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As filed with the Securities and Exchange Commission on September 12, 2003
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
Washington, D.C. 20549
------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
Under
THE SECURITIES ACT OF 1933
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CORPORATE OFFICE PROPERTIES TRUST
(Exact
Corporate Office Properties Trust
(Exact name of Registrantregistrant as specified in its charter)
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Maryland 23-2947217
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
| Maryland | 23-2947217 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
8815 Centre Park Drive, Suite 400
Columbia, MarylandMD 21045
(410) 730-9092
(Address,
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
------------------
CLAY
Clay W. HAMLIN,Hamlin, III
Chief Executive Officer
Corporate Office Properties Trust
8815 Centre Park Drive, Suite 400
Columbia, MD 21045
(410) 730-9092
(Name,
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------
Copies
with 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:
| John H. Gurley, Esquire Senior Vice President, Secretary and General Counsel Corporate Office Properties Trust 8815 Centre Park Drive, Suite 400 Columbia, MD 21045 (410) 730-9092 | Richard A. Silfen, Esquire Justin W. Chairman, Esquire Morgan, Lewis & Bockius LLP 1701 Market Street Philadelphia, Pennsylvania 19103 (215) 963-5000 |
Approximate date of commencement of the 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: / /o
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/ý
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: / /______o
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
-------------------------------
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
- ----------
o
CALCULATION OF REGISTRATION FEE
| Title of Each Class of Securities to be Registered(1)(2) | Proposed Maximum Aggregate Offering Price(3) | Amount of Registration Fee | ||
|---|---|---|---|---|
| Common Shares of Beneficial Interest, par value $.01 per share | ||||
| Preferred Shares of Beneficial Interest, par value $.01 per share | $400,000,000 | $32,360 | ||
| Depositary Shares | ||||
| Warrants(4) | ||||
- (1)
- The securities registered hereby may be sold separately, together or in units with other securities registered hereby.
- (2)
- In addition to any common shares of beneficial interest, preferred shares of beneficial interest and depositary shares as may be issued directly under this registration statement, an indeterminate number of common shares, preferred shares and other securities that may be issued by the registrant, either at the option of the holder thereof or the registrant, upon conversion of, or in exchange for, common, preferred or depositary shares or warrants, and for which no separate consideration will be received, are being registered hereby.
- (3)
- Estimated solely for
the purposepurposes of computing the registration fee, pursuant to Rule457(a)457(o) under the SecuritiesAct,Act. - (4)
- The warrants, if issued, will entitle the holders thereof to purchase preferred shares and/or common shares, and may be sold separately, together or in units with other securities registered hereby.
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 Rule 457(c) underSection 8(a) of the Securities Act basedof 1933 or until this registration statement shall become effective on such date as the average ofSecurities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
The information in this prospectus is not complete and may be changed. We may not sell these securities until the highregistration statement filed with the Securities and low reportedExchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where an offer or sale prices of theis not permitted.
Subject to completion, dated September 12, 2003
PROSPECTUS
CORPORATE OFFICE PROPERTIES TRUST
$400,000,000
COMMON SHARES OF BENEFICIAL INTEREST
PREFERRED SHARES OF BENEFICIAL INTEREST
DEPOSITARY SHARES
WARRANTS
This prospectus relates to common shares of beneficial interest, preferred shares of Corporate Office Properties Trust onbeneficial interest, depositary shares representing interests in preferred shares and warrants to purchase common shares and/or preferred shares, or any combination of these securities, that we may sell from time to time in one or more offerings. The aggregate public offering price of 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 offeringsecurities we may sell in these offerings will not exceed $400,000,000. We will provide the specific terms and conditions of Common Shares of Corporate Office Properties Trust.
Corporate Office Properties Trust is referredthese sales and the securities offered in supplements to in this prospectus as "we,"
"us"prepared in connection with each offering. The prospectus supplement may also add, update or "COPT." The Common Shares covered by this prospectus may be sold by
certain selling shareholders identifiedchange information contained in this prospectus. The selling
shareholders may acquire the 310,342 Common Shares covered byYou should read this prospectus by
redeeming limited partnership interests which they ownand each applicable prospectus supplement carefully before you invest in the securities. The securities may be offered directly, through agents on our operating
partnership, Corporate Office Properties, L.P., in exchange for Common Shares.
You may find information pertainingbehalf 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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or through underwriters.
Our Common Sharescommon 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 doeshave not necessarily mean
thatyet determined whether any of the sharesother securities that may be offered by this prospectus will be offeredlisted on any exchange, inter-dealer quotation system, or sold by the selling shareholders. We
will receive no proceedsover-the-counter market. If we decide to seek listing of any salessuch securities, a prospectus supplement relating to those securities will disclose the exchange, quotation system or market on which the securities will be listed.
Investing in our securities involves risks. See "Risk Factors" beginning on page 3 of this prospectus.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these Common Shares, but will incur
expenses in connectionsecurities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The date of this prospectus is , 2003.
| Page | ||
|---|---|---|
| ABOUT THIS PROSPECTUS | 1 | |
FORWARD-LOOKING STATEMENTS | 1 | |
SUMMARY | 2 | |
RISK FACTORS | 3 | |
USE OF PROCEEDS | 12 | |
RATIOS OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED SHARE DIVIDENDS | 13 | |
DESCRIPTION OF SHARES | 14 | |
DESCRIPTION OF WARRANTS | 26 | |
FEDERAL INCOME TAX MATTERS | 27 | |
PLAN OF DISTRIBUTION | 37 | |
EXPERTS | 39 | |
LEGAL MATTERS | 39 | |
WHERE YOU CAN FIND MORE INFORMATION | 39 |
The terms "COPT," "Company," "we," "our" and "us" refer to Corporate Office Properties Trust and its subsidiaries, including Corporate Office Properties, L.P., which we refer to as our operating partnership, Corporate Office Management, Inc. ("COMI"), Corporate Development Services, LLC, Corporate Office Services, LLC, Corporate Realty Management, LLC and Corporate Cooling & Controls, LLC, unless the context suggests otherwise. The term "you" refers to a prospective investor.
i
This prospectus is part of a registration statement that we filed with the offering.
The selling shareholdersSecurities and Exchange Commission, or SEC, using a "shelf" registration process, which enables us, from time to time, mayto offer and sell in one or more offerings common shares, preferred shares, depositary shares and warrants to purchase common shares and/or preferred shares or any combination of these securities. The aggregate public offering price of the shares
held by them directly or through agents or broker-dealers on termssecurities we sell in these offerings will not exceed $400,000,000. This prospectus contains a general description of the securities that we may offer. Each time we sell any securities pursuant 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 offerthis prospectus, we will be set forth inprovide a prospectus supplement whichthat will accompany this prospectus.contain specific information about the terms of that offering. The prospectus supplement also may add, update or change information contained in this prospectus. The date ofYou should read 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 applicable prospectus supplement, together with the additional information described below under the heading "Where You Can Find More Information," AND THE DOCUMENTS TO WHICH WE REFER YOU IN THE
SECTION CALLED "WHERE YOU CAN FIND MORE INFORMATION" IN THIS PROSPECTUS.
OUR COMPANY
GENERAL.before you decide whether to invest in the securities.
This prospectus and the documents incorporated by reference in this prospectus contain "forward-looking" statements, as defined in the Private Securities Litigation Reform Act of 1995, that are based on our current expectations and estimates about future events and financial trends affecting 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, competition with other companies;
- •
- risks relating to real estate acquisitions and development;
- •
- governmental actions and initiatives;
- •
- environmental requirements; and
- •
- the other factors described in this prospectus beginning on page 3 under the heading "Risk Factors."
This summary highlights selected information about us. Because it is a summary, it does not contain all of the information that you should consider before reaching an investment decision. To understand us and the securities that may be offered pursuant to this prospectus, you should read the entire prospectus carefully, especially the "Risk Factors" section beginning on page 3 and the documents we refer you to in the section called "Where You Can Find More Information" beginning on page 39.
We are a fully-integrated and self-managed real estate investment trust, ("REIT")or REIT, that focuses principally on the ownership, management, leasing, acquisition and development of suburban office buildingsproperties located in select
submarkets in the Mid-Atlantic region of the United States.region. Our strategy is to operate in select, demographically strong submarkets where we can achieve operating synergies and key competitive advantages, including attracting high quality tenants and securing acquisition and development opportunities. As of December 31,
2001, we:
-June 30, 2003, we owned 98 office113 operating properties, in Maryland, Pennsylvania, New Jersey and
Virginia containing approximately 7.8 million rentable square feet
(including twoincluding three properties owned through joint ventures) plus
developable land;
- achieved a 96% occupancy rateventures, encompassing 9.5 million square feet.
We focus on leasing our properties; and
- had construction underway on six new buildings totaling 532,000
square feet that were 54.9% pre-leased (excluding the construction
activitiesoffice properties to large, financially sound entities with significant, long-term space requirements. As of two joint ventures).
We conduct almost allJune 30, 2003, our portfolio was 92.0% leased. Our top twenty tenants, which represented 63.2% of our operations throughtotal annualized revenue as of June 30, 2003 had a weighted average lease term of 5.9 years and an average lease size of 58,544 square feet.
We believe our operating partnership,
Corporate Office Properties, L.P., a Delaware limited partnership, for which we
areextensive experience, market knowledge and network of industry contacts within the managing general partner.Mid-Atlantic region provide us with an important competitive advantage in establishing, maintaining and enhancing our prominence within our targeted submarkets. Our Operating Partnership ownssix executive officers have an average of 26 years of 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 areexperience, specifically in the formMid-Atlantic region. In addition, as of CommonJune 30, 2003, our executive officers and Preferred Units. As of December 31, 2001, wetrustees collectively 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 certain22.0% of our officers and
Trustees.common equity interests, on a fully diluted basis.
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
Codelaws 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 numberthe State 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).Maryland. Our principal 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
Recent Developments
Since the quarter ended June 30, 2003, we completed the following transactions:
- •
- acquired a five office property portfolio in Northern Virginia on July 25 2003, which was 96.3% occupied as of June 30, 2003 and contains 433,814 square feet, for $75.5 million. We funded this acquisition using proceeds from a $45.0 million mortgage loan, $30.0 million in borrowings under our secured revolving credit facility and cash reserves for the balance. The $45.0 million mortgage loan closed simultaneously with the acquisition, bears interest at an annual rate of LIBOR plus 2.0% and matures in July 2004, subject to our ability to extend the maturity date pursuant to two six-month extension options.
- •
- sold 2,200,000 shares of our 8% Series G Cumulative Redeemable Preferred Shares in an underwritten public offering, raising $53.2 million in net proceeds. We used the net proceeds from this offering plus cash reserves to repay $58.0 million in borrowings under our $150.0 million secured revolving credit facility.
2
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.
You should carefully consider the risks and uncertainties described below before purchasing our securities. While our most significant risks and uncertainties are described below, these are not the only risks 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 securities, to the extent such securities are listed on any exchange, inter-dealer quotation system or over-the-counter market, could decline and you may lose all or part of your investment. In addition to the risks and uncertainties described below, you should carefully consider 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 may suffer adverse consequences as a result of our reliance on rental revenues for our income.
We earn incomerevenue from renting our properties. Our operating costs do not necessarily fluctuate in relation to changes in our rental revenue. This means that our costs will not necessarily decline and may increase even if our revenues do. Also, our operating costs may increase while our revenues do not.decline.
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 incomerevenue 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.costs, in which case our operations could be adversely affected. 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.
Adverse developments concerning some of our key tenants could have a negative impact on our revenue.
As of December 31, 2001, tenJune 30, 2003, twenty tenants accounted for 41.8%approximately 63.2% of our total annualized rental revenue, and five of these tenants accounted for approximately 36.0% of our total annualized rental revenue. Three of theseInformation regarding our five largest tenants accounted for approximately 24.2% of our total annualized rental revenue. Our
largest tenant is set forth below:
| Tenant | Total Annualized Rental Revenue at June 30, 2003 | Percentage of Total Annualized Rental Revenue | Number of Buildings in Which Tenant Leased Space | ||||
|---|---|---|---|---|---|---|---|
| | (in thousands) | | | ||||
| United States Government(1) | $ | 22,104 | 13.6 | % | 21 | ||
| Computer Sciences Corporation(2) | 10,600 | 6.5 | % | 3 | |||
| AT&T Local Services(2) | 9,100 | 5.6 | % | 6 | |||
| VeriSign, Inc.(3) | 8,985 | 5.5 | % | 1 | |||
| Unisys(4) | 7,593 | 4.7 | % | 3 | |||
- (1)
- Generally, the leases with 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 leasesGovernment provide for one-year terms or provide for early termination rights. ThegovernmentUnited States Government may terminate its leases if, among other reasons, theCongress of theUnited States Congress fails to provide funding.TheCongressof the United Stateshas appropriated funds for these leases through September2002. Our second largest tenant, AT&T Local Services, which combined2003. - (2)
- Includes affiliated companies and organizations.
- (3)
- VeriSign, Inc. has the right to terminate the lease with respect to a maximum of 232,268 rentable square feet at designated times from June 2005 through September 2006.
- (4)
- Unisys subleases some of its
affiliates represented 6.4% of ourspace to Merck and Co., Inc. Revenue from this subleased space is not included in total annualized rental revenueas 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.for Unisys.
3
If any of our threefive largest tenants fail to make rental payments to us, or if the Federal governmentUnited States Government elects to terminate several of its leases and the space cannot be re-leased on satisfactory terms, there would be an adverse effect on our financial performance and ability to make expected distributions to shareholdersour shareholders.
We classify the revenue from our leases into industry groupings based solely on management's knowledge of the tenants' operations in leased space. Occasionally, classifications require subjective and complex judgments. For example, we have a tenant that is considered by many to be in the computer industry; however, since the nature of that tenant's operations in the space leased from us is focused on providing service to the United States Government's defense department, we classify the revenue we earn from the lease as United States Government defense/defense contractor industry revenue. We do not use independent sources such as Standard Industrial Classification codes for classifying our revenue into industry groupings and if we did, the resulting groupings 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.different. As of June 30, 2003, the United States defense industry (comprised of the United States Government and defense contractors) accounted for approximately 39.2% of our total annualized rental revenue. Most of the 13.6% of our total annualized rental revenue that we derived from leases with agencies of the United States Government as of June 30, 2003 is included in the 39.2% of our total annualized revenue from the United States defense industry.
We have become increasingly reliant on defense industry tenants, particularly due to the increased activity in that sector following the events of September 11, 2001. Furthermore, we expect that the percentage of our total annualized rental revenue derived from the defense industry will continue to increase. A reduction in government spending for defense could affect the ability of these tenants to fulfill lease obligations or decrease the likelihood that these tenants will renew their leases. In the case of the United States Government, a reduction in government spending could result in the early termination of leases. Such occurrences could have an adverse effect on our results of operations, financial condition, cash flows and ability to make distributions to our shareholders.
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 believe that the recent economic slowdown in the United States has, and could continue to, adversely affect a number of our tenants. In addition, as noted above, 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, there could be an adverse effect on 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.shareholders.
Our properties are geographically concentrated in the Mid-Atlantic region, particularly in the Baltimore/Washington corridor. We believe that our occupancy rates have been affected as a result of adverse conditions in that region, as well as in the United States generally, and we may suffer economic harm if these conditions continue.
All of our properties are located in the Mid-Atlantic region of the United States, and asStates. As of December 31, 2001,June 30, 2003, our properties located in the Baltimore/Washington Corridorcorridor accounted for 65.1%55.3% of our total annualized rental revenue. Our properties are also typically concentrated in office parks in which we own most of the properties. Consequently, we do not have a broad geographic distribution of our properties. As a result, a decline in the real estate market or general economic conditions generallyin the Mid-Atlantic region, the Baltimore/Washington corridor or the office parks in which our properties are located could have an adverse effect on our financial position, results of operations, cash flows and ability to make distributions to our shareholders.
4
We believe that the recent economic slowdown in the United States has adversely affected occupancy rates in the Mid-Atlantic region and particularlyour properties and, in theturn, led to downward pressure on rental rates. Occupancy in our portfolio decreased from 94.1% at June 30, 2002 to 91.6% at June 30, 2003; this decrease reflected a somewhat larger decline in our Baltimore/Washington Corridor,corridor properties, where occupancy decreased from 93.3% at June 30, 2002 to 90.3% at June 30, 2003. Lower occupancy rates and the resulting increased competition for tenants in our operating regions placed downward pressure on rental rates in most of these regions, a trend that we believe will affect us further as we attempt to lease vacant space and renew leases scheduled to expire on occupied space. If occupancy rates in our regions do not improve or further decline, we may have difficulty leasing both existing vacant space and space associated with future lease expirations at rental rates that are sufficient to meet our short term capital needs, which could have a materially adverse effectadversely affect our financial position, results of operations, cash flows and ability to make distributions to shareholders.
We would suffer economic harm if we were unable to renew our leases on our
operations and financial position.
4
WE WOULD SUFFER ECONOMIC HARM IF WE ARE UNABLE TO RENEW OUR LEASES ON
FAVORABLE TERMS.favorable terms.
When leases expire for our properties expire, our tenants may not renew or may renew on terms less favorable to us than the terms of their original leases. If a tenant leaves, we can expect to experience a vacancy for some period of time as well as higher capital costs than if a tenant renews. As a result, our financial performance and ability to make distributions to our shareholders could be adversely affected if we experience a high volume of tenant departures at the original
lease. Asend of December 31, 2001, our percentagetheir lease terms. Set forth below are the percentages of total annualized rental revenue as of June 30, 2003 that were subject to scheduled lease expirations for the six month period from July 1, 2003 through December 31, 2003 and in each of the next fivefour calendar years
were:
| 2003 (from July 1, 2003) | 2.3 | % | |
| 2004 | 9.4 | % | |
| 2005 | 11.0 | % | |
| 2006 | 11.1 | % | |
| 2007 | 15.0 | % |
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 expectGovernment leases that provide for early termination rights accounted for 13.6% of our total annualized rental revenue at June 30, 2003.
We may not be able to incur a vacancy for some period of
time as well as higher capital costs than if a tenant renews. In either case,compete successfully with other entities that operate in 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.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.we do. If our competitors prevent us from buying the properties that we have targetedtarget for acquisition, we may not be able to meet our property acquisition and development goals. Moreover, numerous commercial properties compete for tenants with our properties. Some of the properties competing with ours may have newer or more desirable locations, or the competing properties' owners may be willing to accept lower rates than are acceptable to us. Competition for property acquisitions, or for tenants in properties that we own, could have an adverse effect on our financial performance and distributions to our shareholders.
We may incur costs on unsuccessful
acquisitions that we will not be ableunable to recover. The operating performance ofexecute 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.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 whichthat are not fully pre-leased. When we develop and construct properties, we runassume the risksrisk that actual costs will exceed our budgets, that we will experience construction or development delays and that projected leasing will not occur, allany of which could adversely affect our financial performance and our ability to make expected distributions to our shareholders. In
5
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 may suffer economic harm as a result of the actions of our joint venture partners.
We invest in certain entities wherein which we are not the exclusive investor or principal decision maker. As of June 30, 2003, we owned a total of 113 properties, three of which were held through joint ventures. Aside from our inability to unilaterally control the operations of these joint ventures, our investments entail the additional risks that: (i)that (1) the other parties to these investments may not fulfill their financial obligations as investors;investors, in which case we may need to fund such parties' share of additional capital requirements and (ii)(2) the other parties to these investments may take actions that are inconsistent with our objectives.
WE ARE SUBJECT TO POSSIBLE ENVIRONMENTAL LIABILITIES.objectives, either of which could have an adverse effect on our financial condition, results of operations, cash flows and ability to make distributions to our shareholders.
We are subject to possible environmental liabilities.
We are subject to various Federal,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 5
similarother reasons. VariousAdditionally, 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 noton an entity even if the facility is or
ever was not 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.the entity.
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 likesuch as 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. TheMoreover, under certain circumstances, 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,operating partnership, we are restricted for a certain period of time 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.sellers' consent. 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 methodology for accounting for property acquisitions with in-place leases may be affected by future interpretive guidance issued by the SEC, which could have an adverse impact on our operating results and our funds from operations.
We believe that the SEC has expressed concerns regarding the application by many public companies of Financial Accounting Standards Board ("FASB") Statement No. 141, Business Combinations, to acquisitions of properties with in-place leases. We further believe that the SEC is in the process of proposing additional interpretive guidance relating to the application of Statement No. 141. While we believe that our current approach to accounting for property acquisitions is consistent with the current methodology suggested by FASB under Statement No. 141, as well as with industry-wide practice, any additional interpretive guidance issued by the SEC regarding Statement
6
No. 141 may result in a modification of our accounting for property acquisitions, which modification could have an adverse impact on our operating results and determination of funds from operations, or FFO.
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 laws relating to zoning, construction orand other regulations.matters. These laws may require significant property modifications in the future for which we may not have budgeted and could result in the levy of 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.war or terrorism. The occurrence of any of these events could adversely
impacthave an adverse effect on our financial position,condition, results of operations, cash flows and ability to make distributions to our shareholders.
AS A RESULT OF THE SEPTEMBER
As a result of the September 11, 2001 TERRORIST ATTACKS, WE MAY BE SUBJECT
TO INCREASED COSTS OF INSURANCE AND LIMITATIONS ON COVERAGE.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 2002.2003. Due largely to the terrorist attacks on September 11, 2001, the insurance industry is reportedly changinghas changed its risk assessment approach and cost structure. In addition, the fact that agencies of
the United States government are tenantsWe renew our insurance policies on an annual basis, and experienced an increase in a number of our buildings increases
the risk profile of those buildings and other buildings thatpolicy premiums in October 2002, at which time we own near those
buildings. Thesemaintained our coverage relating to terrorism. Continuing changes in the insurance industry may increase the cost of insuring our properties mayand decrease the scope of insurance coverage, and mayeither of which could adversely affect our financial position and 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
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,June 30, 2003, 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$736.1 million, and our debt to total market
capitalization ratioundepreciated book value of real estate assets was 53.7% at December 31, 2001.60.4%. We define debt to undepreciated book value of real estate assets as mortgage loans payable divided by gross investment in real estate as computed by adding accumulated depreciation to the net investment in real estate as presented on our balance sheet. Our debt to total market capitalization ratio was 53.7%49.4% based upon the $16.93 closing per share market price forof our Common Sharescommon shares on June 30, 2003. Total market capitalization is the sum of $11.87 on December 31, 2001.(1) total debt, (2) the value of all outstanding common shares and common units in our operating partnership not owned by us at the $16.93 market price and (3) the total liquidation value of preferred shares.
Payments of principal and interest on our debt may leave us with insufficient cash to operate our properties or pay distributions to our shareholders as 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
7
- •
- certain debt agreements of our
Operating Partnershipoperating partnership could restrict the ability of ourOperating Partnershipoperating 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; ando - •
- if we are unable to pay our debt service on time or are unable to comply with restrictive financial covenants
appearingin certain of our mortgage loans, our lenders could foreclose on our properties securing such debt and in some cases other properties and assetswhichthat 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 allmany 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 whichthat would negatively affect our financial condition, and results of operations.operations, cash flows and ability to make distributions to our shareholders. 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.
We use interest rate swap agreements to reduce the impact of changes in interest rates. As of June 30, 2003, we had two interest rate swap agreements in place, each of which is for a notional amount of $50.0 million. These agreements expire in January 2004 and January 2005. Decreases in interest rates would result in increased interest payments due under interest rate swap agreements in place and could result in the Company recognizing a loss and remitting a payment to unwind such agreements. As of June 30, 2003, approximately 32.9% of our total debt had variable interest rates, excluding effects of the outstanding interest rate swap agreements. This percentage decreases to 19.3% when including the effect of the interest rate swap agreements in effect at June 30, 2003. If short termshort-term interest rates were to rise, our debt service payments on adjustable rate debt 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,
ourOur scheduled debt payments overfor the six month period from July 1, 2003 through December 31, 2003 and in each of the next fivefour calendar years, including maturities, are as follows:
| Year | Amount (in thousands) | |||
|---|---|---|---|---|
| 2003 (from July 1, 2003) | $ | 59,925 | (1) | |
| 2004 | 185,256 | (2) | ||
| 2005 | 69,611 | (3) | ||
| 2006 | 73,281 | |||
| 2007 | 65,898 | |||
- (1)
- Includes
$13.5 million in maturities in July 2002 that may be extended for one-year terms, subject to certain conditions. Also includesa$10.4$36.0 million maturity inDecember 2002 thatNovember, which may be extended for a one-year period, subject to certain conditions. - (2)
- Includes
a $10.9maturities of $89.0 millionmaturityinApril 2003 thatMarch and $25.8 million in August, each of which may be extended for a one-yearterm,period, subject to certain conditions.Also includes - (3)
- Includes a
$36.0$40.0 million maturity inNovember thatJanuary, which may be extended fora one-year term,two six-month periods, 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.financings. If we cannot refinance our debt, extend the debt duerepayment dates, or raise additional equity prior to the date when our debt matures, we would default on our existing debt, which couldwould have a materialan adverse effect on our business.
7
WE MAY BE UNABLE TO CONTINUE TO MAKE SHAREHOLDER DISTRIBUTIONS AT EXPECTED
LEVELS.financial position, results of operations, cash flows and ability to make distributions to our shareholders.
8
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 will also will be dependent, in part, on other matters including:
o
- •
- continued property occupancy and
profitabilitytimely payment by tenants oftenants; orent obligations; - •
- 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 whetherdecision to reinvest in operations 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 Sharespreferred shares.
Our ownership limits are important factors that may prevent a change of control or otherwise affect the ownership of our common 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.preferred shares.
Our Declaration of Trust limits ownership of our Common Sharescommon shares by any single shareholder to 9.8% of the number of the outstanding Common Sharescommon shares or 9.8% of the value of the outstanding Common
Shares.common shares, whichever is more restrictive. Our Declaration of Trust also limits ownership by any single shareholder of our common and preferred shares in the aggregate to 9.8% of the aggregate value of the outstanding common and preferred 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 4% Series D Cumulative Convertible Redeemable Preferred Shares from the Ownership Limit.
OUR DECLARATION OF TRUST INCLUDES OTHER PROVISIONS THAT MAY PREVENT OR
DELAY A CHANGE OF CONTROL.
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 Sharescommon 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 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 expireTrustees expires each year, at which time a successor class is elected for a three-year term.term ending at the third succeeding annual meeting of shareholders. 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.
9
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 Bylawsbylaws exempt us from such laws, but our Board of Trustees can change our Bylawsbylaws at any time to make these provisions applicable to us.
OUR FAILURE TO QUALIFY AS A
Our failure to qualify as a REIT WOULD HAVE ADVERSE TAX CONSEQUENCES.would have adverse tax consequences.
We believe that since 1992 we have qualified for taxation as a REIT for Federalfederal income tax purposes. We plan to continue to meet the requirements for qualification 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(excluding capital gains.gains). The fact that we hold most of our assets through our Operating Partnershipoperating partnership and its
8
If we fail to qualify as a REIT, we would be subject to Federalfederal 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.securities. 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.
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 (excluding capital gains), 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 that 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. We may become subject to tax liabilities that adversely affect our operating cash flow and available cash for distribution to shareholders.
A NUMBER OF FACTORS COULD CAUSE OUR SECURITY PRICES TO DECLINE.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 Commoncommon and preferred shares. These conditions include, but are not limited to:
- •
- market perception of REITs in
general; market perception ofgeneral and officeREITs;REITs in particular; - •
- market perception of REITs relative to other investment opportunities;
- •
- the level of institutional investor interest in our company;
- •
- general economic and business conditions;
- •
- prevailing interest rates; and
- •
- market perception of our financial condition, performance, dividends and growth potential.
Generally, REITs are tax-advantaged relative to C corporations because they are not subject to corporate-level federal income tax on income that they distribute to shareholders. However, Congress recently made changes to the tax laws and regulations that could make it less advantageous for
10
investors to invest in REITs. The Jobs and Growth Tax Relief Reconciliation Act of 2003, or the 2003 Act, provides that generally for taxable years beginning after December 31, 2002 and before December 31, 2008, certain dividends received by domestic individual shareholders from certain C corporations are subject to a reduced rate of tax of up to 15%. Prior to this Act, such dividends received by domestic individual shareholders were generally subject to tax at ordinary income rates, which were as high as 38.6%. In general, the provisions of the Act do not benefit individual shareholders of REITs and could make an investment in a C corporation that is not a REIT more attractive than an investment in a REIT. We cannot predict the effects that this Act may have on the market price for our common or preferred shares.
The average daily trading volume of our Common Sharescommon shares during 2001the three months ended June 30, 2003 was approximately 24,000121,000 shares, and the average trading volume of our publicly-traded preferred shares iswas generally insignificant. As a result, relatively small volumes of transactions could have a pronounced affecteffect on the market price of such shares.
WE ARE DEPENDENT ON EXTERNAL SOURCES OF CAPITAL FOR FUTURE GROWTH.
We are dependent on external sources of capital for future growth.
As noted above, because we are a REIT, we must distribute 90% of our annual taxable income. Due to these
requirements,this requirement, we will not be able to fund our acquisitions,acquisition, construction and development activities using cash flow from operations. OurTherefore, 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,common shares, preferred shares, common and preferred units in our Operating
Partnershipoperating 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 subject us to covenants that restrict management's flexibility in directing our operations, 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.business and fund other cash requirements.
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.operating partnership. These individuals may have personal interests that conflict with the interests of our shareholders. For example, if our Operating Partnershipoperating partnership sells or refinances certain of the properties that these officers or trusteesTrustees contributed to the Operating Partnership, theyoperating partnership, the officers or Trustees 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 minimizeaddress conflicts of interest. We cannot assure you,guarantee, 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 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.officers. 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 youguarantee 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.
We may change our policies without shareholder approval, which could adversely affect our financial condition, results of operations, market price of our securities or 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 dividendssecurities or distributions.
10
THE SELLING SHAREHOLDERS
11
Unless otherwise set forth in a prospectus supplement accompanying this prospectus, we intend to use the net proceeds of any sale of the securities that we may offer under this prospectus and any accompanying prospectus supplement for working capital and other general business purposes, which may include capital expenditures, acquisition or development of additional properties, repayment of indebtedness and repurchases of outstanding shares.
12
RATIOS OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED SHARE DIVIDENDS
The following table sets forth our ratios of earnings to combined fixed charges and preferred share dividends for the beneficial ownership of Common Shares by the
selling shareholders as of March 26, 2002, the number of Common Shares covered
by this prospectussix months ended June 30, 2003 and the beneficial ownership of Common Shares by the selling
shareholders on March 26, 2002 as adjusted to give effect to the salefor each of the Common Shares offered. Beneficial ownershiplast five calendar years. For purposes of Common Shares includes securities
heldcalculating the ratio of earnings to combined fixed charges and preferred share dividends, earnings were calculated 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 thoseadding fixed charges (excluding preferred share dividends and capitalized interest) and minority interest 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.
| Six Months Ended June 30, 2003 | 2002 | 2001 | 2000 | 1999 | 1998 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Ratio of earnings to combined fixed charges and preferred share dividends | — | (1) | 1.25x | 1.26x | 1.30x | 1.41x | 1.30x |
- (1)
- During the six months ended June 30, 2003, our fixed charges and preferred share dividends included a nonrecurring deemed distribution of approximately $11.2 million in connection with the repurchase of Series C preferred units in our operating partnership at an amount in excess of the recorded book value of the units. As a result, earnings were inadequate to cover fixed charges and preferred share dividends by approximately $3.1 million in the six months ended June 30, 2003.
13
The following summary of the terms and provisions of our common shares, preferred shares and depositary shares representing interests in our Operating
Partnership that maypreferred shares does not purport to be redeemedcomplete and if we approve, exchanged for Common
Shares. Our Operating Partnership has the right,is subject to and qualified in its sole discretion,entirety by reference to deliverour Declaration of Trust and the Articles Supplementary to such redeeming holder for each Common Unit either one Common Share
(subject to adjustment) or a cash payment equalour Declaration of Trust relating to the then fair market valuedesignation of such share determinedeach series of our preferred shares, each of which is available from us as provideddescribed in the Operating Partnership agreement.
11
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"Where You Can Find More Information."
General
Under our Declaration of Trust, we are authorized to issue up to 45,000,000 common shares and 10,000,00015,000,000 preferred shares. As of March 26, 2002, 40,693
preferredAugust 31, 2003, there were 29,491,751 common shares were classified as 5.5% Series A Convertible Preferred Shares,
none of which were issued and outstanding; 1,725,000 preferred shares were classifieddesignated as 10% Series B Cumulative Redeemable Preferred Shares (the "Series B Preferred Shares"), 1,250,000 of which were issued and outstanding; 544,000 preferred shares were classifieddesignated as 4% Series D Cumulative Convertible Redeemable Preferred Shares (the "Series D Preferred Shares"), all of which were issued and outstanding; 1,265,000 shares were classifieddesignated as 10.25% Series E Cumulative Redeemable Preferred Shares (the "Series E Preferred Shares"), 1,150,000 of which were issued and outstanding; and 1,425,000 shares were classifieddesignated as 9.875% Series F Cumulative Redeemable Preferred Shares (the "Series F Preferred Shares"), all of which were issued and outstanding; and 2,200,000 shares were designated as 8% Series G Cumulative Redeemable Preferred Shares (the "Series G Preferred Shares"), all of which were issued and outstanding. All previously issued and outstanding Series A Preferred Shares have been reacquired by us and restored to the status of undesignated preferred shares under our Declaration of Trust.
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,series, with thesuch 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
Common Shares
All common shares offered hereby will be duly authorized, fully paid and nonassessable. Subject to the preferential rights of the Series B, D, E, F and G Preferred Shares (collectively referred to as the Series D"Outstanding Preferred Shares, the Series E Preferred
SharesShares") and the Series F Preferred Shares, there are currently noany other classes
or series of preferred shares authorized. However,that we may issue in the future, and to the provisions of our Operating Partnership has
issuedDeclaration of Trust regarding the restriction on transfer of common shares, holders of common shares are entitled to receive dividends on such shares if and when authorized and declared by the Board of Trustees out of assets legally available therefor and to share ratably in the assets of the Company legally available for distribution to our shareholders in the event of our liquidation, dissolution or winding-up after payment of, or adequate provision for, all known debts and liabilities of the Company. Holders of common shares have no preference, conversion, sinking fund, redemption or appraisal rights and have no preemptive rights to subscribe for any securities of the Company. Subject to the provisions of our Declaration of Trust regarding the restriction on transfer of common shares, the common shares have equivalent dividend, distribution, liquidation and other rights.
Subject to the provisions of our Declaration of Trust regarding restrictions on transfer of shares, each outstanding common share entitles the holder thereof to one vote on all matters submitted to a third party 1,016,662 Series C Preferred Units.vote of shareholders, including the election of Trustees, and, except as provided with respect to any other class or series of shares, the holders of such common shares possess the exclusive voting power. There is no cumulative voting in the election of Trustees, which means that, except as provided with respect to any other class or series of shares, the holders of a majority of the outstanding common shares can elect all of the Trustees then standing for election.
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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 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 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 the Company with another entity or the sale (or other disposition) of all or substantially all of the assets of the Company (which requires the affirmative vote of the holders of two-thirds of the outstanding shares entitled to vote on the matter), (iv) the amendment of our 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 the Company (which requires the affirmative vote of two-thirds of the outstanding shares 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 our Declaration of Trust from time to time to qualify as a REIT under the Internal Revenue Code or Title 8 of the Corporations and Associations Article of the Annotated Code of Maryland, as amended (the "Maryland REIT Law") and (b) by a majority vote to amend our Declaration of Trust to increase or decrease the aggregate number of shares, or the number of shares of any class of shares, that we have authority to issue.
Units in Our Operating Partnership
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 March 26, 2002,August 31, 2003, we owned approximately 65.9%75.4% of the outstanding common units and the 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 and 2,200,000 Series G Preferred Units issued by our Operating Partnership. Each seriesoperating partnership. Our operating partnership repurchased all of units hasthe outstanding Series C Preferred Units in June 2003.
The Series B Preferred Units, Series D Preferred Units, Series E Preferred Units, Series F Preferred Units and Series G Preferred Units have economic terms substantially equivalent to the economic terms of the corresponding Series B Preferred Shares, Series D Preferred Shares, Series E Preferred Shares, Series F Preferred Shares and Series FG Preferred Shares, respectively, that we have issued.issued, which terms are described in more detail below.
The 1,016,662
Series CB, Series D, Series E, Series F and Series G Preferred Units of our Operating Partnershipoperating 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 Unitspari passu (i.e., are treated equally (i.e., are PARI
PASSU)equivalently) in priority over the common units in our Operating Partnershipoperating 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
Preferred Shares
The Series B Preferred Shares, Series E Preferred Shares, Series F Preferred Shares and Series G Preferred Shares were issued in underwritten public offerings in July 1999, April 2001, September 2001 and August 2003 respectively. The Series D Preferred Shares were issued in a private placement to a private investor in January 2001. We contributed the proceeds from each of these offerings to our operating partnership in exchange for a number of preferred units of our operating partnership equal in number to, and of a series having designations, rights and preferences substantially similar to, the preferred shares that we sold in the above-described public offerings and private placement. All previously issued and outstanding Series A Preferred Shares have been reacquired by us and have been restored to the status of undesignated preferred shares under our Declaration of Trust.
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The terms of each series of the Outstanding Preferred Shares are substantially similar to one another and any difference among the terms is noted in the following summary.
Ranking. Each series of the Outstanding Preferred Shares, as to dividend rights and rights upon our liquidation, dissolution or winding up, ranks (1) 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 Outstanding 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 (the "Junior Shares"); (2) on a parity with any other series of Outstanding Preferred Shares and any other class or series of our equity securities authorized or designated in the future if, by the terms of such class or series, the holders of such class or series of securities and Outstanding 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 (the "Parity Shares"); and (3) junior to any class or series of our equity securities authorized or designated in the future if, by the terms of such class or series, 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 Outstanding Preferred Shares (the "Senior Shares").
Dividends. Holders of Outstanding 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 each series of the Outstanding Preferred Shares at the annual rates indicated in the table below.
| Series | Annual Dividend Rate | Annual Per Share Dividend Payment | Aggregate Annual Dividend Payment | |||||
|---|---|---|---|---|---|---|---|---|
| B | 10.0 | % | $ | 2.50 | $ | 3,125,000 | ||
| D | 4.0 | % | $ | 1.00 | $ | 544,000 | ||
| E | 10.25 | % | $ | 2.5625 | $ | 2,946,875 | ||
| F | 9.875 | % | $ | 2.46875 | $ | 3,517,969 | ||
| G | 8.0 | % | $ | 2.00 | $ | 4,400,000 | ||
These dividends are cumulative from the date of original issue, whether or not in any dividend period or periods these dividends have been declared or there are 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" and collectively, the "Dividend Payment Dates"). Any dividend payable on any series of the Outstanding 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 dates, which are fixed by our Board of Trustees and which are not more than 60 nor less than 10 days prior to the related Dividend Payment Dates. Holders of Outstanding Preferred Shares are not entitled to receive any dividends in excess of cumulative dividends on the particular series of Outstanding Preferred Shares. No interest, or sum of money in lieu of interest, will be payable in respect of any dividend payment or payments on a series of Outstanding Preferred Shares that may be in arrears.
When dividends are not paid in full upon any series of Outstanding Preferred Shares or any other class or series of Parity Shares, or a sum sufficient for this payment is not set apart, all dividends declared upon such series of the Outstanding Preferred Shares and any Parity Shares will be declared ratably in proportion to the respective amounts of dividends accrued and unpaid on such series of Outstanding Preferred Shares and accrued and unpaid on such Parity Shares. Except as set forth in the preceding sentence, unless dividends on a series of the Outstanding 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
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such payment for all past dividend periods, no dividends will 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 Outstanding 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 with respect to 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, and no Junior Shares will 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, and no monies will 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 for Junior Shares, or options, warrants or rights to subscribe for or purchase Junior Shares), nor will any other cash or other property be paid or distributed to or for the benefit of holders of Junior Shares. Regardless of the provisions described above, if this declaration, payment, redemption, purchase or other acquisition is necessary to maintain our qualification as a REIT, we will 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.
Liquidation Preference. Upon any voluntary or involuntary liquidation, dissolution or winding up, before any payment or distribution by us will be made to or set apart for the holders of any Junior Shares, the holders of each series of Outstanding Preferred Shares will be entitled to receive a liquidation preference of $25.00 per share (the "Outstanding Preferred Shares 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. Such holders will not be entitled to any further payment. The aggregate amount of the liquidation preference for each series of Outstanding Preferred Shares, exclusive of accrued and unpaid dividends, is as follows:
| Series | Liquidation Preference | ||
|---|---|---|---|
| B | $ | 31,250,000 | |
| D | $ | 13,600,000 | |
| E | $ | 28,750,000 | |
| F | $ | 35,625,000 | |
| G | $ | 55,000,000 | |
Until all holders of each series of Outstanding Preferred Shares have been paid the Outstanding Preferred Shares 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 will 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 Outstanding Preferred Shares will 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, will be distributed among all of the holders of Outstanding Preferred Shares and any such other Parity Shares ratably in the same proportion as the respective amounts that would be payable on such Outstanding Preferred Shares and any such other Parity Shares if all amounts payable thereon were paid in full.
A voluntary or involuntary liquidation, dissolution or winding up will 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 has been made in full to the holders of Outstanding Preferred Shares and any Parity Shares, any other
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series or class or classes of Junior Shares will be entitled to receive any and all of our assets remaining to be paid or distributed, and the holders of the Outstanding Preferred Shares and any Parity Shares will not be entitled to share in that payment or distribution.
Optional Redemption. Each series of Outstanding Preferred Shares will not be redeemable by us prior to the date indicated in the table below (except in certain limited circumstances relating to our maintenance of our ability to qualify as a REIT as described under "Description of Shares—Restrictions on Ownership and Transfer").
| Series | Redemption Date | |
|---|---|---|
| B | July 15, 2004 | |
| D | January 25, 2006 | |
| E | July 15, 2006 | |
| F | October 15, 2006 | |
| G | August 11, 2008 |
On or after the indicated redemption date, we may, at our option, redeem such series of Outstanding Preferred Shares, in whole or from time to time in part, at a cash redemption price equal to 100% of the Outstanding Preferred Shares Liquidation Preference for each series, plus all accrued and unpaid dividends, if any, to the redemption date. The redemption price for the Series B, D, E and F 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 in us or in our operating partnership.
In the event of a redemption of any series of Outstanding 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 Outstanding Preferred 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 series of Outstanding Preferred 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 that notice of redemption is sent by us. If full cumulative dividends on any series of Outstanding Preferred Shares have not been paid or declared and set apart for payment, no Outstanding Preferred Shares of such series may be redeemed unless all Outstanding Preferred Shares of such series are simultaneously redeemed and neither we nor any of our affiliates may purchase or acquire such series of Outstanding Preferred Shares otherwise than pursuant to a purchase or exchange offer made on the same terms to all holders of that series of Outstanding Preferred Shares.
If fewer than all of a series of Outstanding Preferred Shares are to be redeemed, we will select the Outstanding Preferred Shares of such series to be redeemed pro rata in proportion to the number of Outstanding Preferred Shares of such series held by holders of such series (with adjustment to avoid redemption of fractional shares) or by lot or in such other manner as our Board of Trustees may determine.
Notice of redemption with respect to the Series B, E, F and G Preferred Shares 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. In addition, notice of redemption of any of the Outstanding Preferred Shares
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must be mailed by us not less than 30 days nor more than 60 days prior to the redemption date to each holder of such series of Outstanding 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 Outstanding Preferred Shares of the relevant series to be redeemed, (iii) the place or places where certificates for such Outstanding 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 Outstanding Preferred Shares to be redeemed will cease to accrue, such shares will no longer be deemed to be Outstanding Preferred Shares 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 Outstanding 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.
None of the Outstanding Preferred Shares have a stated maturity or are subject to any sinking fund or mandatory redemption provisions except as provided under "Description of Shares—Restrictions on Ownership and Transfer."
Subject to applicable law and the limitation on purchases when dividends on the Outstanding Preferred Shares are in arrears, we may, at any time and from time to time, purchase any of the Series B, E, F and G Preferred Shares in the open market, by tender or by private agreement. The Series D Preferred Shares are not publicly traded and may only be purchased by private agreement.
Voting Rights. Holders of any series of Outstanding 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 of Outstanding Preferred Shares or 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 will be increased by two (if not already increased by reason of similar types of provisions with respect to Voting Parity Shares (as defined below)) and the holders of such series of Outstanding Preferred Shares, together with any class or series of our equity securities then entitled to exercise similar voting rights (the "Voting Parity Shares"), voting as a single class regardless of series or class, 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 such series of Outstanding Preferred Shares and 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 such series of Outstanding Preferred Shares and shares of any series or class 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 will 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 such series of Outstanding Preferred Shares and such other 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, a successor will be elected to the Board of Trustees,
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upon the nomination by the remaining trustee elected by the holders of such series of Outstanding Preferred Shares and the Voting Parity Shares or the successor to the remaining trustee, to serve until the next annual meeting of shareholders or special meeting held in place of the annual meeting if such office has not previously been terminated as described below. Whenever dividends in arrears on such series of Outstanding Preferred Shares and Voting Parity Shares shall have been paid and dividends thereon for the current dividend period shall have been paid or declared and set apart for payment, then the right of the holders of such series of Outstanding Preferred Shares and 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 each series of Outstanding Preferred Shares and the holders of all other classes or series of 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 or exchangeable into shares of any class of Senior Shares or (ii) amend, alter or repeal any provision of, or add any provision to, our Declaration of Trust or bylaws, if such action would materially adversely affect the voting powers, rights or preferences of any of the holders of the Outstanding Preferred Shares; provided, however, that no such vote of the holders of each series of Outstanding Preferred Shares will 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 or exchangeable security is to be made, as the case may be, provisions are made for the redemption of all of the outstanding shares of such series of Outstanding Preferred Shares. 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, any series of Outstanding Preferred Shares or any shares of any class of Parity Shares will not be deemed to materially adversely affect the voting powers, rights or preferences of any of the holders of Outstanding Preferred Shares.
With respect to the exercise of the above-described voting rights, each Outstanding Preferred Share will have one vote per share, except that when any other class or series of preferred shares will have the right to vote with the Outstanding Preferred Shares as a single class, then the Outstanding Preferred Shares and such other class or series will have one quarter of one (0.25) vote per $25.00 of liquidation preference.
Conversion. 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 share split, subdivision of our 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. The Series B, E, F and G Preferred Shares are not convertible into or exchangeable for any other property or securities.
Depositary Shares
We may, at our option, elect to offer fractional preferred shares, rather than full preferred shares. In the event such option is exercised, we will issue receipts for depositary shares, each of which will represent a fraction (to be set forth in the prospectus supplement relating to the preferred shares) of a share of that series of preferred shares. The preferred shares represented by depositary shares will be deposited under a deposit agreement between us and a bank or trust company selected by us having its principal office in the United States and having a combined capital and surplus of at least $50,000,000.
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Subject to the terms of the deposit agreement, each owner of a depositary share will be entitled, in proportion to the applicable fraction of a preferred share represented by the depositary share, to all the rights and preferences of the preferred share, represented thereby (including dividend, voting, redemption, conversion and liquidation rights). The above description of the depositary shares is only a summary, is not complete and is subject to, and is qualified in its entirety by, the description in the related prospectus supplement and the provisions of the deposit agreement, which will contain the form of depositary receipt. A copy of the deposit agreement will be filed with the Securities and Exchange Commission (the "SEC") as an exhibit to, or incorporated by reference in, the registration statement of which this prospectus is a part.
Restrictions on Ownership and Transfer
For us to qualify as a REIT (asas 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.
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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 Internal Revenue Code, more than 9.8% (the "Aggregate Share Ownership Limit") of the number or value of our outstanding shares of beneficial interest.shares. 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 usthe Company being "closely held" within the meaning of Section 856(h) of the Internal Revenue 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 Board of Trustees has exempted the foreign trust owning all of our Series D Preferred Shares from the Aggregate Share Ownership Limit and the Common Share Ownership Limit.
Our Declaration of Trust further prohibits (i) any person from beneficially or constructively owning our shares of beneficial interest if such
ownershipthat would result in us being "closely held" under Section 856(h) of the Internal Revenue 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, as defined below, is required to give notice immediately to us and provide us with such other information as we may
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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. SuchThis 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.shares in us. 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) (i) 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) to recast such vote in accordance with the desires of the Share Trustee acting for the
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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 theour 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 theour 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
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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 Internal Revenue 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,
Classification 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 transferReclassification of Common Shares holders of Commonor Preferred 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
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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 Commoncommon or Preferred Sharespreferred 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,Therefore, in addition to the Series B Preferred Shares, Series D Preferred Shares, Series E Preferred Shares, Series F Preferred Shares and Series FG Preferred Shares, the Board of Trustees could authorize the issuance of other Preferred Sharespreferred shares with terms and conditions whichthat could also have the effect of delaying, deferring or preventing a change in control of COPTthe Company or other transaction that might involve a premium over the then prevailing market price for Common Sharescommon 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;
Classification of Board, Vacancies and 1,425,000 Series F Preferred
Shares in an underwritten public offering in September 2001. We contributed the
proceedsRemoval of each of these offerings to our Operating Partnership in exchange
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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.Trustees
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
17
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
18
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. At the conclusion of our annual meeting of shareholders on May 15, 2003, we had eight Trustees divided into three classes, with terms ending upon the third succeeding annual meeting. The number of three years each.
Trustees in each class and the expiration of each class' term is as follows:
| Class 1 | 2 Trustees | Expires 2005 | ||
| Class 2 | 3 Trustees | Expires 2006 | ||
| Class 3 | 3 Trustees | Expires 2004 |
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 ending upon the third succeeding annual meeting 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 COPTthe Company or other transaction that might involve a premium over the then prevailing
23
market price for the Common Shares or other attributes that the shareholders may consider to be desirable. In addition, a classified Boardboard 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
Our bylaws 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 BylawsMoreover, these provisions preclude the removal of any Trustee by written consent of shareholders.
Advance Notice of Nominations and New Business
Our 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'sthe Company'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.bylaws. With respect to special meetings of shareholders, the Bylawsbylaws provide that only the business specified in COPT'sthe Company'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'sthe Company'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 LAWbylaws. Our bylaws allow special meetings of shareholders to be called by the chairman of the Board, the president, a majority of the Trustees or by our secretary upon the written request of the holders of shares entitled to cast not less than a majority of all votes entitled to be cast at such meeting.
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.As noted below, these provisions do not currently apply to us, but the Board of Trustees can take action that would cause these provisions to become applicable.
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 boardBoard of trusteesTrustees 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
24
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 boardBoard of trusteesTrustees 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.resolution and our bylaws contain a provision exempting from these business combination provisions any of our shares owned by any person. 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.us.
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 of the trust or trusteesTrustees of the trust 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 trusteesTrustees 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.approval, as described below. 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 a demand for the demandspecial meeting 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 Bylawsbylaws contain a provision exempting from the control share acquisition statute any and all acquisitions by any person of COPT's shares of beneficial interest.our shares. The Board of Trustees may, however, amend the Bylawsbylaws at any time to eliminate such provision, either prospectively or retroactively.
DISSOLUTION OF THE COMPANY; TERMINATION OF
Dissolution of the Company; Termination of REIT STATUS
TheStatus
Our 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 Sharescommon shares entitled to be cast on the matter at athe meeting of shareholders or by written consent. In addition, theour 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 our shareholders.
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We may issue separately, or together with any preferred shares or common shares offered by any prospectus supplement, warrants for the shareholders.
purchase of other preferred shares and common shares. The warrants may be issued under warrant agreements to be entered into between us and a bank or trust company, as warrant agent, and may be represented by certificates evidencing the warrants, all as set forth in the prospectus supplement relating to the particular series of warrants. The following summaries of certain provisions of the warrants are not complete and are subject to, and are qualified in their entirety by reference to, all the provisions of any related warrant agreement and warrant certificate, respectively, which will be filed with the SEC as an exhibit to, or incorporated by reference in, the registration statement of which this prospectus is a part.
A prospectus supplement will describe the terms of the warrants in respect of which this prospectus is being delivered including, where applicable, the following:
- •
- the title of the warrants;
- •
- the aggregate number of the warrants;
- •
- the price or prices at which the warrants will be issued;
- •
- the designation, terms and number of common shares or preferred shares that may be purchased upon exercise of the warrants;
- •
- the designation and terms of the securities, if any, with which the warrants are issued and the number of the warrants issued with each such offered security;
- •
- the date, if any, on and after which the warrants and related preferred shares or common shares with which the warrants are issued will be separately transferable;
- •
- the price (or manner of calculation of the price) at which each common share or preferred share may be purchased upon exercise of the warrant;
- •
- the date on which the right to exercise the warrants will commence and the date on which the right will expire;
- •
- the minimum or maximum amount of the warrants which may be exercised at any one time;
- •
- information with respect to book-entry procedures, if any;
- •
- a discussion of certain material federal income tax considerations; and
- •
- any other terms of the warrants, including terms, procedures and limitations relating to the exchange and exercise of the warrants.
The exercise of any warrants will be subject to, and limited by, the transfer and ownership restrictions in our Declaration of Trust. See "Description of Shares—Restrictions on Ownership and Transfer."
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FEDERAL INCOME TAX MATTERS
We were
COPT was organized in 1988 and elected to be taxed as a REIT commencing with ourits 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 Federalfederal income tax considerations that may be relevant to COPT and its shareholders, including the continued treatment of COPT as a REIT for Federalfederal income tax purposes. For purposes of this discussion of "FEDERAL INCOME TAX MATTERS""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 Internal Revenue 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 Internal Revenue Code described below, claim a tax deduction for the dividends it pays to its shareholders. Such an entity generally is not taxed on its
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Federalfederal 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 Federalfederal income tax purposes, COPT has properly elected and otherwise qualified to be taxed as a REIT under the Internal Revenue 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 Internal Revenue 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 Internal Revenue 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
Taxation of COPT
GENERAL.
General. In any year in which COPT qualifies as a REIT, it will not generally be subject to Federalfederal income tax on that portion of its REIT taxable income or capital gain whichthat 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 (each as
27
discussed below), and nonetheless maintains its qualification as a REIT because certain other requirements are met, it will be subject to a 100% tax on the greater of the amount by which 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,this purpose only, 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 Federalfederal income tax purposes, as is required of a REIT under the Internal Revenue 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.
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 Internal Revenue 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 Internal Revenue 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.
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REIT QUALIFICATION REQUIREMENTSQualification Requirements
In order to qualify as a REIT, COPT must meet the following requirements, among others:
SHARE OWNERSHIP TESTS.
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
28
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.
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 or outstanding value of any one such issuer (the(collectively, the "Issuer Voting Stock Test") and 10% of the total
value of any such issuer (the "Issuer Value Test")Tests").
The REIT Value Test and the Issuer Voting Stock Test or the Issuer Value Test doesTests will not, however, 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"). Taxable REIT subsidiaries are subject to full corporate level taxation on their earnings, but are permitted to engage in certain types of real estate management activities and certain other activities which cannot currently be performed by REITs or their controlled subsidiaries without jeopardizing REIT status. On January 1, 2001, our operating partnership acquired all of the stock in Corporate Office Management, Inc. ("COMI") that was not previously owned by it, and we elected to treat COMI as a "taxable REIT subsidiary" effective January 1, 2001. Thus, COMI will remain fully taxable with respect to its earnings. The election will, however, generally allow COMI to continue its real estate management activities without jeopardizing our REIT status.
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)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
Operating Partnershipoperating 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.
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
The 75% TEST.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,REIT, as well as gain from the sale of such shares; (v) abatements and refunds of real property taxes; (vi) income from the
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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 MINIMISde minimis amount of non-customary services. COPT believes that the services provided with regard to COPT's properties by the Operating Partnershipoperating 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 Partnershipoperating partnership will be performed by independent contractors.
THE
The 95% TEST.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.
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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 Internal Revenue 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
30
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,this purpose only 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
Compliance 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.Income Tests. 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 Partnershipoperating 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
Partnershipoperating 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
Partnershipoperating partnership or other agents will be performed by independent contractors.
ANNUAL DISTRIBUTION REQUIREMENTS.
Annual Distribution Requirements. In order to qualify as a REIT, COPT wasis 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
suchthe prior 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.requirements. In this regard, the Operating Partnershipoperating partnership agreement authorizes COPT in its capacity as General Partner to take such steps as may be necessary to cause the Operating Partnershipoperating 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
Partnershipoperating 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.
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 shareshares for the taxable year. However, corporate shareholders may
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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"
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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".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.
Capital Gains and Losses. The maximum marginal individual income tax rate is 39.6%35%. 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.15%. For individuals, trusts and estates whothat would be subject to a maximum tax rate of 15%10%, 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.5%. 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
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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.
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%28% 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"Taxation of Foreign Shareholders."
TAXATION OF TAX-EXEMPT 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 Internal Revenue 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 Internal Revenue Code or has used the shares in a trade or business.
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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 Internal Revenue Code, is tax-exempt under Section 501(a) of the Internal Revenue 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 MINIMISde 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.
Taxation of Foreign Shareholders. The rules governing the United States Federalfederal 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
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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 Federalfederal 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 Internal Revenue Code, which is payable in addition to the regular United States corporate income tax. The following discussion addresses only the Federalfederal 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,
dividendsDividends paid to an address in a country outside the United States will no
longernot 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 wasis currently 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
Under the Final
Regulations, generally effective for distributions on or after January 1, 2001,
COPT willwould not 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
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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 beare 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 common shares and Series B, E, F and G Preferred 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 purchasesale 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 Internal Revenue Code. Under the backup withholding rules, a shareholder may be subject to backup withholding at the rate of 31%28% 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
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
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Other Tax Considerations
Effect of Tax Status of the Final Regulations and the potential effectOperating Partnership on their ownership of COPT's shares of beneficial interest.
OTHER TAX CONSIDERATIONS
EFFECT OF TAX STATUS OF THE OPERATING PARTNERSHIP ON REIT QUALIFICATION.Qualification. All of COPT's investments are through the Operating Partnership.operating partnership. COPT believes that the Operating Partnershipoperating partnership is properly treated as a partnership for tax purposes (and not as an association taxable as a corporation). If, however, the Operating Partnershipoperating 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 Partnershipoperating 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 Partnershipoperating partnership in computing its taxable income.
TAX ALLOCATIONS WITH RESPECT TO THE PROPERTIES.
Tax Allocations with Respect to the Properties. The Operating Partnershipoperating 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 Partnershipoperating 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 Internal Revenue 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 Partnershipoperating 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 Internal Revenue 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 Partnershipoperating 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.
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 Federalfederal 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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36
PLAN OF DISTRIBUTION
We are registering
Unless otherwise set forth in a prospectus supplement accompanying this prospectus, we may sell the Common Sharessecurities offered 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 offeredthis prospectus to 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 inthrough one or more underwritten
transactionsunderwriters or dealers, or we may sell the securities to investors directly or through agents. Any such underwriter, dealer or agent involved in the offer and sale of the securities will be named in the applicable prospectus supplement. We may sell securities directly to investors on our own behalf in those jurisdictions where we are authorized to do so.
Underwriters may offer and sell the securities 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. AnyWe also may, from time to time, authorize dealers or agents to offer and sell the securities upon such underwritten offeringterms and conditions as may be on
a "best efforts" or a "firm commitment" basis.set forth in the applicable prospectus supplement. In connection with the sale of any underwritten offering,of the securities, underwriters or agents may receive compensation from us in the form of underwriting discounts concessions or commissions from the selling shareholders orand may also receive commissions from purchasers of the Common Shares.securities for whom they may act as agent. Underwriters may sell the Common Sharessecurities 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
Our 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 NYSENew York Stock Exchange or other stock exchange, quotation system or over-the-counter market 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 markersmakers or established trading markets, including direct sales to purchasers. In effecting sales, broker-dealers engaged
Any underwriting compensation paid by us to underwriters or agents in connection with the selling shareholdersoffering of the securities, and any discounts or concessions or commissions allowed by underwriters to participating dealers, will be set forth in the applicable prospectus supplement. Dealers and agents participating in the distribution of the securities may arrange for other broker-dealers to participate.
Broker-dealers will receive commissions or other compensation from the selling
shareholders in amountsbe deemed 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 purchasersunderwriters, and any discounts and commissions received by them and any profit realized by them on resale 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 agreeddeemed to pay all expenses incident to the offering and sale of the
Common Shares, other than commissions,be underwriting discounts and fees of underwriters,
broker-dealers or agents. We have agreedcommissions.
Underwriters, dealers and agents may be entitled, under agreements entered into with us, to indemnify the selling
32
shareholdersindemnification against and contribution toward certain losses, claims, damages, actions,civil liabilities,
costs and expenses, including liabilities under the Securities Act.
EachAct of 1933, as amended. Unless otherwise set forth in an accompanying prospectus supplement, the obligations of any underwriters to purchase any of the selling shareholders has agreedsecurities will be subject to indemnifycertain conditions precedent, and the underwriters will be obligated to purchase all of such securities, if any are purchased.
Underwriters, dealers and agents may engage in transactions with, or perform services for, us and our officers
and Trustees and each person who controls (withinaffiliates in the meaningordinary course of business.
In connection with the offering of the Securities
Act) us,securities hereby, certain underwriters, and eachselling group members and their respective affiliates may engage in transactions that stabilize, maintain or otherwise affect the market price of the applicable securities. Such transactions may include stabilization transactions effected in accordance with Rule 104 of Regulation M promulgated by the SEC pursuant to which such persons may bid for or purchase securities for the purpose of stabilizing their market
37
price. The underwriters in an offering of securities may also create a "short position" for their account by selling more securities in connection with the offering than they are committed to purchase from us. In such case, the underwriters could cover all or a portion of such short position by either purchasing securities in the open market following completion of the offering of such securities or by exercising any over-allotment option granted to them by us. In addition, the managing underwriter may impose "penalty bids" under contractual arrangements with other underwriters, which means that they can reclaim from an underwriter (or any selling group member participating in the offering) for the account of the other underwriters, the selling shareholders, against any losses, claims,
damages, liabilities and expenses arising under the securities laws in
connection with this offeringconcession with respect to written information furnishedsecurities that are distributed in the offering but subsequently purchased for the account of the underwriters in the open market. Any of the transactions described in this paragraph or comparable transactions that are described in any accompanying prospectus supplement may result in the maintenance of the price of the securities at a level above that which might otherwise prevail in the open market. None of such transactions described in this paragraph or in an accompanying prospectus supplement are required to be taken by any underwriters and, if they are undertaken, may be discontinued at any time.
Our common shares are listed on the New York Stock Exchange under the symbol "OFC." Any new series of preferred shares or warrants will be new issues of securities with no established trading market and may or may not be listed on a national securities exchange, quotation system or over-the-counter market. Any underwriters or agents to or through which securities are sold by us bymay make a market in such selling shareholder; provided, however, that the indemnification
obligation is several,securities, but such underwriters or agents will not joint,be obligated to do so and any of them may discontinue any market making at any time without notice. No assurance can be given as to each selling shareholder.
the liquidity of or trading market for any securities sold by us.
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The financial statements incorporated in this prospectus by reference to theour Annual Report on Form 10-K of Corporate Office Properties Trust for the year ended December 31, 20012002, 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.
The validity of the Common Sharessecurities offered hereby isare being passed upon for usCOPT 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. Certain legal matters may be passed upon for any of the underwriters or agents by counsel named in the applicable prospectus supplement.
WHERE YOU CAN FIND MORE INFORMATION
COPT has
We have filed a registration statement on Form S-3 with the Securities
and Exchange CommissionSEC in connection with this offering.the offer and sale of the securities from time to time in the future. In addition, COPT
fileswe file annual, quarterly, and current reports, proxy statements and other information with the Securities and Exchange Commission.SEC. You may read and copy the registration statement and any other documents filed by COPTus at the Securities and Exchange Commission'sSEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the Securities and Exchange CommissionSEC at 1-800-SEC-0330 for further information on the Public Reference Room. COPT's
Securities and Exchange CommissionOur SEC filings are also available to the public at the Securities and Exchange Commission's Internet siteSEC's website at http://www.sec.gov. Our reference to the SEC's website is intended to be an inactive textual reference only.
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 anyincluding documents we incorporate by reference in this prospectus, supplement to any contractof our contracts or other document of COPT,documents, the reference may not be complete and you should refer to the exhibits that are a part of or incorporated by reference in the registration statement for a copy of the contract or document.
The Securities and Exchange CommissionSEC allows us to "incorporate by reference" into this prospectus the information we file with the Commission,SEC, 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 CommissionSEC 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 CommissionSEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended until this offering is completed:
o
- •
- Our Annual Report on Form 10-K for the year ended December 31,
2001; o2002; - •
- Our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2003 and June 30, 2003;
- •
- Our Current Reports on Form 8-K filed
with the Securitieson May 23, 2003, July 31, 2003 (as amended by Form 8-KA filed on July 31, 2003), August 4, 2003, August 7, 2003 andExchange Commission on January 30, 2002, February 13, 2002 and March 4, 2002; and oSeptember 12, 2003; - •
- The description of our common shares of beneficial interest set forth in our Registration Statement on Form 8-A,
relating to the registration of our Common Shares,as filedwith the Securities and Exchange Commissionon April 7, 1998.
You may request a copy of these filings, at no cost, by contacting Roger A
Waesche, Jr., SeniorMary Ellen Fowler, Vice President, Finance and Chief Financial Officer,Investor Relations, Corporate Office Properties Trust, 8815 Centre Park Drive, Suite 400, Columbia, Maryland 21045, by telephone at 33
410-992-7348,410-992-7324, by facsimile at 410-740-1174, or by e-mail at roger.waesche@copt.com.maryellen.fowler@copt.com, or by visiting our website, www.copt.com. The information contained on our website is not part of this prospectus.
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39
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM
Item 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
TheOther Expenses of Issuance and Distribution
COPT will incur and pay the following expected expenses in connection with the securities being registered hereby. All amounts, other than the SEC registration fee, are estimated. We expect to incur additional fees in connection with the issuance and distribution of the securities being registered are set forth inhereby but the following table (all amounts
exceptamount of such expenses cannot be estimated at this time as they will depend upon the registration fee are estimated):
| Securities and Exchange Commission Registration Fee | $ | 32,360 | ||
Legal Fees and Expenses | 175,000 | |||
Accountant's Fees and Expenses | 100,000 | |||
Printing and Engraving Expenses | 50,000 | |||
NYSE Listing Fees | 35,000 | |||
Transfer Agent Fees | 10,000 | |||
Miscellaneous | 15,000 | |||
Total | $ | 417,360 | ||
Item 15. INDEMNIFICATION OF TRUSTEES AND OFFICERS.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 trusteesTrustees and officers to the trust and its shareholders for money damages except for liability resulting from (i)(a) actual receipt of an improper benefit or profit in money, property or services or (ii)(b) active andor deliberate dishonesty established by a final judgment as being material to the cause of action. The
DeclarationOur declaration of Trusttrust contains such a provision limiting suchwhich limits the liability of our Trustees and officers to the maximum extent permitted by Maryland law.
The Maryland REIT Law permits a Maryland real estate investment trust to indemnify and advance expenses to its Trustees, officers, employees and agents to the same extent as permitted by the MGCL for directors and officers of Maryland corporations. The MGCL permits a corporation to indemnify its present and former directors 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 a party by reason of their service in those or other capacities unless it is established that (a) the act or omission if the director or officer was material to the matter giving rise to the proceeding and (i) was committed in bad faith or (ii) was a result of active and deliberate dishonesty, (b) the director or officer actually received an improper personal benefit in money, property or services or (c) in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. Similarly, a Maryland corporation may not indemnify for an adverse judgment in a suit by or in the right if the corporation or if the trustee or officer was adjudged to be liable for an improper personal benefit. In accordance with the MGCL and our bylaws, our bylaws require us, as a condition to advancing expenses, to obtain (a) a written affirmation by the trustee or officer of his good faith belief that he has met the standard of conduct necessary for indemnification and (b) a written statement by or on his behalf to repay the amount paid or reimbursed by us if it shall ultimately be determined that the standard of conduct was not met.
Our Declaration of Trust authorizes COPT,permits us, 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
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to (a) any present or former Trusteetrustee or officer or (b) any individual who, while a Trustee
of COPTtrustee and at theour 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 agentpartner of such entityreal estate investment trust, corporation, partnership, joint venture, trust, employee benefit plan or other enterprise 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,his status as a present or former trustee or officer of us. Our bylaws, as amended, require us, 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)(a) any present or former Trusteetrustee or officer who is made a party to the proceeding by reason of his or her service in that capacity or (ii)(b) any such Trusteeindividual who, while a trustee or officer who,of our company and at theour 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. Thesuch status. Our Declaration of Trust and the Bylawsbylaws, as amended, also permit COPTus to provide
indemnificationindemnify and advance expenses to any person who served a predecessor of COPTour company in any of the capacities described above and to any employee or agent of COPT or a predecessor
of COPT. The Bylaws require COPTabove. Maryland law requires us to indemnify a Trusteetrustee 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
We maintain, on behalf of our Trustees and officers, insurance protection against liabilities arising out of Maryland corporations. The MGCL permits a corporationthe discharge of their duties, as well as insurance covering us for indemnification payments made by us to indemnify its present and formerour 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
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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.certain liabilities. 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 providespremiums for such indemnification. In addition, reasonable expenses may be advanced upon the
corporation's receiptinsurance are paid by us.
Item 16. Exhibits
The exhibits filed as part 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 expensesthis Registration Statement 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.
ITEMfollows:
| Exhibit Number | Description | |
|---|---|---|
| 4.1 | Amended and Restated Registration Rights Agreement, dated March 16, 1998, for the benefit of certain shareholders of the Registrant (filed with the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1998 and incorporated herein by reference). | |
4.2 | Registration Rights Agreement, dated January 25, 2001, for the benefit of Barony Trust Limited (filed with the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 and incorporated herein by reference). | |
5.1 | Opinion of Morgan, Lewis & Bockius LLP regarding legality of securities being registered. | |
8.1 | Opinion of Morgan, Lewis & Bockius LLP regarding tax matters. | |
12.1 | Statement regarding computation of ratios (filed with the Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on August 4, 2003). | |
23.1 | Consent of Morgan, Lewis & Bockius LLP (included in its opinions filed as Exhibits 5.1 and 8.1). | |
23.2 | Consent of PricewaterhouseCoopers LLP. | |
24.1 | Power of Attorney (included on signature pages to this Registration Statement). |
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Item 17. UNDERTAKINGS.
(a)Undertakings
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
Sectionsection 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 Statementregistration 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 theRegistration 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 effectiveregistration statement;and II-2 - (iii)
- To include any material information with respect to the plan of distribution not previously disclosed in the
Registration Statementregistration statement or any material change to such information in theRegistration Statement; PROVIDED, HOWEVER,registration statement;
provided, however, that paragraphs (a)paragraph (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 Registrantregistrant pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the Registration Statement.
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
thatwhich remain unsold at the termination of the offering.(b)
The undersigned Registrant hereby undertakes that, for the purposepurposes 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 Statementthe registration statement shall be deemed to be a new registration statement relating to the securities offered hereintherein, 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 andor 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,trustee, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such Trustee,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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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
statementRegistration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the cityCity 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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| CORPORATE OFFICE PROPERTIES TRUST | |||
By: | RANDALL M. GRIFFIN Randall M. Griffin President and Chief Operating Officer (Principal Executive Officer) | ||
Pursuant to the requirements of the Securities Act of 1933, as amended, this registration statementRegistration 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,Jr., and each of them acting alone, as his or her true and lawful attorney-in-fact, in his or her name, place and stead,with full power of substitution, to execute and cause to be filedfilled with the Securities and Exchange Commission pursuant to the requirements of the Securities Act of 1933, as amended, any orand all amendments and post-effective amendments to this report.
registration statement, and any additional related registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933 and any and all amendments and post-effective amendments to such registration statement, in each case with exhibits thereto and other documents in connection therewith, and hereby ratifies and confirms all that said attorney-in-fact or his or her substitute or substitutes may do or cause to be done by virtue hereof.
| Name | Title | Date | ||
|---|---|---|---|---|
| JAY H. SHIDLER Jay H. Shidler | Chairman of the Board of Trustees | September 12, 2003 | ||
CLAY W. HAMLIN, III Clay W. Hamlin, III | Chief Executive Officer and Trustee | September 12, 2003 | ||
RANDALL M. GRIFFIN Randall M. Griffin | President and Chief Operating Officer (Principal Executive Officer) | September 12, 2003 | ||
ROGER A. WAESCHE, JR. Roger A. Waesche, | Senior Vice President and Chief Financial Officer (Chief Accounting and Financial Officer) | September 12, 2003 | ||
BETSY Z. COHEN Betsy Z. Cohen | Trustee | September 12, 2003 | ||
KENNETH D. WETHE Kenneth D. Wethe | Trustee | September 12, 2003 | ||
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ROBERT L. DENTON Robert L. Denton | Trustee | September 12, 2003 | ||
KENNETH S. SWEET, JR. Kenneth S. Sweet, Jr. | Trustee | September 12, 2003 | ||
THOMAS F. BRADY Thomas F. Brady | Trustee | September 12, 2003 | ||
STEVEN D. KESLER Steven D. Kesler | Trustee | September 12, 2003 |
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| Exhibit Number | Description | |
|---|---|---|
| 4.1 | Amended and Restated Registration Rights Agreement, dated March | |
4.2 | Registration Rights Agreement, dated January 25, 2001, for the benefit of Barony Trust Limited (filed with the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 and incorporated herein by reference). | |
5.1 | Opinion of Morgan, Lewis & Bockius LLP regarding legality of securities being registered. | |
8.1 | Opinion of Morgan, Lewis & Bockius LLP regarding tax matters. | |
12.1 | Statement regarding computation of ratios (filed with the Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on August 4, 2003). | |
23.1 | Consent of Morgan, Lewis & Bockius LLP (included in its opinions filed as Exhibits 5.1 and 8.1). | |
23.2 | Consent of PricewaterhouseCoopers LLP. | |
24.1 | Power of Attorney (included on signature pages to this Registration Statement). |