<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
- -- of 1934 for the fiscal year ended December 31, 1998, or
___Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the period from ____________ to ______________
Commission File Number: 1934 Act File Number: 0-25968
CHARLES E. SMITH RESIDENTIAL REALTY L.P.
(Exact name of registrant as specified in its charter)
Delaware 54-1681657
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2345 Crystal Drive
Crystal City, Arlington, VA 22202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 920-8500
Securities registered pursuant to Section 12(b) of the Act:
Class A Units of Limited Partnership Interest
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ____
Documents Incorporated by Reference
Portions of the proxy statement of Charles E. Smith Residential Realty,
Inc. for its annual shareholders' meeting to be held in 1999 are incorporated
by reference into Part III.
<PAGE>
FORWARD-LOOKING STATEMENTS
When used throughout this report, the words "believes", "anticipates", and
"expects" and similar expressions are intended to identify forward-looking
statements. Such statements indicate that assumptions have been used that are
subject to a number of risks and uncertainties which could cause actual
financial results or management plans and objectives to differ materially from
those projected or expressed herein, including: the effect of national and
regional economic conditions, particularly with regard to the levels of
multifamily property occupancy and rental growth in the Washington, D.C.,
Chicago and Boston metropolitan areas; the registrant's ability to identify and
secure additional properties and sites that meet its criteria for acquisition or
development; the acceptance of the registrant's financing plans by the capital
markets, and the effect of prevailing market interest rates and the pricing of
the Company's stock; and other risks described from time-to-time in the
Registrant's filings with the Securities and Exchange Commission. Given these
uncertainties, readers are cautioned not to place undue reliance on such
statements. The Registrant undertakes no obligation to publicly release the
result of any revisions to these forward-looking statements that may be made to
reflect any future events or circumstances.
PART I
Item 1. Business.
Charles E. Smith Residential Realty L.P., a Delaware limited partnership
(the "Operating Partnership"), was formed in 1993 and commenced operations on
June 30, 1994. It is managed by its general partner, Charles E. Smith
Residential Realty, Inc., a Maryland corporation (the "Company"), which is a
self-administered and self-managed equity real estate investment trust("REIT").
The Company was organized in 1993 and also commenced operations on June 30, 1994
upon completion of its initial public offering (the "Initial Public Offering").
The Operating Partnership and the Company are engaged primarily in the
acquisition, development, management and operation of multifamily properties.
The Operating Partnership, together with the Company and their respective
subsidiaries as described below, is a fully integrated real estate organization
with in-house acquisition, development, financing, marketing, leasing and
property management expertise. The Operating Partnership's primary strategy for
growth is to acquire, develop, own and manage high quality multifamily
properties for income generation and long-term value appreciation.
The Company is the sole general partner and holds approximately 62% of the
common and preferred units of limited partnership interest ("Units") in the
Operating Partnership as of March 1, 1999. The other limited partners of the
Operating Partnership (the "Minority Interest") primarily consist of the former
limited and general partners of properties and the former owners of the property
service businesses acquired by the Operating Partnership (see "History of the
Company" below). The Operating Partnership and its subsidiaries own all of the
properties, property interests, and business assets and conduct all operations
on behalf of the Company and
1
<PAGE>
the Operating Partnership. The Operating Partnership owns 100% of the nonvoting
common stock, which represents 99% of the total economic interest, of three
operating companies (collectively, the "Property Service Businesses") which
provide property services to the properties owned by the Operating Partnership
and to other multifamily, retail, and office properties. The three Property
Service Businesses are: Smith Realty Company, which directly provides
management, leasing, financing, development and insurance services and
indirectly provides furnished corporate apartments through a wholly-owned
subsidiary; Consolidated Engineering Services, Inc., which provides engineering
and technical services; and Smith Management Construction, Inc., which provides
construction and interior renovation services. As the sole general partner of
the Operating Partnership, the Company has the exclusive power to manage and
conduct the business of the Operating Partnership, subject to the consent of the
holders of Units in connection with the sale of all or substantially all of the
assets of the Operating Partnership. Some references made herein to the Company
include the Operating Partnership and the Property Service Businesses, as the
context requires.
As of March 1, 1999, the Operating Partnership, directly or through its
subsidiaries, owned 50 operating multifamily apartment properties containing a
total of 19,852 units (the "Multifamily Properties"), two retail centers
containing approximately 436,000 square feet of retail space (the "Retail
Properties"), and had four properties under construction containing
approximately 2,100 units ("Development Properties"). All properties, excluding
five in Chicago, Illinois and two in Boston, Massachusetts, are located in the
Washington, D.C. metropolitan area (collectively, the "Properties").
The executive offices of the Operating Partnership are located at 2345
Crystal Drive, Crystal City, Arlington, Virginia 22202, and its telephone number
is (703) 920-8500.
History of the Company
The Operating Partnership was formed to succeed to the property assets of
38 partnerships (the "Property Partnerships") and certain asset management and
property service businesses of the Charles E. Smith Companies (the "Smith
Companies"). On June 30, 1994, the Company consummated an initial public
offering (the "Initial Public Offering") of 8,632,800 shares of its common
stock, $.01 par value per share (the "Common Stock"), and a private placement of
416,667 shares of its Common Stock. The Company contributed the net proceeds of
such offerings to the Operating Partnership in return for 9,049,467 Units of
general and limited partnership interest therein. On that same date, (i) the
Operating Partnership acquired, in exchange for 12,131,292 Units, 30 Properties
(reflects the combination of three buildings into one for operational and
statistical purposes), partial interests in two additional properties, all of
the non-voting common stock of the Property Service Businesses (representing 99%
of the economic interest), and notes of the Property Service Businesses in the
aggregate amount of $44.5 million; (ii) the Operating Partnership, through its
partnership subsidiaries, issued $352.4 million of fixed-rate indebtedness
secured by certain of the Properties in private placements to institutional
investors and assumed certain other indebtedness (the "Mortgage Loans"); (iii)
the Operating Partnership applied the proceeds of the Mortgage Loans and the
Company's contribution of offering proceeds to repay approximately $454 million
of mortgage indebtedness,
2
<PAGE>
$26.2 million in related party indebtedness and $11.1 million in notes payable
to a bank, to pay $13.8 million in prepayment penalties related to the early
extinguishment of debt, to pay $14.7 million in transfer taxes and other costs
associated with the formation of the Company and the Operating Partnership, and
to pay $18.5 million of mortgage recording taxes, origination fees and other
expenses associated with the Mortgage Loans, and to supply $15.4 million of
working capital; and (iv) the Operating Partnership established a $100 million
line of credit to fund development activities and property acquisitions and for
general corporate purposes (collectively, the "Formation Transactions").
Since the Formation Transactions and through March 1, 1999, the Operating
Partnership developed one and acquired 24 operating Multifamily Properties
totaling 9,351 apartment units and sold three properties totaling 1,334 units.
In addition, the Operating Partnership had approximately 2,100 units under
construction in four Development Properties as of March 1, 1999 (see "Recent
Developments" below).
Business Strategy
The Operating Partnership seeks growth in funds from operations (a common
measure of equity real estate investment trust performance, defined as net
income [loss] computed in accordance with generally accepted accounting
principles, excluding gains or losses from debt restructuring and other non-
recurring items, plus depreciation and amortization of assets unique to the real
estate industry) while preserving and enhancing property values by pursuing the
following strategies: (i) maximizing cash flow from operations of the Properties
by seeking to maintain high occupancy levels, obtain rent increases, manage
tenant turnover efficiently, make strategic capital investments, expand the
availability of furnished rental apartments, initiate new tenant fees and
control operating expenses; (ii) acquiring additional multifamily properties for
Common Stock, Units, or cash in situations where, in the judgment of management,
the Operating Partnership's business strengths have the potential to increase
property performance and value; (iii) developing new multifamily properties
consistent with the predecessor Smith Companies' historical policies of
constructing and maintaining high quality properties for long-term income and
value enhancement; and (iv) actively promoting the comprehensive property
services of the Property Service Businesses to unaffiliated property owners. In
addition to its activities in the Washington, D.C. metropolitan area, the
Operating Partnership also seeks to acquire additional properties or portfolios
in Chicago, Boston, southeast Florida and other markets with characteristics
similar to the Operating Partnership's current portfolio that offer
opportunities for profitable investment and long-term growth.
Financing Strategy
To the extent that the Company's board of directors determines to seek
additional capital for acquisitions or otherwise, the Company or the Operating
Partnership may raise such capital through additional equity offerings, debt
financing or retention of cash flow (subject to provisions of the Internal
Revenue Code of 1986, as amended, requiring the distribution by a REIT of a
certain percentage of taxable income and taking into account taxes that would be
imposed on undistributed taxable income), or a combination of these methods.
3
<PAGE>
Equity
During 1998 and through March 1, 1999, the Company and the Operating
Partnership completed several equity transactions.
In January 1998, the Company sold 500 shares of Series C Cumulative
Redeemable Preferred Stock ("Series C Preferred Shares"), $0.01 par value, to
Cobalt Capital, L.L.C. The Company contributed the net proceeds to the
Operating Partnership in exchange for 500 units of Series C Cumulative
Redeemable Preferred Units ("Series C Preferred Units").
The Operating Partnership amended the Articles of Incorporation to
designate and establish the rights and privileges of the Series C Preferred
Unitholders which include certain voting, distribution and liquidation
preferences over the common unitholders. The Series C Preferred Units have a
liquidation preference of $100,000 per unit and an initial annual distribution
of $7,910 per unit (7.91% of purchase price). If the securities receive an
investment grade rating, the distribution will decrease to $7,660 per unit.
Distributions are cumulative and are payable quarterly. The Operating
Patrnership may redeem Series C Preferred Units after February 1, 2028, at the
liquidation price plus accrued distributions.
In April 1998, the Company sold the remaining 978,581 shares of Series A
Cumulative Convertible Redeemable Preferred Stock ("Series A Preferred Shares")
to Security Capital Preferred Growth Inc. under the May 1997 agreement. The
Company contributed the net proceeds to the Operating Partnership in exchange
for 978,581 units of Series A Cumulative Convertible Redeemable Preferred Units
("Series A Preferred Units").
In July 1998, the Company completed the sale of 1,400,000 shares of common
stock (par value of $0.01 per share) under its existing shelf registration
statement. The net proceeds were contributed to the Operating Partnership in
exchange for 1,400,000 units of common units.
During 1998, 502,038 shares of Series B Cumulative Convertible Redeemable
Preferred Stock ("Series B Preferred Shares") were converted to common shares on
a one-for-one basis. The Operating Partnership converted 502,038 units of
Series B Cumulative Convertible Redeemable Preferred Units ("Series B Preferred
Units") to common units on a one-for-one basis.
The Company currently has on file with the Securities and Exchange
Commission an effective registration statement which allows the sale of up to
$450,000,000 in debt or equity securities, of which approximately $312,000,000
remains available. As long as the Operating Partnership is in existence, the net
proceeds of all equity capital raised by the Company will be contributed to the
Operating Partnership in exchange for limited partnership interests in the
Operating Partnership. The Company and the Operating Partnership also may issue
securities senior to the Common Stock or Units, including additional preferred
stock or debt securities (either of which may be convertible into Common Stock
or Units or may be accompanied by warrants to purchase Common Stock or Units).
4
<PAGE>
Debt
The Operating Partnership's policy, which is set by the Board of Directors
of the Company, is to incur debt (including debt incurred under its lines of
credit) only if upon such incurrence its ratio of debt to total market
capitalization would be 60% or less. The Operating Partnership may reevaluate or
modify this financing policy from time to time in light of economic conditions,
relative costs of debt and equity capital, market values of properties, growth
and acquisition opportunities and other factors. At December 31, 1998, the
Operating Partnership's debt to total market capitalization ratio was 40.3%.
Property Management
The Operating Partnership and its Property Service Businesses are
experienced in the management and leasing of multifamily and retail properties.
The Operating Partnership believes that the management and leasing of its own
portfolio has resulted in consistent income growth and reduced operating
expenses. The Property Service Businesses have provided the Operating
Partnership both with a source of cash flow and with economies of scale in
conjunction with the management and leasing of its own Properties. These
Property Service Businesses also allow the Operating Partnership and its
subsidiaries to establish additional relationships with tenants that benefit the
Properties.
Property Service Businesses
Multifamily Property Management Services. The residential property
management business of Smith Realty Company ("SRC"), an operating subsidiary of
the Operating Partnership, is a long-established, integrated business with
extensive experience in leasing and managing multifamily properties. This
subsidiary has been managing and leasing multifamily housing in the Washington,
D.C. metropolitan area since 1946 and, as of March 1, 1999, manages 63 apartment
properties of which 50 are owned by the Operating Partnership. It also assists
in the development and acquisition of additional multifamily properties and
carries out a periodic inspection program that addresses all aspects of the
property and property management.
During 1998, Multifamily and Retail Property Management Services expanded
the corporate apartment program as a result of the acquisition by Smith Realty
Company of Noel Enterprises, Inc. ( d.b.a. "Presidential Villas"), a provider of
furnished corporate apartments in Chicago, Illinois. A portion of the total
purchase price of $8.5 million is contingent upon achievement by Presidential
Villas of certain earnings targets over the next two years. The Operating
Partnership lent to Smith Realty Company the initial payment of $6.75 million in
exchange for a five year note.
Retail Property Management Services. The retail management and leasing
business, also conducted through Smith Realty Company, approaches the management
and leasing of its retail portfolio with an integrated program of regular direct
communication with retail tenants,
5
<PAGE>
proactive assistance with marketing, merchandising and monitoring store
operations, and maintenance. A retail marketing staff works to promote the
shopping centers as a whole and to work with individual tenants to ensure the
effectiveness of store design, marketing, merchandising and sales efforts. The
retail management and leasing group, in addition to providing complete property
management and leasing services for the Operating Partnership's two Retail
Properties totaling approximately 436,000 square feet, also provides such
services for a fee to three retail properties owned by affiliated parties
totaling approximately 293,000 square feet. Smith Realty Company also provides
retail leasing and brokerage services for additional, unaffiliated third parties
on a fee-for-service basis.
Financing Services. Historically, the Operating Partnership
solicited, procured and arranged financing for a fee on behalf of commercial
office properties, the majority of which are affiliated with Robert H. Smith and
Robert P. Kogod, the Co-Chief Executives and Co-Chairmen of the Board of the
Company and the owners of approximately 13% of the Shares and Units of the
Company. During the fourth quarter of 1997, Financing Services personnel
transferred to Charles E. Smith Commercial Realty L.P. ("CESCR"), a commercial
office partnership affiliated with Messrs. Smith and Kogod. In 1998 most of the
remaining commercial office properties were rolled up into CESCR. In connection
with the formation of CESCR, the Operating Partnership entered into a 14-month
agreement to continue to provide financing services for certain of the
properties of CESCR through December 31, 1998. Management does not expect any
significant future income from Financing Services.
Engineering and Technical Services. The engineering and technical services
business is conducted through Consolidated Engineering Services, Inc., an
operating subsidiary of the Operating Partnership, which manages, operates,
maintains and repairs the "physical plant" of office, multifamily, and retail
properties. Through its staff of on-site and off-site engineers, supervisors,
technical specialists and maintenance personnel, this subsidiary provides
various services, including on-site building systems operations and maintenance,
engineering and technical consulting, automated environmental monitoring and
controls, preventive maintenance, management of building environmental systems
and repair and replacement of mechanical/electrical systems. This business
serves the Properties and also provides facilities management services for both
affiliated and unaffiliated third parties, including condominium, bank,
university and government buildings. During 1998, services were provided with
respect to approximately 46 million square feet of facilities.
Interior Construction and Renovation Services. The construction services
business, conducted through Smith Management Construction, Inc., an operating
subsidiary of the Operating Partnership, is a construction management and
general contracting company that provides interior construction and renovation
services to the Properties and various other affiliated and unaffiliated third
party clients. This business focuses primarily on capital improvement projects
and office and retail tenant space construction and alteration, and provides the
expertise necessary to take a project from the initial planning and
preconstruction stage through the completion of construction. In 1998, oversight
was provided to approximately $80 million of construction activity.
6
<PAGE>
Corporate Services. The corporate services businesses, conducted through
Smith Realty Company, enable a central office to provide supporting services in
the areas of insurance, legal advice, accounting, information systems, human
resources, office administration and marketing to the Operating Partnership and
its subsidiaries, as well as to other affiliated third parties, including CESCR.
Services are provided at cost (including overhead) in accordance with cost and
executive sharing agreements. In management's opinion, the allocation methods
provide reasonable estimates of the costs that would have been incurred by the
Operating Partnership had the services been provided by the Operating
Partnership.
The accounting department is responsible for all accounting, auditing and
controls, procedures and management information systems as they relate to the
Operating Partnership and the Properties, and for certain other partnerships and
corporate entities (including affiliates of Messrs. Smith and Kogod). The legal
department provides real estate and corporate advice to management, performs
legal services and in some cases coordinates representation by outside counsel.
The marketing department develops and implements a variety of marketing programs
for the Operating Partnership and its subsidiaries. The human resources
department administers all personnel functions. The insurance subsidiary
provides property and casualty insurance placement services for both corporate
and individual property requirements.
Employees
As of March 1, 1999, the Operating Partnership and its subsidiaries had
approximately 1,820 full-time and part-time employees, the latter primarily
employed in on-site clerical positions. This total includes 680 employees who
provide on-site property services and, in the Property Service Businesses, 690
persons in its engineering and technical services subsidiary, 120 persons in its
interior construction and renovation subsidiary, and 330 persons in its
residential and retail leasing and management, finance, and corporate services
subsidiary.
Recent Developments
Acquisition Properties. During 1998, the Company, through the Operating
Partnership, acquired five operating multifamily properties containing 1,942
apartment units, as further described below.
Tunlaw Park. In January 1998, this 120-unit mid-rise property in northwest
Washington, D.C. was acquired for $0.8 million in cash and 123,818 Operating
Partnership units valued at $4.4 million. The property was developed and
managed by the Smith Companies and the Operating Partnership previously owned a
20% minority interest.
Tunlaw Gardens. In January 1998, this 167-unit, garden property in
northwest Washington, D.C. was acquired for $6.9 million consisting of $2.5
million cash and 130,371 Operating Partnership units valued at $4.4 million.
The property was previously managed by the Operating Partnership.
7
<PAGE>
Parc Vista. In April 1998, this 299-unit, 16-story high-rise built in
1990 was acquired for approximately $39 million of cash funded by $4.3 million
in proceeds from the sale of Oxford Manor with the balance drawn on the line of
credit. During the fourth quarter of 1998, the property had an average economic
occupancy of 98.4% and average monthly rental revenue per apartment unit of
approximately $1,430.
McClurg Court. In May 1998, the Operating Partnership acquired a 1,075-
unit multifamily property in Chicago, Illinois. The cost of approximately $70
million cash was funded from the line of credit and proceeds from the sale of
Series A Preferred Shares totaling $26.5 million. Approximately 13% of the
underlying land is included in the purchase, with the balance subject to ground
leases expiring in 2067. The total capitalized cost of approximately $74
million reflects $4 million of planned initial capital improvements. During the
fourth quarter of 1998, the property had an average economic occupancy of 93.4%
and average monthly rental revenue per apartment unit of approximately $1,287.
Cronin's Landing. In July 1998, the Operating Partnership acquired a
newly-constructed 281-unit mid-rise multifamily property in Boston,
Massachusetts. The total capitalized cost of approximately $63.5 million was
comprised of $27.0 million cash, $31.5 million in assumed debt, a fair value
adjustment to debt of $2.0 million, and 92,793 Operating Partnership units
valued at $3.0 million. During the fourth quarter of 1998, the property had an
average economic occupancy of 89.5% and average monthly rental revenue per
apartment unit of approximately $1,733.
In January 1999, the Company, through the Operating Partnership acquired
three additional properties as further described below.
Buchanan House. This 442-unit property in Crystal City, Virginia was
acquired for a total capitalized cost of $65.5 million which includes assumed
debt of $7.4 million, initial capital improvement costs of $5.0 million and $0.4
million in acquisition related costs. Cash of $52.7 million was provided by
$17.7 million in proceeds from the sale of Marbury with the balance drawn on the
line of credit. In February 1999, the Operating Partnership repaid the assumed
debt of $7.4 million through a draw on the line of credit. The Operating
Partnership paid a prepayment penalty of $0.9 million which was recognized as an
extraordinary loss.
Parkwest. This 139-unit property in Chicago, Illinois was acquired for a
total capitalized cost of approximately $14.1 million, consisting of 201,950
Operating Partnership Units valued at $6.3 million, assumed debt of $6.0
million, a fair value adjustment to debt of $0.4 million, initial capital
improvement costs of $0.8 million, and $0.6 million in other related costs.
Terrace. This 427-unit property in Chicago, Illinois was acquired for a
total capitalized cost of approximately $26.1 million, consisting of 320,304
Operating Partnership Units valued at $10.0 million, assumed debt of $13.7
million, a fair value adjustment to debt of $0.7 million, initial capital
improvement costs of $0.4 million, and $1.3 million in other related costs.
8
<PAGE>
In March 1999, the Operating Partnership acquired the land beneath the
Crystal Square property and the 5.1% net profits interest in the Crystal Plaza
property. The purchase price of $10 million consisted of 32,258 Operating
Partnership Units valued at $1 million and $9 million cash drawn upon the line
of credit.
Disposition Properties. During 1998, the Operating Partnership sold two
properties (Oxford Manor and Marbury Plaza) in southeast Washington, D.C. for a
total of $22.0 million. The Operating Partnership recognized gains on the sales
totaling $18.2 million.
In February 1999, the Operating Partnership sold The Manor, a 435-unit
property located in suburban Maryland for $23.0 million. The Operating
Partnership recognized a gain on the sale of $1.9 million.
Development Properties. During 1998, the Operating Partnership had four
properties totaling 2,146 apartment units under construction.
Springfield Station. The Operating Partnership is nearing completion
on the construction of its 631-unit mid-rise and garden apartment property in
Springfield, Virginia. The project is located adjacent to a new Metrorail and
commuter rail station and a regional shopping mall and offers convenient access
to major transportation routes. Initial delivery was in May 1998, with final
delivery projected in the second quarter of 1999.
Courthouse Place. The Operating Partnership is nearing completion on the
construction of its 564-unit high-rise apartment property in Arlington,
Virginia. The initial delivery of 103 units was in December 1998. Final
delivery is expected in December 1999.
One Superior Place. During 1997, the Operating Partnership began
construction on a 52-story, 809-unit high-rise apartment and commercial center
in downtown Chicago. Initial occupancy is expected in the third quarter of 1999
with final delivery in mid-2000.
Park Connecticut. During 1998, the Operating Partnership began
construction on a 142-unit high- rise apartment property in downtown Washington,
D.C. The project is expected to deliver initial units in the fourth quarter of
1999 with stabilization in the second quarter of 2000.
As of March 1, 1999, the Operating Partnership owned $14.5 million of land for
future development.
Prepurchase Agreements. During 1998, the Operating Partnership entered
into four contracts to purchase to-be-constructed multifamily properties
totaling approximately 1,200 apartment units ("Prepurchase Agreements"). The
maximum aggregate purchase price totals $151 million with projected closing
dates between July 2000 and May 2001. Further details of each project are
reflected below.
9
<PAGE>
Reston Landing. This 400-unit property is expected to be completed in the
fourth quarter of 1999. The Operating Partnership expects to acquire the
property in the third quarter of 2000 at a cost of $44 million, including earn-
out payments.
New River Village. This 240-unit property is expected to be completed in
the second quarter of 2000. The Operating Partnership expects to acquire the
property in the fourth quarter of 2000 at a cost of $32 million, including earn-
out payments.
Wilson Boulevard. This 220-unit property is expected to be completed in
the second quarter of 2000. The Operating Partnership expects to acquire the
property in the fourth quarter of 2000 at a cost of $28 million, including earn-
out payments.
Pollard Gardens. This 383-unit property is expected to be completed in the
fourth quarter of 2000. The Operating Partnership expects to acquire the
property in the second quarter of 2001 at a cost of $47 million, including earn-
out payments.
These acquisitions are contingent upon satisfactory completion of
construction and attainment of final certificates of occupancy by the owners.
At December 31, 1998, the Operating Partnership had posted three letters-of-
credit totaling $7.7 million in accordance with three of the contracts to be
drawn upon only if the Operating Partnership defaults on its contractual
obligations to purchase the completed assets.
Financial Information
For information relating to the Operating Partnership's operating segments,
please refer to Footnote 14 in the Financial Statements.
Executive Officers of the Company
The following is a biographical summary of the experience of the executive
officers of the Company:
Robert H. Smith. Mr. Smith is Co-Chief Executive Officer and Co-Chairman
of the Board of the Company and Co-Chairman of the Board of each of the Property
Service
10
<PAGE>
Businesses. Since 1962, Mr. Smith has been the President, Chief Executive
Officer and a director of Charles E. Smith Construction, Inc. and its
predecessor companies, where he oversees and directs all phases of development
and construction of the Smith Companies' office, retail and residential real
estate projects. He is also Co-Chairman of the Board and a director of Charles
E. Smith Commercial Realty, Inc. which together with its subsidiaries and
affiliates is engaged in the ownership, operation, and management of commercial
office buildings. Mr. Smith joined the Smith Companies in 1950. Mr. Smith is 70
years old and the brother-in-law of Robert P. Kogod.
Robert P. Kogod. Mr. Kogod is Co-Chief Executive Officer and Co-Chairman
of the Board of the Company and Co-Chairman of the Board of each of the Property
Service Businesses. From 1964 to 1997, Mr. Kogod was the President, Chief
Executive Officer and a director of Charles E. Smith Management, Inc., where he
oversaw and directed all phases of the leasing and management of the Smith
Companies' commercial real estate portfolio. He is now the Co-Chairman of the
Board and a director of Charles E. Smith Commercial Realty, Inc., a successor to
Charles E. Smith Management, Inc., and the owner, operator, and manager of
commercial office buildings. He is also Secretary/Treasurer and a director of
Charles E. Smith Construction, Inc., an affiliated company that specializes in
the development and construction of office, retail and residential projects.
Mr. Kogod joined the Smith Companies in 1959. Mr. Kogod is 67 years old and the
brother-in-law of Robert H. Smith.
Ernest A. Gerardi, Jr. Mr. Gerardi is President, Chief Operating Officer
and a Director of the Company, and is President, Chief Executive Officer, and a
director of each of the Property Service Businesses. From 1985 until 1994, Mr.
Gerardi was a member of the Executive Committee of Charles E. Smith Management,
Inc., where he had overall responsibility for all day-to-day business operations
and long-range planning. From 1985 through 1993, he served as Executive Vice
President and Senior Executive Vice President of Charles E. Smith Management,
Inc. Prior to joining the Smith Companies in 1985, Mr. Gerardi was with Arthur
Andersen and Co., where he served as senior partner in charge of the firm's
accounting and financial practice for over 250 professionals in Washington, D.C.
During his 27 years with Arthur Andersen, he specialized in management
consultation and strategic planning. He is also a member of the American
Institute of Certified Public Accountants and the D.C. Institute of Certified
Public Accountants. Mr. Gerardi is 63 years old.
Wesley D. Minami. Mr. Minami is Senior Vice President and Chief Financial
Officer of the Company and Smith Realty Company, one of the Property Service
Businesses, and is responsible for the Company's debt portfolio, corporate
financial planning, local acquisitions, and its treasury, accounting, controls
and information systems departments. Prior to joining the Company in 1997, Mr.
Minami was the Chief Financial Officer for Ascent Entertainment Company where he
was responsible for an $86 million initial public offering spin-off of Ascent,
which had been a wholly-owned subsidiary of Comsat Corporation. Formerly, he
had served as the Treasurer of Comsat Corporation. From 1985 to 1993, Mr.
Minami held several positions, including Senior Vice President, Chief Financial
Officer at Oxford Realty Services Corporation which developed and managed a
portfolio of over 45,000 apartment units. Mr. Minami is 42 years old.
Robert D. Zimet. Mr. Zimet is Senior Vice President, General Counsel and
Secretary of the Company and Smith Realty Company, one of the Property Service
Businesses. He was the General Counsel and a Senior Vice President of Charles
E. Smith Management, Inc., since joining the Smith Companies in 1983, and
became a Group Senior Vice President in 1991. He continues in these capacities
for Charles E. Smith Commercial Realty, Inc., a successor to Charles E. Smith
Management, Inc., and the owner, operator, and manager of commercial office
buildings. Mr. Zimet is responsible for the legal affairs of the Company and the
Smith Companies, as well as supervision of the Human Resources and Office
Services departments of Smith Realty Company. Mr. Zimet is 60 years old.
11
<PAGE>
John T. Gray. Mr. Gray is the Senior Vice President-Residential Management
of the Company and Smith Realty Company, one of the Property Service Businesses.
Prior to joining the Smith Companies in November 1998, he was President for two
years of Walter V. Clark Associates, a human resources consulting firm. Prior
to that, Mr. Gray was with Summit Properties, Inc. for ten years. As President
of the Management Company, he was an active participant in Summit's initial
public offering and had total responsibility for the residential portfolio of
over 20,000 apartment units. Mr. Gray is responsible for the overall
management, leasing and operation of Smith's multifamily portfolio. Mr. Gray is
43 years old.
Matthew B. McCormick. Mr. McCormick is the Senior Vice President-
Residential Marketing of the Company and Smith Realty Company, one of the
Property Service Businesses. Prior to January 1998, Mr. McCormick was the Senior
Vice President and Department Head of the Retail Group, where he was responsible
for retail property management and leasing, as well as outside retail brokerage
services. Prior to joining the Smith Companies in 1988, Mr. McCormick was a
retail specialist with the Washington, D.C. office of Coldwell Banker. Mr.
McCormick is 38 years old.
Alfred G. Neely. Mr. Neely is Senior Vice President-Development of the
Company, responsible for the zoning, planning and development of all multifamily
buildings. Since joining Charles E. Smith Construction, Inc., in 1989 as a
Senior Vice President and now as a Group Senior Vice President, Mr. Neely has
been responsible for zoning, planning and development. Prior to joining the
Smith Companies, Mr. Neely was Executive Vice President and Managing General
Partner of the New Height Group, a real estate and development company in
Denver, Colorado. During his nine years with this company, Mr. Neely has been
responsible for development and management of mixed-use properties. Mr. Neely
is 53 years old.
Item 2. Properties
General
The 56 Properties as of March 1, 1999 consist of 50 Multifamily Properties,
four Development Properties and two Retail Properties, as described in more
detail below. Twenty-eight of the Multifamily Properties (reflecting the
combination of three buildings into one for operational and statistical
purposes) and both Retail Properties were acquired in connection with the
Formation Transactions. In addition, the Operating Partnership held a minority
limited partnership interest in one other multifamily property in the
Washington metropolitan area, acquired in the Formation Transactions and
increased in a subsequent transaction.
All of the Operating Partnership's properties are located in developed
areas that include other residential and retail properties. The number of
competitive residential properties in a particular area could have a material
effect on the Operating Partnership's ability to lease apartment units and on
the rents charged. In addition, other forms of single and multifamily
residential properties provide housing alternatives to tenants and potential
tenants of the
12
<PAGE>
Operating Partnership's residential properties. The Operating Partnerships's
retail properties face similar competition with other retail properties with
respect to tenant leases. The Operating Partnership believes that the properties
are well located in their markets and are well constructed and designed. In the
opinion of management, the Operating Partnership's properties are adequately
covered by insurance.
Multifamily Properties
The 48 operating Multifamily Properties owned as of December 31, 1998
contain a total of 19,279 garden, mid-rise, and high-rise apartment units,
ranging in size from 115 to 1,075 apartment units. Two of the properties are
located in Chicago, Illinois, two are located in Boston, Massachusetts with the
balance in the Washington D.C. metropolitan area. All of the Multifamily
Properties are 100% owned by the Operating Partnership and its subsidiaries. In
1998, the average monthly rental revenue per core unit was $970 and the average
economic occupancy was 96.6% for the Core Residential Portfolio (Multifamily
Properties owned as of December 31, 1996.) As of December 31, 1998, the average
age of the operating Multifamily Properties, weighted by 1998 revenues, was 25
years.
Each of the Multifamily Properties is established in its local market and
provides residents with numerous amenities and services, which may include 24-
hour desk service, swimming pools, tennis courts, exercise rooms and/or saunas,
day care centers, party or meeting rooms, tenant newsletters, and laundry
facilities. Nearly all units are wired for cable television, and many units also
offer additional features, such as washer/dryer, microwave, fireplace, and
patio/balcony. The Operating Partnership maintains an ongoing program of regular
maintenance and capital improvements and renovations, including roof replacement
and exterior maintenance, kitchen and bath renovations, balcony repairs, and
replacements of various building systems.
The following table sets forth certain additional information relating to
the Multifamily Properties as of December 31, 1998 (in the following table,
occupancy is based upon economic occupancy, which measures occupancy beginning
on the rent commencement date; monthly revenue per unit is total property
revenue divided by the number of apartment units; and certain data may be
omitted for properties not operated by the Operating Partnership for the entire
year):
13
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY L.P.
Residential Portfolio Statistics for the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Number of Average Monthly Average
Property Apartment Sq. Ft. Revenue Economic
Property Type/Property Name Type Units Per Unit Per Unit Occupancy
- --------------------------- -------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Core Residential Portfolio
NW Washington, D.C.
1841 Columbia Road High-rise 115 634 $ 955 99.0%
2501 Porter Street High-rise 202 760 1,472 97.5%
Albemarle High-rise 235 1,097 1,226 98.9%
Calvert-Woodley High-rise 136 1,001 1,169 99.0%
Cleveland House High-rise 216 894 1,138 99.2%
Connecticut Heights High-rise 519 536 889 95.6%
Corcoran House High-rise 138 464 832 99.2%
Statesman High-rise 281 593 798 97.7%
Van Ness South High-rise 625 956 1,109 98.7%
------ ------ ----- -------
2,467 778 1,051 98.0%
Other NE & SE Washington, D.C.
Car Barn Garden 196 1,311 888 96.6%
Fort Chaplin Garden 549 983 673 98.2%
------ ----- ------ ------
745 1,069 729 97.6%
Other Northern Virginia - Inside Beltway
Crystal City
------------
The Bennington High-rise 348 804 1,059 96.0%
Crystal House I High-rise 426 917 1,010 97.2%
Crystal House II High-rise 402 938 987 96.6%
Crystal Square High-rise 378 1,121 1,179 99.0%
Crystal Place High-rise 180 894 1,310 97.7%
Gateway Place High-rise 162 826 1,792 94.7%
Water Park Towers High-rise 360 881 1,436 92.9%
------ ----- ------ ------
2,256 923 1,190 96.2%
Rosslyn/Ballston
------------------
Courthouse Plaza High-rise 396 772 1,299 96.9%
Other
--------
Arlington Overlook Mid-rise 711 877 780 95.6%
Bedford Village Garden 752 1,070 914 95.0%
Berkeley Mid-rise 138 891 744 97.4%
Boulevard of Old Town Garden 159 603 934 98.3%
Columbia Crossing Garden 247 976 1,122 95.8%
Columbian Stratford Mid-rise 227 942 767 97.8%
Concord Village Garden 531 1,025 820 95.4%
Newport Village Garden 937 1,115 911 97.1%
Orleans Village Garden 851 1,061 828 94.6%
Patriot Village Garden 1,065 1,162 915 96.6%
Skyline Towers High-rise 940 1,221 988 95.5%
Windsor Towers Mid-rise 280 1,025 812 98.0%
------ ----- ------ ------
6,838 1,063 887 96.0%
Other Northern Virginia - Outside Beltway
Charter Oak Garden 262 1,097 956 96.8%
Oaks of Tysons Garden 218 968 1,047 97.2%
Potomac View Garden 192 965 791 97.8%
Westerly at Worldgate Garden 320 921 1,120 95.5%
------ ----- ------ ------
992 986 997 96.6%
Suburban Maryland
The Manor Garden 435 999 774 96.9%
Suburban Tower High-rise 172 677 830 98.1%
------ ----- ------ ------
607 908 790 97.2%
------ ----- ------ ------
Subtotal/Average 14,301 972 $ 970 96.6%
------ ----- ------ ------
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Number of Average Monthly Average
Property Apartment Sq. Ft. Revenue Economic
Property Type/Property Name Type Units Per Unit Per Unit Occupancy
- --------------------------- -------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Acquisition Portfolio
The Kenmore (NW Washington, D.C.) High-rise 376 725 756 97.8%
Crystal Plaza (Crystal City) High-rise 540 1,129 1,254 98.4%
Crystal Towers (Crystal City) High-rise 912 1,107 1,139 97.5%
Lincoln Towers (Rosslyn/Ballston) High-rise 714 879 1,276 93.5%
2000 Commonwealth (Boston) High-rise 188 878 1,649 96.2%
One East Delaware (Chicago) High-rise 306 704 1,886 98.0%
Tunlaw Gardens (NW Washington,
D.C.) Garden 167 850 767 97.0%
Tunlaw Park (NW Washington, D.C.) Mid-rise 120 856 1,105 97.8%
Parc Vista (Crystal City) High-rise 299 770 n/a n/a
McClurg Court (Chicago) High-rise 1,075 688 n/a n/a
Cronin's Landing (Boston) Mid-rise 281 1,129 n/a n/a
------ ----- ----- -----
Sub-Total/Average 4,978 890 n/a n/a
------ ----- ----- -----
Development Portfolio
Springfield Station (Other
Northern Virginia) Mid-rise / Garden 631
Courthouse Place (Rosslyn/
Ballston) High-rise 564
One Superior Place (Chicago) High-rise 809
Park Connecticut (NW Washington,
D.C.) High-rise 142
---------
Sub-Total 2,146
---------
All Residential Properties 21,425
=========
</TABLE>
15
<PAGE>
The following table sets forth the total number of apartment units in the
Core Residential Portfolio, the economic occupancy, and the average monthly
rental revenue per unit as of the end of 1998 and in each of the previous five
years:
<TABLE>
<CAPTION>
Multifamily Properties
Average Monthly
Year Number of Units Percent Occupied* Revenue Per Unit
- ------- --------------- ------------------ ----------------
<S> <C> <C> <C>
1998 14,301 96.6% $970
1997 14,198 96.4% $901
1996 12,462 97.0% $883
1995 11,834 97.2% $862
1994 11,834 97.8% $845
1993 11,834 97.8% $818
</TABLE>
* Based on economic occupancy
Retail Properties
The Operating Partnership's two Retail Properties, Skyline Mall and
Worldgate Centre, are enclosed malls containing a total of approximately 436,000
square feet of retail space. Until December 1997, both Retail Properties
leased health club facilities to entities controlled by Messrs. Smith and Kogod
pursuant to leases expiring on December 31, 2015. In December 1997, the health
clubs were sold by Messrs. Smith and Kogod. In conjunction with that sale, the
Operating Partnership agreed to restructure the two leases, including reduced
base rent on the Worldgate lease, and extended terms on both leases for ten
years, through 2025, in exchange for a $2.3 million cash payment.
Worldgate Centre. Worldgate Centre is a community retail center located in
Herndon, Virginia, at the intersection of two major Northern Virginia traffic
arteries, the Dulles Airport Access Highway and Centreville Road. Developed by
the Smith Companies in 1991, it is a part of a mixed-use development which
includes the 320-unit Multifamily Property which the Operating Partnership
constructed in 1995. The town of Herndon is located in Fairfax County, one of
the highest median income counties in the country. The Property contains the
108,670 square foot Worldgate Athletic Club, a Loew's Cinema, and a mix of
approximately 40 other food service, fashion and specialty retailers and various
business and general service tenants. Worldgate Centre has 230,926 square feet
of leasable area and had an average occupancy rate of 99.5% during 1998.
Approximately 16% of the leases, based on net rentable area, are scheduled to
expire prior to the year 2003.
Skyline Mall. Skyline Mall is a two-level, enclosed community retail
center located on Route 7 in Northern Virginia, at the intersection of Fairfax
County, Arlington County, and the City of Alexandria, Virginia. Originally
developed by the Smith Companies in 1977, it is part of a mixed-use community
which also includes over two million square feet of office space and over 3,300
high-rise condominium and apartment units (including Skyline Towers, a 940-unit
Multifamily Property owned by the Operating Partnership), all within walking
distance. The Property has 204,914 square feet of leasable area and had an
average occupancy rate of 97.2% in 1998. It contains the 79,920
16
<PAGE>
square foot Skyline Racquet and Health Club, an AMC Cinema, and approximately 40
other stores, including restaurants, fashion and specialty retailers, and
various business and general services. Approximately 12% of the leases, based on
net rentable area, are scheduled to expire prior to the year 2003.
The following table sets forth certain additional information relating to
the Retail Properties as of December 31, 1998:
Retail Properties
<TABLE>
<CAPTION>
Gross Average Average
Leasable Number Average Base Rent Gross Rent
Property Year Area of % Leased Per SF Per SF
Name Location Completed (SF) Stores 1998 Leased Leased
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Skyline Mall Fairfax Co., VA 1977 204,914 40 97.2 % $12.13 $16.42
Worldgate
Centre Herndon, VA 1991 230,926 40 99.5% $20.19 $26.92
------- ----- ------ ------
435,840 98.4% $16.40 $21.98
======= ===== ====== ======
</TABLE>
Property Markets
The Operating Partnership believes that economic trends and market
conditions in the locations where the Operating Partnership currently operates -
- - Chicago, Boston, Northern Virginia, and Washington, D.C. -- and locations
where the Operating Partnership will operate -- southeast Florida -- indicate
an excellent potential for continued high occupancy and rental rate growth in
1999 and beyond. These markets have all experienced strong employment growth in
1998, as shown in the table below, and are projected to be among the top U.S.
markets in total employment growth over the period 1993 to 2005, with a
projected average annual increase in each market of 45,000 jobs or more,
according to projections prepared by the U.S. Dept. of Commerce, Bureau of
Economic Analysis and released in mid-1996.
<TABLE>
<CAPTION>
Employment Growth - 1998
1998 Jobs %
Market Increase Increase
- ---------------------------- --------- ----------
<S> <C> <C>
Washington D.C. MSA 53,500 2.2%
- Northern Virginia 41,300 4.1%
Chicago - MSA 61,200 1.5%
Boston - MSA 50,100 2.6%
Southeast Florida 60,000 3.0%
- Ft. Lauderdale/Broward 20,600 3.3%
USA Average --- 2.6%
</TABLE>
17
<PAGE>
In the Washington D.C. metropolitan area, employment and population growth
in recent years, and expected in future years, has been strongest in the
Northern Virginia segment of the metropolitan area, which is the sector where
the majority (68%) of the Operating Partnership's Properties are located. The
growth in Northern Virginia is substantially attributable to continuing strong
growth in the technology sector, particularly the Internet technology and
telecommunications segments. The Operating Partnership believes that this trend
will continue due to the concentration of technology firms in Northern Virginia
and the growth outlook for the Internet technology and telecommunications
industries. The outlook for the District of Columbia economy has improved
significantly due to the return to positive employment growth late in 1998 after
several years of federal government cutbacks and the election of a new mayor.
Demand for multifamily rental apartments continues to be strong in all of
the Operating Partnership's markets as evidenced by high occupancy and rent
growth rates. Surveys of comparable investment grade apartment properties are
conducted in each these markets annually by The REIS Reports, Inc. The results
of these surveys are shown in the following tables:
Apartment Occupancy and Rental Rate Growth for Smith Residential Markets
<TABLE>
<CAPTION>
Metro area market Occupancy % Rental Rate Growth
- -------------------------------- ---------------------- ---------------------
<S> <C> <C> <C> <C>
1997 1998 1997 1998
----- ----- ----- -----
Boston 97.6% 98.0% 5.7% 6.7%
Chicago 97.2% 97.3% 4.7% 3.0%
- - Downtown 97.0% 97.2% 5.5% 7.0%
Washington D.C. area
- - Northern Virginia 96.2% 96.6% 3.5% 3.5%
- - Washington D.C. 96.9% 97.0% 3.4% 4.7%
Southeast Florida
- - Fort Lauderdale 96.1% 96.1% 4.0% 3.6%
</TABLE>
- ----------------------
Source: The REIS Reports, Inc., February, 1999, and Appraisal Research Corp.,
March 1999
The supply of new rental apartment properties in the more urbanized
portions of the Operating Partnership's markets has been extremely limited in
recent years, particularly in the more desirable submarkets where the Operating
Partnership concentrates its focus. In the Washington metro area the supply of
new multifamily properties has been increasing moderately over the past several
years and is likely to continue to do so based on multifamily permits data
compiled by the U.S. Census Bureau. These data show that the number of
multifamily permits issued in the area were, 7,786 in 1996, 6,907 in 1997, and
8,935 in 1998, which includes both for-sale condominium and rental apartment
properties. These levels remain well below the peak of over 13,000 in 1987.
Most of the new supply of rental apartments is occurring in the outer suburban
areas and does not compete directly with the Operating Partnership's properties,
which are predominantly in the vicinity of and within Interstate 495, the
Capital Beltway. Downtown Chicago has actually experienced a
18
<PAGE>
net decrease in higher end rental apartments in recent years due to condo
conversions, and the Company's 809-unit Superior Place property is currently the
only new apartment property under construction in the downtown area.
Overall, the Operating Partnership believes that the anticipated increases
in employment and population projected for the Boston, Chicago, Northern
Virginia, Washington D.C. and southeast Florida markets, together with limited
increases in supply of new rental units in locations competitive with the
Operating Partnership's properties, will result in the Operating Partnership's
multifamily rental submarkets remaining in a strong occupancy position for at
least the next 18-24 months. As a result, the Operating Partnership believes
that these conditions will provide an opportunity to improve apartment rent
levels, and will also allow additional development and acquisition
opportunities.
Mortgage Financing
As of December 31, 1998, 30 of the 54 Properties were subject to Mortgage
Loans aggregating approximately $592,386,000. The Mortgage Loans are
collateralized by first lien mortgages or deeds of trust on Properties organized
into three pools ("Mortgage Pool Three," "FNMA" and "Prudential" as shown in the
chart below) and ten individual loans (the "Individual Mortgages"). The
Mortgage Loans bear interest at a weighted average interest rate of 7.1% at
December 31, 1998. The Properties collateralizing each Mortgage Loan, the
outstanding principal balances as of December 31, 1998, the applicable interest
rates, and the maturity dates for each Mortgage Loan are set forth in the chart
below.
19
<PAGE>
<TABLE>
<CAPTION>
12/31/98
Mortgage Pool/ Outstanding Interest Maturity
Collateral Location Principal Rate Date
- ------------------------------------------------------------------------------------------------------------------------------------
(000's)
<S> <C> <C> <C> <C>
FNMA $ 140,000 6.75% October 30, 2013 (2)
- -----
Bedford Village Fairfax County, Virginia
Car Barn Washington, D.C.
Concord Village Arlington, Virginia
Crystal Place Arlington, Virginia
Crystal Square Arlington, Virginia
Arlington Overlook (1) Arlington, Virginia
Fort Chaplin Washington, D.C.
Newport III (1) Alexandria, Virginia
Orleans Village Fairfax County, Virginia
Mortgage Pool Three 117,000 7.99% June 30, 2009 (3)
- -------------------
Berkeley Arlington, Virginia
Calvert Woodley Washington, D.C.
Cleveland House Washington, D.C.
Columbia Crossing Arlington, Virginia
Courthouse Plaza Arlington, Virginia
Gateway Place Arlington, Virginia
Newport I/II (1) Alexandria, Virginia
Skyline Mall Fairfax County, Virginia
2501 Porter Street Washington, D.C.
Prudential 53,000 6.88% June 5, 2008 (2)
- -----------
Waterpark Arlington, Virginia
Parc Vista Arlington, Virginia
Individual Mortgages
- --------------------------
1841 Columbia Road Washington, D.C. 3,173 9.00% August 1, 1999 (6)
Crystal Towers Arlington, Virginia 44,198 7.16% January 1, 2006 (6)
2000 Commonwealth Boston, Massachusetts 17,100 6.30% December 3, 2006 (2)
Connecticut Heights Washington, D.C. 20,000 7.10% March 18, 2008 (2)
Cronin's Landing Boston, Massachusetts 33,208 6.90% March 1, 2009 (7)
Patriot Village Fairfax County, Virginia 31,095 8.24% August 1, 2009 (4)
Crystal Plaza Arlington, Virginia 33,615 6.86% November 1, 2009 (6)
Crystal House I/II Arlington, Virginia 38,250 6.29% December 30, 2010 (5)
Skyline Towers Fairfax County, Virginia 49,300 6.45% December 10, 2010 (5)
The Bennington Arlington, Virginia 12,447 7.50% October 1, 2020 (7)
------ -----
$592,386 7.10%
======== ======
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Operated as a single property, but divided for collateralization purposes.
(2) Interest only.
(3) Twenty-five year amortization begins June 30, 1999.
(4) Thirty year amortization begins in August 2004.
(5) Thirty year amortization begins in December 2008.
(6) Thirty year amortization.
(7) Twenty-five year amortization.
The loan secured by Mortgage Pool Three is interest only through June 30,
1999, at which time amortization begins using a 25-year amortization schedule
with a balloon payment at maturity. In addition, this loan may not be prepaid
until May 1, 1999, at which time it would be subject to a yield maintenance
premium. The loan is cross-collateralized with the $83 million line of credit
from
20
<PAGE>
the same lender, as described below. Certain predecessor partners executed
guarantees for $42 million of the mortgage loans secured by Mortgage Pool Three.
The Operating Partnership announced a standby credit facility in 1998 of up
to $300 million with Fannie Mae which provides for non-recourse, long-term debt
for up to fifteen years. The initial draw on this facility was $140 million at
6.75% for fifteen years. The bulk of the proceeds were used to retire Mortgage
Pool Two of $125.2 million and the associated prepayment penalty of $9.5
million. Terms and rates of subsequent draws on this facility will be determined
at the time of use. Closing of the facility is expected during the second
quarter of 1999.
During 1998, the Operating Partnership obtained a $53 million, ten year
secured loan from Prudential at a fixed coupon rate of 6.88%. The loan is
secured by two Multifamily Properties. In conjunction with this loan, the
Operating Partnership terminated a $20 million (notional value) treasury lock
contract at a gain of $0.4 million which will be amortized over the term of the
new loan.
The Individual Mortgages relate to debt secured by individual Multifamily
Properties. The loans require monthly payments of interest and, in certain
cases, principal. The loan secured by Patriot Village was refinanced in
September 1996 and was obtained jointly with a ground lessor, with a portion of
the principal allocated to each of them. The ground lessor has been allocated
$9.9 million of the refinanced loan (of the total of $41.0 million outstanding
as of December 31, 1998), for which the Operating Partnership is contingently
liable. The loan requires the payment of interest only through August 2004, at
which time amortization begins using a 30-year amortization schedule with a
balloon payment due in August 2009. The Operating Partnership remits full debt
service to the lender and reduces its ground rent payment by the corresponding
amount of debt service relating to the principal assigned to the ground lessor.
Lines of Credit
The Operating Partnership terminated its $100 million line of credit in 1998
and entered into two new unsecured lines of credit -- a $100 million line and a
$185 million line -- with PNC Bank, NationsBank, and U.S. Bank, as agents,
which mature in March 2001. Draws upon the new lines are subject to certain
unencumbered asset requirements and bear interest at a selected London Interbank
Offer Rate (LIBOR) plus 75 to 120 basis points based on the leverage ratio of
the Operating Partnership. As of December 31, 1998, the weighted average
interest rate on outstanding draws was 6.22%. If the Operating Partnership
receives an investment grade rating on its unsecured debt, the interest rate
will decrease to 60 to 90 basis points over LIBOR based on the rating. The
Operating Partnership pays a fee of 0.20% on the full amount available under the
lines of credit. The line of credit agreements contain certain restrictive
covenants, including maintenance of minimum equity value, debt to equity ratios
and debt service coverage requirements. The maximum amounts outstanding during
1998 and 1997 were $251.5 million and $97.0 million, respectively.
The Operating Partnership also has an $83 million acquisition credit
facility which allows for debt maturities up through July 2004. The line of
credit provides for an interest rate that is fixed at the time of each borrowing
at 150 basis points over 10-year Treasury Bills and is cross-collateralized
21
<PAGE>
with Mortgage Pool Three. Debt outstanding of $30 million at December 31, 1998
bears interest at a weighted-average fixed rate of 7.27% and is collateralized
by two Properties. The agreement contains certain restrictive covenants
including a limit on debt to asset value and maintenance of debt service
coverage ratios. In February 1999, the unused portion, or $53 million, of the
line expired.
Construction Loans
In October 1997, the Operating Partnership obtained a variable rate,
unsecured construction loan of $46.3 million to finance the construction of an
acquired development property. The loan is recourse to the Operating
Partnership, bears interest at LIBOR plus 130 basis point (6.85% at December 31,
1998), and matures in October 2000 with three six-month extension options based
on certain conditions. The loan balance at December 31, 1998 was $31.6 million.
During 1998, the Operating Partnership obtained a $90 million variable rate,
secured construction loan in connection with the development of One Superior
Place in Chicago, Illinois, with interest currently at LIBOR plus 135 basis
points (6.93% at December 31, 1998), payable monthly, due July 1, 2001. At the
Operating Partnership's option, maturity may be extended for two one-year
periods based on certain conditions. The loan is collateralized by the property
and is recourse to the Operating Partnership. The loan balance at December 31,
1998 was $31.6 million.
Item 3. Legal Proceedings.
The Operating Partnership and/or the Property Service Businesses are
presently subject to legal actions or claims for damages that arise in the
ordinary course of business. In the opinion of management and counsel to the
Operating Partnership, the ultimate outcome of such litigation will not have a
material adverse effect on the Operating Partnership's financial position,
results of operations or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
22
<PAGE>
Part II
Item 5. Market for Registrant's Common Equity and Related Shareholder
Matters.
There is no established public trading market for the Units of the Operating
Partnership. The Company's shares of Common Stock have been listed on the New
York Stock Exchange ("NYSE") since June 24, 1994, trading under the symbol
"SRW." Prior to that date, the Company's shares of Common Stock were not
publicly traded.
In December 1998, the Company adopted a Shareholder Rights Plan (the "Rights
Plan") in which certain stock purchase rights were granted as a distribution to
holders of common stock. The Rights Plan is designed to deter coercive or
unfair takeover tactics. In implementing the Rights Plan, the Board of
Directors declared a distribution of one Right for each share of the Company's
outstanding common stock. Each Right initially entitles the holder thereof to
purchase one one-thousandth of a share of preferred stock for $108. One one-
thousandth of a share of preferred stock is intended to be approximately the
economic equivalent of one share of common stock. The Rights expire on December
13, 2008. At the time of adoption of the Rights Plan, the Rights are neither
exercisable nor traded separately from the common stock. The Rights are
exercisable only if a person or group in the future becomes the beneficial owner
of 15% or more of the common stock or announces a tender or exchange offer which
would result in its ownership of 15% or more of the common stock. In connection
with these Rights, the partnership agreement of the Operating Partnership was
amended to provide for certain purchase rights by Unitholders in the event the
Rights become exercisable and are, in fact, exercised. These purchase rights
would allow Unitholders to purchase additonal Units at a price which would
prevent their dilution by the issuance of additional Units to the Company upon
the issuance of additional Common Stock under the Right Plan.
Unregistered Unit Issuances
<TABLE>
<CAPTION>
Issue # of Units Implied Unit
Date Issued Consideration Value Redeemable
- -------- ------- ---------------------- ------------- --------------
<S> <C> <C> <C> <C>
1/99 201,950 Interest in Parkwest $ 6,300,843 After one year
Apartments ($31.20/Unit)
1/99 320,304 Interest in Terrace $ 9,993,499 After one year
Apartments ($31.20/Unit)
</TABLE>
In December 1998, 259,305 units of Series B Cumulative Convertible
Redeemable Preferred Units were converted to common units on a one-for-one
basis.
23
<PAGE>
The following table sets forth the distributions made by the Operating
Partnership with respect to each such period:
<TABLE>
<CAPTION>
Distribution
Period Per Unit
- ------ ------------
<S> <C>
January 1, 1997, to March 31, 1997 $0.505
April 1, 1997, to June 30, 1997 $0.505
July 1, 1997, to September 30, 1997 $0.520
October 1, 1997, to December 31, 1997 $0.520
January 1, 1998, to March 31, 1998 $0.520
April 1, 1998, to June 30, 1998 $0.520
July 1, 1998, to September 30, 1998 $0.535
October 1, 1998, to December 31, 1998 $0.535
</TABLE>
On March 1, 1999, the Operating Partnership had approximately 750 unitholders
of record.
Item 6. Selected Financial Data.
The following table sets forth selected financial and operating information
on a historical basis for the Operating Partnership and the Predecessor (as
hereinafter defined in the Notes to Consolidated Financial Statements). The
following information should be read in conjunction with all of the financial
statements and notes thereto included elsewhere in this Form 10-K. The
historical operating data for the years ended December 31, 1998, 1997, 1996,
1995 and 1994 have been derived from the financial statements of the Operating
Partnership and the Predecessor audited by Arthur Andersen LLP, independent
accountants.
24
<PAGE>
Charles E. Smith Residential Realty L.P. and CES Group
Selected Financial Data
<TABLE>
<CAPTION>
Charles E. Smith Residential Realty L.P. CES Group
------------------------------------------------------------ -----------
June 30, January 1,
Year Ended December 31, 1994 to 1994 to
------------------------------------------------ December 31, June 29,
(Dollars in Thousands, Except Per Unit Data) 1998 1997 1996 1995 1994 1994
- ----------------------------------------------------------------------------------------------------------------------- -----------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA
Rental properties
Revenues $ 250,211 $ 200,104 $ 163,959 $143,464 $ 66,683 $ 63,496
Expenses 130,593 104,493 89,156 78,514 36,571 36,039
Equity in income of Property Service Businesses 8,433 7,597 7,846 6,868 3,785 2,798
Corporate general & administrative expenses 8,947 6,563 5,255 4,768 2,089 1,550
Interest income 1,257 1,063 1,029 1,424 825 970
Interest expense 47,334 45,411 43,606 37,421 17,392 24,798
Income/(loss) before gain on sale, loss on unused
treasury lock, and extraordinary item 73,027 52,297 34,817 31,053 15,241 (10,700)
Net income/(loss) of the Operating Partnership 69,870 52,210 34,817 31,053 15,241 (25,895)
---------------------------------------------------------- ---------
Earnings per common unit - basic $1.96 $1.89 $1.59 $1.44 $0.72
Earnings per common unit - diluted $1.95 $1.88 $1.59 $1.44 $0.72
OTHER DATA
Funds from Operations (1):
Net income $ 69,870 $ 52,210 $ 34,817 $31,053 $ 15,241
Less
Perpetual preferred distributions (3,647) - - - -
Gain on sale of property (18,150) - - - -
Plus
Depreciation and amortization of rental property 28,958 20,666 17,931 16,258 7,738
Amortization of goodwill 250 - - - -
Loss on unused treasury lock 4,923 - - - -
Extraordinary item - loss on extinguishment of debt 16,384 87 - - -
----------------------------------------------------------
Funds from Operations $ 98,588 $ 72,963 $ 52,748 $47,311 $ 22,979
==========================================================
Net cash flows provided by (used in):
Operating activities $ 118,566 $ 75,223 $ 50,958 $54,283 $ 19,877
Investing activities (289,995) (196,924) (72,742) (68,495) (26,666)
Financing activities 171,429 117,803 16,204 5,340 25,139
Cash dividends per unit $2.095 $2.035 $1.975 $1.915 $0.480
Average residential occupancy rate (2) 96.6% 96.4% 97.0% 97.2% 97.8%
Number of apartment units - core portfolio (3) 14,301 14,198 12,462 11,834 11,834
Number of apartment units - total portfolio 19,279 18,236 15,200 14,198 12,462
BALANCE SHEET DATA
Rental properties, net (4) $1,093,963 $ 804,323 $ 470,093 $414,490 $ 315,213
Total assets 1,185,399 865,506 522,211 469,322 391,189
Total mortgage loans and notes payable (5) 790,579 610,971 546,544 483,177 404,971
Other Limited Partners' Interest, at redemption value (6) 426,258 502,719 351,873 288,663 310,247
Partners' Equity
General Partner's General and Limited
Partnership Interest (6) (56,676) (264,369) (389,252) (320,286) (347,767)
</TABLE>
25
<PAGE>
FOOTNOTES TO SELECTED FINANCIAL DATA
1. Funds from Operations (FFO) is defined by the National Association of Real
Estate Investment Trusts (NAREIT) as net income (loss) (computed in
accordance with generally accepted accounting principles) excluding gains
(or losses) from debt restructuring and other non-recurring items, plus
depreciation/amortization of assets unique to the real estate industry.
Depreciation/amortization of assets not unique to the industry, such as
amortization of deferred financing costs and non-real estate assets, is not
added back. FFO does not represent cash flow from operating activities in
accordance with generally accepted accounting principles (which, unlike
Funds from Operations, generally reflects all cash effects of transactions
and other events in the determination of net income) and should not be
considered an alternative to net income as an indication of the Operating
Partnership's performance or to cash flow as a measure of liquidity or
ability to make distributions. The Operating Partnership considers FFO a
meaningful, additional measure of operating performance because it
primarily excludes the assumption that the value of real estate assets
diminishes predictably over time, and because industry analysts have
accepted it as a performance measure. Comparison of the Operating
Partnership presentation of FFO, using the NAREIT definition, to similarly
titled measures for other REITs may not necessarily be meaningful due to
possible differences in the application of the NAREIT definition used by
such REITs.
2. Average occupancy is defined as gross potential rent for the core portfolio
less vacancy allowance divided by gross potential rent for the period,
expressed as a percentage.
3. Core portfolio represents properties owned or stabilized by the Operating
Partnership as of December 31 two years prior to the current reporting
date.
4. At the formation of the Operating Partnership, all rental properties were
recorded at predecessor partners' historical cost basis which is
significantly less than current value and, therefore, results in dilution
of shareholders' book value. Shareholders' equity for each year presented
is net of $(244,208) contribution by Predecessors of assets at historical
cost, net of liabilities.
5. Represents mortgage loans, lines of credit and construction loans.
6. Limited partnership units of the Other Limited Partners may be redeemed at
the unitholder's discretion. Consequently, the Other Limited
Partners' Interest, measured at redemption value, is not included in
partner's equity. Partner's equity has been adjusted to reflect the
redemption value of Other Limited Partners' Interest. (See footnote 15 to
the financial statements.)
26
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
BACKGROUND
The following discussion compares historical results of operations for the
years ended December 31, 1998 and 1997 as well as the years ended December 31,
1997 and 1996. The discussion should be read in conjunction with the "Selected
Financial Data," and the financial statements and notes thereto included
elsewhere in this annual report.
THE OPERATING PARTNERSHIP
The Operating Partnership is engaged primarily in the acquisition,
development, management and operation of multifamily properties. Together with
its subsidiaries, the Operating Partnership is a fully integrated real estate
organization with in-house acquisition, development, financing, marketing,
leasing and property management expertise.
On June 30, 1994, Charles E. Smith Residential Realty, Inc. (the "Company")
made a $201.4 million capital contribution to the Operating Partnership for a 1%
general partnership interest and a 41.7% limited partnership interest in the
Operating Partnership. The Company is the sole general partner of the Operating
Partnership.
As of December 31, 1998, the Operating Partnership and its subsidiaries,
owned 48 operating multifamily properties, four multifamily properties under
construction and two retail shopping centers (collectively, the "Properties").
Three of the properties are located in Chicago, Illinois and two are located in
Boston, Massachusetts; all other properties are located in the Washington, D.C.
metropolitan area. The Operating Partnership also had conditional agreements to
purchase four additional to-be-constructed multifamily properties.
The operating multifamily properties consist of the following:
<TABLE>
<CAPTION>
Number of
------------------
Type Properties Units
------------------------ ---------- -----
<S> <C> <C>
Core Portfolio
High-Rise/Mid-Rise 23 7,587
Garden 14 6,714
-- ------
37 14,301
-- ------
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Acquisition Portfolio
High-Rise/Mid-Rise 10 4,811
Garden 1 167
-- ------
11 4,978
-- ------
48 19,279
== ======
</TABLE>
The Operating Partnership's two free standing retail properties are enclosed
malls containing a total of approximately 436,000 square feet of retail space.
Additionally, the Operating Partnership owned substantially all the equity
in the following entities (collectively, the "Property Service Businesses")
which provide a range of services to the owned Properties, essentially at cost
(including overhead), and for a fee to other properties including commercial
office partnerships which have Messrs. Smith and Kogod as the general partners
("Affiliates"):
. Multifamily and Retail Property Management Services provides property
management and leasing services to multifamily and retail properties. In
addition, this entity leases furnished corporate apartments through a
subsidiary.
. Interior Construction and Renovation Services provides construction and
project management services for capital improvement and tenant renovation
projects of office, retail and residential properties.
. Engineering and Technical Services provides on-site building systems
operations and maintenance; engineering and technical consulting;
automated environmental monitoring and controls; repair and replacement
of mechanical/electrical systems; and facilities management services.
. Financing Services provides negotiation, administration and execution of
debt refinancing.
28
<PAGE>
RENTAL PROPERTIES
Revenue, expenses and income from the multifamily and retail properties were
as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1998 1997 /(2)/ 1996 /(2)/
----------- ----------- -----------
<S> <C> <C> <C>
Multifamily Properties - Core/(1)/
Revenues $ 166,465 $ 158,785 $ 147,522
Expenses (67,070) (66,264) (63,386)
--------- ---------- ----------
Income before depreciation $ 99,395 $ 92,521 $ 84,136
========= ========== ==========
Multifamily Properties -
Acquisitions/Dispositions
Revenues $ 72,499 $ 31,277 $ 6,639
Expenses (30,061) (13,896) (4,308)
--------- ---------- ----------
Income before depreciation $ 42,438 $ 17,381 $ 2,331
========= ========== ==========
Multifamily Properties - Development
Revenues $ 1,258 $ --- $ ---
Expenses (1,300) (97) ---
--------- ---------- ----------
Income before depreciation $ (42) $ (97) $ ---
========= ========== ==========
Retail Properties
Revenues $ 9,989 $ 10,042 $ 9,798
Expenses (3,204) (3,570) (3,531)
--------- ---------- ----------
Income before depreciation $ 6,785 $ 6,472 $ 6,267
========= ========== ==========
Total Rental Properties
Revenues $ 250,211 $ 200,104 $ 163,959
Expenses (101,635) (83,827) (71,225)
Depreciation (28,958) (20,666) (17,931)
--------- ---------- ----------
Income from Rental Properties $ 119,618 $ 95,611 $ 74,803
========= ========== ==========
</TABLE>
/(1)/ "Core" represents properties owned as of
December 31, 1996.
/(2)/ Certain prior year balances have been reclassified to conform with current
year presentation.
Occupancy Rates
Average occupancy of the Operating Partnership's core multifamily properties
in the Washington, D.C. metropolitan area, where over 90% of the Operating
Partnership's portfolio is located, is consistent with the area's market-wide
average occupancy, based on annual surveys of approximately 80% of comparable
investment grade apartment properties conducted by The REIS Reports, Inc. as
follows:
<TABLE>
<CAPTION>
Occupancy Percent
----------------------------------------
Company Washington DC Area
------------------ -------------------
<S> <C> <C>
1998 96.6% 97.0%
1997 96.4% 96.4%
1996 97.0% 96.5%
</TABLE>
29
<PAGE>
It is important to note that market data from The REIS Reports, Inc. is
determined on a physical occupancy basis, whereas the Operating Partnership's
occupancy data is calculated on an economic basis. Physical occupancy data
commonly yields a slightly higher percentage than economic occupancy because
apartment units are considered physically rented when a rental applicant's
deposit is received, a point in time generally prior to the actual rent
commencement date used in computing economic occupancy.
Rental Revenue
Average revenue per apartment unit for the Operating Partnership's core
multifamily properties increased approximately 4.8% in 1998 as compared with
1997, and 3.5% in 1997 (based on properties owned as of December 31, 1995) as
compared with 1996.
A schedule of portfolio statistics follows:
30
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY L.P.
- --------------------------------------------------------------------------------
Residential Portfolio Statistics for the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Number of Average Monthly Average
Property Apartment Sq. Ft. Revenue Economic
Property Type/Property Name Type Units Per Unit Per Unit Occupancy
- ------------------------------ -------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Core Residential Portfolio
NW Washington, D.C.
1841 Columbia Road High-rise 115 634 $ 955 99.0%
2501 Porter Street High-rise 202 760 1,472 97.5%
Albemarle High-rise 235 1,097 1,226 98.9%
Calvert-Woodley High-rise 136 1,001 1,169 99.0%
Cleveland House High-rise 216 894 1,138 99.2%
Connecticut Heights High-rise 519 536 889 95.6%
Corcoran House High-rise 138 464 832 99.2%
Statesman High-rise 281 593 798 97.7%
Van Ness South High-rise 625 956 1,109 98.7%
------ ------ ----- --------
2,467 778 1,051 98.0%
Other NE & SE Washington, D.C.
Car Barn Garden 196 1,311 888 96.6%
Fort Chaplin Garden 549 983 673 98.2%
------ ----- ------ -----
745 1,069 729 97.6%
Other Northern Virginia -
Inside Beltway
Crystal City
------------
The Bennington High-rise 348 804 1,059 96.0%
Crystal House I High-rise 426 917 1,010 97.2%
Crystal House II High-rise 402 938 987 96.6%
Crystal Square High-rise 378 1,121 1,179 99.0%
Crystal Place High-rise 180 894 1,310 97.7%
Gateway Place High-rise 162 826 1,792 94.7%
Water Park Towers High-rise 360 881 1,436 92.9%
------ ----- ------ -----
2,256 923 1,190 96.2%
Rosslyn/Ballston
----------------
Courthouse Plaza High-rise 396 772 1,299 96.9%
Other
-----
Arlington Overlook Mid-rise 711 877 780 95.6%
Bedford Village Garden 752 1,070 914 95.0%
Berkeley Mid-rise 138 891 744 97.4%
Boulevard of Old Town Garden 159 603 934 98.3%
Columbia Crossing Garden 247 976 1,122 95.8%
Columbian Stratford Mid-rise 227 942 767 97.8%
Concord Village Garden 531 1,025 820 95.4%
Newport Village Garden 937 1,115 911 97.1%
Orleans Village Garden 851 1,061 828 94.6%
Patriot Village Garden 1,065 1,162 915 96.6%
Skyline Towers High-rise 940 1,221 988 95.5%
Windsor Towers Mid-rise 280 1,025 812 98.0%
------ ----- ------ -----
6,838 1,063 887 96.0%
Other Northern Virginia - Outside Beltway
Charter Oak Garden 262 1,097 956 96.8%
Oaks of Tysons Garden 218 968 1,047 97.2%
Potomac View Garden 192 965 791 97.8%
Westerly at Worldgate Garden 320 921 1,120 95.5%
------ ----- ------ -----
992 986 997 96.6%
Suburban Maryland
The Manor Garden 435 999 774 96.9%
Suburban Tower High-rise 172 677 830 98.1%
------ ----- ------ -----
607 908 790 97.2%
------ ----- ------ -----
Subtotal/Average 14,301 972 $ 970 96.6%
------ ----- ------ -----
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
Number of Average Monthly Average
Property Apartment Sq. Ft. Revenue Economic
Property Type/Property Name Type Units Per Unit Per Unit Occupancy
- ------------------------------ -------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Acquisition Portfolio
The Kenmore (NW Washington, D.C.) High-rise 376 725 756 97.8%
Crystal Plaza (Crystal City) High-rise 540 1,129 1,254 98.4%
Crystal Towers (Crystal City) High-rise 912 1,107 1,139 97.5%
Lincoln Towers (Rosslyn/Ballston) High-rise 714 879 1,276 93.5%
2000 Commonwealth (Boston) High-rise 188 878 1,649 96.2%
One East Delaware (Chicago) High-rise 306 704 1,886 98.0%
Tunlaw Gardens (NW Washington, D.C.) Garden 167 850 767 97.0%
Tunlaw Park (NW Washington, D.C.) Mid-rise 120 856 1,105 97.8%
Parc Vista (Crystal City) High-rise 299 770 n/a n/a
McClurg Court (Chicago) High-rise 1,075 688 n/a n/a
Cronin's Landing (Boston) Mid-rise 281 1,129 n/a n/a
------ ----- ------ -----
Sub-Total/Average 4,978 890 n/a n/a
------ ----- ------ -----
Development Portfolio
Springfield Station (Other Northern Virginia) Mid-rise / Garden 631
Courthouse Place (Rosslyn/Ballston) High-rise 564
One Superior Place (Chicago) High-rise 809
Park Connecticut (NW Washington, D.C.) High-rise 142
-----
Sub-Total 2,146
------
All Residential Properties 21,425
========
</TABLE>
32
<PAGE>
PROPERTY SERVICE BUSINESSES
Revenues, expenses and income from the Property Service Businesses were as
follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Multifamily and Retail Property
Management Services/(1)/
Revenues $ 28,412 $ 10,546 $ 11,465
Expenses (26,441) (9,756) (9,169)
-------- -------- --------
Income before depreciation $ 1,971 $ 790 $ 2,296
======== ======== ========
Interior Construction and Renovation
Services
Net fee revenues $ 8,267 $ 6,614 $ 5,650
Expenses (6,441) (5,547) (4,670)
-------- -------- --------
Income before depreciation $ 1,826 $ 1,067 $ 980
======== ======== ========
Engineering and Technical Services
(including reimbursed costs)
Revenues $ 67,988 $ 50,597 $ 42,179
Expenses (63,811) (46,759) (38,516)
-------- -------- --------
Income before depreciation $ 4,177 $ 3,838 $ 3,663
======== ======== ========
Financing Services
Revenues $ 2,623 $ 3,798 $ 2,640
Expenses (778) (670) (687)
-------- -------- --------
Income before depreciation $ 1,845 $ 3,128 $ 1,953
======== ======== ========
Total Property Service Businesses
Revenues $107,290 $ 71,555 $ 61,934
Expenses (97,471) (62,732) (53,042)
-------- -------- --------
Income before depreciation 9,819 8,823 8,892
Depreciation (1,386) (1,226) (1,046)
-------- -------- --------
Income from Property
Service Businesses $ 8,433 $ 7,597 $ 7,846
======== ======== ========
</TABLE>
/(1)/Includes May 1998 purchase of Presidential Villas.
33
<PAGE>
Multifamily and Retail Property Management Services provide management
services to the Operating Partnership at cost plus 5% in accordance with the
management agreement. In addition to 50 owned Properties (operating Multifamily
and Retail), management services were also provided to 13 third-party owned
multifamily properties of approximately 3,800 apartment units and to three
third-party owned retail properties of approximately 293,000 square feet. Of the
16 third-party management agreements, eleven are with Affiliates and five are
with unaffiliated property owners. The management agreements with Affiliates are
for initial terms of three years or more while the management agreements with
unaffiliated owners generally have one-year terms.
During 1998, Multifamily and Retail Property Management Services expanded the
corporate apartment program as a result of the acquisition by Smith Realty
Company of Noel Enterprises, Inc. ( d.b.a. "Presidential Villas"), a provider of
furnished corporate apartments in Chicago, Illinois. A portion of the total
purchase price of $8.5 million is contingent upon achievement by Presidential
Villas of certain earnings targets over the next two years. The Operating
Partnership lent to Smith Realty Company the initial payment of $6.75 million in
exchange for a five year note.
Interior Construction and Renovation Services provided oversight to
approximately $80 million of gross construction activity in 1998 compared to
approximately $66 million in 1997 and $58 million in 1996. Services are provided
to the Operating Partnership at cost and to Affiliates and third parties at cost
plus a fee.
Engineering and Technical Services provides on-site building systems
operations, maintenance and inspection to the Operating Partnership and
Affiliates at cost and to third parties at cost plus a fee. Services were
provided to approximately 46 million square feet of facilities in 1998, 30
million square feet in 1997, and 28 million square feet in 1996.
Financing Services performed $335 million of refinancings in 1998 compared to
$489 million in 1997 and $242 million in 1996.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998
Comparison to Year Ended December 31, 1997
Summary. Net income of the Operating Partnership increased 33.8%, or $17.7
million, from $52.2 million for the year ended December 31, 1997 to $69.9
million for the year ended December 31, 1998. Funds from Operations ("FFO") of
the Operating Partnership increased $25.6 million, or 35.1% during the same
period. The increase in both net income and FFO is due to increases in income
from the rental properties, primarily the multifamily acquisition and
development properties. These increases were partially offset by higher interest
and other expenses related to acquisitions and development. The decrease in net
income per share is attributable to the loss on an unused treasury lock and
extraordinary losses associated with extinguishment of debt.
Rental Properties. Revenue from rental properties increased $50.1 million, or
25.0%, from $200.1 million for 1997 to $250.2 million for 1998. Expenses
(including depreciation) from all rental operations increased $26.1 million, or
25.0%, from $104.5 million in 1997 to $130.6 million in 1998.
34
<PAGE>
Core Portfolio. Revenue from the core portfolio increased $7.7 million, or
4.8% over the prior year due to rent increases in all submarkets, slightly
improved occupancy and additional cable and telephone revenues. Average monthly
revenue per core apartment unit increased from $925 in 1997 to $970 per month
during 1998. Revenue growth by submarket over 1997 ranged from 3.7% in the
Maryland properties to 6.5% in northwest Washington, D.C. Average economic
occupancy for the portfolio increased to 96.6% in 1998 from 96.5% in 1997. The
Operating Partnership also continues to expand and aggressively market its
furnished apartment program. As a result, revenues from this program increased
$0.4 million, or 19.4%, over the prior year period. Operating expenses on the
core portfolio increased 1.2% over the prior year. This was primarily due to
higher personnel costs (including outsourcing) and real estate tax expenses
partially offset by utility savings and lower repair and maintenance costs both
related to a mild winter.
Operating margins of the Operating Partnership's core portfolio of
approximately 60% and 58% for the years ended December 31, 1998 and 1997,
respectively, are generally lower in comparison to industry averages due
primarily to the Operating Partnership's method of recovering utility costs.
Apartment rents, for the most part, include utility services such as electricity
and gas since the Operating Partnership bears utility costs. The majority of the
Operating Partnership's competitors, however, require their tenants to pay
utilities directly. Management estimates that the Operating Partnership's
operating margins would be approximately 63% on a comparable basis.
Acquisition/Disposition Portfolio. The eleven acquisition properties and two
disposition properties, contributed $41.2 million, or 82.3%, of the total rental
revenue increase and $16.2 million, or 90.8%, of the increase in operating
expenses resulting in a contribution to net operating income of $25.0 million.
The balance of the portfolio reflects operations of the two properties sold
during 1998 - Oxford Manor and Marbury Plaza.
Development Portfolio. Springfield Station delivered initial units in May
1998 and has a total of 280 units delivered as of December 31, 1998. Estimated
completion and stabilization is expected in late 1999. Courthouse Place
delivered 103 initial units in December 1998. Estimated completion and
stabilization is expected by early 2000.
Retail Portfolio. Retail revenues decreased by $0.1 million, or 0.5%, during
1998 compared to the prior year due primarily to the restructuring of the
Worldgate health club lease in 1997 partially offset by other rent increases.
Average occupancy at the two retail properties increased from 97.4% in 1997 to
98.4% in 1998.
Property Service Businesses. Income from the Property Service Businesses
increased $0.8 million, or 11.0%, during 1998 compared to 1997.
Income before depreciation for Multifamily and Retail Property Management
Services increased $1.2 million, or 149.5%, primarily due to the acquisition in
the second quarter of Presidential Villas.
Income before depreciation for Interior Construction and Renovation Services
increased $0.8 million, or 71.1%, due to an increase of $1.7 million in net fee
revenue offset by an increase of $0.9 million in related expenses. This was due
primarily to an increase in the volume of projects completed on behalf of
Affiliated commercial office property partnerships, partially offset by a loss
incurred during the first quarter of 1998 associated with cost overruns and
unrecovered owner
35
<PAGE>
change orders on a large outside contract. The Operating Partnership is
currently pursuing an arbitration claim which may result in a partial recovery
of the loss.
Revenue from Engineering and Technical Services increased 34.4%, or $17.4
million, in 1998 with a corresponding increase of $17.1 million in expenses
compared to 1997 due primarily to significant additional facilities management
contracts obtained in 1997 and 1998. Income before depreciation for Engineering
and Technical Services increased 8.8% to $4.2 million for 1998 compared to $3.8
million in 1997. The lower margin in 1998 reflects a decrease in higher margin
HVAC repair and replacement projects.
Income before depreciation for Financing Services decreased $1.3 million, or
41.0%, due primarily to an unusually high level of fees in 1997 in connection
with the roll-up of Affiliated commercial properties into a single partnership -
Charles E. Smith Commercial Realty L.P. ("CESCR"). At the formation of CESCR,
the Company entered into a 14-month agreement to continue providing financing
services through December 31, 1998 for certain properties owned by CESCR. The
1998 fees were earned in connection with debt refinancings arranged for
properties owned or managed by CESCR. Fees on properties owned by CESCR were
earned in accordance with the Operating Partnership's agreement while fees on
properties managed by CESCR were separately negotiated. Management does not
expect any significant future income from Financing Services.
Other. Corporate general and administrative expenses increased by $2.4
million, or 36.3%, due primarily to additional personnel added in mid-1997 to
expand the Operating Partnership's acquisition and development program and
write-offs of capitalized costs on terminated acquisition and development
projects. Interest expense increased by $1.9 million, or 4.2%, primarily due to
financing of acquisition and development activities.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997
Comparison to Year Ended December 31, 1996
Summary. Net income of the Operating Partnership increased 50.0%, or $17.4
million, from $34.8 million for the year ended December 31, 1996 to $52.2
million for the year ended December 31, 1997. Funds from Operations of the
Operating Partnership increased $20.2 million, or 38.3%, during the same period.
The increase in both net income and FFO is due to increases in income from the
rental properties, primarily the multifamily acquisition and development
properties. These increases were partially offset by higher interest and
expenses related to acquisitions and development.
Rental Properties. Revenue from rental properties increased $36.1 million, or
22.0%, from $164.0 million for 1996 to $200.1 million for 1997. Expenses from
rental properties (including depreciation) increased $15.3 million, or 17.2%,
from $89.2 million in 1996 to $104.5 million in 1997.
1997 Core Portfolio. Revenue from the 1997 core portfolio (based on
properties owned as of December 31, 1995) increased $5.2 million, or 3.5%, from
$148.2 million in 1996 to $153.4 in 1997. Based on the 1998 core, revenue was
$158.8 million for the year ended December 31, 1997. The difference of $5.4
million represents the transfer of three properties into core on January 1, 1998
36
<PAGE>
and two properties out of core that were sold in 1998. Expenses increased $0.3
million, or 0.4%, over the prior year primarily due to expected increases in
payroll and related costs, partially offset by savings from management
restructuring and the outsourcing of janitorial services.
Average monthly revenue per apartment unit of the 1997 core portfolio
increased 3.5% from $870 in 1996 to $901 per month during 1997. Average economic
occupancy decreased slightly to 96.4% in 1997 from 96.9% in 1996. The decrease
in occupancy was not unexpected given the aggressive efforts initiated by
management to increase rents as well as the implementation during the third
quarter of 1996 of several revenue-enhancing initiatives, including a premium
for month-to-month leases and the charging of a non-refundable move-in fee in
lieu of security deposits.
1997 Acquisition Portfolio. The 1997 acquisition portfolio, consisting of
4,038 apartment units contributed $30.4 million, or 84.2% of the rental revenue
increase. This growth was primarily due to the fact that six of the nine
properties, or 3,036 units, were acquired during 1997. The acquisition
properties added $12.3 million in property operating expenses compared to the
prior year.
Retail Portfolio. Retail revenues increased by $0.2 million, or 2.5%, during
the year ended December 31, 1997 compared to the prior year due primarily to
rent increases and improved vacancy at Skyline Mall. Average occupancy at
Skyline Mall increased from 95.1% in 1996 to 97.2% in 1997.
In December 1997, Messrs. Smith and Kogod sold their health club facilities
which lease retail space from the Operating Partnership. In conjunction with
that sale, the Operating Partnership agreed to restructure the leases by
reducing base rent on the Worldgate lease and extending the terms on both leases
by ten years, through 2025, in exchange for a $2.3 million cash payment which is
being amortized over the lives of the revised leases. The Operating Partnership
used the funds to retire 65,000 Operating Partnership units.
Property Service Businesses. Income from the Property Service Businesses
decreased $0.2 million, or 3.2%, during 1997 compared to 1996.
Income before depreciation for Multifamily and Retail Property Management
Services decreased $1.5 million, or 65.6%, primarily due to a non-recurring fee
of $0.6 million earned in 1996 in connection with the termination of a
management agreement with a hotel owned by a related party. In addition, revenue
decreased by an additional $0.9 million due to the February 1997 acquisition of
two properties previously managed by the Operating Partnership.
Income before depreciation for Interior Construction and Renovation Services
increased $0.1 million, or 8.9%, due to an increase of $1.0 million in net fee
revenue offset by an increase of $0.9 million in related expenses.
Revenue from Engineering and Technical Services increased 20.0%, or $8.4
million, in 1997 with a corresponding increase of $8.2 million in expenses
compared to 1996 due primarily to additional HVAC systems operations and
preventative maintenance contracts obtained throughout 1997. Due to start-up
costs on the new contracts, operating margins during 1997 were lower than 1996.
Consequently, income before depreciation for Engineering and Technical Services
increased a moderate 4.8% to $3.8 million for 1997 compared to $3.7 million in
1996.
37
<PAGE>
Income before depreciation for Financing Services increased $1.2 million, or
60.2%, due primarily to fees earned on an unusually high level of refinancings
performed during the fourth quarter of 1997. Such refinancings were related to
the roll-up of Affiliated commercial properties into a single partnership. In
conjunction with the roll-up, Financing Services personnel transferred to the
new entity, Charles E. Smith Commercial Realty L.P.
Other. Corporate general and administrative expenses increased by $1.3
million, or 24.9%, due primarily to additional personnel added during the year
to expand the Operating Partnership's acquisition and development program.
Interest expense increased by $1.8 million, or 4.1%, primarily due to assumed
debt on acquisitions of multifamily properties. Distributions in excess of
earnings allocated to Minority Interest decreased $4.8 million. Such charges
are no longer necessary as a result of the February 1997 stock offering and the
related elimination of the Minority Interest deficit.
LIQUIDITY AND CAPITAL RESOURCES
Summary
Net cash flow provided by operating activities was $118.6 million for 1998
compared to $75.2 million for 1997. The increase of $43.4 million was primarily
due to higher cash flow contributed by the acquisition portfolio as well as core
revenue growth.
Net cash flow used by the Operating Partnership for investing activities
increased $93.1 million in 1998, from $196.9 million in 1997 to $290.0 million
in 1998 due primarily to the substantial increase in development volume during
the year as well as increased capital expenditures.
Net cash flow provided by financing activities was $171.4 million in 1998
compared to $117.8 million in 1997. During 1998, the Operating Partnership
raised approximately $120 million through sales of common and preferred equity.
In addition, the Operating Partnership completed a number of debt financing
transactions which resulted in net cash inflows of $122.4 million which is net
of prepayment penalties and other related costs. In 1998, the Operating
Partnership also paid distributions of $73.5 million, or $2.095 per unit
representing three quarters of distributions at $0.52 per unit and one quarter
at $0.535, a 3.0% increase.
Equity Activity
During 1997, the Company entered into an agreement with a private investor to
sell 2.6 million shares of Series A Cumulative Convertible Redeemable Preferred
Stock ("Series A Preferred Shares") for $71.5 million. In 1997, the Company
issued 1.6 million shares of Series A Preferred Shares at $27.08 per share
resulting in proceeds of $44.5 million, net of underwriting discounts and other
expenses totaling $0.5 million. The net proceeds were contributed to the
Operating Partnership in exchange for 1.6 million Series A Preferred Units. The
Operating Partnership used the proceeds to repay on the line of credit. In
April 1998, the Company issued the remaining 1.0 million shares of Series A
Preferred Shares at $27.08 per share resulting in proceeds of $26.1 million, net
of expenses of $0.4 million. The net proceeds were contributed to the Operating
Partnership in
38
<PAGE>
exchange for 1.0 million Series A Preferred Units. These units were also used to
repay the line of credit.
In January 1998, the Company sold 500 shares of Series C Cumulative Redeemable
Preferred Stock ("Series C Preferred Shares") for $48.6 million, net of offering
costs of $1.4 million. The net proceeds were contributed to the Operating
Partnership in exchange for 500 units of Series C Preferred Units. The
Series C Preferred Shares have a liquidation preference of $100,000 per unit
and an initial annual distribution rate of $7,910 per unit. If the securities
receive an investment grade rating, the distribution rate will decrease by
$250 per unit. The Operating Partnership used the proceeds to repay outstanding
amounts under its lines of credit.
In July 1998, the Company completed the sale of 1.4 million shares of common
stock (par value of $0.01 per share) under its existing shelf registration
statement at a net purchase price of $32.625 per share. The net proceeds of
approximately $45.4 million have been used to retire outstanding debt and for
working capital needs.
During 1998, 0.5 million Series B Cumulative Convertible Redeemable Preferred
Stock ("Series B Preferred Shares") were converted to common shares on a one-
for- one basis. The Operating Partnership converted 0.5 million Series B
Preferred Units to common units on a one-for-one basis.
During 1998, the Operating Partnership issued approximately 0.3 million
Operating Partnership units valued at $11.8 million in connection with property
acquisitions.
Funds from Operations
FFO is defined by the National Association of Real Estate Investment Trusts
("NAREIT") as net income (loss) (computed in accordance with generally accepted
accounting principles) excluding gains (or losses) from debt restructuring, and
other non-recurring items, plus depreciation/amortization of assets unique to
the real estate industry. Depreciation/amortization of assets not unique to the
industry, such as amortization of deferred financing costs and non-real estate
assets, is not added back. FFO does not represent cash flow from operating
activities in accordance with generally accepted accounting principles (which,
unlike FFO, generally reflects all cash effects of transactions and other events
in the determination of net income) and should not be considered an alternative
to net income as an indication of the Operating Partnership's performance or to
cash flow as a measure of liquidity or ability to make distributions. The
Operating Partnership considers FFO a meaningful, additional measure of
operating performance because it primarily excludes the assumption that the
value of real estate assets diminishes predictably over time, and because
industry analysts have accepted it as a performance measure. Comparison of the
Operating Partnership's presentation of FFO, using the NAREIT definition, to
similarly titled measures for other REITs may not necessarily be meaningful due
to possible differences in the application of the NAREIT definition used by such
REITs.
The Operating Partnership's FFO for the years ended December 31, 1998, 1997
and 1996 was as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1998 1997 1996
--------- ------- -------
<S> <C> <C> <C>
Net Income $ 69,870 $52,210 $34,817
Perpetual preferred distributions (3,647) -- --
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Gain on sale of property (18,150) -- --
Depreciation of real property 28,958 20,666 17,931
Amortization of goodwill 250 -- --
Loss on unused treasury lock 4,923 -- --
Extraordinary item - loss on
debt extinguishment 16,384 87 --
-------- ------- -------
Funds from Operations 98,588 72,963 52,748
======== ======= =======
</TABLE>
40
<PAGE>
Acquisitions/Dispositions
The Operating Partnership acquired the following operating properties during
1998 and 1997:
<TABLE>
<CAPTION>
Total Cost (Dollars in Thousands)
---------------------------------
1998 1997
---- ----
<S> <C> <C>
120-unit mid-rise apartment $ 6,700 $ -
167-unit garden apartment 7,100 -
299-unit high-rise apartment 39,100 -
1,075-unit high-rise apartment /(1)/ 74,100 -
281-unit mid-rise apartment 63,500 -
376-unit high-rise apartment - 16,300
540-unit high-rise apartment - 43,000
912-unit high-rise apartment - 69,800
714-unit high-rise apartment - 88,900
306-unit high-rise apartment - 43,100
188-unit high-rise apartment - 27,500
-------- --------
$190,500 $288,600
======== ========
</TABLE>
/(1)/ Purchase included approximately 13% of underlying land. Balance of land
is subject to ground leases expiring in 2067.
During 1998, the Operating Partnership sold two properties (Oxford Manor and
Marbury Plaza) in southeast Washington, D.C. for a total of $22.0 million. The
sales were completed as tax-deferred I.R.C. Section 1031 exchanges. In the
financial statements, the Operating Partnership recognized gains on the sales
totaling $18.2 million.
In January 1999, the Operating Partnership completed the acquisition of three
multifamily properties totaling 1,008 apartment units. The total capitalized
cost of $105.7 million was comprised of approximately $55.0 million cash,
initial capital improvement costs of $6.2 million, 0.5 million Operating
Partnership units valued at approximately $16.3 million, assumed debt of $27.1
million and fair market value adjustments of $1.1 million.
In February, 1999, the Operating Partnership sold The Manor, a 435-unit
multifamily property located in suburban Maryland for $23.0 million. The
Operating Partnership recognized a gain on the sale of $1.9 million.
In March 1999, the Operating Partnership acquired the land beneath the Crystal
Square property and the 5.1% net profits interest in the Crystal Plaza property.
The purchase price of $10.0 million consisted of 32,258 Operating Partnership
Units valued at $1.0 million and $9.0 million cash drawn upon the line of
credit.
41
<PAGE>
Development
The Operating Partnership's development pipeline as of December 31, 1998
consists of the following projects:
<TABLE>
<CAPTION>
Number Units Initial Estimated Estimated Estimated
of Units Delivered Delivery Completion Stabilization Cost
-------- --------- -------------- ---------- ------------- ------------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Springfield Station
(Northern Virginia) 631 280 May, 1998 Q2 1999 Q4 1999 $ 60
Courthouse Place
(Rosslyn/Ballston) 564 103 December, 1998 Q4 1999 Q1 2000 68
One Superior Place
(Chicago) 809 n/a Q3 1999 Q2 2000 Q4 2000 115
Park Connecticut
(Washington, DC) 142 n/a Q4 1999 Q1 2000 Q2 2000 26
----- --- -----
2,146 383 $269
===== === =====
</TABLE>
Commitments
As of December 31, 1998, the Operating Partnership had executed four contracts
to purchase to-be-constructed multifamily properties as follows:
<TABLE>
<CAPTION>
Number Units Estimated Purchase Estimated
of Units Delivered Completion Date Purchase Price
-------- --------- ---------- ---- --------------
(in millions)
<S> <C> <C> <C> <C> <C>
New River Village 240 n/a Q2 2000 Q4 2000 $ 32
(Ft. Lauderdale)
Wilson Boulevard 220 n/a Q2 2000 Q4 2000 28
(Rosslyn/Ballston)
Pollard Gardens 383 n/a Q4 2000 Q2 2001 47
(Rosslyn/Ballston)
Reston Landing 400 n/a Q4 1999 Q3 2000 44
(Northern Virginia)
----- ----
1,243 $151
===== ====
</TABLE>
These contracts are contingent upon satisfactory completion of construction
and attainment of final certificates of occupancy by the owners. At December 31,
1998, the Operating Partnership had posted three letters-of-credit totaling $7.7
million in accordance with three of the contracts to be drawn upon only in the
event the Operating Partnership defaults on its contractual obligations to
purchase the completed assets.
Numerous other acquisition and development projects are being pursued by the
Operating Partnership. The Operating Partnership anticipates meeting the
related funding requirements through draws on its lines of credit, long-term
borrowings and public or private issuances of equity, including Operating
Partnership unit exchanges.
42
<PAGE>
Debt
As of December 31, 1998, the Operating Partnership had the following
mortgage indebtedness and other borrowings carrying a weighted average interest
rate of 6.97% and collateralized by 33 of the 54 Properties:
<TABLE>
<CAPTION>
Dollars in
Thousands Percent of Total
--------- -----------------
<S> <C> <C>
Fixed rate debt:
Mortgages $592,386 74.9%
$83M Acquisition Line of Credit 30,000 3.8%
Variable rate debt:
$185M Line of Credit 53,000 6.7%
$100M Line of Credit 52,000 6.6%
Construction loans 63,193 8.0%
-------- -----
$790,579 100.0%
======== =====
</TABLE>
As of December 31, 1998, the Operating Partnership's Debt to Total Market
Capitalization Ratio was 40.3% (based on 31.5 million common units, 3.4 million
preferred units and 13.3 million partnership units outstanding at the Company's
stock price of $32.125 and $50 million of perpetual preferred units) versus
35.0% at December 31, 1997. The Operating Partnership's Interest Coverage Ratios
for the years ended December 31, 1998 and 1997 were 3.24:1 and 2.78:1,
respectively.
Outstanding debt matures as follows (in thousands):
<TABLE>
<S> <C>
1999 $ 3,173
2000 31,574
2001 136,621
2002 --
2003 --
Thereafter 619,211
---------
$790,579
=========
</TABLE>
At December 31, 1998, the Operating Partnership had $306.1 million of
unused borrowing capacity available. Amounts outstanding under lines of credit
averaged $202.9 million and $80.1 million for the years ended December 31, 1998
and 1997, respectively.
The Operating Partnership anticipates meeting principal repayment
requirements through long-term borrowings, public or private issuances of debt
securities or public or private equity offerings.
During 1998, the Operating Partnership completed several debt financing
transactions as follows:
. The Operating Partnership terminated its existing $100 million line of
credit and entered into two new unsecured lines of credit - a $100
million line and a $185 million line - with PNC Bank, NationsBank, and
U.S. Bank which mature in March 2001. The Operating Partnership repaid
the balance outstanding under the $100
43
<PAGE>
million line and recognized an extraordinary loss of $0.3 million
related to the extinguishment of such debt.
. The Operating Partnership repaid $110.1 million outstanding on
Mortgage Pool One by drawing on the new line of credit. The Operating
Partnership recognized an extraordinary loss of $4.1 million related
to the repayment. The Operating Partnership refinanced part of the
draw through a $53 million, ten year secured loan with Prudential at a
fixed coupon rate of 6.88%. The loan is secured by two of the
multifamily properties. In conjunction with this loan, the Operating
Partnership terminated a $20 million (notional value) treasury lock
contract at a gain of $0.4 million which will be amortized over the
term of the new loan.
. The Operating Partnership repaid mortgage loans totaling $9.2 million
and recognized an extraordinary loss of $0.3 million due to
extinguishment of debt.
. In connection with the development of One Superior Place in Chicago,
Illinois, the Operating Partnership obtained a $90 million interest-
only construction loan in July 1998 with interest currently at LIBOR
plus 135 basis points, payable monthly, due July 1, 2001. The loan is
collateralized by the property.
. The Operating Partnership assumed a $31.5 million mortgage loan in
connection with the Cronin's Landing acquisition in July 1998. The
loan has an effective fixed interest rate of 6.9% with principal
amortized using a 25-year amortization schedule and a final payment
due March 2009. A fair value adjustment of $2.0 million was recorded
upon assumption of this loan.
. In September 1998, the Operating Partnership terminated a $50 million
(notional value) treasury lock contract at a loss of $4.9 million. The
treasury lock was put in place in the first quarter of 1998 to hedge
interest rate risk associated with an anticipated 10-year, unsecured
financing which ultimately did not occur. Therefore, this amount has
been charged to current year earnings.
. The Operating Partnership announced a standby credit facility of up to
$300 million with Fannie Mae which provides for non-recourse, long-
term debt for up to fifteen years. The initial draw on this facility
was $140 million at 6.75% for fifteen years. The bulk of the proceeds
were used to retire Mortgage Pool Two of $125.2 million and the
associated prepayment penalty of $9.7 million. Terms and rates of
subsequent draws on this facility will be determined at the time of
use. Closing of the facility is expected during the second quarter of
1999.
. The Operating Partnership obtained an interest-only $17.1 million
mortgage on 2000 Commonwealth at a fixed interest rate of 6.3% due
December 3, 2006.
. The Operating Partnership obtained a $38.3 million mortgage on Crystal
House I & II at a fixed interest rate of 6.29%. The loan is interest
only through December
44
<PAGE>
2008, at which time principal amortization begins using a 30-year
amortization schedule with a balloon payment due December 30, 2010.
. The Operating Partnership obtained a $49.3 million mortgage on Skyline
Towers at a fixed interest rate of 6.45%. The loan is interest only
through December 2008, at which time principal amortization begins
using a 30-year amortization schedule with a balloon payment due
December 10, 2010.
. In February 1999, the unused portion, or $53 million, of the Operating
Partnership's $83 million line of credit with Northwestern Mutual
expired.
. In February 1999, the Operating Partnership repaid $7.4 million of
mortgage debt. The Operating Partnership paid a prepayment penalty of
$0.9 million which was recognized as an extraordinary loss.
Other
Capital Improvements. In 1998, total capital improvements were $16.9
million, of which $12.4 million, or $871 per apartment unit, was for the core
portfolio. Approximately 55% of the capital expenditures on the core portfolio
are considered by management to generate net operating income ("NOI") by
increasing revenue or decreasing expenses ("NOI generating"). The remaining
capital expenditures on the core portfolio indirectly influence the Operating
Partnership's ability to generate NOI ("non-NOI generating"). A summary of core
capital expenditures during 1998 follows:
<TABLE>
<CAPTION>
Total $ Average $ Per
Expenditure Type Spent Core Unit
- ---------------- ------- -------------
(in thousands)
<S> <C> <C>
Installations $ 2,643 $185
Water saving devices 1,016 71
Renovations 1,075 75
Redevelopment 1,435 100
Other 681 48
------- ----
NOI-Generating Improvements 6,850 479
Non-NOI Generating Improvements 5,605 392
------- ----
Total Capital Expenditures
- Core Portfolio $12,455 $871
======= ====
</TABLE>
Income Taxes. The Company is taxed as a REIT under Sections 856 through 860
of the Internal Revenue Code of 1986, as amended. As such, the Company generally
is not subject to Federal corporate income taxes on net income it distributes
currently to shareholders provided that the Company distributes at least 95% of
its taxable income each year. REITs are subject to certain organizational
requirements and asset and income tests in order to
45
<PAGE>
maintain their REIT status. The Property Service Businesses are taxable
corporations, and thus, pay Federal and state income taxes on their net income.
Such taxes amounted to $ 0.6 million, $0.4 million and $0.4 million for 1998,
1997 and 1996.
Effect of Inflation. Substantially all of the leases at the Multifamily
Properties are for a term of one year or less, which enables the Operating
Partnership to seek increased rents upon renewal or reletting of apartments.
Retail tenant leases provide for pass-through of common area maintenance, real
estate taxes and other operating costs to tenants, which reduces the impact of
inflation.
Year 2000. In 1997, the Operating Partnership began a comprehensive review
of its year 2000 compliance issues utilizing an overlapping, three-phased
approach. Phase I involves assessments of building infrastructure and internal
computer systems including both hardware and software to identify possible
compliance failures. Phase II involves vendor compliance and actual testing of
hardware and software applications including significant electronic interfaces.
Phase III involves identifying remaining company-wide risks and development of
contingency plans. The Operating Partnership expects to complete Phases I and
II of its year 2000 review in mid-1999. Phase III is expected to run from March
1999 through December 1999. Based on the review plan as well as the expected
success of remediation efforts currently underway, management believes the
Operating Partnership has no material risks related to the ability of its
hardware and software to recognize the year 2000 and beyond as valid dates.
The Operating Partnership's primary financial and operational software
programs are purchased from outside vendors who have already resolved year 2000
issues. The Operating Partnership has received letters from these vendors
indicating that their software is year 2000 compliant. The Operating
Partnership is in the process of replacing one computer system, however, which
is not currently year 2000 compliant at an estimated cost of approximately $1.6
million. The new system was implemented in January 1999 and is expected to be
fully operational in early 1999. The related cost will be depreciated over its
estimated useful life.
As part of Phase II, the Operating Partnership has initiated steps to
identify and contact key vendors whose inability to provide service in the year
2000 could have a material adverse effect on the Operating Partnership's
business operations. With the exception of utility services, the Operating
Partnership believes that there are no other critical suppliers whose inability
to provide service would materially affect business operations. This is due
primarily to the physical nature of the Operating Partnership's product as well
as the availability of multiple suppliers of property services. The Operating
Partnership does not have a contingency plan to address the possibility that
utility services may not be available. However, management believes that this
is a very unlikely scenario. Readers are cautioned that these conclusions
involve numerous subjective assumptions and there can be no assurances that
management has adequately identified or addressed all possible contingencies.
Excluding the replacement system, the Operating Partnership's year 2000
compliance efforts have been primarily conducted with internal staff.
Accordingly, the costs have been immaterial and are expensed as incurred.
46
<PAGE>
Item 7a. Quantitative and Qualitative Disclosures of Market Risk.
None.
Item 8. Financial Statements and Supplementary Data.
See Index to Consolidated and Combined Financial Statements on Page F-1 of
this
Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Part III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this item with respect to directors is hereby
incorporated by reference to the material appearing under the caption "Election
of Directors" in the Company's definitive proxy statement for the annual meeting
of shareholders to be held in 1999 (the "Proxy Statement"). Information required
by this item with respect to executive officers is provided in Item 1 of this
report. See "Executive Officers of the Company."
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership of such securities with the Securities and
Exchange Commission and the NYSE. To the best of the Company's knowledge, all
required reports were timely filed during and with respect to the fiscal year
ended December 31, 1998, except for the following reports which were filed
late: Ernest A. Gerardi, Jr. (one report, one transaction); John T. Gray
(Form 3); John W. Guinee (amendment to Form 3); Steven E. Gulley (Form 3 and an
amendment to Form 3); Charles R. Hagen (one report, four transactions); Matthew
B. McCormick (one report, one transaction); Alfred G. Neely (two reports, three
transactions); Roger L. Weeks (one report, one transaction); Robert D. Zimet
(one transaction, one report).
47
<PAGE>
Item 11. Executive Compensation.
The information required by this item is hereby incorporated by reference
to the material appearing under the caption "Executive Compensation" in the
Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is hereby incorporated by reference
to the material appearing under the caption "Voting Securities and Principal
Holders Thereof" in the Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by this item is hereby incorporated by reference
to the material appearing under the caption "Certain Relationships and Related
Transactions" in the Proxy Statement.
Part IV
Item 14. Exhibits, Financial Schedules, and Reports on Form 8-K.
14(a)(1) Financial Statements
Reference is made to the Index to Financial Statements and Schedule
on Page F-1 of this Form 10-K.
14(a)(2) Financial Statement Schedules
Reference is made to the Index to Financial Statements and Schedule
on Page F-1 of this Form 10-K.
All other schedules have been omitted because the required information
of such other schedules is not present in amounts sufficient to require
submission of the schedule or because the required information is included
in the consolidated financial statements.
48
<PAGE>
14(a)(3) Exhibits
2.1 Third Party Management and Leasing, Hotel Asset Management and Corporate
Services Business Transfer Agreement by and between Charles E. Smith
Residential Realty, Inc. and Smith Property Management, Inc.
(Incorporated by reference to Exhibit No. 2.1 of the Operating
Partnership's Form 10-K for the year ended December 31, 1994)
2.2 REIT Properties Management and Leasing Business Transfer Agreement by
and between Charles E. Smith Management, Inc. and Charles E. Smith
Residential Realty L.P. (Incorporated by reference to Exhibit No. 2.2 of
the Operating Partnership's Form 10-K for the year ended December 31,
1994)
2.3 Assignment by Robert H. Smith, Clarice R. Smith, Robert P. Kogod and
Arlene R. Kogod to Charles E. Smith Management, Inc. of 99% of all
Partnership Interests of Residential Associates Limited Partnership
(Incorporated by reference to Exhibit No. 2.3 of the Operating
Partnership's Form 10-K for the year ended December 31, 1994)
2.4 Assignment and Assumption Agreement by Residential Associates Limited
Partnership and Charles E. Smith Residential Realty L.P. (Incorporated
by reference to Exhibit No. 2.4 of the Operating Partnership's Form 10-K
for the year ended December 31, 1994)
2.5 Debt Assumption Agreement and Accord and Satisfaction of Debt by Charles
E. Smith Management, Inc. and Charles E. Smith Residential Realty L.P.
(Incorporated by reference to Exhibit No. 2.5 of the Operating
Partnership's Form 10-K for the year ended December 31, 1994)
2.6 Debt Contribution Agreement between Charles E. Smith Management, Inc.
and Charles E. Smith Residential Realty L.P. (the "Operating
Partnership") (Incorporated by reference to Exhibit No. 2.6 of the
Operating Partnership's Form 10-K for the year ended December 31, 1994)
3.1 Amended and Restated Articles of Incorporation of Charles E. Smith
Residential Realty, Inc. (the "Company") (Incorporated by reference to
Exhibit No. 3.1 of the Company's Registration Statement on Form S-11,
No. 33-75288)
49
<PAGE>
3.2 Articles of Amendment to Articles of Amendment and Restatement of
Articles of Incorporation of Charles E. Smith Residential Realty, Inc.
3.3 Amended and Restated Bylaws of the Company (Incorporated by reference to
Exhibit 3.2 in the Company's Registration Statement on Form S-3
(File No. 33-93986)
3.4 Articles Supplementary to Amended and Restated Articles of Incorporation
of the Company (Incorporated by reference to Exhibit No. 3.1 of
Operating Partnership's Quarterly Report on Form 10-Q for the Quarter
Ended June 30, 1997)
3.5 Articles Supplementary of the Company for Classifying and Designating
Series B Cumulative Convertible Redeemable Preferred Stock (Incorporated
by reference to Exhibit No. 4.1 of the Operating Partnership's Report on
Form 8-K dated October 3, 1997 and filed November 10, 1997)
3.6 Certificate of Correction relating to Articles Supplementary for Series
B Cumulative Convertible Redeemable Preferred Stock (Incorporated by
reference to Exhibit No. 4.2 of the Operating Partnership's Report on
Form 8-K dated October 3, 1997 and filed November 10, 1997)
3.7 Articles Supplementary for Series C Cumulative Redeemable Preferred
Stock (Incorporated by reference to Exhibit No. 3.5 in the
Company's Registration Statement on Form S-3, File No. 333-17053)
3.8 Articles Supplementary of the Company for Classifying and Designating a
Series of Preferred Stock as Series D Junior Participating Preferred
Stock and Fixing Distribution and Other Preferences and Rights of Such
Series
4.1 First Amended and Restated Agreement of Limited Partnership of the
Operating Partnership, as amended (Incorporated by reference to Exhibit
No. 4.1 of the Operating Partnership's Form 10-K for the year ended
December 31, 1994)
50
<PAGE>
4.2 Certificate of Limited Partnership of the Operating Partnership
(Incorporated by reference to Exhibit No. 4.2 of the Operating
Partnership's Form 10-K for the year ended December 31, 1994)
4.3 Ninth Amendment to Amended and Restated Agreement of Limited Partnership
of the Operating Partnership (Incorporated by reference to Exhibit No.
4.1 of the Operating Partnership's Quarterly Report on Form 10-Q for the
Quarter Ended June 30, 1997)
4.4 Tenth Amendment to Amended and Restated Agreement of Limited Partnership
of the Operating Partnership (Incorporated by reference to Exhibit No.
4.4 of the Operating Partnership's Form 10-K for the year ended December
31, 1997)
4.5 Fifteenth Amendment to First Amended and Restated Agreement of Limited
Partnership of the Operating Partnership (Incorporated by reference to
Exhibit 99.1 of the Operating Partnership's Quarterly Report on Form 10-
Q for the Quarter Ended March 31, 1998)
4.6 Seventeenth Amendment to First Amended and Restated Agreement of Limited
Partnership of the Operating Partnership
10.1 Noncompetition Agreement by and among the Company, the Operating
Partnership and Robert P. Kogod and Robert H. Smith (Incorporated by
reference to Exhibit No. 10.1 of the Operating Partnership's Form 10-K
for the year ended December 31, 1994)
10.2 Registration Rights and Lock-up Agreement (Incorporated by reference to
Exhibit No. 10.2 of the Operating Partnership's Form 10-K for the year
ended December 31, 1994)
10.3 Pledge Agreement (Incorporated by reference to Exhibit No. 10.3 of the
Operating Partnership's Form 10-K for the year ended December 31, 1994)
10.4 First Amended and Restated 1994 Employee Stock and Unit Option Plan
(Incorporated by reference to Exhibit No. 10.4 of the Operating
Partnership's Form 10-K for the year ended December 31, 1994)
10.5 First Amended and Restated 1994 Employee Restricted Stock and Restricted
Unit Plan (Incorporated by reference to Exhibit No. 10.5 of the
Operating Partnership's Form 10-K for the year ended December 31, 1994)
51
<PAGE>
10.6 Non-Employee Directors Stock Option Plan (Incorporated by reference to
Exhibit No. 10.6 of the Operating Partnership's Form 10-K for the year
ended December 31, 1994)
10.7 Subscription Agreement (Incorporated by reference to Exhibit No. 10.7 of
the Operating Partnership's Form 10-K for the year ended December 31,
1994)
10.8 Voting Stock Partnership Agreement for Smith Property Management
Partnership (Incorporated by reference to Exhibit No. 10.8 of the
Operating Partnership's Form 10-K for the year ended December 31, 1994)
10.9 Voting Stock Partnership Agreement for Smith Management Construction
Partnership (Incorporated by reference to Exhibit No. 10.9 of the
Operating Partnership's Form 10-K for the year ended December 31, 1994)
10.10 Voting Stock Partnership Agreement for Consolidated Engineering Services
Partnership (Incorporated by reference to Exhibit No. 10.10 of the
Operating Partnership's Form 10-K for the year ended December 31, 1994)
10.11 Amended and Restated Articles of Incorporation of Smith Realty Company
(Incorporated by reference to Exhibit No. 10.11 of the Operating
Partnership's Form 10-K for the year ended December 31, 1994)
10.12 By-Laws of Smith Property Management, Inc. (Incorporated by reference to
Exhibit No. 10.12 of the Company's Registration Statement on Form S-11,
No. 33-75288)
10.13 Articles of Incorporation of Smith Management Construction, Inc.
(Incorporated by reference to Exhibit No. 10.13 of the Company's
Registration Statement on Form S-11, No. 33-75288)
10.14 By-Laws of Smith Management Construction, Inc. (Incorporated by
reference to Exhibit No. 10.14 of the Company's Registration Statement
on Form S-11, No. 33-75288)
10.15 Articles of Incorporation of Consolidated Engineering Services, Inc.
(Incorporated by reference to Exhibit No. 10.15 of the Company's
Registration Statement on Form S-11, No. 33-75288)
10.16 By-Laws of Consolidated Engineering Services, Inc. (Incorporated by
reference to Exhibit No. 10.16 of the Company's Registration Statement
on Form S-11, No. 33-75288)
10.17 Certificate of Incorporation of Smith One, Inc. (Incorporated by
reference to Exhibit No. 10.17 of the Company's Registration Statement
on Form S-11, No. 33-75288)
52
<PAGE>
10.18 By-Laws of Smith One, Inc. (Incorporated by reference to Exhibit No.
10.18 of the Company's Registration Statement on Form S-11,
No. 33-75288)
10.19 Agreement of Limited Partnership of Smith Property Holdings One L.P.
(Incorporated by reference to Exhibit No. 10.19 of the Operating
Partnership's Form 10-K for the year ended December 31, 1994)
10.20 Agreement of Limited Partnership of Smith Property Holdings One (D.C.)
L.P. (Incorporated by reference to Exhibit No. 10.20 of the Operating
Partnership's Form 10-K for the year ended December 31, 1994)
10.21 Certificate of Incorporation of Smith Two, Inc. (Incorporated by
reference to Exhibit No. 10.21 of the Company's Registration Statement
on Form S-11, No. 33-75288)
10.22 By-Laws of Smith Two, Inc. (Incorporated by reference to Exhibit No.
10.22 of the Company's Registration Statement on Form S-11,
No. 33-75288)
10.23 Agreement of Limited Partnership of Smith Property Holdings Two
L.P.(Incorporated by reference to Exhibit No. 10.23 of the Operating
Partnership's Form 10-K for the year ended December 31, 1994)
10.24 Agreement of Limited Partnership of Smith Property Holdings Two (D.C.)
L.P. (Incorporated by reference to Exhibit No. 10.24 of the Operating
Partnership's Form 10-K for the year ended December 31, 1994)
10.25 Certificate of Incorporation of Smith Three, Inc. (Incorporated by
reference to Exhibit No. 10.25 of the Company's Registration Statement
on Form S-11, No. 33-75288)
10.26 By-Laws of Smith Three, Inc. (Incorporated by reference to Exhibit No.
10.26 of the Company's Registration Statement on Form S-11,
No. 33-75288)
10.27 Agreement of limited Partnership of Smith Property Holdings Three L.P.
(Incorporated by reference to Exhibit No. 10.27 of the Operating
Partnership's Form 10-K for the year ended December 31, 1994)
10.28 Agreement of Limited Partnership of Smith Property Holdings Three (D.C.)
L.P.(Incorporated by reference to Exhibit No. 10.28 of the Operating
Partnership's Form 10-K for the year ended December 31, 1994)
53
<PAGE>
10.29 Certificate of Incorporation of Smith Four, Inc. (Incorporated by
reference to Exhibit No. 10.29 of the Company's Registration Statement
on Form S-11, No. 33-75288)
10.30 By-Laws of Smith Four, Inc. (Incorporated by reference to Exhibit No.
10.30 of the Company's Registration Statement on Form S-11,
No. 33-75288)
10.31 Agreement of Limited Partnership of Smith Property Holding Four L.P.
(Incorporated by reference to Exhibit No. 10.31 of the Operating
Partnership's Form 10-K for the year ended December 31, 1994)
10.32 Amended and Restated Certificate of Incorporation of Smith Five, Inc.
(Incorporated by reference to Exhibit No. 10.32 of the Operating
Partnership's Form 10-K for the year ended December 31, 1994)
10.33 By-Laws of Smith Five, Inc. (Incorporated by reference to Exhibit No.
10.33 of the Company's Registration Statement on Form S-11,
No. 33-75288)
10.34 Agreement of Limited Partnership of Smith Property Holdings Five (D.C.)
L.P. (Incorporated by reference to Exhibit No. 10.34 of the Operating
Partnership's Form 10-K for the year ended December 31, 1994)
10.35 License Agreement between Charles E. Smith Management, Inc. and the
Company (Incorporated by reference to Exhibit No. 10.35 of the Operating
Partnership's Form 10-K for the year ended December 31, 1994)
10.36 License Agreement between Charles E. Smith Management, Inc. and the
Operating Partnership (Incorporated by reference to Exhibit No. 10.36 of
the Operating Partnership's Form 10-K for the year ended December 31,
1994)
10.37 Agreement of Limited Partnership of Smith Property Holdings Five L.P.
(Incorporated by reference to Exhibit No. 10.0 of the Operating
Partnership's Quarterly Report on Form 10-Q for the Quarter Ended
September 30, 1994)
10.38 Certificate of Limited Partnership of Smith Property Holdings Five L.P.
(Incorporated by reference to Exhibit No. 10.38 of the Operating
Partnership's Form 10-K for the year ended December 31, 1994)
10.39 Deed of Trust and Security Agreement between Smith Property Holdings
Three L.P. ("Smith Three") and The Northwestern Mutual Life Insurance
Company ("Northwestern") (Incorporated by reference to Exhibit No. 10.2
of the Operating Partnership's Quarterly Report on Form 10-Q for the
Quarter Ended June 30, 1994)
54
<PAGE>
10.40 Guarantee of Recourse Obligations by Smith Three and the Operating
Partnership (Incorporated by reference to Exhibit No. 10.3 of the
Operating Partnership's Quarterly Report on Form 10-Q for the Quarter
Ended June 30, 1994)
10.41 Absolute Assignment of Leases and Rents between Smith Three and
Northwestern (Incorporated by reference to Exhibit No. 10.4 of the
Operating Partnership's Quarterly Report on Form 10-Q for the Quarter
Ended June 30, 1994)
10.42 Promissory Note of Smith Three to Northwestern (Incorporated by
reference to Exhibit No. 10.5 of the Operating Partnership's Quarterly
Report on Form 10-Q for the Quarter Ended June 30, 1994)
10.43 Purchase Money Deed of Trust and Security Agreement between Smith
Property Holdings Three (D.C.) L.P. ("Smith Three D.C.") and
Northwestern (Incorporated by reference to Exhibit No. 10.6 of the
Operating Partnership's Quarterly Report on Form 10-Q for the Quarter
Ended June 30, 1994)
10.44 Guarantee of Recourse Obligations by Smith Three D.C. and the Operating
Partnership (Incorporated by reference to Exhibit No. 10.7 of the
Operating Partnership's Quarterly Report on Form 10-Q for the Quarter
Ended June 30, 1994)
10.45 Absolute Assignment of Leases and Rents between Smith Three D.C. and
Northwestern (Incorporated by reference to Exhibit No. 10.8 of the
Operating Partnership's Quarterly Report on Form 10-Q for the Quarter
Ended June 30, 1994)
10.46 Purchase Money Promissory Note of Smith Three D.C. to Northwestern
(Incorporated by reference to Exhibit No. 10.9 of the Operating
Partnership's Quarterly Report on Form 10-Q for the Quarter Ended June
30, 1994)
10.47 Supplemental Loan Agreement by and among Smith Property Holdings Two
L.P. ("Smith Two"), Smith Property Holdings Two (D.C.) L.P. ("Smith Two
D.C.") and Green Park Financial Limited Partnership ("Green Park")
10.48 Supplemental Loan Agreement by and among Smith Property Holdings One
L.P. ("Smith One D.C."), Smith Property Holdings One (D.C.) L.P. ("Smith
One D.C.") and GMAC (Incorporated by reference to Exhibit No. 10.13 of
the Operating Partnership's Quarterly Report on Form 10-Q for the
Quarter Ended June 30, 1994)
55
<PAGE>
10.49 Multifamily Note of Smith One to GMAC (Incorporated by reference to
Exhibit No. 10.14 of the Operating Partnership's Quarterly Report on
Form 10-Q for the Quarter Ended June 30, 1994)
10.50 Multifamily Note of Smith One D.C. to GMAC (Incorporated by reference to
Exhibit No. 10.15 of the Operating Partnership's Quarterly Report on
Form 10-Q for the Quarter Ended June 30, 1994)
10.51 Absolute Assignment of Leases and Rents by Smith One D.C. to GMAC
(Incorporated by reference to Exhibit No. 10.16 of the Operating
Partnership's Quarterly Report on Form 10-Q for the Quarter Ended June
30, 1994)
10.52 Property Management Agreement by and between Smith One and the Operating
Partnership (Incorporated by reference to Exhibit No. 10.17 of the
Operating Partnership's Quarterly Report on Form 10-Q for the Quarter
Ended June 30, 1994)
10.53 Multifamily Deed of Trust, Assignment of Rents and Security Agreement
between Smith One D.C. and GMAC (Incorporated by reference to Exhibit
No. 10.18 of the Operating Partnership's Quarterly Report on Form 10-Q
for the Quarter Ended June 30, 1994)
10.54 Commercial Leasing and Property Management Agreement between Smith Three
and the Operating Partnership (Incorporated by reference to Exhibit No.
10.19 of the Operating Partnership's Quarterly Report on Form 10-Q for
the Quarter Ended June 30, 1994)
10.55 Agreement of Limited Partnership of Smith Employment Services L.P.
(Incorporated by reference to Exhibit No. 10.58 of the Operating
Partnership's Form 10-K for the year ended December 31, 1994)
10.56 Certificate of Limited Partnership of Smith Employment Services L.P.
(Incorporated by reference to Exhibit No. 10.59 of the Operating
Partnership's Form 10-K for the year ended December 31, 1994)
10.57 Second Restated and Amended Agreement of Limited Partnership of First
Herndon Associated Limited Partnership (Incorporated by reference to
Exhibit No. 10.1 of the Operating Partnership's Quarterly Report on Form
10-Q for the Quarter Ended June 30, 1995)
10.58 Second Amendment to the Certificate of Limited Partnership of First
Herndon Associates Limited Partnership (Incorporated by reference to
Exhibit No. 10.2 of the Operating Partnership's Quarterly Report on Form
10-Q for the Quarter Ended June 30, 1995)
56
<PAGE>
10.59 Certificate of Incorporation of Smith Six, Inc. (Incorporated by
reference to Exhibit No. 10.1 of the Operating Partnership's Quarterly
Report on Form 10-Q for the Quarter Ended March 31, 1995)
10.60 By-Laws of Smith Six, Inc. (Incorporated by reference to Exhibit No.
10.2 of the Operating Partnership's Quarterly Report on Form 10-Q for
the Quarter Ended March 31, 1995)
10.61 Agreement of Limited Partnership of Smith Property Holdings Six L.P.
(Incorporated by reference to Exhibit No. 10.3 of the Operating
Partnership's Quarterly Report on Form 10-Q for the Quarter Ended March
31, 1995)
10.62 Agreement of Limited Partnership of Smith Property Holdings Six (D.C.)
L.P. (Incorporated by reference to Exhibit No. 10.4 of the Operating
Partnership's Quarterly Report on Form 10-Q for the Quarter Ended March
31, 1995)
10.63 Certificate of Incorporation of Smith Seven, Inc. (Incorporated by
reference to Exhibit No. 10.66 of the Operating Partnership's Form 10-K
for the year ended December 31, 1995)
10.64 By-Laws of Smith Seven, Inc. (Incorporated by reference to Exhibit No.
10.67 of the Operating Partnership's Form 10-K for the year ended
December 31, 1995)
10.65 Agreement of Limited Partnership of Smith Property Holdings Seven L.P.
(Incorporated by reference to Exhibit No. 10.68 of the Operating
Partnership's Form 10-K for the year ended December 31, 1995)
57
<PAGE>
10.66 Commitment for Mortgage Loan to the Operating Partnership from
Northwestern Mutual Life Insurance Company (Incorporated by reference to
Exhibit No. 10.69 of the Operating Partnership's Form 10-K for the year
ended December 31, 1995)
10.67 Third Amended and Restated Credit Agreement by and between the Operating
Partnership and PNC Bank, National Association, et. al. (Incorporated by
reference to Exhibit No. 10.71 of the Operating Partnership's Form 10-K
for the year ended December 31, 1997)
10.68 First Amendment to Third Amended and Restated Credit Agreement between
the Operating Partnership and PNC Bank, National Association, et. al.
(Incorporated by reference to Exhibit 99.1 of the Operating
Partnership's Quarterly Report on Form 10-Q for the Quarter Ended June
30, 1998)
10.69 Second Amendment to Third Amended and Restated Credit Agreement between
the Operating Partnership and PNC Bank, National Association, et. al.
(Incorporated by reference to Exhibit 99.2 of the Operating
Partnership's Quarterly Report on Form 10-Q for the Quarter Ended June
30, 1998)
10.70 First Amendment to First Amended and Restated Agreement of 1994 Employee
Stock and Unit Option Plan of Charles E. Smith Residential Realty, Inc.
(Incorporated by reference to Exhibit 4.9 in the Operating Partnership's
Registration Statement on Form S-8, File No. 333-67421)
10.71 Second Amendment to First Amended and Restated Agreement of 1994
Employee Stock and Unit Option Plan of Charles E. Smith Residential
Realty, Inc.
10.72 Rights Agreement between Charles E. Smith Residential Realty, Inc. and
First Union National Bank, as Rights Agent
21 Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen LLP
27 Financial Data Schedule
___________________________________
58
<PAGE>
14(b) Reports on Form 8-K
A report on Form 8-K was filed on May 13, 1998 providing information
on a Property acquired by the Operating Partnership during the second
quarter of 1998, including certain unaudited proforma balance sheets
and statements of operations of the Operating Partnership reflecting
the acquisition and statements of revenue and certain expenses for the
McClurg Court Property for the year ended December 31, 1997, and
applicable subsequent periods.
A report on Form 8-K was filed on July 15, 1998 providing information
on a Property (Cronin's Landing) acquired by the Operating Partnership
during the third quarter of 1998.
A report on Form 8-K was filed on December 8, 1998 providing
information on the Rights Plan.
14(c) Exhibits
The list of Exhibits filed with this report is set forth in response
to Item 14(a)(3). The required exhibit index has been filed with the
exhibits.
14(d) Financial Statements
See Index to Financial Statements and Schedules on Page F-1 of this
Form 10-K.
59
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on this
26th day of March, 1999.
CHARLES E. SMITH RESIDENTIAL REALTY, L.P.
By Charles E. Smith Residential Realty,
Inc., it's General Partner
By /s/Ernest A. Gerardi, Jr.
-------------------------------------
Ernest A. Gerardi, Jr.
President and Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on this 26th day of March, 1999.
Signature Title
--------- -----
/s/Robert H. Smith Co-Chairman of the Board, Co-Chief
--------------------------
Robert H. Smith Executive Officer, and Director
/s/Robert P. Kogod Co-Chairman of the Board, Co-Chief
--------------------------
Robert P. Kogod Executive Officer, and Director
/s/Ernest A. Gerardi, Jr. President, Chief Operating Officer, and
--------------------------
Ernest A. Gerardi, Jr. Director
/s/Wesley D. Minami Senior Vice President and
--------------------------
Wesley D. Minami Chief Financial Officer
/s/ Steven E. Gulley Vice President, Controller, and Chief
--------------------------
Steven E. Gulley Accounting Officer
60
<PAGE>
/s/Fred J. Brinkman Director
--------------------------
Fred J. Brinkman
/s/Charles B. Gill Director
--------------------------
Charles B. Gill
/s/Mandell J. Ourisman Director
--------------------------
Mandell J. Ourisman
/s/Mallory Walker Director
--------------------------
Mallory Walker
61
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY L.P.
Index to Financial Statements and Schedules
-------------------------------------------
CHARLES E. SMITH RESIDENTIAL REALTY L.P.
FINANCIAL STATEMENTS FILED AS PART OF THIS REPORT
Pages
-----
Report of Independent Public Accountants F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Partner's Equity and
Other Limited Partners' Interest F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7 to F-33
SCHEDULES FILED AS PART OF THIS REPORT
Schedule III - Real Estate and Accumulated Depreciation S-1 to S-2
All other Schedules have been omitted because the required information of
such other Schedules is not present in amounts sufficient to require
submission of the schedule or because the required information is included
in the consolidated financial statements.
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Charles E. Smith Residential Realty, L.P.:
We have audited the accompanying consolidated balance sheets of Charles E. Smith
Residential Realty L.P. (a Delaware limited partnership) and subsidiaries as of
December 31, 1998 and 1997 and the related consolidated statements of
operations, partners' equity and other limited partners' interest, and cash
flows for each of the years in the three years ended December 31, 1998. These
consolidated financial statements and the schedule referred to below are the
responsibility of the management of Charles E. Smith Residential Realty, L.P.
Our responsibility is to express an opinion on these consolidated financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Charles E. Smith
Residential Realty L.P. and subsidiaries as of December 31, 1998 and 1997, and
the consolidated results of its operations and its cash flows for each of the
years in the three years ended December 31, 1998, in conformity with generally
accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in the index to financial
statements is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Washington, D.C.
February 9, 1999
F-2
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY L.P.
CONSOLIDATED STATEMENTS OF PARTNER'S EQUITY AND OTHER LIMITED PARTNERS' INTEREST
(Dollars in Thousands, Except Per Unit Data)
<TABLE>
<CAPTION>
Other
General Partner's General and Limited Partners'
Limited Interest Interest
---------------------------------------------------- -----------------
Series A Series B Series C
Preferred Preferred Preferred Common Common
Units Units Units Units Units
---------- ---------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ - $ - $ - $ (320,286) $ 288,663
Units exchanged for acquisition - - - - 2,403
Adjustment for unit grants - - - - 333
Net income - - - 15,755 19,062
Distributions - - - (19,469) (23,840)
Adjustment to reflect Other Limited Partners'
interest at redemption value - - - (65,252) 65,252
---------- ---------- --------- ----------- -----------
Balance, December 31, 1996 - - - (389,252) 351,873
Units exchanged for acquisition - - - - 75,019
Adjustment for unit grants - - - - 579
Net income - - - 26,593 25,617
Contribution by Charles E. Smith Residential
Realty, Inc. 45,000 34,675 - 124,180 -
Offering costs - - - (562) -
Repurchase and cancellation of Operating
Partnership units - - - - (2,206)
Distributions - - - (27,151) (26,369)
Other - - - 244 110
Adjustment to reflect Other Limited Partners'
interest at redemption value - - - (78,096) 78,096
---------- ---------- --------- ----------- -----------
Balance, December 31, 1997 45,000 34,675 - (344,044) 502,719
Units exchanged for acquisition - - - - 11,820
Adjustment for unit grants - - - - 521
Net income - - - 41,129 28,741
Contribution by Charles E. Smith Residential
Realty, Inc. 26,500 - 50,000 45,454 -
Conversion of Preferred units to Common Units - (14,308) - 14,308 -
Offering costs - - - (1,874) -
Repurchase and cancellation of Operating
Partnership units - - - - (594)
Distributions - - - (44,498) (28,962)
Other - - - 121 2,874
Adjustment to reflect Other
Limited Partners' interest
at redemption value - - - 90,861 (90,861)
---------- ---------- --------- ----------- -----------
Balance, December 31, 1998 $ 71,500 $ 20,367 $ 50,000 $ (198,543) $ 426,258
========== ========== ========= =========== ===========
Units issued and outstanding at December 31, 1998 2,640,325 714,628 500 18,212,600 13,268,740
========== ========== ========= =========== ===========
Units issued and outstanding at December 31, 1997 1,661,743 1,216,666 - 14,942,429 14,161,102
========== ========== ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 69,870 $ 52,210 $ 34,817
Adjustments to reconcile net income
to net cash provided by operating activities:
Extraordinary Item-Loss on extinguishment of debt 16,384 - -
Loss on unused treasury lock 4,923 - -
Gain on sale of property (18,150) - -
Depreciation and amortization 31,118 23,543 21,039
(Increase) decrease in escrow funds 1,490 (1,519) (716)
(Increase) decrease in other assets 3,833 (3,218) (1,014)
(Decrease) increase in accounts payable and
accrued expenses 9,098 4,207 (3,168)
--------------- -------------- ---------------
Net cash provided by operating activities 118,566 75,223 50,958
--------------- -------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions and development of rental property (255,695) (173,205) (60,173)
Additions to rental property (16,852) (12,811) (7,425)
Decrease in related party payables - - (1,441)
(Increase) decrease in investment in and advances
to Property Service Businesses and other (14,492) (5,111) (2,408)
Acquisition deposits and other (2,956) (5,797) (1,295)
--------------- -------------- ---------------
Net cash used by investing activities (289,995) (196,924) (72,742)
--------------- -------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to deferred charges (6,149) (1,033) (402)
Capital contributions by Charles E. Smith
Residential Realty, Inc.:
Common units 45,454 124,180 -
Preferred units 74,626 79,113 -
Mortgages:
Proceeds 317,650 34,000 31,095
Repayments (259,155) (43,847) (31,520)
Lines of credit:
Proceeds 296,000 92,350 75,500
Repayments (266,000) (99,400) (16,000)
Construction loans:
Proceeds 66,157 5,536 1,032
Repayments (8,500) (17,686) -
Prepayment penalties (12,672) - -
Loss on unused treasury lock (4,923) - -
Repurchase of units (594) (2,206) -
Distributions (73,460) (53,520) (43,309)
Other, net 2,995 316 (192)
--------------- -------------- ---------------
Net cash provided by financing activities 171,429 117,803 16,204
--------------- -------------- ---------------
NET DECREASE IN CASH AND CASH EQUIVALENTS - (3,898) (5,580)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD - 3,898 9,478
--------------- -------------- ---------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ - - $ 3,898
=============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Unit Data)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------
1998 1997 1996
------------ ------------- ------------
<S> <C> <C> <C>
Rental Properties:
Revenues $ 250,211 $ 200,104 $ 163,959
Expenses
Operating costs (84,381) (71,425) (60,796)
Real estate taxes (17,254) (12,402) (10,429)
Depreciation and amortization (28,958) (20,666) (17,931)
------------ ------------- ------------
Total expenses (130,593) (104,493) (89,156)
Equity in income of Property Service Businesses 8,433 7,597 7,846
Corporate general and administrative expenses (8,947) (6,563) (5,255)
Interest income 1,257 1,063 1,029
Interest expense (47,334) (45,411) (43,606)
------------ -------------- ------------
Income before gain on sale, loss on unused treasury lock,
and extraordinary item 73,027 52,297 34,817
Gain on sale of property 18,150 - -
Loss on unused treasury lock (4,923) - -
------------ -------------- ------------
Income before extraordinary item 86,254 52,297 34,817
Extraordinary item - loss on extinguishment of debt (16,384) (87) -
------------ -------------- ------------
Net income 69,870 52,210 34,817
Less: Income attributable to preferred units (10,722) (1,881) -
------------ -------------- ------------
Net income attributable to common units $ 59,148 $ 50,329 $ 34,817
============= ============== ============
Earnings per common unit - basic
Income before extraordinary item $ 2.50 $ 1.89 $ 1.59
Extraordinary item 0.54 - -
------------ ------------- ------------
Net income $ 1.96 $ 1.89 $ 1.59
============= ============= ============
Earnings per common unit - diluted
Income before extraordinary item $ 2.49 $ 1.88 $ 1.59
Extraordinary item 0.54 - -
------------- ------------- -------------
Net income $ 1.95 $ 1.88 $ 1.59
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY L.P.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31,
(Dollars in Thousands)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Rental property, net $ 926,749 $ 751,230
Rental property under construction 167,214 53,093
Escrow funds 23,819 7,606
Investment in and advances to Property Service Businesses 28,633 14,141
Deferred charges, net 18,081 16,047
Security deposits 2,408 2,453
Other assets 18,495 20,936
---------- --------
$ 1,185,399 $ 865,506
---------- --------
LIABILITIES AND EQUITY
Liabilities
Mortgage loans $ 592,386 $ 500,435
Lines of credit 135,000 105,000
Construction loans 63,193 5,536
Accounts payable and accrued expenses 22,830 13,732
Security deposits 2,408 2,453
---------- --------
Total liabilities 815,817 627,156
---------- --------
Commitments and contingencies
Other Limited Partners' Interest
13,268,740 and 14,161,102 common units issued and outstanding
at December 31, 1998 and 1997, respectively, at redemption value 426,258 502,719
---------- --------
Partner's Equity
General Partner's General and Limited Partnership Interest
Preferred units - Series A Cumulative Convertible
Redeemable Preferred Units, 2,640,325 and 1,661,743 units
issued and outstanding at December 31, 1998 and 1997,
respectively 71,500 45,000
Prererred units - Series B Cumulative Convertible
Redeemable Preferred Units, 714,628 and 1,216,666 units
issued and outstanding at December 31, 1998 and 1997,
respectively 20,367 34,675
Preferred units - Series C Cumulative Redeemable Preferred
Units, 500 units issued and outstanding 50,000 -
Common units - 18,212,600 and 14,942,429 units issued and
outstanding at December 31, 1998 and 1997, respectively (198,543) (344,044)
---------- --------
Total partner's equity (56,676) (264,369)
---------- --------
$ 1,185,399 $ 865,506
========== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND FORMATION OF COMPANY
Charles E. Smith Residential Realty L.P. (The "Operating Partnership")
was organized in Delaware in 1993. The Operating Partnership had no operations
prior to the completion of the business combination (discussed below) which
occurred on June 30, 1994. Charles E. Smith Residential Realty, Inc. (the
"Company"), formed in June 1993, is a self-administered and self-managed equity
real estate investment trust ("REIT"). On June 30, 1994, the Company raised
equity through an initial public offering and a private placement (the
"Offerings"), and issued debt in a series of concurrent private financing
transactions. The proceeds from the Offerings were used to acquire the 1.0% sole
general partnership and a 41.7% limited partnership interest in the Operating
Partnership.
Simultaneous with the Offerings, the entities that owned the properties
and the related service businesses included in the CES Group contributed the
properties (the "Predecessor Properties") and the management, development,
leasing, interior construction, engineering, and financing services business
segments of the Predecessor to the Operating Partnership (or corporations in
which the Operating Partnership owns substantially all of the equity) and
received in exchange, directly or indirectly, units of limited partnership in
the Operating Partnership. (The contributing entities and their owners, which
include Robert H. Smith and Robert P. Kogod and their families, and other former
owners of indirect interests in contributed properties, are referred to
collectively as the "Other Limited Partners"). The contributed assets and
liabilities were recorded at historical net book value which transferred a net
carry-over deficit of $244.2 million to the Operating Partnership.
The Operating Partnership and its subsidiaries are engaged in the
ownership, operation, management, leasing, acquisition, and development of real
estate properties, primarily residential multifamily properties. As of December
31, 1998, the Operating Partnership owned 48 operating multifamily properties
containing 19,279 apartment units (the "Properties"), had approximately 2,100
units under construction at four owned sites and had agreements to purchase
approximately 1,200 units at four additional sites. In addition, the Operating
Partnership owned two free-standing community retail shopping centers
aggregating 436,000 square feet. The properties are located in the following
metropolitan areas:
<TABLE>
<CAPTION>
Washington, D.C.
Area Chicago Boston Ft. Lauderdale Total
- ----------------------- --------------- ------- ------ -------------- -----
<S> <C> <C> <C> <C> <C>
Multi-Family
- ------------
Operating 44 2 2 - 48
Under Construction 6 1 - 1 8
</TABLE>
F-7
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Retail Centers 2 - - - 2
- -------------- -- -- -- -- --
52 3 2 1 58
== == == == ==
</TABLE>
Additionally, the Operating Partnership owned substantially all of the
equity in entities which provide multifamily and retail property management and
leasing, furnished corporate apartments, interior construction and renovation,
building engineering and technical services, and financial advisory services
(collectively, the "Property Service Businesses").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements include all of the
accounts of the Operating Partnership and its subsidiaries and affiliates. The
Operating Partnership uses the equity method of accounting for its 99% non-
voting interest in the Property Service Businesses.
All significant intercompany balances and transactions have been
eliminated.
Rental Property
The Operating Partnership recorded the contributed Predecessor Properties
at the Predecessor's historical cost. Rental property subsequently acquired or
developed is recorded at the Operating Partnership's actual cost, including
interest and real estate taxes incurred during development. Ordinary repairs
and maintenance, such as minor replacements and painting, are expensed as
incurred. Major improvements, such as new HVAC equipment and kitchen/bath
renovations, are capitalized when they extend the useful life, increase capacity
or improve the efficiency of the asset. Depreciation on buildings and
improvements is computed using the straight-line method over estimated useful
asset lives as follows:
<TABLE>
<S> <C>
Base building 40 years
Land improvements 20 years
Building improvements 7 to 20 years
Tenant improvements Shorter of remaining lease term or useful life
Furniture, fixtures and equipment 5 to 10 years
</TABLE>
Deferred Charges
Deferred charges consist primarily of permanent loan fees, which are
amortized to interest expense over the terms of the notes using the effective
interest rate method, and retail lease acquisition costs, which are amortized
over the terms of the related leases.
F-8
<PAGE>
Revenue Recognition
Rental income attributable to residential leases is recognized when due
from tenants. The Operating Partnership requires residential tenants to
initially execute a one-year lease. At the expiration of the lease term, if not
renewed, the lease converts to a month-to-month basis.
Minimum rental income attributable to retail leases is recognized on a
straight-line basis over the term of the lease regardless of when payments are
due. Minimum rental income recognized in excess of payments due was $5.4 million
and $5.0 million at December 31, 1998 and 1997, respectively, and is included in
other assets. The lease agreements contain provisions that provide for
additional rentals based on the tenants' sales volume and reimbursement from the
tenants for their share of real estate taxes and certain common area maintenance
costs. Additional rentals are recognized on the accrual basis.
The future minimum lease payments to be received by the Operating
Partnership under noncancelable retail leases as of December 31, 1998, are as
follows (in thousands):
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C>
1999 $ 7,162
2000 6,980
2001 6,822
2002 7,102
2003 6,808
Thereafter 87,684
--------
$122,558
========
</TABLE>
Income Taxes
These financial statements contain no provision for Federal income taxes
since the entity is a partnership and, therefore, all Federal income tax
liabilities and/or tax benefits are passed through to the individual partners in
accordance with the partnership agreement and the Internal Revenue Code.
The Operating Partnership's income tax basis in its assets and liabilities
was $966 million and $879 million, respectively, at December 31, 1998 and $702
million and $635 million, respectively, at December 31, 1997.
Cash and Cash Equivalents
F-9
<PAGE>
Cash and cash equivalents include all cash and cash equivalent investments
with original maturities of three months or less.
Use of Estimates in the Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions related to the net realizable value of rental property, the
collectibility of accounts and notes receivable, and the outcome of asserted and
unasserted claims that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Impairment of Long-Lived Assets
Management assesses for impairment any property whenever events or
circumstances indicate that the carrying amount may not be recoverable. An
impairment loss is recognized when the sum of the estimated undiscounted future
cash flows before interest charges is less than its carrying value. The loss is
measured as the difference between the carrying value and the fair value of the
property.
Stock-based compensation
The Company accounts for stock-based compensation programs under Accounting
Principles Board Opinion No. 25 whereby compensation expense is equal to the
excess, if any, of the quoted market price of the stock at the grant date over
the exercise price.
New Accounting Pronouncements
During 1998, the Company implemented Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income", which had no
impact, and SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information", which is reflected in Note 14.
During 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" which is
effective for years beginning after June 15, 1999. The standard is not expected
to have a significant impact on the Operating Partnership's financial statements
since the Operating Partnership has no derivative instruments.
Reclassifications
Certain reclassifications of the prior years' information have been made
to conform to the current year's presentation.
3. RENTAL PROPERTY
F-10
<PAGE>
Rental Property
Rental property consists of the following as of December 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Land $ 157,337 $ 129,213
Buildings and improvements 997,868 832,203
Property under construction 167,441 53,093
--------- ---------
1,322,646 1,014,509
Less: Accumulated depreciation (228,683) (210,186)
--------- ---------
$1,093,963 $ 804,323
========== ==========
</TABLE>
Depreciation expense of the Operating Partnership was $28.6 million, $20.3
million and $17.7 million for the years ended December 31, 1998, 1997 and 1996,
respectively. Repairs and maintenance expense of the Operating Partnership was
$13.6 million, $13.2 million and $11.8 million for the years ended December 31,
1998, 1997 and 1996, respectively.
Acquisitions
During 1998, the Operating Partnership acquired five properties for $190.5
million, adding 1,942 apartment units. The Operating Partnership issued a total
of approximately 0.3 million Operating Partnership units valued at $11.8 million
and assumed a $31.5 million mortgage loan which was adjusted to its fair value
of $33.5 million. The balance was funded from available cash and draws on the
line of credit. The conversion of these Operating Partnership units into
Company common stock is restricted for up to two years. One of the properties
acquired included 13% of the underlying land with the balance subject to ground
leases expiring in 2067.
During 1997, the Operating Partnership acquired six properties for $288.6
million, adding 3,036 apartment units. The Operating Partnership issued a total
of approximately 2.1 million Operating Partnership units valued at $61.1 million
and assumed $93.5 million in mortgage loans. The balance was funded from
available cash and draws on the line of credit. The conversion of these
Operating Partnership units into Company common stock is restricted for up to
one year.
During 1996, the Operating Partnership acquired four properties for $64.1
million, adding 1,049 apartment units. The Operating Partnership issued a total
of approximately 0.1 million Operating Partnership units valued at approximately
$2.4 million and assumed a $3.3 million mortgage loan. The balance was funded
from available cash and draws on the line of credit.
Dispositions
During 1998, the Operating Partnership sold two properties in southeast
Washington, D.C. for a total of $22.0 million. The sales were completed as tax-
deferred I.R.C. Section 1031 exchanges. Under generally accepted accounting
principles, the Operating Partnership recognized gains on the sales totaling
$18.2 million.
F-11
<PAGE>
Development
At December 31, 1998, the Operating Partnership had approximately 2,100
apartment units under construction at four sites. Total estimated cost
(including land) is approximately $269 million.
4. INVESTMENT IN AND ADVANCES TO PROPERTY SERVICE BUSINESSES
The Operating Partnership uses the equity method of accounting for its 99%
non-voting interest in the Property Service Businesses, which include Smith
Realty Company ("SRC"), Consolidated Engineering Services, Inc. ("CES") and
Smith Management Construction, Inc. ("SMC"). These companies provide services
which include property management, leasing, engineering and technical, financing
and property construction and renovation. Under the equity method, the Operating
Partnership's investment is adjusted for its proportionate share of earnings or
losses of the Property Service Businesses and by dividends received. The
Operating Partnership recognized its 99% interest in the earnings of each of the
Property Service Businesses which aggregated $8.4 million, $7.6 million and $7.8
million for the years ended December 31, 1998, 1997 and 1996, respectively. The
Operating Partnership received distributions aggregating $10.5 million, $8.9
million and $8.9 million for the years ended December 31, 1998, 1997 and 1996,
respectively.
The Property Service Businesses provide services to the Operating
Partnership under one-year agreements which are automatically renewable. Such
services are generally provided at cost (including a proportionate share of
total overhead) except property management and leasing services which are
provided at cost plus five percent. The Property Service Businesses also provide
services to certain partnerships which own multifamily and commercial office
properties and have Messrs. Smith and Kogod as the general partners
("Affiliates"). Such services are generally provided at cost (including
overhead) plus a fee, except for certain engineering and technical services
which are provided at cost and overhead.
In November 1997, certain commercial office Affiliates combined into a
single partnership, Charles E. Smith Commercial Realty L.P. ("CESCR"). In
conjunction with the combination, CES and SMC each entered into eight-year
agreements with CESCR to continue providing services under the same terms and
conditions in place prior to the business combination. In addition, certain
Financing Services personnel of SRC transferred to CESCR. SRC entered into an
agreement which expired December 31, 1998 to provide Financing Services for
certain properties owned by CESCR. Services were provided by SRC in 1998
utilizing CESCR personnel on a negotiated cost basis. SRC separately negotiated
revenue and cost sharing agreements for Financing Services provided to
properties managed but not owned by CESCR.
In addition to the above, SRC provided administrative services such as
accounting, systems and human resources services to the Operating Partnership
and Affiliates at cost and overhead in accordance with cost and executive
sharing agreements. In management's opinion, the allocation
F-12
<PAGE>
methods provide reasonable estimates of the costs that would have been incurred
had the services been provided by the Operating Partnership.
Total fees and administrative services charged by the Property Service
Businesses to the Operating Partnership and Affiliates follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------
1998 1997 1996
-------- -------- ---------
<S> <C> <C> <C>
Fees Charged by Property Services Businesses to:
- ------------------------------------------------
Operating Partnership $12,789 $ 8,762 $ 7,969
Affiliates 32,512 29,841 31,321
Costs of Administrative Services Charged by SRC to:
- ---------------------------------------------------
Operating Partnership 11,845 9,629 7,459
Affiliates 4,806 5,632 5,630
</TABLE>
The Operating Partnership had net working capital advances to the Property
Service Businesses of $25.9 million and $10.6 million at December 31, 1998 and
1997, respectively, which are reflected in the investment balance.
Combined summarized balance sheet information for the Property Service
Businesses follows (in thousands):
<TABLE>
As of December 31,
-----------------------
1998 1997
--------- ---------
<S> <C> <C>
Assets/(1)/
Accounts receivable $42,356 $27,827
Property, net 6,910 5,475
Other, net 7,123 3,091
------- -------
$56,389 $36,393
======= =======
Liabilities/(1)/
Accounts payable $19,468 $17,422
Deferred revenue 5,050 5,120
Due to related parties 29,800 11,529
Other 3,403 1,552
Equity (1,332) 770
------- -------
$56,389 $36,393
======= =======
</TABLE>
/(1)/ Balance sheets exclude $44.5 million of notes due to the Operating
Partnership which, under the equity method, are eliminated for purposes of
carry-over basis accounting.
F-13
<PAGE>
Combined summarized income statement information for the Property Service
Businesses follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues $108,199 $ 72,277 $ 62,559
Operating expenses (98,072) (62,976) (53,245)
Depreciation/amortization (1,401) (1,238) (1,056)
Other expense, net (274) (447) (391)
-------- -------- --------
Net income/(1)/ $ 8,452 $ 7,616 $ 7,867
======== ======== ========
</TABLE>
/(1)/ Represents 100% of the Property Service Businesses' net income, of which
the Operating Partnership's share was $8.4 million, $7.6 million and $7.8
million, respectively, for the years ended December 31, 1998, 1997 and 1996.
5. DEFERRED CHARGES
Deferred charges consist of the following as of December 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- ---------
<S> <C> <C>
Permanent loan fees $16,619 $20,513
Retail lease acquisition costs 4,395 4,170
Acquisition/development costs and other 2,258 1,742
------- -------
23,272 26,425
Less: Accumulated amortization (5,191) (10,378)
------- -------
$18,081 $16,047
======= =======
</TABLE>
Amortization of permanent loan fees (which is charged to interest expense)
was $1.6 million, $2.3 million and $2.7 million for the years ended December 31,
1998, 1997 and 1996, respectively. Other amortization expense was $0.3 million,
$0.4 million and $0.2 million for the years ended December 31, 1998, 1997 and
1996, respectively.
F-14
<PAGE>
6. MORTGAGE LOANS AND NOTES PAYABLE
The Operating Partnership, through its subsidiary financing partnerships,
has mortgage loans and notes payable as follows as of December 31:
<TABLE>
<CAPTION>
Balance as of December 31,
--------------------------
Interest
1998 1997 Rate Maturity
------ ------ --------- --------
(in thousands)
<S> <C> <C> <C> <C>
Mortgage Pools
- --------------
Pool One -- $110,140 -- --
Pool Two -- 125,214 -- --
Pool Three $117,000 117,000 7.99% June 30, 2009
FNMA 140,000 -- 6.75% October 30, 2013
Prudential 53,000 -- 6.88% June 5, 2008
Individual Mortgages
- --------------------
1841 Columbia Road 3,173 3,211 9.00% August 1, 1999
Kenmore -- 1,165 -- --
Crystal Towers 44,198 44,610 7.16% January 1, 2006
2000 Commonwealth 17,100 13,310 6.30% December 3, 2006
Connecticut Heights 20,000 8,053 7.10% March 18, 2008
Cronin's Landing 33,208 -- 6.90% March 1, 2009
Patriot Village 31,095 31,095 8.24% August 1, 2009
Crystal Plaza 33,615 33,971 6.86% November 1, 2009
Crystal House I & II 38,250 -- 6.29% December 30, 2010
Skyline Towers 49,300 -- 6.45% December 10, 2010
Bennington 12,447 12,666 7.50% October 1, 2020
Secured Construction Loans
- --------------------------
One Superior Place 31,620 -- 6.93% July 1, 2001
Secured Lines of Credit
- -----------------------
$83 million
Northwestern Mutual 30,000 30,000 7.27% July 1, 2004
Unsecured Lines of Credit
- -------------------------
$185 million
PNC revolver 53,000 -- 6.31% March 1, 2001
$100 million
PNC revolver 52,000 75,000 6.12% March 1, 2001
Unsecured Construction Loans
- -----------------------------
Courthouse Place 31,573 5,536 6.85% October 9, 2000
------ ------
$790,579 $610,971
======== =========
</TABLE>
These loans require monthly interest and, where applicable, principal
payments and are collateralized by first lien mortgages or deeds of trust on 33
of the 54 Properties, bear interest at a weighted-average interest rate of 6.97%
as of December 31, 1998 and have a weighted-average maturity of 9.3 years.
Mortgage Pools
F-15
<PAGE>
The $110.1 million principal balance of Mortgage Pool One was partially
repaid on February 28, 1998, in conjunction with the sale of Oxford Manor, and
fully repaid on March 31, 1998. An extraordinary loss of $4.1 million was
recognized which consisted of a $2.9 million yield maintenance premium and a
$1.2 million non-cash write-off of unamortized loan fees.
The $125.2 million principal balance of Mortgage Pool Two was repaid on
October 31, 1998. An extraordinary loss of $11.7 million was recognized
consisting of a $9.7 million prepayment penalty and a $2.0 million non-cash
write-off of unamortized loan fees.
The loan for Mortgage Pool Three is interest only, at a fixed rate of 7.99%
paid monthly, through June 30, 1999, at which time principal amortization begins
using a 25-year amortization schedule with a balloon payment due June 30, 2009.
The loan requires a capital and repair escrow. Certain Predecessor partners
guaranteed $42 million of the mortgage loan secured by Mortgage Pool Three.
During 1998, the Operating Partnership obtained a $53 million, ten year
secured loan from Prudential at a fixed coupon rate of 6.88%. The loan is
secured by two of the multifamily properties with an aggregate book value of
$71.7 million. In conjunction with this loan, the Operating Partnership
terminated a $20 million (notional value) treasury lock contract at a gain of
$0.4 million which will be amortized over the term of the new loan.
The Operating Partnership announced a standby credit facility in 1998 of
up to $300 million with Fannie Mae which provides for non-recourse, long-term
debt for up to fifteen years. The initial draw on this facility was $140
million at 6.75% for fifteen years. The bulk of the proceeds were used to
retire Mortgage Pool Two of $125.2 million and the associated prepayment penalty
of $9.7 million. Terms and rates of subsequent draws on this facility will be
determined at the time of use. Closing of the facility is expected during the
second quarter of 1999.
Individual Mortgages
Individual mortgages have fixed interest rates ranging from 6.3% to 9.0%.
During 1998, in connection with the Cronin's Landing acquisition, the
Operating Partnership assumed a $31.5 million mortgage loan which was adjusted
to its fair value of $33.5 million. The loan has an effective fixed interest
rate of 6.9% with principal amortized using a 25-year amortization schedule and
a final payment due March 2009.
During 1998, the Operating Partnership also obtained a $38.3 million
mortgage on the Crystal House properties at a fixed interest rate of 6.29% and a
$49.3 million mortgage on the Skyline Towers property at a fixed interest rate
of 6.45%. The Crystal House loan is interest only through December 2008, at
which time principal amortization begins using a 30-year amortization schedule
with a balloon payment due December 30, 2010. The Skyline loan is interest only
through December 2008, at which time principal amortization begins using a
30-year amortization schedule
F-16
<PAGE>
with a balloon payment due December 30, 2010. The Skyline loan is interest
only through December 2008, at which time principal amortization begins using a
30-year amortization schedule with a balloon payment due December 10, 2010. The
Operating Partnership also refinanced mortgages on 2000 Commonwealth and
Connecticut Heights in 1998.
In September, 1998, the Operating Partnership terminated a $50 million
(notional value) treasury lock contract at a loss of $4.9 million. The treasury
lock was put in place in the first quarter of 1998 to hedge interest rate risk
associated with an anticipated 10-year, unsecured financing which ultimately did
not occur. Therefore, this amount has been charged to current year earnings.
In September 1996, the outstanding loan balance of $40.6 million for
Mortgage Pool Four was refinanced for a new loan amount of $41 million. The
ground lessor (see Note 8) has been allocated $9.9 million of the refinanced
loan for which the Operating Partnership is contingently liable. The remaining
$31.1 million of debt is allocated to the Operating Partnership. The loan bears
interest at a fixed rate of 8.24%, paid monthly through August, 2004, at which
time principal amortization begins, using a 30-year amortization schedule with a
final payment due August 1, 2009.
Lines of Credit
The Operating Partnership terminated its $100 million line of credit in
1998 and entered into two new unsecured lines of credit -- a $100 million line
and a $185 million line -- with PNC Bank, NationsBank, and U.S. Bank, as agents,
which mature in March 2001. Draws upon the new lines are subject to certain
unencumbered asset requirements and bear interest at a selected London Interbank
Offer Rate (LIBOR) plus 75 to 120 basis points based on the leverage ratio of
the Operating Partnership. As of December 31, 1998, the weighted average
interest rate on outstanding draws was 6.22%. If the Operating Partnership
receives an investment grade rating on its unsecured debt, the interest rate
will decrease to 60 to 90 basis points over LIBOR based on the rating. The
Operating Partnership pays a fee of 0.20% on the full amount available under the
line of credit. The line of credit agreements contain certain restrictive
covenants, including maintenance of minimum equity value, debt to equity ratios
and debt service coverage requirements. The maximum amounts outstanding during
1998 and 1997 were $251.5 million and $97.0 million, respectively.
The Operating Partnership also has an $83 million acquisition credit
facility which allows for debt maturities up through July 2004. The line of
credit provides for an interest rate that is fixed at the time of each borrowing
at 150 basis points over 10-year Treasury Bills and is cross-collateralized with
Mortgage Pool Three. Borrowings outstanding of $30 million at December 31, 1998
bear interest at a weighted-average fixed rate of 7.27% and are collateralized
by two Properties with an aggregate book value of $30.5 million. The agreement
contains certain restrictive covenants including a limit on debt to asset value
and maintenance of debt service coverage ratios.
Construction Loans
F-17
<PAGE>
In October 1997, the Operating Partnership obtained a variable rate,
unsecured construction loan of $46.3 million to finance the construction of an
acquired development property. The loan is recourse to the Operating
Partnership, bears interest at LIBOR plus 130 basis point (6.85% at December 31,
1998), and matures in October 2000 with three six-month extension options based
on certain conditions. The loan balance at December 31, 1998 was $31.6 million.
During 1998, the Operating Partnership obtained a $90 million interest-only
construction loan in connection with the development of One Superior Place in
Chicago, Illinois, with interest currently at LIBOR plus 135 basis points (6.93%
at December 31, 1998), payable monthly, due July 1, 2001. At the Operating
Partnership's option, maturity may be extended for two one-year periods based on
certain conditions. The loan is collateralized by the property, which has a net
book value of $54.8 million, and is recourse to the Operating Partnership The
loan balance at December 31, 1998 was $31.6 million.
The scheduled principal payments for all mortgage loans and notes payable
are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C>
1999 $ 5,960
2000 35,000
2001 140,317
2002 3,984
2003 4,294
Thereafter 601,024
--------
$790,579
========
</TABLE>
7. PARTNERS' EQUITY
During the first quarter of 1997, the Company completed an equity offering
and issued 3.1 million shares of common stock at $28.375 per share totaling
$82.9 million, net of underwriting discount and other expenses totaling $5.2
million. The net proceeds of the offering was contributed to the Operating
Partnership in exchange for 3.1 million common units and were used to repay
$72.1 million of notes payable and $9 million of mortgage debt and to fund
property acquisitions.
In May 1997, the Company entered into an agreement with Security Capital
Preferred Growth Inc. ("Security Capital") to sell 2.6 million shares of Series
A Cumulative Convertible Redeemable Preferred Stock ("Series A Preferred
Shares"), $0.01 par value (liquidation preference of $27.08 per share), at
$27.08 per share for a total of $71.5 million. During 1997, the Company sold 1.6
million Series A Preferred Shares for proceeds of $44.5 million, net of $0.5
million in offering costs. In April 1998, the Company sold the remaining 1.0
million shares of Series A Preferred Shares for $26.1 million, which is net of
offering costs of $0.4 million. The net proceeds of the Sale was contributed to
the Operating Partnership in exchange for 2.6 million Series A Preferred Units.
Series A Preferred Unitholders have certain voting, distribution and
liquidation preferences over the common unitholders. Distributions are
cumulative from the date of original issue and are payable quarterly at the
greater of the rate declared on the common units or the annual rate of $2.02 per
unit. The Series A Preferred Units are not redeemable prior to May 15, 2003. On
or after May
F-18
<PAGE>
15, 2003, the Operating Partnership, at its option, may redeem the Series A
Preferred Units for cash at a redemption price of $27.08 per unit, plus accrued
and unpaid distributions. Under certain circumstances, the Operating Partnership
may elect to make such redemption with common units at the then market price of
the Company's common stock. On or after January 31, 1999, Security Capital may
convert the Series A Preferred Shares into shares of common stock on a one-for-
one basis subject to certain limitations. Prior to January 31, 1999, the Series
A Preferred Shares will not be convertible unless the Company undergoes a change
in control, as defined by the agreement, or fails to qualify as a REIT for tax
purposes.
In October 1997, the Company sold 1.45 million shares of common stock and
1.22 million shares of Series B Cumulative Convertible Redeemable Preferred
Stock ("Series B Preferred Shares"), $0.01 par value, to the Prudential
Insurance Company of America ("Prudential") for approximately $76 million in
connection with a property acquisition. The net proceeds were contributed to the
Operating Partnership in exchange for 1.45 million common units and 1.22 million
Series B Preferred Units. During 1998, 0.5 million shares of Series B Preferred
Shares were converted to common shares on a one-for-one basis. The Operating
Partnership converted 0.5 million units of Series B Preferred Units to common
shares on a one-for-one basis.
Series B Preferred Unitholders have certain voting, distribution and
liquidation preferences over the common unitholders. The Series B Preferred
Units have a liquidation preference of $28.50 per unit. Distributions are
cumulative and are payable quarterly at the greater of the rate declared on the
common units or the annual rate of $2.02 per unit. Prudential may convert the
Series B Preferred Shares into shares of common stock on a one-for-one basis,
subject to certain adjustments and limitations related to its ownership of
common stock of the Company. The Operating Partnership may redeem Series B
Preferred Units at any time for common units, plus accrued and unpaid
distributions.
In January 1998, the Company sold 500 shares of Series C Cumulative
Redeemable Preferred Stock ("Series C Preferred Shares"), $0.01 par value, for
$48.6 million, net of offering costs of $1.4 million. The net proceeds were
contributid to the Operating Partnership in exchange for 500 units of Series C
Preferred Units. The Operating Partnership amended the Articles of Incorporation
to designate and establish the rights and privileges of the Series C Preferred
Unitholders which include certain voting, distribution and liquidation
preferences over the common unitholders. The Series C Preferred Units have a
liquidation preference of $100,000 per unit and an initial annual distribution
rate of $7,910 per unit. If the securities receive an investment grade rating,
the distribution rate will decrease by $250 per unit. Distributions are
cumulative and are payable quarterly. The Operating Partnership may redeem
Series C Preferred Units after February 1, 2028, at the liquidation price plus
accrued distributions.
In July 1998, the Company completed the sale of 1.4 million shares of
common stock (par value of $0.01 per share) under its existing shelf
registration statement at a net purchase price of $32.625 per share. The net
proceeds were contributed to the Operating Partnership in exchange for 1.4
million common units and proceeds of approximately $45.4 million have been used
to retire outstanding debt and for working capital needs.
In December 1998, the Company adopted a Shareholder Rights Plan (the
"Rights Plan") in which certain stock purchase rights were granted as a
distribution to holders of common stock. The Rights allow the holder to
purchase preferred stock only if a person or group becomes the owner of
F-19
<PAGE>
15% or more of the common stock or announces an offer to acquire 15% or more of
the common stock. The Rights expire on December 13, 2008.
During 1998, the Operating Partnership issued approximately 0.3 million
Operating Partnership units valued at $11.8 million in connection with property
acquisitions.
As of December 31, 1998, approximately 17.3 million shares of the Company's
authorized common stock had been reserved for redemption of Operating
Partnership units and 1.0 million shares were reserved under the Company's
Dividend and Distribution Investment and Share Purchase Plan, respectively.
8. COMMITMENTS AND CONTINGENCIES
Purchase Commitments
As of December 31, 1998, the Operating Partnership had executed four
contracts to purchase to-be-constructed multifamily properties totaling
approximately 1,200 apartment units. The maximum aggregate purchase price
totals $151 million with projected closing dates between July 2000 and May 2001.
These contracts are contingent upon satisfactory completion of construction
and attainment of final certificates of occupancy by the owners. At December
31, 1998, the Operating Partnership had posted three letters-of-credit totaling
$ 7.7 million in accordance with three of the contracts to be drawn upon only if
the Operating Partnership defaults on its contractual obligations to purchase
the completed assets.
Land Leases
Eight of the Properties have ground leases expiring at various dates
between December 2032 and April 2067. (See Note 17 for related subsequent
event.) Generally, each ground lease provides for a nominal annual rental and
an additional rental calculated from the results of Property operations after
capital expenditures.
The base rental expense to the Operating Partnership under the ground
leases was $1.7 million for 1998 and $0.5 million for each of the years ended
December 31, 1997 and 1996. The
F-20
<PAGE>
additional rental expense to the Operating Partnership under the ground leases
was $4.1 million, $3.2 million and $2.6 million for the years ended December 31,
1998, 1997 and 1996, respectively. At the expiration of the ground leases, the
land and all of the improvements thereon will revert to the land owner. In most
cases, the leases are subordinated to the mortgage debt on the related rental
property.
The future nominal base annual rentals as of December 31, 1998 for the
ground leases are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C>
1999 $ 1,630
2000 1,630
2001 1,630
2002 1,630
2003 1,630
Thereafter 93,718
--------
$101,868
========
</TABLE>
Net Profits Interest
An unaffiliated third party has a 5.1% interest in the net profits of one of
the Properties acquired in 1997. Net profit is calculated based on the results
of Property operations less capital expenditures. (See Note 16 for related
subsequent event).
Litigation
The Operating Partnership and/or the Property Service Businesses are
presently subject to legal actions or claims for damages that arise in the
ordinary course of business. In the opinion of management and counsel to the
Operating Partnership, the ultimate outcome of such litigation will not have a
material adverse effect on the Operating Partnership's financial position,
results of operations or cash flows.
401 (k) Retirement Plan
Substantially all of the personnel employed at the Properties are eligible
and participate in the Charles E. Smith 401 (k) Retirement Plan, a defined
contribution, tax-qualified savings plan (the "Plan"). These personnel are
employed by Smith Employment Services, L.P. ("Employment Services"), a limited
partnership owned by the Operating Partnership, which is the primary employer in
the Plan. Previously, such employees were participants in the Charles E. Smith
Building Employees Retirement Plan which was merged into the Plan effective July
1, 1998. Employment Services generally contributes 4% of employee-qualified
earnings. The total contributions were $0.2 million in 1998, $ 0.4 million in
1997, and $ 0.3 million in 1996. Employees of the Property Service Businesses
are also covered by the Plan.
F-21
<PAGE>
9. RELATED-PARTY TRANSACTIONS
The Operating Partnership conducts business with entities in which Messrs.
Smith and Kogod exercise control. In each case, the Company's Board of
Directors reviews the transaction and obtains, as required, independent
assurance as to the arms-length nature of the terms. The following is a
description of these transactions.
. For the years ended December 31, 1998, 1997 and 1996, the Operating
Partnership paid approximately $2.3 million, $0.7 million and $0.7 million,
respectively, in payroll reimbursements to an entity controlled by Messrs.
Smith and Kogod for efforts on development properties and potential
development sites. The increase in 1998 reflects the higher level of activity
associated with expanding the Operating Partnership's development pipeline
during the year.
.In January, 1998, the Operating Partnership purchased a multifamily property
(Tunlaw Park) for $6.7 million from a partnership in which Messrs. Smith and
Kogod had ownership interests.
.In connection with the development of Springfield Station, a contract was
executed with an entity controlled by Messrs. Smith and Kogod to manage the
construction of the apartments at a fee of 4% of hard construction costs.
Construction management fees were $0.7 million and $0.4 million for the years
ended December 31, 1998 and 1997, respectively.
.In November 1998, the Operating Partnership purchased land for future
development for $5.4 million from a partnership in which Messrs. Smith and
Kogod had ownership interests.
.Prior to December 1997, the two retail properties leased health club
facilities to entities controlled by Messrs. Smith and Kogod. Rental income
earned under these leases approximated $5.0 million for each of the years
ended December 31, 1997 and 1996. In December 1997, the health clubs were
sold. In conjunction with that sale, the Operating Partnership agreed to
restructure the leases by reducing base rent on the Worldgate lease and
extending the terms of both leases for ten years, through 2025, in exchange
for a $2.3 million cash payment which is amortized over the lives of the
revised leases.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 requires disclosure
about fair value for all financial instruments. Based on the borrowing rates
currently available to the Operating Partnership for mortgages with similar
terms and remaining maturities, the fair value of mortgages payable was
approximately $619 million and $527 million at December 31, 1998 and 1997,
respectively. The fair values of lines of credit and construction loans
approximate the carrying values.
F-22
<PAGE>
11. EARNINGS PER UNIT
For the years ended December 31, 1998, 1997 and 1996, basic earnings per
common unit is computed based on 30.2 million, 26.7 million and 21.9 million
weighted average units outstanding during the year, respectively, and diluted
earnings per common unit is computed based on 30.3 million, 26.8 million, and
21.9 million weighted average units outstanding during the year adjusted for the
assumed conversion of dilutive securities, respectively. In 1998, the per-share
impact of the extraordinary item was $0.54 per common unit (basic and diluted).
A reconciliation of income (before extraordinary item) and units used to
calculate basic and diluted earnings per common unit for 1998 and 1997 follows
(dilutive securities had no effect on earnings in 1996):
<TABLE>
<CAPTION>
Weighted Per-Unit
Income Avg. Units Amount
-------------- -------------- -------
Year Ended December 31, 1998 (In Thousands) (In Thousands)
- ----------------------------
<S> <C> <C> <C>
Income before extraordinary item $ 86,254
Income Attributable to Preferred Units (10,722)
--------
Earnings per unit - Basic
Income attributable to common
unitholders before extraordinary item $ 75,532 30,184 $ 2.50
Effect of Dilutive Securities
Options - 165 (.01)
-------- ------ --------
Earnings per unit - Diluted $ 75,532 30,349 $ 2.49
======== ====== ========
Year Ended December 31, 1997
- ----------------------------
Income before extraordinary item $ 52,297
Income attributable to Preferred Units (1,881)
--------
Earnings per Unit - Basic
Income attributable to common
unitholders before extraordinary item $ 50,416 26,670 $ 1.89
Effect of Dilutive Securities
Options 161 (.01)
-------- ------ --------
Earnings per share - Diluted $ 50,416 26,831 $ 1.88
======== ====== ========
</TABLE>
Options to purchase 771,750 shares of the Company's common stock were not
included in the computation of diluted earnings per unit because the options'
exercise price was higher than the average price of the Company's common shares.
All convertible preferred units were also excluded from the calculation of
diluted earnings per unit since the preferred distributions paid per unit
exceeded basic earnings per unit.
12. INCENTIVE PLANS
F-23
<PAGE>
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" and related interpretations in accounting for its
plans. Accordingly, no compensation expense has been recognized for its stock-
based compensation plans other than for restricted stock and performance-based
awards. Had compensation cost for the Company's other stock option plans been
determined based on the fair value at the grant date consistent with the
methodology prescribed under SFAS 123, the Operating Partnership's net income
would have been reduced by approximately $499,000 for the year ended December
31, 1998 ($0.02 per basic and diluted common unit), $65,000 (less than $0.01
per basic and diluted common unit) for the year ended December 31, 1997 and
$8,000 for the year ended December 31, 1996. The fair value of options granted
during 1998, 1997 and 1996 is estimated at approximately $305,000, $2,111,000
and $23,000, respectively, based on the date of grant using the Black-Scholes
option-pricing model. The following assumptions were used:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Dividend yield 6.2% 6.8% 8.3%
Volatility 13% 14% 9%
Risk-free interest rate 5.1% 5.7% 6.3%
Expected life 4 years 3 years 7 years
</TABLE>
Option Plans
The Company with the Operating Partnership maintains an employee stock and
unit option plan designed for executive officers and other key employees of the
Company, the Operating Partnership and the Property Service Businesses. The
Company also maintains a Director's stock option plan which provides for
automatic grants of vested options, exercisable for 5,000 shares of common
stock, to newly appointed non-employee directors. The plans authorize the
issuance of up to 3,150,000 shares of common stock and/or units pursuant to
options granted. Options outstanding under both plans are as follows:
F-24
<PAGE>
<TABLE>
<CAPTION>
Weighted Average Options
Number Exercise Price Exercisable/(1)/
------ ---------------- -----------
<S> <C> <C> <C>
Shares/units under option, December 31, 1995 895,000 $ 24 199,000
Options granted 40,000 24
Options canceled (100,000) 24
---------
Shares/units under option, December 31, 1996 835,000 24 351,000
Options granted 918,000 34
Options canceled (12,000) 24
Options exercised (25,000) 24
---------
Shares/units under option, December 31, 1997 1,716,000 29 677,000
Options granted 189,000 31
Options canceled (164,000) 32
Options exercised (125,000) 24
---------
Shares/units under option, December 31, 1998 1,616,000 $30/(2)/ 707,000
=========
</TABLE>
/(1)/Weighted average exercise price is $27
/(2)/ Range of exercise prices is $24-$35
The exercise price of options granted under the plans may not be less than
the fair market value of the common stock on the date of grant. Payment for
shares and/or units granted under the plans may be made either in cash, or, if
permitted by the option agreement, by exchanging shares of common stock of the
Company having a fair market value equal to the option exercise price. The
weighted average remaining contractual life of options outstanding as of
December 31, 1998 was 7.7 years.
Options granted under the employee plan have a maximum term of ten years
and vest generally in three to five equal annual installments beginning on the
first anniversary of the date of grant. Generally, options terminate three
months after the optionee's termination of employment with the Company. The
Executive Compensation Committee of the Board of Directors may provide, however,
that an option may be exercised over a longer period following termination of
employment, but in no event beyond the expiration date of the option.
Restricted Stock and Unit Plan
The Company, with the Operating Partnership, maintains a restricted stock
and unit plan for executive officers and other key employees of the Company, the
Operating Partnership and the Property Service Businesses. Messrs. Smith and
Kogod are not eligible to participate under the plan. A maximum of 300,000
shares of common stock and/or units may be issued under the plan. Restricted
shares and/or units that have not vested at the time of an employee's
termination of employment with the Company will be forfeited, except where such
termination occurs by reason of death or disability. Any restricted shares
and/or units forfeited pursuant to the vesting provisions of the plan will again
be available for award under the plan. During 1998, 21,823 grants were awarded
and 28,801 units vested. During 1997, 24,000 grants were awarded and 20,700
units vested. During 1996, 7,500 grants were canceled and 23,750 units vested.
During 1995, 23,750 units vested. During 1994, 95,000 grants were awarded. For
the years ended December 31, 1998, 1997
F-25
<PAGE>
and 1996, compensation expense relating to the plan was $0.5 million, $0.6
million and $0.5 million, respectively, based on the market value of the
Company's stock at the date of grant.
13. SUPPLEMENTAL CASH FLOW DATA
Information on non-cash investing and financing activities and cash
interest paid is as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
<S> <C> <C> <C>
1998 1997 1996
------- ------- -------
Cash paid during the period
for interest $52,242 $44,420 $41,078
Capitalized interest 6,520 1,306 60
Purchase of properties
for Operating Partnership units 11,820 75,019 2,403
Assumption of debt on acquisitions 33,456 93,474 3,260
Sale proceeds held in 1031 escrow 22,011 - -
Purchase of property with 1031 escrow
proceeds 4,308 - -
</TABLE>
14. OTHER LIMITED PARTNERS' INTEREST
Limited partnership units of the Other Limited Partners may be redeemed at
the unitholders' discretion. At the option of the Company, such redemption may
be made for cash, at the then fair value of the Company's stock, or for shares
of common stock of the Company on a one-for-one basis. As of December 31, 1998,
approximately 17.3 million shares of the Company's authorized common stock had
been reserved for possible issuance upon redemption of limited partnership
units.
In accordance with generally accepted accounting principles, the Other
Limited Partners' redemption rights are not included in partner's equity.
Consequently, the accompanying consolidated balance sheets and statements of
partner's equity reflect the Other Limited Partners' Interest in the Operating
Partnership, measured at redemption value. Such interest is deducted from
partner's equity.
15. SEGMENT REPORTING
The Operating Partnership adopted SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information", during 1998. SFAS No. 131 established
standards for reporting information about operating segments in annual financial
statements and requires selected information about operating segments in interim
financial reports issued to unitholders. It also established standards for
related disclosures about products and services, and geographic areas. Operating
segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by senior
management in deciding how to allocate resources and in assessing performance.
Property Segments
The Operating Partnership's primary business is the ownership and operation
of multifamily residential real estate. As such, the residential rental
properties constitute the three primary operating segments -- Core, Acquisition
and Development portfolios -- depending upon the maturity of each property.
Core consists of all multifamily properties which have been owned more than one
full calendar year. Therefore, the 1998 Core represents properties owned as of
December 31, 1996. Acquisition consists of purchased properties which have not
yet reflected one full calendar year of operations. Development consists of
properties which the Operating Partnership has constructed or
F-26
<PAGE>
is in the process of constructing which have not yet had a full calendar year of
stabilized operating results. On the first of January each year, Acquisition and
Development properties that meet the one year requirements are transferred to
the Core portfolio.
The Operating Partnership's fourth property segment is the Retail portfolio
which consists of the two free-standing retail properties.
The Operating Partnership evaluates performance for the Property Segments
based on Net Operating Income ("NOI") which is the difference between Rental
Revenue and Operating Expenses (which primarily excludes interest expense,
general and administrative costs and depreciation.)
Property Service Business Segments
The Operating Partnership also evaluates the separate financial information
of its equity investment in the Property Service Businesses. Therefore, the
Operating Partnership has three additional segments based on service type --
Multifamily and Retail Management, Engineering and Technical Services and
Interior Construction and Renovation. The Operating Partnership evaluates
performance for the Property Service Business segments based on Funds from
Operations ("FFO"). Funds from Operations is defined under the revised
definition adopted by the National Association of Real Estate Investment Trusts
("NAREIT") as net income (loss) (computed in accordance with generally accepted
accounting principles) excluding gains (or losses) from debt restructuring and
sale of property, plus depreciation/amortization of assets unique to the real
estate industry. Depreciation/amortization of assets not unique to the industry,
such as amortization of deferred financing costs and non-real estate assets, is
not added back.
The accounting policies for all seven segments are the same as those
described in the summary of significant accounting policies.
Information concerning operations by segment for each of the three years
ended December 31, was as follows (in thousands):
F-27
<PAGE>
<TABLE>
<CAPTION>
Property Segments
1998 1997 1996
---------- ---------- ----------
Net Operating Income
- --------------------
<S> <C> <C> <C>
Core Portfolio $ 99,395 $ 92,521 $ 84,136
Acquisition Portfolio 42,438 17,381 2,331
Development Portfolio (42) (97) --
Retail Portfolio 6,785 6,472 6,267
---------- ---------- ---------
Sub-total 148,576 116,277 92,734
Adjustments -- -- --
---------- ---------- ---------
Consolidated total 148,576 116,277 92,734
Depreciation and amortization (28,958) (20,666) (17,931)
Equity in income of Property Service Businesses 8,433 7,597 7,846
Corporate general and administrative expenses (8,947) (6,563) (5,255)
Net interest expense (46,077) (44,348) (42,577)
---------- ---------- ---------
Income before gain on sale, loss on unused
treasury lock, and extraordinary item $ 73,027 $ 52,297 $ 34,817
========== ========== =========
Revenues
- --------
Core Portfolio $ 166,465 $ 158,785 $ 147,522
Acquisition Portfolio 72,499 31,277 6,639
Development Portfolio 1,258 -- --
Retail Portfolio 9,989 10,042 9,798
---------- ---------- ---------
Sub-total 250,211 200,104 163,959
Adjustments -- -- --
---------- ---------- ---------
Consolidated total $ 250,211 $ 200,104 $ 163,959
========== ========== =========
Real Estate Assets, gross
- -------------------------
Core Portfolio $ 610,066 $ 597,611 $ 586,807
Acquisition Portfolio 485,108 303,904 13,548
Development Portfolio 167,441 53,093 --
Retail Portfolio 60,031 59,901 59,645
---------- ---------- ---------
Sub-total 1,322,646 1,014,509 660,000
Accumulated Depreciation (228,683) (210,186) (189,907)
---------- ---------- ---------
Consolidated total, net $1,093,963 $ 804,323 $ 470,093
========== ========== =========
</TABLE>
F-28
<PAGE>
Property Service Business Segments
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Funds from Operations
- ---------------------
Multifamily and Retail Management $ 1,464 $ 22 $ 1,590
Interior Construction and Renovation 1,763 1,027 948
Engineering and Technical Services 3,611 3,420 3,355
Other 1,845 3,128 1,953
-------- ------- -------
Total $ 8,683 $ 7,597 $ 7,846
======== ======= =======
Revenues
- --------
Multifamily and Retail Management $ 28,412 $10,546 $11,465
Interior Construction and Renovation 8,267 6,614 5,650
Engineering and Technical Services 67,988 50,597 42,179
Other 2,623 3,798 2,640
-------- ------- -------
Total $107,290 $71,555 $61,934
======== ======= =======
Depreciation
- ------------
Multifamily and Retail Management $ 757 $ 768 $ 706
Interior Construction and Renovation 63 40 32
Engineering and Technical Services 566 418 308
-------- ------- -------
Total $ 1,386 $ 1,226 $ 1,046
======== ======= =======
</TABLE>
16. EXTRAORDINARY ITEM
The Operating Partnership recognized an extraordinary loss of $16.4 million
in connection with debt extinguishments in 1998. Losses of $4.1 million and
$11.7 million were recognized in connection with the repayment of Mortgage Pool
One and Mortgage Pool Two, respectively. The losses consisted of $2.9 million
and $9.7 million in yield maintenance premiums and $1.2 million and $2.0 million
in non-cash write-offs of unamortized loan fees. In addition, a loss of $0.6
million was recognized on the write-off of unamortized loan fees associated with
the termination of the $100 million line of credit and the refinancing of $9.2
million of mortgage loans.
17. SUBSEQUENT EVENTS (Unaudited)
In January 1999, the Operating Partnership acquired a 442-unit multifamily
property in Crystal City, Virginia ("Buchanan House") for a capitalized cost of
$65.5 million which includes assumed debt of $7.4 million, initial capital
improvement costs of $5.0 million, $0.4 million in acquisition related costs and
$17.7 million in proceeds from the sale of Marbury. The balance was funded by
the Operating Partnership's bank line of credit. In February 1999, the
Operating Partnership repaid the assumed debt through a draw on its line of
credit. The Operating Partnership paid a prepayment penalty of $0.9 million
which was recognized as an extraordinary loss.
F-29
<PAGE>
In January 1999, the Operating Partnership acquired a 139-unit multifamily
property in Chicago, Illinois ("Parkwest") for a capitalized cost of
approximately $14.1 million, consisting of 201,950 Operating Partnership Units
valued at $6.3 million, assumed debt of $6.0 million, a fair value adjustment to
debt of $0.4 million, initial capital improvement costs of $0.8 million, and
$0.6 million in other related costs.
In January 1999, the Operating Partnership acquired a 427-unit multifamily
property in Chicago, Illinois ("Terrace") for a capitalized cost of
approximately $26.1 million, consisting of 320,304 Operating Partnership Units
valued at $10.0 million, assumed debt of $13.7 million, a fair value adjustment
to debt of $0.7 million, initial capital improvement costs of $0.4 million, and
$1.3 million in other related costs.
In February 1999, the Operating Partnership sold The Manor, a 435-unit
multifamily property located in suburban Maryland for $23.0 million. The
Operating Partnership recognized a gain on the sale of $1.9 million.
In February 1999, the unused portion, or $53 million, of the Operating
Partnership's $83 million line of credit with Northwestern Mutual expired.
In March 1999, the Operating Partnership acquired the land beneath the
Crystal Square property and the 5.1% net profits interest in the Crystal Plaza
property. The purchase price of $10 million consisted of 32,258 Operating
Partnership Units valued at $1 million and $9 million cash drawn upon the line
of credit. This transaction was reviewed and approved by the Operating
Partnership's Board of Directors as it was completed concurrently with the
purchase by CESCR of commercial land and partnership interests.
F-30
<PAGE>
17. QUARTERLY FINANCIAL INFORMATION (Unaudited)
Quarterly financial information for 1998 and 1997 is as follows (in thousands
except per share data):
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------
March 31, June 30, September 30, December 31,
---------- --------- -------------- -------------
1998 1998 1998 1998
---------- --------- -------------- -------------
<S> <C> <C> <C> <C>
Revenues $ 55,831 $ 62,063 $ 66,449 $ 67,125
Operating expenses
(including depreciation) (28,685) (32,212) (35,752) (33,944)
Equity in income of Property
Service Businesses 664 2,227 2,693 2,849
Interest expense (10,888) (11,601) (12,582) (12,263)
Corporate general and administrative
expenses (2,025) (2,203) (2,177) (2,542)
-------- -------- -------- --------
Income before gain on sale, loss on unused
treasury lock, and extraordinary item 14,897 18,274 18,631 21,225
Gain on sale of property 3,120 -- -- 15,030
Loss on unused treasury lock -- -- (4,923) --
-------- -------- -------- --------
Income before extraordinary item 18,017 18,274 13,708 36,255
Extraordinary item - loss on extinguishment
of debt (4,702) -- -- (11,682)
-------- -------- -------- --------
Net Income 13,315 18,274 13,708 24,573
Income attributable to preferred
units (1,490) (3,580) (2,868) (2,784)
-------- -------- -------- --------
Net income attributable to common
units $ 11,825 $ 14,694 $ 10,840 $ 21,789
======== ======== ======== ========
Earnings per common unit-basic $0.39 $ 0.46 $0.32 $0.68
======== ======== ======== ========
Earnings per common unit-diluted $0.39 $ 0.45 $0.32 $0.68
======== ======== ======== ========
</TABLE>
F-31
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------------------
March 31, June 30, September 30, December 31,
------------------- --------- -------------- ------------
1997 1997 1997 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 45,007 $ 49,784 $ 51,065 $ 55,311
Operating expenses
(including depreciation) (24,202) (25,708) (26,688) (27,895)
Equity in income of Property
Service Businesses 809 896 1,931 3,961
Interest expense (11,427) (11,256) (10,981) (11,747)
Corporate general and
administrative expenses (1,391) (1,648) (1,544) (1,980)
-------- -------- -------- --------
Income before extraordinary item 8,796 12,068 13,783 17,650
Extraordinary item -
Loss on extinguishment of debt - - - (87)
-------- -------- -------- --------
Net income 8,796 12,068 13,783 17,563
Income attributable to preferred units - - (384) (1,497)
-------- -------- -------- --------
Net income attributable to
common units $ 8,796 $ 12,068 $ 13,399 $ 16,066
======== ======== ======== ========
Earnings per common unit-basic $ 0.40 $ 0.50 $ 0.36 $ 0.70
======== ======== ======== ========
Earnings per common unit-diluted $ 0.40 $ 0.50 $ 0.36 $ 0.69
======== ======== ======== ========
</TABLE>
F-32
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY L.P.
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Capitalized Costs Before
Accumulated Depreciation at
Initial Cost Costs December 31, 1998
----------------------------- Capitalized -----------------------------
Building and Subsequent To Building and
Properties Land Improvements Acquisition Land Improvements Total
- ------------------------------------------------------ --------------------------------------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Operating Properties:
Albemarle $418 - $5,311 $418 $5,311 $5,729
Bedford Village 1,062 - 14,214 1,062 14,214 15,276
Bennington 6,922 22,641 458 6,922 23,099 30,021
Berkeley 108 - 2,074 108 2,074 2,182
Boulevard of Old Town 2,653 6,391 256 2,653 6,647 9,300
Calvert-Woodley 172 - 2,613 172 2,613 2,785
Car Barn 3,576 - 13,998 3,576 13,998 17,574
Charter Oaks 4,387 10,058 838 4,387 10,896 15,283
Cleveland House 325 - 4,578 325 4,578 4,903
Columbia Crossing 4,701 - 18,607 4,701 18,607 23,308
Columbian-Stratford 242 - 4,672 242 4,672 4,914
2000 Commonwealth 3,827 23,703 113 3,827 23,816 27,643
Concord Village - - 9,230 - 9,230 9,230
Connecticut Heights 6,956 18,700 1,167 6,956 19,867 26,823
Corcoran House 230 - 2,199 230 2,199 2,429
Courthouse Plaza - - 44,349 - 44,349 44,349
Cronin's Landing $9,114 $54,427 44 9,114 54,471 63,585
Crystal House I - - 11,579 - 11,579 11,579
Crystal House II - - 10,007 - 10,007 10,007
Crystal Place 1,245 - 18,794 1,245 18,794 20,039
Crystal Plaza 7,710 35,355 738 7,710 36,093 43,803
Crystal Square - - 15,229 - 15,229 15,229
Crystal Towers 12,607 57,189 1,808 12,607 58,997 71,604
1841 Columbia Road 3,611 2,000 376 3,611 2,376 5,987
Arl Overlook Central 262 - 14,757 262 14,757 15,019
Arl Overlook North 245 - 299 245 299 544
Arl Overlook South 303 - 773 303 773 1,076
Fort Chaplin 97 - 8,163 97 8,163 8,260
Gateway Place 1,660 - 17,755 1,660 17,755 19,415
Kenmore 4,456 11,837 363 4,456 12,200 16,656
Lincoln Towers 12,471 76,480 700 12,471 77,180 89,651
Manor 5,809 15,576 1,144 5,809 16,720 22,529
McClurg Court 10,637 63,487 810 10,637 64,297 74,934
Newport Village 281 - 16,850 281 16,850 17,131
Oakwood 3,819 12,567 592 3,819 13,159 16,978
One East Delaware 6,851 36,576 212 6,851 36,788 43,639
Orleans Village 700 - 14,654 700 14,654 15,354
Parc Vista 5,830 33,222 149 5,830 33,371 39,201
Patriot Village - - 29,667 - 29,667 29,667
Potomac View 2,520 6,449 714 2,520 7,163 9,683
Skyline Mall 482 - 14,617 482 14,617 15,099
Skyline Towers 360 - 27,342 360 27,342 27,702
Statesman 600 - 4,599 600 4,599 5,199
Suburban Tower 1,815 5,027 244 1,815 5,271 7,086
Tunlaw Gardens 1,530 5,609 192 1,530 5,801 7,331
Tunlaw Park 1,251 5,414 144 1,251 5,558 6,809
2501 Porter Street 1,126 - 18,400 1,126 18,400 19,526
Van Ness 12,699 29,997 498 12,699 30,495 43,194
Water Park Towers 2,500 - 42,064 2,500 42,064 44,564
Westerly 4,700 19,313 240 4,700 19,553 24,253
Windsor Towers 362 - 5,827 362 5,827 6,189
Worldgate Centre 4,105 - 40,829 4,105 40,829 44,934
Development Properties:
Courthouse Place 7,130 45,920 - 7,130 45,920 53,050
One Superior Place 8,471 46,293 - 8,471 46,293 54,764
Park Connecticut 3,160 3,561 - 3,160 3,561 6,721
Springfield Station 9,100 38,382 - 9,100 38,382 47,482
Undeveloped Land 5,424 - - 5,424 0 5,424
----------------------------------------------------------------------------------------
$190,622 $686,174 $445,850 $190,622 $1,132,024 $1,322,646
========================================================================================
<CAPTION>
Accumulated Net Date of Date Depreciable
Properties Depreciation Property Construction Acquired Lives
- ------------------------- ---------------- -----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Properties:
Albemarle ($3,677) $2,052 1966 - 5 - 40 years
Bedford Village (9,117) 6,159 1967 - 5 - 40 years
Bennington (1,882) 28,139 - 1995 5 - 40 years
Berkeley (1,644) 538 1961 - 5 - 40 years
Boulevard of Old Town (566) 8,734 - 1995 5 - 40 years
Calvert-Woodley (1,974) 811 1962 - 5 - 40 years
Car Barn (5,528) 12,046 1982/1986 - 5 - 40 years
Charter Oaks (818) 14,465 1970 1996 5 - 40 years
Cleveland House (3,240) 1,663 1962 - 5 - 40 years
Columbia Crossing (4,905) 18,403 1990/1991 - 5 - 40 years
Columbian-Stratford (3,508) 1,406 1959 - 5 - 40 years
2000 Commonwealth (720) 26,923 - 1997 5 - 40 years
Concord Village (6,117) 3,113 1967 - 5 - 40 years
Connecticut Heights (1,769) 25,054 - 1995 5 - 40 years
Corcoran House (1,695) 734 1961 - 5 - 40 years
Courthouse Plaza (12,415) 31,934 1988/1990 - 5 - 40 years
Cronin's Landing (611) 62,974 1997 1998 5 - 40 years
Crystal House I (6,694) 4,885 1969 - 5 - 40 years
Crystal House II (6,687) 3,320 1964 - 5 - 40 years
Crystal Place (6,945) 13,094 1986 - 5 - 40 years
Crystal Plaza (1,692) 42,111 - 1997 5 - 40 years
Crystal Square (8,714) 6,515 1975 - 5 - 40 years
Crystal Towers (2,748) 68,856 - 1997 5 - 40 years
1841 Columbia Road (126) 5,861 1923 1996 5 - 40 years
Arl Overlook Central (10,617) 4,402 1960 - 5 - 40 years
Arl Overlook North (532) 12 1960 - 5 - 40 years
Arl Overlook South (621) 455 1960 - 5 - 40 years
Fort Chaplin (6,397) 1,863 1963 - 5 - 40 years
Gateway Place (5,627) 13,788 1987 - 5 - 40 years
Kenmore (542) 16,114 - 1997 5 - 40 years
Lincoln Towers (2,321) 87,330 - 1997 5 - 40 years
Manor (1,848) 20,681 - 1994 5 - 40 years
McClurg Court (1,136) 73,798 1972 1998 5 - 40 years
Newport Village (10,019) 7,112 1971 - 5 - 40 years
Oakwood (1,010) 15,968 - 1995 5 - 40 years
One East Delaware (1,103) 42,536 - 1997 5 - 40 years
Orleans Village (9,953) 5,401 1965/1966 - 5 - 40 years
Parc Vista (592) 38,609 1990 1998 5 - 40 years
Patriot Village (16,060) 13,607 1973/1975/1977 - 5 - 40 years
Potomac View (828) 8,855 - 1994 5 - 40 years
Skyline Mall (8,275) 6,824 1977 - 5 - 40 years
Skyline Towers (16,705) 10,997 1972 - 5 - 40 years
Statesman (3,659) 1,540 1961 - 5 - 40 years
Suburban Tower (517) 6,569 - 1995 5 - 40 years
Tunlaw Gardens (112) 7,219 1941 1998 5 - 40 years
Tunlaw Park (111) 6,698 1953 1998 5 - 40 years
2501 Porter Street (5,475) 14,051 1987/1988 - 5 - 40 years
Van Ness (1,842) 41,352 1970 1996 5 - 40 years
Water Park Towers (11,448) 33,116 1989 - 5 - 40 years
Westerly (1,615) 22,638 1995 - 5 - 40 years
Windsor Towers (4,350) 1,839 1965 - 5 - 40 years
Worldgate Centre (11,349) 33,585 1990 - 5 - 40 years
Development Properties:
Courthouse Place ($12) 53,038 Under construction - N/A
One Superior Place - 54,764 Under construction - N/A
Park Connecticut - 6,721 Under construction - N/A
Springfield Station ($215) 47,267 Under construction - N/A
Undeveloped Land - 5,424 Future development - N/A
------------------------------------
($228,683) $1,093,963
====================================
</TABLE>
S-1
<PAGE>
The aggregate cost for Federal income tax purposes of the Operating
Partnership's investment in real estate was approximately $1,054 million and
$896 million at December 31, 1998 and 1997, respectively. The changes in total
real estate and accumulated depreciation for the three years ended December 31
are as follows (in thousands):
<TABLE>
<CAPTION>
Total Real Estate Assets
-------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
BALANCE, beginning of year $1,014,509 $ 660,000 $587,114
Acquisitions 190,933 288,605 65,836
Development 114,347 53,093 --
Improvements 16,852 12,811 7,425
Retirements and write-offs (13,995) -- (375)
---------- ---------- --------
BALANCE, end of year $1,322,646 $1,014,509 $660,000
========== ========== ========
Accumulated Depreciation
-----------------------------------
1998 1997 1996
---- ---- ----
BALANCE, beginning of year $ 210,186 $ 189,907 $172,624
Depreciation expense 28,616 20,279 17,658
Retirements and write-offs (10,119) - (375)
---------- ---------- --------
BALANCE, end of year $ 228,683 $ 210,186 $189,907
========== ========== ========
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Item Document Page
---- -------- ----
<S> <C> <C>
2.1 Third Party Management and Leasing, Hotel Asset Management -
and Corporate Services Business Transfer Agreement by and
between Charles E. Smith Residential Realty, Inc. and Smith
Property Management, Inc. (Incorporated by reference to Exhibit
No. 2.1 of the Operating Partnership's Form 10-K for the year
ended December 31, 1994)
2.2 REIT Properties Management and Leasing Business Transfer -
Agreement by and between Charles E. Smith Management, Inc.
and Charles E. Smith Residential Realty L.P. (Incorporated by
reference to Exhibit No. 2.2 of the Operating Partnership's Form
10-K for the year ended December 31, 1994)
2.3 Assignment by Robert H. Smith, Clarice R. Smith, Robert P. -
Kogod and Arlene R. Kogod to Charles E. Smith Management,
Inc. of 99% of all Partnership Interests of Residential Associates
Limited Partnership (Incorporated by reference to Exhibit No. 2.3
of the Operating Partnership's Form 10-K for the year ended
December 31, 1994)
2.4 Assignment and Assumption Agreement by Residential Associates -
Limited Partnership and Charles E. Smith Residential Realty L.P.
(Incorporated by reference to Exhibit No. 2.4 of the Operating
Partnership's Form 10-K for the year ended December 31, 1994)
2.5 Debt Assumption Agreement and Accord and Satisfaction of -
Debt by Charles E. Smith Management, Inc. and Charles E. Smith
Residential Realty L.P. (Incorporated by reference to Exhibit No.
2.5 of the Operating Partnership's Form 10-K for the year ended
December 31, 1994)
2.6 Debt Contribution Agreement between Charles E. Smith -
Management, Inc. and Charles E. Smith Residential Realty L.P.
(the "Operating Partnership") (Incorporated by reference to
Exhibit No. 2.6 of the Operating Partnership's Form 10-K for the
year ended December 31, 1994)
3.1 Amended and Restated Articles of Incorporation of Charles E. -
Smith Residential Realty, Inc. (the "Company") (Incorporated by
reference to Exhibit No. 3.1 of the Company's Registration
Statement on Form S-11, No. 33-75288)
</TABLE>
<PAGE>
<TABLE>
Item Document Page
---- -------- ----
<S> <C> <C>
3.2 Articles of Amendment to Articles of Amendment and E-1
Restatement of Articles of Incorporation of Charles E. Smith
Residential Realty, Inc.
3.3 Amended and Restated Bylaws of the Company (Incorporated by
reference to Exhibit 3.2 in the Company's Registration -
Statement on Form S-3 (File No. 33-93986)
3.4 Articles Supplementary to Amended and Restated Articles of
Incorporation of the Company (Incorporated by reference to
Exhibit No. 3.1 of Operating Partnership's Quarterly Report on -
Form 10-Q for the Quarter Ended June 30, 1997)
3.5 Articles Supplementary of the Company for Classifying and
Designating Series B Cumulative Convertible Redeemable
Preferred Stock (Incorporated by reference to Exhibit No. 4.1 of
the Operating Partnership's Report on Form 8-K dated October -
3, 1997 and filed November 10, 1997)
3.6 Certificate of Correction relating to Articles Supplementary for
Series B Cumulative Convertible Redeemable Preferred Stock
(Incorporated by reference to Exhibit No. 4.2 of the Operating
Partnership's Report on Form 8-K dated October 3, 1997 and -
filed November 10, 1997)
3.7 Articles Supplementary for Series C Cumulative Redeemable
Preferred Stock (Incorporated by reference to Exhibit No. 3.5 in
the Company's Registration Statement on Form S-3, File No. 333-17053)
3.8 Articles Supplementary of the Company for Classifying and E-2
Designating a Series of Preferred Stock as Series D Junior
Participating Preferred Stock and Fixing Distribution and Other
Preferences and Rights of Such Series
4.1 First Amended and Restated Agreement of Limited Partnership of -
the Operating Partnership, as amended (Incorporated by reference
to Exhibit No. 4.1 of the Operating Partnership's Form 10-K for
the year ended December 31, 1994)
</TABLE>
<PAGE>
<TABLE>
Item Document Page
---- -------- ----
<S> <C> <C>
4.2 Certificate of Limited Partnership of the Operating Partnership -
(Incorporated by reference to Exhibit No. 4.2 of the Operating
Partnership's Form 10-K for the year ended December 31, 1994)
4.3 Ninth Amendment to Amended and Restated Agreement of -
Limited Partnership of the Operating Partnership (Incorporated
by reference to Exhibit No. 4.1 of the Operating Partnership's
Quarterly Report on Form 10-Q for the Quarter Ended June 30,
1997)
4.4 -
Tenth Amendment to Amended and Restated Agreement of
Limited Partnership of the Operating Partnership (Incorporated
by reference to Exhibit No. 4.4 of the Operating Partnership's
Form 10-K for the year ended December 31, 1997)
4.5 -
Fifteenth Amendment to First Amended and Restated Agreement
of Limited Partnership of the Operating Partnership (Incorporated
by reference to Exhibit 99.1 of the Operating Partnership's
Quarterly Report on Form 10-Q for the Quarter Ended March 31,
4.6 1998) E-3
Seventeenth Amendment to First Amended and Restated
Agreement of Limited Partnership of the Operating Partnership
10.1 Noncompetition Agreement by and among the Company, the -
Operating Partnership and Robert P. Kogod and Robert H. Smith
(Incorporated by reference to Exhibit No. 10.1 of the Operating
Partnership's Form 10-K for the year ended December 31, 1994)
10.2 Registration Rights and Lock-up Agreement (Incorporated by -
reference to Exhibit No. 10.2 of the Operating Partnership's
Form 10-K for the year ended December 31, 1994)
10.3 Pledge Agreement (Incorporated by reference to Exhibit No. 10.3 -
of the Operating Partnership's Form 10-K for the year ended
December 31, 1994)
10.4 First Amended and Restated 1994 Employee Stock and Unit -
Option Plan (Incorporated by reference to Exhibit No. 10.4 of the
Operating Partnership's Form 10-K for the year ended December
31, 1994)
10.5 First Amended and Restated 1994 Employee Restricted Stock and -
Restricted Unit Plan (Incorporated by reference to Exhibit No.
10.5 of the Operating Partnership's Form 10-K for the year ended
December 31, 1994)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Item Document Page
---- -------- ----
<S> <C> <C>
10.6 Non-Employee Directors Stock Option Plan (Incorporated by -
reference to Exhibit No. 10.6 of the Operating Partnership's Form
10-K for the year ended December 31, 1994)
10.7 Subscription Agreement (Incorporated by reference to Exhibit -
No. 10.7 of the Operating Partnership's Form 10-K for the year
ended December 31, 1994)
10.8 Voting Stock Partnership Agreement for Smith Property -
Management Partnership (Incorporated by reference to Exhibit
No. 10.8 of the Operating Partnership's Form 10-K for the year
ended December 31, 1994)
10.9 Voting Stock Partnership Agreement for Smith Management -
Construction Partnership (Incorporated by reference to Exhibit
No. 10.9 of the Operating Partnership's Form 10-K for the year
ended December 31, 1994)
10.10 Voting Stock Partnership Agreement for Consolidated -
Engineering Services Partnership (Incorporated by reference to
Exhibit No. 10.10 of the Operating Partnership's Form 10-K for
the year ended December 31, 1994)
10.11 Amended and Restated Articles of Incorporation of Smith Realty -
Company (Incorporated by reference to Exhibit No. 10.11 of the
Operating Partnership's Form 10-K for the year ended December
31, 1994)
10.12 By-Laws of Smith Property Management, Inc. (Incorporated by -
reference to Exhibit No. 10.12 of the Company's Registration
Statement on Form S-11, No. 33-75288)
10.13 Articles of Incorporation of Smith Management Construction, -
Inc. (Incorporated by reference to Exhibit No. 10.13 of the
Company's Registration Statement on Form S-11, No. 33-75288)
10.14 By-Laws of Smith Management Construction, Inc. (Incorporated -
by reference to Exhibit No. 10.14 of the Company's Registration
Statement on Form S-11, No. 33-75288)
10.15 Articles of Incorporation of Consolidated Engineering Services, -
Inc. (Incorporated by reference to Exhibit No. 10.15 of the
Company's Registration Statement on Form S-11, No. 33-75288)
10.16 By-Laws of Consolidated Engineering Services, Inc. -
(Incorporated by reference to Exhibit No. 10.16 of the Company's
Registration Statement on Form S-11, No. 33-75288)
</TABLE>
<PAGE>
<TABLE>
Item Document Page
---- -------- ----
<S> <C> <C>
10.17 Certificate of Incorporation of Smith One, Inc. (Incorporated by -
reference to Exhibit No. 10.17 of the Company's Registration
Statement on Form S-11, No. 33-75288)
10.18 By-Laws of Smith One, Inc. (Incorporated by reference to Exhibit -
No. 10.18 of the Company's Registration Statement on Form S-11,
No. 33-75288)
10.19 Agreement of Limited Partnership of Smith Property Holdings -
One L.P. (Incorporated by reference to Exhibit No. 10.19 of the
Operating Partnership's Form 10-K for the year ended December
31, 1994)
10.20 Agreement of Limited Partnership of Smith Property Holdings -
One (D.C.) L.P. (Incorporated by reference to Exhibit No. 10.20
of the Operating Partnership's Form 10-K for the year ended
December 31, 1994)
10.21 Certificate of Incorporation of Smith Two, Inc. (Incorporated by -
reference to Exhibit No. 10.21 of the Company's Registration
Statement on Form S-11, No. 33-75288)
10.22 By-Laws of Smith Two, Inc. (Incorporated by reference to -
Exhibit No. 10.22 of the Company's Registration Statement on
Form S-11, No. 33-75288)
10.23 Agreement of Limited Partnership of Smith Property Holdings -
Two L.P.(Incorporated by reference to Exhibit No. 10.23 of the
Operating Partnership's Form 10-K for the year ended December
31, 1994)
10.24 Agreement of Limited Partnership of Smith Property Holdings -
Two (D.C.) L.P. (Incorporated by reference to Exhibit No. 10.24
of the Operating Partnership's Form 10-K for the year ended
December 31, 1994)
10.25 Certificate of Incorporation of Smith Three, Inc. (Incorporated by -
reference to Exhibit No. 10.25 of the Company's Registration Statement
on Form S-11, No. 33-75288)
10.26 By-Laws of Smith Three, Inc. (Incorporated by reference to -
Exhibit No. 10.26 of the Company's Registration Statement on Form S-11,
No. 33-75288)
10.27 Agreement of limited Partnership of Smith Property Holdings -
Three L.P. (Incorporated by reference to Exhibit No. 10.27 of the
Operating Partnership's Form 10-K for the year ended December
31, 1994)
</TABLE>
<PAGE>
<TABLE>
Item Document Page
---- -------- ----
<S> <C> <C>
10.28 Agreement of Limited Partnership of Smith Property Holdings -
Three (D.C.) L.P.(Incorporated by reference to Exhibit No. 10.28
of the Operating Partnership's Form 10-K for the year ended
December 31, 1994)
10.29 Certificate of Incorporation of Smith Four, Inc. (Incorporated by -
reference to Exhibit No. 10.29 of the Company's Registration
Statement on Form S-11, No. 33-75288)
10.30 By-Laws of Smith Four, Inc. (Incorporated by reference to -
Exhibit No. 10.30 of the Company's Registration Statement on
Form S-11, No. 33-75288)
10.31 Agreement of Limited Partnership of Smith Property Holding -
Four L.P. (Incorporated by reference to Exhibit No. 10.31 of the
Operating Partnership's Form 10-K for the year ended December
31, 1994)
10.32 Amended and Restated Certificate of Incorporation of Smith Five, -
Inc. (Incorporated by reference to Exhibit No. 10.32 of the
Operating Partnership's Form 10-K for the year ended December
31, 1994)
10.33 By-Laws of Smith Five, Inc. (Incorporated by reference to -
Exhibit No. 10.33 of the Company's Registration Statement
on Form S-11, No. 33-75288)
10.34 Agreement of Limited Partnership of Smith Property Holdings -
Five (D.C.) L.P. (Incorporated by reference to Exhibit No. 10.34
of the Operating Partnership's Form 10-K for the year ended
December 31, 1994)
10.35 License Agreement between Charles E. Smith Management, Inc. -
and the Company (Incorporated by reference to Exhibit No. 10.35
of the Operating Partnership's Form 10-K for the year ended
December 31, 1994)
10.36 License Agreement between Charles E. Smith Management, Inc. -
and the Operating Partnership (Incorporated by reference to
Exhibit No. 10.36 of the Operating Partnership's Form 10-K for
the year ended December 31, 1994)
10.37 Agreement of Limited Partnership of Smith Property Holdings -
Five L.P. (Incorporated by reference to Exhibit No. 10.0 of the
Operating Partnership's Quarterly Report on Form 10-Q for the
Quarter Ended September 30, 1994)
</TABLE>
<PAGE>
<TABLE>
Item Document Page
---- -------- ----
<S> <C> <C>
10.38 Certificate of Limited Partnership of Smith Property Holdings -
Five L.P. (Incorporated by reference to Exhibit No. 10.38 of the
Operating Partnership's Form 10-K for the year ended December
31, 1994)
-
10.39 Deed of Trust and Security Agreement between Smith Property -
Holdings Three L.P. ("Smith Three") and The Northwestern
Mutual Life Insurance Company ("Northwestern") (Incorporated
by reference to Exhibit No. 10.2 of the Operating Partnership's
Quarterly Report on Form 10-Q for the Quarter Ended June 30,
1994)
10.40 Guarantee of Recourse Obligations by Smith Three and the -
Operating Partnership (Incorporated by reference to Exhibit No.
10.3 of the Operating Partnership's Quarterly Report on Form 10-
Q for the Quarter Ended June 30, 1994)
10.41 Absolute Assignment of Leases and Rents between Smith Three -
and Northwestern (Incorporated by reference to Exhibit No. 10.4
of the Operating Partnership's Quarterly Report on Form 10-Q for
the Quarter Ended June 30, 1994)
10.42 Promissory Note of Smith Three to Northwestern (Incorporated -
by reference to Exhibit No. 10.5 of the Operating Partnership's
Quarterly Report on Form 10-Q for the Quarter Ended June 30,
1994)
10.43 Purchase Money Deed of Trust and Security Agreement between -
Smith Property Holdings Three (D.C.) L.P. ("Smith Three D.C.")
and Northwestern (Incorporated by reference to Exhibit No. 10.6
of the Operating Partnership's Quarterly Report on Form 10-Q for
the Quarter Ended June 30, 1994)
10.44 Guarantee of Recourse Obligations by Smith Three D.C. and the -
Operating Partnership (Incorporated by reference to Exhibit No.
10.7 of the Operating Partnership's Quarterly Report on Form 10-
Q for the Quarter Ended June 30, 1994)
10.45 Absolute Assignment of Leases and Rents between Smith Three -
D.C. and Northwestern (Incorporated by reference to Exhibit No.
10.8 of the Operating Partnership's Quarterly Report on Form 10-
Q for the Quarter Ended June 30, 1994)
10.46 Purchase Money Promissory Note of Smith Three D.C. to -
Northwestern (Incorporated by reference to Exhibit No. 10.9 of
the Operating Partnership's Quarterly Report on Form 10-Q for
the Quarter Ended June 30, 1994)
</TABLE>
<PAGE>
<TABLE>
Item Document Page
---- -------- ----
<S> <C> <C>
10.47 Supplemental Loan Agreement by and among Smith Property E-4
Holdings Two L.P. ("Smith Two"), Smith Property Holdings
Two (D.C.) L.P. ("Smith Two D.C.") and Green Park Financial
Limited Partnership ("Green Park")
10.48 Supplemental Loan Agreement by and among Smith Property -
Holdings One L.P. ("Smith One D.C."), Smith Property Holdings
One (D.C.) L.P. ("Smith One D.C.") and GMAC (Incorporated
by reference to Exhibit No. 10.13 of the Operating Partnership's
Quarterly Report on Form 10-Q for the Quarter Ended June 30,
1994)
10.49 Multifamily Note of Smith One to GMAC (Incorporated by -
reference to Exhibit No. 10.14 of the Operating Partnership's
Quarterly Report on Form 10-Q for the Quarter Ended June 30,
1994)
10.50 Multifamily Note of Smith One D.C. to GMAC (Incorporated by -
reference to Exhibit No. 10.15 of the Operating Partnership's
Quarterly Report on Form 10-Q for the Quarter Ended June 30,
1994)
10.51 Absolute Assignment of Leases and Rents by Smith One D.C. to -
GMAC (Incorporated by reference to Exhibit No. 10.16 of the
Operating Partnership's Quarterly Report on Form 10-Q for the
Quarter Ended June 30, 1994)
10.52 Property Management Agreement by and between Smith One and -
the Operating Partnership (Incorporated by reference to Exhibit
No. 10.17 of the Operating Partnership's Quarterly Report on
Form 10-Q for the Quarter Ended June 30, 1994)
10.53 Multifamily Deed of Trust, Assignment of Rents and Security -
Agreement between Smith One D.C. and GMAC (Incorporated
by reference to Exhibit No. 10.18 of the Operating Partnership's
Quarterly Report on Form 10-Q for the Quarter Ended June 30,
1994)
10.54 Commercial Leasing and Property Management Agreement -
between Smith Three and the Operating Partnership
(Incorporated by reference to Exhibit No. 10.19 of the Operating
Partnership's Quarterly Report on Form 10-Q for the Quarter
Ended June 30, 1994)
10.55 Agreement of Limited Partnership of Smith Employment Services -
L.P. (Incorporated by reference to Exhibit No. 10.58 of the
Operating Partnership's Form 10-K for the year ended December
31, 1994)
</TABLE>
<PAGE>
<TABLE>
Item Document Page
---- -------- ----
<S> <C> <C>
10.56 Certificate of Limited Partnership of Smith Employment Services -
L.P. (Incorporated by reference to Exhibit No. 10.59 of the
Operating Partnership's Form 10-K for the year ended December
31, 1994)
10.57 Second Restated and Amended Agreement of Limited Partnership -
of First Herndon Associated Limited Partnership (Incorporated by
reference to Exhibit No. 10.1 of the Operating Partnership's
Quarterly Report on Form 10-Q for the Quarter Ended June 30,
1995)
10.58 Second Amendment to the Certificate of Limited Partnership of -
First Herndon Associates Limited Partnership (Incorporated by
reference to Exhibit No. 10.2 of the Operating Partnership's
Quarterly Report on Form 10-Q for the Quarter Ended June 30,
1995)
10.59 Certificate of Incorporation of Smith Six, Inc. (Incorporated by -
reference to Exhibit No. 10.1 of the Operating Partnership's
Quarterly Report on Form 10-Q for the Quarter Ended March 31,
1995)
10.60 By-Laws of Smith Six, Inc. (Incorporated by reference to Exhibit -
No. 10.2 of the Operating Partnership's Quarterly Report on
Form 10-Q for the Quarter Ended March 31, 1995)
10.61 Agreement of Limited Partnership of Smith Property Holdings Six -
L.P. (Incorporated by reference to Exhibit No. 10.3 of the
Operating Partnership's Quarterly Report on Form 10-Q for the
Quarter Ended March 31, 1995)
10.62 Agreement of Limited Partnership of Smith Property Holdings Six -
(D.C.) L.P. (Incorporated by reference to Exhibit No. 10.4 of the
Operating Partnership's Quarterly Report on Form 10-Q for the
Quarter Ended March 31, 1995)
10.63 Certificate of Incorporation of Smith Seven, Inc. (Incorporated by -
reference to Exhibit No. 10.66 of the Operating Partnership's
Form 10-K for the year ended December 31, 1995)
10.64 By-Laws of Smith Seven, Inc. (Incorporated by reference to -
Exhibit No. 10.67 of the Operating Partnership's Form 10-K for
the year ended December 31, 1995)
10.65 Agreement of Limited Partnership of Smith Property Holdings -
Seven L.P. (Incorporated by reference to Exhibit No. 10.68 of the
Company's Form 10-K for the year ended December 31, 1995)
</TABLE>
<PAGE>
<TABLE>
Item Document Page
---- -------- ----
<S> <C> <C>
10.66 Commitment for Mortgage Loan to the Operating Partnership -
from Northwestern Mutual Life Insurance Company
(Incorporated by reference to Exhibit No. 10.69 of the Operating
Partnership's Form 10-K for the year ended December 31, 1995)
10.67 Third Amended and Restated Credit Agreement by and between -
the Operating Partnership and PNC Bank, National Association,
et. al. (Incorporated by reference to Exhibit No. 10.71 of the
Operating Partnership's Form 10-K for the year ended December 31, 1997)
10.68 First Amendment to Third Amended and Restated Credit
Agreement between the Operating Partnership and PNC Bank, -
National Association, et. al. (Incorporated by reference to Exhibit
99.1 of the Operating Partnership's Quarterly Report on Form 10-Q for the
Quarter Ended June 30, 1998)
-
10.69 Second Amendment to Third Amended and Restated Credit
Agreement between the Operating Partnership and PNC Bank,
National Association, et. al. (Incorporated by reference to Exhibit
99.2 of the Operating Partnership's Quarterly Report on Form 10-Q
for the Quarter Ended June 30, 1998) -
10.70 First Amendment to First Amended and Restated Agreement of
1994 Employee Stock and Unit Option Plan of Charles E. Smith
Residential Realty, Inc. (Incorporated by reference to Exhibit 4.9
in the Operating Partnership's Registration Statement on Form S-8,
File No. 333-67421) -
10.71 Second Amendment to First Amended and Restated Agreement E-5
of 1994 Employee Stock and Unit Option Plan of Charles E.
Smith Residential Realty, Inc.
10.72 Rights Agreement between Charles E. Smith Residential Realty, E-6
Inc. and First Union National Bank, as Rights Agent
21 Subsidiaries of the Registrant E-7
23.1 Consent of Arthur Andersen LLP E-8
27 Financial Data Schedule -
- --------------------------------------------------------------------------------------
</TABLE>
<PAGE>
ARTICLES OF AMENDMENT
TO
ARTICLES OF AMENDMENT AND RESTATEMENT
OF
ARTICLES OF INCORPORATION
OF
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
Charles E. Smith Residential Realty, Inc., a Maryland corporation (the
"Corporation"), hereby certifies to the State Department of Assessments and
Taxation of Maryland pursuant to Section 2-607(2) of the Annotated Code of
Maryland (the "Code") and Section 9(a)(6) of the Corporation's Articles of
Amendment and Restatement of Articles of Incorporation (the "Articles") that:
FIRST: Article VI, Section 6(a) of the Articles provides that the total
number of shares of capital stock of all classes which the Corporation has the
authority to issue is 145,000,000 shares each with a par value of $.01,
classified as (i) 95,000,000 shares of Common Stock, (ii) 45,000 shares of
Excess Common Stock, and (iii) 5,000,000 unclassified shares.
SECOND: To date, the Corporation has issued and sold approximately 17.5
million shares of Common Stock and an aggregate of 3,857,491 shares of Preferred
Stock in three separate series designated and classified as follows: (i)
2,640,325 Series A Cumulative Convertible Redeemable Preferred Shares, par value
$.01 per share; (ii) 1,216,666 Series B Cumulative Convertible Redeemable
Preferred Shares, par value $0.1 per share; and (iii) 500 Series C Cumulative
Convertible Preferred Shares, par value $.01 per share.
THIRD: Pursuant to Article VI, Section 6(a) of the Articles, the Board
of Directors of the Corporation is empowered to classify and reclassify any
unissued shares of capital stock.
FOURTH: On January 27, 1998, the Board of Directors deemed it to be in
the best interests of the Corporation and its shareholders to increase the
flexibility of the Corporation to support future offerings of preferred stock by
increasing the current number of shares of preferred stock of the Corporation.
FIFTH: Pursuant to authority granted by Article VI, Section 6(a) and as
previously supplemented, a majority of the entire Board of Directors on January
27, 1998 adopted a resolution reclassifying 15,000,000 authorized but unissued
shares of Common Stock of the Corporation as Preferred Stock, with the
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications or terms and conditions of
redemption, and other characteristics to be determined only at the time of
issuance and sale of such Preferred Stock by the adoption of appropriate
Articles Supplementary by the Board of Directors pursuant to Section 2-208 of
the Code, such Articles Supplementary to be in such form as the officers of the
Corporation may deem necessary or advisable.
E-1
<PAGE>
SIXTH: The first two sentences of Section 6(a) of the Articles are
hereby amended and restated in their entirety as follows:
"The total number of shares of capital stock of all three classes
which the Corporation has authority to issue is 145,000,000 shares (par
value $.01 per share), of which (i) 80,000,000 shares are classified as
common stock having a par value of $.01 per share (the "Common Stock"),
amounting to an aggregate par value of $800,000, (ii) 45,000,000 shares
are classified as excess stock having a par value of $.01 per share
(the "Excess Stock"), amounting to an aggregate par value of $450,000
and (iii) 18,857,491 shares are classified as preferred stock having a
par value of $.01 per share (the "Preferred Stock", amounting to an
aggregate par value of $188,575. The remaining 1,142,509 shares are not
classified."
SEVENTH: No stock entitled to be voted on relating to the reclassification of
Common Stock pursuant to these Articles of Amendment was outstanding or
subscribed for at the time of approval of such reclassification by the Board of
Directors of the Corporation.
[Page Break Intentionally Inserted]
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused these Articles of Amendment to
the Articles of Amendment and Restatement of Articles of Incorporation of the
Corporation to be duly executed by its President and attested by its Secretary
this 23th day of December, 1998.
CHARLES E. SMITH
RESIDENTIAL REALTY, INC.
By: /s/ Ernest. A. Gerardi, Jr.
--------------------------------
Name: Ernest A. Gerardi, Jr.
Title: President
I, Robert D. Zimet, Secretary, hereby acknowledge on behalf of Charles E.
Smith Residential Realty, Inc. that the foregoing Articles of Amendment to the
Articles of Amendment and Restatement of Articles of Incorporation of the
Corporation are the corporate act of said corporation under the penalties of
perjury.
Attest:
/s/ Robert D. Zimet
- -------------------
Robert D. Zimet
Secretary
<PAGE>
Series D Junior Participating Preferred Stock
ARTICLES SUPPLEMENTARY
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
========================================
Articles Supplementary of Charles E. Smith
Residential Realty, Inc.
Classifying and Designating a Series of
Preferred Stock as
Series D Junior Participating
Preferred Stock and
Fixing Distribution and Other Preferences
and Rights of Such Series
=========================================
Dated as of December 3, 1998
E-2
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
=========================================
Articles Supplementary of Charles E. Smith
Residential Realty, Inc.
Classifying and Designating a Series of
Preferred Stock as
Series D Junior Participating
Preferred Stock and
Fixing Distribution and Other Preferences
and Rights of Such Series
=========================================
Charles E. Smith Residential Realty, Inc., a Maryland corporation (the
"Corporation"), hereby certifies to the State Department of Assessments and
Taxation of Maryland pursuant to Section 2-208 of the Annotated Code of Maryland
that:
FIRST: Pursuant to authority granted by the Amended and Restated Articles
of Incorporation of the Corporation, the Board of Directors on December 2, 1998
adopted a resolution designating and classifying 72,980 unissued and
unclassified shares of capital stock as Series D Junior Participating Preferred
Stock.
SECOND: The following is a description of the Series D Junior Participating
Preferred Stock, including the preferences, conversion and other rights, voting
powers, restrictions, limitations as to dividends, qualifications, terms and
conditions of redemption thereof:
Section 1. Number of Shares and Designation. This class of preferred
--------------------------------
stock shall be designated as Series D Junior Participating Preferred Stock and
the number of shares which shall constitute such series shall not be more than
72,980 shares, par value $0.01 per share, which number may be increased or
decreased from time to time by resolution of the Board of Directors and by the
filing of articles supplementary in accordance with the Maryland General
Corporation Law; provided, that no decrease shall reduce the number of shares of
Series D Junior Participating Preferred Stock to a number less than the number
of shares then outstanding plus the number of shares reserved for issuance upon
the exercise of outstanding options, rights or warrants or upon the conversion
of any outstanding securities issued by the Corporation convertible into Series
D Junior Participating Preferred Stock.
Section 2. Definitions. For purposes of the Series D Junior Participating
-----------
Preferred Stock, the following terms shall have the meanings indicated:
"Adjustment Number" shall have the meaning set forth in
-----------------
Section 6(A).
"Average Market Value" shall have the meaning set forth in
--------------------
Section 8.
"Board of Directors" shall mean the Board of Directors of the
------------------
Corporation or any committee authorized by such Board of Directors to perform
any of its responsibilities with respect to the Series D Preferred Shares.
2
<PAGE>
"Business Day" shall mean any day other than a Saturday,
------------
Sunday or a day on which state or federally chartered banking institutions in
New York City, New York are not required to be open.
"Common Stock" shall mean the shares of common stock, par
------------
value $0.01 per share, of the Corporation.
"Common Adjustment" shall have the meaning set forth in
-----------------
Section 6(A).
"Parity Shares" shall have the meaning set forth in Section
-------------
5(A).
"Quarterly Dividend Payment Date" shall mean the 15th day
-------------------------------
(or if such day is not a Business Day, the next Business Day thereafter) of
February, May, August and November of each year; commencing February 15, 1999.
"Rights Declaration Date" shall mean December 2, 1998.
-----------------------
"Senior Preferred Stock" shall mean preferred stock of the
----------------------
Corporation ranking prior and superior to the shares of Series D Preferred Stock
with respect to dividends and distributions of the Corporation.
"Series D Junior Liquidation Preference" means an amount per
--------------------------------------
Series D Preferred Share equal to $108,000.
"Series D Preferred Shares" shall mean the shares of Series D
-------------------------
Junior Participating Preferred Stock.
Section 3. Dividends and Distributions.
---------------------------
(A) Subject to the prior and superior rights of the holders of any
Senior Preferred Stock (or any similar stock) of the Corporation, the holders of
shares of Series D Preferred Stock shall be entitled to receive, when, as and if
declared by the Board of Directors out of funds legally available for payment of
dividends, quarterly dividends payable in cash on the Quarterly Dividend Payment
Date, commencing on the first Quarterly Dividend Payment Date after first
issuance of a share or fraction of a share of Series D Preferred Stock, in an
amount per share (rounded to the nearest cent) equal to the greater of (a)
$10.00 or (b) subject to the provision for adjustment hereinafter set forth, one
thousand (1,000) times the aggregate per share amount of all cash dividends, and
one thousand (1,000) times the aggregate per share amount (payable in kind) of
all non-cash dividends or other distributions (other than a dividend payable in
shares of Common Stock of the Corporation, or a subdivision of the outstanding
shares of Common Stock (by reclassification or otherwise)) declared on the
Common Stock, since the immediately preceding Quarterly Dividend Payment Date,
or, with respect to the first Quarterly Dividend Payment Date, since the first
issuance of any share or fraction of a share of Series D Preferred Stock. In
the event the Corporation shall at any time after December 2, 1998 (the "Rights
Declaration Date") (i) declare or pay any dividend on Common Stock payable in
shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii)
combine the outstanding Common Stock into a smaller number of shares, then in
each such case the amount to which holders of shares of Series D Preferred Stock
were entitled immediately prior to such event under clause (b) of the preceding
sentence shall be adjusted by multiplying such
3
<PAGE>
amount by a fraction, the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding immediately prior to
such event.
(B) The Corporation shall declare a dividend or distribution on the Series
D Preferred Stock as provided in paragraph (A) above immediately after it
declares a dividend or distribution on any Common Stock (other than a dividend
payable in shares of Common Stock); provided that, in the event no dividend or
distribution shall have been declared on the Common Stock during the period
between any Quarterly Dividend Payment Date and the next subsequent Quarterly
Dividend Payment Date, a dividend of $10.00 per share on the Series D Preferred
Stock shall nevertheless be payable on such subsequent Quarterly Dividend
Payment Date.
(C) Dividends shall begin to accrue and be cumulative on outstanding shares
of Series D Preferred Stock from the Quarterly Dividend Payment Date next
preceding the date of issue of such shares of Series D Preferred Stock, unless
the date of issue of such shares is prior to the record date set for the first
Quarterly Dividend Payment Date, in which case dividends on such shares shall
begin to accrue from the date of issue of such shares, or unless the date of
issue is a Quarterly Dividend Payment Date or is a date after the record date
for the determination of holders of shares of Series D Preferred Stock entitled
to receive a quarterly dividend and before such Quarterly Dividend Payment Date,
in either of which events such dividends shall begin to accrue and be cumulative
from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall
not bear interest. Dividends paid on the shares of Series D Preferred Stock in
an amount less than the total amount of such dividends at the time accrued and
payable on such shares shall be allocated pro rata on a share-by-share basis
among all such shares at the time outstanding. The Board of Directors may fix a
record date for the determination of holders of shares of Series D Preferred
Stock entitled to receive payment of a dividend or distribution declared
thereon, which record date shall be no more than 60 days prior to the date fixed
for the payment thereof.
Section 4. Voting Rights. The holders of Series D Preferred Shares shall
-------------
have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set forth, each
share of Series D Preferred Stock shall entitle the holder thereof to one
thousand (1,000) votes on all matters submitted to a vote of the stockholders of
the Corporation. In the event the Corporation shall at any time after the
Rights Declaration Date (i) declare any dividend on Common Stock payable in
shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii)
combine the outstanding Common Stock into a smaller number of shares, then in
each such case the number of votes per share to which holders of shares of
Series D Preferred Stock were entitled immediately prior to such event shall be
adjusted by multiplying such number by a fraction, the numerator of which is the
number of shares of Common Stock outstanding immediately after such event and
the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(B) Except as otherwise provided by law, the holders of shares of Series D
Preferred Stock and the holders of shares of Common Stock and any other stock of
the Corporation having general voting rights shall vote together as one class on
all matters submitted to a vote of stockholders of the Corporation.
4
<PAGE>
(C) Except as set forth herein, holders of Series D Preferred Stock shall
have no special voting rights and their consent shall not be required (except to
the extent they are entitled to vote with holders of Common Stock as set forth
herein) for taking any corporate action.
Section 5. Certain Restrictions.
--------------------
(A) Whenever dividends or distributions payable on the Series D Preferred
Stock as provided in Section 3 are not paid, thereafter and until such dividends
and distributions, whether or not declared, on shares of Series D Preferred
Stock outstanding shall have been paid in full, the Corporation shall not:
(i) declare or pay dividends on, or make any other distributions on, or
redeem or purchase or otherwise acquire for consideration any shares of
stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series D Preferred Stock; or
(ii) declare or pay dividends on, or make any other distributions on,
any shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) (the "Parity Shares") with the
Series D Preferred Stock, except dividends paid ratably on the Series D
Preferred Stock and all such Parity Shares on which dividends are payable
in proportion to the total amounts to which the holders of all such shares
are then entitled; or
(iii) redeem or purchase or otherwise acquire for consideration shares
of any Parity Shares, provided that the Corporation may at any time redeem,
purchase or otherwise acquire shares of any such Parity Shares in exchange
for shares of any stock of the Corporation ranking junior (either as to
dividends or upon dissolution, liquidation or winding up) to the Series D
Preferred Stock; or
(iv) redeem or purchase or otherwise acquire for consideration any
shares of Series D Preferred Stock, or any Parity Shares, except in
accordance with a purchase offer made in writing or by publication (as
determined by the Board of Directors) to all holders of such shares upon
such terms as the Board of Directors, after consideration of the respective
annual dividend rates and other relative rights and preferences of the
respective series and classes, shall determine in good faith will result in
fair and equitable treatment among the respective series or classes.
(B) The Corporation shall not permit any subsidiary of the Corporation to
purchase or otherwise acquire for consideration any shares of stock of the
Corporation unless the Corporation could, under paragraph (A) of this Section 5,
purchase or otherwise acquire such shares at such time and in such manner.
Section 6. Liquidation, Dissolution or Winding Up.
--------------------------------------
(A) Upon any liquidation (voluntary or otherwise), dissolution or winding
up of the Corporation, no distribution shall be made to the holders of shares of
stock ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series D Preferred Stock unless, prior thereto, the holders
of shares of Series D Preferred Stock shall have received (i) $108,000 per
share, plus (ii) any unpaid dividends and distributions accrued and unpaid
thereon, whether or not
5
<PAGE>
declared, to the date of such payment (the "Series D Junior Liquidation
Preference"). Following the payment of the full amount of the Series D Junior
Liquidation Preference, no additional distributions shall be made to the holders
of Series D Preferred Stock unless, prior thereto, the holders of shares of
Common Stock shall have received an amount per share (the "Common Adjustment")
equal to the quotient obtained by dividing (i) the Series D Junior Liquidation
Preference by (ii) 1,000 (as appropriately adjusted as set forth in subparagraph
(C) below to reflect such events as stock splits, stock dividends and
recapitalizations with respect to the Common Stock) (such number in clause (ii)
immediately above as so adjusted being referred to as the "Adjustment Number").
Following the payment of the full amount of the Series D Junior Liquidation
Preference and the Common Adjustment in respect of all outstanding shares of
Series D Preferred Stock and Common Stock, respectively, holders of Series D
Preferred Stock and holders of shares of Common Stock shall receive their
ratable and proportionate share of the remaining assets to be distributed in the
ratio of the Adjustment Number to one (1) with respect to such Series D
Preferred Stock and Common Stock, on a per share basis, respectively.
(B) In the event, however, that there are not sufficient assets
available to permit payment in full of the Series D Junior Liquidation
Preference and the liquidation preferences of all other series of preferred
stock, if any, which rank on a parity with the Series D Preferred Stock,
then such remaining assets shall be distributed ratably to the holders of
such parity shares in proportion to their respective liquidation
preferences. In the event, however, that there are sufficient assets
available to permit payment in full of the Common Adjustment, then such
remaining assets shall be distributed ratably to the holders of Common
Stock.
(C) In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares
of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii)
combine the outstanding Common Stock into a smaller number of shares, then
in each such case the Adjustment Number in effect immediately prior to such
event shall be adjusted by multiplying such Adjustment Number by a fraction
the numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such
event.
Section 7. Consolidation, Merger, Etc. In case the Corporation shall
---------------------------
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case the shares of
Series D Preferred Stock shall at the same time be similarly exchanged or
changed into such stock or securities, cash and/or any other property in an
amount per share (subject to the provision for adjustment hereinafter set forth)
equal to one thousand (1,000) times the aggregate amount of stock, securities,
cash and/or any other property (payable in kind), as the case may be, into which
or for which each share of Common Stock is changed or exchanged. In the event
the Corporation shall at any time after the Rights Declaration Date (i) declare
any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide
the outstanding Common Stock, or (iii) combine the outstanding Common Stock into
a smaller number of shares, then in each such case the amount set forth in the
preceding sentence with respect to the exchange or change of shares of Series D
Preferred Stock (as previously adjusted, if any prior adjustment has occurred)
shall be adjusted by multiplying such amount by a fraction, the numerator of
which is the number of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of Common Stock that
were outstanding immediately prior to such event.
Section 8. Redemption at the Option of the Board of Directors. The
--------------------------------------------------
outstanding shares of Series
6
<PAGE>
D Preferred Stock may be redeemed as a whole, but not in part, at any time, or
from time to time, at the option of the Board of Directors, at a cash price per
share equal to 105 percent of (i) the product of the Adjustment Number times the
Average Market Value (as such term is hereinafter defined) of the Common Stock,
plus (ii) all dividends which on the redemption date are payable on the shares
to be redeemed and have not been paid, earned or declared and a sum sufficient
for the payment thereof set apart, without interest. The "Average Market Value"
is the average of the closing sale prices of the Common Stock during the 30 day
period immediately preceding the date before the redemption date on the
Composite Tape for New York Stock Exchange Listed Stocks, or, if such stock is
not quoted on the Composite Tape, on the New York Stock Exchange, or, if such
stock is not listed on such Exchange, on the principal United States securities
exchange registered under the Securities Exchange Act of 1934, as amended, on
which such stock is listed, or, if such stock is not listed on any such
exchange, the average of the closing sale prices with respect to a share of
Common Stock during such 30 day period, as quoted on the National Association of
Securities Dealers, Inc. Automated Quotations System or any system then in use,
or if no such quotations are available, the fair market value of the Common
Stock as determined by the Board in good faith.
Section 9. Shares To Be Retired. Any shares of Series D Preferred Stock
--------------------
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and canceled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued shares of
preferred stock of the Corporation and may be reissued as part of a new series
of preferred stock to be created by resolution or resolutions of the Board of
Directors, subject to the conditions and restrictions on issuance set forth
herein, or reclassified as Common Stock or other stock of the Corporation as
provided in the Corporation's Articles of Incorporation.
Section 10. Ranking. Notwithstanding anything contained herein to the
-------
contrary, the Series D Preferred Stock shall rank junior to all other series of
the Corporation's preferred stock as to voting rights, the payment of dividends
and the distribution of assets in liquidation, unless the terms of any such
series shall provide otherwise.
Section 11. Amendment. The Articles of Incorporation of the Corporation
---------
shall not be further amended, nor shall an Articles Supplementary be filed or
amended, in any manner which would materially alter or change the powers,
preferences or special rights of the Series D Preferred Stock so as to affect
them adversely without the affirmative vote of the holders of at least a
majority of the outstanding shares of Series D Preferred Stock, voting
separately as a class.
Section 11. Fractional Shares. Series D Preferred Stock may be issued
-----------------
in fractions of a share which shall entitle the holders, in proportion to such
holders' fractional shares, to exercise voting rights, receive dividends,
participate in distributions and have the benefit of all other rights of holders
of Series D Preferred Stock.
[Page Break Intentionally Inserted]
7
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused these Articles Supplementary
to be duly executed by its President and attested by its Secretary this 3rd day
of December, 1998.
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
By: /s/ Ernest A. Gerardi, Jr.
---------------------------
By: Ernest A. Gerardi, Jr.
Its: President
I, Robert D. Zimet, Secretary, hereby acknowledge on behalf of Charles E.
Smith Residential Realty, Inc. that the foregoing Articles Supplementary are the
corporate act of said corporation under the penalties of perjury.
Attest:
/s/ Robert D. Zimet
- ---------------------
8
<PAGE>
SEVENTEENTH AMENDMENT TO
FIRST AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
CHARLES E. SMITH RESIDENTIAL REALTY L.P.
THIS SEVENTEENTH AMENDMENT TO FIRST AMENDED AND RESTATED AGREEMENT OF
LIMITED PARTNERSHIP OF CHARLES E. SMITH RESIDENTIAL REALTY L.P. (this
"Seventeenth Amendment"), dated as of December 2, 1998, is entered into by
Charles E. Smith Residential Realty, Inc., a Maryland corporation, as general
partner (the "General Partner") of Charles E. Smith Residential Realty L.P. (the
"Partnership"), for itself and on behalf of the limited partners of the
Partnership.
WHEREAS, the General Partner has entered into a Rights Agreement dated as
of December 4, 1998 between the General Partner and First Union National Bank,
as rights agent (the "Rights Agreement"), pursuant to which the General Partner
has agreed to issue to the holder of its shares of common stock Rights to
purchase shares of a newly created series of capital stock, designated Series D
Junior Participating Preferred Stock (the "Series D Preferred Stock") upon and
subject to the terms and conditions set forth in the Rights Agreement;
WHEREAS, pursuant to Section 4.2B of the Partnership Agreement, the
Partnership will issue to the General Partner rights to purchase a new class of
Units, to be entitled "Series D Junior Participating Preferred Units" from time
to time concurrently with the issuance by the General Partner from time to time
of a like number Series D Preferred Stock purchase rights pursuant to the Rights
Agreement; and
WHEREAS, pursuant to the authority granted to the General Partner pursuant
to Section 14.1B of the Partnership Agreement, the General Partner desires to
amend the Partnership Agreement (i) to establish a new class of Units, to be
entitled Series D Junior Participating Preferred Units (the "Series D Preferred
Units"), and to set forth the designations, rights, powers, preferences and
duties of such Series D Preferred Units, which are substantially the same as
those of the Series D Preferred Stock, pursuant to Section 4.2A of the
Partnership Agreement; (ii) to protect the economic interests of limited
partners in the Partnership to the extent provided herein upon exercise by
holders of certain rights to purchase Series D Preferred Stock granted under the
Rights Agreement and Articles Supplementary relating to such preferred stock;
and (iii) to make certain other changes to the Partnership Agreement.
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which hereby are
acknowledged, the General Partner hereby amends the Partnership Agreement, as
follows:
1. Article 1 of the Partnership Agreement shall be amended to include the
definition entitled "Exercise Percentage" and to amend and restate the
definition of "REIT Shares Amount" in its entirety as follows:
"Exercise Percentage" has the meaning set forth in Section 4.4.
-------------------
"REIT Shares Amount" means a number of REIT Shares equal to the product
------------------
of the
E-3
<PAGE>
number of Common Units offered for redemption by a Redeeming Partner, multiplied
by the Conversion Factor; provided that in the event the General Partner issues
to all holders of REIT Shares rights, options, warrants or convertible or
exchangeable securities entitling the shareholders to subscribe for or purchase
REIT Shares, or any other securities or property (collectively, the "rights")
and if the Partnership does not issue to all of the holders of Common Units at
such time (other than the General Partner) corresponding rights to subscribe for
or purchase Common Units or other securities or property corresponding to the
securities or property covered by the rights granted by the General Partner,
then the REIT Shares Amount shall also include such rights that a holder of that
number of REIT Shares would be entitled to receive had it owned such REIT Shares
at the time such rights were issued, provided further that, if the rights issued
by the General Partner are issued pursuant to a stockholder rights plan (or
other arrangement having the same objective and substantially the same effect),
then the REIT Shares Amount shall include only such rights to the extent that
such rights have not been exercised by the holders thereof (and have not
otherwise terminated or been eliminated).
2. Section 4.2 of the Partnership Agreement is hereby amended to add
after Section 4.2.F the following section:
G. Series D Preferred Units. Under the authority granted to it by
------------------------
Section 4.2.A. hereof, the General Partner hereby establishes an additional
class of Partnership Units entitled "Series D Junior Participating Preferred
Units" (the "Series D Preferred Units"). Series D Preferred Units shall have the
designations, preferences, rights, powers and duties as set forth in Exhibit I
---------
hereto.
3. Section 4.4 of the Partnership Agreement is hereby amended and
restated in its entirety as follows:
If the General Partner acquires any Class A Units using the proceeds
from any exercise of any rights (as defined in the definition of REIT Shares
Amount) issued under a stockholder rights plan (or other arrangement having the
same objective and substantially the same effect), then (a) the holders of
Common Units at such time (other than the General Partner) as a group shall have
the right to acquire, at the same price per Class A Unit paid by the General
Partner, a total number of additional Class A Units equal to the product of (i)
the total number of Common Units held by such holders, multiplied by (ii) a
fraction, the numerator of which is the number of Class A Units issued to the
General Partner as a result of the exercise of such rights and the denominator
of which is the total number of Class A Units held by the General Partner
immediately prior to such issuance (which fraction is referred to as the
"Exercise Percentage"), and (b) each holder of a Class A Unit or Class B Unit at
such time shall have the right to acquire, at the same price per Class A Unit
paid by the General Partner, a number of Class A Units equal to the product of
(iii) the aggregate number of Common Units that such holder holds at such time,
multiplied by (iv) the Exercise Percentage. (Thus, for example, if the General
Partner were to acquire 2,000,000 Class A Units at $5 per Unit from the proceeds
of the exercise of outstanding rights issued under a stockholder rights plan at
a time when the General Partner already owned 8,000,000 Class A Units out of a
total of 12,000,000 outstanding Common Units (which would represent a 25%
increase in the number of Class A Units held by the General Partner), then the
other holders of Common Units as a group would have the right to purchase a
total of 1,000,000 Class A Units at $5 per Class A Unit, and each holder of a
Class A Unit or Class B Unit
<PAGE>
would be entitled to purchase his proportionate share of such Class A Units, or
.25 Class A Units for each Class A Unit or Class B Unit then held by such
holder.) In the event Partnership Units or Partnership Interests other than
Class A Units (including, without limitation, Series D Preferred Units) are
issued to the General Partner using proceeds of any exercise of rights issued
under a stockholder rights plan (or other arrangement), the holders of Common
Units shall be granted the right to acquire such other Partnership Units or
Partnership Interests at the same price as paid by the General Partner and in
such amounts as would be comparable to their rights had Class A Units been
issued instead. The General Partner shall provide prompt written notice to the
holders of Common Units of its acquisition of Class A Units (or other
Partnership Units or Partnership Interests) using such proceeds and shall
establish in good faith such procedures as it deems appropriate (including,
without limitation, procedures to eliminate the issuance of fractional
Partnership Units if the General Partner deems appropriate) to effectuate the
rights of the holders of Common Units under the preceding provisions of this
Section 4.4. Except to the extent expressly granted by the Partnership pursuant
to this Section 4.4 or another agreement, no person shall have any preemptive,
preferential or other similar right with respect to (i) additional Capital
Contributions or loans to the Partnership; or (ii) issuance or sale of any
Partnership Units or other Partnership Interests.
4. Exhibits to Partnership Agreement.
---------------------------------
A. The General Partner shall maintain the information set forth in
Exhibit A to the Partnership Agreement, as such information shall change from
- ---------
time to time, in such form as the General Partner deems appropriate for the
conduct of the Partnership's affairs, and Exhibit A shall be deemed amended from
---------
time to time to reflect the information so maintained by the General Partner,
whether or not a formal amendment to the Partnership Agreement has been executed
amending such Exhibit A. In addition to the designation of Series D Preferred
---------
Units pursuant to this Seventeenth Amendment, such information shall reflect
(and Exhibit A shall be deemed amended from time to time to reflect) the
---------
issuance of any additional Partnership Units to the General Partner or any other
Person, the transfer of Partnership Units and the redemption of any Partnership
Units, all as contemplated herein.
B. The Partnership Agreement is hereby amended by attaching thereto
as Exhibit I the Exhibit I attached hereto.
--------- ---------
5. Certain Capitalized Terms. All capitalized terms used in this
-------------------------
Seventeenth Amendment and not otherwise defined shall have the meanings assigned
in the Partnership Agreement or in the Articles Supplementary of the General
Partner. Except as modified herein, all terms and conditions of the Partnership
Agreement shall remain in full force and effect, which terms and conditions the
General Partner hereby ratifies and affirms.
[Page Break Intentionally Inserted]
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Seventeenth Amendment
as of the date first set forth above.
CHARLES E. SMITH RESIDENTIAL REALTY, INC.,
as General Partner of
Charles E. Smith Residential Realty L.P.
and on behalf of existing Limited Partners
By: /s/ Ernest A. Gerardi, Jr.
---------------------------
Name: Ernest A. Gerardi, Jr.
---------------------------
Title: President
---------------------------
4
<PAGE>
EXHIBIT I
DESIGNATION OF THE PREFERENCES AND OTHER RIGHTS, VOTING
POWERS, RESTRICTIONS, LIMITATIONS AS TO SERIES D PREFERRED
UNITS
The Series D Preferred Units shall have the following designations,
preferences, rights, powers and duties:
(1) Certain Defined Terms. The following capitalized terms used in this
---------------------
Exhibit I shall have the respective meanings set forth below:
- ---------
"Quarterly Distribution Payment Date" means shall mean the 15th day (or if
such day is not a Business Day, the next Business Day thereafter) of February,
May, August and November of each year, commencing February 15, 1999.
"Parity Units" has the meaning ascribed thereto in Section 3(A).
(2) Distributions.
-------------
(A) The General Partner, in its capacity as the holder of the then
outstanding Series D Preferred Units, shall be entitled to receive out of funds
legally available therefor, when, as and if declared by the General Partner,
quarterly distributions payable in cash on the Quarterly Distribution Payment
Date at the rate per Series D Preferred Unit equal to the greater of (a) $10.00
or (b) subject to the provision for adjustment hereinafter set forth, one
thousand (1,000) times the aggregate per share amount of all cash distributions,
and one thousand (1,000) times the aggregate per share amount (payable in kind)
of all non-cash or other distributions (other than a distribution payable in
Class A Units or Class B Units of the General Partner, or a subdivision of the
outstanding Class A Units or Class B Units (by reclassification or otherwise))
declared on such Class A or Class B Units, since the immediately preceding
Quarterly Distribution Payment Date, or, with respect to the first Quarterly
Distribution Payment Date, since the first issuance of any Series D Preferred
Units or a fraction thereof. In the event the General Partner shall at any time
after December 2, 1998 (the "Rights Declaration Date") (i) declare or pay any
distribution on Class A Units or Class B Units payable in Class A Units or Class
B Units, (ii) subdivide the outstanding Class A Units or Class B Units, or (iii)
combine the outstanding Class A Units or Class B Units into a smaller number of
units, then in each such case the amount to which holders of Series D Preferred
Units were entitled immediately prior to such event under clause (b) of the
preceding sentence shall be adjusted by multiplying such amount by a fraction,
the numerator of which is the number of Common Units outstanding immediately
after such event and the denominator of which is the number of shares of Common
Units that were outstanding immediately prior to such event.
(B) The General Partner shall declare a distribution on the Series D
Preferred Units as provided in paragraph (A) above immediately after it declares
a distribution on any Common Units (other than a distribution payable in Common
Units); provided that, in the event no distribution shall have been declared on
the Common Units during the period between any Quarterly Distribution Payment
Date and the next subsequent Quarterly Distribution Payment Date, a distribution
of $10.00 per unit on the Series D Preferred Units shall nevertheless be payable
on such subsequent Quarterly Distribution Payment Date.
I-1
<PAGE>
(C) Distributions shall begin to accrue and be cumulative on
outstanding Series D Preferred Units from the Quarterly Distribution Payment
Date next preceding the date of issue of such Series D Preferred Units, unless
the date of issue of such units is prior to the record date set for the first
Quarterly Distribution Payment Date, in which case distributions on such units
shall begin to accrue from the date of issue of such units, or unless the date
of issue is a Quarterly Distribution Payment Date or is a date after the record
date for the determination of holders of Series D Preferred Units entitled to
receive a quarterly distribution and before such Quarterly Distribution Payment
Date, in either of which events such distributions shall begin to accrue and be
cumulative from such Quarterly Distribution Payment Date. Accrued but unpaid
distributions shall not bear interest. Distributions paid on the Series D
Preferred Units in an amount less than the total amount of such distributions at
the time accrued and payable on such units shall be allocated pro rata on a
unit-by-unit basis among all such units at the time outstanding. The Board of
Directors of the General Partner may fix a record date for the determination of
holders of Series D Preferred Units entitled to receive payment of a
distribution declared thereon, which record date shall be no more than 60 days
prior to the date fixed for the payment thereof.
(3) Certain Restrictions.
--------------------
(A) Whenever distributions payable on the Series D Preferred Units as
provided in Section (2) are not paid, thereafter and until such distributions,
whether or not declared, on Series D Preferred Units outstanding shall have been
paid in full, the Partnership shall not:
(i) declare or pay distributions on, or redeem or purchase or
otherwise acquire for consideration any units ranking junior (either as to
distributions or upon liquidation, dissolution or winding up) to the Series D
Preferred Units; or
(ii) declare or pay distributions on any units ranking on a
parity (either as to distributions or upon liquidation, dissolution or winding
up) (the "Parity Units") with the Series D Preferred Units, except distributions
paid ratably on the Series D Preferred Units and all such Parity Units on which
distributions are payable in proportion to the total amounts to which the
holders of all such units are then entitled; or
(iii) redeem or purchase or otherwise acquire for consideration
any Parity Units, provided that the Partnership may at any time redeem, purchase
or otherwise acquire any such Parity Units in exchange for any units ranking
junior (either as to distributions or upon dissolution, liquidation or winding
up) to the Series D Preferred Units; or
(iv) redeem or purchase or otherwise acquire for consideration
any Series D Preferred Units, or any Parity Units, except in accordance with a
purchase offer made in writing or by publication (as determined by the Board of
Directors of the General Partner) to all holders of such units upon such terms
as the Board of Directors of the General Partner, after consideration of the
respective annual distribution rates and other relative rights and preferences
of the respective series and classes, shall determine in good faith will result
in fair and equitable treatment among the respective series or classes.
I-2
<PAGE>
(B) The General Partner shall not permit any subsidiary of the
Partnership to purchase or otherwise acquire for consideration any units of the
Partnership unless the
Partnership could, under paragraph (A) of this Section 3, purchase or otherwise
acquire such units at such time and in such manner.
(4) Liquidation, Dissolution or Winding Up.
--------------------------------------
(A) Upon any liquidation (voluntary or otherwise), dissolution or
winding up of the Partnership, no distribution shall be made to the holders of
units ranking junior (either as to distributions or upon liquidation,
dissolution or winding up) to the Series D Preferred Units unless, prior
thereto, the holders of Series D Preferred Units shall have received (i)
$108,000 per Unit, plus (ii) any unpaid distributions accrued and unpaid
thereon, whether or not declared, to the date of such payment (the "Series D
Junior Liquidation Preference"). Following the payment of the full amount of the
Series D Junior Liquidation Preference, no additional distributions shall be
made to the holders of Series D Preferred Units unless, prior thereto, the
holders of Common Units shall have received an amount per unit (the "Common
Adjustment") equal to the quotient obtained by dividing (i) the Series D Junior
Liquidation Preference by (ii) 1,000 (as appropriately adjusted as set forth in
subparagraph (C) below to reflect such events as unit splits, unit distributions
and recapitalizations with respect to the Common Units) (such number in clause
(ii) immediately above as so adjusted being referred to as the "Adjustment
Number"). Following the payment of the full amount of the Series D Junior
Liquidation Preference and the Common Adjustment in respect of all outstanding
Series D Preferred Units and Common Units, respectively, holders of Series D
Preferred Units and holders of Common Units shall receive their ratable and
proportionate share of the remaining assets to be distributed in the ratio of
the Adjustment Number to one (1) with respect to such Series D Preferred Units
and Common Units, on a per unit basis, respectively.
(B) In the event, however, that there are not sufficient assets
available to permit payment in full of the Series D Junior Liquidation
Preference and the liquidation preferences of all other series of preferred
units, if any, which rank on a parity with the Series D Preferred Units, then
such remaining assets shall be distributed ratably to the holders of such Parity
Units in proportion to their respective liquidation preferences. In the event,
however, that there are sufficient assets available to permit payment in full of
the Common Adjustment, then such remaining assets shall be distributed ratably
to the holders of Common Units.
(C) In the event the Partnership shall at any time after the Rights
Declaration Date (i) declare any distribution on Class A Units or Class B Units
payable in Class A Units or Class B Units, (ii) subdivide the outstanding Class
A Units or Class B Units, or (iii) combine the outstanding Class A Units or
Class B Units into a smaller number of units, then in each such case the
Adjustment Number in effect immediately prior to such event shall be adjusted by
multiplying such Adjustment Number by a fraction, the numerator of which is the
number of Common Units outstanding immediately after such event and the
denominator of which is the number of Common Units that were outstanding
immediately prior to such event.
5. Consolidation, Merger, Etc. In case the Partnership shall enter
--------------------------
into any consolidation, merger, combination or other transaction in which Class
A Units or Class B Units are exchanged for or changed into other units or
securities, cash and/or any other property, then in any such case the Series D
I-3
<PAGE>
Preferred Units shall at the same time be similarly exchanged or changed into
such units or securities, cash and/or any other property in an amount per unit
(subject to the provision for adjustment hereinafter set forth) equal to one
thousand (1,000) times the aggregate amount of units, securities, cash and/or
any other property (payable in kind), as the case may be, into which or for
which each Class A Unit or Class B Unit is changed or exchanged. In the event
the Partnership shall at any time after the Rights Declaration Date (i) declare
any distribution on Class A Units or Class B Units payable in Class A Units or
Class B Units, (ii) subdivide the outstanding Class A Units or Class B Units, or
(iii) combine the outstanding Class A Units or Class B Units into a smaller
number of units, then in each such case the amount set forth in the preceding
sentence with respect to the exchange or change of Series D Preferred Units (as
previously adjusted, if any prior adjustment has occurred) shall be adjusted by
multiplying such amount by a fraction, the numerator of which is the number of
Class A Units or Class B Units outstanding immediately after such event and the
denominator of which is the number of Class A Units or Class B Units that were
outstanding immediately prior to such event.
6. Redemption Right. The outstanding Series D Preferred Units may be
----------------
redeemed as a whole, but not in part, at any time, or from time to time, at the
option of the Board of Directors of the General Partner, at a cash price per
share equal to 105 percent of (i) the product of the Adjustment Number times the
Average Market Value (as such term is hereinafter defined) of the Class A Units
or Class B Units, plus (ii) all distributions which on the redemption date are
payable on the Class A Units or Class A Units to be redeemed and have not been
paid, earned or declared and a sum sufficient for the payment thereof set apart,
without interest. The "Average Market Value" of a Class A or Class B Unit shall
equal the average of the closing sale prices of the Common Stock of the General
Partner during the 30 day period immediately preceding the date before the
redemption date on the Composite Tape for New York Stock Exchange Listed Stocks,
or, if such stock is not quoted on the Composite Tape, on the New York Stock
Exchange, or, if such stock is not listed on such Exchange, on the principal
United States securities exchange registered under the Securities Exchange Act
of 1934, as amended, on which such stock is listed, or, if such stock is not
listed on any such exchange, the average of the closing sale prices with respect
to a share of Common Stock during such 30 day period, as quoted on the National
Association of Securities Dealers, Inc. Automated Quotations System or any
system then in use, or if no such quotations are available, the fair market
value of the Common Stock as determined by the Board in good faith.
7. Ranking. Notwithstanding anything contained herein to the contrary,
-------
the Series D Preferred Units shall rank junior to all other series of the
preferred units as to voting rights, the payment of distributions and the
distribution of assets in liquidation, unless the terms of any such series shall
provide otherwise.
8. Voting Rights. The holders of Series D Preferred Units shall have
-------------
the following voting rights:
(A) Subject to the provision for adjustment hereinafter set
forth, each Series D Preferred Unit shall entitle the holder thereof to one
thousand (1,000) votes on all matters submitted to a vote of the Partners. In
the event the General Partner shall at any time after the Rights Declaration
Date (i) declare any distribution on Class A Units or Class B Units payable in
Class A Units or Class B Units, (ii) subdivide the outstanding Class A Units or
Class B Units, or (iii) combine the outstanding Class A Units or Class B Units
into a smaller number of units, then in each such case the number of votes per
share to which holders of Series D Preferred Units were entitled immediately
prior to such event shall be adjusted by multiplying such number by a fraction,
the numerator of which is the number of Common Units outstanding immediately
after such event and the denominator of which is the number of Common Units that
were outstanding immediately prior to such event.
I-4
<PAGE>
(B) Except as otherwise provided by law, the holders of Series D
Preferred Units and the holders of Common Units and any Partnership Units having
general voting rights shall vote together as one class on all matters submitted
to a vote of stockholders of the Partners.
(C) Except as set forth herein, holders of Series D Preferred Units
shall have no special voting rights and their consent shall not be required
(except to the extent they are entitled to vote with holders of Common Units as
set forth herein) for taking any Partnership action.
9. General. The rights of the General Partner, in its capacity as the
-------
holder of the Series D Preferred Units, are in addition to and not in limitation
on any other rights or authority of the General Partner, in any other capacity,
under the Partnership Agreement. In addition, nothing contained in this Exhibit
-------
I shall be deemed to limit or otherwise restrict any rights or authority of the
- -
General Partner under the Partnership Agreement, other than in its capacity as
the holder of the Series D Preferred Units.
* * * *
I-5
<PAGE>
SUPPLEMENTAL LOAN AGREEMENT
THIS SUPPLEMENTAL LOAN AGREEMENT (this "Agreement") is made and entered
into as of the 29th day of October, 1998 by and among SMITH PROPERTY HOLDINGS
TWO L.P. ("SPH TWO"), and SMITH PROPERTY HOLDINGS TWO (D.C.) L.P. ("SPH TWO
(DC)"), (SPH TWO and SPH TWO (DC), each a Delaware limited partnership and
sometimes hereinafter referred to collectively as "Borrowers"), and GREEN PARK
FINANCIAL LIMITED PARTNERSHIP, a District of Columbia limited partnership, its
successors, transferees and assigns ("Lender").
BACKGROUND
A. This Agreement is being executed in connection with the making by
Lender of two separate mortgage loans to Borrowers in the amounts set forth on
Exhibit A attached hereto and made a part hereof (each, a "Mortgage Loan" and
- ---------
collectively, the "Mortgage Loans").
B. The Mortgage Loans are evidenced by two separate Multifamily Notes
(collectively, the "Notes") and are secured by, among other things, thirteen
(13) separate (i) Multifamily Deeds of Trust, Assignments of Rents and Security
Agreements (collectively, the "Mortgages") encumbering the properties (and the
improvements now or hereafter existing thereon) listed on Exhibit B attached
---------
hereto and made a part hereof. For purposes of this Agreement, the term
"Mortgaged Properties" means the thirteen (13) separate properties and
improvements listed on Exhibit B which from time to time are encumbered by the
---------
Mortgages (and each additional Multifamily Residential Property which from time
to time are encumbered by Mortgages in accordance with this Agreement). The
Mortgaged Properties as of the date hereof (the "Initial Mortgaged Properties")
also are identified by their common names on Exhibit B.
---------
C. The SPH TWO Loan (defined in Exhibit A) is secured by a Payment
---------
Guaranty, dated the same date as this Agreement, by SPH TWO (DC) for the benefit
of Lender. The SPH TWO (DC) Loan (defined in Exhibit A) is secured by a Payment
---------
Guaranty, dated the same date as this Agreement, by SPH TWO for the benefit of
Lender. The Payment Guaranties are hereinafter referred to as the "Payment
Guaranties."
D. The Mortgaged Properties identified on Exhibit C as leasehold
---------
mortgaged properties are hereinafter referred to collectively as the "Leasehold
Mortgaged Properties." The Notes, the Mortgages, the Payment Guaranties and all
other documents evidencing and securing the Mortgage Loans are hereinafter
referred to collectively as the "Loan Documents".
E. Lender requires as a condition to making the Mortgage Loans that
Borrowers enter into this Agreement for the purpose of setting forth certain
additional agreements with respect to the Mortgage Loans, the Notes, the
Mortgages, the other Loan Documents and the Mortgaged Properties.
E-4
<PAGE>
F. Lender intends to sell, transfer, and deliver the Notes and assign the
Mortgages to Fannie Mae. In consideration of such assignment, Fannie Mae will
issue to Lender Guaranteed Mortgage Pass-Through Certificates backed by mortgage
loan pools comprised solely of the Mortgage Loans. The Mortgage Loans will be
placed in a mortgage-backed security pool.
NOW, THEREFORE, in consideration of the above and the mutual promises
contained in this Agreement, the receipt and sufficiency of which are
acknowledged, Borrowers and Lender agree as follows:
1. Defined Terms. For purposes of this Agreement, the following terms not
-------------
otherwise defined herein shall have the respective meanings set forth below:
"Affiliate" or "affiliated" means, when used with reference to a
--------- ----------
specified Person, (i) any Person that, directly or indirectly, through one or
more intermediaries, controls or is controlled by, or is under common control
with, the specified Person, (ii) any Person that is an officer of, partner in or
trustee of, or serves in a similar capacity with respect to, the specified
Person or of which the specified Person is an officer, partner or trustee, or
with respect to which the specified Person serves in a similar capacity, (iii)
any Person that, directly or indirectly, is the beneficial owner of 10% or more
of any class of equity securities of, or otherwise has a substantial beneficial
interest in, the specified Person or of which the specified Person is, directly
or indirectly, the owner of 10% or more of any class of equity securities or in
which the specified Person has a substantial beneficial interest, and (iv) for
the specified Person, any of the individual's spouse, issue, parents, siblings
and a trust for the benefit of the individual's spouse or issue, or both.
"Aggregate Debt Service Coverage Ratio for the Trailing 12 Month
----------------------------------------------------------------
Period" means, for any specified date, the ratio (expressed as a percentage) of
- ------
(a) the aggregate of the Net Operating Income for the Trailing 12
Month Period for the Mortgaged Properties
to
--
(b) the Facility Debt Service on the specified date.
"Aggregate Debt Service Coverage Ratio for the Trailing Three Month
-------------------------------------------------------------------
Period" means, for any specified date, the ratio (expressed as a percentage)
- ------
of--
(a) the product obtained by multiplying--
(i) the aggregate of the Net Operating Income for the
Trailing Three Month Period for the Mortgaged Properties, by
(ii) four
to
--
(b) the Facility Debt Service on the specified date.
2
<PAGE>
"Aggregate Loan to Value Ratio for the Trailing 12 Month Period"
--------------------------------------------------------------
means, for any specified date, the ratio (expressed as a percentage)
of --
(a) the outstanding principal balance of the Mortgage Loans (and
any other loans made in accordance with the provisions of
Section 16) on the specified date,
to
--
(b) the aggregate of the Values most recently obtained prior to
the specified date for the Mortgaged Properties.
"Appraisal" means an appraisal of a Multifamily Residential
---------
Property conforming to the requirements of Chapter 5 of Part III of
the DUS Guide, and accepted by the Lender.
"Appraised Value" means the value set forth in an Appraisal.
---------------
"Cap Rate" means, for each Mortgaged Property, a capitalization
--------
rate selected by Lender in accordance with Section 19 for use in
determining the Values.
"Coverage and LTV Tests" mean, for any specified date, each of
----------------------
the following financial tests:
(a) The Aggregate Debt Service Coverage Ratio for the Trailing 12
Month Period is not less than 135%.
3
<PAGE>
(b) The Aggregate Loan to Value Ratio for the Trailing 12 Month Period
does not exceed 65%.
"DUS Guide" means the Fannie Mae Multifamily Delegated
---------
Underwriting and Servicing (DUS) Guide, as such Guide may be amended
from time to time, including exhibits to the DUS Guide and amendments
in the form of Lender Memos, Guide Updates and Guide Announcements
(and, if such Guide is no longer used by Fannie Mae, the term "DUS
Guide" as used in this Agreement means the Fannie Mae Multifamily
Negotiated Transactions Guide, as such Guide may be amended from time
to time, including amendments in the form of Lender Memos, Guide
Updates and Guide Announcements). All references to specific articles
and sections of, and exhibits to, the DUS Guide shall be deemed
references to such articles, sections and exhibits as they may be
amended, modified, updated, superseded, supplemented or replaced from
time to time.
"Facility Debt Service" means, as of any specified date, the
---------------------
amount of interest and principal amortization, during the 12 month
period immediately succeeding the specified date, with respect to the
Mortgage Loans on the specified date, except that, for these purposes,
each Note shall be deemed to require level monthly payments of
principal and interest (at the applicable coupon rate) in an amount
necessary to fully amortize the original principal amount of the Note
over a 30-year period, with such amortization to commence on the day
of the first payment of the Note.
"Gross Revenues" means, for any specified period, with respect to
--------------
any Multifamily Residential Property, all income in respect of the
Multifamily Residential Property, as determined by Lender in
accordance with the method described in paragraph 3 of Section 302.02
of Part V of the DUS Guide, except that for these purposes the
financial statements to be used need not be audited and paragraph (b)
of such paragraph 3 shall be taken into account in Lender's
discretion.
"Initial Underwriting Date" means the date Lender completes its
-------------------------
initial underwriting of the Initial Mortgaged Properties and notifies
Borrower of Lender's initial determination of the Aggregate Debt
Service Coverage Ratio for the Trailing 12 Month Period and Aggregate
Loan to Value Ratio for the Trailing 12 Month Period.
"Multifamily Residential Property" means a residential property,
--------------------------------
located in the United States, containing five or more dwelling units
in which not more than twenty percent (20%) of the net rentable area
is or will be rented to non-residential tenants, and conforming to the
requirements of Sections 201 and 203 of Part III of the DUS Guide.
"Net Operating Income" means, for any specified period, with
--------------------
respect to any Multifamily Residential Property, the aggregate net
income during such period equal to Gross Revenues during such period
less the aggregate Operating Expenses during such
4
<PAGE>
period. If a Multifamily Residential Property is not owned by a
Borrower for the entire specified period, the Net Operating Income for
the Multifamily Residential Property for the time within the specified
period during which the Multifamily Residential Property was owned by
the Borrower shall be the Multifamily Residential Property's pro forma
net operating income determined by Lender in accordance with the
underwriting procedures set forth in Part III of the DUS Guide.
"Operating Expenses" means, for any period, with respect to any
------------------
Multifamily Residential Property, all expenses in respect of the
Multifamily Residential Property, as determined by Lender in
accordance with the method described in paragraph 3 of Section 302.02
of Part V of the DUS Guide, including replacement reserves, if any,
under the Replacement Reserve Agreements for the Multifamily
Residential Properties.
"Person" means an individual, an estate, a trust, a corporation,
------
a partnership, a limited liability company or any other organization
or entity (whether governmental or private).
"Release Fee" means, for each Mortgaged Property released from
-----------
the lien of its Mortgage, a fee of $8,000 payable to Lender.
"Trailing 12 Month Period" means, for any specified date, the 12
------------------------
month period ending with the last day of the most recent calendar
quarter for which financial statements have been delivered by
Borrowers to Lender pursuant to Section 10.
"Trailing Three Month Period" means, for any specified date, the
---------------------------
three month period ending with the last day of the most recent
calendar quarter for which financial statements have been delivered by
Borrowers to Lender pursuant to Section 10.
"Value" means, for any specified date, with respect to a
-----
Multifamily Residential Property, (a) if an Appraisal of the
Multifamily Residential Property was more recently obtained than a Cap
Rate for the Multifamily Residential Property, the Appraised Value of
such Multifamily Residential Property, or (b) if a Cap Rate for the
Multifamily Residential Property was more recently obtained than an
Appraisal of the Multifamily Residential Property, the value derived
by dividing --
(i) the Net Operating Income of such Multifamily Residential
Property for the Trailing 12 Month Period, by
(ii) the most recent Cap Rate determined pursuant to Section 19.
Notwithstanding the foregoing, any Value of a Multifamily Residential
Property calculated for a date occurring before the first anniversary
of the date on which the Multifamily Residential Property becomes
secured by the Mortgage Loans shall equal the
5
<PAGE>
Appraised Value of such Multifamily Residential Property, unless
Lender determines that changed market or property conditions warrant
that the value be determined as set forth in the preceding sentence.
2. Substitution and Release of Mortgaged Properties.
------------------------------------------------
(a) Prior to the Initial Underwriting Date, Borrowers shall not be
permitted to release any Mortgaged Property from the lien of its Mortgage.
(b) During the 90 day period commencing on the Initial Underwriting
Date, a Mortgaged Property (the "Release Property") may be released from the
lien of a Mortgage, without another Multifamily Residential Property being
substituted therefor, if each of the following conditions are met :
(1) After giving effect to the release, the Coverage and LTV
Tests are satisfied.
(2) Borrowers shall cause the Release Property to be immediately
conveyed to a Person other than a Borrower.
(3) All documentation relating to the foregoing is acceptable to
Lender in all respects, including legal opinions, release
documentation and any amendments to this Agreement or the
other Loan Documents;
(4) Borrowers shall pay to Lender a Release Fee for each Release
Property;
(5) Borrowers shall pay, with respect to each Release Property,
to each of Lender and Servicer, all out-of-pocket costs and
expenses (including reasonable legal fees and expenses)
incurred by Lender or Servicer in connection with the
foregoing. Such amounts shall be paid by Borrowers on or
prior to the closing date of such release, or if such release
fails to close, within 30 days of Borrower's receipt of
invoices therefor (and if requested by Borrowers, reasonable
supporting back-up invoices evidencing such items), and shall
be payable regardless whether the property is or is not (for
any reason) ultimately released from the lien of a Mortgage;
and
(6) No Event of Default, or any event which, with the giving of
notice or the passage of time, or both, would constitute an
Event of Default, shall have occurred and be continuing.
6
<PAGE>
(c) Upon 30 days' advance written notice from Borrower to Lender, a
Mortgaged Property may be released from the lien of a Mortgage, and a New
Property substituted therefor, if each of the following conditions are met:
(1) Borrowers have substituted for the Mortgaged Property to be
released a new Multifamily Residential Property (the "New
Property") by granting to Lender a first lien Mortgage
encumbering the New Property;
(2) The New Property has a Value equal to or greater than the
Value of the Mortgaged Property to be released on the date
of the release;
(3) The New Property meets all of Fannie Mae's then applicable
underwriting criteria under the DUS Guide for new loans
secured by Multifamily Residential Properties (as determined
by Lender) and has a debt service coverage ratio and loan to
value ratio, computed in accordance with the applicable
underwriting criteria under the DUS Guide, equal to at least
135% and 65% respectively (and, for such purposes, Lender
shall calculate such ratios using a debt, and debt service,
based on the amount of debt then currently allocated to the
Mortgaged Property in accordance with Section 19);
(4) after giving effect to the substitution, the Coverage and
LTV Tests are satisfied;
(5) All documentation relating to the foregoing is acceptable to
Lender in its discretion in all respects, including legal
opinions, title insurance, Mortgages, Collateral Agreements,
assignments and any amendments to the other Loan Documents;
(6) Borrowers shall pay to Lender a fee equal to the product
obtained by multiplying (i) 65 basis points, by (ii) 65%, by
(iii) the Value of the New Property (except that, for these
purposes only, the Value of the New Property shall not
exceed an amount which, when added to the Values of the
other Mortgaged Properties (excluding the Mortgaged Property
to be released) causes the Aggregate Loan to Value Ratio to
equal 65%);
(7) With respect to the proposed New Property, Borrowers shall
pay Fannie Mae and Lender a due diligence fee plus all costs
and expenses (including legal fees and expenses) reasonably
incurred by Fannie Mae or Lender in connection with the
foregoing. Such amounts shall be paid by Borrowers promptly
upon receipt of invoices therefor, and shall be payable
regardless whether the property substitution does or does
not (for any reason) ultimately occur;
7
<PAGE>
(8) No prior release of a Mortgaged Property has occurred within
the calendar quarter in which the release of the Release
Property is scheduled to occur; and
(9) No Event of Default, or any event which, with the giving of
notice or the passage of time, or both, would constitute an
Event of Default, shall have occurred and be continuing.
(d) Special Provisions Relating to Newport Village III and Crystal
--------------------------------------------------------------
Square. Until such time as Lender shall have received from each of the
------
ground lessors for the two Leasehold Mortgaged Properties known as Newport
Village III and Crystal Square estoppel certificates substantially in the
form approved by Lender, the Net Operating Income and Value of these
Leasehold Mortgage Properties for which a satisfactory estoppel certificate
has not been obtained shall not be included in the pool of Mortgaged
Properties for purposes of calculation of the respective financial tests
comprising the Coverage and LTV Tests. The amount of any debt (and any
debt service on such debt) allocated to these Leasehold Mortgaged
Properties for any purpose shall not be excluded for purposes of
calculating the Coverage and LTV Tests.
(e) Special Provisions Relating to Fort Chaplin Park. In the event
------------------------------------------------
that, on or before December 31, 1999, Borrower conveys the Mortgaged
Property identified as Fort Chaplin Park on Exhibit B (the "Fort Chaplin
---------
Park Property") to a Person that is not an Affiliate of Borrower, then,
provided that all other conditions precedent to the release of this
Mortgaged Property set forth in this Section 2 are complied with, Lender
shall release this Mortgaged Property from the lien of the Loan Documents.
Notwithstanding the foregoing, Borrower shall not be required, as a
condition to the release of the Fort Chaplin Park Property on or before
December 31, 1999, to pay a Release Fee or pay any underwriting or due
diligence fee (or any appraisal, inspection or other costs customarily
incurred in underwriting) to Lender in connection with the inclusion of the
Fort Chaplin Park Property as collateral for the Mortgage Loans or the
release of the Fort Chaplin Park Property from the lien of its Mortgage,
but Borrower shall be liable for any other out-of-pocket costs incurred by
Lender in connection with the inclusion or release. If, on or before
December 31, 1999, the Fort Chaplin Park Property is not conveyed to a
Person that is not an Affiliate of Borrower, (i) the provision of this
paragraph shall no longer apply, (ii) Lender shall proceed to perform an
underwriting on the Fort Chaplin Park Property at Borrower's expense
(subject to the limitations set forth in Section 12) and (iii) the other
provisions of this Agreement shall govern the release of the Fort Chaplin
Park Property from the lien of its Mortgage.
3. District of Columbia Rental Housing Sale and Conversion Act of 1980.
-------------------------------------------------------------------
SPH TWO (DC) hereby agrees that, in the event a final, nonappealable judgment
entered by a court of competent jurisdiction determines that the residential
tenants of any Mortgaged Property owned by SPH TWO (DC), or a tenant
organization formed by such residential tenants, have the right to purchase such
Mortgaged Property, it will, upon the conveyance of legal title to such tenants
or their tenant organization effect a substitution permitted under Section 2 so
that the Coverage and LTV Tests are satisfied.
8
<PAGE>
4. Ground Leases. (a) Each Borrower which owns a Leasehold Mortgaged
-------------
Property shall pay all rent and other sums due under the Ground Lease with
respect to its Leasehold Mortgaged Property directly to the lessor under such
ground lease (the "Ground Lessor"), and, within 20 days after the commencement
of each calendar quarter, shall deliver to Lender a written notification that
Borrower has made all payments which are required under the Ground Lease for the
immediately preceding calendar quarter, together with evidence of such payment
and an accounting of any percentage or other rent payments which are made other
than on a fixed annual, quarterly or monthly basis, all in form satisfactory to
Lender.
(b) Each Borrower hereby agrees to deliver to Lender promptly upon
receipt of notice of a bankruptcy or similar proceeding affecting any Ground
Lessor of a Leasehold Mortgaged Property written notice of such bankruptcy or
similar proceeding. Furthermore, each Borrower which has an interest in a
Leasehold Mortgaged Property hereby assigns, transfers and sets over unto Lender
all rights it may have in connection with such bankruptcy or similar proceeding.
In furtherance of and not in limitation of the foregoing, each Borrower hereby
authorizes Lender to demand, sue for, collect and receive all amounts due such
Borrower, and hereby appoints Lender its attorney-in-fact, to vote in connection
with any resolution, arrangement, plan of reorganization or compromise, or
settlement, and to take any other action which would otherwise have been taken
by such Borrower in connection with such a proceeding.
5. Shelf Condominiums. Except for Car Barn I, Car Barn II and Car Barn
------------------
III (the "Car Barn Condominia"), none of the Mortgaged Properties shall be
submitted to a condominium during the term of the Mortgage Loans. SPH TWO (DC)
covenants and agrees that it will not sell, transfer, enter into a contract for
sale, or enter into a lease with an option for the lessee to purchase, any of
the condominium units in the Car Barn Condominia.
6. Covenants of the Borrowers. Notwithstanding anything to the contrary
--------------------------
set forth in the Mortgages, Lender acknowledges and approves of Borrowers'
ownership, management and operation of the Mortgaged Properties identified as
being owned by it on Exhibit B. Each Borrower covenants and agrees that, until
---------
the principal of, interest on and all other amounts payable in connection with,
the Mortgage Loans have been paid in full, it will (a) not incur any
indebtedness of any kind or nature whatsoever secured by a lien on any of the
Mortgaged Properties (with the exception of the mortgages described on Exhibit
-------
D, or (b) not incur any unsecured indebtedness for borrowed money outstanding at
- -
any time in excess of $100,000. The limitations in clauses (a) and (b) above
shall not prohibit either Borrower from becoming a party, as lessee, to
equipment leases requiring payment of an annual rent less than or equal to
$25,000 per lease provided that such Borrower is not a party to more than three
such leases at any one time in connection with each Mortgaged Property owned by
it.
7. Reserve Account. Except as otherwise provided by Section 16, each
---------------
Borrower shall at all times perform its obligations under that certain Reserve
Agreement (the "Reserve Agreement") of even date herewith executed by Borrowers
and Lender.
9
<PAGE>
8. Restrictions on Partnership Distributions. Each Borrower covenants
-----------------------------------------
and agrees that it will not make any distributions of any nature or kind
whatsoever to its general partners or limited partners if, at the time of such
distribution, a Borrower is in default (determined without taking into account
any notice of, or grace period for curing, the default) in performing any of its
obligations under the Loan Documents.
9. Replacement Reserve and Security Agreements. At the Closing of the
-------------------------------------------
Mortgage Loans the Borrowers shall execute and deliver to the Lender Replacement
Reserve and Security Agreements (the "Replacement Reserve Agreements"), one for
the Virginia Mortgaged Properties and one for the District of Columbia Mortgaged
Properties, but no amounts need be funded under the Replacement Reserve
Agreements by Borrowers so long as (a) no Event of Default is existing which
remains uncured under the Loan Documents and (b) the Mortgaged Properties are
being maintained in accordance with standards acceptable to Lender and Fannie
Mae.
10. Additional Reporting Requirements. In addition to the financial
---------------------------------
reporting requirements set forth in the Mortgages, Borrowers shall deliver to
Lender quarterly (or monthly if required by Lender) financial statements for
each of the Mortgaged Properties, in form and substance satisfactory to Lender,
on an individual basis by no later than 21 days after the end of each fiscal
quarter, or month, as the case may be. In addition Borrowers shall deliver to
Lender copies of all annual reports on Form 10K, all quarterly reports on Form
10Q and all current reports on Form 8K filed by the REIT with the Securities and
Exchange Commission (the "SEC") promptly following the filing thereof with the
SEC.
11. Events of Default. An "Event of Default" shall occur if:
-----------------
(a) SPH TWO defaults in the payment of any of the interest on the SPH
TWO Note when the same becomes due and payable and the default continues for a
period of more than five days;
(b) SPH TWO (DC) defaults in the payment of any of the interest on the
SPH TWO (DC) Note when the same becomes due and payable and the default
continues for a period of more than five days;
(c) SPH TWO fails to perform, comply with or observe any of the terms,
covenants or conditions of this Agreement or any of the other Loan Documents
(other than a default described in subparagraph (a)) required to be performed,
complied with or observed by it;
(d) SPH TWO (DC) fails to perform, comply with or observe any of the
terms, covenants or conditions of this Agreement or any of the other Loan
Documents (other than a default described in subparagraph (b)) required to be
performed, complied with or observed by it;
(e) Any representation or warranty made by SPH TWO and SPH TWO (DC),
or both, in this Agreement, the Loan Closing Certifications or any of the other
Loan Documents is false or misleading in any material respect as of the date
made;
10
<PAGE>
(f) There is a Transfer of all or any part of the Mortgaged Properties
or any interest in the Mortgaged Properties or a Transfer of a Controlling
Interest (as those terms are defined in the Mortgages) which violates Section 21
of the Mortgages;
(g) SPH TWO (DC) defaults in the payment of any of the principal of,
interest on, or other amounts payable under any of the four Deed of Trust Notes
in the aggregate principal amount of $10,007,006, dated June 30, 1994 and
subordinated as of the date hereof to the liens of the applicable Mortgages,
issued by SPH TWO (DC) and payable to the order of SPH TWO;
(h) SPH TWO defaults in the payment, when due, of rent payable under,
or defaults in performing, complying with or observing any of the terms,
covenants or conditions of, any Ground Lease required to be paid, performed,
complied with or observed by it as lessee under such Ground Lease and the
default continues after the expiration of the period, if any, provided in the
Ground Lease for curing the default;
(i) SPH TWO or SPH TWO (DC) fails to perform, comply with or observe
any of the terms, covenants or conditions of the Reserve Agreement required to
be performed, complied with or observed by it; or
(j) If any circumstances arise with respect to the condominium regimes
for the Car Barn Condominia, or any of them, including without limitation,
changes in the law, that materially impair the value of the Car Barn Condominia,
or any of them, or Lender's security interest therein.
A default under subparagraphs (c) or (d) shall not be an Event of Default
until the Lender notifies the Borrowers in writing of the default and the
Borrowers do not cure the default within 10 days after receipt of such notice
(or, if the default can be cured, but not within 10 days, within such additional
period, not to exceed 20 days in the aggregate, as may be required by the
Borrowers to cure the default, provided that the Borrowers commence to cure the
default within the first 10-day period and thereafter prosecute the curing of
the default with diligence, continuity and in good faith). The preceding
sentence shall not apply to (i) a default by the Borrowers in performing or
complying with the provisions of Section 7 of the Mortgages, or (ii) a default
by the Borrowers in performing or complying with any negative covenant or
agreement in the Loan Documents which prohibits the Borrowers from taking
specified action.
12. Underwriting.
------------
(a) The parties acknowledge that Lender has not completed its
underwriting with respect to the Mortgaged Properties. Lender shall continue to
perform its underwriting of the Mortgaged Properties (other than the Fort
Chaplin Property) after the date of this Agreement and Borrowers shall cooperate
with Lender in performing such underwriting. Provided Borrowers cooperate with
Lender, Lender shall complete its underwriting on or before December 20, 1998.
Borrowers shall pay for all fees and expenses charged or incurred by Lender or
Fannie Mae in connection with such underwriting. Notwithstanding the foregoing,
Borrowers' liability for all third party underwriting charges (other than Fannie
Mae's legal costs) shall not exceed $25,000 (including environmental,
engineering, appraisal and
11
<PAGE>
other due diligence costs, and Lender's legal costs). If Lender determines, in
its discretion, that any Mortgaged Properties do not meet all of Fannie Mae's
then applicable underwriting criteria under the DUS Guide for new loans secured
by Multifamily Residential Properties, then such Mortgaged Properties, at either
Borrower's or Lender's request, shall be released from the lien of its Mortgage,
without payment of a Release Fee, and shall not be taken into account in
determining the Aggregate Debt Service Coverage Ratio and Aggregate Loan to
Value Ratio.
(b) Borrowers shall comply with all repair, replacement, operations and
maintenance or similar requirements required by Lender after the completion of
its underwriting, to the extent they are obligated to do so under the
Completion/Repair, Replacement Reserve and other Loan Documents executed in
connection with this Agreement. The foregoing shall not modify, expand or
reduce any of the obligations set forth in the Loan Documents. Without
limiting the foregoing, if required by Lender after completion of its
underwriting of the Mortgaged Properties identified as Crystal Place and Crystal
Square on Exhibit B, then, commencing on the first anniversary of the date of
---------
the Notes and on each anniversary date thereafter during the term of the
Mortgage Loans, SPH TWO will cause the parking garage structures in the
following Mortgaged Properties to be tested, at SPH TWO's sole cost and expense,
in accordance with the standards attached hereto as Exhibit E:
---------
Crystal Place
Crystal Square
The results of these tests, together with SPH TWO's written assessment of the
corrective action, if any, that should be taken, shall be delivered to Lender
within 30 days after SPH TWO receives the test results.
13. Waivers; Consents. Borrowers hereby waive the benefit of any laws or
-----------------
decisions requiring the marshaling of assets and consent to Lender's exercise of
its remedies under the Loan Documents by foreclosure of any of the Mortgaged
Properties in any order as Lender may determine, or all at one time.
14. Lender's Approval. Unless otherwise expressly provided in the Loan
-----------------
Documents, wherever the Loan Documents provide that the consent or approval of
Lender is required, Lender may give or withhold such consent or approval in its
sole and absolute discretion.
15. Operations and Maintenance Agreements. Borrowers agree at any time or
-------------------------------------
from time to time during the term of the Mortgage Loans, within 30 days after
demand by Lender, to enter into an agreement with Lender (or to enter into a
written program of operations and maintenance satisfactory to Lender and
governed by the Mortgages), under which Borrowers will agree to comply with any
reasonable program of operations and maintenance relating to the Mortgaged
Properties requested by Lender.
16. Revolving Facility.
------------------
(a) As contemplated in that certain letter executed by Lender and Charles
E. Smith Residential Realty, L.P. dated October 22, 1998, a copy of which is
attached hereto as Exhibit F, Borrowers, Lender and Fannie Mae have entered into
---------
12
<PAGE>
and, at their discretion, may continue discussions pursuant to which Borrowers
and Lender would execute a Master Credit Facility Agreement (a "Master
------
Agreement") providing for a Base Facility and a Revolving Facility under the
Fannie Mae Base/Revolver Credit Facility Product Line in an aggregate amount
(the "Commitment") not to exceed $200,000,000 (except as may be increased
pursuant to Section 16(b)(9)). In the event that Borrowers and Lender execute a
Master Agreement, it is contemplated that the Notes shall thereupon constitute
Base Facility Notes under the Base Facility and that the Mortgages shall be part
of the Collateral Pool securing the Notes. It is further contemplated that any
Advances made under the Base Facility or the Revolving Facility shall be deemed
secured under the Mortgages, and shall be considered Future Advances currently
contemplated by the Mortgages. Accordingly, upon the execution of such a Master
Agreement, the Mortgages shall secure the Notes, any other Base Facility Notes,
the Revolving Facility Note and all other Obligations under the Master Agreement
or the other loan documents executed by a party to the Master Agreement from
time to time in connection with the Master Agreement or the transactions
contemplated by the Master Agreement. Nothing in this paragraph shall impose
any obligation whatsoever on Borrowers, Fannie Mae or the Lender to enter into
the Master Agreement or any other transaction or to enter into discussions or
negotiations with respect to the Master Agreement or any other transaction.
Capitalized terms used in this paragraph shall have the meanings set forth in
the form Master Agreement prescribed by Fannie Mae from time to time under the
Fannie Mae Base/Revolver Credit Facility Product Line.
(b) In addition to the provisions of paragraph (a), if and when the Master
Agreement is executed, then the following terms shall apply:
(1) Any Advances (other than the Mortgage Loans described in this
Agreement) shall be secured by additional separate Multifamily Deeds of Trust,
Assignment of Rents and Security Agreements encumbering each Mortgaged Property
(collectively, the "Additional Mortgages"). Each Additional Mortgage
encumbering a Mortgaged Property shall be equal in priority to the lien of each
Mortgage encumbering the Mortgaged Property and shall contain such terms and
conditions as may be agreed upon by Lender and Borrowers. Lender and Borrowers
agree to enter into such amendments as may be necessary to the Mortgages or
other Loan Documents in order to accomplish the equality of lien priority as
between the Mortgages and the Additional Mortgages.
(2) If and when the Master Agreement is executed, Lender and Borrowers
shall terminate the Reserve Agreement and enter into a cash management agreement
(the "Cash Management Agreement"). The Cash Management Agreement shall include
the current Fannie Mae requirements regarding the establishment and maintenance
of cash management accounts pledged to Lender into which all Gross Revenues from
all Mortgaged Properties will be deposited, together with the following terms
and conditions: Borrowers shall not be required to deposit Gross Revenues into
the cash management accounts pledged to Lender unless the Aggregate Debt Service
Coverage Ratio for the Trailing 12 Month Period is less than 120%, assuming, for
purposes of this paragraph (2) only, that Facility Debt Service for term loans
shall be actual debt service and debt service for loans made under the Revolving
Facility shall be calculated at the rate at which each loan made under the
Revolving Facility is capped pursuant to the Cap Agreement executed by Borrowers
in connection with each loan made under the Revolving Facility.
13
<PAGE>
(3) At Borrower's request, a Mortgaged Property shall be released from the
lien of its Mortgage and all collateral derived from such Mortgaged Property
shall be released to Borrowers, without another Multifamily Residential Property
being substituted therefor, if each of the following conditions are met:
(a) After giving effect to the release, the Modified Coverage and LTV
Tests are satisfied.
(b) Borrowers shall cause the Release Property to be immediately
conveyed by Borrowers to a Person other than a Borrower;
(c) All documentation relating to the foregoing is acceptable to
Lender in all respects, including legal opinions, release
documentation and any amendments to this Agreement or the other
Loan Documents;
(d) Borrowers shall pay to Lender the Release Fee for each Release
Property;
(e) Borrowers shall pay, with respect to each Release Property, to
each of Lender and Servicer, all out-of-pocket costs and expenses
(including reasonable legal fees and expenses) incurred by Lender
or Servicer in connection with the foregoing. Such amounts shall
be paid by Borrowers on or prior to the closing date of such
release, or if such release fails to close, within 30 days of
Borrower's receipt of invoices therefor (and if requested by
Borrowers, reasonable supporting back-up invoices evidencing such
items), and shall be payable regardless whether the property is or
is not (for any reason) ultimately released from the lien of a
Mortgage; and
(f) No Event of Default, or any event which, with the giving of notice
or the passage of time, or both, would constitute an Event of
Default, shall have occurred and be continuing.
For these purposes the following terms shall have the respective
meanings set forth below:
"Modified Coverage and LTV Tests" mean, for any specified date, each
-------------------------------
of the following financial tests:
(a) The Aggregate Debt Service Coverage Ratio for the Trailing
12 Month Period is not less than (i) 10 basis points in
excess of the Initial Aggregate Debt Service Coverage Ratio
(if the specified date occurs prior to the tenth anniversary
of the date of this Agreement) or (ii) 15 basis points in
excess of the Initial Debt Service Coverage Ratio (if the
specified date occurs on or after the tenth anniversary of
the date of this Agreement).
14
<PAGE>
(b) The Aggregate Loan to Value Ratio for the Trailing 12 Month
Period does not exceed (i) 5 basis points lower than the
Initial Aggregate Loan to Value Ratio (if the specified date
occurs prior to the tenth anniversary of the date of this
Agreement) or (ii) 10 basis points lower than the Initial
Aggregate Loan to Value Ratio (if the specified date occurs
on or after the tenth anniversary of the date of this
Agreement).
For example, if the Initial Aggregate Debt Service Coverage Ratio were
140% and the Initial Loan To Value Ratio were 60%, (i) the Modified
Coverage and LTV Tests for a date that occurs prior to the tenth
anniversary of the date of this Agreement would be satisfied if the
Aggregate Debt Service Coverage Ratio for the Trailing 12 Month Period is
not less than 150% and the Aggregate Loan to Value Ratio for the Trailing
12 Month Period does not exceed 55% and (ii) the Modified Coverage and LTV
Tests for a date that occurs on or after the tenth anniversary of the date
of this Agreement would be satisfied if the Aggregate Debt Service Coverage
Ratio for the Trailing 12 Month Period is not less than 155% and the
Aggregate Loan to Value Ratio for the Trailing 12 Month Period does not
exceed 50%.
"Initial Aggregate Debt Service Coverage Ratio" means the
---------------------------------------------
Aggregate Debt Service Coverage Ratio for the Trailing 12 Month
Period for the Initial Mortgaged Properties, as determined by
Lender as of the Initial Underwriting Date, but determined after
giving effect to any releases, if any, of any Mortgaged
Properties pursuant to Section 2(b) hereof. For these purposes,
Facility Debt Service for term loans shall be actual debt service
and debt service for the Revolving Facility shall be calculated
on the full amount of the Revolving Facility Commitment (whether
or not the full amount of advances under the Revolving Facility
have been, or may be, drawn) at the rate at which each loan made
under the Revolving Facility is capped pursuant to the Cap
Agreement executed by Borrowers in connection with the
establishment of the Revolving Facility.
"Initial Aggregate Loan to Value Ratio" means the Aggregate Loan
-------------------------------------
to Value Ratio for the Trailing 12 Month Period, as determined by
Lender as of the Initial Underwriting Date, but determined after
giving effect to any releases, if any, of any Mortgaged
Properties pursuant to Section 2(b) hereof. For these purposes,
the outstanding principal balance of term loans shall be the
actual outstanding amount of the term loans and the outstanding
principal balance of revolving loans shall be calculated on the
full amount of the Revolving Facility Commitment (whether or not
the full amount of advances under the Revolving Facility have
been, or may be, drawn)
15
<PAGE>
(4) Borrowers shall be required to maintain an interest rate cap in the
amount of the maximum commitment under the Revolving Facility, at a strike rate
which will yield an Aggregate Debt Service Coverage Ratio for the Trailing 12
Month Period of 110%;
(5) Commencing in the seventh month of the term of the Revolving Facility,
Borrowers shall be required to pay a monthly standby fee equal to the product
obtained by multiplying (i) 1/12 by (ii) 25 basis points, by (iii) the Unused
Capacity for the month. The term "Unused Capacity" means, for any month, the
---------------
sum of the daily average during such month of the undrawn amount of the
Revolving Facility Commitment available under the Master Agreement for the
making of Revolving Advances, without regard to any unclosed Requests or to the
fact that a Request must satisfy conditions precedent.
(6) On and after the date of the Master Agreement, "Facility Debt Service"
---------------------
shall mean, as of any specified date, the sum of --
(a) the amount of interest and principal amortization, during the 12
month period immediately succeeding the specified date, with respect to the
Advances outstanding on the specified date, except that, for these purposes:
(i) each Revolving Advance shall be deemed to require level
monthly payments of principal and interest (at the Coupon
Rate for the Revolving Advance in an amount necessary to
fully amortize the original principal amount of the
Revolving Advance over a 30-year period, with such
amortization deemed to commence on the first day of the 12
month period; and
(ii) each Base Facility Advance shall be deemed to require level
monthly payments of principal and interest (at the Coupon
Rate for the Base Facility Advance) in an amount necessary
to fully amortize the original principal amount of the Base
Facility Advance over a 30-year period, with such
amortization to commence on the day of the first payment of
the Notes; and
(b) the amount of the standby fees payable to the Lender during such
12 month period (assuming, for these purposes, that the Advances
Outstanding throughout the 12 month period are always equal to the amount
of Advances Outstanding on the specified date).
(7) On and after the date of the Master Agreement, the definition of
"Coverage and LTV Tests" shall be modified to mean, for any specified date, each
- -----------------------
of the following financial tests:
(a) The Aggregate Debt Service Coverage Ratio for the Trailing 12
Month Period is not less than 135%.
16
<PAGE>
(b) The Aggregate Debt Service Coverage Ratio for the Trailing Three
Month Period is not less than 125%.
(c) The Aggregate Loan to Value Ratio for the Trailing 12 Month Period
does not exceed 65%.
(8) Borrowers shall, subject to certain conditions to be set forth in the
Master Agreement, have the right, but not the obligation, to convert all or a
portion of the Revolving Facility Commitment to Base Facility Commitment.
Borrowers shall not be permitted to convert a portion of the Revolving Facility
Commitment to Base Facility Commitment unless it obtains a simultaneous term
loan in the amount of the Revolving Facility Commitment being converted.
(9) Borrowers shall, subject to certain conditions to be set forth in the
Master Agreement, have the right, but not the obligation, to expand the
Commitment by $100,000,000.
(10) The occurrence of any event which constitutes an "Event of Default",
as defined in the Master Agreement, shall also constitute an Event of Default
under this Agreement, the Notes, the Mortgages and every other Loan Document.
17. General Conditions. The obligation of Lender to either release a
------------------
Mortgaged Property or substitute an additional Mortgaged Property shall be
subject to the following conditions precedent in addition to any other
conditions precedent set forth in this Agreement:
(a) Payment of Expenses. The payment by Borrowers of Lender's fees
-------------------
and expenses payable in accordance with the Agreement for which Lender has
presented an invoice on or before the applicable Closing Date.
(b) No Material Adverse Change. There has been no material adverse
--------------------------
change in the financial condition, business or prospects of Borrowers or in the
physical condition, operating performance or value of any of the Mortgaged
Properties since the date of this Agreement.
(c) No Default. There shall exist no Event of Default on the Closing
----------
Date and, after giving effect to the intended transaction, no Event of Default
shall have occurred.
(d) No Insolvency. Receipt by Lender on the Closing Date of evidence
-------------
of satisfactory to Lender that Borrowers are not insolvent (within the meaning
of any applicable federal or state laws relating to bankruptcy or fraudulent
transfers) or will be rendered insolvent by the transactions contemplated by the
Loan Documents, or, after giving effect to the intended transactions, will be
left with an unreasonably small capital with which to engage in their business
or undertakings, or will have intended to incur, or believe that it has
incurred, debts beyond their ability to pay such debts as they mature or will
have intended to hinder, delay or defraud any existing or future creditor.
17
<PAGE>
(e) No Untrue Statement. The Loan Documents shall not contain any
-------------------
untrue or misleading statement of a material fact and shall not fail to state a
material fact necessary in order to make the information contained therein not
misleading.
(f) Representations and Warranties. All representations and
------------------------------
warranties made by Borrowers in the Loan Documents shall be true and correct in
all material respects on the Closing Date with the same force and effect as if
such representations and warranties had been made on and as of the Closing Date.
(g) No Condemnation or Casualty. There shall not be pending or
---------------------------
threatened any condemnation or other taking, whether direct or indirect, against
any Mortgaged Property and there shall not have occurred any unrestored casualty
to any improvements located on any Mortgaged Property.
(h) Delivery of Closing Documents. The receipt by Lender of the
-----------------------------
following, each dated as of the Closing Date, in form and substance satisfactory
to Lender in all respects:
(i) A Compliance Certificate;
(ii) An Organizational Certificate; and
(iii) Such other documents, instruments, approvals (and, if
requested by the Lender, certified duplicates of executed copies thereof)
and opinions as Lender may request.
(i) Opinion. A favorable opinion of local counsel to Borrowers as to
-------
the enforceability of the Mortgage, and any other Loan Documents,
executed in connection with the intended transaction.
(j) Title Insurance. A commitment for the title insurance policy
---------------
applicable to only Mortgaged Property being substituted and the
pro forma title insurance policy based on the commitment of title
insurance.
(k) Insurance. The insurance policy (or a certified copy of the
---------
insurance policy) applicable to the Mortgaged Property.
(l) Survey. The survey applicable to the Mortgaged Property.
------
(m) DUS Guide Compliance. Evidence satisfactory to Lender of
--------------------
compliance of the Mortgaged Property with property laws as required by Sections
205 and 206 of Part III of the DUS Guide.
(n) Appraisal. An Appraisal of the Mortgaged Property.
---------
18
<PAGE>
(o) Replacement Reserve Agreement. A Replacement Reserve Agreement,
-----------------------------
providing for the establishment of a replacement reserve account, to be pledged
to Lender, in which the owner shall (unless waived by Lender) periodically
deposit amounts for replacements for improvements at the Mortgaged Property and
as additional security for the Borrowers' obligations under the Loan Documents.
(p) Completion/Repair and Security Agreement. A Completion/Repair and
----------------------------------------
Security Agreement, on the standard form required by the DUS Guide.
(q) Assignment of Management Agreement. An Assignment of Management
----------------------------------
Agreement, on the standard form required by the DUS Guide.
(r) Operations and Maintenance Agreement. An Operations and
------------------------------------
Maintenance Agreement, if Lender determines one to be necessary or desirable.
(s) Cash Management Agreement. With respect to requested substitution
-------------------------
of a Mortgaged Property, an amendment to the Cash Management Agreement, adding
the new owner as a party, if necessary, and adding a property account for the
Mortgaged Property.
18. Expenses. In addition to the other fees incurred by Lender and Fannie
--------
Mae to be paid by Borrowers pursuant to this Agreement, Borrowers shall also pay
all third-party costs incurred by Lender and Fannie Mae in connection with this
Agreement and the transactions described herein, including fees and expenses of
environmental consultants, engineering firms, appraisal companies, Lender's
counsel, Fannie Mae's counsel, and all other due diligence and other fees
incurred by Lender and Fannie Mae.
19. Capitalization Rate. For purposes of calculating the value of any
-------------------
Mortgaged Property, from time to time, including the value of any Mortgage
Property for which a request for a substitution or release has been transmitted
to Lender, the value of such Mortgaged Property shall be determined by
capitalizing the Net Operating Income for the Trailing 12 Month Period at the
capitalization rate utilized by Fannie Mae in the annual facility assessment
most recent to the date of the proposed substitution or release. Once such
values have been determined, if for any purpose, including that in Section
2(c)(3) of this Agreement, an amount of debt is allocated to each Mortgaged
Property, such amount shall be allocated pro rata to each Mortgaged Property, in
accordance with the respective values of such Mortgaged Properties determined by
Lender, and the debt service shall equal a pro rata portion of the Facility Debt
Service allocable to such debt.
20. Maximum Collateral Value. The term "Maximum Collateral Value" of each
------------------------
of the Mortgaged Properties, as such term may be used in the Loan Documents,
shall be the Maximum Collateral Value ascribed to such Mortgaged Property on
Exhibit B.
- ---------
19
<PAGE>
IN WITNESS WHEREOF, Borrowers and Lender have executed this Agreement or
caused the same to be executed by its representatives hereunto duly authorized.
BORROWERS:
SMITH PROPERTY HOLDINGS TWO L.P., a Delaware limited
partnership, by and through its managing general
partner
SMITH TWO, INC., a Delaware corporation
By: /s/ Gregory Samay
-------------------
Gregory Samay
Treasurer
SMITH PROPERTY HOLDINGS TWO (D.C.) L.P., a Delaware
limited partnership, by and through its managing
general partner
SMITH PROPERTY HOLDINGS TWO L.P., a Delaware
limited partnership, by and through its managing
general partner
SMITH TWO, INC., a Delaware corporation
By: /s/ Gregory Samay
------------------
Gregory Samay
Treasurer
[Signatures continued on following page]
<PAGE>
[Signatures continued from preceding page]
LENDER:
GREEN PARK FINANCIAL LIMITED PARTNERSHIP,
A District of Columbia limited partnership
By: Walker & Dunlop Multifamily, GP, LLC, a Delaware
limited liability company
By: /s/ Mary Ellen Slavinskas
---------------------------
Mary Ellen Slavinskas
Vice President
[Signatures continued on following page]
21
<PAGE>
[Signatures continued from preceding page]
UNDERTAKING OF CHARLES E. SMITH RESIDENTIAL REALTY, L.P.
--------------------------------------------------------
The undersigned, Charles E. Smith Residential Realty, L.P. (the "Operating
Partnership"), a general partner of each of the Borrowers, hereby makes the
following covenants for the benefit of Lender, acknowledges that Lender would
not make the Mortgage Loans without the Operating Partnership's execution of
these covenants, and acknowledges that it will benefit by the Lender's making of
the Mortgage Loans to Borrowers:
In the event that, as of the Initial Underwriting Date, the Coverage and LTV
Tests are not satisfied, the Operating Partnership shall execute a guaranty of
the Mortgage Loans, in form and substance acceptable to Lender. The guaranty
shall provide that the maximum amount which Lender may recover under the
guaranty shall be limited to the sum of--
(i) all costs, including attorneys' fees, to collect or enforce the
guaranty, and
(ii) the lesser of--
(x) $20,000,000, or
(y) the excess, if any, of--
(1) $140,000,000, over
(2) the maximum principal amount of debt (as determined by
Lender), bearing interest at 6.75% per annum (the
interest rate set forth in the Notes) at which the
Coverage and LTV Tests would be satisfied.
The guaranty shall be released at such time as the Coverage and LTV Tests are
satisfied.
22
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY, L.P., a
Delaware limited partnership, by and through its
managing general partner
Charles E. Smith Residential Realty, Inc., a
Maryland corporation, its general partner
By: /s/ Ernest A. Gerardi
-----------------------
Ernest A. Gerardi
President
23
<PAGE>
Exhibit A
---------
Borrower Amount Designation
-------------- ------------ -----------------
SPH TWO $125,334,060 SPH TWO Loan
SPH TWO (DC) $ 14,665,940 SPH TWO (DC) Loan
24
<PAGE>
Exhibit B
---------
<TABLE>
<CAPTION>
Property Common Name
and Property Address Maximum Collateral Value
-------------------- ------------------------
<S> <C>
Bedford Village
8301 Anderson Drive
Fairfax, Virginia 22031 $46,540,293
Car Barn I
One 14th Street, N.E.
Washington, D.C. 20002 $ 3,186,543
Car Barn II
One 14th Street, N.E.
Washington, D.C. 20002 $ 2,616,320
Car Barn III
One 14th Street, N.E.
Washington, D.C. 20002 $ 1,677,128
Concord Village
4155 S. Four Mile Run
Arlington, Virginia 22204 $20,497,962
Crystal Place
1801 Crystal Drive
Arlington, Virginia 22202 $19,295,353
Crystal Square
1515 Jefferson Davis Highway
Arlington, Virginia 22202 $23,253,375
Executive Central
1201 S. Scott Street
Arlington, Virginia 22204 $10,515,591
Executive South
1301 S. Scott Street
Arlington, Virginia 22204 $13,081,596
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Fort Chaplin Park
4212 E. Capitol Street
Washington, D.C. 20019 $14,518,920
Newport Village III
4757 W. Braddock Road
Alexandria, Virginia 22311 $ 8,888,778
Orleans Village North
6340 Wingate Street
Fairfax County, Virginia 22312 $21,987,144
Orleans Village South
6340 Wingate Street
Fairfax County, Virginia 22312 $23,940,997
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Exhibit C
---------
ORLEANS NORTH:
- -------------
<S> <C>
Landlord: Orleans Associates Limited
Partnership
Document: Indenture of Lease
Date: August 1, 1965
Document: Lease (Short Form)
Date: August 1, 1965
Recorded: December 27, 1979 in Book 5387,
Page 669
<CAPTION>
CRYSTAL SQUARE:
- ---------------------
<S> <C>
Landlord: South Washington Land
Corporation
Document: Indenture of Lease
Date: December 1, 1972
Document: Lease (Short Form)
Date: December 1, 1972
Recorded: Book 1805, Page 287
Document: Amendment to Indenture of Lease
Date: August 6, 1974
Document: Agreement
Date: December 23, 1966
Recorded Book 1639, Page 324
Document: Agreement
Date: December 23, 1966
Recorded: Book 1640, Page 318
Document: Second Supplemental Agreement
Date: February 1, 1967
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Document: Amended Agreement
Date: December 2, 1985
Recorded: Book 2200, Page 268
Document: Second Amended Agreement
Date: August 28, 1990
Document: Amendment to Indenture of Lease
Date: May 5, 1994
Recorded: Deed Book 2680, Page 136
<CAPTION>
NEWPORT III:
- -----------
<S> <C>
Landlord: Washington Forrest Foundation
Document: Lease
Date: August 31, 1970
Document: Lease (Short Form)
Date: October 1, 1970
Recorded: November 19, 1970 in Book 716,
Page 683
<CAPTION>
CONCORD:
- -------
<S> <C>
Landlord: Benjamin M. Smith, Jr. and
Howard W. Smith, Jr., Trustees
Document: Indenture of Lease
Date: January 1, 1966
Document: Lease (Short Form)
Date: January 1, 1966
Recorded: February 25, 1966 in Book 1614,
Page 594
Document: Agreement
Date: December 23, 1966
Recorded: Book 1639, Page 324
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Document: Agreement
Date: December 23, 1966
Recorded: Book 1640, Page 318
Document: Second Supplemental Agreement
Date: February 1, 1967
Document: Amended Agreement
Date: December 2, 1985
Recorded: Book 2200, Page 268
Document: Second Amended Agreement
Date: August 28, 1990
Document: Third Amendment to Indenture of Lease
Date: June 30, 1994
Recorded: Book 2685, Page 645
</TABLE>
<PAGE>
Exhibit D
---------
Amount of Second
Borrower Mortgage Loan
- -------- -------------
Smith Property Holdings Two (D.C.) L.P.
Breakdown By Property
- ------------------------
Fort Chaplin
4212 E. Capitol Street
Washington, D.C. 20019 $6,591,328
Car Barn I
One 14th Street, N.E.
Washington, D.C. 20002 $ 947,500
Car Barn II
One 14th Street, N.E.
Washington, D.C. 20002 $ 663,101
Car Barn III
One 14th Street, N.E.
Washington, D.C. 20002 $1,805,077
<PAGE>
Exhibit E
---------
[Garage Testing Standards]
<PAGE>
Exhibit F
---------
[Term Sheet]
<PAGE>
SECOND AMENDMENT TO
FIRST AMENDED AND RESTATED AGREEMENT OF
1994 EMPLOYEE STOCK AND UNIT OPTION PLAN OF
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
THIS SECOND AMENDMENT TO THE FIRST AMENDED AND RESTATED AGREEMENT OF 1994
EMPLOYEE STOCK AND UNIT OPTION PLAN, dated as of March 1, 1999, is entered into
by Charles E. Smith Residential Realty, Inc., a Maryland corporation, (the
"Corporation") for itself and as general partner of Charles E. Smith Residential
Realty L.P. (together the "Company"), and Smith Realty Company, Consolidated
Engineering Services, Inc., and Smith Management Construction, Inc.
(collectively the "Operating Subsidiaries").
WHEREAS, the 1994 Employee Stock and Unit Option Plan (the "Plan") was
approved by the Board of Directors of Charles E. Smith Residential Realty, Inc.,
for itself and as a general partner of the Charles E. Smith Residential Realty
L.P., by unanimous written consents dated May 25, 1994, June 13, 1994, June 22,
1994, and June 23, 1994, and at a meeting held on July 26, 1994, by the
shareholders of Charles E. Smith Residential Realty, Inc., by unanimous written
consents dated June 17, 1994, June 22, 1994, and June 23, 1994, and by the
partners of Charles E. Smith Residential Realty L.P. by unanimous written
consents dated June 17, 1994, and June 23, 1994, and the Plan, together with the
1994 Employee Restricted Stock and Restricted Unit Plan and Directors Stock
Option Plan, was incorporated in a filing on Form S-8 with the Securities and
Exchange Commission, which became effective on August 8, 1994; and
WHEREAS, the Board of Directors of the Company duly adopted and approved
the First Amended and Restated 1994 Employee Stock and Unit Option Plan on
November 8, 1994, which was incorporated in a filing on Form 10-K for the year
ended December 31, 1994 and filed with the SEC on March 31, 1995, and the First
Amendment thereto dated as of May 7, 1998, which was incorporated in a filing on
Form S-8 and filed with the SEC on November 17, 1998; and
WHEREAS, the Board of Directors believes that it is in the best interests
of the Company to allow options to be granted to the Co-Chief Executive Officers
of the Corporation, and did, by unanimous written consents dated March 1, 1999,
approve a resolution to permit such grants.
NOW, THEREFORE, IT IS RESOLVED, that in consideration of the premises set
forth and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto hereby amend the Plans as
follows:
1. Section 5.1 of the Plan is hereby amended and restated in its entirety
as follows:
"Designated Recipients. Incentive Awards may be granted under the Plan to
(i) any full-time employee of the Company or any Affiliate (including any
such individual who is an officer or director of the Company or an
Affiliate) as the Committee shall determine and designate from time to time
or (ii) any other individual whose participation in the Plan is determined
by the Committee to be in the best interests of the Company and is so
designated by the Committee."
E-5
<PAGE>
2. All capitalized terms used in this Second Amendment and not otherwise
defined shall have the meanings assigned to them in the Plan. Except as modified
herein, all terms and conditions of the Plan shall remain in full force and
effect, which terms and conditions the parties hereto ratify and affirm.
IN WITNESS WHEREOF, the undersigned have executed this SECOND AMENDMENT TO
FIRST AMENDED AND RESTATED AGREEMENT OF 1994 EMPLOYEE STOCK AND UNIT OPTION PLAN
as of the date first above written.
CHARLES E. SMITH RESIDENTIAL REALTY, INC.,
for itself and as general partner of Charles E.
Smith Residential Realty L.P.
BY: /s/ Ernest A. Gerardi, Jr.
-------------------------------------------
Ernest A. Gerardi, Jr., President
This Second Amendment to the Plan was duly adopted and approved by the Board of
Directors of the Company by unanimous written consents dated March 1, 1999.
/s/ Robert D. Zimet
--------------------------------------------------
Robert D. Zimet, Secretary
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
and
FIRST UNION NATIONAL BANK
as Rights Agent
RIGHTS AGREEMENT
dated as of December 2, 1998
E-6
<PAGE>
RIGHTS AGREEMENT
Rights Agreement, dated as of December 2, 1998 (this "Agreement"), between
CHARLES E. SMITH RESIDENTIAL REALTY, INC., a Maryland corporation (the
"Company"), and FIRST UNION NATIONAL BANK (the "Rights Agent").
WHEREAS, on December 2, 1998 (the "Rights Dividend Declaration Date"), the
Board of Directors of the Company authorized and declared a dividend of one
preferred share purchase right (a "Right") for each share of Common Stock (as
defined herein) of the Company outstanding at the Close of Business (as defined
herein) on the Record Date (as defined herein), and has authorized the issuance
of one Right with respect to each share of Common Stock of the Company issued
between the Record Date (whether originally issued or delivered from the
Company's treasury) and the Distribution Date (as defined herein), each Right
initially representing the right to purchase one one-thousandth of a share of
Series D Junior Participating Preferred Stock of the Company having the
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, and terms or conditions of
redemption set forth in the form of Articles Supplementary of Board of Directors
Classifying and Designating a Series of Preferred Stock as Series D Junior
Participating Preferred Stock and Fixing Distribution and Other Preferences and
Rights of such Series attached hereto as Exhibit A, upon the terms and subject
---------
to the conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein set forth, the parties hereby agree as follows:
Section 1. Certain Definitions.
For purposes of this Agreement, the following terms have the meanings
indicated:
(a) "Acquiring Person" shall mean any Person (as defined herein) who
or which, together with all Affiliates and Associates (as such terms are defined
herein) of such Person, shall be the Beneficial Owner (as defined herein) of 15%
or more of the shares of Common Stock then outstanding, but shall not include:
(i) the Company;
(ii) any Subsidiary of the Company; or
(iii) any employee benefit plan of the Company or any Subsidiary
of the Company, or any Person holding shares of Common Stock for or pursuant to
the terms of any such plan to the extent, and only to the extent, of such shares
so held.
Notwithstanding the foregoing, no Person shall become an "Acquiring
Person" as the result of an acquisition of shares of Common Stock by the Company
which, by reducing the number of shares of
<PAGE>
Common Stock outstanding, increases the proportionate number of shares of Common
Stock beneficially owned by such Person to 15% or more of the shares of Common
Stock of the Company then outstanding; provided, however, that if a Person shall
-------- -------
become the Beneficial Owner of 15% or more of the Common Stock of the Company
then outstanding by reason of share purchases by the Company and shall, after
such share purchases by the Company, become the Beneficial Owner of any
additional shares of Common Stock of the Company, then such Person shall be
deemed to be an "Acquiring Person" if such Person is then the Beneficial Owner
of 15% or more of the Common Stock then outstanding. Notwithstanding the
foregoing, if the Board of Directors of the Company determines in good faith
that a Person who would otherwise be an "Acquiring Person", as defined pursuant
to the foregoing provisions of this paragraph (a), has become such
inadvertently, and such Person divests as promptly as practicable a sufficient
number of shares of Common Stock so that such Person would no longer be an
"Acquiring Person", then such Person shall not be deemed an "Acquiring Person"
for any purposes of this Agreement unless and until such Person shall again
become an "Acquiring Person".
(b) "Adjustment Shares" shall have the meaning set forth in Section
11(a)(ii) hereof.
(c) "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Exchange Act (as defined herein).
(d) "Agreement" shall mean this Rights Agreement as originally
executed or as it may from time to time be supplemented or amended pursuant to
the applicable provisions hereof.
(e) A Person shall be deemed the "Beneficial Owner" of and shall be
deemed to "beneficially own" any securities:
(i) which such Person or any of such Person's Affiliates or
Associates, directly or indirectly, has the right to acquire (whether
such right is exercisable immediately or only after the passage of
time) pursuant to any agreement, arrangement or understanding (whether
or not in writing), or upon the exercise of conversion rights,
exchange rights, other rights (other than these Rights), warrants or
options, or otherwise; provided, however, that a Person shall not be
deemed the "Beneficial Owner" of, or to "beneficially own", (A)
securities tendered pursuant to a tender or exchange offer made by or
on behalf of such Person or any of such Person's Affiliates or
Associates until such tendered securities are accepted for purchase or
exchange; or (B) securities issuable upon exercise of Rights at any
time prior to the occurrence of a Triggering Event, or (C) securities
issuable upon exercise of Rights from and after the occurrence of a
Triggering Event which Rights were acquired by such Person or any of
such Person's Affiliates or Associates prior to the Distribution Date
or pursuant to Section 3(a) or Section 22 hereof (the "Original
Rights") or pursuant to Section 11(i) hereof in connection with an
adjustment made with respect to any Original Rights;
<PAGE>
(ii) which such Person or any of such Person's Affiliates or
Associates, directly or indirectly, has the right to vote or dispose
of or has "beneficial ownership" of (as determined pursuant to Rule
13d-3 of the General Rules and Regulations under the Exchange Act),
including pursuant to any agreement, arrangement or understanding,
whether or not in writing; provided, however, that a Person shall not
be deemed the "Beneficial Owner" of, or to beneficially own, any
security under this subparagraph (ii) as a result of an agreement,
arrangement or understanding to vote such security if such agreement,
arrangement or understanding: (A) arises solely from a revocable proxy
given in response to a public proxy or consent solicitation made
pursuant to, and in accordance with, the applicable provisions of the
General Rules and Regulations under the Exchange Act, and (B) is not
also then reportable by such Person on Schedule 13D under the Exchange
Act (or any comparable or successor report); or
(iii) which are beneficially owned, directly or indirectly, by any
other Person (or any Affiliate or Associate thereof) with which such
Person or any of such Person's Affiliates or Associates has any
agreement, arrangement or understanding (whether or not in writing),
for the purpose of acquiring, holding, voting (except pursuant to a
revocable proxy as described in the proviso to subparagraph (ii) of
this paragraph (e)) or disposing of any voting securities of the
Company;
provided, however, that nothing in this paragraph (e) shall cause a Person
-------- -------
engaged in business as an underwriter of securities to be the "Beneficial
Owner" of, or to "beneficially own," any securities acquired through such
Person's participation in good faith in a firm commitment underwriting
until the expiration of forty days after the date of such acquisition.
Notwithstanding anything contained in this paragraph (e), a Person shall
not be deemed the "Beneficial Owner" of, or to "beneficially own" any
Exempt Shares.
(f) "Board" shall mean the Board of Directors of the Company.
(g) "Business Day" shall mean any day other than a Saturday, Sunday,
or a day on which banking or trust institutions in the State of New York are
authorized or obligated by law or executive order to close.
(h) "Close of Business" on any given date shall mean 5:00 P.M., New
York City time, on such date; provided, however, that if such date is not a
Business Day it shall mean 5:00 P.M., New York City time, on the next succeeding
Business Day.
(i) "Common Stock" when used with reference to the Company shall mean
the shares of common stock, par value $.01 per share, of the Company. "Common
Stock" when used with reference to any Person other than the Company shall mean
the class of capital stock with the greatest aggregate voting power, or the
class of equity securities or other equity interests having power to control or
direct the management, of such Person.
<PAGE>
(j) "Company" shall mean Charles E. Smith Residential Realty, Inc., a
Maryland corporation.
(k) "Distribution Date" shall mean the earlier of (i) the Close of
Business on the tenth day after the Stock Acquisition Date (or, if the tenth day
after the Stock Acquisition Date occurs before the Record Date, the Close of
Business on the Record Date), or (ii) the Close of Business on the tenth
Business Day (or, if such tenth Business Day occurs before the Record Date, the
Close of Business on the Record Date), or such specified or unspecified later
date on or after the Record Date as may be determined by action of the Board
prior to such time as any Person becomes an Acquiring Person, after the date
that a tender or exchange offer by any Person (other than the Company, any
Subsidiary of the Company or any employee benefit plan of the Company or of any
Subsidiary of the Company or any Person holding shares of Common Stock for or
pursuant to the terms of any such plan) is first published or sent or given
within the meaning of Rule 14d-2(a) of the General Rules and Regulations under
the Exchange Act, if upon consummation thereof, such Person would be the
beneficial owner of 15% or more of the outstanding shares of Common Stock.
(m) "Equivalent Preferred Stock" shall have the meaning set forth in
Section 11(b) hereof.
(n) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, as in effect on the date of this Agreement.
(o) "Exchange Date" shall have the meaning set forth in Section 7(a)
hereof.
(p) "Exempt Shares" shall mean, as to Security Capital Preferred
Growth Incorporated and any of its Affiliates and Associates controlled,
directly or indirectly, by Security Capital Group Incorporated (collectively,
"Security Capital") and any other Person that Beneficially Owns shares of Series
A Cumulative Convertible Redeemable Preferred Stock ("Series A Preferred
Shares") or shares of Common Stock on the Rights Dividend Declaration Date
solely by reason of Security Capital's Beneficial Ownership of Series A
Preferred Shares on the Rights Dividend Declaration Date, (i) in the event (a)
Security Capital or such other Person shall have acquired shares of Common Stock
upon the conversion of Series A Preferred Shares strictly in accordance with and
consistent with the provisions and limitations set forth in the Series A
Preferred Stock Purchase Agreement dated as of May 15, 1997 between Security
Capital Preferred Growth Incorporated and the Company (including, without
limitation, the Waiver of Ownership Limitations set forth in Exhibit D attached
thereto) and the Series A Preferred Articles Supplementary (as defined therein),
(b) such shares of Common Stock so acquired have been continuously since such
acquisition beneficially owned by Security Capital or such other Person and (c)
such shares of Common Stock so acquired and so beneficially owned represent 15%
or more of the shares of Common Stock at any time outstanding, then the portion
of such shares of Common Stock that represents in excess of 15% of the
outstanding shares of Common Stock, and (ii) shares of Common Stock acquired by
Security Capital or such other Person as a result of a stock dividend, stock
distribution or other recapitalization, in respect to Exempt Shares only,
<PAGE>
whereby any Common Stock received by such Person is substantially proportional
to the amount of Common Stock owned by such Person prior to such transaction and
where such Common Stock is beneficially owned (without giving effect to the last
sentence of Section 1(e)) by such Person continuously thereafter. For purposes
of the determination of Exempt Shares, any shares of Common Stock sold,
transferred or otherwise disposed of shall be deemed to have been from Exempt
Shares, if any. Any disputes arising pursuant to this definition shall be
definitively and conclusively resolved by the Board, in its sole discretion.
(q) "Expiration Date" shall have the meaning set forth in Section 7(a)
hereof.
(r) "Final Expiration Date" shall have the meaning set forth in
Section 7(a) hereof.
(s) "Person" shall mean any individual, firm, corporation, partnership
or other entity, and shall include any successor (by merger or otherwise) of
such entity.
(t) "Principal Party" shall have the meaning set forth in Section
13(b) hereof.
(u) "Purchase Price" shall have the meaning set forth in Section 4(a)
and 11(a)(ii) hereof.
(v) "Record Date" shall mean the close of business on December 14,
1998.
(w) "Redemption Period" shall have the meaning set forth in Section
23(a) hereof.
(x) "Redemption Price" shall have the meaning set forth in Section
23(a) hereof.
(y) "Rights Agent" shall mean First Union National Bank.
(z) "Rights Certificate" shall have the meaning set forth in Section
3(d) hereof.
(aa) "Rights Dividend Declaration Date" shall mean the close of
business on December 2, 1998.
(bb) "Section 11(a)(ii) Event" shall mean any event described in
Section 11(a)(ii) hereof.
(cc) "Section 11(a)(ii) Trigger Date" shall have the meaning set forth
in Section 11(a)(iii) hereof.
(dd) "Section 13 Event" shall mean any event described in clauses (x),
(y) or (z) of Section 13(a) hereof.
<PAGE>
(ee) "Securities Act" shall mean the Securities Act of 1933, as
amended and as in effect on the date of this Agreement.
(ff) "Series D Preferred Stock" shall mean shares of Series D Junior
Participating Preferred Stock of the Company.
(gg) "Stock Acquisition Date" shall mean the first date of public
announcement (which, for purposes of this definition, shall include, without
limitation, a report filed pursuant to Section 13(d) of the Exchange Act) by the
Company or an Acquiring Person that an Acquiring Person has become such.
(hh) "Spread" shall have the meaning set forth in Section 11(a)(iii)
hereof.
(ii) "Stock Equivalents" shall have the meaning set forth in Section
11(a)(iii) hereof.
(jj) "Subsidiary" of any Person shall mean any corporation or other
entity of which a majority of the voting power of the voting equity securities
or equity interests is owned, directly or indirectly, by such Person, or is
otherwise controlled by such Person.
(kk) "Substitution Period" shall have the meaning set forth in Section
11(a)(iii) hereof.
(ll) "Summary Rights" shall have the meaning set forth in Section 3(a)
hereof.
(mm) "Trading Day" shall have the meaning set forth in Section
11(d)(i) hereof.
(nn) "Triggering Event" shall mean any Section 11(a)(ii) Event or any
Section 13 Event.
Section 2. Appointment of Rights Agent.
The Company hereby appoints the Rights Agent to act as agent for the
Company and the holders of the Rights (who, in accordance with Section 3 hereof,
shall prior to the Distribution Date also be the holders of the Common Stock) in
accordance with the terms and conditions hereof, and the Rights Agent hereby
accepts such appointment. The Company may from time to time appoint such Co-
Rights Agents as it may deem necessary or desirable.
Section 3. Issue of Rights Certificates.
(a) As promptly as practicable following the Record Date, the Company will
send or deliver a copy of a Summary of Rights to Purchase Series D Preferred
Stock, in substantially the form attached hereto as Exhibit B (the "Summary of
---------
Rights"), to each record holder of Common Stock as of the Close of Business on
the Record Date at the address of such holder shown on the
<PAGE>
records of the Company. With respect to certificates for shares of Common Stock
outstanding as of the Record Date, until the Distribution Date, the Rights will
be evidenced by such certificates for the Common Stock and the registered
holders of the Common Stock shall also be the registered holders of the
associated Rights. Until the Distribution Date (or the earlier Expiration Date
or Final Expiration Date), the transfer of any certificate representing shares
of Common Stock in respect of which Rights have been issued shall also
constitute the transfer of the Rights associated with the shares of Common Stock
represented thereby.
(b) Rights shall be issued in respect of all shares of Common Stock issued
(whether originally issued or from the Company's treasury) after the Record Date
but prior to the earlier of the Distribution Date or the Expiration Date or the
Final Expiration Date. Rights shall also be issued to the extent provided in
Section 22 in respect of all shares of Common Stock which are issued (whether
originally issued or from the Company's treasury) after the Distribution Date
and prior to the Expiration Date. Certificates representing such shares of
Common Stock shall also be deemed to be certificates for Rights, and shall bear
the following legend (in addition to any other legends that may be required):
This Certificate also evidences and entitles the holder hereof to
certain Rights as set forth in a Rights Agreement between Charles E.
Smith Residential Realty, Inc., a Maryland corporation (the
"Corporation") and First Union National Bank (the "Rights Agent"),
dated as of December __, 1998 (the "Rights Agreement"), the terms of
which are hereby incorporated herein by reference and a copy of which
is on file at the principal executive offices of the Corporation. Under
certain circumstances, as set forth in the Rights Agreement, such
Rights will be evidenced by separate certificates and will no longer be
evidenced by this Certificate. The Corporation will mail to the holder
of this Certificate a copy of the Rights Agreement as in effect on the
date of mailing without charge after receipt of a written request
therefor.
Under certain circumstances set forth in the Rights Agreement, Rights
issued to, or held by, any Person who is, was or becomes an Acquiring
Person or any Affiliate or Associate thereof (as such terms are defined
in the Rights Agreement), whether currently held by or on behalf of
such Person or by any subsequent holder, may become null and void. The
Rights shall not be exercisable, and shall be null and void so long as
held, by a holder in any jurisdiction where the requisite qualification
of the issuance to such holder, or the exercise by such holder, of the
Rights in such jurisdiction shall not have been obtained or be
obtainable.
With respect to such certificates containing the foregoing legend, until the
earlier of (i) the Distribution Date or (ii) the Expiration Date, the Rights
associated with the Common Stock represented by such certificates shall be
evidenced by such certificates alone and registered holders of Common Stock
shall also be the registered holders of the associated Rights, and the transfer
of any such certificate shall also constitute the transfer of the Rights
associated with the Common Stock represented thereby.
<PAGE>
(c) Until the Distribution Date (i) the Rights will be evidenced (subject
to the provisions of paragraph (a) of this Section 3) by the certificates for
Common Stock registered in the names of the holders thereof (which certificates
for Common Stock shall also be deemed to be Rights Certificates) and not by
separate Rights Certificates, and (ii) the Rights will be transferable only in
connection with the transfer of the underlying shares of Common Stock (including
a transfer to the Company).
(d) As soon as practicable after the Distribution Date, the Rights Agent
upon notification thereof will send by first-class, insured, postage prepaid
mail, to each record holder of Common Stock as of the Close of Business on the
Distribution Date, at the address of such holder shown on the records of the
Company, a rights certificate, in substantially the form of Exhibit C hereto
---------
(the "Rights Certificate"), evidencing one Right for each share of Common Stock
so held, subject to adjustment as provided herein. In the event that an
adjustment in the number of Rights per share of Common Stock has been made
pursuant to Section 11 hereof, at the time of distribution of the Rights
Certificates, the Company shall make necessary and appropriate rounding
adjustments (in accordance with Section 14(a) hereof) so that Rights
Certificates representing only whole numbers of Rights are distributed and cash
is paid in lieu of any fractional Rights. As of and after the Distribution
Date, the Rights will be evidenced solely by such Right Certificates.
(e) Notwithstanding anything to the contrary set forth herein, if a timely
and proper exercise of a conversion right with respect to any Series A Preferred
Shares is delivered to the Company on or prior to the Distribution Date, the
shares of Common Stock issuable upon exercise of such conversion right shall be
deemed to have been issued prior to the Distribution Date, and any holder of a
share of Common Stock issued upon such exercise of such right shall be entitled
to receive the same number of Rights per share of Common Stock as if such holder
were a record holder of Common Stock as of the Close of Business on the
Distribution Date as provided in Section 3(d), even if issuance of shares of
Common Stock upon such exercise of such right occurs after the Distribution
Date.
Section 4. Form of Rights Certificates.
(a) The Rights Certificates (and the forms of election to purchase and of
assignment to be printed on the reverse thereof) shall be substantially the same
as Exhibit C hereto and may have such marks of identification or designation and
---------
such legends, summaries or endorsements printed thereon as the Company may deem
appropriate, and as are not inconsistent with the provisions of this Agreement,
or as may be required to comply with any applicable law or with any rule or
regulation made pursuant thereto or with any rule or regulation of any stock
exchange on which the Rights may from time to time be listed, or to conform to
usage. Subject to the provisions of Section 11 and Section 22 hereof, the
Rights Certificates, whenever issued, shall be dated as of the Record Date, and
on their face shall entitle the holders thereof to purchase such number of one
one-thousandths of a share of Series D Preferred Stock as shall be set forth
therein at the price set forth therein (such exercise price per one one-
thousandth of a share, the "Purchase Price"), but the amount and type of
securities purchasable upon exercise of each Right and the
<PAGE>
Purchase Price thereof shall be subject to adjustment as provided herein.
(b) Any Rights Certificate issued pursuant to Section 3(d) or Section 22
hereof that represents Rights beneficially owned by: (i) an Acquiring Person or
any Associate or Affiliate of an Acquiring Person; (ii) a transferee of an
Acquiring Person (or of any such Associate or Affiliate) who becomes a
transferee after the Acquiring Person becomes such; or (iii) a transferee of an
Acquiring Person (or of any such Associate or Affiliate) who becomes a
transferee prior to or concurrently with the Acquiring Person becoming such and
receives such Rights pursuant to either (A) a transfer (whether or not for
consideration) from the Acquiring Person to holders of equity interests in such
Acquiring Person or to any Person with whom such Acquiring Person has any
continuing agreement, arrangement or understanding regarding the transferred
Rights or (B) a transfer which a majority of the Board has determined is part of
an agreement, arrangement or understanding which has as a primary purpose or
effect avoidance of Section 7(e) hereof and any Rights Certificate issued
pursuant to Section 6 or Section 11 hereof upon transfer, exchange, replacement
or adjustment of any other Rights Certificate referred to in this sentence,
shall contain (to the extent feasible) the following legend:
The Rights represented by this Rights Certificate are or were
beneficially owned by a Person who was or became an Acquiring
Person or an Affiliate or Associate of an Acquiring Person (as
such terms are defined in the Rights Agreement). Accordingly,
this Rights Certificate and the Rights represented hereby may
become null and void in the circumstances specified in Section
7(e) of such Rights Agreement.
Section 5. Countersignature and Registration.
(a) The Rights Certificates shall be executed on behalf of the Company by
its President, a Vice-President or the Chairman of the Board and countersigned
by the Secretary, an Assistant Secretary, the Treasurer or an Assistant
Treasurer, in each case either manually or by facsimile signature, and have
affixed thereto the Company's seal or a facsimile thereof. The Rights
Certificates shall be countersigned, either manually or by facsimile signature,
by the Rights Agent and shall not be valid for any purpose unless so
countersigned (but it shall not be necessary for the same signatory to
countersign all of the Rights Certificates hereunder). In case any officer of
the Company who shall have signed any of the Rights Certificates shall cease to
be such officer of the Company before countersignature by the Rights Agent and
issuance and delivery by the Company, such Rights Certificates, nevertheless,
may be countersigned by the Rights Agent, and issued and delivered by the
Company with the same force and effect as though the person who signed such
Rights Certificates had not ceased to be such officer of the Company; and any
Rights Certificate may be signed on behalf of the Company by any person who, at
the actual date of the execution of such Rights Certificate, shall be a proper
officer of the Company to sign such Rights Certificate, although at the date of
the execution of this Agreement any such person was not such an officer.
(b) Following the Distribution Date, the Rights Agent will keep or cause to
be kept, at
<PAGE>
its principal office or at offices designated as the appropriate place for
surrender of Rights Certificates upon exercise or transfer, books for
registration and transfer of the Rights Certificates issued hereunder. Such
books shall show the names and addresses of the respective holders of the Rights
Certificates, the number of Rights evidenced on its face by each of the Rights
Certificates and the date of each of the Rights Certificates.
Section 6. Transfer, Split Up, Combination and Exchange of Rights
Certificates; Mutilated, Destroyed, Lost or Stolen Rights
Certificates.
(a) Subject to the provisions of Section 4(b), Section 7(e) and Section 14
hereof, at any time after the Close of Business on the Distribution Date, and at
or prior to the Close of Business on the earlier of the Expiration Date or Final
Expiration Date, any Rights Certificate or Certificates may be transferred,
split up, combined or exchanged for another Rights Certificate or Certificates,
entitling the registered holder to purchase a like number of one one-thousandths
of a share of Series D Preferred Stock (or following a Triggering Event, Common
Stock, other securities, cash, or other assets, as the case may be) as the
Rights Certificate or Certificates surrendered then entitled such holder (or
former holder in the case of a transfer) to purchase. Any registered holder
desiring to transfer, split up, combine or exchange any Rights Certificate shall
make such request in writing delivered to the Rights Agent, and shall surrender
the Rights Certificate or Certificates to be transferred, split up, combined or
exchanged at the office of the Rights Agent designated for such purpose.
Neither the Rights Agent nor the Company shall be obligated to take any action
whatsoever with respect to the transfer of any such surrendered Rights
Certificate until the registered holder shall have properly completed and signed
the certificate contained in the form of assignment on the reverse side of such
Rights Certificate and shall have provided such additional evidence of the
identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or
Associates thereof as the Company shall reasonably request. Thereupon the
Rights Agent shall, subject to Section 4(b), Section 7(e) and Section 14 hereof,
countersign and deliver to the Person entitled thereto a Rights Certificate or
Certificates, as the case may be, as so requested. The Company may require
payment of a sum sufficient to cover any tax or governmental charge that may be
imposed in connection with any transfer, split up, combination or exchange of
Rights Certificates.
(b) Upon receipt by the Company and the Rights Agent of evidence reasonably
satisfactory to them of the loss, theft, destruction or mutilation of a Rights
Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to them, and, at the Company's request,
reimbursement to the Company and the Rights Agent of all reasonable expenses
incidental thereto, and upon surrender to the Rights Agent and cancellation of
the Rights Certificate if mutilated, the Company will execute and deliver a new
Rights Certificate of like tenor to the Rights Agent for countersignature and
delivery to the registered owner in lieu of the Rights Certificate so lost,
stolen, destroyed, or mutilated.
Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights.
(a) Subject to Section 7(e) hereof, the registered holder of any Rights
Certificate may
<PAGE>
exercise the Rights evidenced thereby (except as otherwise provided herein
including, without limitation, the restrictions on exercisability set forth in
Section 9(c), Section 11(a)(iii) and Section 23(a) hereof) in whole or in part
at any time after the Distribution Date upon surrender of the Rights
Certificate, with the form of election to purchase and the certificate on the
reverse side thereof duly and properly executed, to the Rights Agent at the
office of the Rights Agent designated for such purpose, together with payment of
the Purchase Price for each one one-thousandth of a share of Series D Preferred
Stock (or other securities, cash or other assets, as the case may be) as to
which the Rights are exercised, at or prior to the earlier of (i) the close of
business on December 13, 2008 (the "Final Expiration Date"), (ii) the time at
which the Rights are redeemed as provided in Section 23 hereof, (iii) the time
at which such Rights are exchanged (the "Exchange Date") as provided in Section
24 hereof, or (iv) the time at which the Rights expire pursuant to Section 13(d)
hereof (the earliest of (i), (ii), (iii) and (iv) being herein referred to as
the "Expiration Date").
(b) Each Right shall entitle the registered holder thereof to purchase one
one-thousandth of a share of Series D Preferred Stock, and the Purchase Price
for each one one-thousandth of a share of Series D Preferred Stock pursuant to
the exercise of a Right shall initially be $108.00, and shall be subject to
adjustment from time to time as provided in Sections 11 and 13 hereof and shall
be payable in lawful money of the United States of America in accordance with
paragraph (c) below.
(c) Upon receipt of a Rights Certificate representing exercisable Rights,
with the form of election to purchase and the certificate duly and properly
executed, accompanied by payment, with respect to each Right so exercised, of
the Purchase Price per one one-thousandth of a share of Series D Preferred Stock
(or Common Stock, other securities, cash or other assets, as the case may be) to
be purchased and an amount equal to any applicable transfer tax or governmental
charge in cash, or by certified check, cashier's check or bank draft payable to
the order of the Company, the Rights Agent shall, subject to Section 18(k)
hereof, thereupon promptly (i) (A) requisition from any transfer agent of the
shares of Series D Preferred Stock (or make available, if the Rights Agent is
the transfer agent) certificates for the total number of one one-thousandths of
a share of Series D Preferred Stock to be purchased and the Company hereby
irrevocably authorizes its transfer agent to comply with all such requests, or
(B) if the Company shall have elected to deposit the total number of shares of
Series D Preferred Stock issuable upon exercise of the Rights hereunder with a
depositary agent, requisition from the depositary agent depositary receipts
representing such number of one one-thousandths of a share of Series D Preferred
Stock as are to be purchased (in which case certificates for the shares of
Series D Preferred Stock represented by such receipts shall be deposited by the
transfer agent with the depositary agent) and the Company will direct the
depositary to comply with such request, (ii) requisition from the Company the
amount of cash, if any, to be paid in lieu of issuance of fractional shares in
accordance with Section 14, (iii) promptly after receipt of such certificates or
depositary receipts, cause the same to be delivered to or upon the order of the
registered holder of such Rights Certificate, registered in such name or names
as may be designated by such holder and (iv) after receipt thereof, promptly
deliver such cash, if any, to or upon the order of the registered holder of such
Rights Certificate. In the event that the Company is obligated to issue other
securities (including Common Stock) of the Company, pay cash and/or distribute
other
<PAGE>
property pursuant to Section 11(a) hereof, the Company will make all
arrangements necessary so that such securities, cash and/or other property are
available for distribution by the Rights Agent, if and when appropriate.
(d) In case the registered holder of any Rights Certificate shall exercise
less than all the Rights evidenced thereby, a new Rights Certificate evidencing
Rights equivalent to the Rights remaining unexercised shall be issued by the
Rights Agent and delivered to, or upon the order of, the registered holder of
such Rights Certificate, registered in such name or names as may be designated
by such holder, subject to the provisions of Section 14 hereof.
(e) Notwithstanding anything in this Agreement to the contrary, from and
after the first occurrence of a Section 11(a)(ii) Event, any Rights beneficially
owned by (i) an Acquiring Person or an Associate or Affiliate of an Acquiring
Person, (ii) a transferee of an Acquiring Person (or of any such Associate or
Affiliate) who becomes a transferee after the Acquiring Person becomes such, or
(iii) a transferee of an Acquiring Person (or of any such Associate or
Affiliate) who becomes a transferee prior to or concurrently with the Acquiring
Person becoming such and receives such Rights pursuant to either (A) a transfer
(whether or not for consideration) from the Acquiring Person to holders of
equity interests in such Acquiring Person or to any Person with whom such
Acquiring Person has any continuing agreement, arrangement or understanding
regarding the transferred Rights or (B) a transfer which a majority of the Board
has determined is part of an agreement, arrangement or understanding which has
as a primary purpose or effect the avoidance of this Section 7(e), shall become
null and void without any further action, and no holder of such Rights shall
have any rights whatsoever with respect to such Rights, whether under any
provision of this Agreement or otherwise. The Company shall use all reasonable
efforts to ensure that the provisions of this Section 7(e) and Section 4(b)
hereof are complied with, but shall have no liability to any holder of Rights
Certificates or other Person as a result of its failure to make any
determinations with respect to an Acquiring Person or its Affiliates, Associates
or transferees hereunder.
(f) Notwithstanding anything in this Agreement to the contrary, neither the
Rights Agent nor the Company shall be obligated to undertake any action with
respect to a registered holder upon the occurrence of any purported exercise as
set forth in this Section 7 unless such registered holder shall have (i)
properly completed and signed the certificate contained in the form of election
to purchase set forth on the reverse side of the Rights Certificate surrendered
for such exercise, and (ii) provided such additional evidence of the identity of
the Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates
thereof as the Company shall reasonably request.
Section 8. Cancellation and Destruction of Rights Certificates.
All Rights Certificates surrendered for the purpose of exercise, transfer,
split up, combination or exchange shall, if surrendered to the Company or to any
of its agents, be delivered to the Rights Agent for cancellation or in canceled
form, or, if surrendered to the Rights Agent, shall be canceled by it, and no
Rights Certificates shall be issued in lieu thereof except as expressly
<PAGE>
permitted by any provisions of this Agreement. The Company shall deliver to the
Rights Agent for cancellation and retirement, and the Rights Agent shall so
cancel and retire, any other Rights Certificate purchased or acquired by the
Company otherwise than upon the exercise thereof. The Rights Agent shall
deliver all canceled Rights Certificates to the Company, or shall, at the
written request of the Company, destroy such canceled Rights Certificates, and
in such case shall deliver a certificate of destruction thereof to the Company.
Section 9. Reservation and Availability of Capital Stock.
(a) The Company covenants and agrees that it will cause to be reserved and
kept available out of its authorized and unissued shares of Series D Preferred
Stock (and following the occurrence of a Triggering Event, out of its authorized
and unissued shares of Common Stock and/or other securities or out of its
authorized and issued shares held in its treasury), the number of shares of
Series D Preferred Stock (and, following the occurrence of a Triggering Event,
shares of Common Stock and/or other securities) that, as provided in this
Agreement, including Section 11(a)(iii) hereof, will be sufficient to permit the
exercise in full of all outstanding Rights.
(b) In the event the shares of Series D Preferred Stock (and, following the
occurrence of a Triggering Event, Common Stock and/or other securities) issuable
upon the exercise of Rights become listed on any national securities exchange,
the Company shall use its best efforts to cause, from and after such time as the
Rights become exercisable, all such shares reserved for such issuance to be
listed on such exchange upon official notice of issuance upon such exercise.
(c) The Company shall use its best efforts to (i) file, as soon as
practicable following the earliest date after the first occurrence of a Section
11(a)(ii) Event on which the consideration to be delivered by the Company upon
exercise of the Rights has been determined in accordance with this Agreement, or
as soon as is required by law following the Distribution Date, as the case may
be, a registration statement under the Securities Act with respect to the
securities purchasable upon exercise of the Rights on an appropriate form, (ii)
cause such registration statement to become effective as soon as practicable
after such filing, and (iii) cause such registration statement to remain
effective (with a prospectus at all times meeting the requirements of the
Securities Act) until the earlier of (A) the date as of which the Rights are no
longer exercisable for such securities, and (B) the Expiration Date. The
Company also shall take such action as may be appropriate under, or to ensure
compliance with, the securities or "blue sky" laws of the various states in
connection with the exercisability of the Rights. The Company may temporarily
suspend, for a period of time not to exceed ninety (90) days after the date set
forth in clause (i) of the first sentence of this Section 9(c), the
exercisability of the Rights in order to prepare and file such registration
statement and permit it to become effective. In addition, if the Company shall
determine that a registration statement is required following the Distribution
Date, the Company may temporarily suspend the exercisability of the Rights until
such time as a registration statement has been declared effective. Upon any
suspension of exercisability of Rights referred to in this Section 9(c), the
Company shall issue a public announcement stating that the exercisability of the
Rights has been temporarily suspended, as well as a public announcement at such
time as the suspension is no longer in effect. Notwithstanding any provision of
this
<PAGE>
Agreement to the contrary, the Rights shall not be exercisable and shall be null
and void so long as held by a holder in any jurisdiction where the requisite
qualification to the issuance to such holder, or the exercise by such holder, of
the Rights in such jurisdiction shall not have been obtained or be obtainable,
or the exercise thereof shall not be permitted under applicable law or a
registration statement shall not have been declared effective.
(d) Subject to Section 11(a)(iii) hereof, the Company covenants and agrees
that it will take all such action as may be necessary to ensure that all one
one-thousandths of a share of Series D Preferred Stock (and, following the
occurrence of a Triggering Event, Common Stock and/or other securities)
delivered upon exercise of Rights shall, at the time of delivery of the
certificates for such shares (subject to payment of the Purchase Price), be duly
and validly authorized and issued and fully paid and non-assessable.
(e) The Company further covenants and agrees that it will pay when due and
payable any and all federal and state transfer taxes and charges which may be
payable in respect of the issuance or delivery of the Rights Certificates or of
any certificates for a number of one one-thousandths of a share of Series D
Preferred Stock (or Common Stock and/or other securities, as the case may be)
upon the exercise of Rights. The Company shall not, however, be required to pay
any transfer tax or charge which may be payable in respect of any transfer or
delivery of Rights Certificates to a Person other than, or the issuance or
delivery of certificates for a number of one one-thousandths of a share of
Series D Preferred Stock (or Common Stock and/or other securities, as the case
may be) in a name other than that of, the registered holder of the Rights
Certificate evidencing Rights surrendered for exercise or to issue or deliver
any certificates for a number of one one-thousandths of a share of Series D
Preferred Stock (or Common Stock and/or other securities, as the case may be) in
a name other than that of the registered holder upon the exercise of any Rights
until any such tax or charge shall have been paid (any such tax or charge being
payable by the holder of such Rights Certificate at the time of surrender) or
until it has been established to the Company's satisfaction that no such tax or
charge is due.
Section 10. Series D Preferred Stock Record Date.
Each Person in whose name any certificate for a number of one one-
thousandths of a share of Series D Preferred Stock (or Common Stock and/or other
securities, as the case may be) is issued upon the exercise of Rights shall for
all purposes be deemed to have become the holder of record of such fractional
shares of Series D Preferred Stock (or Common Stock and/or other securities, as
the case may be) represented thereby on, and such certificate shall be dated,
the date upon which the Rights Certificate evidencing such Rights was duly
surrendered and payment of the Purchase Price (and any applicable transfer taxes
and charges) was made; provided, however, that if the date of such surrender and
-------- -------
payment is a date upon which the Series D Preferred Stock (or Common Stock
and/or other securities as the case may be)
<PAGE>
transfer books of the Company are closed, such Person shall be deemed to have
become the record holder of such shares (fractional or otherwise) on, and such
certificate shall be dated, the next succeeding Business Day on which the Series
D Preferred Stock (or Common Stock and/or other securities as the case may be)
transfer books of the Company are open. Prior to the exercise of the Rights
evidenced thereby, the holder of a Rights Certificate shall not be entitled to
any rights of a stockholder of the Company with respect to shares for which the
Rights shall be exercisable, including, without limitation, the right to vote,
to receive dividends or other distributions or to exercise any preemptive
rights, and shall not be entitled to receive any notice of any proceedings of
the Company, except as provided herein.
Section 11. Adjustment of Purchase Price, Number and Kind of Shares or Number
of Rights.
The Purchase Price, the number and kind of shares covered by each Right and
the number of Rights outstanding are subject to adjustment from time to time as
provided in this Section 11.
(a) (i) In the event the Company shall at any time after the date of this
Agreement (A) declare a dividend on the Series D Preferred Stock payable in
shares of Series D Preferred Stock, (B) subdivide the outstanding Series D
Preferred Stock, (C) combine the outstanding Series D Preferred Stock into a
smaller number of shares or (D) issue any shares of its capital stock in a
reclassification of the Series D Preferred Stock (including any such
reclassification in connection with a consolidation or merger in which the
Company is the continuing or surviving corporation), except as otherwise
provided in this Section 11(a) and Section 7(e) hereof, the Purchase Price in
effect at the time of the record date for such dividend or of the effective date
of such subdivision, combination or reclassification, and the number and kind of
shares of Series D Preferred Stock or the number and kind of shares of capital
stock issuable on such date, as the case may be, shall be proportionately
adjusted so that the holder of any Right exercised after such time shall be
entitled to receive, upon payment of the aggregate adjusted Purchase Price then
in effect necessary to exercise a Right in full, the aggregate number and kind
of shares of Series D Preferred Stock or the number and kind of shares of
capital stock, as the case may be, which, if such Right had been exercised
immediately prior to such date and at a time when the Series D Preferred Stock
(or other capital stock, as the case may be) transfer books of the Company were
open, he would have owned upon such exercise and been entitled to receive by
virtue of such dividend, subdivision, combination, or reclassification. If an
event occurs which would require an adjustment under both this Section 11(a)(i)
and Section 11(a)(ii) hereof, the adjustment provided for in this Section
11(a)(i) shall be in addition to, and shall be made prior to, any adjustment
required pursuant to Section 11(a)(ii) hereof.
(ii) Subject to Sections 23 and 24 of this Agreement, in the event
that any Person, alone or together with its Affiliates and Associates, shall, at
any time after the Rights Dividend Declaration Date, become an Acquiring Person,
unless the event causing such Person to become an Acquiring Person is (x) a
Section 13 Event or (y) an acquisition of shares of Common Stock pursuant to a
cash tender offer made pursuant to Section 14(d) of the Exchange Act for all
outstanding shares of Common Stock (other than shares of Common Stock
beneficially owned by the Person making the offer or by its Affiliates or
Associates) at a price and on terms determined by at least two-thirds of the
Board, after receiving advice from one or more investment banking firms, to be
(a) fair to stockholders (taking into account all factors which such members of
the
<PAGE>
Board deem relevant including, without limitation, prices which could reasonably
be achieved if the Company or its assets were sold on an orderly basis designed
to realize maximum value) and (b) otherwise in the best interests of the Company
and its stockholders, then promptly after the date of occurrence of a Section
11(a)(ii) Event, proper provision shall be made so that each holder of a Right
(except as provided below and in Section 7(e) hereof) shall thereafter have the
right to receive, upon exercise thereof and payment of an amount equal to the
then current Purchase Price in accordance with the terms of this Agreement, in
lieu of a number of one one-thousandths of a share of Series D Preferred Stock,
such number of shares of Common Stock of the Company as shall equal the result
obtained by (x) multiplying the then current Purchase Price by the then number
of one one-thousandths of a share of Series D Preferred Stock for which a Right
was or would have been exercisable immediately prior to the first occurrence of
a Section 11(a)(ii) Event, whether or not such Right was then exercisable, and
(y) dividing that product (which, following such first occurrence, shall
thereafter be referred to as the "Purchase Price" for each Right and for all
purposes of this Agreement except to the extent set forth in Section 13 thereof)
by 50% of the current market price per share of Common Stock (determined
pursuant to Section 11(d) hereof) on the date of such first occurrence (such
number of shares, the "Adjustment Shares").
(iii) The Company may at its option substitute for a share of
Common Stock issuable upon the exercise of Rights in accordance with the
foregoing subparagraph (ii) such number or fractions of shares of Series D
Preferred Stock having an aggregate market value equal to the current per share
market price of a share of Common Stock. In the event that the number of shares
of Common Stock which is authorized by the Company's Articles of Incorporation,
as amended from time to time, but not outstanding, or reserved for issuance for
purposes other than upon exercise of the Rights, is not sufficient to permit the
exercise in full of the Rights in accordance with the foregoing subparagraph
(ii), the Board shall, to the extent permitted by applicable law and to the
extent permitted by any material agreements or material instruments then in
effect to which the Company is a party, (A) determine the excess of (1) the
value of the Adjustment Shares issuable upon the exercise of a Right (the
"Current Value") over (2) the Purchase Price (such excess, the "Spread"), and
(B) with respect to each Right (subject to Section 7(e) hereof), make adequate
provision to substitute for some or all of the Adjustment Shares, upon exercise
of a Right and payment of the applicable Purchase Price, (1) cash, (2) a
reduction in the Purchase Price, (3) Common Stock or other equity securities of
the Company (including, without limitation, shares, or units of shares, of
Series D Preferred Stock which the Board has deemed to have the same value as
shares of Common Stock) (such shares of equity securities being herein called
"Stock Equivalents"), (4) debt securities of the Company, (5) other assets, or
(6) any combination of the foregoing, having an aggregate value equal to the
Current Value, where such aggregate value has been determined by the Board based
upon the advice of an investment banking firm selected by the Board; provided,
--------
however, if the Company shall not have made adequate provision to deliver value
- -------
pursuant to clause (B) above within thirty (30) days following the later of (x)
the first occurrence of a Section 11(a)(ii) Event and (y) the date on which the
Company's right of redemption pursuant to Section 23(a) expires (the later of
(x) and (y) being referred to herein as the "Section 11(a)(ii) Trigger Date"),
then the Company shall be obligated to deliver, upon the surrender for exercise
of a Right and without requiring payment of the Purchase Price, shares of Common
Stock (to the extent available) and then, if necessary, cash,
<PAGE>
which shares and/or cash have an aggregate value equal to the Spread.
If, upon the occurrence of a Section 11(a)(ii) Event, the Board shall
determine in good faith that it is likely that sufficient additional shares of
Common Stock could be authorized for issuance upon exercise in full of the
Rights, then if the Board so elects, the thirty (30) day period set forth above
may be extended to the extent necessary, but not more than ninety (90) days
after the Section 11(a)(ii) Trigger Date, in order that the Company may seek
stockholder approval for the authorization of such additional shares (such
period, as it may be extended, the "Substitution Period"). To the extent that
action is to be taken pursuant to the preceding provisions of this Section
11(a)(iii), the Company (x) shall provide, subject to Section 7(e) hereof, that
such action shall apply uniformly to all outstanding Rights, and (y) may suspend
the exercisability of the Rights until the expiration of the Substitution Period
in order to seek any authorization of additional shares and/or to decide the
appropriate form of distribution to be made pursuant to the first sentence of
this Section 11(a)(iii) and to determine the value thereof. In the event of any
such suspension, the Company shall issue a public announcement stating that the
exercisability of the Rights has been temporarily suspended, as well as a public
announcement at such time as the suspension is no longer in effect. For
purposes of this Section 11(a)(iii), the value of the Common Stock shall be the
current market price (as determined pursuant to Section 11(d) hereof) per share
of the Common Stock on the Section 11(a)(ii) Trigger Date and the value of any
Stock Equivalent shall be deemed to have the same value as the Common Stock on
such date. The Board may, but shall not be required to, establish procedures to
allocate the right to receive shares of Common Stock upon the exercise of the
Rights among holders of Rights pursuant to this Section 11(a)(iii).
(b) In case the Company shall fix a record date for the issuance of rights,
options or warrants to all holders of Series D Preferred Stock entitling them
(for a period expiring within forty-five (45) calendar days after such record
date) to subscribe for or purchase Series D Preferred Stock (or shares having
the same preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, and terms or conditions or
redemption as the shares of Series D Preferred Stock ("Equivalent Preferred
Stock") or securities convertible into Series D Preferred Stock at a price per
share of Series D Preferred Stock or per share of Equivalent Preferred Stock (or
having a conversion price per share of Series D Preferred Stock, if a security
convertible into Series D Preferred Stock) less than the current per share
market price of the Series D Preferred Stock (as defined in Section 11(d)) on
such record date, the Purchase Price to be in effect after such record date
shall be determined by multiplying the Purchase Price in effect immediately
prior to such record date by a fraction, the numerator of which shall be the
number of shares of Series D Preferred Stock outstanding on such record date,
plus the number of shares of Series D Preferred Stock which the aggregate
offering price of the total number of shares of Series D Preferred Stock and/or
Equivalent Preferred Stock so to be offered (and/or the aggregate initial
conversion price of the convertible securities so to be offered) would purchase
at such current market price, and the denominator of which shall be the number
of shares of Series D Preferred Stock outstanding on such record date, plus the
number of additional shares of Series D Preferred Stock and/or Equivalent
Preferred Stock to be offered for subscription or purchase (or into which the
convertible securities so to be offered are initially convertible). In case
such subscription price may be paid in a consideration part or all of which
<PAGE>
shall be in a form other than cash, the value of such consideration shall be as
determined in good faith by the Board, whose determination shall be described in
a statement filed with the Rights Agent and shall be conclusive for all
purposes. Shares of Series D Preferred Stock owned by or held for the account
of the Company shall not be deemed outstanding for the purpose of any such
computation. Such adjustment shall be made successively whenever such a record
date is fixed; and in the event that such rights or warrants are not so issued,
the Purchase Price shall be adjusted to be the Purchase Price which would then
be in effect if such record date had not been fixed.
(c) In case the Company shall fix a record date for a distribution to all
holders of Series D Preferred Stock (including any such distribution made in
connection with a consolidation or merger in which the Company is the continuing
or surviving corporation) of evidences of indebtedness, cash (other than a
regular quarterly cash dividend out of the earnings or retained earnings of the
Company), assets (other than a dividend payable in Series D Preferred Stock, but
including any dividend payable in stock other than Series D Preferred Stock), or
subscription rights or warrants (excluding those referred to in Section 11(b)),
the Purchase Price to be in effect after such record date shall be determined by
multiplying the Purchase Price in effect immediately prior to such record date
by a fraction, the numerator of which shall be the current per share market
price of the Series D Preferred Stock (as defined in Section 11(d)) on such
record date, less the fair market value (as determined in good faith by the
Board, whose determination shall be described in a statement filed with the
Rights Agent and shall be conclusive for all purposes) of the portion of the
cash, assets or evidences of indebtedness so to be distributed or of such
subscription rights or warrants applicable to a share of Series D Preferred
Stock and the denominator of which shall be such current per share market price
of the Series D Preferred Stock. Such adjustment shall be made successively
whenever such a record date is fixed; and in the event that such distribution is
not so made, the Purchase Price shall again be adjusted to be the Purchase Price
which would then be in effect if such record date had not been fixed.
(d) (i) For the purpose of any computation hereunder, the "current market
price" of the Common Stock on any date shall be deemed to be the average of the
daily closing prices per share of such Common Stock for the 30 consecutive
Trading Days (as defined herein) immediately prior to but not including such
date, and for purposes of computations made pursuant to Section 11(a)(iii)
hereof, the "current market price" per share of Common Stock on any date shall
be deemed to be the average of the daily closing prices per share of Common
Stock for the ten (10) consecutive Trading Days immediately following but not
including such date; provided, however, that in the event that the current
-------- -------
market price of the Common Stock is determined during a period following the
announcement by the issuer of such Common Stock of (i) a dividend or
distribution on such Common Stock payable in shares of such Common Stock or
securities convertible into such Common Stock (other than the Rights), or (ii)
any subdivision, combination or reclassification of such Common Stock, and prior
to the expiration of the requisite thirty (30) Trading Day or ten (10) Trading
Day period, as set forth above, after the ex-dividend date for such dividend or
distribution, or the record date for such subdivision, combination or
reclassification, then, and in each such case, the "current market price" shall
be appropriately adjusted to take into account ex-dividend trading. The closing
price for each day shall be the last sale price, regular way, or, in case no
such sale takes place on such day, the average of the closing bid and asked
prices, regular way, in either case as reported in the principal consolidated
<PAGE>
transaction reporting system with respect to securities listed or admitted to
trading on the New York Stock Exchange or, if the shares of Common Stock are not
listed or admitted to trading on the New York Stock Exchange, as reported in the
principal consolidated transaction reporting system with respect to securities
listed on the principal national securities exchange on which the shares of
Common Stock are listed or admitted to trading or, if the shares of Common Stock
are not listed or admitted to trading on any national securities exchange, the
last quoted price or, if not so quoted, the average of the high bid and low
asked prices in the over-the-counter market, as reported by the National
Association of Securities Dealers, Inc. Automated Quotations System or such
other system then in use, or, if on any such date the shares of Common Stock are
not quoted by any such organization, the average of the closing bid and asked
prices as furnished by a professional market maker making a market in the shares
of Common Stock selected by the Board. If on any such date no market maker is
making a market in the Common Stock, the fair value of such shares on such date
as determined in good faith by the Board shall be used. The term "Trading Day"
shall mean a day on which the principal national securities exchange on which
the shares of Common Stock are listed or admitted to trading is open for the
transaction of business, or, if the shares of Common Stock are not listed or
admitted to trading on any national securities exchange, the term "Trading Day"
shall mean a Monday, Tuesday, Wednesday, Thursday or Friday on which banking or
trust institutions in the State of New York are not authorized or obligated by
law or executive order to close. If the Common Stock is not publicly held or
not listed or traded, "current market price" shall mean the fair value per share
as determined in good faith by the Board, whose determination shall be described
in a statement filed with the Rights Agent and shall be conclusive for all
purposes.
(ii) For the purpose of any computation hereunder, the "current market
price" per share of Series D Preferred Stock shall be determined in the same
manner as set forth above for the Common Stock in clause (i) of this Section
11(d) (other than the last sentence thereof). If the current market price per
share of Series D Preferred Stock cannot be determined in the manner provided
above or if the Series D Preferred Stock is not publicly held or listed or
traded in a manner described in clause (i) of this Section 11(d), the "current
market price" per share of Series D Preferred Stock shall be conclusively deemed
to be an amount equal to 1,000 (as such number may be appropriately adjusted for
such events as stock splits, stock dividends and recapitalizations with respect
to the Common Stock occurring after the date of this Agreement) multiplied by
the current market price per share of the Common Stock. If neither the Common
Stock nor the Series D Preferred Stock is publicly held or so listed or traded,
"current market price" per share of the Series D Preferred Stock shall mean the
fair value per share as determined in good faith by the Board, whose
determination shall be described in a statement filed with the Rights Agent and
shall be conclusive for all purposes. For all purposes of this Agreement, the
"current market price" of one one-thousandth of a share of Series D Preferred
Stock shall be equal to the "current market price" of one share of Series D
Preferred Stock divided by 1,000.
(e) Anything herein to the contrary notwithstanding, no adjustment in the
Purchase Price shall be required unless such adjustment would require an
increase or decrease of at least one percent (1%) in such price; provided,
--------
however, that any adjustments which by reason of this Section 11(e) are not
- -------
required to be made shall be carried forward and taken into account in any
subsequent adjustment. All calculations under this Section 11 shall be made to
the nearest cent or
<PAGE>
to the nearest ten-thousandth of a share of Common Stock or other share or one
one-millionth of a share of Series D Preferred Stock, as the case may be.
Notwithstanding the first sentence of this Section 11(e), an adjustment required
by this Section 11 shall be made no later than the earlier of (i) three years
from the date of the transaction which requires such adjustment or (ii) the
Expiration Date.
(f) If as a result of an adjustment made pursuant to Section 11(a)(ii) or
Section 13(a) hereof, the holder of any Right thereafter exercised shall become
entitled to receive any shares of capital stock of the Company other than Series
D Preferred Stock, thereafter the number of such other shares so receivable upon
exercise of any Right and the Purchase Price thereof shall be subject to
adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Series D Preferred Stock
contained in Sections 11(a), (b), (c), (e), (g), (h), (i), (j), (k) and (m), and
the provisions of Sections 7, 9, 10, 13 and 14 hereof with respect to the Series
D Preferred Stock shall apply on like terms to any such other shares.
(g) All Rights originally issued by the Company subsequent to any
adjustment made to the Purchase Price hereunder shall evidence the right to
purchase, at the adjusted Purchase Price, the number of one one-thousandths of a
share of Series D Preferred Stock purchasable from time to time hereunder upon
exercise of the Rights, all subject to further adjustment as provided herein.
(h) Unless the Company shall have exercised its election as provided in
Section 11(i), upon each adjustment of the Purchase Price as a result of the
calculations made in Sections 11(b) and (c), each Right outstanding immediately
prior to the making of such adjustment shall thereafter evidence the right to
purchase, at the adjusted Purchase Price, that number of one one-thousandths of
a share of Series D Preferred Stock (calculated to the nearest one one-
millionth) obtained by (i) multiplying (x) the number of one one-thousandths of
a share covered by a Right immediately prior to this adjustment by (y) the
Purchase Price in effect immediately prior to such adjustment of the Purchase
Price and (ii) dividing the product so obtained by the Purchase Price in effect
immediately after such adjustment of the Purchase Price.
(i) The Company may elect on or after the date of any adjustment of the
Purchase Price to adjust the number of Rights, in lieu of any adjustment in the
number of one one-thousandths of a share of Series D Preferred Stock issuable
upon the exercise of a Right. Each of the Rights outstanding after such
adjustment of the number of Rights shall be exercisable for the number of one
one-thousandths of a share of Series D Preferred Stock for which a Right was
exercisable immediately prior to such adjustment. Each Right held of record
prior to such adjustment of the number of Rights shall become that number of
Rights (calculated to the nearest ten-thousandth) obtained by dividing the
Purchase Price in effect immediately prior to adjustment of the Purchase Price
by the Purchase Price in effect immediately after adjustment of the Purchase
Price. The Company shall make a public announcement of its election to adjust
the number of Rights, indicating the record date for the adjustment, and, if
known at the time, the amount of the adjustment to be made. This record date
may be the date on which the Purchase Price is adjusted or any day thereafter,
but, if the Rights Certificates have been issued, shall be at least ten (10)
<PAGE>
days later than the date of the public announcement. If Rights Certificates
have been issued, upon each adjustment of the number of Rights pursuant to this
Section 11(i), the Company shall, as promptly as practicable, cause to be
distributed to holders of record of Rights Certificates on such record date
Rights Certificates evidencing, subject to Section 14 hereof, the additional
Rights to which such holders shall be entitled as a result of such adjustment,
or, at the option of the Company, shall cause to be distributed to such holders
of record in substitution and replacement for the Rights Certificates held by
such holders prior to the date of adjustment, and upon surrender thereof, if
required by the Company, new Rights Certificates evidencing all the Rights to
which such holders shall be entitled after such adjustment. Rights Certificates
so to be distributed shall be issued, executed and countersigned in the manner
provided for herein (and may bear, at the option of the Company, the adjusted
Purchase Price) and shall be registered in the names of the holders of record of
Rights Certificates on the record date specified in the public announcement.
(j) Irrespective of any adjustment or change in the Purchase Price or the
number of one one-thousandths of a share of Series D Preferred Stock issuable
upon the exercise of the Rights, the Rights Certificates theretofore and
thereafter issued may continue to express the Purchase Price per one one-
thousandth of a share and the number of one one-thousandths of a share which
were expressed in the initial Rights Certificates issued hereunder.
(k) Before taking any action that would cause an adjustment reducing the
Purchase Price below the then-par value, if any, of the number of one one-
thousandths of a share of Series D Preferred Stock issuable upon exercise of the
Rights, the Company shall take any corporate action which may, in the opinion of
its counsel, be necessary in order that the Company may validly and legally
issue fully paid and non-assessable such number of one one-thousandths of a
share of Series D Preferred Stock at such adjusted Purchase Price.
(l) In any case in which this Section 11 shall require that an adjustment
in the Purchase Price be made effective as of a record date for a specified
event, the Company may elect to defer until the occurrence of such event the
issuance to the holder of any Right exercised after such record date the number
of one one-thousandths of a share of Series D Preferred Stock and other capital
stock or securities of the Company, if any, issuable upon such exercise over and
above the number of one one-thousandths of a share of Series D Preferred Stock
and other capital stock or securities of the Company, if any, issuable upon such
exercise on the basis of the Purchase Price in effect prior to such adjustment;
provided, however, that the Company shall deliver to such holder a due bill or
- -------- -------
other appropriate instrument evidencing such holder's right to receive such
additional shares (fractional or otherwise) or securities upon the occurrence of
the event requiring such adjustment.
(m) Anything in this Section 11 to the contrary notwithstanding, the
Company shall be entitled to make such reductions in the Purchase Price, in
addition to those adjustments expressly required by this Section 11, as and to
the extent that the Board in its sole discretion shall determine to be advisable
in order that any (i) consolidation or subdivision of the Series D Preferred
Stock, (ii) issuance wholly for cash of any shares of Series D Preferred Stock
at less than the current market price, (iii) issuance wholly for cash of shares
of Series D Preferred Stock
<PAGE>
or securities which by their terms are convertible into or exchangeable for
Series D Preferred Stock, (iv) stock dividends or (v) issuance of rights,
options or warrants referred to hereinabove in this Section 11, hereafter made
by the Company to holders of its Series D Preferred Stock shall not be taxable
to such stockholders.
(n) The Company covenants and agrees that it shall not, at any time after
the Distribution Date, (i) consolidate with any other Person (other than a
Subsidiary of the Company in a transaction which complies with Section 11(o)
hereof), (ii) merge with or into any other Person (other than a Subsidiary of
the Company in a transaction which complies with Section 11(o) hereof), or (iii)
sell or transfer (or permit any Subsidiary to sell or transfer), in one
transaction, or a series of related transactions, assets or earning power
aggregating more than 50% of the assets or earning power of the Company and its
Subsidiaries (taken as a whole) to any other Person or Persons (other than the
Company and/or any of its Subsidiaries in one or more transactions each of which
complies with Section 11(o) hereof), if (x) at the time of or immediately after
such consolidation, merger, sale or transfer there are any rights, warrants or
other instruments or securities outstanding or agreements in effect which would
substantially diminish or otherwise eliminate the benefits intended to be
afforded by the Rights or (y) prior to, simultaneously with or immediately after
such consolidation, merger, sale or transfer, the stockholders of the Person who
constitutes, or would constitute, the "Principal Party" for purposes of Section
13(a) hereof shall have received a distribution of Rights previously owned by
such Person or any of its Affiliates and Associates.
(o) The Company covenants and agrees that, after the Distribution Date, it
will not, except as permitted by Section 23 or Section 27 hereof, take (or
permit any Subsidiary to take) any action if at the time such action is taken it
is reasonably foreseeable that such action will diminish substantially or
otherwise eliminate the benefits intended to be afforded by the Rights.
(p) Anything in this Agreement to the contrary notwithstanding, in the
event that the Company shall at any time after the Rights Dividend Declaration
Date and prior to the Distribution Date (i) declare a dividend on the
outstanding shares of Common Stock payable in shares of Common Stock, (ii)
subdivide the outstanding shares of Common Stock, or (iii) combine the
outstanding shares of Common Stock into a smaller number of shares, the number
of Rights associated with each share of Common Stock then outstanding, or issued
or delivered thereafter but prior to the Distribution Date, shall be
proportionately adjusted so that the number of Rights thereafter associated with
each share of Common Stock following any such event shall equal the result
obtained by multiplying the number of Rights associated with each share of
Common Stock immediately prior to such event by a fraction the numerator of
which shall be the total number of shares of Common Stock outstanding
immediately prior to the occurrence of the event and the denominator of which
shall be the total number of shares of Common Stock outstanding immediately
following the occurrence of such event.
Section 12. Certificate of Adjusted Purchase Price or Number of Shares.
Whenever an adjustment is made as provided in Sections 11 or 13 hereof, the
Company
<PAGE>
shall (a) promptly prepare a certificate setting forth such adjustment, and a
brief statement of the facts and computations accounting for such adjustment,
(b) promptly file with the Rights Agent and with each transfer agent for the
Series D Preferred Stock and the Common Stock a copy of such certificate and (c)
mail or deliver a brief summary thereof to each holder of a Rights Certificate
(or, if prior to the Distribution Date, to each holder of a certificate
representing shares of Common Stock) in accordance with Section 25 hereof. The
Rights Agent shall be fully protected in relying on any such certificate and on
any adjustment therein contained and shall not be deemed to have knowledge of
any adjustment unless and until it shall have received such certificate.
Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning
Power.
(a) Subject to Section 23 of this Agreement, in the event that, following
the Stock Acquisition Date, directly or indirectly, (x) the Company shall
consolidate with, or merge with and into, any other Person (other than a
Subsidiary of the Company in a transaction which complies with Section 11(o)
hereof), and the Company shall not be the continuing or surviving corporation of
such consolidation or merger, (y) any Person (other than a Subsidiary of the
Company in a transaction which complies with Section 11(o) hereof) shall
consolidate with, or merge with or into, the Company, and the Company shall be
the continuing or surviving corporation of such consolidation or merger and, in
connection with such consolidation or merger, all or part of the outstanding
shares of Common Stock shall be changed into or exchanged for stock or other
securities of any other Person or cash or any other property, or (z) the Company
shall sell or otherwise transfer (or one or more of its Subsidiaries shall sell
or otherwise transfer), in one transaction or a series of related transactions,
assets or earning power aggregating more than 50% of the assets or earning power
of the Company and its Subsidiaries (taken as a whole) to any Person or Persons
(other than the Company or any Subsidiary of the Company in one or more
transactions each of which complies with Section 11(o) hereof), then, and in
each such case (except as may be contemplated by Section 13(d) hereof), proper
provision shall be made so that: (i) each holder of a Right, except as provided
in Section 7(e) hereof, shall, upon the expiration of the Redemption Period (as
defined in Section 23(a)), thereafter have the right to receive, upon the
exercise thereof at the then current Purchase Price in accordance with the terms
of this Agreement, such number of validly authorized and issued, fully paid,
non-assessable and freely tradable shares of Common Stock of the Principal Party
(as defined herein), not subject to any liens, encumbrances, rights of first
refusal or other adverse claims, as shall be equal to the result obtained by (1)
multiplying the then current Purchase Price by the number of one one-thousandths
of a share of Series D Preferred Stock for which a Right was exercisable
immediately prior to the first occurrence of a Section 13 Event (or, if a
Section 11(a)(ii) Event has occurred prior to the first occurrence of a Section
13 Event, multiplying the number of one one-thousandths of a share of Series D
Preferred Stock for which a Right was exercisable immediately prior to the first
occurrence of a Section 11(a)(ii) Event by the Purchase Price in effect
immediately prior to such first occurrence), and (2) dividing that product
(which product, following the first occurrence of a Section 13 Event, shall be
referred to as the "Purchase Price" for each Right and for all purposes of this
Agreement) by 50% of the current market price per share of the shares of Common
Stock of such Principal Party on the date of
<PAGE>
consummation of such Section 13 Event (or the fair market value on such date of
other securities or property of the Principal Party, as provided for herein);
(ii) such Principal Party shall thereafter be liable for, and shall assume, by
virtue of such Section 13 Event, all the obligations and duties of the Company
pursuant to this Agreement; (iii) the term "Company" shall thereafter be deemed
to refer to such Principal Party, it being specifically intended that the
provisions of Section 11 hereof (other than Sections 11(a)(ii) and 11(a)(iii))
shall apply only to such Principal Party following the first occurrence of a
Section 13 Event; (iv) such Principal Party shall take such steps (including,
but not limited to, the reservation of a sufficient number of shares of its
Common Stock) in connection with the consummation of any such transaction as may
be necessary to assure that the provisions hereof shall thereafter be
applicable, as nearly as reasonably may be, in relation to its shares of Common
Stock thereafter deliverable upon the exercise of the Rights; and (v) the
provisions of Section 11(a)(ii) and Section 11(a)(iii) hereof shall be of no
effect following the first occurrence of any Section 13 Event.
(b) "Principal Party" shall mean
(i) in the case of any transaction described in clause (x) or (y) of
the first sentence of Section 13(a), the Person that is the issuer
of any securities into which shares of Common Stock of the Company
are converted in such merger or consolidation, and if no securities
are so issued, the Person that is the other party to such merger or
consolidation; and
(ii) in the case of any transaction described in clause (z) of the
first sentence of Section 13(a), the Person that is the party
receiving the greatest portion of the assets or earning power
transferred pursuant to such transaction or transactions;
provided, however, that in any such case, (1) if the Common Stock of such Person
-------
is not at such time and has not been continuously over the preceding twelve (12)
month period registered under Section 12 of the Exchange Act, and such Person is
a direct or indirect Subsidiary of another Person the Common Stock of which is
and has been so registered, "Principal Party" shall refer to such other Person;
and (2) in case such Person is a Subsidiary, directly or indirectly, of more
than one Person, the Common Stocks of two or more of which are and have been so
registered, "Principal Party" shall refer to whichever of such Persons is the
issuer of the Common Stock having the greatest aggregate market value.
(c) The Company shall not consummate any Section 13 Event unless the
Principal Party shall have a sufficient number of authorized shares of its
Common Stock which have not been issued or reserved for issuance to permit the
exercise in full of the
<PAGE>
Rights in accordance with this Section 13 and unless prior thereto the Company
and such Principal Party shall have executed and delivered to the Rights Agent a
supplemental agreement providing for the terms set forth in paragraphs (a) and
(b) of this Section 13 and further providing that, as soon as practicable after
the date of any such Section 13 Event, the Principal Party will:
(i) prepare and file a registration statement under the
Securities Act, with respect to the Rights and the securities
purchasable upon exercise of the Rights on an appropriate form,
and will use its best efforts to cause such registration
statement to (A) become effective as soon as practicable after
such filing and (B) remain effective (with a prospectus at all
times meeting the requirements of the Securities Act) until the
Expiration Date;
(ii) deliver to holders of the Rights historical financial
statements for the Principal Party and each of its Affiliates
which comply in all respects with the requirements for
registration on Form 10 under the Exchange Act;
(iii) use its best efforts to obtain any necessary regulatory
approvals in respect of the securities purchasable upon exercise
of outstanding Rights; and
(iv) use its best efforts, if such Common Stock of the Principal
Party shall be listed or admitted to trading on the New York
Stock Exchange or on another national securities exchange, to
list or admit to trading (or continue the listing of) the Rights
and the securities purchasable upon exercise of the Rights on the
New York Stock Exchange or such securities exchange, or, if the
securities of the Principal Party purchasable upon exercise of
the Rights shall not be listed or admitted to trading on the New
York Stock Exchange or a national securities exchange, to cause
the Rights and the securities purchasable upon exercise of the
Rights to be reported by such other system then in use.
The provisions of this Section 13 shall similarly apply to successive mergers or
consolidations or sales or other transfers. In the event that a Section 13
Event shall occur at any time after the occurrence of a Section 11(a)(ii) Event,
the Rights which have not theretofore been exercised shall thereafter become
exercisable in the manner described in Section 13(a) hereof.
(d) Notwithstanding anything in this Agreement to the contrary, Section 13
shall not be applicable to a transaction described in subparagraphs (x) and (y)
of Section 13(a) if (i) such transaction is consummated with a Person or Persons
(or a wholly owned subsidiary of any such Person or Persons) who acquired shares
of Common Stock pursuant to a cash tender offer for all
<PAGE>
outstanding shares of Common Stock which complies with the provisions of Section
11(a)(ii) hereof, (ii) the price per share of Common Stock offered in such
transaction is not less than the price per share of Common Stock paid to all
holders of Common Stock whose shares were purchased pursuant to such cash tender
offer and (iii) the form of consideration being offered to the remaining holders
of shares of Common Stock pursuant to such transaction is the same as the form
of consideration paid pursuant to such cash tender offer. Upon consummation of
any such transaction contemplated by this Section 13(d), all Rights hereunder
shall expire.
Section 14. Fractional Rights and Fractional Shares.
(a) The Company shall not be required to issue fractions of Rights except
prior to the Distribution Date as provided in Section 11(p) hereof, or to
distribute Rights Certificates which evidence fractional Rights. In lieu of
such fractional Rights, there shall be paid to the registered holders of the
Rights Certificates with regard to which such fractional Rights would otherwise
be issuable, an amount in cash equal to the same fraction of the current market
value of the whole Right. For the purposes of this Section 14(a), the current
market value of a whole Right shall be the closing price of the Rights for the
Trading Day immediately prior to the date on which such fractional Rights would
have been otherwise issuable. The closing price for any day shall be the last
sale price, or, in case no such sale takes place on such day, the average of the
high bid and low asked prices, in either case as reported by the New York Stock
Exchange or, if the Rights are not listed or admitted to trading on the New York
Stock Exchange, as reported in the principal consolidated transaction reporting
system with respect to securities listed on the principal national securities
exchange on which the Rights are listed or admitted to trading, or such other
system then in use or, if on any such date the Rights are not quoted by any such
organization, the average of the closing bid and asked prices as furnished by a
professional market maker making a market in the Rights selected by the Board.
If on any such date no such market maker is making a market in the Rights the
fair value of the Rights on such date as determined in good faith by the Board
shall be used. In the event the Rights are listed or admitted to trading on a
national securities exchange, the closing price for any day shall be the last
sale price, regular way, or, in case no such sale takes place on such day, the
average of the high bid and low asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect
to the national securities exchange on which the Rights are listed or admitted
to trading.
(b) The Company shall not be required to issue fractions of shares of
Series D Preferred Stock (other than fractions which are integral multiples of
one one-thousandth of a share of Series D Preferred Stock) upon exercise of the
Rights or to distribute certificates which evidence fractional shares of Series
D Preferred Stock (other than fractions which are integral multiples of one one-
thousandth of a share of Series D Preferred Stock). In lieu of fractional
shares of Series D Preferred Stock that are not integral multiples of one one-
thousandth of a share of Series D Preferred Stock, the Company may pay to the
registered holders of Rights Certificates at the time such Rights are exercised
as herein provided an amount in cash equal to the same fraction of the current
market value of one one-thousandth of a share of Series D Preferred Stock. For
purposes of this Section 14(b), the current market value of one one-thousandth
of a share of
<PAGE>
Series D Preferred Stock shall be one one-thousandth of the closing price of a
share of Series D Preferred Stock (as determined pursuant to Section 11(d)(ii)
hereof) for the Trading Day immediately prior to the date of such exercise.
(c) Following the occurrence of one of the events specified in Section 11
giving rise to the right to receive Common Stock, Stock Equivalents or other
securities upon the exercise of a Right, the Company shall not be required to
issue fractions of shares of Common Stock, Stock Equivalents or other securities
upon exercise of the Rights or to distribute certificates which evidence
fractional shares of Common Stock, Stock Equivalents or other securities. In
lieu of fractional shares of Common Stock, Stock Equivalents or other securities
the Company may pay to the registered holders of Rights Certificates at the time
such Rights are exercised as herein provided an amount in cash equal to the same
fraction of the current market value of one (1) share of Common Stock, Stock
Equivalents or other securities. For purposes of this Section 14(c), the
current market value of one share of Common Stock shall be the closing price of
one share of Common Stock (as determined pursuant to Section 11(d)(i) hereof)
for the Trading Day immediately prior to the date of such exercise.
(d) The holder of a Right by the acceptance of the Rights expressly waives
his right to receive any fractional Rights or any fractional shares upon
exercise of a Right, except as permitted by this Section 14.
Section 15. Rights of Action.
All rights of action in respect of this Agreement, except the rights of
action vested in the Rights Agent pursuant to Section 18 and Section 19 hereof,
are vested in the respective registered holders of the Rights Certificates (and,
prior to the Distribution Date, the registered holders of the Common Stock); and
any registered holder of any Rights Certificate (or, prior to the Distribution
Date, of the Common Stock), without the consent of the Rights Agent or of the
holder of any other Rights Certificate (or, prior to the Distribution Date, of
the Common Stock), may, in his own behalf and for his own benefit, enforce, and
may institute and maintain any suit, action or proceeding against the Company to
enforce, or otherwise act in respect of, his right to exercise the Rights
evidenced by such Rights Certificate in the manner provided in such Rights
Certificate and in this Agreement. Without limiting the foregoing or any
remedies available to the holders of Rights, it is specifically acknowledged
that the holders of Rights would not have an adequate remedy at law for any
breach of this Agreement and will be entitled to specific performance of the
obligations under, and injunctive relief against actual or threatened violations
of, the obligations hereunder of any Person subject to this Agreement.
Section 16. Agreement of Rights Holders.
Every holder of a Right by accepting the same consents and agrees with the
Company and the Rights Agent and with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be transferable only in
connection
<PAGE>
with the transfer of the Common Stock;
(b) after the Distribution Date, the Rights Certificates are transferable
only on the registry books of the Rights Agent if surrendered at the office of
the Rights Agent designated for such purposes, duly endorsed or accompanied by a
proper instrument of transfer and with the appropriate form of assignment and
the certificate contained therein duly completed and executed;
(c) subject to Section 6(a) and Section 7(f) hereof, the Company and the
Rights Agent may deem and treat the Person in whose name the Rights Certificate
(or, prior to the Distribution Date, the associated Common Stock certificate) is
registered as the absolute owner thereof and of the Rights evidenced thereby
(notwithstanding any notations of ownership or writing on the Rights
Certificates or the associated Common Stock certificate made by anyone other
than the Company or the Rights Agent) for all purposes whatsoever, and neither
the Company nor the Rights Agent, subject to the last sentence of Section 7(e)
hereof, shall be affected by any notice to the contrary; and
(d) Notwithstanding anything in this Agreement to the contrary, neither the
Company nor the Rights Agent shall have any liability to any holder of a Right
or other Person as a result of its inability to perform any of its obligations
under this Agreement by reason of any preliminary or permanent injunction or
other order, decree, judgment or ruling (whether interlocutory or final) issued
by a court of competent jurisdiction or by a governmental, regulatory or
administrative agency or commission, or any statute, rule, regulation or
executive order promulgated or enacted by any government authority, prohibiting
or otherwise restraining performance of such obligation; provided, however, the
-------- -------
Company must use its best efforts to have any such order, decree or ruling
lifted or otherwise overturned as soon as possible.
Section 17. Rights Certificate Holder Not Deemed a Stockholder.
No holder, as such, of any Rights Certificate shall be entitled to vote,
receive dividends or be deemed for any purpose the holder of the Series D
Preferred Stock or any other securities of the Company which may at any time be
issuable on the exercise of the Rights represented thereby, nor shall anything
contained herein or in any Rights Certificate be construed to confer upon the
holder of any Rights Certificate, as such, any of the rights of a stockholder of
the Company or any right to vote for the election of directors or upon any
matter submitted to stockholders at any meeting thereof, or to give or withhold
consent to any corporate action, or to receive notice of meetings or other
actions affecting stockholders (except as provided in Section 25 hereof), or to
receive dividends or subscription rights, or otherwise, until the Right or
Rights evidenced by such Rights Certificate shall have been exercised in
accordance with the provisions hereof.
Section 18. Duties of Rights Agent.
The Rights Agent undertakes only the duties and obligations expressly
imposed by this Agreement upon the following terms and conditions, by all of
which the Company and the holders of Rights Certificates, by their acceptance
thereof, shall be bound:
<PAGE>
(a) The Rights Agent may consult with legal counsel (who may be legal
counsel for the Company), and the advice or opinion of such counsel shall be
full and complete authorization and protection to the Rights Agent, and the
Rights Agent shall incur no liability, for or in respect of any action taken or
omitted by it in good faith and in accordance with such advice or opinion.
(b) Whenever in the performance of its duties under this Agreement the
Rights Agent shall deem it necessary or desirable that any fact or matter
(including, without limitation, the identity of any Acquiring Person and the
determination of "current market price") be proved or established by the Company
prior to taking or suffering or omitting to take any action hereunder, such fact
or matter (unless other evidence in respect thereof be herein specifically
prescribed) may be deemed to be conclusively proved and established by a
certificate signed by any person believed by the Rights Agent to be any one of
the Chairman of the Board, President, Chief Executive Officer, a Vice President,
the Treasurer or the Secretary of the Company and delivered to the Rights Agent;
and such certificate shall be full authorization to the Rights Agent, and the
Rights Agent shall incur no liability, for or in respect of any action taken,
omitted or suffered in good faith by it under the provisions of this Agreement
in reliance upon such certificate.
(c) The Rights Agent shall be liable hereunder only for its own gross
negligence, bad faith, or willful misconduct.
(d) The Rights Agent shall not be liable for or by reason of any of the
statements of fact or recitals contained in this Agreement or in the Rights
Certificates (except as to its countersignature thereof) or be required to
verify the same, but all such statements and recitals are and shall be deemed to
have been made by the Company only.
(e) The Rights Agent is serving as an administrative agent and shall not be
under any responsibility in respect of, the validity of any provision of this
Agreement or the execution and delivery of this Agreement (except the due
execution hereof by the Rights Agent) or in respect of the validity or execution
of any Rights Certificate (except its countersignature thereof); nor shall it be
responsible for any breach by the Company of any covenant or condition contained
in this Agreement or in any Rights Certificate; nor shall it be responsible for
any change in the exercisability of the Rights (including the Rights becoming
null and void pursuant to Section 7(e) hereof) or any adjustment required under
any of the provisions hereof or responsible for the manner, method, or amount of
any such adjustment or the ascertaining of the existence of facts that would
require any such adjustment (except with respect to the exercise of Rights
evidenced by Rights Certificates after actual notice of any such adjustment);
nor shall it by any act hereunder be deemed to make any representation or
warranty as to the authorization or reservation of any shares of Common Stock or
shares of Series D Preferred Stock to be issued pursuant to this Agreement or
any Rights Certificate or as to whether any shares of Common Stock or shares of
Series D Preferred Stock will, when so issued, be validly authorized and issued,
fully paid and non-assessable.
(f) The Company agrees that it will perform, execute, acknowledge and
deliver or cause to be performed, executed, acknowledged and delivered all such
further and other acts,
<PAGE>
instruments and assurances as may reasonably be required by the Rights Agent for
the carrying out or performing by the Rights Agent of the provisions of this
Agreement.
(g) The Rights Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from any
person believed by the Rights Agent to be any one of the Chairman of the Board,
the President, Chief Executive Officer, a Vice President, the Secretary or the
Treasurer of the Company, and to apply to such officers for advice or
instructions in connection with its duties, and it shall not be liable for any
action taken, omitted to be taken or suffered to be taken by it in good faith in
accordance with instructions of any such officer or for any delay in acting
while awaiting instructions. Any application by the Rights Agent for written
instructions from the Company may, at the option of the Rights Agent, set forth
in writing any action proposed to be taken, suffered or omitted by the Rights
Agent under this Agreement and the date on or after which such action shall be
taken or suffered or such omission shall be effective. The Rights Agent shall
not be liable for any action taken or suffered by, or omission of, the Rights
Agent in accordance with a proposal included in any such application on or after
the date specified in such application (which date shall not be less than five
Business Days after the date any officer of the Company actually receives such
application, unless any such officer shall have consented in writing to an
earlier date) unless, prior to taking any such action (or the effective date in
the case of an omission), the Rights Agent shall have received written
instruction in response to such application specifying the action to be taken,
suffered or omitted.
(h) The Rights Agent and any stockholder, affiliate, director, officer or
employee of the Rights Agent may buy, sell or deal in any of the Rights or other
securities of the Company or become pecuniarily interested in any transaction in
which the Company may be interested, or contract with or lend money to the
Company or otherwise act as fully and freely as though it were not Rights Agent
under this Agreement. Nothing herein shall preclude the Rights Agent from
acting in any other capacity for the Company or for any other Person or legal
entity.
(i) The Rights Agent may execute and exercise any of the rights or powers
hereby vested in it or perform any duty hereunder either itself or by or through
its attorneys or agents, and the Rights Agent shall not be answerable or
accountable for any act, default, neglect, or misconduct of any such attorneys
or agents or for any loss to the Company resulting from any such act, default,
neglect, or misconduct; provided, however, the Rights Agent was not grossly
negligent in the selection and continued employment thereof.
(j) No provision of this Agreement shall require the Rights Agent to expend
or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder or in the exercise of its rights if
there shall be reasonable grounds for believing that repayment of such funds or
adequate indemnification against such risk or liability is not reasonably
assured to it.
(k) If, with respect to any Rights Certificate surrendered to the Rights
Agent for exercise or transfer, the certificate attached to the form of
assignment or form of election to purchase, as the case may be, has either not
been properly completed or indicates an affirmative response to clause 1 and/or
2 thereof, the Rights Agent shall not take any further action with
<PAGE>
respect to such requested exercise of transfer without first consulting with the
Company.
(l) The Rights Agent undertakes only the express duties and obligations
imposed on it by this Agreement and no implied duties or obligations shall be
read into this Agreement against the Rights Agent.
Section 19. Compensation and Indemnification of the Rights Agent.
(a) The Company agrees to pay to the Rights Agent reasonable compensation
for all services rendered by it hereunder and, from time to time, on demand of
the Rights Agent, its reasonable expenses and counsel fees and other
disbursements incurred in the administration and execution of this Agreement and
the exercise and performance of its duties hereunder. The Company also agrees
to indemnify the Rights Agent, its officers, employees, agents and directors
for, and to hold each of them harmless against, any loss, liability, or expense,
incurred without gross negligence, bad faith or willful misconduct on the part
of the Rights Agent, for any action taken, suffered or omitted by the Rights
Agent or such other indemnified party in connection with the acceptance and
administration of this Agreement and the exercise of its duties hereunder,
including but not limited to the costs and expenses of defending against any
claim of liability in the premises. The indemnity provided for hereunder shall
survive the expiration of the Rights and the termination of this Agreement.
(b) The Rights Agent shall be authorized and protected and shall incur no
liability for or in respect of any action taken, suffered or omitted by it in
connection with its administration of this Agreement or the exercise of its
duties hereunder in reliance upon any Rights Certificate or certificate for
Common Stock or for other securities of the Company, instrument of assignment or
transfer, power of attorney, endorsement, affidavit, letter, notice, direction,
consent, certificate, statement, or other paper or document believed by it to be
genuine and to be signed, executed and, where necessary, verified or
acknowledged, by the proper person or persons.
(c) Anything in this Agreement to the contrary notwithstanding, in no event
shall the Rights Agent be liable for special, indirect or consequential loss or
damage of any kind whatsoever (including but not limited to lost profits), even
if the Rights Agent has been advised of the likelihood of such loss or damage
and regardless of the form of the action unless such loss or damage results from
the gross negligence, bad faith or willful misconduct of the Rights Agent.
Section 20. Merger or Consolidation or Change of Name of Rights Agent.
(a) Any Person into which the Rights Agent or any successor Rights Agent
may be merged or with which it may be consolidated, or any Person resulting from
any merger or consolidation to which the Rights Agent or any successor Rights
Agent shall be a party, or any Person succeeding to the shareholder services
business of the Rights Agent or any successor Rights Agent, shall be the
successor to the Rights Agent under this Agreement without the execution or
filing of any paper or any further act on the part of any of the parties hereto;
provided, however, that such Person would be eligible for appointment as a
- -------- -------
successor Rights
<PAGE>
Agent under the provisions of Section 21 hereof.
(b) In case at any time the name of the Rights Agent shall be changed and
at any such time any of the Rights Certificates shall have been countersigned
but not delivered, the Rights Agent may adopt the countersignature under its
prior name and deliver Rights Certificates so countersigned; and in case at that
time any of the Rights Certificates shall not have been countersigned, the
Rights Agent may countersign such Rights Certificates either in its prior name
or in its changed name; and in all such cases such Rights Certificates shall
have the full force provided in the Rights Certificates and in this Agreement.
Section 21. Change of Rights Agent.
(a) The Rights Agent or any successor Rights Agent may resign and be
discharged from its duties under this Agreement upon thirty (30) days' notice in
writing mailed to the Company and to each transfer agent of the Common Stock and
the Series D Preferred Stock by registered or certified mail, and to the holders
of the Rights Certificates by first-class mail. The Company may remove the
Rights Agent or any successor Rights Agent upon thirty (30) days' notice in
writing, mailed to the Rights Agent or successor Rights Agent, as the case may
be, and to each transfer agent of the Common Stock and Series D Preferred Stock
by registered or certified mail, and to the holders of the Rights Certificates
by first-class mail. If the Rights Agent shall resign or be removed or shall
otherwise become incapable of acting, the Company shall appoint a successor to
the Rights Agent. If the Company shall fail to make such appointment within a
period of thirty (30) days after giving notice of such removal or after it has
been notified in writing of such resignation or incapacity by the resigning or
incapacitated Rights Agent or by the holder of a Rights Certificate (who shall,
with such notice, submit his Rights Certificate for inspection by the Company),
then the registered holder of any Rights Certificate may apply to any court of
competent jurisdiction for the appointment of a new Rights Agent. Any successor
Rights Agent, whether appointed by the Company or by such a court, shall be (i)
a Person organized and doing business under the laws of the United States or of
the State of Maryland or New York (or of any other state of the United States so
long as such Person is authorized to do business in the State of Maryland or New
York), in good standing, having an office in the State of Maryland or New York
which is authorized under such laws to exercise corporate trust power and is
subject to supervision or examination by federal or state authority and which
has at the time of its appointment as Rights Agent a combined capital and
surplus of at least $100 million or (ii) an Affiliate of such a Person described
in clause (a). After appointment, the successor Rights Agent shall be vested
with the same powers, rights, duties and responsibilities as if it had been
originally named as Rights Agent without further act or deed; but the
predecessor Rights Agent shall deliver and transfer to the successor Rights
Agent any property at the time held by it hereunder, and execute and deliver any
further assurance, conveyance, act or deed necessary for the purpose. Not later
than the effective date of any such appointment the Company shall file notice
thereof in writing with the predecessor Rights Agent and each transfer agent of
the Common Stock and the Series D Preferred Stock, and mail a notice thereof in
writing to the registered holders of the Rights Certificates. Failure to give
any notice provided for in this Section 21, however, or any defect therein,
shall not affect the legality or validity of the resignation or removal of the
Rights
<PAGE>
Agent or the appointment of the successor Rights Agent, as the case may
be.
(b) In case at the time such successor Rights Agent shall succeed to the
agency created by this Agreement, any of the Rights Certificates shall have been
countersigned but not delivered, any such successor Rights Agent may adopt the
countersignature of the predecessor Rights Agent and deliver such Rights
Certificates so countersigned; and in case at that time any of the Rights
Certificates shall not have been countersigned, any successor Rights Agent may
countersign such Rights Certificates either in the name of the predecessor
Rights Agent or in the name of the successor Rights Agent; and in all such cases
such Rights Certificates shall have the full force provided in the Rights
Certificates and in this Agreement.
Section 22. Issuance of New Rights Certificates.
Notwithstanding any of the provisions of this Agreement or of the Rights to
the contrary, the Company may, at its option, issue new Rights Certificates
evidencing Rights in such form as may be approved by the Board to reflect any
adjustment or change in the Purchase Price per share and the number or kind of
class of shares or other securities or property purchasable under the Rights
Certificates made in accordance with the provisions of this Agreement. In
addition, in connection with the issuance or sale of shares of Common Stock
following the Distribution Date (other than upon exercise of a Right) and prior
to the redemption or expiration of the Rights, the Company (a) shall, with
respect to shares of Common Stock so issued or sold pursuant to the exercise of
stock options or under any employee plan or arrangement, or upon the exercise,
conversion or exchange of securities hereinafter issued by the Company, and (b)
may, in any other case, if deemed necessary or appropriate by the Board, issue
Rights Certificates representing the appropriate number of Rights in connection
with such issuance or sale; provided, however, that (i) no such Rights
-------- -------
Certificate shall be issued if, and to the extent that, the Company shall be
advised by counsel that such issuance would create a significant risk of
material adverse tax consequences to the Company or the Person to whom such
Rights Certificate would be issued, and (ii) no such Rights Certificate shall be
issued if, and to the extent that, appropriate adjustment shall otherwise have
been made in lieu of the issuance thereof.
Section 23. Redemption.
(a) The Board may, at its option, at any time during the period commencing
on the Rights Dividend Declaration Date and ending on the earlier of (i) the
Close of Business on the tenth day following the Stock Acquisition Date (or, if
the Stock Acquisition Date shall have occurred prior to the Record Date, the
Close of Business on the tenth day following the Record Date), as such period
may be extended or shortened in the discretion of the Board (the "Redemption
Period") or (ii) the Close of Business on the Final Expiration Date, cause the
Company to redeem all but not less than all the then outstanding Rights at a
redemption price of $.005 per Right, as such amount may be appropriately
adjusted to reflect any stock split, stock dividend or similar transaction
occurring after the date hereof (such redemption price being hereinafter
referred to as the "Redemption Price"); provided, however, that, if the Board
-------- -------
authorizes redemption of the Rights or a change in the Redemption Period on or
after the time a
<PAGE>
Person becomes an Acquiring Person, then such authorization shall require the
concurrence of two-thirds of the Board. If, following the occurrence of a Stock
Acquisition Date and following the expiration of the Company's right of
redemption hereunder (i) a Person who is an Acquiring Person shall have
transferred or otherwise disposed of a number of shares of Common Stock in one
transaction or series of transactions, not directly or indirectly involving the
Company or any of its Subsidiaries, which did not result in the occurrence of a
Triggering Event such that such Person is thereafter a Beneficial Owner of 10%
or less of the outstanding shares of Common Stock, (ii) there are no other
Persons, immediately following the occurrence of the event described in clause
(i), who are Acquiring Persons, and (iii) the Board, by a vote of two-thirds of
the Board, shall so approve, then the Company's right of redemption shall be
reinstated and thereafter be subject to the provisions of this Section 23.
Notwithstanding anything contained in this Agreement to the contrary, the Rights
shall not be exercisable after the first occurrence of a Section 11(a)(ii) Event
or a Section 13 Event until such time as the Company's right of redemption
hereunder has expired. The Company may, at its option, pay the Redemption Price
in cash, shares of Common Stock (based on the current market price of the Common
Stock at the time of redemption) or any other form of consideration deemed
appropriate by the Board.
(b) Immediately upon the action of the Board ordering the redemption of the
Rights, evidence of which shall have been filed with the Rights Agent, and
without any further action and without any notice, the right to exercise the
Rights will terminate and the only right thereafter of the holders of Rights
shall be to receive the Redemption Price. Promptly after the action of the
Board ordering the redemption of the Rights, the Company shall give notice of
such redemption to the Rights Agent and the holders of the then outstanding
Rights by mailing such notice to all such holders at their last addresses as
they appear upon the registry books of the Rights Agent or, prior to the
Distribution Date, on the registry books of the Transfer Agent for the Common
Stock. Any notice which is mailed in the manner herein provided shall be deemed
given, whether or not the holder receives the notice. Each such notice of
redemption will state the method by which the payment of the Redemption Price
will be made.
Section 24. Exchange.
(a) The Board may, at its option, at any time after any Person becomes an
Acquiring Person, exchange all or part of the then outstanding and exercisable
Rights (which shall not include Rights that have become null and void pursuant
to the provisions of Section 11(a)(ii) or Section 7(e) hereof) for shares of
Common Stock at an exchange ratio of one share of Common Stock per Right,
appropriately adjusted to reflect any stock split, stock dividend or similar
transaction occurring after the date hereof (such exchange ratio being
hereinafter referred to as the "Exchange Ratio").
(b) Immediately upon the action of the Board ordering the exchange of any
Rights pursuant to subsection (a) of this Section 24 and without any further
action and without any notice, the right to exercise such Rights shall terminate
and the only right thereafter of a holder of such Rights shall be to receive
that number of shares of Common Stock equal to the number of such Rights held by
such holder multiplied by the Exchange Ratio. The Company shall promptly
<PAGE>
give public notice of any such exchange; provided, however, that the failure to
give, or any defect in, such notice shall not affect the validity of such
exchange. The Company promptly shall mail a notice of any such exchange to all
of the holders of such Rights at their last addresses as they appear upon the
registry books of the Rights Agent. Any notice which is mailed in the manner
herein provided shall be deemed given, whether or not the holder receives the
notice. Each such notice of exchange will state the method by which the exchange
of Common Stock for Rights will be effected and, in the event of any partial
exchange, the number of Rights which will be exchanged. Any partial exchange
shall be effected pro rata based on the number of Rights (other than Rights
which have become void pursuant to the provisions of Section 11(a)(ii) or
Section 7(e) hereof) held by each holder of Rights.
(c) In the event that there shall not be sufficient Common Stock issued but
not outstanding or authorized but unissued to permit any exchange of Rights as
contemplated in accordance with this Section 24, the Company shall take all such
action as may be necessary to authorize additional shares of Common Stock for
issuance upon exchange of the Rights.
(d) The Company shall not be required to issue fractions of shares of
Common Stock or to distribute certificates which evidence fractional shares of
Common Stock. In lieu of such fractional shares, the Company shall pay to the
registered holders of the Right Certificates with regard to which such
fractional shares would otherwise be issuable an amount in cash equal to the
same fraction of the current market value of a whole share of Common Stock. For
the purposes of this paragraph (d), the current market value of a whole share of
Common Stock shall be the closing price of a share of Common Stock (as
determined pursuant to the second sentence of Section 11(d) hereof) for the
Trading Day immediately prior to the date of exchange pursuant to this Section
24.
Section 25. Notice of Certain Events.
(a) In case the Company shall propose, at any time after the Distribution
Date (i) to pay any dividend payable in stock of any class to the holders of
Series D Preferred Stock or to make any other distribution to the holders of
Series D Preferred Stock (other than a regular quarterly cash dividend out of
earnings or retained earnings) or (ii) to offer to the holders of Series D
Preferred Stock rights or warrants to subscribe for or to purchase any
additional shares of Series D Preferred Stock or shares of stock of any class or
any other securities, rights or options, or (iii) to effect any reclassification
of its Series D Preferred Stock (other than a reclassification involving only
the subdivision of outstanding Series D Preferred Stock), or (iv) to effect any
consolidation or merger into or with, or to effect any sale or other transfer
(or to permit one or more of its subsidiaries to effect any sale or other
transfer), in one or more transactions, of more than 50% of the assets or
earning power of the Company and its subsidiaries (taken as a whole) to, any
other Person, or (v) to effect the liquidation, dissolution or winding up of the
Company, then, in each such case, the Company shall give to each holder of a
Rights Certificate, to the extent feasible and in accordance with Section 26
hereof, a notice of such proposed action, which shall specify the record date
for the purposes of such stock dividend, distribution of rights or warrants, or
the date on which such reclassification, consolidation, merger, sale, transfer,
<PAGE>
liquidation, dissolution, or winding up is to take place and the date of
participation therein by the holders of the shares of Series D Preferred Stock,
if any such date is to be fixed, and such notice shall be so given in the case
of any action covered by clause (i) or (ii) above at least twenty (20) days
prior to the record date for determining holders of the shares of Series D
Preferred Stock for purposes of such action and in the case of any such other
action, at least twenty (20) days prior to the date of the taking of such
proposed action or the date of participation therein by the holders of the
shares of Series D Preferred Stock whichever shall be the earlier.
(b) In case any Section 11(a)(ii) Event shall occur, then, in any such
case, (i) the Company shall as soon as practicable thereafter give to each
holder of a Rights Certificate, to the extent feasible and in accordance with
Section 26 hereof, a notice of the occurrence of such event which shall specify
the event and the consequences of the event to holders of Rights under Section
11(a)(ii) hereof, and (ii) all references in the preceding paragraph to Series D
Preferred Stock shall be deemed thereafter to refer to Common Stock and/or, if
appropriate other securities.
Section 26. Notices.
Notices or demands authorized by this Agreement to be given or made by the
Rights Agent or by the holder of any Rights Certificate to or on the Company
shall be sufficiently given or made if sent by first-class mail, postage
prepaid, addressed (until another address is filed in writing with the Rights
Agent) as follows:
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
2345 Crystal Drive, 10th Floor
Arlington, Virginia 22202
Attention: Robert D. Zimet
Subject to the provisions of Section 21 hereof, any notice or demand authorized
by this Agreement to be given or made by the Company or by the holder of any
Rights Certificate to or on the Rights Agent shall be sufficiently given or made
if sent by first-class mail, postage prepaid, addressed (until another address
is filed in writing with the Company) as follows:
FIRST UNION NATIONAL BANK
1525 West W.T. Harris Blvd., 3C3, NC-1153
Charlotte, North Carolina 28288-1153
Attention: Shareholder Services Group
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Rights Certificate shall be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed to any such holder at the address of such holder as shown on the
registry books of the Company.
<PAGE>
Section 27. Supplements and Amendments.
Prior to the Distribution Date and subject to the penultimate sentence of
this Section 27, the Company may, and the Rights Agent shall, if the Company so
directs, supplement or amend any provision of this Agreement without the
approval of any holders of certificates representing shares of Common Stock.
From and after the Distribution Date and subject to the penultimate sentence of
this Section 27, the Company may, and the Rights Agent shall at any time and
from time to time, if the Company so directs, supplement or amend this Agreement
without the approval of any holders of Rights Certificates in order (i) to cure
any ambiguity, (ii) to correct or supplement any provision contained herein
which may be defective or inconsistent with any other provisions herein, (iii)
to shorten or lengthen any time period hereunder or (iv) to change or supplement
the provisions hereunder in any manner which the Company may deem necessary or
desirable and which shall not adversely affect the interests of the holders of
Rights Certificates (other than an Acquiring Person or an Affiliate or Associate
of any such Person); provided, however, that this Agreement may not be
-------- -------
supplemented or amended (A) to lengthen a time period relating to when the
Rights may be redeemed at such time as the Rights are not then redeemable, (B)
to lengthen any other time period unless such lengthening is for the purpose of
protecting, enhancing or clarifying the rights of, and/or the benefits to, the
holders of Rights (other than an Acquiring Person or an Affiliate or Associate
of any such Person) or (C) to change any rights or duties of the Rights Agent
under this Agreement without the prior approval of the Rights Agent (which
approval shall not be unreasonably withheld and shall be conclusively evidenced
by the Rights Agent's execution of any such supplement or amendment). Upon the
delivery of a certificate from an appropriate officer of the Company which
states that the proposed supplement or amendment is in compliance with the terms
of this Section 27, the Rights Agent shall execute such supplement or amendment.
Notwithstanding anything contained in this Agreement to the contrary, no
supplement or amendment shall be made which changes the Redemption Price, the
Final Expiration Date, the number of one one-thousandths of a share of Series D
Preferred Stock for which a Right is exercisable or the Purchase Price;
provided, however, that at any time prior to the Distribution Date, the Company
- -------- -------
may amend this Agreement to increase the Purchase Price. Prior to the
Distribution Date, the interests of the holders of Rights shall be deemed
coincident with the interests of the holders of shares of Common Stock.
Section 28. Successors.
All the covenants and provisions of this Agreement by or for the benefit of
the Company or the Rights Agent shall bind and inure to the benefit of their
respective successors and assigns hereunder.
Section 29. Determinations and Actions by the Board, etc.
For all purposes of this Agreement, any calculation of the number of shares
of Common Stock outstanding at any particular time, including for purposes of
determining the particular
<PAGE>
percentage of such outstanding shares of Common Stock of which any Person is the
Beneficial Owner, shall be made in accordance with the last sentence of Rule
13d-3(d)(1)(i) of the General Rules and Regulations under the Exchange Act. The
Board (with, where specifically provided for herein, the concurrence of two-
thirds of the Directors) shall have the exclusive power and authority to
administer this Agreement and to exercise all rights and powers specifically
granted to the Board (with, where specifically provided for herein, the
concurrence of two-thirds of the Directors) or to the Company, or as may be
necessary or advisable in the administration of this Agreement, including,
without limitation, the right and power to (i) interpret the provisions of this
Agreement, and (ii) make all determinations deemed necessary or advisable for
the administration of this Agreement (including without limitation a
determination to redeem or not redeem the Rights or to amend the Agreement). All
such actions, calculations, interpretations and determinations (including, for
purposes of clause (y) below, all omissions with respect to the foregoing) which
are done or made by the Board (with, where specifically provided for herein, the
concurrence of two-thirds of the Directors) in good faith, shall (x) be final,
conclusive and binding on the Company, the Rights Agent, the holders of the
Rights and all other Persons, and (y) not subject any director to any liability
to the holders of the Rights.
Section 30. Benefits of this Agreement.
Nothing in this Agreement shall be construed to give to any Person other
than the Company, the Rights Agent and the registered holders of the Rights
Certificates (and, prior to the Distribution Date, the registered holders of the
Common Stock) any legal or equitable right, remedy or claim under this
Agreement; but this Agreement shall be for the sole and exclusive benefit of the
Company, the Rights Agent and the registered holders of the Rights Certificates
(and, prior to the Distribution Date, registered holders of Common Stock).
Section 31. Severability.
If any term, provision, covenant or restriction of this Agreement is held
by a court of competent jurisdiction or other authority to be invalid, void or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated; provided, however, that
-------- -------
notwithstanding anything in this Agreement to the contrary, if any such term,
provision, covenant or restriction is held by such court or authority to be
invalid, void or unenforceable and the Board determines in its good faith
judgment that severing the invalid language from this Agreement would materially
and adversely affect the purpose or effect of this Agreement, the right of
redemption set forth in Section 23 hereof shall be reinstated and shall not
expire until the Close of Business on the tenth day following the date of such
determination by the Board.
Section 32. Governing Law.
This Agreement, each Right and each Rights Certificate issued hereunder
shall be deemed to be a contract made under the laws of the State of Maryland
and for all purposes shall be
<PAGE>
governed by and construed in accordance with laws of such State.
Section 33. Counterparts.
This Agreement may be executed in any number of counterparts. It shall not
be necessary that the signature of or on behalf of each party appears on each
counterpart, but it shall be sufficient that the signature of or on behalf of
each party appears on one or more of the counterparts. All counterparts shall
collectively constitute a single agreement. It shall not be necessary in any
proof of this Agreement to produce or account for more than a number of
counterparts containing the respective signatures of or on behalf of all of the
parties.
Section 34. Descriptive Headings.
Descriptive headings of the several Sections of this Agreement are inserted
for convenience only and shall not control or affect the meaning or construction
of any of the provisions hereof.
Section 35. Limitation of Ownership.
Notwithstanding anything to the contrary in this Agreement, a Person's
ability to acquire shares of Series D Preferred Stock and/or Common Stock of the
Company under this Agreement shall be limited to only such number of shares of
Series D Preferred Stock and/or Common Stock, as the case may be, as would not
cause any such Person or any other Person (taking into account the attribution
rules of the Internal Revenue Code) to exceed the ownership limits set forth in
the Articles of Incorporation of the Company.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and attested, all as of the day and year first above written.
ATTEST: CHARLES E. SMITH RESIDENTIAL
REALTY, INC.
By:________________________________ By:________________________________
Name: Name:
Title: Title:
ATTEST: FIRST UNION NATIONAL BANK
By:________________________________ By:________________________________
Name: Name:
Title: Title:
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 1. CERTAIN DEFINITIONS......................................................................... 1
SECTION 2. APPOINTMENT OF RIGHTS AGENT................................................................. 7
SECTION 3. ISSUE OF RIGHTS CERTIFICATES................................................................ 7
SECTION 4. FORM OF RIGHTS CERTIFICATES................................................................. 9
SECTION 5. COUNTERSIGNATURE AND REGISTRATION........................................................... 10
SECTION 6. TRANSFER, SPLIT UP, COMBINATION AND EXCHANGE OF RIGHTS CERTIFICATES; MUTILATED,
DESTROYED, LOST OR STOLEN RIGHTS CERTIFICATES..................................................... 11
SECTION 7. EXERCISE OF RIGHTS; PURCHASE PRICE; EXPIRATION DATE OF RIGHTS............................... 12
SECTION 8. CANCELLATION AND DESTRUCTION OF RIGHTS CERTIFICATES......................................... 14
SECTION 9. RESERVATION AND AVAILABILITY OF CAPITAL STOCK............................................... 15
SECTION 10. SERIES D PREFERRED STOCK RECORD DATE....................................................... 16
SECTION 11. ADJUSTMENT OF PURCHASE PRICE, NUMBER AND KIND OF SHARES OR NUMBER OF RIGHTS................ 17
SECTION 12. CERTIFICATE OF ADJUSTED PURCHASE PRICE OR NUMBER OF SHARES................................. 26
SECTION 13. CONSOLIDATION, MERGER OR SALE OR TRANSFER OF ASSETS OR EARNING POWER....................... 26
SECTION 14. FRACTIONAL RIGHTS AND FRACTIONAL SHARES.................................................... 29
SECTION 15. RIGHTS OF ACTION........................................................................... 31
SECTION 16. AGREEMENT OF RIGHTS HOLDERS................................................................ 31
SECTION 17. RIGHTS CERTIFICATE HOLDER NOT DEEMED A STOCKHOLDER......................................... 32
SECTION 18. DUTIES OF RIGHTS AGENT..................................................................... 32
SECTION 19. COMPENSATION AND INDEMNIFICATION OF THE RIGHTS AGENT....................................... 35
SECTION 20. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF RIGHTS AGENT.................................. 36
SECTION 21. CHANGE OF RIGHTS AGENT..................................................................... 36
SECTION 22. ISSUANCE OF NEW RIGHTS CERTIFICATES........................................................ 38
SECTION 23. REDEMPTION................................................................................. 38
SECTION 24. EXCHANGE................................................................................... 39
SECTION 25. NOTICE OF CERTAIN EVENTS................................................................... 40
SECTION 26. NOTICES.................................................................................... 41
SECTION 27. SUPPLEMENTS AND AMENDMENTS................................................................. 42
SECTION 28. SUCCESSORS................................................................................. 43
SECTION 29. DETERMINATIONS AND ACTIONS BY THE BOARD, ETC............................................... 43
SECTION 30. BENEFITS OF THIS AGREEMENT................................................................. 43
SECTION 31. SEVERABILITY............................................................................... 44
</TABLE>
<PAGE>
<TABLE>
<S> <C>
SECTION 32. GOVERNING LAW.............................................................................. 44
SECTION 33. COUNTERPARTS............................................................................... 44
SECTION 34. DESCRIPTIVE HEADINGS....................................................................... 44
SECTION 35. LIMITATION OF OWNERSHIP.................................................................... 45
</TABLE>
EXHIBITS
EXHIBIT A Form Articles Supplementary of Charles E. Smith Residential
Realty, Inc. Classifying and Designating A Series of Preferred
Stock as Series D Junior Participating Preferred Stock and
Fixing Distribution and Other Preferences and Rights of such
Series
EXHIBIT B Form of Summary of Rights
EXHIBIT C Form of Rights Certificate
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF CHARLES E. SMITH RESIDENTIAL REALTY, INC.
<TABLE>
<CAPTION>
Name State of Incorporation/Formation
<S> <C>
Smith One, Inc. Delaware
Smith Two, Inc. Delaware
Smith Three, Inc. Delaware
Smith Four, Inc. Delaware
Smith Five, Inc. Delaware
Smith Six, Inc. Delaware
Smith Seven, Inc. Delaware
Charles E. Smith Residential Realty L.P. Delaware
Smith Employment Services L.P. Delaware
Courthouse Hill L.L.C. Delaware
Smith Property Holdings Springfield L.L.C. Delaware
Smith Property Holdings 2000 Commonwealth L.L.C. Delaware
Smith Property Holdings Cathedral Place L.L.C. Delaware
Smith Property Holdings Crystal Plaza L.L.C. Delaware
Smith Property Holdings Dearborn Place L.L.C. Delaware
Smith Property Holdings One East Delaware L.L.C. Delaware
Smith Property Holdings Lincoln Towers L.L.C. Delaware
Smith Property Holdings One, L.P. Delaware
Smith Property Holdings One (D.C.) L.P. Delaware
Smith Property Holdings Crystal Towers L.P. Delaware
Smith Property Holdings Two L.P. Delaware
Smith Property Holdings Two (D.C.) L.P. Delaware
Smith Property Holdings Three L.P. Delaware
Smith Property Holdings Three (D.C.) L.P. Delaware
Smith Property Holdings Four L.P. Delaware
Smith Property Holdings Kenmore L.P. Delaware
Smith Property Holdings Five L.P. Delaware
Smith Property Holdings Five (D.C.) L.P. Delaware
First Herndon Associates Limited Partnership Virginia
Smith Property Holdings Six L.P. Delaware
Smith Property Holdings Six (D.C.) L.P. Delaware
Smith Property Holdings Van Ness L.P. Delaware
Smith Property Holdings Columbia Road L.P. Delaware
Smith Property Holdings Seven L.P. Delaware
Metropolitan Acquisition Finance L.P. Delaware
Smith Realty Company Maryland
Consolidated Engineering Services, Inc. Maryland
Smith Management Construction, Inc. Maryland
Charles E. Smith Insurance Agency, Inc. District of Columbia
Noel Enterprises, Inc. Delaware
Smith Property Holdings Cronin's Landing Limited Partnership Delaware
Smith Property Holdings 4411 Connecticut L.L.C. Delaware
Smith Property Holdings Buchanan House L.L.C. Delaware
Smith Property Holdings McClurg Court L.L.C. Delaware
Smith Property Holdings Parc Vista L.L.C. Delaware
Smith Property Holdings Stonebridge L.L.C. Delaware
Smith Property Holdings Superior Place L.L.C. Delaware
Smith Property Holdings Water Park Towers L.L.C. Delaware
Smith Property Holdings Renaissance Manager L.L.C. Delaware
SPH Renaissance L.L.C. Delaware
</TABLE>
E-7
<PAGE>
Exhibit 23.1
------------
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report included in this Form 10-K, into Charles E. Smith
Residential Realty, L.P.'s previously filed Registration Statement File No. 33-
82382.
[AA] /s/ ARTHUR ANDERSEN LLP
Washington, D.C.
March 26, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 26,277
<PP&E> 1,322,646
<DEPRECIATION> (228,683)
<TOTAL-ASSETS> 1,185,399
<CURRENT-LIABILITIES> 25,238
<BONDS> 790,579
0
141,867
<COMMON> (198,543)
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,185,399
<SALES> 0
<TOTAL-REVENUES> 250,211
<CGS> 0
<TOTAL-COSTS> 130,593
<OTHER-EXPENSES> 8,947
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 46,077
<INCOME-PRETAX> 86,254
<INCOME-TAX> 0
<INCOME-CONTINUING> 86,254
<DISCONTINUED> 0
<EXTRAORDINARY> 16,384
<CHANGES> 0
<NET-INCOME> 59,148
<EPS-PRIMARY> 1.96
<EPS-DILUTED> 1.95
</TABLE>
