<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): OCTOBER 3, 1997
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
(Exact name of registrant as specified in its charter)
COMMISSION FILE NUMBER: 1934 ACT FILE NUMBER: 1-13174
MARYLAND 54-1681655
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2345 CRYSTAL DRIVE
CRYSTAL CITY, VA 22202
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number including area code: (703) 920-8500
<PAGE>
Item 2. Property Acquisitions
- ------- ---------------------
On October 3, 1997, Charles E. Smith Residential Realty L.P. ("the
Operating Partnership"), of which Charles E. Smith Residential Realty, Inc.
("the Company") is the sole general partner, acquired a 714-unit, luxury high-
rise apartment property located in Ballston, Virginia ("Lincoln Towers") for a
total cost of approximately $88.7 million in cash. Lincoln Towers was built in
1992 and consists of twin 22 story towers above a three level parking garage.
The acquisition was funded in part by the sale of 1.45 million shares of common
stock and 1.22 million shares of preferred stock to the Prudential Insurance
Company of America ("Prudential") for approximately $76 million.
On October 8, 1997, the Company, through the Operating Partnership,
acquired a 306-unit luxury high-rise property in downtown Chicago, Illinois
("One East Delaware") for approximately $42.5 million in cash. Built in 1989,
the property consists of a 36 story tower over an enclosed parking garage. The
Company funded the acquisition with proceeds from its line of credit.
On October 10, 1997, the Company, through the Operating Partnership,
acquired a 188-unit, luxury high-rise property in Boston, Massachusetts ("2000
Commonwealth") for a total cost of approximately $27.6 million consisting of
464,667 limited partnership units of the Operating Partnership valued at $14.1
million, assumed debt of $13.3 million, and acquisition related costs of
approximately $0.2 million. Built in 1986, the property is a sixteen story,
brick structure over below grade parking .
On October 8, 1997, the Company, through the Operating Partnership,
acquired a 564-unit, luxury high-rise property under construction in Arlington,
Virginia for $17.5 million consisting of $3.6 million cash and approximately
450,000 limited partnership units of the Operating Partnership valued at $13.9
million. The total expected project cost is approximately $65 million. The
balance of construction costs is expected to be funded through a construction
loan. Management expects to initially deliver apartment units in October 1998.
Item 5. Other Events
- ------- -------------
On October 3, 1997, the Company issued 1,450,000 shares of common
stock, $0.01 par value per share (the "Common Stock") and 1,216,666 shares of
Series B Cumulative Convertible Redeemable Preferred Stock, par value $0.01 per
share, (the "Series B Preferred Shares") to The Prudential Insurance Company of
America ("Prudential") and two of its affiliates, Strategic Value Investors, LLC
("SVI-US") and Strategic Value Investors International, LLC
2
<PAGE>
("SVI-International;" Prudential, SVI-US and SVI-International, collectively,
the "Investors"), for a total of $75,999,981 in gross proceeds to the Company,
pursuant to a Purchase Agreement dated as of September 17, 1997 (the "Purchase
Agreement").
Certain material terms of the Purchase Agreement and the Series B
Preferred Shares are more fully described below
THE SERIES B PREFERRED SHARES
The following summary of certain material terms of the Series B
Preferred Shares does not purport to be complete and is qualified in its
entirety by reference to the Articles Supplementary classifying and designating
the Series B Preferred Shares and fixing the distribution and other preferences
and rights of such series filed as an exhibit hereto (the "Articles
Supplementary").
Dividends
---------
The Series B Preferred Shares will have a dividend rate equal to the
greater of (i) $2.02 per share per annum or (ii) the ordinary cash dividends
declared on the Company's Common Stock, $.01 par value per share (as adjusted),
payable quarterly at the time of the Common Stock dividend payment (each such
payment date, a "Dividend Payment Date") (or if no dividend is declared, at a
similar time declared by the Board of Directors of the Company). Dividends will
be payable quarterly, when, as and if declared by the Board of Directors, in the
arrears on Dividend Payment Dates, beginning on the Dividend Payment Date with
respect to the quarter ended September 30, 1997, for which a full dividend will
be paid on the Series B Preferred Shares, notwithstanding the fact that they
were not issued until October 3, 1997. So long as any Series B Preferred Shares
are outstanding, no dividends, except as described below, will be declared or
paid on any class or series of capital stock ranking junior or in parity with
the Series B Preferred Shares, unless full cumulative dividends have been or
contemporaneously are declared and paid or declared and a sum sufficient for the
payment thereof set apart for such payment on the Series B Preferred Shares.
3
<PAGE>
Liquidation Rights
------------------
The holders of the Series B Preferred Shares will be entitled to receive a
liquidation preference equal to the sum of $28.50 per share, plus an amount
equal to any dividends (whether or not earned or declared) accumulated, accrued
and unpaid thereon to the date of final distribution to such holders in the
event of any liquidation, dissolution or winding up of the Company, subject to
the proper rights of any series of capital stock ranking senior to the Series B
Preferred Shares. Until the holders of Series B Preferred Shares have been paid
their Liquidation Preference in full, no payment will be made to holders of
Common Stock or any other capital stock that ranks junior to the Series B
Preferred Shares as to liquidation rights. After payment of the full amount of
the liquidating distributions to which they are entitled, the holders of Series
B Preferred Shares will have no right or claim to any of the remaining assets of
the Company.
Redemption
----------
The Company may redeem the Series B Preferred Shares, at its option, in whole
or in part, by issuing for each Series B Preferred Share to be redeemed the
number of shares of Common Stock as equals $28.50 divided by the Conversion
Price in effect as of the opening of business on the call date (which Conversion
Price initially is $28.50, and is subject to adjustment as described below),
provided that the Company may not issue to any holder a number of shares of
Common Stock that would result in such holder exceeding the Common Stock
Ownership Limit (as defined below) then applicable to such holder.
Conversion
----------
Subject to compliance with the limitations on ownership of Common Stock set
forth in the Company's Articles of Incorporation, a holder of Series B Preferred
Shares shall have the right, on or after January 1, 1998, to convert such shares
into the number of shares of Common Stock obtained by multiplying the number of
Series B Preferred Shares to be converted by $28.50 and dividing such product by
the Conversion Price in effect on the date such shares are surrendered and
notice is received by the Company.
The Conversion Price initially is $28.50 (equivalent to a conversion rate of
one share of Common Stock for each Series B Preferred Share) and is subject to
adjustment in the event of certain Common Stock dividends, subdivisions,
combinations, recapitalizations, issuances of certain rights, options, or
warrants to purchase Common Stock to all holders of Common Stock, distributions
of securities or assets to all holders of Common Stock, and other events
specified in the Articles Supplementary.
4
<PAGE>
Ranking
-------
The Series B Preferred Shares will, with respect to dividend rights and
distributions upon liquidation, dissolution, and winding up of the Company, rank
senior to the Common Stock and all other outstanding shares of capital stock of
the Company other than any series of capital stock the terms of which
specifically provide that the capital stock of such series ranks senior to or on
a parity with the Series B Preferred Shares with respect to dividends and
distributions upon liquidation, dissolution or winding up (such shares ranking
on a parity with the Series B Preferred Shares, the "Parity Shares"). The
outstanding Series A Cumulative Convertible Redeemable Preferred Shares of the
Company are Parity Shares.
Voting
------
So long as any Series B Preferred Shares are outstanding, unless provision is
made for the redemption of all Series B Preferred Shares at the time
outstanding, the affirmative vote of at least 66 2/3% of the votes entitled to
be cast by holders of the Series B Preferred Shares will be necessary for
effecting (i) any amendment, alteration, or repeal of any provisions of the
Company's Articles of Incorporation, By-Laws or the Articles Supplementary
relating to the Series B Preferred Shares that materially and adversely affects
the voting powers, rights or preferences of the holders of the Series B
Preferred Shares; (ii) a share exchange that affects the Series B Preferred
Shares, a consolidation with or merger of the Company into another entity, or a
consolidation with or merger of another entity into the Company, unless in each
case each Series B Preferred Share (A) shall remain outstanding without a
material and adverse change to its terms and rights or (B) shall be converted
into or exchanged for convertible preferred shares of the surviving entity
having preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms or conditions of
redemption thereof identical to that of a Series B Preferred Share (except for
changes that do not materially and adversely affect the Series B Preferred
Shares); or (iii) the authorization, reclassification or creation of, or the
increase in the authorized amount of, any shares of any class or any security
convertible into shares of any class ranking prior to the Series B Preferred
Shares in the distribution of assets on any liquidation, dissolution or winding
up or in the payment of dividends.
THE PURCHASE AGREEMENT
Information and Consultation Rights
-----------------------------------
Until the earlier of (i) January 1, 2003 and (ii) the first date on which the
number of shares of Common Stock issuable upon conversion of Series B Preferred
Shares then held by the Investors have an aggregate Market Value (as defined in
the Purchase Agreement) of less than $30 million (the "QUALIFICATION PERIOD"),
the Investors will have certain information and consultation rights as follows:
(i) the right to receive copies of all documents (or any amendments to such
documents) required to be filed by the Company and/or the Operating Partnership
with the Securities and Exchange Commission pursuant to the Securities Exchange
Act of 1934, as amended, (ii) the right to inspect the Operating Partnership's
books and records, (iii) the right to consult with the management of the
Operating Partnership regarding operating and financial matters of the Operating
Partnership and its Subsidiaries and (iv) the right to receive non-confidential
operating information of the Operating Partnership of the same general nature as
provided to financial analysts, substantially with the provision of such
information to financial analysts.
Maintenance of REIT Status
--------------------------
The Purchase Agreement provides that until the earlier of (i) the end of the
Qualification Period or (ii) December 31, 2002, the Company shall use its
reasonable best efforts to continue to be taxed as a real estate investment
trust ("REIT"), subject to the right of the Company to voluntarily terminate its
status as a REIT by stockholder vote. The Company has agreed not to voluntarily
terminate its status as a REIT for a period of 24 months after September 17,
1997. If the Company's Board of Directors adopts a resolution recommending that
the Company terminate its status as a REIT, the Company will, within 10 days of
such resolution, provide each Investor with notice of the
5
<PAGE>
record date for the annual or special meeting of stockholders called for the
approval of such action.
Ownership Limitations
---------------------
The Company has granted to the Investors a limited and conditional waiver of
the 9.8% limitation on ownership of Common Stock contained in the Articles of
Incorporation of the Company to permit the Investors and any Permitted
Transferees (as a group) to own the Series B Preferred Shares; provided however,
that such waiver will terminate (i) if at any time the Investors, any Permitted
Transferees, and their respective affiliates own a number of shares of Common
Stock (including shares of Common Stock issuable upon conversion of the Series B
Preferred Shares) in excess of 19.998% of the outstanding shares of Common Stock
(the "Common Stock Ownership Limit") or (ii) if the Investors, any Permitted
Transferees, and their respective affiliates (as a group) own more than 9.8% of
the outstanding shares of Common Stock, provided that the waiver will not
terminate solely by reason of the issuance of Common Stock by the Company in
redemption of Series B Preferred Shares or by reason of a conversion of Series B
Preferred Shares into Common Stock immediately prior to liquidation of the
Company.
Standstill
----------
The Investors have agreed, and any Permitted Transferees will agree, not to,
directly or indirectly, (i) sell or transfer any Series B Preferred Shares or
Common Stock to any person if such transfer would violate the ownership limits
in the Company's Articles of Incorporation, (ii) purchase or acquire shares of
Common Stock or other securities of the Company which would cause them
collectively to own in excess of 19.998% of the outstanding shares of Common
Stock, (iii) solicit, propose or effect any business combination, liquidation or
sale of the Company or similar extraordinary transaction, (iv) seek board
representation or participate in any proxy contest, or (v) take certain other
actions, for a period of time ending on the earlier of (i) January 1, 2003 or
(ii) first date following the date on which the Investor, any Permitted
Transferees, and their respective affiliates (as a group) own less than 9.8% of
the outstanding Common Stock (treating shares of Common Stock issuable upon
conversion of the Series B Preferred Shares as outstanding for this purpose).
Such period may be terminated earlier upon the occurrence of certain
extraordinary events.
6
<PAGE>
Registration Rights
-------------------
The Company has granted the Investors and any Permitted Transferees certain
registration rights under the Securities Act of 1933, as amended, with respect
to the resale of shares of Common Stock issued or issuable upon conversion of
Series B Preferred Shares.
The press release announcing the transaction is attached hereto as Exhibit
99.1.
7
<PAGE>
ISSUANCE OF SERIES A CUMULATIVE CONVERTIBLE REDEEMABLE STOCK
On May 15, 1997, Charles E. Smith Residential Realty, Inc. (the "Company")
entered into an agreement (the "Purchase Agreement") to sell 2,640,325 shares of
Series A Cumulative Convertible Redeemable Stock (the "Series A Preferred
Shares") at a price of $27.08 per share to Security Capital Preferred Growth,
Inc ("Security Capital") an accredited investor, for a total of $71,500,000 in
gross proceeds to the Company. The initial closing relating to the sale of
approximately $20 million of Series A Preferred Shares occurred on June 30,
1997, and the remainder of the Series A Preferred Shares will be issued and sold
in amounts determined by the Company on or before May 14, 1998. Security Capital
may assign its rights under the Purchase Agreement to certain of its affiliates
who agree to be bound by the terms thereof (such affiliates, the "Permitted
Transferees").
Certain material terms of the Purchase Agreement and the Series A Preferred
Shares are more fully described below.
TERMS OF SERIES A PREFERRED SHARES
The following summary of certain material terms of the Series A Preferred
Shares does not purport to be complete and is qualified in its entirety by
reference to the Articles Supplementary classifying and designating the Series A
Preferred Shares and fixing the distribution and other preferences and rights of
such series filed as an exhibit to the Company's Form 10-Q for the second
quarter of 1997 (the "Articles Supplementary").
Dividends. The Series A Preferred Shares will have a dividend rate equal to
---------
the greater of $2.02 per share per annum or the ordinary cash dividends declared
on the Company's Common Stock, and will be payable quarterly, when, as and if
declared by the Board of Directors, in arrears.
Liquidation Rights. The holders of the Series A Preferred Shares will be
------------------
entitled to receive a liquidation preference equal to the sum of $27.08 per
share, plus accrued and unpaid dividends thereon to the date of final
distribution to such holders in the event of any liquidation, dissolution or
winding up of the Company, subject to the rights of any series of capital stock
ranking senior to the Series A Preferred Shares.
Redemption. The Series A Preferred Shares will not be redeemable by the
----------
Company prior to May 15, 2003. On and after May 15, 2003, the Company, at its
option, may redeem the Series A Preferred Shares, in whole or in part, for cash
at the redemption price per share of $27.08 (plus all accumulated, accrued and
unpaid dividends) or by issuing for each Series A Preferred Share to be redeemed
the number of shares of Common Stock as equals $27.08 divided by the Conversion
Price in effect as of the opening of business on the call date (which Conversion
Price initially is $27.08, and is subject to adjustment as described below);
provided, however, that the Company may redeem Series A Preferred Shares for
shares of Common Stock, rather than cash, only if the weighted average trading
price of the Common Stock for 20 of the last 30 trading days immediately before
the date of the notice of redemption, equals or exceeds 108% of the Conversion
Price in effect on the date of the notice and at least 1,000,000 shares of
Common Stock were traded during those 30 trading days.
8
<PAGE>
Conversion. Subject to compliance with the limitations on ownership of Common
-----------
Stock set forth in the Company's Articles of Incorporation, a holder of Series A
Preferred Shares shall have the right, upon the earliest to occur of (i) January
31, 1999, (ii) the first day on which a Change of Control (as defined in the
Articles Supplementary) occurs, (iii) the first day on which a Change of
Ownership (as defined in the Articles Supplementary) occurs, or (iv) the
occurrence of a REIT Termination Event (as defined in the Articles
Supplementary), to convert such shares into the number of shares of Common Stock
obtained by multiplying the number of Series A Preferred Shares to be converted
by $27.08 and dividing such product by the Conversion Price in effect on the
date such shares are surrendered and notice is received by the Company. The
Conversion Price initially is $27.08 (equivalent to a conversion rate of one
share of Common Stock for each Series A Preferred Share) and is subject to
adjustment in the event of certain Common Stock dividends, subdivisions,
combinations, recapitalizations, issuances of certain rights, options, or
warrants to purchase Common Stock to all holders of Common Stock, distributions
of securities or assets to all holders of Common Stock, and other events
specified in the Articles Supplementary.
Ranking. The Series A Preferred Shares will rank senior, with respect to
--------
dividend rights and distributions upon liquidation, dissolution, and winding up
of the Company, to the Common Stock and all other outstanding shares of capital
stock of the Company other than any series of capital stock the terms of which
specifically provide that the capital stock of such series ranks senior to or on
a parity with the Series A Preferred Shares.
Voting. If and whenever four quarterly dividends (whether or not consecutive)
------
payable on the Series A Preferred Shares or any series or class of parity shares
have not been paid in full, the holders of the Series A Preferred Shares,
together with holders of every series of parity shares, voting as a single
class, shall be entitled to elect two additional directors to serve on the Board
of Directors. Whenever all arrears in dividends on the Series A Preferred
Shares or parity shares, as applicable, have been paid, the right of the holders
to elect such additional directors shall cease (subject to the same provision
for vesting of voting rights in the case of future arrears).
So long as any Series A Preferred Shares are outstanding, unless provision is
made for the redemption of all Series A Preferred Shares at the time
outstanding, the affirmative vote of at least 66 2/3% of the votes entitled to
be cast by holders of the Series A Preferred Shares will be necessary for
effecting (i) any amendment of any provisions of the Company's Articles of
Incorporation, By-Laws or the Articles Supplementary relating to the Series A
Preferred Shares that materially and adversely affects the voting powers, rights
or preferences of the holders of the Series A Preferred Shares; (ii) a share
exchange that affects the Series A Preferred Shares, a consolidation with or
merger of the Company into another entity, or a consolidation with or merger of
another entity into the Company, unless in each case each Series A Preferred
Share (A) shall remain outstanding without a material and adverse change to its
terms and rights or (B) shall be converted into or exchanged for convertible
preferred shares of the surviving entity having preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends, qualifications
and terms or conditions of redemption thereof identical to that of a Series A
Preferred Share (except for changes that do not materially and adversely affect
the Series A Preferred Shares); or (iii) the authorization, reclassification or
creation of, or the increase in the authorized amount of, any shares of any
class or any security convertible into shares of any class ranking prior to the
Series A Preferred Shares in the distribution of assets on any liquidation,
dissolution or winding up or in the payment of dividends.
9
<PAGE>
THE PURCHASE AGREEMENT
Consultation Rights. Until January 31, 1999, Security Capital will have
-------------------
information rights and the right to be consulted concerning certain significant
decisions of the Company. The Company will not have any obligation to accept or
comply with any advice offered in any such consultation.
Purchase Offer for Shares in Certain Events. The Purchase Agreement provides
-------------------------------------------
that if, prior to January 31, 1999, the Company (a) fails to continue to be
taxed as a real estate investment trust ("REIT"), or (b) experiences a "Change
in Control," Security Capital may compel the Company to repurchase the Series A
Preferred Shares for a cash amount equal to 105% of the liquidation preference
value of the Series A Preferred Shares ($27.08) plus all accumulated, accrued
and unpaid dividends. ff a Change of Control occurs after January 31, 1999,
Security Capital may request that the Company repurchase the Series A Preferred
Shares at the price specified above but the Company may elect not to repurchase
such shares, in which event the Series A Preferred Shares will be immediately
convertible into Common Stock in accordance with their terms as set forth above.
Fixed Charge Coverage; Limitations on Issuance of Additional Preferred Shares
-----------------------------------------------------------------------------
and Indebtedness. The Company has agreed that, so long as Security Capital
- -----------------
and any Permitted Transferees (as a group) own at least 1,330,000 Series A
Preferred Shares, that it will not, without the consent of the holders of a
majority of the Series A Preferred Shares, issue any additional preferred shares
or incur any additional indebtedness for borrowed money if, immediately
following such issuance and the application of the net proceeds therefrom the
Company's ratio of Consolidated EBITDA to Consolidated Fixed Charges for the
four fiscal quarters immediately preceding such issuance would be less than 1.5
to 1.0.
Ownership Limitations. The Company has granted to Security Capital
---------------------
a limited and conditional waiver of the 9.8% limitation on ownership of Common
Stock contained in the Articles of Incorporation of the Company to permit
Security Capital and any Permitted Transferees (as a group) to own the Series A
Preferred Shares; provided however, that such waiver will terminate (i) if at
any time Security Capital, any Permitted Transferees, and their respective
affiliates own a number of shares of Common Stock (including shares of Common
Stock issuable upon conversion of the Series A Preferred Shares) in excess of
19.9% of the outstanding shares of Common Stock or (ii) if Security Capital, any
Permitted Transferees, and their respective affiliates (as a group) own more
than 9.8% of the outstanding shares of Common Stock at any time prior to the
earliest to occur of (i) May 15, 2002 or (ii) the occurrence of a Change of
Control, a Change of Ownership, or a REIT Termination Event.
Standstill. Security Capital has agreed, and any Permitted Transferees will
----------
agree, not to, directly or indirectly, (i) sell or transfer any Series A
Preferred Shares or Common Stock to any person if such transfer would result in
a violate the ownership limits in the Company's Articles of Incorporation, (ii)
purchase or acquire shares of Common Stock or other securities of the Company
which would cause them collectively to own in excess of 19.9% of the outstanding
shares of Common Stock, (iii) solicit, propose or effect any business
combination, liquidation or sale of the Company or similar extraordinary
transaction, (iv) seek board representation (other than as provided in the terms
of the Series A Preferred Stock when dividends thereon are in arrears) or
participate in any proxy contest, or (v) take certain other actions, for a
period of time ending on later of May 15, 2002 or the date on which the
Investor, any Permitted Transferees ' and their respective affiliates (as a
group) own less than 9.8% of the outstanding Common Stock (treating shares of
Common Stock issuable upon conversion of the Series A Preferred Shares as
outstanding for this purpose). Such period may be terminated earlier upon the
occurrence of certain extraordinary events.
Registration Rights. The Company has granted Security Capital and any
-------------------
Permitted Transferees certain registration rights with respect to the resale of
shares of Common Stock issued or issuable upon conversion of Series A Preferred
Shares.
The press release announcing the transaction is attached hereto as Exhibit 99.
2.
10
<PAGE>
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
- ------- ------------------------------------------------------------------
(A) Pro forma and historical financial information ( Lincoln Towers) -
beginning at page F-6
Pro forma and historical financial information (One East Delaware and
2000 Commonwealth) - to be filed within 60 days of this filing.
(B) Exhibits
4.1 Articles Supplementary for Series B Cumulative Convertible Redeemable
Preferred Stock.
4.2 Certificate of Correction relating to Articles Supplementary or
Series B Cumulative Convertible Redeemable Preferred Stock filed and
approved by the Maryland State Department of Assessments and Taxation
on October 9, 1997.
99.1 Press Release dated September 17, 1997
99.2 Press Release dated October 15, 1997
99.3 Consent of Independent Public Accountants dated October 17th, 1997
11
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND PRO FORMA INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
Pro Forma (unaudited) Consolidated Balance Sheet F-5
as of June 30, 1997
Pro Forma (unaudited) Consolidated Statement of F-6
Operations for the six months ended June 30, 1997
Pro Forma (unaudited) Consolidated Statement of F-7
Operations for the year ended December 31, 1996
Notes and Management's Assumptions to Unaudited Pro Forma
Consolidated Financial Information F-8
ACQUISITION PROPERTIES
Report of Independent Public Accountants - Lincoln Towers F-10
Statements of Revenues and Certain Expenses of Lincoln Towers F-11
for the six months ended June 30, 1997 (unaudited) and
the year ended December 31, 1996 (audited)
</TABLE>
F-1
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
Charles E. Smith Residential Realty, Inc. (the "Company"), a Maryland
Corporation, is a self-managed real estate investment trust and is the sole
general partner of Charles E. Smith Residential Realty L.P. ("the Operating
Partnership"). The Company, through the Operating Partnership and its
subsidiaries, is engaged in the ownership, operation, management, leasing,
acquisition and development of real estate properties, primarily residential
multifamily properties.
On June 30, 1994, the Company raised equity through an initial public offering
and a private placement which was used to acquire the sole general partnership
and a proportionate limited partnership interest in the Operating Partnership.
Simultaneous with the initial public offering and private placement, the
entities that owned the properties and the related service businesses
transferred the properties and related service businesses to the Operating
Partnership (or corporations in which the Operating Partnership owns
substantially all of the equity) and received in exchange, directly or
indirectly, limited partnership units in the Operating Partnership. The assets
and liabilities transferred were recorded at predecessor cost.
The Company, through the Operating Partnership, has recently acquired the
following properties:
. Lincoln Towers On October 3, 1997, the Operating Partnership acquired
---------------
this 714-unit, luxury high-rise apartment property located in Ballston, Virginia
for $88.5 million cash. The acquisition was funded in part by the sale of 1.45
million shares of common stock and 1.22 million shares of preferred stock to the
Prudential Insurance Company of America ("Prudential") for approximately $76
million ("the Offerings"). Historical and pro forma financial information for
Lincoln Towers is included in this Form 8-K.
. One East Delaware On October 8, 1997, the Operating Partnership acquired
------------------
this 306-unit luxury high-rise property in downtown Chicago, Illinois for
approximately $42.5 million cash. The Company funded the acquisition with
proceeds from its line of credit. Historical and pro forma financial
information for One East Delaware will be provided in an amended Form 8-K within
60 days of this filing.
<PAGE>
. 2000 Commonwealth On October 10, 1997, the Operating Partnership acquired
-----------------
this 188-unit, luxury high rise property in Boston, Massachusetts for a total
cost of approximately $27.4 million consisting of 0.5 million limited
partnership units of the Operating Partnership valued at $14.1 million, assumed
debt of $13.1 million, and acquisition related costs of approximately $0.2
million. Historical and pro forma financial information for 2000 Commonwealth
will be provided in an amended Form 8-K within 60 days of this filing.
. Courthouse Hill On October 8, 1997, the Operating Partnership acquired
----------------
this 564-unit, luxury high rise property under construction in Arlington,
Virginia for $17.5 million consisting of $3.6 million cash and 450,000 limited
partnership units of the Operating Partnership valued at $13.9 million. Total
expected project cost is approximately $65 million. The balance of construction
costs is expected to be funded through a construction loan. Management expects
to initially deliver apartment units in October 1998.
The following sets forth the Pro Forma (unaudited) Consolidated Balance Sheet
as of June 30, 1997, the Pro Forma (unaudited) Consolidated Statement of
Operations for the six months ended June 30, 1997, and the Pro Forma (unaudited)
Consolidated Statement of Operations for the year ended December 31, 1996 of
Charles E. Smith Residential Realty, Inc. The unaudited pro forma information
is based on the financial statements of the Company and should be read in
conjunction with the historical financial statements and notes related thereto
appearing in the Company's Form 10-K and 10-Q.
The unaudited pro forma consolidated financial statements as of June 30, 1997
and for the six months ended June 30, 1997 and the year ended December 31, 1996
are presented as if the Lincoln Towers acquisition and related offerings of
common and preferred stock to Prudential had occurred by June 30, 1997 for the
Pro Forma Consolidated Balance Sheet and at the beginning of the period for the
Pro Forma Consolidated Statement of Operations for the six months ended June 30,
1997 and the year ended December 31, 1996.
The pro forma consolidated financial information is unaudited and is not
necessarily indicative
<PAGE>
of the results which actually would have occurred if the Lincoln Towers
acquisition and the related Offerings had been consummated as of June 30, 1997
for the pro forma consolidated balance sheet and at the beginning of the periods
for the pro forma consolidated statements of operations, nor does it purport to
represent the future financial position and results of operations for future
periods. In management's opinion, all adjustments necessary to reflect the
effects of these transactions have been made.
F-4
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1997
(UNAUDITED) (IN THOUSANDS)
<TABLE>
<CAPTION>
Pro Forma Adjustments
---------------------
Lincoln Towers
---------------------------------
ASSETS Historical Offerings (A) Acquisition (B) Pro Forma
---------- ------------- --------------- ---------
<S> <C> <C> <C> <C>
Rental property, at predecessor cost, net $263,786 $263,786
Rental property, acquired and developed, net 329,856 88,728 418,584
Rental property under development 12,742 12,742
Cash and cash equivalents 7,290 75,900 (76,728) 6,462
Tenants' security deposits 3,112 117 3,229
Escrow funds 8,998 8,998
Investment in and advances to Property Service
Businesses and other 14,356 14,356
Deferred charges, net 16,274 16,274
Other assets 12,501 12,501
---------- ---------
Total assets $668,915 $756,932
========== =========
LIABILITIES AND EQUITY
Liabilities
Mortgage loans $487,342 $487,342
Notes payable 56,000 12,000 68,000
Accounts payable and accrued expenses 12,934 12,934
Tenants' security deposits 3,112 117 3,229
---------- ---------
Total liabilities 559,388 571,505
---------- ---------
Minority Interest 55,393 30,840 (C) 86,233
---------- ---------
Shareholders' Equity
Preferred stock
Series A Cumulative Convertible Redeemable
Preferred Stock 19,772 19,772
Series B Cumulative Convertible Redeemable
Preferred Stock - 34,629 34,629
Common stock 133 15 148
Additional paid-in capital 41,655 41,256 (30,840) (C) 52,071
Retained deficit (7,426) (7,426)
---------- ---------
Total shareholders' equity 54,134 99,194
---------- ---------
Total liabilities and shareholders' equity $668,915 $756,932
========== =========
</TABLE>
F-5
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
PRO FORMA STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED) (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Pro Forma Adjustments
--------------------------
Lincoln
Towers Other
Historical Acquisition Adjustments Pro Forma
RENTAL PROPERTIES ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues $ 94,259 5,463 $ 99,722
Expenses
Operating 33,766 1,769 (177)(A) 35,358
Real estate taxes 5,998 353 6,351
Depreciation and amortization 10,146 - 953 (B) 11,099
----------- ----------- ----------- ---------
Total expenses 49,910 2,122 776 52,808
PROPERTY SERVICE BUSINESSES
Equity in income of Property Service Businesses 1,705 - 1,705
Corporate general and administrative expenses (3,039) - (3,039)
Interest income 532 - - 532
Interest expense (22,683) - (425)(C) (23,108)
----------- ----------- ----------- ---------
Net income of the Operating Partnership 20,864 3,341 (1,201) 23,004
Minority Interest (10,711) 19 (D) (10,692)
----------- ---------
Net income $ 10,153 $ 12,312
=========== =========
Net income per share $ 0.82 $ 0.82
=========== =========
Weighted average shares outstanding 12,416 15,082
=========== =========
</TABLE>
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED) (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Pro Forma Adjustments
--------------------------
Lincoln
Towers Other
Historical Acquisition Adjustments Pro Forma
RENTAL PROPERTIES ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues $ 166,283 11,001 $ 177,284
Expenses
Operating 65,350 3,575 (355)(A) 68,570
Real estate taxes 10,429 669 11,098
Depreciation and amortization 17,931 - 1,906 (B) 19,837
----------- ----------- ----------- ---------
Total expenses 93,710 4,244 1,551 99,505
PROPERTY SERVICE BUSINESSES
Equity in income of Property Service Businesses 7,846 - 7,846
Corporate general and administrative expenses (3,025) - (3,025)
Interest income 1,029 - 1,029
Interest expense (43,606) - (860)(C) (44,466)
----------- ----------- ----------- ---------
Net income of the Operating Partnership 34,817 6,757 (2,411) 39,163
Minority Interest (19,062) (53)(D) (19,115)
Distributions in excess of earnings allocated to
Minority Interest (4,778) (4,778)(E) -
----------- ---------
Net income $ 10,977 $ 20,048
=========== =========
Net income per share $ 1.11 $ 1.59
=========== =========
Weighted average shares outstanding 9,913 12,580
=========== =========
</TABLE>
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL INFORMATION
(DOLLAR AMOUNTS IN THOUSANDS)
1. Basis of Presentation
The unaudited Pro Forma Consolidated Balance Sheet as of June 30, 1997 and
unaudited Pro Forma Consolidated Statement of Operations for the six months
ended June 30, 1997 and the year ended December 31, 1996 are based on the
historical financial statements of the Company and Operating Partnership.
The unaudited Pro Forma Consolidated Balance Sheet as of June 30, 1997 is
presented as if the Lincoln Towers acquisition and related offerings of
common and preferred stock to Prudential had occurred by June 30, 1997. The
unaudited Pro Forma Consolidated Statement of Operations for the six months
ended June 30, 1997 and the year ended December 31, 1996 are presented as if
the Lincoln Towers acquisition and related offerings of common and preferred
stock to Prudential had occurred at the beginning of the periods. The
unaudited pro forma information should be read in conjunction with the
historical financial statements and notes related thereto appearing in the
Company's Form 10-Q and 10-K.
Preparation of the pro forma financial information was based on assumptions
considered appropriate by the Company's management. The pro forma financial
information is unaudited and is not necessarily indicative of the results
which would have occurred if the Lincoln Towers acquisition and related
offerings of common and preferred stock to Prudential had been consummated at
the beginning of the periods presented, nor does it purport to represent the
future financial position and results of operations for future periods. In
management's opinion, all adjustments necessary to reflect the effects of
these transactions have been made.
2. Adjustments to Pro Forma Consolidated Balance Sheet
(A) Sale of 1,450,000 shares of Common Stock in the Offering
($28.50 share price)
Sale of 1,216,666 shares of Preferred Stock in the Offering
($28.50 share price)
Proceeds from Offering $76,000
Costs associated with Offering (100)
-------
Net proceeds $75,900
=======
Par value of common stock issued $15
Additional paid-in capital 41,256
Value of preferred stock issued 34,629
-------
$75,900
=======
(B) Acquisition of Lincoln Towers
Purchase price of rental property $88,500
Acquisition costs 228
-------
Cost basis of rental property $88,728
=======
Cash paid for rental property ($76,728)
Proceeds from line of credit (12,000)
-------
($88,728)
=======
(C) To adjust the Minority Interest for the issuance of Operating
Partnership Units and shares of Common and Preferred Stock in the
Company.
3. Adjustments to Pro Forma Consolidated Statements of Operations
(A) Operating expenses have been adjusted to eliminate management fees
related to the Lincoln Towers property
(B) Depreciation and amortization has been adjusted based on the
allocated purchase price of the assets to be
<PAGE>
acquired and an estimated useful life of 40 years, as if the
purchases occurred on January 1, 1997 for the six months ended June
30, 1997 and January 1, 1996 for the year ended December 31, 1996.
(C) Increase in interest expense for draws on the line-of-credit to fund
the Lincoln Towers acquisition (assuming a weighted average interest
rate of 7.09% for the six months ended June 30, 1997 and 7.17% for
the year ended December 31, 1996)
(D) Minority Interest is adjusted for change in ownership interest as a
result of units of the Operating Partnership and shares of stock of
the Company being issued.
(E) There are no distributions in excess of earnings allocated to
Minority Interest as a result of the issuance of common and preferred
stock and units in the Operating Partnership restoring a balance in
the Minority Interest account.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Charles E. Smith Residential Realty, Inc.
We have audited the accompanying statement of revenues and certain expenses of
Lincoln Towers ("the Property") for the year ended December 31, 1996. This
statement is the responsibility of the Property's management. Our responsibility
is to express an opinion on this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform an 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 audit provides a reasonable basis for our opinion.
The accompanying statement of revenues and certain expenses was prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the Form 8-K of Charles E. Smith
Residential Realty, Inc. Material amounts, described in Note 1 to the statement
of revenue and certain expenses, that would not be comparable to those resulting
from the proposed future operations of the Property are excluded and the
statement is not intended to be a complete presentation of the revenues and
expenses of this property.
In our opinion, the statement referred to above presents fairly, in all material
respects, the revenues and certain expenses of Lincoln Towers for the year ended
December 31, 1996 in conformity with generally accepted accounting principles.
Washington, D.C.,
October 17, 1997
F-10
<PAGE>
LINCOLN TOWERS
--------------
STATEMENTS OF REVENUES AND CERTAIN EXPENSES
-------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
AND THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, 1997 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1996
------------------- -----------------
<S> <C> <C>
REVENUES:
Rental income $5,331,378 $10,620,399
Other income 131,323 380,174
---------- -----------
Total Revenue 5,462,701 11,000,573
CERTAIN EXPENSES:
Payroll and related costs 340,682 643,127
Utilities 429,658 851,251
Repairs and maintenance 259,049 462,786
Real estate taxes 353,130 668,880
Administrative 214,010 522,678
Management fees 177,174 355,339
Other expenses 348,036 739,827
---------- -----------
Total Expenses 2,121,739 4,243,888
---------- -----------
REVENUES IN EXCESS OF CERTAIN EXPENSES $3,340,962 $ 6,756,685
========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
LINCOLN TOWERS
--------------
NOTES TO STATEMENTS OF REVENUES AND CERTAIN EXPENSES
----------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
--------------------------------------------------
AND FOR THE YEAR ENDED DECEMBER 31, 1996
----------------------------------------
1. BASIS OF PRESENTATION:
---------------------
The accompanying statements of revenues and certain expenses relate to the
operations of Lincoln Towers (the "Property") which is a residential
apartment complex in Arlington, VA. The Property consists of two apartment
buildings containing 714 residential units. The Property was acquired by
Charles E. Smith Residential Realty, Inc. (the "Company") on October 3,
1997.
The accompanying statements have been prepared for the purpose of complying
with Rule 3-14 of Regulation S-X of the Securities and Exchange Commission
and thus, exclude certain expenses, such as interest expense, depreciation
and amortization, certain professional fees and other costs not related to
the future operations of the Property. Management is not aware of any
material factors relating to the Property which would cause the reported
financial information not to be indicative of future operating results.
Significant Accounting Policies
-------------------------------
The accompanying statements were prepared on the accrual basis of
accounting. Rental income attributable to residential leases is recognized
when due from tenants.
Interim Financial Information
-----------------------------
The interim statements of revenues and certain expenses are unaudited but
reflect all adjustments which are, in the opinion of management, necessary
to a fair presentation of the interim periods presented. The adjustments
consist of normal recurring accruals.
The statements of revenues and certain expenses for interim periods will
not necessarily be indicative of the operating results of the fiscal year.
<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, hereunto duly authorized, on the 20th day of
October 1997.
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
By: /s/ W. D. Minami
-------------------------------------------
W. D. Minami
Senior Vice President and Chief Financial
Officer of the Registrant
By: /s/ C. R. Hagen
-------------------------------------------
Charles R. Hagen
Vice President and Controller
of the Registrant
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. EXHIBIT
- ---------- -------
4.1 Articles Supplementary for Series B Cumulative Convertible
Redeemable Preferred Stock.
4.2 Certificate of Correction relating to ArticlesSupplementary or
Series B Cumulative Convertible Redeemable Preferred Stock filed and
approved by the Maryland State Department of Assessments and
Taxation on October 9, 1997.
99.1 Press Release dated September 17, 1997 of the Company
99.2 Press Release dated October 15, 1997 of the Company
99.3 Consent of Independent Public Accountants
<PAGE>
EXHIBIT A
Series B Cumulative Convertible
Redeemable Preferred Stock
ARTICLES SUPPLEMENTARY
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
========================================
Articles Supplementary of Board of Directors
Classifying and Designating a Series of
Preferred Stock as
Series B Cumulative Convertible Redeemable
Preferred Stock and
Fixing Distribution and Other Preferences
and Rights of Such Series
========================================
Dated as of September 23, 1997
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
=========================================
Articles Supplementary of Board of Directors
Classifying and Designating a Series of
Preferred Stock as
Series B Cumulative Convertible Redeemable
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 8-203(b) 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 September 10,
1997 adopted a resolution designating and classifying 1,216,666 unissued and
unclassified shares of capital stock as Series B Cumulative Convertible
Redeemable Preferred Stock.
SECOND: The following is a description of the Series B Cumulative
Convertible Redeemable Preferred Stock, including the preferences, conversion
and other rights, voting powers, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption thereof:
Section 1. Number of Shares and Designation. This class of preferred
--------------------------------
stock shall be designated as Series B Cumulative Convertible Redeemable
Preferred Stock and the number of shares which shall constitute such series
shall not be more than 1,216,666 shares, par value $0.01 per share, which number
may be decreased (but not below the number thereof then outstanding) from time
to time by the Board of Directors.
Section 2. Definitions. For purposes of the Series B Preferred Shares,
-----------
the following terms shall have the meanings indicated:
"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 B Preferred
Shares.
"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.
"Call Date" shall mean the date specified in the notice to holders
---------
required under Section 5(d) as the Call Date.
"Common Shares" shall mean the shares of Common Stock, par value
-------------
$0.01 per share, of the Corporation.
"Constituent Person" shall have the meaning set forth in Section
------------------
6(e).
2
<PAGE>
"Conversion Price" shall mean the conversion price per Common
----------------
Share for which the Series B Preferred Shares are convertible, as such
Conversion Price may be adjusted pursuant to Section 6. The initial
conversion price shall be $28.50 (equivalent to a conversion rate of one
Common Share for each Series B Preferred Share).
"Current Market Price" of publicly traded shares of Common Stock
--------------------
or any other class of shares of capital stock or other security of the
Corporation or any other issuer for any day shall mean the last reported
sales price, regular way on such day, or, if no sale takes place on such
day, the average of the reported closing bid and asked prices on such day,
regular way, in either case as reported on the New York Stock Exchange
("NYSE") or, if such security is not listed or admitted for trading on the
----
NYSE, on the principal national securities exchange on which such security
is listed or admitted for trading or, if not listed or admitted for trading
on any national securities exchange, on the Nasdaq Stock Market ("NASDAQ")
------
or, if such security is not quoted on such National Market System, the
average of the closing bid and asked prices on such day in the over-the-
counter market as reported by NASDAQ or, if bid and asked prices for such
security on such day shall not have been reported through NASDAQ, the
average of the bid and asked prices on such day as furnished by any NYSE
member firm regularly making a market in such security selected for such
purpose by the Board of Directors.
"Dividend Payment Date" shall mean (i) for any Dividend Period
---------------------
with respect to which the Corporation pays a dividend on the Common Shares,
the date on which such dividend is paid, or (ii) for any Dividend Period
with respect to which the Corporation does not pay a dividend on the Common
Shares, a date to be set by the Board of Directors, which date shall not be
later than the forty-fifth calendar day after the end of the applicable
Dividend Period.
"Dividend Periods" shall mean quarterly dividend periods
----------------
commencing on January 1, April 1, July 1 and October 1 of each year and
ending on and including the day preceding the first day of the next
succeeding Dividend Period (other than the initial Dividend Period, which
shall commence on the Issue Date and end on and include September 30, 1997,
and other than the Dividend Period during which any Series B Preferred
Shares shall be redeemed pursuant to Section 5, which shall end on and
include the Call Date with respect to the Series B Preferred Shares being
redeemed).
"Expiration Time" shall have the meaning set forth in Section
---------------
6(d)(iv).
"Fair Market Value" shall mean the average of the daily Current
-----------------
Market Prices of a Common Share on the five (5) consecutive Trading Days
selected by the Corporation commencing not more than 20 Trading Days
before, and ending not later than, the earlier of the day in question and
the day before the "ex date" with respect to the issuance or distribution
requiring such computation. The term "ex date," when used with respect to
any issuance or distribution, means the first day on which the Common
Shares trade regular way, without the right to receive such issuance or
distribution, on the exchange or in the market, as the case may be, used to
determine that day's Current Market Price.
"Fully Junior Shares" shall mean the Common Shares and any other
-------------------
class or series of shares of capital stock of the Corporation now or
hereafter issued and outstanding over which the Series B Preferred Shares
have preference or priority in both (i) the payment of dividends and (ii)
the distribution of assets on any liquidation, dissolution or winding up of
the Corporation.
"Funds from Operations" shall mean net income (loss) (computed in
---------------------
accordance with generally accepted accounting principles) excluding gains
(or losses) from debt restructuring, and distributions in excess of
earnings allocated to other Operating Partnership interests or minority
interests (as reflected in the financial
3
<PAGE>
statements of the Corporation) plus depreciation/amortization of assets
unique to the real estate industry, all computed in a manner consistent
with the revised definition of Funds From Operations adopted by the
National Association of Real Estate Investment Trusts (NAREIT), in its
White Paper dated March 1995, as such definitions may be modified from time
to time, as determined by the Corporation in good faith.
"Issue Date" shall mean the date on which the first Series B
----------
Preferred Shares are issued.
"Junior Shares" shall mean the Common Shares and any other class
-------------
or series of capital stock of the Corporation now or hereafter issued and
outstanding over which the Series B Preferred Shares have preference or
priority in either (i) the payment of dividends or (ii) the distribution of
assets on any liquidation, dissolution or winding up of the Corporation.
"Liquidation Preference" shall have the meaning set forth in
----------------------
Section 4(a).
"Non-Electing Share" shall have the meaning set forth in Section
------------------
6(e).
"Operating Partnership" shall mean the Charles E. Smith
---------------------
Residential Realty, L.P., a Delaware limited partnership.
"Parity Shares" shall have the meaning set forth in Section 8(b).
-------------
"Person" shall mean any individual, firm, partnership,
------
corporation, limited liability company or other entity, and shall include
any successor (by merger or otherwise) of such entity.
"Purchased Shares" shall have the meaning set forth in Section
----------------
6(d)(iv).
"Securities" and "Security" shall have the meanings set forth in
---------- --------
Section 6(d)(iii).
"Securities Act" shall mean the Securities Act of 1933, as amended.
--------------
"Series B Preferred Shares" shall mean the shares of Series B
-------------------------
Cumulative Convertible Redeemable Preferred Stock.
"Set apart for payment" shall be deemed to include, without any
---------------------
action other than the following, the recording by the Corporation in its
accounting ledgers of any accounting or bookkeeping entry which indicates,
pursuant to a declaration of dividends or other distribution by the Board
of Directors, the allocation of funds to be so paid on any series or class
of shares of capital stock of the Corporation; provided, however, that if
-------- -------
any funds for any class or series of Junior Shares or any class or series
of shares of capital stock ranking on a parity with the Series B Preferred
Shares as to the payment of dividends are placed in a separate account of
the Corporation or delivered to a disbursing, paying or other similar
agent, then "set apart for payment" with respect to the Series B Preferred
Shares shall mean placing such funds in a separate account or delivering
such funds to a disbursing, paying or other similar agent.
"Trading Day" shall mean any day on which the securities in
-----------
question are traded on the NYSE, or if such securities are not listed or
admitted for trading on the NYSE, on the principal national securities
exchange on which such securities are listed or admitted, or if not listed
or admitted for trading on any national securities exchange, on the
National Market System of NASDAQ, or if such securities are not quoted on
such National Market System, in the securities market in which the
securities are traded.
4
<PAGE>
"Transaction" shall have the meaning set forth in Section 6(e).
-----------
"Transfer Agent" shall mean First Union National Bank, or such
--------------
other agent or agents of the Corporation as may be designated by the Board
of Directors or their designee as the transfer agent, registrar and
dividend disbursing agent for the Series B Preferred Shares.
"Units" shall mean Partnership Units as that term is defined in
-----
the Amended and Restated Agreement of Limited Partnership of the Operating
Partnership.
"Voting Preferred Shares" shall have the meaning set forth in
-----------------------
Section 9.
"Weighted Average Trading Price" shall mean, for any Trading Day,
------------------------------
the number obtained by dividing (i) the sum of the products, for each sale
of Common Shares on such Trading Day, of (a) the sale price per Common
Share and (b) the number of Common Shares sold by (ii) the total number of
Common Shares sold on such Trading Day.
Section 3. Dividends.
---------
(a) The holders of Series B Preferred Shares shall be entitled to
receive, when, as and if declared by the Board of Directors, out of funds
legally available for the payment of dividends, cumulative preferential
dividends payable in cash in an amount per share equal to the greater of
(i) 7.0877% of the Liquidation Preference per annum (equivalent to $2.02
per share) or (ii) the ordinary cash dividends (determined on each Dividend
Payment Date) on the Common Shares, or portion thereof, into which a Series
B Preferred Share is convertible. The dividends referred to in clause (ii)
of the preceding sentence shall equal the number of Common Shares, or
portion thereof, into which a Series B Preferred Share is convertible,
multiplied by the most current quarterly dividend on a Common Share on or
before the applicable Dividend Payment Date. If the Corporation pays an
ordinary cash dividend on the Common Shares with respect to a Dividend
Period after the date on which the Dividend Payment Date is declared
pursuant to clause (ii) of the definition of Dividend Payment Date and the
dividend calculated pursuant to clause (ii) of this paragraph (a) with
respect to such Dividend Period is greater than the dividend previously
declared on the Series B Preferred Shares with respect to such Dividend
Period, the Corporation shall pay an additional dividend to the holders of
the Series B Preferred Shares on the date on which the dividend on the
Common Shares is paid, in an amount equal to the difference between (y) the
dividend calculated pursuant to clause (ii) of this paragraph (a) and (z)
the amount of dividends previously declared on the Series B Preferred
Shares with respect to such Dividend Period. The dividends shall begin to
accrue and shall be fully cumulative from the first day of the applicable
Dividend Period, whether or not in any Dividend Period or Periods there
shall be funds of the Corporation legally available for the payment of such
dividends, and shall be payable quarterly, when, as and if declared by the
Board of Directors, in arrears on Dividend Payment Dates. Each such
dividend shall be payable in arrears to the holders of record of Series B
Preferred Shares as they appear in the records of the Corporation at the
close of business on such record dates, not less than 10 nor more than 50
days preceding such Dividend Payment Dates thereof, as shall be fixed by
the Board of Directors. Accrued and unpaid dividends for any past Dividend
Periods may be declared and paid at any time and for such interim periods,
without reference to any regular Dividend Payment Date, to holders of
record on such date, not less than 10 nor more than 50 days preceding the
payment date thereof, as may be fixed by the Board of Directors. Any
dividend payment made on Series B Preferred Shares shall first be credited
against the earliest accrued but unpaid dividend due with respect to Series
B Preferred Shares which remains payable.
(b) The amount of dividends referred to in clause (i) of Section
3(a) payable for each full Dividend Period on the Series B Preferred Shares
shall be computed by dividing the annual dividend rate by
5
<PAGE>
four. The initial Dividend Period will include a full dividend (i.e., the
greater of $0.505 per Series B Share or the ordinary cash dividend paid on
the Common Shares with respect to the quarterly period ending on or about
September 30, 1997) with respect to such the Dividend Period in which the
Issue Date occurs, notwithstanding the fact that the Series B Preferred
Shares may have been outstanding for only a portion of such Dividend
Period. The amount of dividends payable for any period shorter than a full
Dividend Period, on the Series B Preferred Shares shall be computed on the
basis of a 360-day year of twelve 30-day months. Holders of Series B
Preferred Shares shall not be entitled to any dividends, whether payable in
cash, property or shares, in excess of cumulative dividends, as herein
provided, on the Series B Preferred Shares. No interest, or sum of money in
lieu of interest, shall be payable in respect of any dividend payment or
payments on the Series B Preferred Shares which may be in arrears.
(c) So long as any Series B Preferred Shares are outstanding, no
dividends, except as described in the immediately following sentence, shall
be declared or paid or set apart for payment on any class or series of
Parity Shares for any period unless full cumulative dividends have been or
contemporaneously are declared and paid or declared and a sum sufficient
for the payment thereof set apart for such payment on the Series B
Preferred Shares for all Dividend Periods terminating on or prior to the
dividend payment date on such class or series of Parity Shares. When
dividends are not paid in full or a sum sufficient for such payment is not
set apart, as aforesaid, all dividends declared upon Series B Preferred
Shares and all dividends declared upon any other class or series of Parity
Shares shall be declared ratably in proportion to the respective amounts of
dividends accumulated and unpaid on the Series B Preferred Shares and
accumulated and unpaid on such Parity Shares.
(d) So long as any Series B Preferred Shares are outstanding, no
dividends (other than dividends or distributions paid solely in shares of,
or options, warrants or rights to subscribe for or purchase shares of,
Fully Junior Shares) shall be declared or paid or set apart for payment or
other distribution shall be declared or made or set apart for payment upon
Junior Shares, nor shall any Junior Shares be redeemed, purchased or
otherwise acquired (other than a redemption, purchase or other acquisition
of Common Shares made for purposes of an employee incentive or benefit plan
of the Corporation or any subsidiary) for any consideration (or any moneys
be paid to or made available for a sinking fund for the redemption of any
Junior Shares) by the Corporation, directly or indirectly (except by
conversion into or exchange for Fully Junior Shares), unless in each case
(i) the full cumulative dividends on all outstanding Series B Preferred
Shares and any other Parity Shares of the Corporation shall have been or
contemporaneously are declared and paid or declared and set apart for
payment for all past Dividend Periods with respect to the Series B
Preferred Shares and all past dividend periods with respect to such Parity
Shares and (ii) sufficient funds shall have been or contemporaneously are
declared and paid or declared and set apart for the payment of the dividend
for the current Dividend Period with respect to the Series B Preferred
Shares and the current dividend period with respect to such Parity Shares.
(e) No distributions on Series B Preferred Shares shall be declared
by the Board of Directors or paid or set apart for payment by the
Corporation at such time as the terms and provisions of any agreement of
the Corporation, including any agreement relating to its indebtedness,
prohibits such declaration, payment or setting apart for payment or
provides that such declaration, payment or setting apart for payment would
constitute a breach thereof or a default thereunder, or if such declaration
or payment shall be restricted or prohibited by law.
6
<PAGE>
Section 4. Liquidation Preference.
----------------------
(a) In the event of any liquidation, dissolution or winding up of
the Corporation, whether voluntary or involuntary, before any payment or
distribution of the assets of the Corporation (whether capital or surplus)
shall be made to or set apart for the holders of Junior Shares, the holders
of the Series B Preferred Shares shall be entitled to receive Twenty Eight
Dollars and Fifty Cents ($28.50) (the "Liquidation Preference") per Series
B Preferred Share plus an amount equal to all dividends (whether or not
earned or declared) accumulated, accrued and unpaid thereon to the date of
final distribution to such holders; but such holders shall not be entitled
to any further payment; provided, that the dividend payable with respect to
--------
the Dividend Period containing the date of final distribution shall be
equal to the greater of (i) the dividend provided in Section 3(a)(i) or
(ii) the dividend determined pursuant to Section 3(a)(ii) for the preceding
Dividend Period. Until the holders of the Series B Preferred Shares have
been paid the Liquidation Preference in full, no payment will be made to
any holder of Junior Stock upon the liquidation, dissolution, or winding up
of the Corporation. If, upon any liquidation, dissolution or winding up of
the Corporation, the assets of the Corporation, or proceeds thereof,
distributable among the holders of the Series B Preferred Shares shall be
insufficient to pay in full the preferential amount aforesaid and
liquidating payments on any other shares of any class or series of Parity
Shares, then such assets, or the proceeds thereof, shall be distributed
among the holders of Series B Preferred Shares and any such other Parity
Shares ratably in accordance with the respective amounts that would be
payable on such Series B Preferred Shares and any such other Parity Shares
if all amounts payable thereon were paid in full. For the purposes of this
Section 4, (i) a consolidation or merger of the Corporation with one or
more corporations, real estate investment trusts or other entities, (ii) a
sale, lease or conveyance of all or substantially all of the Corporation's
property or business or (iii) a statutory share exchange shall not be
deemed to be a liquidation, dissolution or winding up, voluntary or
involuntary, of the Corporation.
(b) Subject to the rights of the holders of shares of any Parity
Shares upon liquidation, dissolution or winding up, upon any liquidation,
dissolution or winding up of the Corporation, after payment shall have been
made in full to the holders of the Series B Preferred Shares, as provided
in this Section 4, any other series or class or classes of Junior Shares
shall, subject to the respective terms and provisions (if any) applying
thereto, be entitled to receive any and all assets remaining to be paid or
distributed, and the holders of the Series B Preferred Shares shall not be
entitled to share therein.
Section 5. Redemption at the Option of the Corporation.
-------------------------------------------
(a) The Series B Preferred Shares shall be redeemable by the
Corporation, at its option, in whole at any time or from time to time in
part as set forth herein, subject to the following provisions. Series B
Preferred Shares may be redeemed, in whole or in part, at the option of the
Corporation, at any time by issuing and delivering to each holder for each
Series B Preferred Share to be redeemed such number of authorized but
previously unissued Common Shares as equals the Liquidation Preference
(excluding any accumulated, accrued and unpaid dividends, if any, to the
Call Date, which are to be paid in cash as provided below, whether or not
earned or declared) per Series B Preferred Share divided by the Conversion
Price as in effect as of the opening of business on the Call Date; provided
that the Corporation may not issue to any holder a number of Common Shares
that would result in such holder exceeding the Common Stock Ownership Limit
then applicable to such holder; provided further that the Corporation shall
deliver to each holder, as a condition to the redemption of Series B Shares
pursuant to this paragraph, a certificate of an officer of the Corporation
stating that the Corporation has not then commenced liquidation or
bankruptcy proceedings and does not then have any intention of commencing
any such proceedings.
(b) Series B Preferred Shares shall be redeemed by the Corporation
on the date specified in the notice to holders required under paragraph (d)
of this Section 5 (the "Call Date"). The Call Date shall be
7
<PAGE>
selected by the Corporation, shall be specified in the notice of
redemption, and shall be not less than 30 day nor more than 60 days after
the date notice of redemption is sent by the Corporation. Upon any
redemption of Series B Preferred Shares pursuant to paragraph (a) of this
Section 5, the Corporation shall pay in cash to the holder of such shares
an amount equal to all accumulated, accrued, and unpaid dividends, if any,
to the Call Date, whether or not earned or declare as provided in this
paragraph. Immediately prior to authorizing any redemption of the Series B
Preferred Shares, and as a condition precedent for such redemption, the
Corporation, by resolution of its Board of Directors, shall declare a
mandatory dividend on the Series B Preferred Shares, payable in cash on the
Call Date in an amount equal to all accumulated, accrued, and unpaid
dividends as of the Call Date on the Series B Preferred Shares to be
redeemed, which amount shall be added to the redemption price, except to
the extent such dividends are to be paid pursuant to the immediately
following sentence. If the Call Date falls after a dividend payment record
date and prior to the corresponding Dividend Payment Date, then each holder
of Series B Preferred Shares at the close of business on such dividend
payment record date shall be entitled to the dividend payable on such
shares on the corresponding Dividend Payment Date notwithstanding the
redemption of such shares prior to such Dividend Payment Date. Except as
provided above, the Corporation shall make no payment or allowance for
accumulated or accrued dividends on Series B Preferred Shares called for
redemption or on the Common Shares issued upon such redemption.
(c) If full cumulative dividends on the Series B Preferred Shares
and any other class or series of Parity Shares of the Corporation have not
been declared and paid or declared and set apart for payment, the Series B
Preferred Shares may not be redeemed under this Section 5 in part and
neither the Corporation nor any of its subsidiaries may purchase or acquire
Series B Preferred Shares, otherwise than pursuant to a purchase or
exchange offer made on the same terms to all holders of Series B Preferred
Shares .
(d) Notice of the redemption of any Series B Preferred Shares under
this Section 5 shall be mailed by first-class mail to each holder of record
of Series B Preferred Shares to be redeemed at the address of each such
holder as shown on the Corporation's records, not less than 30 nor more
than 90 days prior to the Call Date. Neither the failure to mail any notice
required by this paragraph (d), nor any defect therein or in the mailing
thereof, to any particular holder, shall affect the sufficiency of the
notice or the validity of the proceedings for redemption with respect to
the other holders. Any notice which was mailed in the manner herein
provided shall be conclusively presumed to have been duly given on the date
mailed whether or not the holder receives the notice. Each such mailed
notice shall state, as appropriate: (1) the Call Date; (2) the number of
Series B Preferred Shares to be redeemed and, if fewer than all the shares
held by such holder are to be redeemed, the number of such shares to be
redeemed from such holder; (3) the number of Common Shares to be issued in
redemption of the Series B Preferred Shares to be redeemed; (4) the place
or places at which certificates for such shares are to be surrendered; (5)
the then-current Conversion Price; and (6) that dividends on the shares to
be redeemed shall cease to accrue on such Call Date except as otherwise
provided herein. Notice having been mailed as aforesaid, from and after the
Call Date (unless the Corporation shall fail to make available an amount of
Common Shares and cash necessary to effect such redemption, including all
accumulated, accrued, and unpaid dividends to the Call Date, whether or not
earned or declared), (i) except as otherwise provided herein, dividends on
the Series B Preferred Shares so called for redemption shall cease to
accumulate or accrue on the Series B Preferred Shares called for redemption
(except that, in the case of a Call Date after a dividend payment record
date and prior to the corresponding Dividend Payment Date, holders of
Series B Preferred Shares on the dividend payment record date will be
entitled on such Dividend Payment Date to receive the dividend paid on such
shares), (ii) such shares shall no longer be deemed to be outstanding, and
(iii) all rights of the holders thereof as holders of Series B Preferred
Shares of the Corporation shall cease (except the rights to convert and to
receive the Common Shares and/or cash payable upon such redemption, without
interest thereon, upon surrender and endorsement of their certificates if
so required and to receive any dividends payable thereon). The
Corporation's obligation to provide Common Shares and/or cash in
8
<PAGE>
accordance with the preceding sentence shall be deemed fulfilled if, on or
before the Call Date, the Corporation shall deposit with a bank or trust
company (which may be an affiliate of the Corporation) that has an office
in the Borough of Manhattan, City of New York, and that has, or is an
affiliate of a bank or trust company that has, capital and surplus of at
least $500,000,000, such number of Common Shares and such amount of cash as
is necessary for such redemption, in trust, with irrevocable instructions
that such Common Shares and/or cash be applied to the redemption of the
Series B Preferred Shares so called for redemption. In the case of any
redemption pursuant to paragraph (a)(i) of this Section 5, at the close of
business on the Call Date, each holder of Series B Preferred Shares to be
redeemed (unless the Corporation defaults in the delivery of the Common
Shares or cash payable on such Call Date) shall be deemed to be the record
holder of the Common Shares into which such Series B Preferred Shares are
to be converted at redemption, regardless of whether such holder has
surrendered the certificates representing the Series B Preferred Shares to
be so redeemed. No interest shall accrue for the benefit of the holders of
Series B Preferred Shares to be redeemed on any cash so set aside by the
Corporation. Subject to applicable escheat laws, any such cash unclaimed at
the e nd of two years from the Call Date shall revert to the general funds
of the Corporation, after which reversion the holders of such shares so
called for redemption shall look only to the general funds of the
Corporation for the payment of such cash.
As promptly as practicable after the surrender in accordance with
such notice of the certificates for any such shares so redeemed (properly
endorsed or assigned for transfer, if the Corporation shall so require and
if the notice shall so state), such certificates shall be exchanged in
accordance with such notice for certificates representing Common Shares
and/or any cash (without interest thereon) for which such shares have been
redeemed. If fewer than all the outstanding Series B Preferred Shares are
to be redeemed, shares to be redeemed shall be selected by the Corporation
from outstanding Series B Preferred Shares not previously called for
redemption pro rata (as nearly as may be), by lot or by any other method
determined by the Corporation in its sole discretion to be equitable. If
fewer than all the Series B Preferred Shares represented by any certificate
are redeemed, then new certificates representing the unredeemed shares
shall be promptly issued without cost to the holder thereof.
(e) In the case of any redemption pursuant to paragraph (a)(i) of
this Section 5,
(i) no fractional Common Shares or scrip representing fractions
of Common Shares shall be issued upon redemption of the Series B
Preferred Common Shares. Instead of any fractional interest in
Common Shares that would otherwise be deliverable upon redemption
of Series B Preferred Shares, the Corporation shall pay to the
holder of such share an amount in cash (rounded to the nearest
cent) based upon the Current Market Price of the Common Shares on
the Trading Day immediately preceding the Call Date. If more than
one share shall be surrendered for redemption at one time by the
same holder, the number of full Common Shares issuable upon
redemption thereof shall be computed on the basis of the aggregate
number of Series B Preferred Shares so surrendered.
(ii) the Corporation covenants that any Common Shares issued
upon redemption of Series B Preferred Shares shall be validly
issued, fully paid and non-assessable. The Corporation shall use
its reasonable best efforts to list the Common Shares required to
be delivered upon any such redemption of Series B Preferred Shares,
prior to such redemption, upon each national securities exchange,
if any, upon which the outstanding Common Shares are listed at the
time of such delivery.
Section 6. Conversion. Holders of Series B Preferred Shares shall have
----------
the right to convert all or a portion of such shares into Common Shares, as
follows:
(a) Subject to and upon compliance with the provisions of this
Section 6 and the provisions of Article VIII of the Corporation's Articles
of Incorporation, a holder of Series B Preferred Shares shall have
9
<PAGE>
the right, at his or her option, on or after the date 90 days after the
Issue Date, to convert such shares into the number of authorized but
previously unissued fully paid and non-assessable Common Shares obtained by
dividing the aggregate Liquidation Preference of such shares (exclusive of
accumulated, accrued, and unpaid dividends, which are to be paid in cash as
provided below) by the Conversion Price (as in effect at the time and on
the date provided for in the last paragraph of paragraph (b) of this
Section 6) by surrendering such shares to be converted, such surrender to
be made in the manner provided in paragraph (b) of this Section 6.
Notwithstanding any provision of Article VIII of the Corporation's Articles
of Incorporation, a holder shall be entitled to convert shares of Series B
Preferred Stock immediately prior to the record date for payments of
distributions to holders of Common Shares upon any liquidation or winding
up of the Company.
(b) In order to exercise the conversion right, the holder of each
Series B Preferred Share to be converted shall surrender the certificate
representing such share, duly endorsed or assigned to the Corporation or in
blank, at the office of the Transfer Agent, accompanied by written notice
to the Corporation that the holder thereof elects to convert such Series B
Preferred Shares. Unless the shares issuable on conversion are to be issued
in the same name as the name in which such Series B Preferred Share is
registered, each share surrendered for conversion shall be accompanied by
instruments of transfer, in form satisfactory to the Corporation, duly
executed by the holder or such holder's duly authorized attorney and an
amount sufficient to pay any transfer or similar tax (or evidence
reasonably satisfactory to the Corporation demonstrating that such taxes
have been paid).
Holders of Series B Preferred Shares at the close of business on a
dividend payment record date shall be entitled to receive the dividend
payable on such shares on the corresponding Dividend Payment Date
notwithstanding the conversion thereof following such dividend payment
record date and prior to such Dividend Payment Date. However, Series B
Preferred Shares surrendered for conversion during the period between the
close of business on any dividend payment record date with respect to the
Series B Preferred Shares and the opening of business on the dividend
payment record date with respect to the Common Shares for the corresponding
Dividend Period (except shares converted after the issuance of notice of
redemption with respect to a Call Date during such period, such Series B
Preferred Shares being entitled to such dividend on the Dividend Payment
Date) must be accompanied by payment of an amount equal to the dividend
payable on such Common Shares on such Dividend Payment Date. A holder of
Series B Preferred Shares on a dividend payment record date who (or whose
transferee) tenders any such shares for conversion into Common Shares on
the corresponding Dividend Payment Date will receive the dividend payable
by the Corporation on such Series B Preferred Shares on such date, and the
converting holder need not include payment of the amount of such dividend
upon surrender of Series B Preferred Shares for conversion. Except as
provided above, the Corporation shall make no payment or allowance for
unpaid dividends, whether or not in arrears, on converted shares or for
dividends on the Common Shares issued upon such conversion.
As promptly as practicable after the surrender of certificates for
Series B Preferred Shares as aforesaid, the Corporation shall issue and
shall deliver at such office to such holder, or on his or her written
order, a certificate or certificates for the number of full Common Shares
issuable upon the conversion of such shares in accordance with provisions
of this Section 6, and any fractional interest in respect of a Common Share
arising upon such conversion shall be settled as provided in paragraph (c)
of this Section 6.
Each conversion shall be deemed to have been effected immediately
prior to the close of business on the date on which the certificates for
Series B Preferred Shares shall have been surrendered and such notice shall
have been received by the Corporation as aforesaid (and if applicable,
payment of an amount equal to the dividend payable on such shares shall
have been received by the Corporation as described above), and the person
or persons in whose name or names any certificate or certificates for
Common Shares shall be issuable upon such conversion shall be deemed to
have become the holder or holders of record of the shares represented
10
<PAGE>
thereby at such time on such date and such conversion shall be at the
Conversion Price in effect at such time on such date unless the share
transfer books of the Corporation shall be closed on that date, in which
event such person or persons shall be deemed to have become such holder or
holders of record at the close of business on the next succeeding day on
which such share transfer books are open, but such conversion shall be at
the Conversion Price in effect on the date on which such shares shall have
been surrendered and such notice received by the Corporation.
(c) No fractional shares or scrip representing fractions of Common
Shares shall be issued upon conversion of the Series B Preferred Shares.
Instead of any fractional interest in a Common Share that would otherwise
be deliverable upon the conversion of a Series B Preferred Share, the
Corporation shall pay to the holder of such share an amount in cash based
upon the Current Market Price of the Common Shares on the Trading Day
immediately preceding the date of conversion. If more than one share shall
be surrendered for conversion at one time by the same holder, the number of
full Common Shares issuable upon conversion thereof shall be computed on
the basis of the aggregate number of Series B Preferred Shares so
surrendered.
(d) The Conversion Price shall be adjusted from time to time as follows:
(i) If the Corporation shall after the Issue Date (A) pay a dividend
or make a distribution on its capital shares in Common Shares, (B)
subdivide its outstanding Common Shares into a greater number of shares,
(C) combine its outstanding Common Shares into a smaller number of
shares or (D) issue any shares of capital stock by reclassification of
its Common Shares, the Conversion Price in effect at the opening of
business on the day following the date fixed for the determination of
stockholders entitled to receive such dividend or distribution or at the
opening of business on the Business Day next following the day on which
such subdivision, combination or reclassification becomes effective, as
the case may be, shall be adjusted so that the holder of any Series B
Preferred Share thereafter surrendered for conversion shall be entitled
to receive the number of Common Shares that such holder would have owned
or have been entitled to receive after the happening of any of the
events described above as if such Series B Preferred Shares had been
converted immediately prior to the record date in the case of a dividend
or distribution or the effective date in the case of a subdivision,
combination or reclassification. An adjustment made pursuant to this
subparagraph (i) shall become effective immediately after the opening of
business on the Business Day next following the record date (except as
provided in paragraph (h) below) in the case of a dividend or
distribution and shall become effective immediately after the opening of
business on the Business Day next following the effective date in the
case of a subdivision, combination or reclassification.
(ii) If the Corporation shall issue after the Issue Date rights,
options or warrants to all holders of Common Shares entitling them (for
a period expiring within 45 days after the record date described below)
to subscribe for or purchase Common Shares at a price per share less
than 94% (100% if a stand-by underwriter is used and charges the
Corporation a commission) of the Fair Market Value per Common Share on
the record date for the determination of stockholders entitled to
receive such rights, options or warrants, then the Conversion Price in
effect at the opening of business on the Business Day next following
such record date shall be adjusted to equal the price determined by
multiplying (A) the Conversion Price in effect immediately prior to the
opening of business on the Business Day next following the date fixed
for such determination by (B) a fraction, the numerator of which shall
be the sum of (x) the number of Common Shares outstanding on the close
of business on the date fixed for such determination and (y) the number
of shares that the aggregate proceeds to the Corporation from the
exercise of such rights, options or warrants for Common Shares would
purchase at 94% of such Fair Market Value (or 100% in the case of a
stand-by
11
<PAGE>
underwriting), and the denominator of which shall be the sum of (x) the
number of Common Shares outstanding on the close of business on the date
fixed for such determination and (y) the number of additional Common
Shares offered for subscription or purchase pursuant to such rights,
options or warrants. Such adjustment shall become effective immediately
after the opening of business on the day next following such record date
(except as provided in paragraph (h) below). In determining whether any
rights, options or warrants entitle the holders of Common Shares to
subscribe for or purchase Common Shares at less than 94% of such Fair
Market Value (or 100% in the case of a stand-by underwriting), there
shall be taken into account any consideration received by the
Corporation upon issuance and upon exercise of such rights, options or
warrants, the value of such consideration, if other than cash, to be
determined by the Board of Directors.
(iii) If the Corporation shall distribute to all holders of its
Common Shares any securities of the Corporation (other than Common
Shares) or evidence of its indebtedness or assets (including cash other
than cumulative cash dividends or cash distributions paid with respect
to the Common Shares after December 31, 1996 which are not in excess of
the following: the sum of (A) the Corporation's cumulative undistributed
Funds from Operations at December 31, 1996, plus (B) the cumulative
amount of Funds from Operations, as determined by the Board of
Directors, after December 31, 1996, minus (C) the cumulative amount of
dividends accrued or paid in respect of the Series B Preferred Shares or
any other class or series of preferred stock of the Corporation after
the Issue Date) or rights, options or warrants to subscribe for or
purchase any of its securities (excluding those rights, options and
warrants issued to all holders of Common Shares entitling them for a
period expiring within 45 days after the record date referred to in
subparagraph (ii) above to subscribe for or purchase Common Shares,
which rights and warrants are referred to in and treated under
subparagraph (ii) above) (any of the foregoing being hereinafter in this
subparagraph (iii) collectively called the "Distribution"), then in each
such case the Conversion Price shall be adjusted so that it shall equal
the price determined by multiplying (x) the Conversion Price in effect
immediately prior to the close of business on the date fixed for the
determination of stockholders entitled to receive such Distribution by
(y) a fraction, the numerator of which shall be the Fair Market Value
per Common Share on the record date described below less the then fair
market value (as determined by the Board of Directors, whose
determination shall be conclusive and shall be described in a resolution
of the Board of Directors), of the portion of the Distribution so
distributed and applicable to one Common Share, and the denominator of
which shall be the Fair Market Value per Common Share on the record date
mentioned below. Such adjustment shall become effective immediately at
the opening of business on the Business Day next following (except as
provided in paragraph (h) below) the record date for the determination
of stockholders entitled to receive such Distribution. For the purposes
of this subparagraph (iii), a Distribution, which is distributed not
only to the holders of the Common Shares on the date fixed for the
determination of stockholders entitled to such Distribution, but also is
distributed with each Common Share delivered to a Person converting a
Series B Preferred Share after such determination date, shall not
require an adjustment of the Conversion Price pursuant to this
subparagraph (iii); provided that on the date, if any, on which a
--------
person converting a Series B Preferred Share would no longer be entitled
to receive such Distribution with a Common Share (other than as a result
of the termination of all such Distribution), such Distribution shall be
deemed to have occurred and the Conversion Price shall be adjusted as
provided in this subparagraph (iii) (and such day shall be deemed to be
"the date fixed for the determination of the stockholders entitled to
receive such Distribution" and "the record date" within the meaning of
the two preceding sentences).
(iv) In case a tender or exchange offer (which term shall not
include open market repurchases by the Corporation) made by the
Corporation or any subsidiary of the Corporation for all or any portion
of the Common Shares shall expire and such tender or exchange offer
shall involve
12
<PAGE>
the payment by the Corporation or such subsidiary of consideration per
Common Share having a fair market value (as determined in good faith by
the Board of Directors, whose determination shall be conclusive and
described in a resolution of the Board of Directors), at the last time
(the "Expiration Time") tenders or exchanges may be made pursuant to
---------------
such tender or exchange offer, that exceeds the Current Market Price per
Common Share on the Trading Day next succeeding the Expiration Time, the
Conversion Price shall be reduced so that the same shall equal the price
determined by multiplying the Conversion Price in effect immediately
prior to the effectiveness of the Conversion Price reduction
contemplated by this subparagraph, by a fraction of which the numerator
shall be the number of Common Shares outstanding (including any tendered
or exchanged shares) at the Expiration Time, multiplied by the Current
Market Price per Common Share on the Trading Day next succeeding the
Expiration Time, and the denominator shall be the sum of (A) the fair
market value (determined as aforesaid) of the aggregate consideration
payable to stockholders based upon the acceptance (up to any maximum
specified in the terms of the tender or exchange offer) of all shares
validly tendered or exchanged and not withdrawn as of the Expiration
Time (the shares deemed so such accepted, up to any maximum, being
referred to as the "Purchased Shares") and (B) the product of the
----------------
number of Common Shares outstanding (less any Purchased Shares)
at the Expiration Time and the Current Market Price per Common Share on
the Trading Day next succeeding the Expiration Time, such reduction to
become effective immediately prior to the opening of business on the day
following the Expiration Time.
(v) No adjustment in the Conversion Price shall be required unless
such adjustment would require a cumulative increase or decrease of at
least 1% in such price; provided, however, that any adjustments that by
-------- -------
reason of this subparagraph (v) are not required to be made shall be
carried forward and taken into account in any subsequent adjustment
until made; and provided, further, that any adjustment shall be
-------- -------
required and made in accordance with the provisions of this Section 6
(other than this subparagraph (v)) not later than such time as may be
required in order to preserve the tax-free nature of a distribution to
the holders of Common Shares. Notwithstanding any other provisions of
this Section 6, the Corporation shall not be required to make any
adjustment of the Conversion Price for the issuance of any Common Shares
pursuant to any plan providing for the reinvestment of dividends or
interest payable on securities of the Corporation and the investment of
additional optional amounts in Common Shares under such plan. All
calculations under this Section 6 shall be made to the nearest cent
(with $.005 being rounded upward) or to the nearest one-tenth of a share
(with .05 of a share being rounded upward), as the case may be. Anything
in this paragraph (d) to the contrary notwithstanding, the Corporation
shall be entitled, to the extent permitted by law, to make such
reductions in the Conversion Price, in addition to those required by
this paragraph (d), as it in its discretion shall determine to be
advisable in order that any share dividends, subdivision of shares,
reclassification or combination of shares, distribution of rights or
warrants to purchase shares or securities, or distribution of other
assets (other than cash dividends) hereafter made by the Corporation to
its stockholders shall not be taxable, or it that is not possible, to
reduce any income taxes otherwise payable as a result of such event to
the maximum extent possible.
(e) If the Corporation shall be a party to any transaction (including
without limitation a merger, consolidation, statutory share exchange, self
tender offer for all or a substantial portion of its Common Shares, sale of
all or substantially all of the Corporation's assets or recapitalization of
the Common Shares and excluding any transaction as to which subparagraph
(d)(i) of this Section 6 applies) (each of the foregoing being referred to
herein as a "Transaction"), in each case as a result of which Common Shares
-----------
are converted into the right to receive shares, securities or other
property (including cash or any combination thereof), each Series B
Preferred Share which is not redeemed or converted into the right to
receive shares, securities or other property in connection with such
Transaction shall thereafter be convertible into the kind and amount of
shares,
13
<PAGE>
securities and other property (including cash or any combination
thereof) receivable upon the consummation of such Transaction by a holder
of that number of Common Shares into which one Series B Preferred Share was
convertible immediately prior to such Transaction, assuming such holder of
Common Shares (i) is not a Person with which the Corporation consolidated
or into which the Corporation merged or which merged into the Corporation
or to which such sale or transfer was made, as the case may be
("Constituent Person"), or an affiliate of a Constituent Person and (ii)
------------------
failed to exercise his rights of election, if any, as to the kind or amount
of shares, securities and other property (including cash) receivable upon
such Transaction (provided that if the kind or amount of shares, securities
and other property (including cash) receivable upon such Transaction is not
the same for each Common Share held immediately prior to such Transaction
by other than a Constituent Person or an affiliate thereof and in respect
of which such rights of election shall not have been exercised ("Non-
----
Electing Share"), then for the purpose of this paragraph (e) the kind and
--------------
amount of shares, securities and other property (including cash) receivable
upon such Transaction by each Non-Electing Share shall be deemed to be the
kind and amount so receivable per share by a plurality of the Non-Electing
Shares). The Corporation shall not be a party to any Transaction unless
the terms of such Transaction are consistent with the provisions of this
paragraph (e), and it shall not consent or agree to the occurrence of any
Transaction until the Corporation has entered into an agreement with the
successor or purchasing entity, as the case may be, for the benefit of the
holders of the Series B Preferred Shares that will contain provisions
enabling the holders of the Series B Preferred Shares that remain
outstanding after such Transaction to convert into the consideration
received by holders of Common Shares at the Conversion Price in effect
immediately prior to such Transaction. The provisions of this paragraph
(e) shall similarly apply to successive Transactions.
(f) If:
(i) the Corporation shall declare a dividend (or any other
distribution) on its Common Shares (other than cash dividends or
distributions paid with respect to the Common Shares after December
31, 1996 not in excess of the sum of the Corporation's cumulative
undistributed Funds from Operations at December 31, 1996, plus the
cumulative amount of Funds from Operations, as determined by the
Board of Directors, after December 31, 1996, minus the cumulative
amount of dividends accrued or paid in respect of the Series B
Preferred Shares or any other class or series of preferred shares
of capital stock of the Corporation after the Issue Date); or
(ii) the Corporation shall authorize the granting to all
holders of Common Shares of rights, options or warrants to
subscribe for or purchase any shares of any class or any other
rights, options or warrants; or
(iii) there shall be any reclassification of the Common Shares
(other than an event to which subparagraph (d)(i) of this Section
6 applies) or any consolidation or merger to which the Corporation
is a party and for which approval of any stockholders of the
Corporation is required, or a statutory share exchange, or a self
tender offer by the Corporation for all or a substantial portion
of its outstanding Common Shares (or an amendment thereto changing
the maximum number of shares sought or the amount of type of
consideration being offered therefor) or the sale or transfer of
all or substantially all of the assets of the Corporation as an
entirety; or
(iv) there shall occur the voluntary or involuntary
liquidation, dissolution or winding up of the Corporation;
then the Corporation shall cause to be filed with the Transfer Agent and
shall cause to be mailed to the holders of Series B Preferred Shares at
their addresses as shown on the records of the Corporation, as promptly as
possible, but at least 10 days prior to the applicable date hereinafter
specified, a notice stating (A) the date on
14
<PAGE>
which a record is to be taken for the purpose of such dividend,
distribution or granting of rights, options or warrants, or, if a record is
not to be taken, the date as of which the holders of Common Shares of
record to be entitled to such dividend, distribution or rights, options or
warrants are to be determined or (B) the date on which such
reclassification, consolidation, merger, statutory share exchange, sale,
transfer, liquidation, dissolution or winding up is expected to become
effective, and the date as of which it is expected that holders of Common
Shares of record shall be entitled to exchange their Common Shares for
securities or other property, if any, deliverable upon such
reclassification, consolidation, merger, statutory share exchange, sale,
transfer, liquidation, dissolution or winding up. Failure to give or
receive such notice or any defect therein shall not affect the legality or
validity of the proceedings described in this Section 6.
(g) Whenever the Conversion Price is adjusted as herein provided,
the Corporation shall promptly file with the Transfer Agent an officer's
certificate setting forth the Conversion Price after such adjustment and
setting forth a brief statement of the facts requiring such adjustment
which certificate shall be conclusive evidence of the correctness of such
adjustment absent manifest error. Promptly after delivery of such
certificate, the Corporation shall prepare a notice of such adjustment of
the Conversion Price setting forth the adjusted Conversion Price and the
effective date of such adjustment and shall mail such notice of such
adjustment of the Conversion Price to the holder of each Series B Preferred
Share at such holder's last address as shown on the records of the
Corporation.
(h) In any case in which paragraph (d) of this Section 6 provides
that an adjustment shall become effective on the day next following the
record date for an event, the Corporation may defer until the occurrence of
such event (A) issuing to the holder of any Series B Preferred Share
converted after such record date and before the occurrence of such event
the additional Common Shares issuable upon such conversion by reason of the
adjustment required by such event over and above the Common Shares issuable
upon such conversion before giving effect to such adjustment and (B) paying
to such holder any amount of cash in lieu of any fraction pursuant to
paragraph (c) of this Section 6.
(i) There shall be no adjustment of the Conversion Price in case of
the issuance of any shares of capital stock of the Corporation in a
reorganization, acquisition or other similar transaction except as
specifically set forth in this Section 6. If any action or transaction
would require adjustment of the Conversion Price pursuant to more than one
paragraph of this Section 6, only one adjustment shall be made and such
adjustment shall be the amount of adjustment that has the highest absolute
value.
(j) If the Corporation shall take any action affecting the Common
Shares, other than action described in this Section 6, that in the opinion
of the Board of Directors would materially and adversely affect the
conversion rights of the holders of the Series B Preferred Shares, the
Conversion Price for the Series B Preferred Shares may be adjusted, to the
extent permitted by law, in such manner, if any, and at such time, as the
Board of Directors, in its sole discretion, may determine to be equitable
in the circumstances .
(k) The Corporation covenants that it will at all times reserve and
keep available, free from preemptive rights, out of the aggregate of its
authorized but unissued Common Shares, solely for the purpose of effecting
conversion of the Series B Preferred Shares, the full number of Common
Shares deliverable upon the conversion of all outstanding Series B
Preferred Shares not theretofore converted. For purposes of this paragraph
(k), the number of Common Shares that shall be deliverable upon the
conversion of all outstanding Series B Preferred Shares shall be computed
as if at the time of computation all such outstanding shares were held by a
single holder.
The Corporation covenants that any Common Shares issued upon
conversion of the Series B Preferred Shares shall be validly issued, fully
paid and non-assessable. Before taking any action that would cause an
15
<PAGE>
adjustment reducing the Conversion Price below the then-par value of the
Common Shares deliverable upon conversion of the Series B Preferred Shares,
the Corporation will take any action that, in the opinion of its counsel,
may be necessary in order that the Corporation may validly and legally
issue fully paid and (subject to any customary qualification based upon the
nature of a real estate investment trust) non-assessable Common Shares at
such adjusted Conversion Price.
The Corporation shall use reasonable best efforts to list the
Common Shares required to be delivered upon conversion of the Series B
Preferred Shares, prior to such delivery, upon each national securities
exchange, if any, upon which the outstanding Common Shares are listed at
the time of such delivery.
The Corporation shall endeavor to comply with all federal and state
securities laws and regulations thereunder in connection with the issuance
of any securities that the Corporation shall be obligated to deliver upon
conversion of the Series B Preferred Shares. In addition to any legend
required by Article VIII of the Articles of Incorporation, the certificates
evidencing such securities shall bear such legends restricting transfer
thereof in the absence of registration under applicable securities laws or
an exemption therefrom as the Corporation may in good faith deem
appropriate.
(l) The Corporation will pay any and all documentary stamp or
similar issue or transfer taxes payable in respect of the issue or delivery
of Common Shares or other securities or property on conversion of the
Series B Preferred Shares pursuant hereto; provided, however, that the
-------- -------
Corporation shall not be required to pay any tax that may be
payable in respect of any transfer involved in the issue or delivery of
Common Shares or other securities or property in a name other than that of
the holder of the Series B Preferred Shares to be converted, and no such
issue or delivery shall be made unless and until the person requesting such
issue or delivery has paid to the Corporation the amount of any such tax or
established, to the reasonable satisfaction of the Corporation, that such
tax has been paid .
Section 7. Shares To Be Retired. All Series B Preferred Shares which
--------------------
shall have been issued and reacquired in any manner by the Corporation shall be
restored to the status of authorized but unissued shares of capital stock of the
Corporation, without designation as to class or series.
Section 8. Ranking. Any class or series of shares of capital stock of the
-------
Corporation shall be deemed to rank:
(a) prior to the Series B Preferred Shares, as to the payment of
dividends and as to distribution of assets upon liquidation, dissolution or
winding up, if the holders of such class or series shall be entitled to the
receipt of dividends or of amounts distributable upon liquidation,
dissolution or winding up, as the case may be, in preference or priority to
the holders of Series B Preferred Shares;
(b) on a parity with the Series B Preferred Shares, as to the
payment of dividends and as to distribution of assets upon liquidation,
dissolution or winding up, whether or not the dividend rates, dividend
payment dates or redemption or liquidation prices per share thereof shall
be different from those of the Series B Preferred Shares, if the holders of
such class or series and the Series B Preferred Shares shall be entitled to
the receipt of dividends and of amounts distributable upon liquidation,
dissolution or winding up in proportion to their respective amounts of
accrued and unpaid dividends per share or liquidation preferences, without
preference or priority one over the other ("Parity Shares"); the Series A
-------------
Cumulative Convertible Redeemable Preferred Stock of the Corporation are
Parity Shares ;
(c) junior to the Series B Preferred Shares, as to the payment of
dividends or as to the distribution of assets upon liquidation, dissolution
or winding up, if such class or series shall be Junior Shares; and
16
<PAGE>
(d) junior to the Series B Preferred Shares, as to the payment of
dividends and as to the distribution of assets upon liquidation,
dissolution or winding up, if such class or series shall be Fully Junior
Shares.
Section 9. Voting. So long as any Series B Preferred Shares are
------
outstanding, in addition to any other vote or consent of stockholders required
by law or by the Corporation's Articles of Incorporation, the affirmative vote
of at least 66-2/3% of the votes entitled to be cast by the holders of the
Series B Preferred Shares given in person or by proxy, either in writing without
a meeting or by vote at any meeting called for the purpose, shall be necessary
for effecting or validating:
(a) Any amendment, alteration or repeal of any of the provisions of
the Corporation's Articles of Incorporation, the Corporation's By-Laws or
these Articles Supplementary that materially and adversely affects the
voting powers, rights or preferences of the holders of the Series B
Preferred Shares; provided, however, that the amendment of the provisions
-------- -------
of the Corporation's Articles of Incorporation so as to authorize or create
or to increase the authorized amount of, any Fully Junior Shares, Junior
Shares that are not senior in any respect to the Series B Preferred Shares
or any Parity Shares shall not be deemed to materially adversely affect the
voting powers, rights or preferences of the holders of Series B Preferred
Shares; or
(b) A share exchange that affects the Series B Preferred Shares, a
consolidation with or merger of the Corporation into another entity, or a
consolidation with or merger of another entity into the Corporation, unless
in each such case each Series B Preferred Share (i) shall remain
outstanding without a material and adverse change to its terms and rights
or (ii) shall be converted into or exchanged for convertible preferred
shares of the surviving entity having preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms or conditions of redemption thereof identical to
that of a Series B Preferred Share (except for changes that do not
materially and adversely affect the holders of the Series B Preferred
Shares); or
(c) The authorization, reclassification or creation of, or the
increase in the authorized amount of, any shares of any class or any
security convertible into shares of any class ranking prior to the Series B
Preferred Shares in the distribution of assets on any liquidation,
dissolution or winding up of the Corporation or in the payment of
dividends;
provided, however, that no such vote of the holders of Series B Preferred Shares
- -------- -------
shall be required if, at or prior to the time when such amendment, alteration or
repeal is to take effect, or when the issuance of any such prior shares or
convertible security is to be made, as the case may be, provision is made for
the redemption of all Series B Preferred Shares at the time outstanding for
Common Stock.
For purposes of the foregoing provisions of this Section 9, each Series B
Preferred Share shall have one (1) vote per share, except that when any other
series of Preferred Shares shall have the right to vote with the Series B
Preferred Shares as a single class on any matter, then the Series B Preferred
Shares and such other series shall have with respect to such matters one (1)
vote per $28.50 of stated liquidation preference. Except as otherwise required
by applicable law or as set forth herein, the Series B Preferred Shares shall
not have any relative, participating, optional or other special voting rights
and powers other than as set forth herein, and the consent of the holders
thereof shall not be required for the taking of any Corporation action.
Section 10. Record Holders. The Corporation and the Transfer Agent may
--------------
deem and treat the record holder of any Series B Preferred Shares as the true
and lawful owner thereof for all purposes, and neither the
17
<PAGE>
Corporation nor the Transfer Agent shall be affected by any notice to the
contrary.
18
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused these Articles Supplementary
to be duly executed by its President and attested by its Secretary this ___ day
of September, 1997.
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
By:
----------------------------------
Its: President
I, Robert 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:
=================================
19
<PAGE>
CERTIFICATE OF CORRECTION
TO CORRECT AN ERROR
IN
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
ARTICLES SUPPLEMENTARY
OF BOARD OF DIRECTORS
CLASSIFYING AND DESIGNATING A SERIES OF
PREFERRED STOCK AS
SERIES B CUMULATIVE CONVERTIBLE REDEEMABLE
PREFERRED STOCK AND
FIXING DISTRIBUTION AND OTHER PREFERENCES
AND RIGHTS OF SUCH SERIES
Pursuant to the provisions of Section 1-207 of Corporations and
Associations Articles, Annotated Code of Maryland, the undersigned executes the
following certificate of correction.
1. The name of the only party to the document being corrected is Charles
E. Smith Residential Realty, Inc.
2. An Articles Supplementary of Board of Directors Classifying and
Designating a Series of Preferred Stock as Series B Cumulative Convertible
Redeemable Preferred Stock and Fixing Distribution and Other Preferences and
Rights of Such Series of Charles E. Smith Residential Realty, Inc. ("Series B
Articles Supplementary") was filed with the Department of Assessments and
Taxation of the State of Maryland on September 23, 1997, and said document
requires correction as permitted under the provisions of Section 1-207 of the
Corporations and Associations Articles, Annotated Code of Maryland.
3. The errors in said document to be corrected are highlighted below:
Section 2. Definitions
-----------
"Dividend Periods" shall mean quarterly dividend periods
----------------
commencing on January 1, April 1, July 1 and October 1 of each year and
ending on and including the day preceding the first day of the next
succeeding Dividend Period (OTHER THAN the initial Dividend Period, WHICH
shall commence on THE ISSUE DATE and end on and include September 30, 1997,
and OTHER THAN the Dividend Period during which any Series B Preferred
Shares shall be redeemed pursuant to Section 5, WHICH shall end on and
include the Call Date with respect to the Series B Preferred Shares being
redeemed).
Section 3. Dividends
---------
<PAGE>
(b) The amount of dividends referred to in clause (i) of Section
3(a) payable for each full Dividend Period on the Series B Preferred Shares
shall be computed by dividing the annual dividend rate by four. The
INITIAL Dividend Period will include a full DIVIDEND (i.e., the greater of
$0.505 per Series B Share or the ordinary cash dividend paid on the Common
Shares with respect to the quarterly period ending on or about September
30, 1997) WITH RESPECT TO SUCH THE DIVIDEND PERIOD IN WHICH THE ISSUE DATE
OCCURS, NOTWITHSTANDING THE FACT THAT THE SERIES B PREFERRED SHARES MAY
HAVE BEEN OUTSTANDING FOR ONLY A PORTION OF SUCH DIVIDEND PERIOD. The
amount of dividends payable for any period shorter than a full Dividend
Period, on the Series B Preferred Shares shall be computed on the basis of
a 360-day year of twelve 30-day months. Holders of Series B Preferred
shares shall not be entitled to any dividends, whether payable in cash,
property or shares, in excess of cumulative dividends, as herein provided,
on the Series B Preferred Shares. No interest, or sum of money in lieu of
interest, shall be payable in respect of any dividend payment or payments
on the Series B Preferred Shares which may be in arrears.
4. The foregoing inaccuracies in the document are corrected to read as
highlighted below:
Section 2. Definitions
-----------
"Dividend Periods" shall mean quarterly dividend periods
----------------
commencing on January 1, April 1, July 1 and October 1 of each year and
ending on and including the day preceding the first day of the next
succeeding Dividend Period ***[(other than]***, EXCEPT THAT: (I) the
==================
initial Dividend Period, ***[which]*** shall commence on the ***[Issue
Date]*** JULY 1, 1997 and end on and include September 30, 1997, and
============
***[other than]***(ii) the Dividend Period during which any Series B
====
Preferred Shares shall be redeemed pursuant to Section 5,***[ which]***
shall end on and include the Call Date with respect to the Series B
Preferred Shares being redeemed***[)]***.
2
<PAGE>
Section 3. Dividends
(b) The amount of dividends referred to in clause (i) of Section
3(a) payable for each full Dividend Period on the Series B Preferred Shares
shall be computed by dividing the annual dividend rate by four. The DISTRIBUTION
============
PAYABLE WITH RESPECT TO THE initial Dividend Period will include a full dividend
===========================
WITH RESPECT TO SUCH DIVIDEND PERIOD, NOTWITHSTANDING THE FACT THAT THE SERIES B
================================================================================
PREFERRED SHARES WERE ISSUED AFTER SEPTEMBER 30, 1997 (i.e., the greater of
=====================================================
$0.505 per Series B Share or the ordinary cash dividend paid on the Common
Shares with respect to the quarterly period ending on or about September 30,
1997) ***[with respect to such the Dividend Period in which the Issue Date
occurs, notwithstanding the fact that the Series B Preferred Shares may have
been outstanding for only a portion of such Dividend Period.***] The amount of
dividends payable for any period shorter than a full Dividend Period, on the
Series B Preferred Shares shall be computed on the basis of a 360-day year of
twelve 30-day months. Holders of Series B Preferred Shares shall not be entitled
to any dividends, whether payable in cash, property or shares, in excess of
cumulative dividends, as herein provided, on the Series B Preferred Shares. No
interest, or sum of money in lieu of interest, shall be payable in respect of
any dividend payment or payments on the Series B Preferred Shares which may be
in arrears.
5. The foregoing corrections are necessary in order to avoid confusion
with respect to the commencement of the Initial Dividend Period, because the
Series B Cumulative Convertible Redeemable Stock was issued after September 30,
1997, rather than prior to such date as originally contemplated. The holders of
such Series B Cumulative Convertible Redeemable Stock did not detrimentally rely
on the Series B Articles Supplementary as originally filed, and the foregoing
corrections provide for payment of dividends for the period ended September 30,
1997, as such holders originally contemplated.
3
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Correction to be duly executed by its President and attested by its Secretary
this ___ day of October, 1997.
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
By:
--------------------------------------
Its: President
I, Robert Zimet, Secretary, hereby acknowledge on behalf of Charles E.
Smith Residential Realty, Inc. that the foregoing Certificate of Correction is
the corporate act of said corporation under the penalties of perjury.
Attest:
==========================
4
<PAGE>
NEWS RELEASE
[LOGO OF CHARLES E. SMITH APPEARS HERE]
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
FOR IMMEDIATE RELEASE: Contact: Investors - Bruce Snyder
September 17, 1997 (703) 769-1029
Media - John Kurtz
(703) 769-1153
Prudential - Rick Matthews
(201) 802-4874
CHARLES E. SMITH RESIDENTIAL AND PRUDENTIAL ANNOUNCE
ACQUISITION AND STOCK PURCHASE TRANSACTIONS
SMITH TO ACQUIRE 714-UNIT LUXURY HIGH-RISE
IN NORTHERN VIRGINIA FOR $88.5 MILLION
PRUDENTIAL TO ACQUIRE $76 MILLION IN CHARLES E. SMITH STOCK
ARLINGTON, VA -- Charles E. Smith Residential Realty, Inc (NYSE:SRW)
announced today that it has contracted to acquire a luxury high-rise apartment
property from the Prudential Insurance Company of America for $88.5 million.
The 714-unit Lincoln Towers property, completed in 1992, is located in Northern
Virginia's fast growing Rosslyn-Ballston corridor. The transaction is subject
to final due diligence and is expected to close within 30 days.
In a separate transaction, Prudential will purchase new Charles E. Smith
Residential Realty stock in a combination of 1.45 million common shares and 1.22
million shares of non-voting convertible preferred stock with net proceeds to
Charles E. Smith Residential Realty of $76 million. Prudential can convert
preferred shares into common shares, on a 1 to 1 basis, subject to a ceiling of
9.8% ownership of common stock outstanding. The Smith REIT can redeem preferred
shares for common shares at any time. Prudential's stock purchase may include
an investment made on behalf of one or more of its institutional clients, as
well as the company's own General Account.
-more-
<PAGE>
page - 2
Ernest A. Gerardi, Jr., President of Charles E. Smith Residential Realty,
commented: "These transactions clearly demonstrate our accelerated external
growth strategy -- continuing to invest in urban high-rise "renters by choice"
properties in key growth submarkets, and using stock as acquisition currency to
increase our equity and further strengthen our balance sheet. Lincoln Towers
is an outstanding property, and together with our nearby Arlington Courthouse
Plaza property, provides us with a critical mass of Class A apartments in the
rapidly growing Rosslyn-Ballston corridor submarket."
Added Gerardi: "Prudential will become one of our largest shareholders
through the stock purchase transaction, which is important as it demonstrates
the confidence of another major institutional investor in our company and its
aggressive growth strategy."
For Prudential, the transactions continue its successful real estate
portfolio transformation -- fundamentally changing the way it invests in
commercial real estate for its General Account. In late 1996, Prudential
disclosed plans to sharply reduce its direct property holdings during the next
three years, while investing in REITs and other vehicles that will provide
greater liquidity and the opportunity for higher yields. Prudential also has
said it would offer its institutional clients new opportunities to make such
investments alongside its General Account.
David Twardock, Senior Managing Director in charge of Prudential's General
Account real estate portfolio said, "We are pleased that we -- and potentially
our clients -- will have this opportunity to invest in an outstanding company.
This is just what we had in mind when we launched our new portfolio strategy."
The Lincoln Towers property contains 714 apartments, 65% one bedroom and
35% two bedroom units. Built in 1992, it consists of twin 22 story towers above
a three level 721-car parking garage. Located in the Ballston submarket, it is
less than two blocks from the Ballston Metrorail stop. Extensive amenities
include a swimming pool with a landscaped deck, a fitness center, conference
room, large party room, card access security, and full-sized washers and dryers
in all units. All apartments have oversized windows and balconies -- some with
dramatic views of the Washington skyline. The property also includes over
12,000 square feet of convenience retail space, with tenants including a deli,
gourmet grocery, hair salon, yogurt shop, travel agency
-more-
<PAGE>
page - 3
and dry cleaners. Because of the extensive office employment nearby in the
Rosslyn-Ballston corridor, there is a strong demand for corporate furnished
rentals at the property.
Charles E. Smith Residential Realty, Inc. is a self-managed real estate
investment trust listed on the New York Stock Exchange (SRW). The Company and
its subsidiaries and affiliates own, acquire, develop, and manage multi-family
residential properties for its own account, and provide a full range of real
estate services to other property owners. With this transaction the Company
will own a portfolio of 17,742 apartment units and manage an additional 4,000+
units for other owners, and the total market capitalization of the Company --
Charles E. Smith Residential Realty, including its Operating Partnership --
will be approximately $1.5 billion. Investor information including press
releases about Charles E. Smith Residential Realty is available on the Company's
Web site at:HTTP://WWW.SMITHREIT.COM, and also through PR Newswire "News on
Call" by fax 800-758-5804, ext. 101271, or at: HTTP://WWW.PRNEWSWIRE.COM.
Prudential has long been one of the leading investors in commercial real
estate. In addition to its $5.5 billion General Account portfolio, the Newark,
N.J.-based insurer manages over $8 billion in assets for more than 400 clients
worldwide through Prudential Real Estate Investors and its affiliated units.
Certain items discussed in this press release may be deemed to be forward
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. Although Charles E. Smith Residential Realty, Inc. believes
that such statements are based on reasonable expectations and assumptions, it
can give no assurance that its expectations will be attained. Factors that
could cause actual results to differ materially from the Company's expectations
include real estate market conditions, information determined in the course of
due diligence review, changes in local economic conditions and other risks
detailed from time to time in the Company's reports and filings with the
Securities and Exchange Commission. The Company assumes no obligation to
update or supplement forward looking statements that become untrue because of
subsequent events. Because the described transaction is subject to satisfactory
completion of due diligence and documentation, there can be no assurance at this
time that the transaction will be completed.
# # #
<PAGE>
NEWS RELEASE
[LOGO OF CHARLES E. SMITH APPEARS HERE]
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
FOR IMMEDIATE RELEASE: Contacts: Investors - Bruce Snyder
- --------------------- (703) 769-1029
October 15, 1997
Media - John Kurtz
(703) 769-1153
Sard Verbinnen & Company, Inc.
Judy Brennan/Heather Reeves
(212) 687-8080
CHARLES E. SMITH RESIDENTIAL BEGINS NATIONAL EXPANSION
WITH ACQUISITIONS IN CHICAGO AND BOSTON
IDENTIFIES SECURITY CAPITAL AFFILIATE AS INVESTOR
IN $71.5 MILLION PRIVATE PLACEMENT ANNOUNCED IN MAY
ARLINGTON, VA -- Charles E. Smith Residential Realty, Inc. (NYSE:SRW), a
Northern Virginia-based real estate investment trust specializing in urban
multifamily rental properties, announced the acquisition of luxury high-rise
apartment properties in Chicago and Boston with a total value of approximately
$70 million. The two transactions are part of the first phase of the Company's
program to diversify geographically from its substantial base in the Washington
D.C./Northern Virginia metro area into other strong metropolitan area markets.
The Company also announced that Security Capital Preferred Growth
Incorporated, a private affiliate of Security Capital Group Incorporated, is the
investor with which the Company arranged the private placement of $71.5 million
in convertible preferred stock in May, 1997. Security Capital Preferred Growth
is a private REIT that invests in private and public real estate operating
companies with strong intermediate-term prospects for growth.
(more)
<PAGE>
page - 2
Ernest Gerardi, Jr., president of Smith Residential said, "Our national
expansion strategy is being funded in part with capital supplied by major
institutional investors with significant experience investing in publicly traded
real estate operating companies. Security Capital Group has been one of the
most successful investors in the securitized real estate market, and we welcome
their affiliate's stock ownership in our Company. Their investment, in addition
to a separate stock purchase by Prudential of $76 million in September,
demonstrates the strong confidence shown by two major institutional investors in
our Company."
Daniel F. Miranda, managing director for Security Capital Preferred Growth
stated, "We believe that the real estate industry is still in the early stages
of fundamental change and that securitization of the industry will continue to
grow at a rate similar to what has already taken place in the 1990's." Mr.
Miranda added, "Within this environment, a number of exciting opportunities
exist to invest in well-managed growth companies, such as Charles E. Smith
Residential, and to facilitate their future growth."
Gerardi continued, "The transactions in Chicago and Boston are initial
steps in the implementation of the geographic expansion strategy we announced
earlier this year, focusing on acquisitions in urban locations in growing
metropolitan areas. With these investments in place, we are continuing to work
on an existing pipeline of additional opportunities in key national markets."
"Consistent with our current asset profile, both of these acquisitions are
high quality urban high-rise properties in strong metropolitan areas," Gerardi
added. "Chicago and Boston each have excellent long-term economic growth
outlooks and substantial opportunities for additional investment. Together with
our portfolio in Northern Virginia and Washington D.C., we now operate in three
of the premier urban markets in the country."
In Chicago, Smith Residential acquired a 36-story 306-unit luxury high-rise
apartment property -- One East Delaware -- in the desirable Near North submarket
just north of downtown Chicago, and two blocks west of Michigan Avenue. The
property was completed in 1989 and was 99% occupied on October 1, 1997. It also
includes 41,726 square feet of commercial space. The
(more)
<PAGE>
page - 3
property was acquired from Near North Properties, a private Chicago
developer/manager, in a transaction valued at approximately $43 million using
funds from a Smith Residential bank credit line. Chicago is forecast to have the
largest total job growth of all U.S. cities by 2005, according to the U.S.
Department of Commerce's Bureau of Economic Analysis, and also has a large,
vibrant 24-hour downtown and a long-term tradition of downtown high-rise living.
In Boston, the Company used Operating Partnership units to complete an
exchange for a 188-unit luxury high-rise property -- the Company's first "unit
swap" outside its core Northern Virginia/Washington D.C. markets. The 16-story
property -- 2000 Commonwealth Avenue -- is located in the fashionable Chestnut
Hill section of Boston, overlooking the Chestnut Hill reservoir. It was built
in 1986, and was 98% occupied on October 1, 1997. The property was acquired
from Charles River Management, a Boston owner/manager, in a transaction valued
at approximately $27 million, including assumption of $13 million of debt and
issuance of 465,000 Operating Partnership units.
Smith Residential also noted that in early October it completed settlement
of two high-rise acquisitions announced last month -- the 714-unit Lincoln
Towers property in the Ballston submarket of Arlington County, Virginia for
$88.5 million, and the 564-unit Courthouse Hill property currently under
construction in the Arlington Courthouse section of Arlington County, Virginia,
which upon completion will be valued at over $64 million. The Company also
completed the sale of a combination of common and preferred stock to the
Prudential Insurance Company for a total of $76 million.
With completion of these transactions, in 1997 Smith Residential has
completed acquisitions totaling 3,036 units, bringing its total owned portfolio
to 18,236 units -- an increase of 20%, and $286 million since the first of the
year. In addition, the Company currently has 1,195 units under construction as
part of its development pipeline.
Charles E. Smith Residential Realty, Inc. is a self-managed real estate
investment trust listed on the New York Stock Exchange (SRW). The Company and
its subsidiaries and affiliates own, acquire, develop, and manage multifamily
residential properties in addition to providing a full
(more)
<PAGE>
page - 4
range of real estate services to other property owners. The Company owns a
portfolio of over 18,000 apartment units and manages an additional 4,000+ units
for other owners. The total market capitalization of the Company -- Charles E.
Smith Residential Realty, including its Operating Partnership -- is
approximately $1.6 billion. Investor information including press releases about
Charles E. Smith Residential Realty is available on the Company's Web site at:
HTTP://WWW.SMITHREIT.COM ... and also through PR Newswire Company's "News on
Call" by fax 800-758-5804, ext. 101271, or at: HTTP://WWW.PRNEWSWIRE.COM.
Certain items discussed in this press release may be deemed to be forward
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. Although Charles E. Smith Residential Realty, Inc. believes
that such statements are based on reasonable expectations and assumptions, it
can give no assurance that its expectations will be attained. Factors that
could cause actual results to differ materially from the company's expectations
include real estate market conditions, information determined in the course of
due diligence review, changes in local economic conditions and other risks
detailed from time to time in the company's reports and filings with the
Securities and Exchange Commission. The company assumes no obligation to
update or supplement forward looking statements that may become untrue because
of subsequent events.
# # #
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 8-K, into Charles E. Smith Residential Realty,
Inc.'s previously filed Registration Statement File No. 33-82382, Registration
Statement File No. 33-93986, Registration Statement File No. 33-80835,
Registration Statement File No. 333-340, Registration Statement File No. 333-
8129 and Registration Statement File No. 333-17053.
ARTHUR ANDERSEN LLP
Washington, D.C.
October 17, 1997
