial position.
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WE WOULD SUFFER ECONOMIC HARM IF WE ARE UNABLE TO RENEW OUR LEASES ON
FAVORABLE TERMS. When leases expire for our properties, our tenants may not
renew or may renew on terms less favorable to us than the terms of the original
lease. As of December 31, 2001, our percentage of total annualized rental
revenue subject to scheduled lease expirations for the next five calendar years
were:
2002................................................................... 13.6%
2003................................................................... 10.9%
2004................................................................... 12.6%
2005................................................................... 11.2%
2006................................................................... 9.4%
Our government leases generally provide for early termination rights; the
percentages reported above assume no exercise of such early termination rights.
If a tenant leaves, we can expect to incur a vacancy for some period of
time as well as higher capital costs than if a tenant renews. In either case,
our financial performance and ability to make expected distributions to our
shareholders could be adversely affected.
WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY WITH OTHER ENTITIES THAT OPERATE
IN OUR INDUSTRY. The commercial real estate market is highly competitive.
Numerous commercial properties compete for tenants with our properties, and our
competitors are building additional properties in the markets in which our
properties are located. Some of these competing properties may be newer or have
more desirable locations than our properties. If the market does not absorb
newly constructed space, market vacancies will increase and market rents may
decline. As a result, we may have difficulty leasing space at our properties and
we may be forced to lower the rents we charge on new leases to compete
effectively, which would adversely affect our financial performance.
OUR BUSINESS STRATEGY INCLUDES THE ACQUISITION OF PROPERTIES, WHICH MAY BE
HINDERED BY VARIOUS CIRCUMSTANCES. We compete for the purchase of commercial
property with many entities, including other publicly traded commercial REITs.
Many of our competitors have substantially greater financial resources than
ours. In addition, our competitors may be willing to accept lower returns on
their investments. If our competitors prevent us from buying the properties that
we have targeted for acquisition, we may not be able to meet our property
acquisition and development goals. We may incur costs on unsuccessful
acquisitions that we will not be able to recover. The operating performance of
our property acquisitions may also fall short of our expectations, which could
adversely affect our financial performance.
WE MAY BE UNABLE TO EXECUTE ON OUR PLANS TO DEVELOP AND CONSTRUCT
ADDITIONAL PROPERTIES. Although the majority of our investments are in currently
leased properties, we also develop and construct properties, including some
which are not fully pre-leased. When we develop and construct properties, we run
the risks that actual costs will exceed our budgets, that we will experience
construction or development delays and that projected leasing will not occur,
all of which could adversely affect our financial performance and ability to
make expected distributions to our shareholders. In addition, we generally do
not obtain construction financing commitments until the development stage of a
project is complete and construction is about to commence. We may find that we
are unable to obtain financing needed to continue with the construction
activities for such projects.
WE MAY SUFFER ECONOMIC HARM AS A RESULT OF THE ACTIONS OF OUR JOINT VENTURE
PARTNERS. We invest in certain entities where we are not the exclusive investor
or principal decision maker. Aside from our inability to unilaterally control
the operations of these joint ventures, our investments entail the additional
risks that: (i) the other parties to these investments may not fulfill their
financial obligations as investors; and (ii) the other parties to these
investments may take actions that are inconsistent with our objectives.
WE ARE SUBJECT TO POSSIBLE ENVIRONMENTAL LIABILITIES. We are subject to
various Federal, state and local environmental laws. These laws can impose
liability on property owners or operators for the costs of removal or
remediation of hazardous substances released on a property, even if the property
owner was not responsible for the release of the hazardous substances. Costs
resulting from environmental liability could be substantial. The presence of
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hazardous substances on our properties may also adversely affect occupancy and
our ability to sell or borrow against those properties. In addition to the costs
of government claims under environmental laws, private plaintiffs may bring
claims for personal injury or similar reasons. Various laws also impose
liability for the costs of removal or remediation of hazardous substances at the
disposal or treatment facility. Anyone who arranges for the disposal or
treatment of hazardous substances at such a facility is potentially liable under
such laws. These laws often impose liability whether or not the facility is or
ever was owned or operated by such person.
REAL ESTATE INVESTMENTS ARE ILLIQUID, AND WE MAY NOT BE ABLE TO SELL OUR
PROPERTIES ON A TIMELY BASIS WHEN WE DETERMINE IT IS APPROPRIATE TO DO SO.
Equity real estate investments like our properties are relatively difficult to
sell and convert to cash quickly, especially if market conditions are depressed.
Such illiquidity will tend to limit our ability to vary our portfolio of
properties promptly in response to changes in economic or other conditions. The
Internal Revenue Code imposes certain penalties on a REIT that sells property
held for less than four years. In addition, for certain of our properties that
we acquired by issuing units in our Operating Partnership, we are restricted
from entering into transactions (such as the sale or refinancing of the acquired
property) that will result in a taxable gain to the sellers without the consent
of the sellers. Due to all of these factors, we may be unable to sell a property
at an advantageous time.
WE ARE SUBJECT TO OTHER POSSIBLE LIABILITIES THAT WOULD ADVERSELY AFFECT
OUR FINANCIAL POSITION AND CASH FLOWS. Our properties may be subject to other
risks related to current or future laws including laws benefiting disabled
persons, and other state or local zoning, construction or other regulations.
These laws may require significant property modifications in the future for
which we may not have budgeted and could result in fines being levied against
us. In addition, although we believe that we adequately insure our properties,
we are subject to the risk that our insurance may not cover all of the costs to
restore a property that is damaged by a fire or other catastrophic events,
including acts of war. The occurrence of any of these events could adversely
impact our financial position, cash flows and ability to make distributions to
our shareholders.
AS A RESULT OF THE SEPTEMBER 11, 2001 TERRORIST ATTACKS, WE MAY BE SUBJECT
TO INCREASED COSTS OF INSURANCE AND LIMITATIONS ON COVERAGE. Our portfolio of
properties is insured for losses under our property, casualty and umbrella
insurance policies through September 2002. Due largely to the terrorist attacks
on September 11, 2001, the insurance industry is reportedly changing its risk
assessment approach and cost structure. In addition, the fact that agencies of
the United States government are tenants in a number of our buildings increases
the risk profile of those buildings and other buildings that we own near those
buildings. These changes in the insurance industry may increase the cost of
insuring our properties, may decrease the scope of insurance coverage and may
adversely affect our operating results.
WE MAY SUFFER ADVERSE EFFECTS AS A RESULT OF THE INDEBTEDNESS THAT WE CARRY
AND THE TERMS AND COVENANTS THAT RELATE TO THIS debt. Our strategy is to operate
with higher debt levels than most other REITs. However, these high debt levels
could make it difficult to obtain additional financing when required and could
also make us more vulnerable to an economic downturn. Most of our properties
have been mortgaged to collateralize indebtedness. In addition, we will rely on
borrowings to fund some or all of the costs of new property acquisitions,
construction and development activities and other items. Our organizational
documents do not limit the amount of indebtedness that we may incur.
As of December 31, 2001, our total outstanding debt was $573.3 million. We
compute our total market capitalization based on the sum of the following:
o total debt;
o value of our outstanding Common Shares (based on our Common Shares
closing market price);
o value of common units in our Operating Partnership not owned by us
(based on our Common Shares closing market price);
o liquidation value of our outstanding preferred shares; and
o liquidation value of preferred units in our Operating Partnership not
owned by us.
6
Our total market capitalization was $1,067 million and our debt to total market
capitalization ratio was 53.7% at December 31, 2001. Our debt to total market
capitalization ratio was 53.7% based upon the closing per share market price for
our Common Shares of $11.87 on December 31, 2001.
Payments of principal and interest on our debt may leave us with
insufficient cash to operate our properties or pay distributions to our
shareholders required to maintain our qualification as a REIT. We are also
subject to the risks that:
o we may not be able to refinance our existing indebtedness, or refinance on
terms as favorable as the terms of our existing indebtedness;
o certain debt agreements of our Operating Partnership could restrict the
ability of our Operating Partnership to make cash distributions to us,
which could result in reduced distributions to our shareholders or the need
to incur additional debt to fund these distributions; and
o if we are unable to pay our debt service on time or are unable to comply
with restrictive financial covenants appearing in certain of our mortgage
loans, our lenders could foreclose on our properties securing such debt and
in some cases other properties and assets which we own.
A number of our loans are cross-collateralized, which means that separate
groups of properties from our portfolio secure each of these loans. More
importantly, almost all of our loans are cross-defaulted, which means that
failure to pay interest or principal on any of our loans will create a default
on certain of our other loans. Any foreclosure of our properties would result in
loss of income and asset value which would negatively affect our financial
condition and results of operations. In addition, if we are in default and the
value of the properties securing a loan is less than the loan balance, the
lender may require payment from our other assets.
If short term interest rates were to rise, our debt service payments would
increase, which would lower our net income and could decrease our distributions
to our shareholders. As of December 31, 2001, we had one interest rate swap
agreement with Deutsche Banc Alex. Brown and one interest rate cap agreement
with Bear Stearns Capital Markets, Inc. to reduce the impact of interest rate
changes. Decreases in interest rates would result in increased interest payments
due under the interest rate swap agreement and could result in the Company's
management recognizing a loss and remitting a payment to unwind the agreement.
As of December 31, 2001, approximately 43.0% of our total debt had adjustable
interest rates, without including effects of the outstanding interest rate swap
and interest rate cap agreements; this percentage would decrease to 25.6% when
including the effect of the outstanding interest rate swap agreement.
We must refinance our mortgage debt in the future. As of December 31, 2001,
our scheduled debt payments over the next five calendar years, including
maturities, are as follows:
2002.............................................................. $79,486(1)
2003.............................................................. 68,691(2)
2004.............................................................. 141,992
2005.............................................................. 22,650
2006.............................................................. 66,129
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(1) Includes $13.5 million in maturities in July 2002 that may be extended for
one-year terms, subject to certain conditions. Also includes a $10.4
million maturity in December 2002 that may be extended for a one-year
period, subject to certain conditions.
(2) Includes a $10.9 million maturity in April 2003 that may be extended for a
one-year term, subject to certain conditions. Also includes a $36.0 million
maturity in November that may be extended for a one-year term, subject to
certain conditions.
Our operations likely will not generate enough cash flow to repay some or
all of this debt without additional borrowings or new equity investment. If we
cannot refinance our debt, extend the debt due dates, or raise additional equity
prior to the date when our debt matures, we would default on our existing debt,
which could have a material adverse effect on our business.
7
WE MAY BE UNABLE TO CONTINUE TO MAKE SHAREHOLDER DISTRIBUTIONS AT EXPECTED
LEVELS. We intend to make regular quarterly cash distributions to our
shareholders. However, distribution levels depend on a number of factors, some
of which are beyond our control.
Our loan agreements contain provisions that could restrict future
distributions. Our ability to sustain our current distribution level also will
be dependent, in part, on other matters including:
o continued property occupancy and profitability of tenants;
o the amount of future capital expenditures and expenses relating to our
properties;
o the level of leasing activity and future rental rates;
o the strength of the commercial real estate market;
o competition;
o the costs of compliance with environmental and other laws;
o our corporate overhead levels;
o the amount of uninsured losses; and
o our decisions whether to reinvest rather than distribute available cash.
In addition, we can make distributions to the holders of our common shares
only after we make preferential distributions relating to holders of our 10%
Series B Cumulative Redeemable Preferred Shares, 4% Series D Cumulative
Convertible Redeemable Preferred Shares, 10.25% Series E Cumulative Redeemable
Preferred Shares and 9.875% Series F Cumulative Redeemable Preferred Shares. We
also would have to make prior distributions to third party holders of the Series
C Preferred Units in our Operating Partnership.
OUR OWNERSHIP LIMITS ARE IMPORTANT FACTORS. Our Declaration of Trust limits
ownership of our Common Shares by any single shareholder to 9.8% of the number
of the outstanding Common Shares or 9.8% of the value of the outstanding Common
Shares. We call these restrictions the "Ownership Limit." Our Declaration of
Trust allows our Board of Trustees to exempt shareholders from the Ownership
Limit, and our Board of Trustees previously has exempted Constellation and the
foreign trust owning all of our Series D Preferred Shares from the Ownership
Limit.
OUR DECLARATION OF TRUST INCLUDES OTHER PROVISIONS THAT MAY PREVENT OR
DELAY A CHANGE OF CONTROL. Subject to the requirements of the New York Stock
Exchange, our Board of Trustees has the authority without shareholder approval
to issue additional securities on terms that could delay or prevent a change in
control. In addition, our Board of Trustees has the authority to reclassify any
of our unissued Common Shares into preferred shares. Our Board of Trustees may
issue preferred shares with such preferences, rights, powers and restrictions as
our Board of Trustees may determine, which could also delay or prevent a change
in control.
OUR BOARD OF TRUSTEES IS DIVIDED INTO THREE CLASSES OF TRUSTEES, WHICH
COULD DELAY A CHANGE OF CONTROL. Our Declaration of Trust divides our Board of
Trustees into three classes. The term of one class of the trustees will expire
each year, at which time a successor class is elected for a three-year term.
Such staggered three-year terms make it more difficult for a third party to
acquire control of us.
THE MARYLAND BUSINESS STATUTES ALSO IMPOSE POTENTIAL RESTRICTIONS ON A
CHANGE OF CONTROL OF OUR COMPANY. Various Maryland laws may have the effect of
discouraging offers to acquire us, even if the acquisition would be advantageous
to shareholders. Our Bylaws exempt us from such laws, but our Board of Trustees
can change our Bylaws at any time to make these provisions applicable to us.
OUR FAILURE TO QUALIFY AS A REIT WOULD HAVE ADVERSE TAX CONSEQUENCES. We
believe that since 1992 we have qualified for taxation as a REIT for Federal
income tax purposes. We plan to continue to meet the requirements for taxation
as a REIT. Many of these requirements, however, are highly technical and
complex. The determination that we are a REIT requires an analysis of various
factual matters and circumstances that may not be totally within our control.
For example, to qualify as a REIT, at least 95% of our gross income must come
from certain sources that are itemized in the REIT tax laws. We are also
required to distribute to shareholders at least 90% of our REIT taxable income,
excluding capital gains. The fact that we hold most of our assets through our
Operating Partnership and its
8
subsidiaries further complicates the application of the REIT requirements. Even
a technical or inadvertent mistake could jeopardize our REIT status.
Furthermore, Congress and the IRS might make changes to the tax laws and
regulations, and the courts might issue new rulings that make it more difficult,
or impossible for us to remain qualified as a REIT.
If we fail to qualify as a REIT, we would be subject to Federal income tax
at regular corporate rates. Also, unless the IRS granted us relief under certain
statutory provisions, we would remain disqualified as a REIT for four years
following the year we first fail to qualify. If we fail to qualify as a REIT, we
would have to pay significant income taxes and would therefore have less money
available for investments or for distributions to our shareholders. This would
likely have a significant adverse effect on the value of our securities and
would impair our ability to raise capital. In addition, we would no longer be
required to make any distributions to our shareholders.
WE HAVE CERTAIN DISTRIBUTION REQUIREMENTS THAT REDUCE CASH AVAILABLE FOR
OTHER BUSINESS PURPOSES. As a REIT, we must distribute 90% of our annual taxable
income, which limits the amount of cash we have available for other business
purposes, including amounts to fund our growth. Also, it is possible that
because of the differences between the time we actually receive revenue or pay
expenses and the period we report those items for distribution purposes, we may
have to borrow funds on a short-term basis to meet the 90% distribution
requirement.
A NUMBER OF FACTORS COULD CAUSE OUR SECURITY PRICES TO DECLINE. As is the
case with any publicly-traded securities, certain factors outside of our control
could influence the value of our Common and preferred shares. These conditions
include, but are not limited to: market perception of REITs in general; market
perception of office REITs; market perception of REITs relative to other
investment opportunities; the level of institutional investor interest in our
company; general economic and business conditions; interest rates; and market
perception of our financial condition, performance, dividends and growth
potential.
The average daily trading volume of our Common Shares during 2001 was
approximately 24,000 shares and the average trading volume of our
publicly-traded preferred shares is generally insignificant. As a result,
relatively small volumes of transactions could have a pronounced affect on the
market price of such shares.
WE ARE DEPENDENT ON EXTERNAL SOURCES OF CAPITAL FOR FUTURE GROWTH. As a
REIT, we must distribute 90% of our annual taxable income. Due to these
requirements, we will not be able to fund our acquisitions, construction and
development activities using cash flow from operations. Our ability to fund
these activities is dependent on our ability to access capital funded by third
parties. Such capital could be in the form of new loans, equity issuances of
Common Shares, preferred shares, common and preferred units in our Operating
Partnership or joint venture funding. Such capital may not be available on
favorable terms or at all. Moreover, additional debt financing may substantially
increase our leverage and additional equity offerings may result in substantial
dilution of our shareholders' interests. Our inability to obtain capital when
needed could have a material adverse effect on our ability to expand our
business.
CERTAIN OF OUR OFFICERS AND TRUSTEES HAVE POTENTIAL CONFLICTS OF INTEREST.
Certain of our officers and members of our Board of Trustees own partnership
units in our Operating Partnership. These individuals may have personal
interests that conflict with the interests of our shareholders. For example, if
our Operating Partnership sells or refinances certain of the properties that
these officers or trustees contributed to the Operating Partnership, they could
suffer adverse tax consequences. Their personal interest could conflict with our
interests if such a sale or refinancing would be advantageous to us. We have
certain policies in place that are designed to minimize conflicts of interest.
We cannot assure you, however, that these policies will be successful in
eliminating the influence of such conflicts, and if they are not successful,
decisions could be made that might fail to reflect fully the interests of all of
our shareholders.
WE ARE DEPENDENT ON OUR KEY PERSONNEL, AND THE LOSS OF ANY KEY PERSONNEL
COULD HAVE AN ADVERSE EFFECT ON OUR OPERATIONS. We are dependent on the efforts
of our trustees and executive officers, including Jay Shidler, our Chairman of
the Board of Trustees, Clay Hamlin, our Chief Executive Officer, and Rand
Griffin, our President. The loss of any of their services could have an adverse
effect on our operations. Although certain of our officers have entered into
employment agreements with us, we cannot assure you that they will remain
employed with us.
9
WE MAY CHANGE OUR POLICIES WITHOUT SHAREHOLDER APPROVAL, WHICH COULD
ADVERSELY AFFECT OUR FINANCIAL CONDITION, RESULTS OF OPERATIONS, MARKET PRICE OF
OUR COMMON SHARES OR ABILITY TO PAY DISTRIBUTIONS. Our Board of Trustees
determines all of our policies, including our investment, financing and
distribution policies. Although our Board of Trustees has no current plans to do
so, it may amend or revise these policies at any time without a vote of our
shareholders. Policy changes could adversely affect our financial condition,
results of operations, the market price of the Common Shares or our ability to
pay dividends or distributions.
10
THE SELLING SHAREHOLDERS
The following table sets forth the beneficial ownership of Common Shares by the
selling shareholders as of March 26, 2002, the number of Common Shares covered
by this prospectus and the beneficial ownership of Common Shares by the selling
shareholders on March 26, 2002 as adjusted to give effect to the sale of the
Common Shares offered. Beneficial ownership of Common Shares includes securities
held by the shareholder for the shareholder's benefit. Also included are any
securities held by others for the shareholder's benefit or securities from which
the shareholder obtains benefits substantially equivalent to those of ownership,
such as those held for the shareholder by custodians, brokers, relatives or
trustees, securities held for the shareholder's account by pledgees, and
securities owned by a corporation in which the shareholder has a substantial
equity interest. The SEC has ruled that "beneficial" ownership of a security
also includes the possession, directly or indirectly, through any formal or
informal arrangement, either individually or in a group, of voting power and/or
investment power. A shareholder is also deemed to be, as of any date, the
beneficial owner of all securities which such shareholder has the right to
acquire within 60 days after that date (a) through the exercise of any option,
warrant or right, (b) through the conversion of a security, (c) pursuant to the
power to revoke a trust, discretionary account or similar arrangement, or (d)
pursuant to the automatic termination of a trust, discretionary account or
similar arrangement.
MAXIMUM BENEFICIAL OWNERSHIP
NUMBER OF NUMBER OF AFTER RESALE OF SHARES
SHARES SHARES ----------------------
BENEFICIALLY BEING NUMBER
OWNED (1) OFFERED OF SHARES PERCENT
------------ -------- --------- -------
Manekin Investment Associates 3, LLC...... 307,239 307,239 0 *
RA & DM, Inc.............................. 3,103 3,103 0 *
------- ------- --- ---
Total................................. 310,342 310,342 0 *
======= ======= === ===
----------
* Indicates less than one percent (1%).
(1) The beneficial ownership of Common Shares owned and being offered is in the
form of common units of limited partnership interests in our Operating
Partnership that may be redeemed and, if we approve, exchanged for Common
Shares. Our Operating Partnership has the right, in its sole discretion, to
deliver to such redeeming holder for each Common Unit either one Common Share
(subject to adjustment) or a cash payment equal to the then fair market value of
such share determined as provided in the Operating Partnership agreement.
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DESCRIPTION OF SHARES
THE FOLLOWING SUMMARY OF THE TERMS OF OUR SECURITIES DOES NOT PURPORT TO BE
COMPLETE AND IS SUBJECT TO AND QUALIFIED IN ITS ENTIRETY BY REFERENCE TO OUR
DECLARATION OF TRUST AND BYLAWS, COPIES OF WHICH ARE EXHIBITS TO THE
REGISTRATION STATEMENT OF WHICH THIS PROSPECTUS IS A PART.
GENERAL
Under our Declaration of Trust, we are authorized to issue up to 45,000,000
common shares and 10,000,000 preferred shares. As of March 26, 2002, 40,693
preferred shares were classified as 5.5% Series A Convertible Preferred Shares,
none of which were issued and outstanding; 1,725,000 preferred shares were
classified as 10% Series B Cumulative Redeemable Preferred Shares, 1,250,000 of
which were issued and outstanding; 544,000 preferred shares were classified as
4% Series D Cumulative Convertible Redeemable Preferred Shares, all of which
were issued and outstanding; 1,265,000 shares were classified as 10.25% Series E
Cumulative Redeemable Preferred Shares, 1,150,000 of which were issued and
outstanding; and 1,425,000 shares were classified as 9.875% Series F Cumulative
Redeemable Preferred Shares, all of which were issued and outstanding. Our Board
of Trustees may increase the authorized number of common shares and preferred
shares without shareholder approval. As of March 26, 2002, there were 22,756,851
common shares issued and outstanding.
We are authorized to issue preferred shares in one or more classes or
subclasses, with the designations, preferences, conversion and other rights,
voting powers, restrictions, limitations as to dividends, qualifications and
terms and conditions of redemption, in each case, as are permitted by Maryland
law and as our Board of Trustees may determine by resolution. Except for the
Series B Preferred Shares, the Series D Preferred Shares, the Series E Preferred
Shares and the Series F Preferred Shares, there are currently no other classes
or series of preferred shares authorized. However, our Operating Partnership has
issued to a third party 1,016,662 Series C Preferred Units.
As of March 26, 2002, we owned approximately 65.9% of the outstanding
common units and 1,250,000 Series B Preferred Units, 544,000 Series D Preferred
Units, 1,150,000 Series E Preferred Units and 1,425,000 Series F Preferred Units
issued by our Operating Partnership. Each series of units has economic terms
substantially equivalent to the economic terms of the corresponding Series B
Preferred Shares, Series D Preferred Shares, Series E Preferred Shares and
Series F Preferred Shares, respectively, that we have issued. The 1,016,662
Series C Preferred Units of our Operating Partnership are owned by a third party
and have a liquidation preference of $25.00. Prior to the distributions with
respect to common units of our Operating Partnership, and through December 20,
2009, each Series C Preferred Unit is entitled to a priority distribution of
$0.56 per Series C Preferred Unit, payable quarterly. From December 21, 2009 to
December 20, 2014, the priority distribution on the Series C Preferred Units
increases to $0.66 per Series C Preferred Unit, and after December 20, 2014
further increases to $0.75 per Series C Preferred Unit, also each payable
quarterly.
The economic terms of the common units will be substantially equivalent to
the economic terms of the common shares. The Series B, Series C, Series D,
Series E, and Series F Preferred Units are treated equally (i.e., are PARI
PASSU) in priority over the common units in our Operating Partnership with
respect to quarterly distributions. Distributions on these preferred units are
the source of funds for the payment of dividends on our preferred shares.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
For us to qualify as a REIT (as defined in the Internal Revenue Code of
1986, as amended (the "Code") to include certain entities), our shares of
beneficial interest generally must be beneficially owned by 100 or more persons
during at least 335 days of a taxable year of 12 months or during a
proportionate part of a shorter taxable year. Also, not more than 50% of the
value of the outstanding shares of beneficial interest may be owned, directly or
indirectly, by five or fewer individuals (under the Code) at any time during the
last half of a taxable year (other than the first year for which an election to
be a REIT has been made). This test is applied by "looking through" certain
shareholders which are not individuals (e.g., corporations or partnerships) to
determine indirect ownership of us by individuals.
12
Our Declaration of Trust contains certain restrictions on the number of our
shares of beneficial interest that a person may own, subject to certain
exceptions. Our Declaration of Trust provides that no person may own, or be
deemed to own by virtue of the attribution provisions of the Code, more than
9.8% (the "Aggregate Share Ownership Limit") of the number or value of our
outstanding shares of beneficial interest. In addition, our Declaration of Trust
prohibits any person from acquiring or holding, directly or indirectly, in
excess of 9.8% of our total outstanding common shares, in value or in number of
shares, whichever is more restrictive (the "Common Share Ownership Limit"). Our
Board of Trustees, in its sole discretion, may exempt a proposed transferee from
the Aggregate Share Ownership Limit and the Common Share Ownership Limit (an
"Excepted Holder"). However, our Board of Trustees may not grant such an
exemption to any person if such exemption would result in us being "closely
held" within the meaning of Section 856(h) of the Code or otherwise would result
in our failing to qualify as a REIT. In order to be considered by our Board of
Trustees as an Excepted Holder, a person also must not own, directly or
indirectly, an interest in a tenant of ours (or a tenant of any entity owned or
controlled by us) that would cause us to own, directly or indirectly, more than
a 9.9% interest in such a tenant. The person seeking an exemption must represent
to the satisfaction of our Board of Trustees that it will not violate the two
aforementioned restrictions. The person also must agree that any violation or
attempted violation of any of the foregoing restrictions will result in the
automatic transfer of the shares of stock causing such violation to the Share
Trust (as defined below). Our Board of Trustees may require a ruling from the
Internal Revenue Service or an opinion of counsel, in either case in form and
substance satisfactory to our Board of Trustees, in its sole discretion, in
order to determine or ensure our status as a REIT.
Our Declaration of Trust further prohibits (i) any person from
beneficially or constructively owning our shares of beneficial interest if such
ownership would result in us being "closely held" under Section 856(h) of the
Code or otherwise cause us to fail to qualify as a REIT and (ii) any person from
transferring shares of our beneficial interest if such transfer would result in
our shares of beneficial interest being owned by fewer than 100 persons. Any
person who acquires or attempts or intends to acquire beneficial or constructive
ownership of our shares of beneficial interest that will or may violate any of
the foregoing restrictions on transferability and ownership, or any person who
would have owned our shares of the beneficial interest that resulted in a
transfer of shares to the Share Trust, is required to give notice immediately to
us and provide us with such other information as we may request in order to
determine the effect of such transfer on our status as a REIT. The foregoing
restrictions on transferability and ownership will not apply if our Board of
Trustees determines that it is no longer in our best interests to attempt to
qualify, or to continue to qualify, as a REIT.
If any transfer of our shares of beneficial interest occurs which, if
effective, would result in any person beneficially or constructively owning
shares of beneficial interest in us in excess or in violation of the above
transfer or ownership limitations (a "Prohibited Owner"), then that number of
our shares of beneficial interest, the beneficial or constructive ownership of
which otherwise would cause such person to be in excess of the ownership limit
(rounded to the nearest whole share), will automatically be transferred to a
trust (the "Share Trust") for the exclusive benefit of one or more charitable
beneficiaries (the "Charitable Beneficiary"), and the Prohibited Owner will not
acquire any rights in such shares. Such automatic transfer will be deemed to be
effective as of the close of business on the Business Day (as defined in our
Declaration of Trust) prior to the date of such violative transfer. Shares of
beneficial interest held in the Share Trust will be issued and outstanding
shares. The Prohibited Owner may not benefit economically from ownership of any
shares of beneficial interest held in the Share Trust, may have no rights to
dividends and may not possess any other rights attributable to the shares of
beneficial interest held in the Share Trust. The trustee of the Share Trust (the
"Share Trustee") will have all voting rights and rights to dividends or other
distributions with respect to shares of beneficial interest held in the Share
Trust, which rights will be exercised for the exclusive benefit of the
Charitable Beneficiary. Any dividend or other distribution paid prior to the
discovery by us that shares of beneficial interest have been transferred to the
Share Trust will be paid by the recipient of such dividend or distribution to
the Share Trustee upon demand, and any dividend or other distribution authorized
but unpaid will be paid when due to the Share Trustee. Any dividend or
distribution so paid to the Share Trustee will be held in the Share Trust for
the Charitable Beneficiary. The Prohibited Owner will have no voting rights with
respect to shares of beneficial interest held in the Share Trust and, subject to
Maryland law, effective as of the date that such shares of beneficial interest
have been transferred to the Share Trust, the Share Trustee will have the
authority (at the Share Trustee's sole discretion) to (i) rescind as void any
vote cast by a Prohibited Owner prior to the discovery by us that such shares
have been transferred to the Share Trust and (ii) recast such vote in accordance
with the desires of the Share Trustee acting for the
13
benefit of the Charitable Beneficiary. However, if we have already taken
irreversible trust action, then the Share Trustee will not have the authority to
rescind and recast such vote.
Within 20 days after receiving notice from us that shares of beneficial
interest have been transferred to the Share Trust, the Share Trustee will sell
the shares of beneficial interest held in the Share Trust to a person,
designated by the Share Trustee, whose ownership of the shares will not violate
the ownership limitations set forth in the Declaration of Trust. Upon such sale,
the interest of the Charitable Beneficiary in the shares sold will terminate and
the Share Trustee will distribute the net proceeds of the sale to the Prohibited
Owner and to the Charitable Beneficiary as described below. The Prohibited Owner
will receive the lesser of (i) the price paid by the Prohibited Owner for the
shares or, if the Prohibited Owner did not give value for the shares in
connection with the event causing the shares to be held in the Share Trust
(e.g., a gift, devise or other such transaction), the Market Price (as defined
in the Declaration of Trust) of such shares on the day of the event causing the
shares to be received by the Share Trustee and (ii) the price per share received
by the Share Trustee from the sale or other disposition of the common shares
held in the Share Trust. Any net sale proceeds in excess of the amount payable
to the Prohibited Owner will be paid immediately to the Charitable Beneficiary.
If, prior to the discovery by us that shares of beneficial interest have been
transferred to the Share Trust, such shares are sold by a Prohibited Owner, then
(i) such shares will be deemed to have been sold on behalf of the Share Trust
and (ii) to the extent that the Prohibited Owner received an amount for shares
that exceeds the amount that such Prohibited Owner was entitled to receive as
described above, such excess will be paid to the Share Trustee upon demand.
In addition, shares of beneficial interest held in the Share Trust will be
deemed to have been offered for sale to us, or our designee, at a price per
share equal to the lesser of (i) the price per share in the transaction that
resulted in such transfer to the Share Trust (or, in the case of a devise or
gift, the Market Price at the time of such devise or gift) and (ii) the Market
Price on the date we, or our designee, accept such offer. We will have the right
to accept such offer until the Share Trustee has sold the shares of beneficial
interest held in the Share Trust. Upon such a sale to us, the interest of the
Charitable Beneficiary in the shares sold will terminate and the Share Trustee
will distribute the net proceeds of the sale to the Prohibited Owner.
All certificates representing the common shares will bear a legend
referring to the restrictions described above.
Every owner of more than 5% (or such other percentage as required by the
Code or the regulations promulgated thereunder) of all classes or series of our
shares of beneficial interest, including the common shares, is required to give
written notice to us, within 30 days after the end of each taxable year, stating
the name and address of such owner, the number of shares of each class and
series of shares of beneficial interest of us which the owner beneficially owns
and a description of the manner in which such shares are held. Each such owner
will provide to us such additional information as we may request in order to
determine the effect, if any, of such beneficial ownership on our status as a
REIT and to ensure compliance with the Aggregate Share Ownership Limit. In
addition, each shareholder will upon demand be required to provide to us such
information as we may request, in good faith, in order to determine our status
as a REIT and to comply with the requirements of any taxing authority or
governmental authority or to determine such compliance.
These ownership limitations could delay, defer or prevent a change in
control of us or other transaction that might involve a premium over the then
prevailing market price for the common shares or other attributes that the
shareholders may consider to be desirable.
COMMON SHARES
All Common Shares that are currently outstanding have been, or when issued
upon redemption of Common and Preferred Units of our Operating Partnership in
accordance with the terms of the Operating Partnership agreement will be, duly
authorized, fully paid and nonassessable. Subject to the preferential rights of
our Series B Preferred Shares, Series D Preferred Shares, Series E Preferred
Shares, Series F Preferred Shares and any other shares or series of beneficial
interest that we may issue in the future, and to the provisions of our
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
14
ratably in our assets legally available for distribution to our shareholders in
the event of the liquidation, dissolution or winding-up of COPT after payment
of, or adequate provision for, all of our known debts and liabilities.
Subject to the provisions of our 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. The Declaration of Trust provides for the
election of Trustees to staggered three-year terms. See the section below
entitled "Classification of Board, Vacancies and Removal of Trustees."
Holders of Common Shares have no preference, conversion, sinking fund,
redemption or appraisal rights and have no preemptive rights to subscribe for
any of our securities. 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.
Our 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 our shareholders at 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 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 of COPT with another entity
or the sale (or other disposition) of all or substantially all of the assets of
COPT (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 (which requires the affirmative vote
of two-thirds of all the votes entitled to be cast on the matter); and (v) the
termination of COPT (which requires the affirmative vote of two-thirds of the
outstanding shares of beneficial interest entitled to be cast on the matter).
Our Declaration of Trust permits the Trustees, without any action by the holders
of Common Shares, (a) 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 and (b) by a majority vote 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 we have authority to issue.
CLASSIFICATION OR RECLASSIFICATION OF COMMON SHARES OR PREFERRED SHARES
Our Declaration of Trust authorizes the Board of Trustees to reclassify any
unissued shares of Common or Preferred Shares into other classes or series of
classes of shares and to establish the number of shares in each class or series
and to set the preferences, conversion and other rights, voting powers,
restrictions, limitations and restrictions on ownership, limitations as to
dividends or other distributions, qualifications and terms or conditions of
redemption for each such class or series. Thus, in addition to the Series B
Preferred Shares, Series D Preferred Shares, Series E Preferred Shares and
Series F Preferred Shares, the Board of Trustees could authorize the issuance of
other Preferred Shares with terms and conditions which could also have the
effect of delaying, deferring or preventing a change in control of COPT or other
transaction that might involve a premium over the then prevailing market price
for Common Shares or other attributes that the shareholders may consider to be
desirable.
PREFERRED SHARES
THE FOLLOWING SUMMARY OF THE TERMS AND PROVISIONS OF OUR PREFERRED SHARES
DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
THE PERTINENT SECTIONS OF OUR DECLARATION OF TRUST AND THE ARTICLES
SUPPLEMENTARY TO THE DECLARATION OF TRUST RELATING TO THE ESTABLISHMENT OF EACH
SERIES OF OUR PREFERRED SHARES, EACH OF WHICH IS AVAILABLE FROM US AS DESCRIBED
IN "WHERE YOU CAN FIND MORE INFORMATION."
We issued 1,250,000 Series B Preferred Shares in an underwritten public
offering in 1999; 544,000 Series D Preferred Shares in a private placement to a
private investor in January 2001; 1,150,000 Series E Preferred Shares in an
underwritten public offering in April 2001; and 1,425,000 Series F Preferred
Shares in an underwritten public offering in September 2001. We contributed the
proceeds of each of these offerings to our Operating Partnership in exchange
15
for a number of respective Series B Preferred Units, Series D Preferred Units,
Series E Preferred Units and Series F Preferred Units equal to the number of the
applicable series of Preferred Shares that we sold in the respective offerings.
The terms of each series of the Preferred Units are substantially equivalent to
the economic terms of the respective series of Preferred Shares to which they
relate. The terms of these outstanding series of Preferred Shares are as
follows:
RANKING. The Series B Preferred Shares, Series D Preferred Shares, Series E
Preferred Shares and Series F Preferred Shares, with respect to dividend rights
and rights upon our liquidation, dissolution or winding up, rank (i) prior or
senior to the Common Shares and any other class or series of our equity
securities authorized or designated in the future if the holders of Series B
Preferred Shares, Series D Preferred Shares, Series E Preferred Shares and
Series F Preferred Shares shall be entitled to the receipt of dividends or of
amounts distributable upon liquidation, dissolution or winding up in preference
or priority to the holders of shares of such class or series ("Junior Shares");
(ii) on a parity with one another and any other class or series of our equity
securities authorized or designated in the future if the holders of such class
or series of securities and the Series B Preferred Shares, Series D Preferred
Shares, Series E Preferred Shares and Series F Preferred Shares shall be
entitled to the receipt of dividends and of amounts distributable upon
liquidation, dissolution or winding up in proportion to their respective amounts
of accrued and unpaid dividends per share or liquidation preferences, without
preference or priority of one over the other ("Parity Shares"); and (iii) junior
to any class or series of our equity securities authorized or designated in the
future if the holders of such class or series shall be entitled to the receipt
of dividends and amounts distributable upon liquidation, dissolution or winding
up in preference or priority to the holders of the Series B Preferred Shares,
Series D Preferred Shares, Series E Preferred Shares and Series F Preferred
Shares ("Senior Shares").
DIVIDENDS. Holders of Series B Preferred Shares, Series D Preferred Shares,
Series E Preferred Shares and Series F Preferred Shares are entitled to receive,
when and as declared by our Board of Trustees, out of our funds legally
available for payment, quarterly cash dividends on such shares at the following
rates: $2.50 per year per Series B Preferred Share; $1.00 per year per Series D
Preferred Share; $2.5625 per year per Series E Preferred Share; and $2.46875 per
year per Series F Preferred Share. Such dividends are cumulative from the date
of original issue, whether or not in any dividend period or periods such
dividends shall be declared or there shall be funds legally available for the
payment of such dividends, and are payable quarterly on January 15, April 15,
July 15 and October 15 of each year (or, if not a business day, the next
succeeding business day) (each a "Dividend Payment Date"). Any dividend payable
on the Series B Preferred Shares, Series D Preferred Shares, Series E Preferred
Shares and Series F Preferred Shares for any partial dividend period will be
computed ratably on the basis of twelve 30-day months and a 360-day year.
Dividends are payable in arrears to holders of record as they appear on our
share records at the close of business on the applicable record date, which are
fixed by our Board of Trustees and which are not more than 60 nor less than 10
days prior to such Dividend Payment Date. Holders of Series B Preferred Shares,
Series D Preferred Shares, Series E Preferred Shares and Series F Preferred
Shares are not entitled to receive any dividends in excess of respective
cumulative dividends on such shares. No interest, or sum of money in lieu of
interest, shall be payable in respect to any dividend payment or payments on the
Series B Preferred Shares, Series D Preferred Shares, Series E Preferred Shares
and Series F Preferred Shares that may be in arrears.
When dividends are not paid in full upon the Parity Shares, or a sum
sufficient for such payment is not set apart, all dividends declared upon the
Parity Shares shall be declared ratably in proportion to the respective amounts
of dividends accrued and unpaid on the Parity Shares. Except as set forth in the
preceding sentence, unless dividends on the Series B Preferred Shares, Series D
Preferred Shares, Series E Preferred Shares and Series F Preferred Shares equal
to the full amount of accrued and unpaid dividends have been or
contemporaneously are declared and paid or declared and a sum sufficient for the
payment thereof has been or contemporaneously is set apart for such payment, for
all past dividend periods, no dividends shall be declared or paid or set apart
for payment by us and no other distribution of cash or other property may be
declared or made, directly or indirectly, by us with respect to any Parity
Shares. Unless dividends equal to the full amount of all accrued and unpaid
dividends on the Series B Preferred Shares, Series D Preferred Shares, Series E
Preferred Shares and Series F Preferred Shares have been paid, or declared and
set apart for payment, for all past dividend periods, no dividends (other than
dividends or distributions paid in Junior Shares or options, warrants or rights
to subscribe for or purchase Junior Shares) may be declared or paid or set apart
for payment by us and no other distribution of cash or other property may be
declared or made, directly or indirectly, by us with respect to any Junior
Shares, nor shall any Junior Shares be redeemed, purchased or otherwise acquired
(except for a redemption, purchase or other acquisition of Common Shares made
for purposes of our employee incentive or benefit plan or any such plan of any
of our subsidiaries) for any consideration (or any monies be paid to or made
available for a sinking fund for the redemption of any such Junior Shares),
directly or indirectly, by us (except by conversion into or exchange
16
for Junior Shares, or options, warrants or rights to subscribe for or purchase
Junior Shares), nor shall any other cash or other property be paid or
distributed to or for the benefit of holders of Junior Shares. Notwithstanding
the provisions described above, we shall not be prohibited from (i) declaring or
paying or setting apart for payment any dividend or distribution on any Parity
Shares or (ii) redeeming, purchasing or otherwise acquiring any Parity Shares,
in each case, if such declaration, payment, redemption, purchase or other
acquisition is necessary to maintain our qualification as a REIT.
LIQUIDATION PREFERENCE. Upon any voluntary or involuntary liquidation,
dissolution or winding up, before any payment or distribution by us shall be
made to or set apart for the holders of any Junior Shares, the holders of Series
B Preferred Shares, Series D Preferred Shares, Series E Preferred Shares and
Series F Preferred Shares shall be entitled to receive a liquidation preference
of $25.00 per share (the "Liquidation Preference"), plus an amount equal to all
accrued and unpaid dividends (whether or not earned or declared) to the date of
final distribution to such holders; but such holders shall not be entitled to
any further payment. Until the holders of the Series B Preferred Shares, Series
D Preferred Shares, Series E Preferred Shares and Series F Preferred Shares have
been paid the Liquidation Preference in full, plus an amount equal to all
accrued and unpaid dividends (whether or not earned or declared) to the date of
final distribution to such holders, no payment shall be made to any holder of
Junior Shares upon our liquidation, dissolution or winding up. If upon any
liquidation, dissolution or winding up, our assets, or proceeds thereof,
distributable among the holders of Series B Preferred Shares, Series D Preferred
Shares, Series E Preferred Shares and Series F Preferred Shares shall be
insufficient to pay in full the above described preferential amount and
liquidating payments on any other shares of any class or series of Parity
Shares, then our assets, or the proceeds thereof, shall be distributed among the
holders of the Parity Shares ratably in the same proportion as the respective
amounts that would be payable on the Parity Shares if all amounts payable
thereon were paid in full. A voluntary or involuntary liquidation, dissolution
or winding up shall not include a consolidation or merger of us with or into one
or more other entities, a sale or transfer of all or substantially all of our
assets or a statutory share exchange. Upon any liquidation, dissolution or
winding up, after payment shall have been made in full to the holders of the
Parity Shares, any other series or class or classes of Junior Shares shall be
entitled to receive any and all of our assets remaining to be paid or
distributed, and the holders of the Parity Shares shall not be entitled to share
therein.
VOTING RIGHTS. Holders of Series B Preferred Shares, Series D Preferred
Shares, Series E Preferred Shares and Series F Preferred Shares will not have
any voting rights, except as set forth below and except as otherwise required by
applicable law.
If and whenever dividends on any series or class of Parity Shares shall be
in arrears for six or more quarterly periods (whether or not consecutive), the
number of Trustees then constituting our Board of Trustees shall be increased by
two (if not already increased by reason of similar types of provisions with
respect to Parity Shares of any other class or series which is entitled to
similar voting rights (the "Voting Parity Shares")), and the holders of all
Voting Parity Shares then entitled to exercise similar voting rights, voting as
a single class regardless of series, will be entitled to vote for the election
of the two additional Trustees at any annual meeting of shareholders or at a
special meeting of the holders of the Voting Parity Shares called for that
purpose. At any time when such right to elect Trustees separately shall have so
vested, we must call such special meeting upon the written request of the
holders of record of not less than 20% of the total number of Voting Parity
Shares then outstanding. Such special meeting shall be held, in the case of such
written request, within 90 days after the delivery of such request, provided
that we shall not be required to call such a special meeting if such request is
received less than 120 days before the date fixed for the next ensuing annual
meeting of shareholders and the holders of the Voting Parity Shares are offered
the opportunity to elect such Trustees at such annual meeting of shareholders.
If, prior to the end of the term of any Trustee so elected, a vacancy in the
office of such Trustee shall occur by reason of death, resignation, or
disability, such vacancy shall be filled for the unexpired term of such former
Trustee by the appointment of a new Trustee by the remaining Trustee or Trustees
so elected. Whenever dividends in arrears on outstanding Voting Parity Shares
shall have been paid and dividends thereon for the current quarterly dividend
period shall have been paid or declared and set apart for payment, then the
right of the holders of the Voting Parity Shares to elect such additional two
Trustees shall cease and the terms of office of such Trustees shall terminate
and the number of Trustees constituting our Board of Trustees shall be reduced
accordingly.
The affirmative vote or consent of at least two-thirds of the votes
entitled to be cast by the holders of the outstanding Voting Parity Shares
entitled to vote on such matters, voting as a single class, will be required to
(i) authorize, create, increase the authorized amount of, or issue any shares of
any class of Senior Shares or any security convertible into shares of any class
of Senior Shares, or (ii) amend, alter or repeal any provision of, or add any
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provision to, our Declaration of Trust or Bylaws, if such action would
materially adversely affect the voting powers, rights or preferences of the
holders of the Voting Parity Shares; provided, however, that no such vote of the
holders of any particular class or series of the Voting Parity Shares shall be
required if, at or prior to the time such amendment, alteration or repeal is to
take effect or the issuance of any such Senior Shares or convertible security is
to be made, as the case may be, provisions are made for the redemption of all
outstanding shares of the respective class or series. The amendment of or
supplement to our Declaration of Trust to authorize, create, increase or
decrease the authorized amount of or to issue Junior Shares, or any shares of
any class or series of Parity Shares shall not be deemed to materially adversely
affect the voting powers, rights or preferences of the holders of the Series B
Preferred Shares, Series D Preferred Shares, Series E Preferred Shares and
Series F Preferred Shares.
With respect to the exercise of the above-described voting rights, each
Series B Preferred Share, Series D Preferred Share, Series E Preferred Share and
Series F Preferred Share has one (1) vote per share, except that when any other
class or series of Preferred Shares shall have the right to vote with the Series
B Preferred Shares, Series D Preferred Shares, Series E Preferred Shares and
Series F Preferred Shares as a single class, then the holders of each such
series and the holders of such other class or series shall have one quarter of
one (0.25) vote per $25.00 of liquidation preference.
CONVERSION. The Series B Preferred Shares, Series E Preferred Shares and
Series F Preferred Shares are not convertible into or exchangeable for any other
property or securities. The Series D Preferred Shares are convertible into our
common shares at any time by the holder after December 31, 2003, at the rate of
2.2 common shares for every one Series D Preferred Share ("Conversion Rate").
This Conversion Rate is subject to adjustment in the event that we effect a
stock split, subdivision of its then outstanding common shares, or distribution
of common shares in the form of a dividend. In addition, in the event that we
effect a distribution of securities other than common shares in the form of a
dividend, then the Series D Preferred Shares shall be entitled to receive upon
conversion, in addition to the number of common shares receivable upon such
conversion, the amount of our other securities that they would have otherwise
received had their Series D Preferred Shares been converted into common shares
on the date of the distribution.
OPTIONAL REDEMPTION. Shares of the Series B Preferred Shares, Series D
Preferred Shares, Series E Preferred Shares and Series F Preferred Shares will
not be redeemable by us prior to the following dates (except in certain limited
circumstances relating to our maintenance of our ability to qualify as a REIT as
described in the section entitled "Restrictions on Ownership and Transfer" above
and subject to the holder's right to convert such shares prior to such date in
the manner as described in the section entitled "Conversion" above): July 15,
2006 with respect to the Series B Preferred Shares and Series E Preferred
Shares; January 25, 2006 with respect to the Series D Preferred Shares; and
October 15, 2006 with respect to the Series F Preferred Shares. On or after
these respective dates, we may, at our option, redeem the applicable series of
Preferred Shares, in whole or from time to time in part, at a cash redemption
price equal to 100% of the Liquidation Preference, plus all accrued and unpaid
dividends, if any, to the redemption date. The redemption price for each series
of these Preferred Shares (other than any portion thereof consisting of accrued
and unpaid dividends) will be payable solely with the proceeds from the sale of
equity securities by us or our Operating Partnership (whether or not such sale
occurs concurrently with such redemption). For purposes of the preceding
sentence, "equity securities" means any common shares, preferred shares,
depositary shares, partnership or other interests, participations or other
ownership interests (however designated) and any rights (other than debt
securities convertible into or exchangeable at the option of the holder for
equity securities (unless and to the extent such debt securities are
subsequently converted into equity securities)) or options to purchase any of
the foregoing of or in us or our Operating Partnership.
In the event of a redemption of any Series B Preferred Shares, Series D
Preferred Shares, Series E Preferred Shares or Series F Preferred Shares, if the
redemption date occurs after a dividend record date and on or prior to the
related Dividend Payment Date, the dividend payable on such Dividend Payment
Date in respect of such series of shares called for redemption will be payable
on such Dividend Payment Date to the holders of record at the close of business
on such dividend record date, and will not be payable as part of the redemption
price for such shares. The redemption date will be selected by us and shall not
be less than 30 days nor more than 60 days after the date notice of redemption
is sent by us. If full cumulative dividends on all outstanding Series B
Preferred Shares, Series D Preferred Shares, Series E Preferred Shares or Series
F Preferred Shares have not been paid or declared and set apart for payment, no
Series B Preferred Shares, Series D Preferred Shares, Series E Preferred Shares
or Series F Preferred Shares may be redeemed unless all outstanding shares
within the applicable series of Preferred Shares are simultaneously redeemed and
neither
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we nor any of our affiliates may purchase or acquire shares within the
applicable series of Preferred Shares otherwise than pursuant to a purchase or
exchange offer made on the same terms to all holders of such series of Preferred
Shares.
If fewer than all the outstanding shares within the Series B Preferred
Shares, Series D Preferred Shares, Series E Preferred Shares or Series F
Preferred Shares are to be redeemed, we will select those Series B Preferred
Shares, Series D Preferred Shares, Series E Preferred Shares or Series F
Preferred Shares to be redeemed pro rata in proportion to the numbers of shares
of the applicable series of Preferred Shares held by holders (with adjustment to
avoid redemption of fractional shares) or by lot or in such other manner as the
Board of Trustees may determine.
Notice of redemption will be given by publication in a newspaper of general
circulation in the City of New York, such publication to be made once a week for
two consecutive weeks commencing not less than 30 nor more than 60 days prior to
the redemption date. A similar notice shall be mailed by us not less than 30
days nor more than 60 days prior to the redemption date to each holder of the
applicable series of Preferred Shares to be redeemed by first class mail,
postage prepaid at such holder's address as the same appears on our share
records. Any notice which was mailed as described above will be conclusively
presumed to have been duly given on the date mailed whether or not the holder
receives the notice. Each notice will state: (i) the redemption date, (ii) the
number of Preferred Shares to be redeemed, (iii) the place or places where
certificates for such Preferred Shares are to be surrendered for cash and (iv)
the redemption price payable on such redemption date, including, without
limitation, a statement as to whether or not accrued and unpaid dividends will
be (x) payable as part of the redemption price or (y) payable on the next
Dividend Payment Date to the record holder at the close of business on the
relevant record date as described above. From and after the redemption date
(unless we default in the payment of our redemption obligation), dividends on
the applicable series of Preferred Shares to be redeemed will cease to accrue,
such shares will no longer be deemed to be outstanding and all rights of the
holders thereof shall cease (except (a) the right to receive the cash payable
upon such redemption without interest thereon and (b) if the redemption date
occurs after a dividend record date and on or prior to the related Dividend
Payment Date, the right of record holders at the close of business on such
record date to receive the dividend payable on such Dividend Payment Date). The
full dividend payable on such Dividend Payment Date with respect to such the
applicable series of Preferred Shares called for redemption will be payable on
such Dividend Payment Date to the holders of record of such shares at the close
of business on the corresponding dividend record date notwithstanding the prior
redemption of such shares.
The Series B Preferred Shares, Series D Preferred Shares, Series E
Preferred Shares and Series F Preferred Shares have no stated maturity and are
not subject to any sinking fund or mandatory redemption provisions except as
provided under "Restrictions on Ownership and Transfer" above.
Subject to applicable law and the limitation on purchases when dividends on
the Series B Preferred Shares, Series D Preferred Shares, Series E Preferred
Shares and Series F Preferred Shares are in arrears, we may, at any time and
from time to time, purchase any Series B Preferred Shares, Series D Preferred
Shares, Series E Preferred Shares and Series F Preferred Shares in the open
market, by tender or by private agreement.
ISSUANCE OF ADDITIONAL PREFERRED SHARES
The Board of Trustees has the ability to designate additional series of
our Preferred Shares of beneficial interest by adopting an amendment to the
Declaration of Trust designating the terms of such additional series of
Preferred Shares (a "Designating Amendment"). The Preferred Shares, when issued,
will be fully paid and non-assessable. Because our Board of Trustees has the
power to establish the preferences, powers and rights of each series of
Preferred Shares, subject to the rights of the holders of the Series B Preferred
Shares, Series D Preferred Shares, Series E Preferred Shares and Series F
Preferred Shares, our Board may afford the holders of any series of Preferred
Shares preferences, powers and rights, voting or otherwise, senior to the rights
of holders of Common Shares. The issuance of additional series of Preferred
Shares could have the effect of delaying or preventing a change of control that
might involve a premium price for shareholders or otherwise be in their best
interest. The rights, preferences, privileges and restrictions of the Preferred
Shares of each series will be fixed by the Designating Amendment relating to the
new series.
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OPERATING PARTNERSHIP SERIES C PREFERRED UNITS
We conduct almost all of our operations through our operating partnership,
for which we are the managing general partner. Interests in our operating
partnership are in the form of Common and Preferred Units. As of the date of
this prospectus, we owned a majority of the outstanding Common Units and a
majority of the outstanding Preferred Units. The remaining Preferred Units in
our operating partnership were 1,016,662 Series C Preferred Units, owned by
United Properties Group, Incorporated, with terms as follows:
VOTING RIGHTS. Except in certain limited circumstances, at any time that
COPT holds less than 90% of the outstanding partnership units in our operating
partnership, any amendment to the operating partnership agreement must be
approved by the vote of a majority of the Common and Preferred Units not held by
us, each voting as a separate class. If we were to hold 90% or more of the
outstanding partnership units, we would have the right to amend the operating
partnership agreement without first seeking such unitholder approval.
LIQUIDATION. In the event of the dissolution of our operating partnership,
the holder of the Series C Preferred Units will be entitled to receive a $25
liquidation preference (the "Series C Liquidation Preference"), prior to any
liquidation payment to be made to the holders of the Common Units but PARI PASSU
with liquidation payments made to us as holder of the Series A, B, D and E
Preferred Units.
DISTRIBUTIONS. The holder of the Series C Preferred Units are entitled to
receive quarterly priority percentage return payments, prior to distributions
made to the holders of the Common Units but PARI PASSU with distributions made
to us as holder of the Series A, B, D and E Preferred Units, in an amount equal
to a percentage of the Series C Liquidation Preference, which percentage equals
(a) 2.25% from December 21, 1999 to December 20, 2009, (b) 2.625% from December
21, 2009 to December 20, 2014, and (c) 3.00% thereafter.
CONVERSION. The Series C Preferred Units are convertible into Common Units
at a conversion rate of 2.381 Common Units per Series C Preferred Unit.
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CLASSIFICATION OF BOARD, VACANCIES AND REMOVAL OF TRUSTEES
Our Declaration of Trust provides for a staggered Board of Trustees divided
into three classes, with terms of three years each.
At each annual meeting of shareholders of COPT, successors of the class of
Trustees whose term expires at that meeting will be elected for a three-year
term and the Trustees in the other two classes will continue in office. A
classified board may delay, defer or prevent a change in control of COPT or
other transaction that might involve a premium over the then prevailing market
price for the Common Shares or other attributes that the shareholders may
consider to be desirable. In addition, a classified Board could prevent
shareholders who do not agree with the policies of the Board of Trustees from
replacing a majority of the Board of Trustees for two years, except in the event
of removal for cause.
The Bylaws of COPT provide that any vacancy on the Board of Trustees may be
filled by a majority of the remaining Trustees. Any individual so elected
Trustee will hold office for the unexpired term of the Trustee he or she is
replacing. The Declaration of Trust provides that a Trustee may be removed at
any time only for cause upon the affirmative vote of at least two-thirds of the
votes entitled to be cast in the election of Trustees, but only by a vote taken
at a shareholder meeting. These provisions preclude shareholders from removing
incumbent Trustees, except for cause and upon a substantial affirmative vote,
and filling the vacancies created by such removal with their own nominees.
ADVANCE NOTICE OF NOMINATIONS AND NEW BUSINESS
The Bylaws provide that, with respect to an annual meeting of shareholders,
nominations of persons for election to the Board of Trustees and the proposal of
business to be considered by shareholders may be made only (a) pursuant to
COPT's notice of the meeting, (b) by the Board of Trustees or (c) by a
shareholder who is entitled to vote at the meeting and has complied with the
advance notice procedures set forth in the Bylaws. With respect to special
meetings of shareholders, the Bylaws provide that only the business specified in
COPT's notice of meeting may be brought before the meeting of shareholders and
nominations of persons for election to the Board of Trustees may be made only
(a) pursuant to COPT's notice of the meeting, (b) by the Board of Trustees or
(c) provided that the Board of Trustees has determined that Trustees shall be
elected at such meeting, by a shareholder who is entitled to vote at the meeting
and has complied with the advance notice provisions set forth in the Bylaws.
POSSIBLE ANTITAKEOVER EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW
The Maryland General Corporations Law ("MGCL") contains provisions that may
be deemed to have an antitakeover effect. The provisions applicable to COPT are
set forth below.
CERTAIN BUSINESS COMBINATIONS. Under the MGCL, as applicable to Maryland
real estate investment trusts, certain business combinations (including certain
mergers, consolidations, share exchanges and asset transfers and certain
issuances and reclassifications of equity securities) between a Maryland real
estate investment trust and any person who beneficially owns ten percent or more
of the voting power of the trust's shares or an affiliate of the trust who, at
any time within the two-year period prior to the date in question, was the
beneficial owner of ten percent or more of the voting power of the then
outstanding voting shares of such trust (an "Interested Shareholder"), or an
affiliate of such an Interested Shareholder, are prohibited for five years after
the most recent date on which the Interested Shareholder becomes an Interested
Shareholder. Thereafter, any such business combination must be recommended by
the board of trustees of such trust and approved by the affirmative votes of at
least (i) 80% of the votes entitled to be cast by holders of outstanding voting
shares of the trust and (ii) two-thirds of the votes entitled to be cast by
holders of voting shares of the trust other than shares held by the Interested
Shareholder with whom (or with whose affiliate) the business combination is to
be effected, unless, among other conditions, the trust's common shareholders
receive a minimum price (as defined in the MGCL) for their shares and the
consideration is received in cash or in the same form as previously paid by the
Interested Shareholder for its shares. These provisions of Maryland law do not
apply, however, to business combinations that are approved or exempted by the
board of trustees of the trust prior to the time that the Interested Shareholder
becomes an Interested Shareholder. The Board of Trustees has opted out of this
statute by resolution. The Board of Trustees may, however, rescind its
resolution at any time to make these provisions of Maryland law applicable to
COPT.
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CONTROL SHARE PROVISIONS. The MGCL generally provides that control shares
of a Maryland real estate investment trust acquired in a control share
acquisition have no voting rights unless those rights are approved by a vote of
two-thirds of the disinterested shares (generally shares held by persons other
than the acquiror, officers or trustees who are employees of the trust). An
acquiror is deemed to own control shares the first time that the acquiror's
voting power in electing trustees equals or exceeds 20% of all such voting
power. Control shares do not include shares the acquiring person is then
entitled to vote as a result of having previously obtained shareholder approval.
A control share acquisition means the acquisition of control shares, subject to
certain exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the Board of Trustees to call a special meeting of shareholders to be
held within 50 days of the demand to consider whether the control shares will
have voting rights. The trust may present the question at any shareholders'
meeting on its own initiative.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute, then,
subject to certain conditions and limitations, the trust may redeem any or all
of the control shares (except those for which voting rights have previously been
approved) for fair value, determined without regard to the absence of voting
rights for the control shares. Fair value will be determined as of the date of
the last control share acquisition by the acquiror or of any meeting of
shareholders at which the voting rights of such shares are considered and not
approved. If voting rights for control shares are approved at a shareholders'
meeting and the acquiror becomes entitled to vote a majority of the shares
entitled to vote, all other shareholders may exercise appraisal rights. The fair
value of the shares as determined for purposes of such appraisal rights may not
be less than the highest price per share paid by the acquiror in the control
share acquisition.
The control share provisions do not apply (a) to shares acquired in a
merger, consolidation or share exchange if the trust is a party to the
transaction or (b) to acquisitions approved or exempted by the declaration of
trust or bylaws of the trust. The Bylaws contain a provision exempting from the
control share acquisition statute any and all acquisitions by any person of
COPT's shares of beneficial interest. The Board of Trustees may, however, amend
the Bylaws at any time to eliminate such provision, either prospectively or
retroactively.
DISSOLUTION OF THE COMPANY; TERMINATION OF REIT STATUS
The Declaration of Trust permits the termination of COPT and the
discontinuation of the operations of COPT by the affirmative vote of the holders
of not less than two-thirds of the outstanding Common Shares entitled to be cast
on the matter at a meeting of shareholders or by written consent. In addition,
the Declaration of Trust permits the termination of COPT's qualification as a
REIT if such qualification, in the opinion of the Board of Trustees, is no
longer advantageous to the shareholders.
FEDERAL INCOME TAX MATTERS
We were organized in 1988 and elected to be taxed as a REIT commencing with
our taxable year ended December 31, 1992. COPT 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 the material Federal
income tax considerations that may be relevant to COPT and its shareholders,
including the continued treatment of COPT as a REIT for Federal income tax
purposes. For purposes of this discussion of "FEDERAL INCOME TAX MATTERS" the
term "COPT" 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 COPT'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 COPT will satisfy such tests on a continuing basis.
In brief, an entity 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 an entity generally is not taxed on
its
22
"REIT taxable income" to the extent such income is currently distributed to
shareholders, thereby substantially eliminating the "double taxation" (i.e., at
both the entity and shareholder levels) that generally results from an
investment in an entity which is taxed as 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 corporate income taxation on its earnings, thereby significantly
reducing or eliminating the cash available for distribution to its shareholders.
Morgan, Lewis & Bockius LLP has opined that, for Federal income tax
purposes, COPT has properly elected and otherwise qualified to be taxed as a
REIT under the Code for taxable years commencing on or after June 1, 1992 and
that its proposed method of operations as described in this prospectus and as
represented to Morgan, Lewis & Bockius LLP by COPT will enable COPT to continue
to satisfy the requirements for such qualification and taxation as a REIT under
the Code for future taxable years. This opinion, however, is based upon certain
factual assumptions and representations made by COPT. Moreover, such
qualification and taxation as a REIT depends upon the ability of COPT to meet,
for each taxable year, various tests imposed under the Code as discussed below,
and Morgan, Lewis & Bockius LLP has not reviewed in the past, and may not review
in the future, COPT's compliance with these tests. Accordingly, no assurance can
be given that the actual results of the operations of COPT for any particular
taxable year will satisfy such requirements.
TAXATION OF COPT
GENERAL. In any year in which COPT qualifies as a REIT, it will not
generally be subject to Federal income tax on that portion of its REIT taxable
income or capital gain which is distributed to shareholders. COPT will, however,
be subject to tax at normal corporate rates upon any taxable income or capital
gains not distributed. Shareholders are required to include their proportionate
share of the REIT's undistributed long-term capital gain in income, but would
receive a credit for their share of any taxes paid on such gain by the REIT.
Notwithstanding its qualification as a REIT, COPT also may be subject to
taxation in certain other circumstances. If COPT should fail to satisfy either
the 75% or the 95% gross income test 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 COPT fails either the 75% or the
95% gross income test (substituting for purposes of calculating the amount by
which the 95% gross income test is failed, 90% for 95%) multiplied by a fraction
intended to reflect COPT's profitability. COPT will also be subject to a tax of
100% on net income from any "prohibited transaction" (as described below), and
if COPT 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 COPT 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, COPT would be subject to a 4%
excise tax on the excess of such required distribution over the amounts actually
distributed. COPT also may be subject to the corporate alternative minimum tax,
as well as to tax in certain situations not presently contemplated. COPT will
use the calendar year both for Federal income tax purposes, as is required of a
REIT under the Code, and for financial reporting purposes. Finally, in the event
that items of rent, interest or other deductible expenses are paid to a REIT by
a "taxable REIT subsidiary" (as defined below) of such REIT, and such amounts
are determined to be other than at arm's length, a REIT may be subject to a 100%
tax on the portion of such amounts treated as excessive. Safe harbors exist for
certain rental payments.
FAILURE TO QUALIFY. If COPT fails to qualify for taxation as a REIT in any
taxable year and the relief provisions do not apply, COPT 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 COPT
fails to qualify as a REIT will not be deductible by COPT, 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, COPT
also will be disqualified from reelecting taxation as a REIT for the four
taxable years following the year during which qualification was lost.
23
REIT QUALIFICATION REQUIREMENTS
In order to qualify as a REIT, COPT must meet the following requirements,
among others:
SHARE OWNERSHIP TESTS. COPT's shares of beneficial interest 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 COPT 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 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, COPT's Declaration of Trust places certain restrictions on the transfer
of its shares of beneficial interest to prevent additional concentration of
share ownership. Moreover, to evidence compliance with these requirements,
Treasury Regulations require COPT to maintain records which disclose the actual
ownership of its outstanding shares of beneficial interest. In fulfilling its
obligations to maintain records, COPT 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
COPT's records. A shareholder failing or refusing to comply with COPT's written
demand must submit with his tax return a similar statement disclosing the actual
ownership of COPT shares of beneficial interest and certain other information.
Under COPT'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 COPT to violate either the 50% Limitation or the gross income tests
described below. The Board of Trustees has exempted Barony Trust Limited from
the 9.8% limitation set forth in the Declaration of Trust and provided that
Barony Trust Limited may own up to 10.5% of the outstanding Common Shares. The
Board of Trustees also exempted from the 9.8% limitation set forth in the
Declaration of Trust Constellation Real Estate, Inc., which owned more than 9.8%
of the Common Shares outstanding from September 28, 1998 through March 5, 2002.
The Board of Trustees has determined, based upon representations made by
Constellation Real Estate, Inc. and Barony Trust Limited, that these exemptions
will not result in a violation of the 50% Limitation or otherwise adversely
affect COPT's ability to qualify as a REIT for Federal income tax purposes.
ASSET TESTS. At the close of each quarter of COPT's taxable year, COPT 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 COPT'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 COPT'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 COPT's total
assets (the "REIT Value Test") or (ii) 10% of the outstanding voting securities
of any one such issuer (the "Issuer Voting Stock Test") and 10% of the total
value of any such issuer (the "Issuer Value Test")). The REIT Value Test, the
Issuer Voting Stock Test or the Issuer Value Test does not apply to securities
held by a REIT in a "taxable REIT subsidiary." A taxable REIT subsidiary is any
corporation in which the REIT owns stock and with which the REIT makes a joint
election to be so treated. COPT has filed an election to have Corporate Office
Management, Inc. ("COMI") (discussed below) treated as a taxable REIT subsidiary
effective January 1, 2001. Any corporation in which a REIT owns, directly or
indirectly, shares possessing more than 35% of the voting power or value of such
corporation will automatically be treated as a taxable REIT subsidiary (other
than certain corporations which are wholly-owned by the REIT and are treated as
"qualified REIT subsidiaries"). In addition, certain debt securities held by a
REIT will not be taken into account for purposes of the Issuer Value Test.
Finally, certain "grandfathering" rules also exempt from the Issuer Value Test
securities owned by the REIT on July 12, 1999. Where COPT 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, COPT's
investment in real properties through its
24
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.
GROSS INCOME TESTS. There are two separate percentage tests relating to the
sources of COPT's gross income which must be satisfied for each taxable year.
For purposes of these tests, where COPT invests in a partnership, COPT 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 COPT as it has in the hands of the partnership. The two tests are described
below.
THE 75% TEST. At least 75% of COPT'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 COPT'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 COPT, or an owner of 10% or more of COPT, directly or
constructively owns 10% or more of such tenant unless such rents are received
from a taxable REIT subsidiary, provided that either (i) at least 90% of the
leased property in respect of which COPT is receiving such rents is occupied by
persons other than such taxable REIT subsidiary or (ii) such rents are received
in respect of a "qualified lodging facility." 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, COPT generally must not operate or manage the property or furnish or
render services to customers, other than through an "independent contractor"
from whom COPT derives no income, or through a taxable REIT subsidiary, except
that the "independent contractor" or taxable REIT subsidiary requirement does
not apply to the extent that the services provided by COPT 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, COPT may directly perform a DE MINIMIS amount of non-customary
services. COPT believes that the services provided with regard to COPT's
properties by the Operating Partnership (or its agents) are now (and, it is
believed, will in the future be) usual or customary services. Any services that
cannot be provided directly by the Operating Partnership will be performed by
independent contractors.
THE 95% TEST. In addition to deriving 75% of its gross income from the
sources listed above, at least 95% of COPT'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 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. COPT intends to monitor
closely its non-qualifying income and anticipates that non-qualifying income
from its activities will not result in COPT failing to satisfy either the 75% or
95% gross income test.
For purposes of determining whether COPT complies with the 75% and the 95%
gross income tests, gross income does not include income from prohibited
transactions. A "prohibited transaction" is a 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.
25
Even if COPT 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) COPT's failure to comply is due
to reasonable cause and not to willful neglect; (ii) COPT 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, COPT 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 (substituting
for purposes of calculating the amount by which the 95% gross income test is
failed, 90% for 95%) multiplied by a fraction intended to reflect COPT's
profitability.
COMPLIANCE WITH INCOME TESTS. During our last fiscal year, Constellation
Real Estate, Inc. and certain affiliated companies were obligated as tenants to
pay annualized office rents with respect to properties owned by the Operating
Partnership. Some of this rental income may not constitute qualifying rental
income for purposes of the 75% and 95% gross income tests. COPT expects, based
on current rent levels, that receipt of such rental income will not cause it to
violate the 95% gross income test for our last taxable year. Aside from this
rental income, COPT does not expect that it will earn material amounts of
non-qualifying income from either Constellation Real Estate, Inc. or its
existing properties. Based on the foregoing, COPT expects that it will continue
to satisfy the 75% and 95% gross income tests.
To avoid a violation of the 95% gross income test, the Operating
Partnership established COMI to own CRM, and interests in certain other entities
whose activities produced income not qualifying under the 95% gross income test.
The management fee and other service income earned by COMI as a result of its
ownership interest in CRM and such other entities, or as a result of management
and other services performed by COMI or its subsidiaries, although
non-qualifying income, was not treated as non-qualifying income earned by COPT
for purposes of the 95% or 75% gross income tests. However, any interest or
dividends paid or distributed by COMI to the Operating Partnership is considered
qualifying income for purposes of the 95% test, but is not considered qualifying
income for purposes of the 75% test.
On January 1, 2001, COPT elected to have COMI treated as a taxable REIT
subsidiary effective January 1, 2001. COMI, as a taxable REIT subsidiary, is
treated as a separate taxable corporation. COMI is currently the only taxable
REIT subsidiary owned by COPT and COPT's ownership of COMI currently represents
20% or less of the value of COPT's total assets. To insure that COPT continues
to focus on real estate as its core business, the Code provides that no more
than 20% of the total value of COPT's total assets may consists of stock of one
or more taxable REIT subsidiaries. In addition, any dividends paid to COPT by
COMI will not be treated as qualifying income for purposes of the 75% income
test. Rents paid by COMI to COPT will, however, qualify as qualifying income
under the 75% gross income test if (a) at least 90% of the leased space of the
property is rented to persons other than COMI and other than entities in which
COPT owns a 10% or greater interest and (b) the rents are substantially
comparable to rents made by other tenants of COPT. Further, to the extent that
income from transactions between COPT or its tenants and COMI is not determined
on an arm's length basis (a "redetermined" item) a 100% tax will apply. The tax
applies to the portion of any redetermined rents and deductions, and any
interest that is determined under applicable tax rules to be excessive. Safe
harbors are provided for certain rental payments where the amounts are de
minimis, the charges to third-parties are substantially comparable, the charges
are separately stated or the gross income received by COMI is not less than 150%
of its direct costs in furnishing the services. In addition, interest paid by
COMI to COPT will be subject to certain tax rules which may limit COMI's ability
to currently deduct such interest.
COPT intends to continue to monitor its operations and investments in the
context of these standards so as to continue to satisfy the 75% and 95% gross
income tests. While the Operating Partnership or its affiliates provide certain
services with respect to the properties in which COPT owns interests and
possibly with respect to any newly acquired properties, COPT 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. COPT
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, COPT was
required to distribute dividends to its shareholders each year in an amount at
least equal to (A) the sum of (i) 90% of COPT's REIT taxable income (computed
without regard to the dividends received deduction and COPT's net capital gain)
and (ii) 90% of the net
26
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
COPT 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 COPT
does not distribute all of its net capital gain or distributes at least 90% 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.
COPT 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 COPT
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 COPT to meet the distribution requirements. It is possible
that COPT may not have sufficient cash or other liquid assets to meet the
above-described distribution requirement, either 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 expenses in
computing COPT's REIT taxable income on the other hand, or for other reasons.
COPT 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 COPT fails to meet the above-described distribution requirement as a
result of an adjustment to COPT's tax return by the Service, COPT may
retroactively cure the failure by paying a "deficiency dividend" (plus
applicable penalties and interest) within a specified period.
TAXATION OF SHAREHOLDERS
TAXATION OF TAXABLE DOMESTIC SHAREHOLDERS. As long as COPT qualifies as a
REIT, distributions made to its taxable domestic shareholders out of current or
accumulated earnings and profits (and not designated as capital gain dividends)
will constitute dividends taxable as ordinary income, and corporate shareholders
will not be eligible for the dividends received deduction as to such amounts.
Distributions that are designated as capital gain dividends will be taxed as
gain from the sale or exchange of a capital asset (to the extent they do not
exceed COPT's actual net capital gain for the taxable year) without regard to
the period for which the shareholder has held its shares. In the event COPT
designates any portion of a dividend as a capital gain dividend, a shareholder's
share of such capital gain dividend would be an amount which bears the same
ratio to the total amount of dividends paid to such shareholder for the taxable
year as the total amount of capital gain dividends bears to the total amount of
all dividends paid on all classes of share for the taxable year. However,
corporate shareholders may be required to treat up to 20% of certain capital
gain dividends as ordinary income. COPT may elect to retain and pay income tax
on any net long-term capital gain, in which case its domestic shareholders would
include in their income as long-term capital gain their proportionate share of
such undistributed net long-term capital gain. A domestic shareholder would also
receive a refundable tax credit for such shareholder's proportionate share of
the tax paid by COPT on such retained capital gains and an increase in its basis
in its shares in an amount equal to the difference between the undistributed
long-term capital gains and the amount of tax paid by COPT. See the section
below entitled "Capital Gains and Losses."
Distributions in excess of current and accumulated earnings and profits
will not be taxable to a shareholder to the extent that they do not exceed the
adjusted basis of the shareholder's shares of beneficial interest, but rather
will reduce the adjusted basis of such shares. To the extent that such
distributions exceed the adjusted basis of a shareholder's shares of beneficial
interest, they will be included in income as short-term or long-term capital
gain (depending on the length of time the shares have been held), assuming the
shares are capital assets in the hands of the shareholder. In addition, any
dividend declared by COPT in October, November or December of any year and
payable to a shareholder of record on a specific date in any such month shall be
treated as both paid by COPT and received by the shareholder on December 31 of
such year, provided that the dividend is actually paid by COPT during January of
the following calendar year.
Domestic shareholders may not include in their individual income tax
returns any of COPT's net operating losses or capital losses. Instead, such
losses would be carried over by COPT for potential offset against future income
(subject to certain limitations). Distributions made by COPT and gain arising
from the sale or exchange of shares will not be treated as passive activity
income, and, as a result, shareholders generally will not be able to apply any
"passive losses"
27
against such income and gain. In addition, taxable distributions from COPT
generally will be treated as investment income. Capital gain dividends
(including distributions treated as such) and capital gain from the disposition
of shares, however, will be treated as investment income only if a shareholder
so elects, in which case such capital gain will be taxed at ordinary income
rates. COPT will notify shareholders after the close of its taxable year as to
the portions of distributions attributable to that year that constitute ordinary
income, return of capital and capital gain.
In general, a domestic shareholder will realize capital gain or loss on the
disposition of COPT's shares of beneficial interest equal to the difference
between (i) the amount of cash and the fair market value of any property
received on such disposition, and (ii) the shareholder's adjusted basis of such
shares of beneficial interest. Such gain or loss generally will constitute
short-term capital gain or loss if the shareholder has not held such shares for
more than one year and long-term capital gain or loss if the shareholder has
held such shares for more than one year. See the section below entitled "Capital
Gains and Losses". Loss upon a sale or exchange of COPT's shares of beneficial
interest by a shareholder who has held such shares for six months or less (after
applying certain holding period rules) will be treated as a long-term capital
loss to the extent of distributions from COPT required to be treated by such
shareholder as long-term capital gain.
CAPITAL GAINS AND LOSSES. The maximum marginal individual income tax rate
is 39.6%. The maximum tax rate on net capital gains applicable to individuals,
trusts and estates from the sale or exchange of capital assets held for more
than one year is 20%, and the maximum rate is reduced to 18% for assets acquired
after December 31, 2000 and held for more than five years. For individuals,
trusts and estates who would be subject to a maximum tax rate of 15%, the rate
on net capital gains is reduced to 10%, and, effective for taxable years
commencing after December 31, 2000, the rate is reduced to 8% for assets held
for more than five years. The maximum rate for net capital gains attributable to
the sale of depreciable real property held for more than 18 months is 25% to the
extent of the deductions for depreciation (other than certain depreciation
recapture taxable as ordinary income) with respect to such property.
Accordingly, the tax rate differential between capital gain and ordinary income
for noncorporate taxpayers may be significant. In addition, the characterization
of income as capital or ordinary may affect the deductibility of capital losses.
Capital losses not offset by capital gains may be deducted against a
noncorporate taxpayer's ordinary income only up to a maximum annual amount of
$3,000. Unused capital losses may be carried forward. All net capital gain of a
corporate taxpayer is subject to tax at ordinary corporate rates. A corporate
taxpayer can deduct capital losses only to the extent of capital gains, with
unused losses being carried back three years and forward five years.
BACKUP WITHHOLDING. COPT will report to its domestic shareholders and the
IRS the amount of dividends paid during each calendar year and the amount of tax
withheld, if any, with respect thereto. Under the backup withholding rules, a
shareholder may be subject to backup withholding at the rate of 30% with respect
to dividends paid unless such holder (i) is a corporation or comes within
certain other exempt categories and, when required, demonstrates this fact or
(ii) provides a taxpayer identification number, certifies as to no loss of
exemption and otherwise complies with the applicable requirements of the backup
withholdings rules. Any amount paid as backup withholding will be creditable
against the shareholder's income tax liability. The United States Treasury has
recently issued final regulations (the "Final Regulations") regarding the
withholding and information reporting rules discussed above. In general, the
Final Regulations do not alter the substantive withholding and information
reporting requirements but unify current certification procedures and forms and
clarify and modify reliance standards. The Final Regulations are generally
effective for payments made on or after January 1, 2001, subject to certain
transition rules. Prospective investors should consult their own tax advisors
concerning the adoption of the Final Regulations and the potential effect on
their ownership of COPT's shares of beneficial interest.
In addition, COPT may be required to withhold a portion of capital gain
distributions made to shareholders that fail to certify their non-foreign status
to COPT. See section below entitled "-Taxation of Foreign Shareholders."
TAXATION OF TAX-EXEMPT SHAREHOLDERS. The IRS has ruled that amounts
distributed as dividends by a REIT generally do not constitute unrelated
business taxable income ("UBTI") when received by a tax-exempt entity. Based on
that ruling, dividend income from COPT's shares of beneficial interest will not
be UBTI to a tax-exempt shareholder, provided that the tax-exempt shareholder
has not held its shares as "debt financed property" within the meaning of the
Code and such shares are not otherwise used in a trade or business. Similarly,
income from the sale of COPT's shares of beneficial interest will not constitute
UBTI unless such tax-exempt shareholder has held such shares as "debt financed
property" within the meaning of the Code or has used the shares in a trade or
business.
28
Notwithstanding the above, however, a portion of the dividends paid by a
"pension held REIT" will be treated as UBTI as to any trust which is described
in Section 401(a) of the Code, is tax-exempt under Section 501(a) of the Code (a
"qualified trust") and which holds more than 10% (by value) of the interests in
the REIT. A REIT is a "pension held REIT" if (i) it would not have qualified as
a REIT but for the application of a "look-through" exception to the 50%
Limitation applicable to qualified trusts, and (ii) either (1) at least one such
qualified trust holds more than 25% (by value) of the interests in the REIT, or
(2) one or more such qualified trusts, each of which owns more than 10% (by
value) of the interests in the REIT, hold in the aggregate more than 50% (by
value) of the interests in the REIT. The percentage of any REIT dividend treated
as UBTI is equal to the ratio of (i) the gross income (less direct expenses
related thereto) of the REIT from unrelated trades or businesses (determined as
if the REIT were a qualified trust) to (ii) the total gross income (less direct
expenses related thereto) of the REIT. A DE MINIMIS exception applies where this
percentage is less than 5% for any year. The provisions requiring qualified
trusts to treat a portion of REIT distributions as UBTI will not apply if the
REIT is able to satisfy the 50% Limitation without relying upon the
"look-through" exception with respect to qualified trusts. As a result of
certain limitations on transfer and ownership of COPT's shares of beneficial
interest contained in the Charter, COPT does not expect to be classified as a
"pension held REIT."
TAXATION OF FOREIGN SHAREHOLDERS. The rules governing the United States
Federal income taxation of the ownership and disposition of COPT's shares of
beneficial interest by persons that are, for purposes of such taxation,
nonresident alien individuals, foreign corporations, foreign partnerships and
other foreign shareholders (collectively, "Non-U.S. Shareholders") are complex
and no attempt will be made herein to provide more than a summary of such rules.
PROSPECTIVE NON-U.S. SHAREHOLDERS SHOULD CONSULT WITH THEIR OWN TAX
ADVISORS TO DETERMINE THE IMPACT OF FEDERAL, STATE, AND LOCAL INCOME TAX LAWS
WITH REGARD TO AN INVESTMENT IN COPT'S SHARES OF BENEFICIAL INTEREST, INCLUDING
ANY REPORTING REQUIREMENTS, AS WELL AS THE TAX TREATMENT OF SUCH AN INVESTMENT
UNDER THEIR HOME COUNTRY LAWS.
In general, Non-U.S. Shareholders will be subject to regular United States
Federal income taxation with respect to their investment in COPT's shares of
beneficial interest in the same manner as a U.S. shareholder (i.e., at graduated
rates on a net basis, after allowance of deductions) if such investment is
"effectively connected" with the conduct by such Non-U.S. Shareholder of a trade
or business in the United States. A Non-U.S. Shareholder that is a corporation
and that receives income with respect to its investment in COPT's shares of
beneficial interest that is (or is treated as) "effectively connected" with the
conduct of a trade or business in the United States may also be subject to the
30% branch profits tax imposed under Section 884 of the Code, which is payable
in addition to the regular United States corporate income tax. The following
discussion addresses only the Federal income taxation of Non-U.S. Shareholders
whose investment in COPT's shares of beneficial interest is not "effectively
connected" with the conduct of a trade or business in the United States.
Prospective investors whose investment in COPT's shares of beneficial interest
may be "effectively connected" with the conduct of a United States trade or
business should consult their own tax advisors as to the tax consequences
thereof.
Distributions that are not attributable to gain from sales or exchanges of
United States real property interests and that are not designated by COPT as
capital gains dividends will be treated as dividends of ordinary income to the
extent that they are made out of COPT's current or accumulated earnings and
profits. Such distributions ordinarily will be subject to a withholding tax
equal to 30% of the gross amount of the distribution unless an applicable tax
treaty reduces or eliminates that tax. Pursuant to the Final Regulations,
dividends paid to an address in a country outside the United States will no
longer be presumed to be paid to a resident of such country for purposes of
determining the applicability of withholding discussed above and the
availability of a reduced tax treaty rate. A Non-U.S. Shareholder who wishes to
claim the benefit of an applicable treaty rate will now be required to satisfy
certain certification and other requirements. Distributions that COPT makes in
excess of its current and accumulated earnings and profits will not be taxable
to a Non-U.S. Shareholder to the extent they do not exceed the adjusted basis of
such Non-U.S. Shareholder's shares, but rather will reduce the adjusted basis of
such shares (but not below zero). To the extent that such distributions exceed
the adjusted basis of a Non-U.S. Shareholder's shares, they will give rise to
tax liability if such Non-U.S. Shareholder would otherwise be subject to tax on
any gain from the sale or disposition of shares, as described below.
For withholding tax purposes, COPT was required to treat all distributions
as if made out of its current or accumulated earnings and profits and thus
intends to withhold at the rate of 30% (or a reduced treaty rate if applicable)
29
on the amount of any distribution (other than distributions designated as
capital gain dividends) made to a Non-U.S. Shareholder. Under the Final
Regulations, generally effective for distributions on or after January 1, 2001,
COPT will be required to withhold at the 30% rate on distributions COPT
reasonably estimates to be in excess of its current and accumulated earnings and
profits. If it cannot be determined at the time a distribution is made whether
such distribution will be in excess of current and accumulated earnings and
profits, the distribution will be subject to withholding at the rate applicable
to ordinary dividends. However, a Non-U.S. Shareholder may seek a refund of such
amounts from the IRS if it is subsequently determined that such distribution
was, in fact, in excess of its current or accumulated earnings and profits, and
the amount withheld exceeded the Non-U.S. Shareholder's United States tax
liability, if any, with respect to the distribution.
For any year in which COPT qualifies as a REIT, distributions that are
attributable to gain from sales or exchanges of United States real property
interests will be taxed to a Non-U.S. Shareholder under the provisions of the
Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"). Under FIRPTA,
these distributions are taxed to a Non-U.S. Shareholder as if such gain were
effectively connected with the conduct of a United States trade or business.
Non-U.S. Shareholders would thus be taxed at the normal capital gain rates
applicable to domestic shareholders (subject to applicable alternative minimum
tax and special alternative minimum tax in the case of nonresident alien
individuals), without regard as to whether such distributions are designated by
COPT as capital gain dividends. Also, distributions subject to FIRPTA may be
subject to a 30% branch profits tax in the hands of a foreign corporate
shareholder not entitled to treaty exemption. COPT is required by Treasury
Regulations to withhold 35% of any distribution to a Non-U.S. Shareholder that
could be designated as a capital gain dividend. This amount is creditable
against the Non-U.S. Shareholder's FIRPTA tax liability.
Gain recognized by a Non-U.S. Shareholder upon a sale of COPT's shares of
beneficial interest generally will not be subject to United States taxation
unless such shares constitute a "United States real property interest" within
the meaning of FIRPTA. COPT's shares of beneficial interest will not constitute
a "United States real property interest" so long as COPT is a "domestically
controlled REIT." A "domestically controlled REIT" is generally a REIT in which
at all times during a specified testing period less than 50% in value of its
share was held directly or indirectly by Non-U.S. Shareholders. COPT believes
that it will be a "domestically controlled REIT" and therefore, the sale of
COPT's shares of beneficial interest will not be subject to taxation under
FIRPTA. However, because COPT's shares of beneficial interest will be publicly
traded, no assurance can be given that COPT will continue to be a "domestically
controlled REIT." Notwithstanding the foregoing, gain from the sale or exchange
of its shares not otherwise subject to FIRPTA generally will be taxable to a
Non-U.S. Shareholder if the Non-U.S. Shareholder is a nonresident alien
individual who is present in the United States for 183 days or more during the
taxable year and has a "tax home" in the United States. In such case, the
nonresident alien individual will be subject to a 30% United States withholding
tax on the amount of such individual's gain.
If COPT does not qualify as or ceases to be a "domestically controlled
REIT," whether gain arising from the sale or exchange by a Non-U.S. Shareholder
of COPT's shares of beneficial interest would be subject to U.S. taxation under
FIRPTA will depend on whether the shares are "regularly traded" (as defined in
applicable Treasury Regulations) on an established securities market (such as
the NYSE on which COPT's shares of beneficial interest are traded) and on the
size of the selling Non-U.S. Shareholder's interest in COPT. If the gain on the
sale of COPT's shares of beneficial interest were to be subject to tax under
FIRPTA, the Non-U.S. Shareholder would be subject to the same treatment as a
domestic shareholder with respect to such gain (subject to applicable
alternative minimum tax and a special alternative minimum tax in the case of
nonresident alien individuals and the possible application of the 30% branch
profits tax in the case of foreign corporations), and the purchaser would be
required to withhold and remit to the IRS 10% of the purchase price. In
addition, if COPT is not a "domestically controlled REIT," distributions in
excess of its current and accumulated earnings and profits would be subject to
withholding at a rate of 10%.
Dividends paid in the United States with respect to COPT's shares of
beneficial interest, and proceeds from the sale of COPT's shares of beneficial
interest, through a United States broker (or certain brokers having significant
connections with the United States) may be subject to the information reporting
requirements of the Code. Under the backup withholding rules, a shareholder may
be subject to backup withholding at the rate of 31% unless such shareholder (i)
is a corporation or comes within certain other exempt categories and, when
required, demonstrates this fact, or (ii) provides a taxpayer identification
number and certifies as to no loss of exemption, and otherwise complies with the
applicable requirements of the backup withholding rules. Non-U.S. Shareholders
are generally exempt from information reporting and backup withholding, but may
be required to provide a properly completed Form W-8 or
30
otherwise comply with applicable certification and identification procedures in
order to prove their exemption. Any amount paid as backup withholding will be
creditable against the Non-U.S. Shareholder's United States income tax
liability.
The Final Regulations, originally issued by the United States Treasury on
October 6, 1997, affect the rules applicable to payments to foreign persons. In
general, the Final Regulations do not alter the substantive withholding and
information reporting requirements but unify current certification procedures
and modify reliance standards. In addition, the Final Regulations also address
certain issues relating to intermediary certification procedures designed to
simplify compliance by withholding agents. The Final Regulations are generally
effective for payments made on or after January 1, 2001, subject to certain
transition rules. Prospective investors should consult their own tax advisors
concerning the adoption of the Final Regulations and the potential effect on
their ownership of COPT's shares of beneficial interest.
OTHER TAX CONSIDERATIONS
EFFECT OF TAX STATUS OF THE OPERATING PARTNERSHIP ON REIT QUALIFICATION.
All of COPT's investments are through the Operating Partnership. COPT believes
that the Operating Partnership is properly treated as a partnership for tax
purposes (and not as an association taxable as a corporation). If, however, the
Operating Partnership were to be treated as an association taxable as a
corporation, COPT would cease to qualify as a REIT. Furthermore, in such a
situation, the Operating Partnership would be subject to corporate income taxes
and COPT would not be able to deduct its share of any losses generated by the
Operating Partnership in computing its taxable income.
TAX ALLOCATIONS WITH RESPECT TO THE PROPERTIES. The Operating Partnership
was formed, in part, by way of contributions of appreciated property. When
property is contributed to a partnership in exchange for an interest in the
partnership, the partnership generally takes a carryover basis in that property
for tax purposes equal to the adjusted basis of the contributing partner in the
property, rather than a basis equal to the fair market value of the property at
the time of contribution (this difference is referred to as a "Book-Tax
Difference"). The partnership agreement of the Operating Partnership requires
allocations of income, gain, loss and deduction with respect to contributed
Property to be made in a manner consistent with the special rules in Section
704(c) of the Code, and the regulations thereunder, which tend to eliminate the
Book-Tax Differences with respect to the contributed Properties over the
depreciable lives of the contributed Properties. However, because of certain
technical limitations, the special allocation rules of Section 704(c) may not
always entirely eliminate the Book-Tax Difference on an annual basis or with
respect to a specific taxable transaction such as a sale. Thus, the carryover
basis of the contributed properties in the hands of the Operating Partnership
could cause COPT to be allocated lower amounts of depreciation and other
deductions for tax purposes than would be allocated to COPT if all properties
were to have a tax basis equal to their fair market value at the time of
acquisition. The foregoing principles also apply in determining its earnings and
profits for purposes of determining the portion of distributions taxable as
dividend income. The application of these rules over time may result in a higher
portion of distributions being taxed as dividends than would have occurred had
COPT purchased its interests in all properties at their agreed value.
Treasury Regulations under Section 704(c) of the Code allow partnerships to
use any reasonable method of accounting for Book-Tax Differences so that the
contributing partner receives the tax benefits and burdens of any built-in gain
or loss associated with the property. The Operating Partnership has determined
to use the "traditional method" (which is specifically approved in the Treasury
Regulations) for accounting for Book-Tax Differences with respect to the
Contributed Properties.
STATE AND LOCAL TAXES. COPT and its shareholders may be subject to state
or local taxation in various state or local jurisdictions, including those in
which COPT or they transact business or reside. The state and local tax
treatment of us and its shareholders may not conform to the Federal income tax
consequences discussed above. Consequently, prospective shareholders should
consult with their own tax advisors regarding the effect of state, local and
other tax laws of any investment in COPT's shares of beneficial interest.
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PLAN OF DISTRIBUTION
We are registering the Common Shares pursuant to our obligations under
several registration rights agreements, but the registration of the Common
Shares does not necessarily mean that any of the Common Shares will be offered
or sold by the selling shareholders or their respective donees or pledgees
hereunder.
The distribution of the Common Shares by the selling shareholders, as well
as any donees or pledgees that receive Common Shares from the selling
shareholders, may be effected from time to time in one or more underwritten
transactions at a fixed price or prices which may be changed, or at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices or at negotiated prices. Any such underwritten offering may be on
a "best efforts" or a "firm commitment" basis. In connection with any
underwritten offering, underwriters or agents may receive compensation in the
form of discounts, concessions or commissions from the selling shareholders or
from purchasers of the Common Shares. Underwriters may sell the Common Shares to
or through dealers, and such dealers may receive compensation in the form of
discounts, concessions or commissions from the underwriters and/or commissions
from the purchasers for whom they may act as agents.
The selling shareholders and any underwriters, dealers or agents that
participate in the distribution of the Common Shares may be deemed to be
"underwriters" within the meaning of the Securities Act of 1933, as amended,
(the "Securities Act"), and any profit on the sale of the Common Shares by them
and any discounts, commissions or concessions received by any such underwriters,
dealers or agents may be deemed to be underwriting discounts and commissions
under the Securities Act.
At a time a particular offer of Common Shares is made by the selling
shareholders, a prospectus supplement, if required, will be distributed that
will set forth the name and names of any underwriters, dealers or agents and any
discounts, commissions and other terms constituting compensation from the
selling shareholders and any other required information.
The sale of Common Shares by the selling shareholders may also be effected
from time to time by selling Common Shares directly to purchasers or to or
through broker-dealers. In connection with any such sale, any such broker-dealer
may act as agent for the selling shareholders or may purchase from the selling
shareholders all or a portion of the Common Shares as principal, and may be made
pursuant to any of the methods described below. Such sales may be made on the
NYSE or other exchanges on which the Common Shares are then traded, in the
over-the-counter market, in negotiated transactions or otherwise at prices and
at terms then prevailing or at prices related to the then-current market prices
or at prices otherwise negotiated.
The Common Shares may also be sold in one or more of the following
transactions: (a) block transactions (which may involve crosses) in which a
broker-dealer may sell all or a portion of such shares as agent but may position
and resell all or a portion of the block as principal to facilitate the
transaction; (b) purchases by any such broker-dealer as principal and resale by
such broker-dealer for its own account pursuant to a prospectus supplement; (c)
a special offering, an exchange distribution or a secondary distribution in
accordance with applicable NYSE or other stock exchange rules; (d) ordinary
brokerage transactions and transactions in which any such broker-dealer solicits
purchasers; (e) sales "at the market" to or through a market maker or into an
existing trading market, on an exchange or otherwise, for such shares; and (f)
sales in other ways not involving market markers or established trading markets,
including direct sales to purchasers. In effecting sales, broker-dealers engaged
by the selling shareholders may arrange for other broker-dealers to participate.
Broker-dealers will receive commissions or other compensation from the selling
shareholders in amounts to be negotiated immediately prior to the sale that will
not exceed those customary in the types of transactions involved. Broker-dealers
may also receive compensation from purchasers of the Common Shares which is not
expected to exceed that customary in the types of transactions involved.
In order to comply with the securities laws of certain states, if
applicable, the Common Shares may be sold only through registered or licensed
brokers or dealers.
We have agreed to pay all expenses incident to the offering and sale of the
Common Shares, other than commissions, discounts and fees of underwriters,
broker-dealers or agents. We have agreed to indemnify the selling
32
shareholders against certain losses, claims, damages, actions, liabilities,
costs and expenses, including liabilities under the Securities Act.
Each of the selling shareholders has agreed to indemnify us, our officers
and Trustees and each person who controls (within the meaning of the Securities
Act) us, and each of the other selling shareholders, against any losses, claims,
damages, liabilities and expenses arising under the securities laws in
connection with this offering with respect to written information furnished to
us by such selling shareholder; provided, however, that the indemnification
obligation is several, not joint, as to each selling shareholder.
EXPERTS
The financial statements incorporated in this prospectus by reference to
the Annual Report on Form 10-K of Corporate Office Properties Trust for the year
ended December 31, 2001 have been so incorporated in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
LEGAL MATTERS
The validity of the Common Shares offered hereby is being passed upon for
us by Morgan, Lewis & Bockius LLP. The opinion of counsel as described under the
heading "Federal Income Tax Matters" is being rendered by Morgan, Lewis &
Bockius LLP, which opinion is subject to various assumptions and is based on
current tax law.
WHERE YOU CAN FIND MORE INFORMATION
COPT has filed a registration statement on Form S-3 with the Securities
and Exchange Commission in connection with this offering. In addition, COPT
files annual, quarterly, and current reports, proxy statements and other
information with the Securities and Exchange Commission. You may read and copy
the registration statement and any other documents filed by COPT at the
Securities and Exchange Commission's Public Reference Room at 450 Fifth Street,
N.W., Washington, D.C. 20549. Please call the Securities and Exchange Commission
at 1-800-SEC-0330 for further information on the Public Reference Room. COPT's
Securities and Exchange Commission filings are also available to the public at
the Securities and Exchange Commission's Internet site at http://www.sec.gov.
This prospectus is part of the registration statement and does not contain
all of the information included in the registration statement. If a reference is
made in this prospectus or any prospectus supplement to any contract or other
document of COPT, the reference may not be complete and you should refer to the
exhibits that are a part of the registration statement for a copy of the
contract or document.
The Securities and Exchange Commission allows us to "incorporate by
reference" into this prospectus the information we file with the Commission,
which means that we can disclose important information to you by referring you
to those documents. Information incorporated by reference is part of this
prospectus. Later information filed with the Securities and Exchange Commission
will update and supersede this information.
We incorporate by reference the documents listed below and any future
filings we make with the Securities and Exchange Commission under Sections
13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 until this
offering is completed:
o Annual Report on Form 10-K for the year ended December 31, 2001;
o Current Reports on Form 8-K, filed with the Securities and Exchange
Commission on January 30, 2002, February 13, 2002 and March 4, 2002; and
o Registration Statement on Form 8-A relating to the registration of our
Common Shares, filed with the Securities and Exchange Commission on April
7, 1998.
You may request a copy of these filings, at no cost, by contacting Roger A
Waesche, Jr., Senior Vice President and Chief Financial Officer, 8815 Centre
Park Drive, Suite 400, Columbia, Maryland 21045, by telephone at
33
410-992-7348, by facsimile at 410-740-1174, or by e-mail at
roger.waesche@copt.com. The information contained on our website is not part of
this prospectus.
34
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses in connection with the issuance and distribution of the
securities being registered are set forth in the following table (all amounts
except the registration fee are estimated):
Registration fee--Securities and Exchange Commission $ 961
Accountant's fees and expenses 10,000
Legal fees and expenses 10,000
Miscellaneous 10,000
-------
TOTAL $30,961
=======
All expenses in connection with the issuance and distribution of the
securities being offered shall be borne by COPT.
ITEM 15. INDEMNIFICATION OF TRUSTEES AND OFFICERS.
The Maryland REIT Law permits a Maryland real estate investment trust to
include in its declaration of trust a provision limiting the liability of its
trustees and officers to the trust and its shareholders for money damages except
for liability resulting from (i) actual receipt of an improper benefit or profit
in money, property or services or (ii) active and deliberate dishonesty
established by a final judgment as being material to the cause of action. The
Declaration of Trust contains such a provision limiting such liability to the
maximum extent permitted by Maryland law.
The Declaration of Trust authorizes COPT, to the maximum extent permitted
by Maryland law, to obligate itself to indemnify and to pay or reimburse
reasonable expenses in advance of final disposition of a proceeding to (a) any
present or former Trustee or officer or (b) any individual who, while a Trustee
of COPT and at the request of COPT, serves or has served another real estate
investment trust, corporation, partnership, joint venture, trust, employee
benefit plan or any other enterprise as a trustee, director, officer, partner,
employee or agent of such entity from and against any claim or liability to
which such person may become subject or which such person may incur by reason of
service in such capacity. The Bylaws obligate COPT, to the maximum extent
permitted by Maryland law, to indemnify and to pay or reimburse reasonable
expenses in advance of final disposition of a proceeding to (i) any present or
former Trustee or officer who is made a party to the proceeding by reason of his
or her service in that capacity or (ii) any such Trustee or officer who, at the
request of COPT, serves or has served another real estate investment trust,
corporation, partnership, joint venture, trust, employee benefit plan or any
other enterprise as a trustee, director, officer, partner, employee or agent of
such entity and who is made a party to the proceeding by reason of his service
in that capacity against any claim or liability to which he may become subject
by reason of his or her status as a present or former Trustee or officer of
COPT. The Declaration of Trust and the Bylaws also permit COPT to provide
indemnification to any person who served a predecessor of COPT in any of the
capacities described above and to any employee or agent of COPT or a predecessor
of COPT. The Bylaws require COPT to indemnify a Trustee or officer who has been
successful, on the merits or otherwise, in the defense of any proceeding to
which he or she is made a party by reason of his or her service in that
capacity.
The Maryland REIT Law permits a Maryland real estate investment trust to
indemnify, and to advance expenses to, its trustees and officers, to the same
extent as permitted by the Maryland General Corporation Law ("MGCL") for
Trustees and officers of Maryland corporations. The MGCL permits a corporation
to indemnify its present and former Trustees and officers, among others, against
judgments, penalties, fines, settlements and reasonable expenses actually
incurred by them in connection with any proceeding to which they may be made a
party by reason of their service in those or other capacities unless it is
established that (i) the act or omission of the director or officer was material
to the matter giving rise to the proceeding and (a) was committed in bad faith
or (b) was the result of active and deliberate dishonesty, (ii) the director or
officer actually received an improper personal benefit in money, property or
services or (iii) in the case of any criminal proceeding, the director or
officer had reasonable cause to believe that the act or omission was unlawful.
However, under the MGCL, a Maryland corporation may not indemnify for an adverse
judgment in a suit by or in the right of the corporation or for a
II-1
judgment of liability on the basis that personal benefit was improperly
received, unless in either case a court orders indemnification and then only for
expenses. The MGCL permits a corporation to advance reasonable expenses to a
director or officer only with respect to a proceeding brought to enforce
indemnification under the MGCL or if the charter or bylaws of the corporation, a
resolution by the board of directors, or an agreement approved by the board of
directors to which the corporation is a party expressly provides for such
indemnification. In addition, reasonable expenses may be advanced upon the
corporation's receipt of (a) a written affirmation by the director or officer of
his or her good-faith belief that he or she has met the standard of conduct
necessary for indemnification by the corporation and (b) a written undertaking
by him or her or on his or her behalf to repay the amount paid or reimbursed by
the corporation if it shall ultimately be determined that the standard of
conduct was not met. Under the MGCL, rights to indemnification and expenses are
nonexclusive, in that they need not be limited to those expressly provided by
statute.
The Maryland REIT Law and the Bylaws may permit indemnification for
liabilities arising under the Securities Act or the Exchange Act. The Board of
Trustees has been advised that, in the opinion of the Commission,
indemnification for liabilities arising under the Securities Act or the Exchange
Act is contrary to public policy and is therefore unenforceable, absent a
decision to the contrary by a court of appropriate jurisdiction.
ITEM 16. EXHIBITS.
EXHIBIT
NO. DESCRIPTION
------- -----------
5.1* Opinion of Morgan, Lewis & Bockius LLP regarding the legality of the
securities being registered.
8.1 Opinion of Morgan, Lewis & Bockius LLP as to certain tax matters
(filed herewith).
23.1 Consent of Independent Accountants (filed herewith).
23.2 Consent of Morgan, Lewis & Bockius LLP (included in Exhibit 5.1
and Exhibit 8.1).
24.1 Power of attorney (included on signature page to the Registration
Statement).
------------
* To be filed by amendment.
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the Registration
Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high
end of the estimated maximum offering range may be reflected
in the form of prospectus filed with the Commission pursuant
to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration
statement; and
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(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
Registration Statement or any material change to such
information in the Registration Statement;
PROVIDED, HOWEVER, that paragraphs (a)(1)(i) and (a)(1)(ii) do not
apply if the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed
with or furnished to the Securities and Exchange Commission by the
Registrant pursuant to Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the
Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered that remain unsold at the
termination of the offering.
(b) The undersigned Registrant hereby undertakes that, for the purpose of
determining any liability under the Securities Act of 1933, each
filing of the Registrant's annual report pursuant to Section 13(a) or
Section 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934) that
is incorporated by reference in this Registration Statement shall be
deemed to be a new registration statement relating to the securities
offered herein and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to Trustees, officers and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act and is,
therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a Trustee, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such Trustee, officer or
controlling person in connection with the securities being registered,
the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and
will be governed by the final adjudication of such issue.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of Columbia, State of Maryland on March 29, 2002.
CORPORATE OFFICE PROPERTIES TRUST
By: /s/ RANDALL M. GRIFFIN
----------------------------
Name: Randall M. Griffin
Title: President and Chief Operating Officer
By: /s/ ROGER A. WAESCHE, JR.
-------------------------
Name: Roger A. Waesche, Jr.
Title: Senior Vice President and
Chief Financial Officer
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Pursuant to the requirements of the Securities Act of 1933, as amended, this
registration statement has been signed below by the following persons in the
capacities with the above Registrant and on the dates indicated.
Each person in so signing also makes, constitutes and appoints Randall M.
Griffin, President and Chief Operating Officer of the Registrant, and Roger A.
Waesche, Senior Vice President and Chief Financial Officer of the Registrant,
and each of them acting alone, as his or her true and lawful attorney-in-fact,
in his or her name, place and stead, to execute and cause to be filed with the
Securities and Exchange Commission any or all amendments to this report.
SIGNATURE CAPACITY DATE
/s/ Jay. H. Shidler Chairman of the Board of Trustees March 29, 2002
---------------------------
Jay H. Shidler
/s/ Clay W. Hamlin Chief Executive Officer and Trustee March 29, 2002
---------------------------
Clay W. Hamlin, III
/s/ Randall M. Griffin President and Chief Operating Officer March 29, 2002
----------------------------- (Principal Executive Officer)
Randall M. Griffin
/s/ Roger A. Waesche, Jr Senior Vice President and Chief Financial Officer March 29, 2002
----------------------------- (Principal Accounting and Financial Officer)
Roger A. Waesche, Jr.
/s/ Betsy Z. Cohen Trustee March 29, 2002
---------------------------
Betsy Z. Cohen
/s/ Kenneth D. Wethe Trustee March 29, 2002
---------------------------
Kenneth D. Wethe
Trustee March 29, 2002
---------------------------
Robert L. Denton
/s/ Kenneth S. Sweet, Jr. Trustee March 29, 2002
----------------------------
Kenneth S. Sweet, Jr.
/s/ Steven D. Kesler Trustee March 29, 2002
---------------------------
Steven D. Kesler
/s/ Thomas F. Brady Trustee March 29, 2002
---------------------------
Thomas F. Brady
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