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Filed Pursuant to Rule 424 (b)(5)
Reg #333-39513
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED JANUARY 30, 1998
500 Shares
Charles E. Smith Residential Realty, Inc.
Series C Cumulative Redeemable Preferred Stock
(Liquidation Preference $100,000 per share)
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Charles E. Smith Residential Realty, Inc. (the "Company") is a
self-administered and self-managed public equity real estate investment trust
("REIT") that is engaged primarily in the acquisition, development,
management and operation of multifamily properties in the Washington, D.C.
metropolitan area.
All of the shares of Series C Cumulative Redeemable Preferred Stock, par
value $.01 per share (the "Series C Preferred Shares"), of the Company
offered hereby are being sold by the Company. The liquidation preference of
each Series C Preferred Share is $100,000. See "Description of Series C
Preferred Shares."
Dividends on the Series C Preferred Shares will be cumulative from the
date of original issue and will be payable quarterly in arrears on the 15th
day of February, May, August and November of each year (or, if such day is
not a business day, the next business day), commencing February 15, 1998, at
the rate of 7.91% of the liquidation preference per share per annum, or such
other dividend rate as may be in effect if the Company does not satisfy
certain financial tests or does not maintain its status as a REIT. Under
certain circumstances, the dividend rate may be increased until the Company
again satisfies such tests or redeems the Series C Preferred Shares. The
dividend rate will be reduced permanently to 7.66% if the Series C Preferred
Shares receive a rating of BBB- or higher by Duff & Phelps Credit Rating
Company. See "Description of Series C Preferred Shares -- Dividends."
The Series C Preferred Shares are not redeemable prior to February 1,
2028 except under certain circumstances including certain changes of control,
loss of REIT status or failure to satisfy certain financial tests. On and
after such date, the Series C Preferred Shares may be redeemed, in whole or
in part, at the option of the Company, at a redemption price of $100,000 per
Series C Preferred Share, plus all accrued and unpaid dividends plus the Make-
Whole Amount (as defined herein). The Series C Preferred Shares will not be
subject to any sinking fund and will not be convertible into any other
securities of the Company. See "Description of Series C Preferred Shares --
Redemption."
Under certain circumstances, the Company may apply for listing of the
Series C Preferred Shares on a national securities exchange for trading or
seek approval for trading of the Series C Preferred Shares through an
inter-dealer quotation system. There can be no assurance regarding the
future development of a market for the Series C Preferred Shares. If such a
market were to develop, the Series C Preferred Shares could trade at prices
that may be higher or lower than the initial public offering price of the
Series C Preferred Shares depending on many factors. See "Description of
Series C Preferred Shares--General."
See "Risk Factors" beginning on page 2 of the accompanying Prospectus for a
discussion of certain factors relating to an investment in the Series C
Preferred Shares.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT
OR THE PROSPECTUS TO WHICH IT RELATES. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
Initial Public Placement Proceeds To
Offering Price Agent Fee(1) Company(2)
----------------- --------------- ----------------
<S> <C> <C> <C>
Per Share $100,000 $2,000 $98,000
Total $ $50,000,000 $1,000,000 $49,000,000
</TABLE>
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(1) The Company has agreed to indemnify the Placement Agent against certain
liabilities under the Securities Act of 1933. See "Plan of
Distribution."
(2) Before deducting expenses payable by the Company estimated at $100,000.
---------------------
The date of this Prospectus Supplement is January 30, 1998.
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As used herein, the term "Company" includes Charles E. Smith Residential
Realty, Inc., a Maryland corporation, Charles E. Smith Residential Realty
L.P. (the "Operating Partnership") and/or one or more of its subsidiaries, as
appropriate; the term "Series C Preferred Shares" refers to the shares of
Series C Cumulative Redeemable Preferred Stock, par value $.01 per share and
liquidation preference $100,000 per share, of the Company; and the offering
of Series C Preferred Shares made hereby is herein referred to as the
"Offering." This Prospectus Supplement and the accompanying Prospectus
contain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
Company's actual results could differ materially from those set forth in the
forward-looking statements. Certain factors that might cause such a
difference are discussed in the section entitled "Risk Factors" beginning on
page 2 of the accompanying Prospectus.
THE COMPANY
Charles E. Smith Residential Realty, Inc. is a public equity REIT that
is engaged primarily in the acquisition, development, management and
operation of multifamily properties in the Washington, D.C. metropolitan
area. Together with its subsidiaries, the Company is a fully integrated real
estate organization with in-house acquisition, development, financing,
marketing, leasing and property management expertise. The Company is
structured as an umbrella partnership REIT ("UPREIT"), in which all of the
Company's properties (the "Properties"), property interests, and business
assets are owned by, and its operations are conducted through, the Operating
Partnership and its subsidiaries. As of January 29, 1998, the Company owned
49 multifamily apartment communities containing a total of 18,523 units and
two retail centers containing approximately 436,000 square feet of retail
space.
The Company's primary business is to acquire, develop, own and manage
high quality multifamily properties for income generation and long-term value
appreciation. Since its IPO, the Company has increased its multifamily
portfolio by 6,688 apartment units, or approximately 56.5%, through
acquisitions and development. The Company currently has pending additional
acquisitions totaling 299 apartment units as well as several development
projects in advanced planning stages.
A substantial majority of the Properties are located in the Washington,
D.C. metropolitan area, which traditionally has been, and which the Company
believes will continue to be, among the strongest regions in the United
States for multifamily rental properties.
The Company is the sole general partner and owned approximately 51.34%
of the Operating Partnership Units as of December 31, 1997. The other
limited partners of the Operating Partnership are the former limited and
general partners of partnerships that owned the properties, and the former
owners of certain property service businesses, acquired by the Operating
Partnership either at the time of its formation in June 1994 or at various
times thereafter. In addition, the Operating Partnership owns 100% of the
nonvoting common stock, which represents 99% of the total economic interest,
of three operating companies which provide property services to the
Properties owned by the Operating Partnership and to multifamily, retail, and
office properties owned by affiliated and other third parties.
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DESCRIPTION OF SERIES C PREFERRED SHARES
The following description of particular terms of the Series C Preferred
Shares supplements, and to the extent inconsistent therewith, replaces, the
description of the general terms of the Preferred Stock set forth in the
accompanying Prospectus, to which description reference is hereby made. The
following description is qualified in its entirety by reference to the
provisions of the Articles Supplementary relating to the Series C Preferred
Shares (the "Articles Supplementary") and the Company's Articles of
Incorporation (the "Articles"), the terms of which are incorporated by
reference herein.
GENERAL
Subject to limitations prescribed by Maryland law and its Articles, the
Company is authorized to issue, from its authorized but unissued capital
stock, shares of Preferred Stock in one or more series, in such numbers of
shares and with such designations, preferences, conversion and other rights,
voting powers, restrictions, limitations as to dividends, qualifications and
terms and conditions of redemption as the Company's Board of Directors may
authorize from time to time. The Company currently has outstanding 1,661,744
shares of Series A Cumulative Convertible Redeemable Preferred Stock (the
"Series A Preferred Shares") and 1,216,666 shares of Series B Cumulative
Convertible Redeemable Preferred Stock (the "Series B Preferred Shares").
The Board of Directors has authorized the Company to designate and issue the
Series C Preferred Shares. The Series C Preferred Shares will rank on a
parity with the Series A Preferred Shares and the Series B Preferred Shares
as to dividends and amounts payable upon liquidation.
When issued, the Series C Preferred Shares will be validly issued,
fully paid and nonassessable. The holders of the Series C Preferred Shares
will have no preemptive rights with respect to any shares of the capital
stock of the Company or any other securities of the Company convertible into
or carrying rights or options to purchase any such shares. The Series C
Preferred Shares will not be subject to any sinking fund or other obligation
of the Company to redeem or retire the Series C Preferred Shares.
The transfer agent, registrar and dividend disbursing agent for the
Series C Preferred Shares will be Smith Realty Company or such other agent as
may be designated by the Board of Directors of the Company.
Under limited circumstances, the Company may apply for listing of the
Series C Preferred Shares on a national securities exchange for trading or
seek approval for trading of the Series C Preferred Shares through an
inter-dealer quotation system. See "Plan of Distribution."
RANKING
The Series C Preferred Shares will rank equally with the Company's
outstanding Series A Preferred Shares and Series B Preferred Shares and
senior to the Common Stock of the Company with respect to payment of
dividends and amounts payable upon liquidation, dissolution or winding up.
While any Series C Preferred Shares are outstanding, the Company may not
authorize, create or increase the authorized amount of any class of security
that ranks senior to the Series C Preferred Shares with respect to the
payment of dividends or amounts payable upon liquidation, dissolution or
winding up, or any class or any security convertible into shares of such a
class, without the consent of the holders of two-thirds of the outstanding
Series C Preferred Shares, voting as a single class; provided that no such
vote of the holders of the Series C Preferred Shares is required if provision
is made for the redemption of the Series C Preferred Shares prior to or
simultaneously
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with the matter subject to vote. However, the Company may create additional
classes of other stock, increase the authorized number of preferred shares or
issue series of preferred shares ranking on a parity with the Series C
Preferred Shares with respect, in each case, to the payment of dividends and
amounts payable upon liquidation, dissolution and winding up (a "Parity
Share") without the consent of any holder of Series C Preferred Shares. See
"--Voting Rights" below.
DIVIDENDS
Holders of Series C Preferred Shares will 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 cash dividends in an
amount per share equal to the Dividend Rate. Such dividends will be
cumulative from the first day of the applicable Dividend Period, whether or
not in any Dividend Period or Periods there are funds of the Company legally
available for the payment of such dividends, and will be payable quarterly,
when, as and if declared by the Board of Directors, in arrears on Dividend
Payment Dates. Each such dividend will be payable in arrears to the holders
of record of Series C Preferred Shares as they appear in the records of the
Company 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 will be
fixed by the Board of Directors (each, a "Dividend Record Date"). 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 the applicable Dividend Record
Date. Any dividend payment made on Series C Preferred Shares will first be
credited against the earliest accrued but unpaid dividend due with respect to
Series C Preferred Shares that remains payable.
Except as provided below, the amount of dividends payable for each full
Dividend Period on the Series C Preferred Shares will be computed by dividing
the applicable Dividend Rate by four. The initial Dividend Period will
include a partial dividend for the period from the date of issuance until
February 14, 1998. The amount of dividends payable for such period, or any
other period shorter than a full Dividend Period, on the Series C Preferred
Shares will be computed on the basis of a 360-day year of twelve 30-day
months. For any Dividend Period in which a Reduced Dividend Trigger Date
occurs, the dividend amount for such Dividend Period will equal the sum of:
(x) the product of (i) the Initial Dividend Rate divided by four, times (ii)
the number of days during the Dividend Period when the Reduced Dividend Rate
is not in effect divided by (iii) the total number of days in the Dividend
Period, plus (y) the product of (i) the Reduced Dividend Rate divided by four
times (ii) the number of days during the Dividend Period when the Initial
Dividend Rate is not in effect divided by (iii) the total number of days in
the Dividend Period. Holders of Series C Preferred Shares will not be
entitled to any dividends, whether payable in cash, property or shares, in
excess of cumulative dividends, as described herein on the Series C Preferred
Shares. The Reduced Dividend Rate shall remain in effect for all Dividend
Periods after the Reduced Dividend Trigger Date. No interest, or sum of
money in lieu of interest, will be payable in respect of any dividend payment
or payments on the Series C Preferred Shares which may be in arrears.
In the event a Trigger Event occurs, the Dividend Rate for any Dividend
Period thereafter but prior to the Reduced Dividend Trigger Date will be
determined as follows:
(i) The Dividend Rate for the Dividend Period in which the Trigger Event
occurs and the immediately following two full Dividend Periods will be
the same as the Dividend Rate in effect immediately prior to the
occurrence of such Trigger Event.
(ii) In the event that a Trigger Event is no longer in effect as of the end
of the second full Dividend Period following the occurrence of such
Trigger Event, the provisions described in this section will no longer
apply with respect to such Trigger Event.
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(iii) In the event that such Trigger Event continues to be in effect as
of the end of the second full Dividend Period following the
occurrence of such Trigger Event, then the Dividend Rate for the
immediately following full two Dividend Periods shall be the
Increased Dividend Rate.
(iv) In the event that such Trigger Event is no longer in effect as of
the end of the fourth full Dividend Period following the occurrence
of such Trigger Event, then the Dividend Rate for the immediately
following Dividend Period shall be (A) the Increased Dividend Rate
if the Trigger Event was in effect as of the immediately preceding
Dividend Payment Date or (B) if such Trigger Event shall not have
been in effect as of the immediately preceding Dividend Payment
Date, the Initial Dividend Rate, unless another Trigger Event shall
have occurred, in which case the Dividend Rate shall be determined
in accordance with these paragraphs (i)-(v) with respect to such
additional Trigger Event.
(v) In the event that such Trigger Event continues to be in effect as of
the end of the fourth full Dividend Period following the occurrence
of such Trigger Event, then the Dividend Rate for the immediately
following Dividend Period shall be the Additional Dividend Rate.
The Dividend Rate shall continue to be the Additional Dividend Rate
until such time as such Trigger Event shall not have been in effect
for two consecutive Dividend Payment Dates, in which event the
Dividend Rate for the Dividend Period ending on the second of such
Dividend Payment Dates shall equal the Initial Dividend Rate, unless
another Trigger Event shall have occurred, in which case the
Dividend Rate shall be determined in accordance with these
paragraphs (i)-(v) with respect to such additional Trigger Event.
So long as Series C Preferred Shares are outstanding, no dividends,
except as described in the immediately following sentence, will 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 C 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 C 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 C Preferred Shares and accumulated and unpaid on such Parity
Shares.
The Company will not (i) declare, pay or set apart funds for the payment
of any 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) or other distribution with respect to any Junior
Shares, (ii) redeem, purchase or otherwise acquire (other than a redemption,
purchase, or other acquisition of Common Shares made for purposes of an
employee incentive or benefit plan of the Company or any subsidiary) for
consideration or money paid or made available for redemption of Junior Shares
through a sinking fund or otherwise, directly or indirectly (except by
conversion into or exchange for Fully Junior Shares), unless (A) the full
cumulative dividends on all outstanding Series C Preferred Shares and any
other Parity Shares for the Company have been or contemporaneously are
declared and paid or declared and set apart for payment of such dividends and
(ii) sufficient funds 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 C Preferred Shares and the current
dividend period with respect to any Parity Shares.
Dividends on Series C Preferred Shares will accrue whether or not
the Company has earnings, whether or not there are funds legally available
for the payment of such dividends and
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whether or not such dividends are declared. No interest, or sum of money in
lieu of interest, will be payable in respect of any dividend payment or
payments on the Series C Preferred Shares that may be in arrears. Holders of
Series C Preferred Shares will not be entitled to any dividends, whether
payable in cash, property or shares of stock, in excess of the full
cumulative dividends, as described herein, on the Series C Preferred Shares.
If, for any taxable year, the Company elects to designate as "capital
gain dividends" (as defined in Section 857 of the Internal Revenue Code of
1986, as amended, or any successor revenue code or section (the "Code")) any
portion (the "Capital Gains Amount") of the dividends (within the meaning of
the Code) paid or made available for the year to holders of all classes of
capital stock (the "Total Dividends"), then the portion of the Capital Gains
Amount that will be allocable to holders of Series C Preferred Shares will be
in the same portion that the Total Dividends paid or made available to the
holders of Series C Preferred Shares for the year bears to the Total
Dividends.
LIQUIDATION
Upon any liquidation, dissolution or winding up of the Company, before
any payment or distribution of the assets of the Company (whether capital or
surplus) is made to or set apart for the holders of Junior Shares, the
holders of the Series C Preferred Shares will be entitled to receive an
amount per Series C Preferred Share equal to $100,000 plus an amount equal to
all dividends (whether or not earned or declared) accrued and unpaid thereon
to the date of final distribution to such holders; but such holders will not
be entitled to any further payment. If, upon any liquidation, dissolution or
winding up of the Company, the assets of the Company, or proceeds thereof,
distributable among the holders of the Series C Preferred Shares are
insufficient to pay in full the preferential amount and liquidating payments
on any other shares of any class or series of Parity Shares, then such
assets, or the proceeds thereof, will be distributed among the holders of
Series C Preferred Shares and any such Parity Shares ratably in accordance
with the respective amounts that would be payable on such Series C Preferred
Shares and any such Parity Shares if all amounts payable thereon were paid in
full. Neither a merger or other consolidation with another entity or
entities, a statutory share exchange, nor a sale, lease or conveyance of all
or substantially all of the Company's property or business will be considered
a liquidation, dissolution or winding up, voluntary or involuntary, of the
Company.
Subject to the rights of the holders of shares of any series or class or
classes of shares of capital stock ranking on a parity with or prior to the
Series C Preferred Shares, upon any liquidation, dissolution or winding up of
the Company, after payment shall have been made in full to the holders of the
Series C Preferred Shares, as provided in the preceding paragraph, 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 C Preferred Shares shall not be entitled to share therein.
REDEMPTION
The Series C Preferred Shares are not redeemable by the Company except
as follows:
(i) On and after the Call Date and on any Dividend Payment Date
thereafter, the Company, at its option, may redeem the Series C
Preferred Shares, in whole at any time, or from time to time in part,
out of funds legally available therefor for cash at a redemption price
of $100,000 per Series C Preferred Share plus all dividends (whether
or not earned or declared) accrued and unpaid thereon to the
Redemption Date.
(ii) At any time after a Trigger Event has occurred and is continuing, but
prior to the Reduced Dividend Trigger Date the Company will have the
right to redeem all (but
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not less than all) of the outstanding Series C Preferred Shares at a
redemption price of $100,000 per Series C Preferred Share plus all
dividends (whether or not earned or declared) accrued and unpaid
thereon to the Redemption Date plus the Make-Whole Amount as of the
Redemption Date.
Upon any redemption of Series C Preferred Shares at the Company's
option, the Company will pay all accrued and unpaid dividends, if any,
thereon to the Redemption Date, without interest. If the Redemption Date
falls after a dividend payment record date and prior to the corresponding
Dividend Payment Date, then each holder of Series C Preferred Shares at the
close of business on that dividend payment record date will be entitled to
the dividend payable on such shares on the corresponding Dividend Payment
Date notwithstanding any redemption of such shares before such Dividend
Payment Date. Except as provided above, the Company will make no payment or
allowance for unpaid dividends, whether or not in arrears, on Series C
Preferred Shares called for redemption.
Unless full cumulative dividends on the Series C Preferred Shares and
any other class or series of Parity Shares of the Company have been declared
and paid or declared and set apart for payment for all dividend periods ended
on or before the Redemption Date, the Series C Preferred Shares may not be
redeemed at the Company's option in part and the Company may not purchase or
acquire Series C Preferred Shares, otherwise than except pursuant to a
purchase or exchange offer made on the same terms to all holders of Series C
Preferred Shares.
Notice of the redemption of any Series C Preferred Shares will be mailed
by first-class mail to each holder of record of Series C Preferred Shares to
be redeemed at the address of each such holder as shown on the Company's
records, not less than 30 nor more than 90 days prior to the Redemption Date.
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 mailed notice shall state, as
appropriate: (1) the Redemption Date; (2) the number of Series C 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 redemption price; (4) the place or places at which
certificates for such shares are to be surrendered; and (5) that dividends on
the shares to be redeemed shall cease to accrue on such Redemption Date
except as otherwise provided herein. If notice has been given and the
Company makes available funds necessary to effect redemption, dividends on
the Series C Preferred Shares so called for redemption will cease to accrue,
such shares will no longer be deemed to be outstanding, and all rights of
their holders will terminate (except the rights to receive the cash payable
upon redemption, without interest, upon surrender and endorsement of their
certificates if so required and to receive any dividends payable thereon).
The Company's obligation to provide cash in accordance with the preceding
sentence will be fulfilled if, on or before the Redemption Date, the Company
deposits with a bank or trust company (which may be an affiliate of the
Company) 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 $50,000,000, necessary for such redemption, in trust,
with irrevocable instructions that such cash be applied to the redemption of
the Series C Preferred Shares called for redemption. No interest will
accrue for the benefit of the holders of Series C Preferred Shares to be
redeemed on any cash so set aside by the Company.
The Series C Preferred Shares have no stated maturity and will not be
subject to any sinking fund or mandatory redemption provisions.
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CHANGE OF CONTROL
If a Change of Control occurs prior to the Reduced Dividend Trigger
Date, the following provisions will apply:
(i) Each holder of Series C Preferred Shares will have the right to
require the Company, to the extent that the Company has funds legally
available therefor, to repurchase all (but not less than all) of such
holder's Series C Preferred Shares held on the date that such holder
receives the notice described below in section (ii) at a repurchase
price (the "Repurchase Price") payable in cash of $100,000, plus all
dividends (whether or not earned or declared) accrued and unpaid
thereon to the Repurchase Date plus the Make-Whole Amount computed as
of the Repurchase Date, pursuant to the offer described below.
(ii) Within 15 days following the Company becoming aware that a Change of
Control has occurred, the Company will mail by first class mail or
overnight courier a notice (the "Repurchase Offer") to each holder of
Series C Preferred Shares stating (A) that a Change of Control has
occurred and that such holder has the right to require the Company to
repurchase for cash all Series C Preferred Shares then held by such
holder; (B) the Repurchase Date (which shall be a Business Day, no
earlier than 30 days and no later than 60 days from the date such
notice is mailed, or such later date as may be necessary to comply
with the requirements of the Exchange Act); (C) the Repurchase
Price; (D) the place or places at which certificates for such
shares are to be surrendered; (E) that dividends on the shares to
be repurchased shall cease to accrue on such Repurchase Date
except as otherwise provided herein; and (F) the instructions
determined by the Company, consistent with this subsection, that
the holder must follow in order to have its Series C Preferred
Shares repurchased.
(iii) On the Repurchase Date, the Company will, to the extent lawful
(and to the extent any payment is unlawful promptly after the date on
which such payment thereafter becomes lawful), accept for payment
Series C Preferred Shares tendered pursuant to the Repurchase Offer
described above in subsection (ii). The Company's obligation to
provide cash in accordance with subsection (ii) will be fulfilled if,
on or before the Repurchase Date, the Company deposits with a bank or
trust company (which may be an affiliate of the Company) 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 $50,000,000, necessary for such repurchase, in
trust, with irrevocable instructions that such cash be applied to the
repurchase of the Series C Preferred Shares so called for repurchase.
No interest shall accrue for the benefit of the holders of Series C
Preferred Shares to be repurchased on any cash so set aside by the
Company.
VOTING RIGHTS
Except as indicated below, or except as otherwise from time to time
required by applicable law, the holders of Series C Preferred Shares will
have no voting rights.
If and whenever six quarterly dividends (whether or not consecutive)
payable on the Series C Preferred Shares or any series or class of Parity
Shares are in arrears (which means, with respect to any such quarterly
dividend, that such dividend has not been paid in full), whether or not
earned or
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declared, the number of directors then constituting the Board of Directors
will be increased by two and the holders of Series C Preferred Shares,
together with the holders of shares of every other series of Parity Shares
(any such other series, the "Voting Preferred Shares"), voting as a single
class regardless of series, will be entitled to elect the two additional
directors to serve on the Board of Directors at any annual meeting of
stockholders or special meeting held in place thereof, or at a special
meeting of the holders of the Series C Preferred Shares and the Voting
Preferred Shares called as hereinafter provided. Whenever all arrears in
dividends on the Series C Preferred Shares and the Voting Preferred Shares
then outstanding have been paid and dividends thereon for the current
quarterly dividend period have been paid or declared and set apart for
payment, then the right of the holders of the Series C Preferred Shares and
the Voting Preferred Shares to elect such additional two directors will
terminate (but subject always to the same provision for the vesting of such
voting rights in the case of any similar future arrearage in quarterly
dividends), and the terms of office of all persons elected as directors by
the holders of the Series C Preferred Shares and the Voting Preferred Shares
will forthwith terminate and the number of the Board of Directors will be
reduced accordingly. At any time after such voting power has vested in the
holders of Series C Preferred Shares and the Voting Preferred Shares, the
Secretary of the Company may, and upon the written request of any holder of
Series C Preferred Shares (addressed to the Secretary at the principal office
of the Company) must, call a special meeting of the holders of the Series C
Preferred Shares and of the Voting Preferred Shares for the election of the
directors to be elected by them. If any such special meeting is not called
by the Secretary within 20 days after receipt of any such request, then any
holder of Series C Preferred Shares may call such meeting, upon notice, and
for that purpose will have access to the records of the Company. The
directors elected at any such special meeting will hold office until the next
annual meeting of the stockholders or special meeting held in lieu thereof if
such office shall not have previously terminated as above provided. If any
vacancy occurs among the directors elected by the holders of the Series C
Preferred Shares and the Voting Preferred Shares, a successor will be elected
by the Board of Directors, upon the nomination of the then-remaining director
elected by the holders of the Series C Preferred Shares and the Voting
Preferred Shares or the successor of such remaining director, to serve until
the next annual meeting of the stockholders or special meeting held in place
thereof if such office shall not have previously terminated as provided
above.
So long as any Series C Preferred Shares are outstanding, in addition to
any other vote or consent of stockholders required by law or by the Company'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 C 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:
(i) Any amendment, alteration or repeal of any of the provisions of
the Company's Articles of Incorporation, the Company's By-Laws or
these Articles Supplementary that materially and adversely
affects the voting powers, rights or preferences of the holders
of the Series C Preferred Shares; provided, however, that the
amendment of the provisions of the Company'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 C Preferred
Shares or any Parity Shares will not be deemed to materially
adversely affect the voting powers, rights or preferences of the
holders of Series C Preferred Shares; or
(ii) A share exchange that affects the Series C 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 such case each Series C Preferred Share
(i) will remain outstanding without a material and adverse change
to its terms and rights or (ii) will 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
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of a Series C Preferred Share (except for changes that do not
materially and adversely affect the holders of the Series C
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 C Preferred Shares in the distribution of assets on
any liquidation, dissolution or winding up of the Company or in
the payment of dividends;
provided, however, that no such vote of the holders of Series C Preferred
Shares will 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 C Preferred Shares at the
time outstanding.
For purposes of the foregoing provisions for voting, each Series C
Preferred Share will have one (1) vote per share, except that when any other
series of Preferred Shares will have the right to vote with the Series C
Preferred Shares as a single class on any matter, then the Series C Preferred
Shares and such other series will have with respect to such matters one (1)
vote per $28.00 of stated liquidation preference. Except as otherwise
required by applicable law or as set forth herein, the Series C Preferred
Shares will 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 Company
action.
REPORTING
Until the Reduced Dividend Trigger Date, the Company will include in its
periodic financial reports provided to holders of the Series C Preferred
Shares a computation of the Leverage Ratio and the Fixed Charge Coverage
Ratio as of the end of the most recent fiscal quarter of the Company for
which financial statements are included in such reports.
CONVERSION
The Series C Preferred Shares are not convertible into or
exchangeable for any other property or securities of the Company at the
option of the holder.
RESTRICTIONS ON TRANSFER; OWNERSHIP LIMITS
For the Company to qualify as a REIT under the Code, no more than 50% in
value of its outstanding stock may be owned, directly or indirectly, by five
or fewer "individuals" during the last half of a full taxable year or during
a proportionate part of a shorter taxable year. Under the constructive
ownership provisions of the Code, stock owned by an entity, including a
corporation, life insurance company, mutual fund or pension trust, is treated
as owned by the ultimate individual beneficial owners of the entity. Because
the Company intends to maintain its qualification as a REIT, the Company's
Charter contains certain restrictions on the ownership and transfer of
capital stock, including the Series C Preferred Shares, intended to assist
the Company in complying with these requirements. For a complete description
of these restrictions, see "Description of Common Stock--Restrictions on
Transfer; Excess Stock" in the accompanying Prospectus.
CERTAIN DEFINITIONS
As used herein:
"ADDITIONAL DIVIDEND RATE" means $15,000.00 per share per annum.
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"AFFILIATE" means, with respect to any specified Person, any Person
that controls, or is controlled by, or is under common control with such
specified Person.
"AGGREGATE PURCHASE PRICE" shall mean, with respect to the purchase
of any Property, without duplication, (i) Cash and Cash Equivalents paid
as consideration for such purchase, plus (ii) the principal amount of
any note delivered or other deferred payment to be made in connection
with such purchase, plus (iii) the value of any other consideration
delivered in connection with such purchase (including without
limitation, shares of the Company and partnership interests of any kind
in CESLP), provided that shares of the Company and partnership interests
of any class in CESLP redeemable therefor (with or without the passage
of time) shall be valued based on the market price of such shares as
reported on the New York Stock Exchange on the date of the closing of
the applicable purchase.
"BASE RATE" means, for any day, a rate per annum equal to the higher
of (i) the Prime Rate for such day and (ii) the sum of 0.5% plus the
Federal Funds Rate for such day.
"BOARD OF DIRECTORS" means the Board of Directors of the Company or
any committee authorized by the Board of Directors to perform any of its
responsibilities with respect to the Series C Preferred Shares.
"BUSINESS DAY" means 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" means February 1, 2028.
"CAPITAL EXPENDITURES" means any expenditures for any item that would
be treated or defined as a capital expenditure under GAAP.
"CAPITAL LEASES" as applied to any Person, means any lease of any
property (whether real, personal or mixed) by that Person as lessee which,
in conformity with GAAP, is or should be accounted for as a capital lease
on the balance sheet of that Person.
"CAPITAL RESERVE" shall mean, for any period, $62.50 for each
residential unit for each fiscal quarter to occur during such period (in
connection with any annualized calculation, the Capital Reserve used in
such calculation shall also be annualized).
"CASH AND CASH EQUIVALENTS" means (i) cash (excluding cash reserve
accounts, tenant credit balances and pledged assets), (ii) direct
obligations of the United States Government, including without limitation,
treasury bills, notes and bonds, (iii) interest-bearing or discounted
obligations of federal agencies and federal government-sponsored entities
or pools of such instruments offered by banks, finance companies or other
financial institutions and dealers, including without limitation, Federal
Home Loan Mortgage Corporation participation sale certificates, Government
National Mortgage Association modified pass-through certificates, Federal
National Mortgage Association bonds and notes and Federal Farm Credit
System securities, (iv) time deposits, domestic and Euro-Dollar
certificates of deposit, bankers acceptances, commercial paper, floating
rate notes, other money market instruments and letters of credit, each
issued by banks, finance companies or other financial institutions, (v)
obligations of domestic corporations, including without limitation,
commercial paper, bonds and debentures, (vi) repurchase agreements with
banks, finance companies or other financial institutions and primary
government security dealers fully secured by the U.S. Government or agency
collateral equal to or exceeding the principal amount in a daily basis and
held in safekeeping and (vii) real estate loan pool participations.
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"CESLP" means Charles E Smith Residential Realty, L.P., a Delaware
limited partnership or its successor.
"CES SHARE" means CESLP's percentage ownership of an Investment
Affiliate or Consolidated Subsidiary, as the case may be.
"CHANGE OF CONTROL" means an occurrence of any of the following:
(i) the acquisition, directly or indirectly, by any "person" or
"group" (as such terms are used in Sections 13(d) and 14(d) of the
Exchange Act), other than Permitted Holders, of beneficial ownership
(as defined in Rule 13d-3 under the Exchange Act, except that a Person
will be deemed to have beneficial ownership of all shares that such
Person has the right to acquire, whether such right is exercisable
immediately or only after passage of time) of 50% or more of the
Company's outstanding capital stock with voting power, under ordinary
circumstances, to elect directors of the Company;
(ii) (A) the Company consolidates with, or merges with or into,
another Person or conveys, transfers, leases or otherwise disposes of
all or substantially all of its assets (including, but not limited to,
real property investments) to any Person, or (B) any Person consolidates
with, or merges with or into the Company, (unless no "person" or "group"
(as such terms are used in Sections 13(d) and 14(d) of the Exchange Act),
other than Permitted Holders, Beneficially Owns 50% or more of the
securities of the surviving or transferee corporation); provided that the
events described in this clause (ii) will not be deemed to be a Change of
Control if (1) the Persons who are shareholders of the Company
immediately preceding such transaction as a group Beneficially Own at
least 50% of the Company's shares after such transaction or (2) the sole
purpose of such event is that the Company is seeking to change its
domicile or to change its form of organization from a corporation to a
statutory business trust; or
(iii) the Company is liquidated or dissolved or adopts a plan of
liquidation or dissolution; provided that no transaction described in (i)
or (ii) above shall constitute a Change of Control unless the rating
assigned to the Series C Preferred Shares by the Rating Agency on the
Rating Determination Date is lower than the Initial Rating and the rating
assigned to the Series C Preferred Shares by the Rating Agency
immediately prior to the first public announcement of such transaction is
higher than the rating on the Rating Determination Date. The Company
shall request the Rating Agency to reaffirm its rating promptly after
such public announcement.
"CONSOLIDATED EBITDA" for any period means the consolidated net income
of CESLP (before extraordinary income or gains) as reported in CESLP's
financial statements filed with the Securities and Exchange Commission
increased by the sum of the following (without duplication):
(i) all ordinary income and state franchise taxes paid or
accrued according to GAAP for such period and all such taxes paid or
accrued by the Property Service Businesses according to GAAP for such
period (in each case, other than income taxes attributable to
extraordinary, unusual or non-recurring gains or losses except to the
extent that such gains were not included in Consolidated EBITDA);
(ii) all interest expense paid or accrued in accordance with GAAP
for such period (including financing fees and amortization of deferred
financing fees and amortization of original issue discount);
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(iii) depreciation and depletion reflected in such reported
net income;
(iv) amortization reflected in such reported net income
including, without limitation, amortization of capitalized debt issuance
costs (only to the extent that such amounts have not been previously
included in the amount of Consolidated EBITDA pursuant to clause (ii)
above), goodwill, other intangibles and management fees; and
(v) any other non-cash charges or discretionary prepayment
penalties, to the extent deducted from consolidated net income (including,
but not limited to, income allocated to minority interests);
minus the gains (and plus the losses) from extraordinary items or
asset sales or write-ups or forgiveness of indebtedness included on the
calculation of net income.
"CONSOLIDATED FIXED CHARGES" for any period means the sum of:
(i) all interest expense paid or accrued in accordance with
GAAP for such period (including financing fees and amortization of
deferred financing fees and amortization of original issue discount);
(ii) preferred stock dividend requirements for such period,
whether or not declared or paid; and
(iii) regularly scheduled amortization of principal during
such period (other than any balloon payments at maturity).
"CONSOLIDATED SUBSIDIARY" means at any date, any Subsidiary or other
entity which is consolidated with the Company or CESLP in accordance with
GAAP.
"CONTINGENT OBLIGATION" as to any Person means, without duplication,
(i) any contingent obligation of such Person required to be shown on such
Person's balance sheet in accordance with GAAP and (ii) any obligation
required to be disclosed in the footnotes to such Person's financial
statements, with respect to a guaranty by such Person of any Indebtedness
or of any other Person. The amount of any Contingent Obligation described
in clause (ii), with respect to a guaranty of interest and principal,
shall be deemed to equal the Net Present Value of the sum of all
payments required to be made thereunder, through, in the case of a
guaranty of interest only or of interest and principal, the stated date
of maturity of the obligation (and commencing on the date interest could
first be payable thereunder). Notwithstanding anything contained herein
to the contrary, guarantees of completion shall not be deemed to be
Contingent Obligations unless and until a claim for payment or
performance has been made thereunder, at which time any such guaranty of
completion shall be deemed to be a Contingent Obligation in an amount
equal to any such claim. Subject to the preceding sentence, (x) in the
case of a joint and several guaranty given by such Person and another
Person (but only to the extent such guaranty is recourse, directly or
indirectly to CESLP), the amount of the guaranty shall be deemed to be
100% thereof unless and only to the extent
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that such other Person has delivered Cash or Cash Equivalents to secure all
or any part of such Person's guaranteed obligations and (y) in the case of
a guaranty (whether or not joint and several) of an obligation otherwise
constituting Indebtedness of such Person, the amount of such guaranty shall
be deemed to be only that amount in excess of the amount of the obligation
constituting Indebtedness of such Person.
"DIVIDEND PAYMENT DATE" means the 15th day (or if such day is not a
Business Day, the next Business Day thereafter) of February, May, August
and November of each year; commencing February 15, 1998.
"DIVIDEND PERIODS" means the periods commencing on, and including,
February 15, May 15, August 15, and November 15 of each year and ending on
the date prior to the next succeeding Dividend Payment Date (other than the
initial Dividend Period, which will commence on the Issue Date and end on
and include February 14, 1998, and other than the Dividend Period during
which any Series C Preferred Shares are redeemed at the Company's option,
which will end on and include the Redemption Date with respect to the
Series C Preferred Shares being redeemed).
"DIVIDEND RATE" means (i) the Initial Dividend Rate for all periods
except when the Reduced Dividend Rate, the Increased Dividend Rate, or the
Additional Dividend Rate is in effect; or (ii) the Reduced Dividend Rate
from and including a Reduced Dividend Trigger Date; or (iii) the Increased
Dividend Rate for any Dividend Period specified in paragraph (iii) or (iv)
under "-- Dividends"; or (iv) the Additional Dividend Rate for any Dividend
Period specified in paragraph (v) under "-- Dividends".
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"FEDERAL FUNDS RATE" means, for any day, the rate per annum (rounded
upward, if necessary, to the nearest 1/100th of 1%) equal to the weighted
average of the rates on overnight federal funds transactions with members
of the Federal Reserve System arranged by federal funds brokers on such
day, as published by the Federal Reserve Bank of New York on the Business
Day next succeeding such day, provided that (i) if such day is not a
Business Day, the Federal Funds Rate for such day shall be such rate on
such transactions on the next preceding Business Day as so published on
such next succeeding Business Day and (ii) if no such rate is so published
on such next succeeding Business Day, the Federal Funds Rate for such day
shall be the average rate quoted to the Corporation on such day on such
transactions as determined by the Corporation.
"FIXED CHARGE COVERAGE RATIO" means, as of any date of determination,
the ratio of Consolidated EBITDA to Consolidated Fixed Charges for the
four fiscal quarters ending on or before such date for which financial
statements are then available.
"FULLY JUNIOR SHARES" means the Common Stock and any other class or
series of shares of capital stock of the Company now or hereafter issued
and outstanding over which the Series C 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 Company.
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"GAAP" means generally accepted accounting principles recognized as
such in the opinions and pronouncements of the Accounting Principles Board
and the American Institute of Certified Public Accountants and the
Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession, which are applicable to the circumstances as of the date of
determination.
"INCREASED DIVIDEND RATE" means, following any Trigger Event, an
amount equal to $9,910.00 per share per annum.
"INDEBTEDNESS" as applied to any Person means, without duplication,
(a) all indebtedness, obligations or other liabilities of such Person
for borrowed money, (b) all indebtedness, obligations or other
liabilities of such Person evidenced by securities or other similar
instruments, (c) all Contingent Obligations of such Person with respect
to obligations of another Person described in clauses (a), (b) or (d)
through (h), (d) all reimbursement obligations and other liabilities of
such Person with respect to letters of credit or banker's acceptances
issued for such Person's account or other similar instruments for which
a contingent liability exists, (e) all obligations of such Person to pay
the deferred purchase price of property acquired by such Person (but not
including items properly included as trade payables in accordance with
GAAP), (f) all obligations in respect of Capital Leases of such Person,
(g) all indebtedness, obligations or other liabilities of such Person or
others secured by a voluntarily granted Lien on any asset of such Person
(other than statutory Liens arising by operation of law), whether or not
such indebtedness, obligations or liabilities are assumed by, or are a
personal liability of, such Person, and (h) all indebtedness, obligations
or other liabilities (other than interest expense liability) in respect
of Interest Rate Contracts and foreign currency exchange agreements
(other than Interest Rate Contracts purchased to hedge Indebtedness), in
each case to the extent any such items described in clauses (a) through
(h) would be included in accordance with GAAP as liabilities on the
liability side of the balance sheet of such Person.
"INITIAL DIVIDEND RATE" means $7,910.00 per share per annum.
"INITIAL RATING" means BB+.
"INTEREST RATE CONTRACTS" means, collectively, interest rate swap,
collar, cap or similar agreements providing interest rate protection.
"INVESTMENT AFFILIATE" means any Person in whom CESLP holds an
equity interest, directly or indirectly, whose financial results are not
consolidated under GAAP with the financial results of CESLP on the
consolidated financial statements of CESLP.
"ISSUE DATE" means the date on which the first Series C Preferred
Shares are issued.
"JUNIOR SHARES" means the Common Stock and any other class or series
of capital stock of the Company now or hereafter issued and outstanding
over which the Series C Preferred Shares have preference or priority in the
payment of dividends or in the distribution of assets on any liquidation,
dissolution or winding up of the Company.
"LAND" means unimproved real estate, including future phases of a
partially completed project, owned or leased for the purpose of future
development of improvements. For purposes of the foregoing definition,
"unimproved" shall mean Land on
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which the construction of building improvements has not commenced or has
been discontinued for a continuous period longer than sixty (60) days prior
to completion.
"LEASE-UP PROPERTY" means any Property which has been substantially
completed within the preceding two (2) year period and which has not
been occupied by tenants under bona fide leases totalling at least
seventy-five percent (75%) of the residential units in such Property for
at least four (4) consecutive fiscal quarters.
"LEVERAGE RATIO" means the percentage determined by dividing the
Total Debt of CESLP by Market Value.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind, or any other type of
preferential arrangement, in each case that has the effect of creating a
security interest in respect of such asset. For the purposes of these
Articles Supplementary, the Company, CESLP or any Consolidated Subsidiary
shall be deemed to own subject to a Lien any asset which it has acquired or
holds subject to the interest of a vendor or lessor under any conditional
sale agreement, capital lease or other title retention agreement relating
to such asset.
"LIQUIDATION PREFERENCE" means an amount per Series C Preferred Share
equal to $100,000.
"MAKE-WHOLE AMOUNT" means, in connection with any redemption of the
Series C Preferred Shares pursuant to due to a Trigger Event or repurchase
pursuant to a Repurchase Offer, an amount with respect to each Series C
Preferred Share equal to the excess, if any of (i) the sum of (A) the
aggregate of the present values as of the applicable Redemption Date or
Repurchase Date of the dividends payable thereon at the Initial Dividend
Rate on each Dividend Payment Date occurring on or prior to the Call Date
(exclusive of dividends accrued to the Redemption Date) that would have
been payable in respect of such Series C Preferred Share if such redemption
had not been made, determined by discounting, on a quarterly basis, each
such dividend payment at the Reinvestment Rate (determined on the third
Business Day preceding the date notice of such redemption is given) from
the respective Dividend Payment Date on which such dividend would have been
payable if such redemption had not been made, to the Redemption Date or
Repurchase Date, plus (B) the present value as of the applicable Redemption
Date or Repurchase Date of a payment equal to the amount that would be
payable if such Series C Preferred Share were redeemed by the Company on
the Call Date (including accrued and unpaid dividends from the first day of
the Dividend Period in which such redemption would have occurred to such
Redemption Date or Repurchase Date), determined by discounting, on a
quarterly basis, such payment at the Reinvestment Rate (determined on the
third Business Day preceding the date notice of such redemption is given)
from the Call Date to the Redemption Date or Repurchase Date, over (ii) the
Liquidation Preference of such Series C Preferred Share.
"MARKET VALUE" means the sum, without duplication, of (i) the book
value of all Unrestricted Tangible Assets, plus (ii) for all
income-producing residential rental Properties, other than Lease-Up
Properties, owned and operated by CESLP or a Consolidated Subsidiary for
at least two (2) consecutive fiscal quarters but less than four (4)
fiscal quarters, the estimated market value thereof, as determined by
dividing the annualized aggregate Net Operating Income of such
Properties for the number of fiscal quarters actually owned, less the
annualized Capital Reserve for such Properties, by a nine percent (9%)
capitalization rate, plus (iii) for all income-producing residential
rental Properties, other than Lease-Up Properties, owned and operated by
CESLP or a Consolidated Subsidiary for four (4) fiscal quarters or more,
the estimated market value thereof, as determined by dividing the
aggregate Net Operating Income of such Properties for the
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immediately preceding four (4) fiscal quarters, less the annualized
Capital Reserve for such Properties, by a nine percent (9%)
capitalization rate, plus (iv) for all income-producing retail
Properties owned and operated by CESLP or a Consolidated Subsidiary for
at least two (2) consecutive fiscal quarters but less than four (4)
consecutive fiscal quarters, the estimated market value thereof, as
determined by dividing the annualized aggregate Net Operating Income of
such Properties for the number of fiscal quarters actually owned, less
the annualized Retail Capital Reserve Reduction Amount for such
Properties, by a ten percent (10%) capitalization rate, plus (v) for all
income-producing retail Properties owned and operated by CESLP or a
Consolidated Subsidiary for four (4) consecutive fiscal quarters or
more, the estimated market value thereof, as determined by dividing the
aggregate Net Operating Income of such Properties for the immediately
preceding four (4) fiscal quarters, less the annualized Retail Capital
Reserve Reduction Amount for such Properties, by a ten percent (10%)
capitalization rate, plus (vi) for any Properties owned and operated by
CESLP or a Consolidated Subsidiary for a period of less than two (2)
consecutive fiscal quarters, the Aggregate Purchase Price for such
Properties, plus (vii) for the Property Service Businesses, the
estimated market value thereof, determined by dividing the Property
Service Business EBITDA for such Property Service Businesses for the
immediately preceding four (4) fiscal quarters by a fourteen percent
(14%) capitalization rate, plus (viii) the estimated market value of
each Lease-Up Property and of all Properties which are not revenue
generating, such as Land and Properties under Development, based upon
the lower of (A) the cost of such Properties or (B) the estimated market
value of such Property plus (ix) the CES Share of the estimated market
value of any Property owned by any Investment Affiliate determined based
upon the status of such Property in accordance with the applicable
preceding subparagraphs (ii) through (viii).
"NET OPERATING INCOME" means, for any period with respect to any
Property, the net operating income of such Property for such period (i)
determined in accordance with GAAP, (ii) determined in accordance with
past practices of CESLP, (iii) inclusive of an allocation of reasonable
management fees and administrative costs to each Property, and (iv)
exclusive of any deduction for depreciation, amortization or interest
expense.
"NET PRESENT VALUE" shall mean, as to a specified or ascertainable
dollar amount, the present value, as of the date of calculation of any such
amount using a discount rate equal to the Base Rate in effect as of the
date of such calculation.
"PAYING AGENT" means any Person authorized by the Company to make
payments of the Repurchase Price with respect to the Series C Preferred
Shares on behalf of the Company.
"PERMITTED HOLDER" means Robert H. Smith, Robert P. Kogod, any member
of their immediate families, and/or any of their respective Affiliates.
"PERSON" means any individual, firm, partnership, corporation,
association, limited liability company, trust or other entity or
organization, (including a government or political subdivision or an agency
or instrumentality thereof), and shall include any successor (by merger or
otherwise) of such entity or organization.
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"PRIME RATE" means the rate of interest publicly announced by PNC
Bank, National Association in Pittsburgh, Pennsylvania from time to time as
its the Prime Rate, or if PNC Bank, National Association is no longer the
administrative agent for the Corporation's revolving credit facility, then
such other administrative agent as designated under the Corporation's
revolving credit facility, or, if there is no such revolving credit
facility, the rate published on the date of determination (or, if it is
not a Business Day, the immediately preceding Business Day) as the
"Prime Rate" under the heading "Money Rates" in the Wall Street Journal.
"PROPERTIES UNDER DEVELOPMENT" means Properties primarily used for
residential rental purposes owned by CESLP, a Consolidated Subsidiary or
an Investment Affiliate and on which CESLP, a Consolidated Subsidiary or
an Investment Affiliate has commenced and continues to pursue
construction of a building or other improvements, provided that any such
Property will no longer be considered a Property under Development when
seventy-five percent (75%) of the rental units contained therein are
occupied by tenants under leases.
"PROPERTY" means, with respect to any Person, any real or personal
property, building, facility, structure, equipment or unit, or other
tangible asset owned by such Person.
"PROPERTY SERVICE BUSINESSES" means any Person primarily engaged in
providing services related to real estate properties, including Smith
Realty, Company, Consolidated Engineering Services, Inc. and Smith
Management Construction, Inc., so long as the Company and/or CESLP shall
own, directly or indirectly, 50.1% or more of the economic interests
therein.
"PROPERTY SERVICE BUSINESS EBITDA" means, for any period (i) net
income for such Property Service Business for such period, plus (ii)
depreciation and amortization expense and other non-cash items deducted
in the calculation of net income for such period, plus (iii) interest
expense deducted in the calculation of net income for such period, plus
(iv) all federal, state, local and foreign income and gross receipts
taxes deducted in the calculation for such period, minus (v) the gains
(and plus the losses) from extraordinary items or asset sales or
write-ups or forgiveness of indebtedness included in the calculation of
net income, for such period, all of the foregoing without duplication.
"RATING AGENCY" means Duff & Phelps Credit Rating Company ("DCR") or
its successor, or if DCR is not the Rating Agency, then another rating
agency acceptable to holders of a majority of the outstanding Series C
Preferred Shares.
"RATING DETERMINATION DATE" means the earlier of (i) the date
following the public announcement of a Change of Control or REIT
Termination Event, as the case may be, on which the Rating Agency first
affirms or changes the rating of the Corporation or its preferred stock and
(ii) the date six (6) months after occurrence of a Change of Control or
REIT Termination Event, as the case may be, or, if such date is not a
Business Day, the next Business Day, unless on such date the Corporation or
its preferred stock has been placed on a credit watch with negative
implications by the Rating Agency in which event the Rating Determination
Date will be the first date thereafter on which the ratings relating to the
Corporation or its preferred stock have been either affirmed or changed.
"REDEMPTION DATE" means the date specified in the notice to holders as
the date for redemption of Series C Preferred Shares.
"REDUCED DIVIDEND RATE" means an amount equal to the Initial Dividend
Rate less $250.00 per share per annum.
"REDUCED DIVIDEND TRIGGER DATE" means the date on which the Series C
Preferred Shares first receive a public or shadow rating of BBB- or higher
by the Rating Agency.
"REINVESTMENT RATE" means the arithmetic mean of the yields under the
heading "Week Ending" published in the most recent Statistical Release
under the caption "Treasury Constant Maturities" for the maturity (rounded
to the nearest month) corresponding to the Call Date, as of the payment
date of the Series C Preferred Shares being redeemed. If no maturity
exactly corresponds to the Call Date, yields for the two published
maturities most closely corresponding to the Call Date will be calculated
pursuant to the immediately preceding sentence and the Reinvestment Rate
shall be interpolated or extrapolated from such yields on a straight-line
basis, rounding in each of such relevant periods to the nearest month. For
the purposes of calculating the Reinvestment Rate, the most recent
Statistical
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Release published prior to the date of determination of the Make-Whole
Amount will be used. If the format or content of the Statistical Release
changes in a manner that precludes determination of the Treasury yield in
the above manner, then the Treasury yield will be determined in the manner
that most closely approximates the above manner, as reasonably determined
by the Company.
"REIT TERMINATION EVENT" means the earliest to occur of:
(i) the filing of a federal income tax return by the Company for any
taxable year on which the Company does not elect to be taxed as a
real estate investment trust;
(ii) the approval by the stockholders of the Company of a proposal for the
Company to cease to qualify as a real estate investment trust for
United States federal income tax purposes;
(iii) the public announcement by the Company that it has ceased to
qualify as a real estate investment trust; or
(iv) a "determination" within the meaning of Section 1313(a) of the
Internal Revenue Code of 1986, as amended, that the Corporation has
ceased to qualify as a real estate investment trust.
None of the foregoing events shall be deemed to constitute a REIT
Termination Event, if the Board of Directors shall have received an opinion
from nationally recognized independent tax counsel experienced in such
matters to the effect that, on or after the Issue Date, as a result,
directly or indirectly, of (a) any amendment to, or change (including any
announced prospective change) in, the laws (or any regulations thereunder)
of the United States, (b) any judicial decision, official administrative
pronouncement, ruling, regulatory procedure, notice, or announcement,
including any notice or announcement of intent to adopt such procedures or
regulations (an "Administrative Action"), or (c) any amendment to,
clarification of, or a change in the official position or the
interpretation of any Administrative Action or judicial decision that
differs from the theretofore generally accepted position, in each case, by
any legislative body, court, governmental authority, or regulatory body,
irrespective of the manner in which such amendment, clarification, or
change is made known, which amendment, clarification, or change is
effective, or such pronouncement or decision is announced, in each case on
or after the Issue Date (collectively, a "Change in Tax Law"), there is the
creation, directly or indirectly, by such Change in Tax Law of more than an
insubstantial risk that the Corporation will no longer be qualified to be
taxed as a real estate investment trust for United States federal income
tax purposes.
"REPURCHASE DATE" means the date of repurchase of the Series C
Preferred Shares or the date such payment is made available.
"RETAIL CAPITAL RESERVE" means for any period, $.0425 per square foot
of retail improvements for each fiscal quarter to occur during such period
(in connection with any annualized calculation, the Retail Capital Reserve
used in such calculation shall also be annualized).
"RETAIL CAPITAL RESERVE REDUCTION AMOUNT" means the greater of (i) the
Retail Capital Reserve for the applicable period or (ii) the actual Capital
Expenditures incurred for the applicable period (in connection with any
annualized calculation, the Retail Capital Reserve Reduction Amount used in
such calculation shall also be annualized).
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"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SERIES C PREFERRED SHARES" means the shares of Series C Cumulative
Redeemable Preferred Stock.
"SET APART FOR PAYMENT" includes, without any action other than the
following, the recording by the Company 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 Company; 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 C Preferred Shares as to
the payment of dividends are placed in a separate account of the Company or
delivered to a disbursing, paying or other similar agent, then "set apart
for payment" with respect to the Series C Preferred Shares means placing
such funds in a separate account or delivering such funds to a disbursing,
paying or other similar agent.
"STATISTICAL RELEASE" means the statistical release designated
"H.15(519)" or any successor publication which is published weekly by the
Federal Reserve System and which reports yields on actively traded United
States government securities adjusted to constant maturities, or such other
comparable index which shall be designated by the Company.
"SUBSIDIARY" means any corporation or other entity of which securities
or other ownership interests having ordinary voting power to elect a
majority of the board of directors or other persons performing similar
functions or having control of any such entity are at the same time
directly or indirectly owned by the Company or CESLP.
"TOTAL DEBT" means all Indebtedness of CESLP, on a consolidated
basis, and the CES Share of the Indebtedness of any Investment Affiliate
(without offset or reduction in respect of prepaid interest,
restructuring fees or similar items).
"TRANSFER AGENT" means Smith Realty Company or such other agent or
agents of the Company as may be designated by the Board of Directors or
their designee as the transfer agent, registrar and dividend disbursing
agent for the Series C Preferred Shares.
"TRIGGER EVENT" means the occurrence any of the following events
prior to the Reduced Dividend Trigger Date:
(i) As of the end of any fiscal quarter of the Company, the Leverage
Ratio shall be greater than 60%; or
(ii) As of the end of any fiscal quarter of the Company, the Fixed
Charge Coverage Ratio shall be less than 1.5 to 1.0; or
(iii) A REIT Termination Event occurs, without the prior consent of
holders of a majority of the outstanding Series C Preferred
Shares, and the rating assigned to the Series C Preferred Shares
by the Rating Agency on the Rating Determination Date is lower
than the Initial Rating and the rating assigned to the Series C
Preferred Shares by the Rating Agency immediately prior to the
first public announcement of such REIT Termination Event is higher
than the rating on the Rating Determination Date. The Company
shall request the Rating Agency to reaffirm its rating promptly
after such public announcement.
"UNRESTRICTED TANGIBLE ASSETS" means the tangible assets of CESLP
and its Consolidated Subsidiaries other than real estate assets,
security deposits, escrow accounts and other reserve accounts.
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<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material federal income tax
consequences pertaining to the acquisition, ownership and disposition of
Series C Preferred Shares. This discussion is general in nature and not
exhaustive of all possible tax considerations, nor does the discussion
address any state, local or foreign tax considerations. The discussion is
based on current law and does not purport to deal with all aspects of federal
income taxation that may be relevant to a prospective shareholder in light of
its particular circumstance or to certain types of shareholders (including
insurance companies, financial institutions, broker-dealers, tax exempt
investors, foreign corporations and persons who are not citizens or residents
of the United States) subject to special treatment under the federal income
tax laws. The Company has not requested and will not request a ruling from
the Internal Revenue Service (the "IRS") with respect to any of the federal
income tax issues discussed below. Prospective investors should consult, and
must depend on, their own tax advisors regarding the federal, state, local,
foreign and other tax consequences of holding and disposing of Series C
Preferred Shares.
TAXATION OF HOLDERS OF SERIES C PREFERRED SHARES
DIVIDENDS AND OTHER DISTRIBUTIONS; BACKUP WITHHOLDING. For a
discussion of the taxation of the Company, the treatment of dividends and
other distributions with respect to shares of the Company, and the backup
withholding rules, see the captions "Federal Income Tax
Considerations--Taxation of the Company" and "--Taxation of Shareholders" in
the accompanying Prospectus. In determining the extent to which a
distribution on the Series C Preferred Shares constitutes a dividend for tax
purposes, the earnings and profits of the Company will be allocated first to
distributions with respect to the Series A, Series B, and Series C Preferred
Shares, on a pro rata basis, and then to the Common Shares.
SALE OR EXCHANGE OF SERIES C PREFERRED SHARES. As used herein, the term
"U.S. Shareholder" means a holder of Series C Preferred Shares who (for
United States federal income tax purposes) is (i) a citizen or resident of
the United States, (ii) a corporation, partnership, or other entity created
or organized in or under the laws of the United States or of any political
subdivision thereof, (iii) an estate or trust the income of which is subject
to United States federal income taxation regardless of its source, or (iv) a
trust whose administration is subject to the primary supervision of a United
States court and which has one or more United States persons who have the
authority to control all substantial decisions of the trust.
In general, a taxable U.S. Shareholder will realize gain or loss on the
sale or other disposition of Series C Preferred Shares equal to the
difference between (i) the amount of cash and the fair market value of any
property received on such disposition and (ii) the U.S. Shareholder's
adjusted basis of such Series C Preferred Shares. Such gain or loss will be
capital gain or loss if the Series C Preferred Shares have been held as a
capital asset. In the case of a taxable U.S. Shareholder that is a
corporation, such capital gain or loss will be long-term capital gain or loss
if such Series C Preferred Shares have been held for more than one year.
Generally, in the case of a taxable non-corporate U.S. Shareholder, such
capital gain or loss will be taxed (i) at a maximum rate of 20% if such
Series C Preferred Shares have been held for more than 18 months; (ii) at a
maximum rate of 28% if such Series C Preferred Shares have been held for more
than one year but not more than 18 months; and (iii) for dispositions
occurring after December 31, 2000, at a maximum rate of 18% if the Series C
Preferred Shares have been held for more than five years. The 1997 Act
allows the IRS to issue regulations relating to how the 1997 Act's new
capital gain rates will apply to sales of capital assets by "pass-through
entities," which include REITs such as the Company, and to sales of interests
in "pass-through entities." To date, the IRS has not issued such
regulations, but if issued, such regulations could affect the taxation of
gain and loss realized on the disposition of Series C
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<PAGE>
Preferred Shares. Shareholders are urged to consult with their own tax
advisors with respect to the new rules contained in the 1997 Act.
Loss upon a sale or exchange of Series C Preferred Shares by a taxable
U.S. Shareholder who has held such Series C Preferred Shares for six months
or less (after applying certain holding period rules) will be treated as
long-term capital loss to the extent of distributions from the Company
required to be treated by such shareholder as long-term capital gain. For a
taxable non-corporate U.S. Shareholder, the long-term capital loss will be
apportioned among the applicable long-term capital gain groups to the extent
that distributions received by such U.S. Shareholder were previously so
treated.
REDEMPTION OF SERIES C PREFERRED SHARES. The treatment accorded to
any redemption by the Company (as distinguished from a sale, exchange or
other disposition) of Series C Preferred Shares can only be determined on the
basis of particular facts as to each holder of Series C Preferred Shares at
the time of redemption. In general, a holder of Series C Preferred Shares
will recognize capital gain or loss measured by the difference between the
amount received by the holder of Series C Preferred Shares upon the
redemption and such holder's adjusted tax basis in the Series C Preferred
Shares redeemed (provided the Series C Preferred Shares are held as a capital
asset) if such redemption (i) results in a "complete termination" of the
interest of the holder of Series C Preferred Shares in all classes of stock
of the Company under Section 302(b)(3) of the Code, or (ii) is "not
essentially equivalent to a dividend" with respect to the holder of Series C
Preferred Shares under Section 302(b)(1) of the Code. In applying these
tests, there must be taken into account not only any Series C Preferred
Shares owned by the holder, but also such holder's ownership of Common
Shares, other Parity Shares and any options (including stock purchase rights)
to acquire any of the foregoing. The holder of Series C Preferred Shares
also must take into account any such securities (including options) which are
considered to be owned by such holder by reason of the constructive ownership
rules set forth in Sections 318 and 302(c) of the Code.
If a particular holder of Series C Preferred Shares owns (actually or
constructively) no Common Shares of the Company or an insubstantial
percentage of the outstanding Common Shares of the Company based upon current
law, it is probable that the redemption of Series C Preferred Shares from
such a holder would be considered "not essentially equivalent to a dividend."
However, whether a distribution is "not essentially equivalent to a
dividend" depends on all of the facts and circumstances, and a holder of
Series C Preferred Shares intending to rely on any of these tests at the time
of redemption should consult its own tax adviser to determine their
application to its particular situation.
If the redemption does not meet any of the tests under Section 302 of
the Code, then the redemption proceeds received from the Series C Preferred
Shares will be treated as a distribution on the Series C Preferred Shares as
described under "Federal Income Tax Considerations--Taxation of Shareholders"
in the accompanying Prospectus. If the redemption is taxed as a dividend,
the shareholder's adjusted tax basis in the Series C Preferred Shares will be
transferred to any other stock in the Company held such shareholder. If the
shareholder owns no other stock in the Company, under certain circumstances,
such basis may be transferred to a related person, or it may be lost entirely.
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<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Series C
Preferred Shares offered hereby are estimated to be approximately $49
million, after payment of offering expenses payable by the Company. The
Company intends to use the net proceeds to repay a portion of the amounts
outstanding under the Company's revolving credit agreement, which had a
weighted average interest rate of 6.9% as of December 31, 1997, and for
general corporate purposes.
PLAN OF DISTRIBUTION
The Company has agreed, pursuant to a purchase agreement (the "Purchase
Agreement") dated as of January 28, 1998 between the Company and Cobalt
Capital, LLC (the "Investor") to sell all 500 shares of Series C Preferred
Stock offered hereby to the Investor for a total purchase price of $50
million. Prudential Securities, Inc. is an investor in Cobalt Capital,
LLC through CGA Group, Ltd., an indirect parent of both CGA Investment
Management, Inc. and Cobalt Capital, LLC Prudential Securities, Inc. has
acted as placement agent and will receive a fee of $1,000,000 for such
services pursuant to a placement agent agreement with the Company. The
Company has agreed to indemnify such placement agent against certain
liabilities, including liabilities under the Securities Act of 1933.
In the Purchase Agreement, the Company has agreed to use its reasonable
best efforts, upon the request and at the expense of the Investor, to cause
the Series C Preferred Shares to be listed for trading on a national
securities exchange or authorized for trading through an inter-dealer
quotation system, provided that the Investor and its affiliates own at least
250 Series C Preferred Shares and that shares of preferred stock of the
Company with an aggregate liquidation preferance of $100,000,000 are then
listed for trading on a national securities exchange or authorized for
trading through an inter-dealer quotation system.
LEGAL MATTERS
The validity of the issuance of the shares of Series C Preferred Stock
pursuant to this Prospectus Supplement will be passed upon for the Company by
Hogan & Hartson L.L.P., Washington, D.C.
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<PAGE>
PROSPECTUS
$361,895,625
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
Debt Securities, Preferred Stock, Depositary Shares, Common Stock and Common
Stock Warrants
----------------
Charles E. Smith Residential Realty, Inc. (the "Company") may from time
to time offer in one or more series (i) unsecured debt securities ("Debt
Securities"), (ii) shares of preferred stock ("Preferred Stock"), (iii)
shares of Preferred Stock represented by depositary shares ("Depositary
Shares"), (iv) shares of common stock, $.01 par value per share ("Common
Stock"), and (v) warrants exercisable for Common Stock ("Common Stock
Warrants"), with an aggregate public offering price of up to $361,895,625 (or
its equivalent based on the exchange rate at the time of sale) in amounts, at
prices and on terms to be determined at the time of offering. The Debt
Securities, Preferred Stock, Depositary Shares, Common Stock and Common Stock
Warrants (collectively, the "Securities") may be offered, separately or
together, in separate series in amounts, at prices and on terms to be described
in one or more supplements to this Prospectus (a "Prospectus Supplement").
The specific terms of the Securities in respect of which this Prospectus is
being delivered will be set forth in the applicable Prospectus Supplement and
will include, where applicable: (i) in the case of Debt Securities, the specific
title, aggregate principal amount, currency, form (which may be registered or
bearer, or certificated or global), authorized denominations, maturity, rate (or
manner of calculation thereof) and time of payment of interest, any terms for
redemption at the option of the Company or repayment at the option of the
holder, any terms for any sinking fund payments, any terms for conversion into
Preferred Stock or Common Stock of the Company, covenants and any initial public
offering price; (ii) in the case of Preferred Stock, the specific title and
stated value, any dividend, liquidation, redemption, conversion, voting and
other rights, and any initial public offering price; (iii) in the case of
Depositary Shares, the fractional share of Preferred Stock represented by each
such Depositary Share, (iv) in the case of Common Stock, any initial public
offering price; and (v) in the case of Common Stock Warrants, the specific title
and aggregate number, and the issue price and the exercise price. In addition,
such specific terms may include limitations on direct or beneficial ownership
and restrictions on transfer of the Securities, in each case as may be
appropriate to preserve the status of the Company as a real estate investment
trust for federal income tax purposes.
The applicable Prospectus Supplement also will contain information, where
applicable, about certain U.S. federal income tax considerations relating to,
and any listing on a securities exchange of, the Securities covered by such
Prospectus Supplement.
The Securities may be offered directly, through agents designated from time
to time by the Company, or to or through underwriters or dealers. If any agents
or underwriters are involved in the sale of any of the Securities, their names,
and any applicable purchase price, fee, commission or discount arrangement with,
between or among them, will be set forth, or will be calculable from the
information set forth, in an accompanying Prospectus Supplement. See "Plan of
Distribution." No Securities may be sold without delivery of a Prospectus
Supplement describing the method and terms of the offering of such Securities.
See "Risk Factors" beginning on page 2 for a discussion of certain factors
relating to an investment in the Securities.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
-----------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION
TO THE CONTRARY IS UNLAWFUL.
-----------------
The date of this Prospectus is January 30, 1998.
<PAGE>
THE COMPANY
General
The Company is a self-administered and self-managed equity real estate
investment trust ("REIT") that is engaged primarily in the acquisition,
development, management and operation of multifamily properties in the
Washington, D.C. metropolitan area. The Company, together with its
subsidiaries, is a fully integrated real estate company with in-house
acquisition, development, financing, marketing and property management and
leasing expertise. The Company's primary strategy for growth is to acquire,
develop, own and manage high quality multifamily properties for long-term income
generation and value appreciation.
The Company is the sole general partner and owned approximately 50% of the
units of limited partnership interest ("Units") in Charles E. Smith Residential
Realty L.P. (the "Operating Partnership") as of September 30, 1997. The other
limited partners of the Operating Partnership are the former limited and general
partners of partnerships that owned the properties, and the former owners of
certain property service businesses, acquired by the Operating Partnership at
the time of its formation in June 1994 or thereafter. All of the Company's
properties, property interests, and business assets are owned by, and its
operations conducted through, the Operating Partnership and its subsidiaries.
In addition, the Operating Partnership owns 100% of the nonvoting common stock,
which represents 99% of the total economic interest, of three operating
companies (collectively, the "Property Service Businesses") which provide
management and leasing services, engineering and technical services and interior
construction and renovation services to the properties owned by the Operating
Partnership and to other multifamily, retail, and office properties. As of
October 10, 1997, the Company, through the Operating Partnership, owned
47 multifamily apartment communities containing a total of 18,236 units (the
"Multifamily Properties"), two retail centers containing approximately 436,000
square feet of retail space (the "Retail Properties", and together with the
Multifamily Properties, the "Properties"), a substantial majority of which are
located in the Washington, D.C. metropolitan area. The Company also manages
over 4,000 additional apartment units for other owners.
The Company's executive offices are located at 2345 Crystal Drive, Crystal
City, Arlington, Virginia 22202, and its telephone number is (703) 920-8500.
The Company is a Maryland corporation formed in 1993, and completed its initial
public offering on June 30, 1994. The Operating Partnership is a Delaware
limited partnership formed in 1993; it commenced business operations on June 30,
1994.
RISK FACTORS
Prospective investors should carefully consider, among other factors, the
matters described below.
Real Estate Investment Risks
General. Real property investments are subject to varying degrees of risk.
The yields available from equity investments in real estate and the Company's
ability to service debt will depend in large part on the amount of income
generated, expenses incurred and capital expenditures required. The Company's
income from multifamily or retail properties may be adversely affected by a
number of factors, including the general economic climate and local real estate
conditions, such as an oversupply of, or a reduction in demand, for apartment or
retail space in the area and the attractiveness of the properties to residents
and shoppers. In addition, income from properties and real estate values also
are affected by such factors as the cost of compliance with government
regulation, including zoning and tax laws, the potential for liability under
applicable laws, interest rate levels and the availability of financing.
Certain significant expenditures associated with each equity investment by the
Company in a property (such as mortgage payments, if any, real estate taxes and
maintenance costs) also are generally not reduced when circumstances cause a
reduction in income from the property.
Debt Financing. The Company is subject to the risks associated with debt
financing, including the risk that the Company's cash provided by operating
activities will be insufficient to meet required payments of principal and
interest, the risks of rising interest rates on the Company's floating rate
debt, the risk that the Company will not be
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<PAGE>
able to prepay or refinance existing indebtedness on the Properties (which
generally will not have been fully amortized at maturity) or that the terms of
such refinancing will not be as favorable as the terms of existing indebtedness.
In the event the Company is unable to secure refinancing of such indebtedness on
acceptable terms, the Company might be forced to dispose of properties upon
disadvantageous terms, which might result in losses to the Company and might
adversely affect the cash flow available for distribution to equity holders or
debt service. In addition, if a property or properties are mortgaged to secure
payment of indebtedness and the Company is unable to meet mortgage payments, the
mortgage securing the property could be foreclosed upon by, or the property
could be otherwise transferred to, the mortgagee with a consequent loss of
income and asset value to the Company.
Renewal of Leases and Reletting of Space at Retail Properties. The
Company is subject to the risks that upon expiration of leases for space located
at Retail Properties, the leases may not be renewed, the space may not be relet
or the terms of the renewal or reletting (including the cost of required
renovations or concessions to tenants) may be less favorable than current lease
terms. Although the Company has established an annual budget for renovation and
reletting expenses that it believes are reasonable in light of each Retail
Property's situation, no assurance can be given that this budget will be
sufficient to cover these expenses. If the Company is unable to promptly relet
or renew leases for all or substantially all of the space at its Retail
Properties, if the rental rates upon such renewal or reletting are significantly
lower than expected, or if the Company's reserves for these purposes prove
inadequate, then the Company's cash provided by operating activities and ability
to make expected distributions to shareholders or debt service payments could be
adversely affected.
Dependence on the Washington, D.C. Metropolitan Area Market. A substantial
majority of the Properties are located in the Washington, D.C. metropolitan area
market. While the Company may pursue acquisitions and development in other
markets, a decline in the economy or rental activities in this market may
adversely affect the ability of the Company to make distributions to its
shareholders.
Possible Environmental Liabilities. Under various Federal, state and
local laws, ordinances and regulations, a current or previous owner or operator
of real estate may be required to investigate and clean up certain hazardous
substances released at the property, and may be held liable to a governmental
entity or to third parties for property damage and for investigation and cleanup
costs incurred by such parties in connection with the contamination. In
addition, some environmental laws create a lien on the contaminated site in
favor of the government for damages and costs it incurs in connection with the
contamination. The presence of contamination or the failure to remediate
contamination may adversely affect the owner's ability to sell or lease real
estate or to borrow using the real estate as collateral. The owner or operator
of a site may be liable under common law to third parties for damages and
injuries resulting from environmental contamination emanating from the site.
The Company has not been notified by any governmental authority of any material
non-compliance, liability or other claim in connection with any of the
Properties and the Company is not aware of any other material environmental
condition with respect to any of the Properties. No assurance, however, can be
given that no prior owner created any material environmental condition not known
to the Company, that no material environmental condition with respect to any
Property has occurred during the Company's ownership thereof, or that future
uses or conditions (including, without limitation, changes in applicable
environmental laws and regulations) will not result in imposition of
environmental liability.
Rent Control Laws. As of October 27, 1997, eleven of the Properties,
representing 3,712 units or 20.4% of the total apartment units owned by the
Company, which were built prior to 1976 and are located in the District of
Columbia, were subject to the District's rent control laws that potentially
restrict a property owner's ability to increase rents and to recover increases
in operating expenses and the costs of capital improvements. Although these
rent control provisions currently allow the maximum rent "ceiling" to be
increased annually in response to several factors, recent legislative changes
have limited the Company's ability to take full advantage of the available
"ceilings" in any one year. Thus, no assurance can be given that the Company
will be able to raise rents under the new legislation to levels that reflect
future market rates.
District of Columbia Tenants' Rights. Under the District of Columbia
Rental Housing Conversion and Sale Act of 1980 (the "Conversion Act"), in the
event of a "sale" of a residential property in the District of Columbia, the
tenants have a right of first refusal to purchase the property as well as a
right to match offers made on the property
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<PAGE>
by prospective purchasers. A transfer of all of the partnership interests of a
partnership that owns such property, or a transfer of all of the stock of a
corporation that owns such property, is considered to be a "sale" within the
meaning of the Conversion Act. Consequently, essentially all future
acquisitions and sales by the Company of residential properties located in the
District of Columbia will be subject to the rights of the tenants of such
properties to purchase the properties at the offered price. Such tenants'
rights may make it difficult for the Company to purchase or sell residential
properties located in the District of Columbia even if a purchase or sale were
in the interests of the Company's shareholders.
Conflicts of Interest
Certain members of the Company's Board of Directors and officers (including
Robert H. Smith and Robert P. Kogod) own Units in the Operating Partnership and,
thus, may have interests that conflict with shareholders with respect to
business decisions affecting the Company and the Operating Partnership. In
particular, a holder of Units may suffer different and/or more adverse tax
consequences than the Company upon the sale or refinancing of some of the
Properties as a result of unrealized gain attributable to certain Properties.
These Unit holders and the Company, therefore, may have different objectives
regarding the appropriate pricing and timing of any sale or refinancing of
Properties. Although the Company, as the sole general partner of the
Partnership, has the exclusive authority as to whether and on what terms to sell
or refinance an individual Property, these Unit holders might seek to influence
the Company not to sell or refinance the Properties, even though such sale might
otherwise be financially advantageous to the Company, or may seek to influence
the Company to refinance a Property with a higher level of debt than would be in
the best interests of the Company.
Messrs. Smith and Kogod hold interests in certain companies that in the
past have performed property management, leasing, construction management,
insurance brokerage and other services with respect to the Properties. These
companies may perform similar services for the Company in the future. As a
result of their financial interest in these companies, Messrs. Smith and Kogod
may realize benefits from transactions between such companies and the Company
that are not realized by other shareholders of the Company. In addition,
Messrs. Smith and Kogod, as directors of the Company, may be in a position to
influence the Company to do business with companies in which they have a
financial interest. Also, Messrs. Smith and Kogod continue to hold general and
limited partnership interests in certain limited partnerships that own
multifamily and commercial properties that were not acquired by the Company at
the time the Company was formed and acquired its assets, which may give rise to
conflicts of interest concerning the fulfillment of their responsibilities as
officers and directors of the Company. Although the Company has adopted certain
policies designed to eliminate or minimize potential conflicts of interest,
including a policy which requires that transactions in which a director or
officer of the Company has a conflict of interest be approved by a majority of
the disinterested directors, there can be no assurance that these policies will
be successful in eliminating the influence of such conflicts, or that such
transactions, if any, will be on terms as favorable to the Company as could be
obtained in an arms-length transaction with a third party.
Development and Acquisition Risks
The Company intends to continue development of new multifamily and retail
properties (including expansions of existing Properties on the land adjacent to
those Properties) and to consider acquisitions of multifamily and retail
properties where it believes that such development or acquisition is consistent
with the business strategies of the Company. New project development is subject
to a number of risks, including construction delays or cost overruns that may
increase project costs, financing risks as described above, the failure to meet
anticipated occupancy or rent levels as and when expected, failure to receive
required zoning, occupancy and other governmental permits and authorizations and
changes in applicable zoning and land use laws, which may result in the
incurrence of development costs in connection with projects that are not pursued
to completion. In addition, because the Company must distribute 95% of its
taxable income (excluding any net capital gain) in order to maintain its
qualification as a REIT, the Company anticipates that new developments and
acquisitions will be financed primarily through lines of credit or other forms
of secured or unsecured construction financing. If permanent debt or equity
financing is not available on acceptable terms to refinance such new
developments or acquisitions are undertaken without permanent financing, further
development activities or acquisitions may be curtailed or cash available for
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distribution to shareholders or to meet debt service obligations may be
adversely affected. Acquisitions entail risks that investments will fail to
perform in accordance with expectations and that judgments with respect to the
costs of improvements to bring an acquired property up to standards established
for the market position intended for that property will prove inaccurate, as
well as general investment risks associated with any new real estate investment.
See "Real Estate Investment Risks" above.
Risks Associated with Leverage
The Company intends to fund acquisitions and development of properties
primarily through short-term borrowings, and also out of undistributed cash flow
from operating activities. The Company expects to finance or refinance such
properties on a longer term basis when market conditions are appropriate either
with long-term indebtedness or equity financing, depending upon the economic
conditions at the time of refinancing. The Company's debt-to-total market
capitalization ratio (i.e., the ratio of total indebtedness to the market value
of issued and outstanding Common Stock, shares of Preferred Stock ("Preferred
Stock") and Units plus total indebtedness) (the "Debt-to-Total Market
Capitalization Ratio") as of September 30, 1997 was 37.2%. The Company has
adopted a policy of incurring debt (including debt incurred under its line of
credit) only if upon such incurrence the Company's Debt-to-Total Market
Capitalization Ratio would be 60% or less. The Company's Articles of
Incorporation, as amended (the "Charter"), however, do not contain any
limitation on the amount or percentage of indebtedness that the Company may
incur in the future. Accordingly, the Company could modify the current policy
at any time. If this policy were changed, the Company could become more highly
leveraged, resulting in an increase in debt service that, in turn, could
increase the Company's risk of default on its obligations and adversely affect
the Company's funds from operations and ability to make expected distributions
to its shareholders.
Property Services Risks; Lack of Voting Control over Property Service Businesses
The Company's Property Service Businesses will continue to be subject to
the risks associated with providing services to affiliated and unaffiliated
multifamily, retail and office properties. These risks include the risk that
management, leasing and other service contracts with property owners will be
lost to competitors; that such contracts will not be renewed upon expiration or
will not be renewed on terms consistent with current terms; that the rental
revenues upon which management fees are based will decline as a result of
general real estate market conditions or specific market factors affecting
properties managed by the Property Service Businesses, resulting in decreased
management fee income; that leasing and other service activity generally may
decline; and that the Property Service Businesses may not be retained to provide
certain property services that property owners are not obligated to retain the
Company to provide under existing contractual arrangements. Each of these
developments could adversely affect the ability of the Property Service
Businesses to make expected distributions to shareholders. In addition, the
restrictions applicable to REITs under the Code may limit the Company's ability
to expand its Property Service Businesses, and net income from such businesses
will be subject to corporate income tax.
The Company owns 100% of the nonvoting common stock, which represents 99%
of the equity, of each of the Property Service Businesses, which conduct the
Company's property services business for properties not owned by the Company.
The members of the boards of directors of the Property Service Businesses are
Messrs. Smith, Kogod and Ernest A. Gerardi, Jr., the Company's Chief Operating
Officer. Separate partnerships consisting of certain executives active in the
management of the Company and the Property Service Businesses and adult children
of Messrs. Smith and Kogod own 100% of the voting common stock, representing 1%
of the equity, of each Property Service Business. Therefore, such holders of
the voting stock have the ability to elect and remove all members of the boards
of directors of the Property Service Businesses. Although the Company's right
to receive distributions with respect to its nonvoting common stock cannot be
changed by the holders of the voting common stock, the Company is not able to
elect directors of the Property Service Businesses, and, therefore, it does not
have the right to control the day-to-day decisions of the Property Service
Businesses. As a result, decisions relating to the day-to-day operations of the
Property Service Businesses may not always reflect the interests of the Company
and all of its shareholders.
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Changes in Policies
The major policies of the Company, including its policies with respect to
development, acquisitions, financing, growth, operations, debt capitalization
and distributions, are determined by its board of directors. Although it has no
present intention to do so, the board may amend or revise these and other
policies from time to time without a vote of the shareholders of the Company. A
change in these policies could adversely affect the Company's financial
condition, results of operations, funds available for distributions to
shareholders or debt service or the market price of the Securities. The Company
cannot change its policy of seeking to maintain its qualification as a REIT
without the approval of the holders of a majority of the Common Shares.
Certain Tax Risks
Tax Liabilities as a Consequence of the Failure to Qualify as a REIT. The
Company believes that it has operated so as to qualify as a REIT under the
Internal Revenue Code of 1986, as amended (the "Code"), commencing with its
taxable year ended December 31, 1994, and intends to continue to so operate. No
assurance, however, can be given that the Company has so qualified or will be
able to remain so qualified. Qualification as a REIT involves the application
of highly technical and complex Code provisions as to which there are only
limited judicial and administrative interpretations. Certain facts and
circumstances that may be wholly beyond the Company's control may affect its
ability to qualify or to continue to qualify as a REIT. In addition, no
assurance can be given that new legislation, Treasury Regulations,
administrative interpretations or court decisions will not significantly change
the tax laws with respect to the qualification as a REIT or the Federal income
consequences of such qualification to the Company. If the Company fails to
qualify as a REIT, it will be subject to Federal income tax (including any
applicable alternative minimum tax) on its taxable income at regular corporate
rates. In addition, unless entitled to relief under certain statutory
provisions, the Company would be disqualified from treatment as a REIT for the
four taxable years following the year during which qualification is lost. The
additional tax incurred in such event would significantly reduce the cash flow
available for distribution to shareholders and to meet debt service obligations.
See "Federal Income Tax Considerations--Taxation of the Company."
REIT Distribution Requirements and Potential Impact of Borrowings. To
obtain the favorable tax treatment associated with qualifying as a REIT under
the Code, the Company generally is required each year to distribute to its
shareholders at least 95% of its net taxable income (excluding net capital
gains). See "Federal Income Tax Considerations--Requirements for
Qualification--Annual Distribution Requirements." The Company could be required
to borrow funds on a short-term basis to meet the distribution requirements that
are necessary to achieve the tax benefits associated with qualifying as a REIT,
even if management believed that then prevailing market conditions were not
generally favorable for such borrowings.
Other Tax Liabilities. Even if the Company qualifies as a REIT, the
Company -- through the Operating Partnership and the Property Services
Businesses--will be subject to certain Federal, state and local taxes on its
income and property. See "Federal Income Tax Considerations--Taxation of the
Company and--Other Tax Considerations."
Price Fluctuations of the Common Shares and Trading Volume; Shares Available for
Future Sale
A number of factors may adversely influence the price of the Company's
Common Stock in the public markets, many of which are beyond the control of the
Company. These factors include possible increases in market interest rates,
which may lead purchasers of Common Stock to demand a higher annual yield from
distributions by the Company in relation to the price paid for Common Stock, the
relatively low daily trading volume of REITs in general, including the Common
Stock and any inability of the Company to invest the proceeds of a future
offering of Securities in a manner that will increase earnings per share. Sales
of a substantial number of shares of Common Stock, or the perception that such
sales could occur, could adversely affect prevailing market prices for shares.
As of October 7, 1997, the Company had outstanding 14,895,693 shares of Common
Stock, all of which are tradable without restriction under the Securities Act
(unless such shares are held by affiliates of the Company). As of October 7,
1997, the Company had outstanding 1,955,219 shares of preferred stock
("Preferred Shares"), 1,216,666 of which will become convertible (subject to the
satisfaction of other conditions) into Common Stock on January 1,
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1998. As of September 30, 1997, the Company had reserved for possible issuance
upon redemption of Units approximately 18.7 million additional shares of Common
Stock. 13,609,928 shares issuable upon any future redemption of Units, or
issuable under employee benefit plans (the "Plans"), will be tradable without
restriction under the Securities Act pursuant to the Registration Statements on
Form S-8 filed by the Company in August, 1994, on Form S-3 filed by the Company
in June 1995 and July 1996, respectively or the Registration Statement of which
this Prospectus is a part. As of October 7, 1997, an additional 14,895,693
Units were eligible to be redeemed for cash or, at the Company's election,
shares of Common Stock (such shares will be restricted from sale in the public
market unless registered under the Securities Act). In addition, 1,000,000
shares have been reserved for issuance under the Company's Dividend and
Distribution Investment and Share Purchase Plan, which plan was registered with
the Commission on December 22, 1995. No prediction can be made about the effect
that future sales of Common Stock will have on the market prices of shares.
Possible Adverse Consequences of Limits on Ownership of Shares
In order to maintain its qualification as a REIT, not more than 50% in
number or value of the outstanding capital stock of the Company may be owned,
directly or constructively under the applicable attribution rules of the Code,
by five or fewer individuals (as defined in the Code to include certain
entities) during the last half of a taxable year. In order to protect the
Company from the risk of losing its REIT status due to a concentration of
ownership among its shareholders, the Company has limited ownership of the
issued and outstanding shares of capital stock by any single shareholder to 9.8%
of either (i) the outstanding Common Stock or (ii) the outstanding capital stock
of the Company (determined in each case taking into account certain ownership
attribution rules). The Board of Directors may waive the percentage ownership
limit for certain entities (but not individuals) if it is satisfied that
ownership in excess of this limit will not jeopardize the Company's status as a
REIT and the Board of Directors otherwise decides such action is in the best
interests of the Company. The Board of Directors has waived the percentage
ownership in the case of a particular investment adviser that holds
approximately 13.148% of the Common Stock as the record owner on behalf of other
beneficial owners and in two instances of the purchase by an accredited investor
and the private placement of Preferred and/or Common Stock. A transfer of
shares of capital stock to a person who, as a result of the transfer, violates
the ownership limit will be void. Shares of Common Stock acquired in breach of
the limitation will be automatically exchanged for shares of a separate class of
stock not entitled to vote or to participate in distributions ("Excess Stock").
In addition, ownership, either directly or indirectly under the applicable
attribution rules of the Code, of stock in excess of the ownership limit
generally will result in the conversion of those shares into Excess Stock. The
Company will direct a holder of Excess Stock to sell such stock to the Company
for the lesser of the price paid or the average closing price for the five
trading days preceding the sale or to sell such stock to a person whose
ownership of the stock does not violate the ownership limit. See "Description
of Common Stock--Restrictions on Transfer; Excess Stock" for additional
information regarding the ownership limits.
Restrictions on Acquisition and Change in Control
Various provisions of the Company's Charter restrict the possibility for
acquisition or change in control of the Company, even if such acquisition or
change in control were in the shareholders' interest, including the limit on the
percentage of shares of Common Stock that may be owned by any person, the
staggered terms of the Company's Directors and the ability of the board to issue
preferred stock.
USE OF PROCEEDS
Unless otherwise specified in the applicable Prospectus Supplement, the
Company intends to invest, contribute or otherwise transfer the net proceeds of
any sale of Securities to the Operating Partnership, the economic terms of which
will be substantially identical to the terms of the Securities sold. The
Operating Partnership would use such net proceeds for general business purposes,
including the development and acquisition of additional properties and other
acquisition transactions, the payment of certain outstanding debt and
improvements to certain properties in the Company's portfolio.
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RATIOS OF EARNINGS TO FIXED CHARGES
The Company's ratio of earnings to fixed charges for the nine months ended
September 30, 1997, and for the years ended December 31, 1996 and 1995 were
2.14, 1.91 and 1.97, respectively.
The ratios of earnings to fixed charges were computed by dividing earnings
by fixed charges. For this purpose, earnings consist of income (loss) before
gains from sales of property and extraordinary items plus fixed charges. Fixed
charges consist of interest expense, excluding amortization of debt issuance
costs. The ratios of earnings to combined fixed charges and preferred stock
dividends are unchanged from the ratios presented in this section.
The Company completed its IPO in June 1994. Prior to such time, certain of
the predecessor entities operated in a highly leveraged manner. As a result,
although the Properties have historically generated positive net cash flow, the
combined financial statements of the predecessor entities show a net loss for
the six months ended June 30, 1994. Consequently, the computation of the ratio
of earnings to fixed charges for such period indicates that earnings were
insufficient to cover fixed charges by approximately $10.7 million. For the
fiscal years ended December 31, 1994 and 1993, the ratio of earnings to fixed
charges of the Company's predecessor entities, on a pro-forma basis, was 1.93
and 1.89, respectively.
The reorganization and recapitalization of the Company effected in
connection with the IPO permitted the Operating Partnership to deleverage the
Properties significantly, resulting in an improved ratio of earnings to fixed
charges for periods subsequent to the IPO.
DESCRIPTION OF DEBT SECURITIES
The following description sets forth certain general terms and provisions
of the Debt Securities to which this Prospectus and any applicable Prospectus
Supplement may relate. The particular terms of the Debt Securities being
offered and the extent to which such general provisions may apply will be set
forth in the applicable Indenture or in one or more indentures supplemental
thereto and described in a Prospectus Supplement relating to such Debt
Securities. The Forms of the Senior Indenture (as defined herein) and the
Subordinated Indenture (as defined herein) have been filed as exhibits to the
Registration Statement of which this Prospectus is a part.
General
The Debt Securities will be direct, unsecured obligations of the Company
and may be either senior Debt Securities ("Senior Securities") or subordinated
Debt Securities ("Subordinated Securities"). The Debt Securities will be
issued under one or more indentures (the "Indentures"). Senior Securities and
Subordinated Securities will be issued pursuant to separate indentures
(respectively, a "Senior Indenture" and a "Subordinated Indenture"), in each
case between the Company and a trustee (a "Trustee"). The Indentures will be
subject to and governed by the Trust Indenture Act of 1939, as amended (the
"TIA"). The statements made under this heading relating to the Debt
Securities and the Indentures are summaries of the anticipated provisions
thereof, do not purport to be complete and are qualified in their entirety by
reference to the Indentures and such Debt Securities. All section references
appearing herein are to sections of each Indenture unless otherwise indicated
and capitalized terms used but not defined below shall have the respective
meanings set forth in each Indenture.
The indebtedness represented by Subordinated Securities will be
subordinated in right of payment to the prior payment in full of the Senior Debt
of the Company as described under "--Subordination."
Except as set forth in the applicable Indenture or in one or more
indentures supplemental thereto and described in a Prospectus Supplement
relating thereto, the Debt Securities may be issued without limit as to
aggregate principal amount, in one or more series, in each case as established
from time to time in or pursuant to authority granted by a resolution of the
Board of Trustees of the Company or as established in the applicable Indenture
or in one or more indentures supplemental to such Indenture. All Debt
Securities of one series need not be issued at the
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same time and, unless otherwise provided, a series may be reopened, without the
consent of the Holders of the Debt Securities of such series, for issuances of
additional Debt Securities of such series.
It is anticipated that each Indenture will provide that there may be more
than one Trustee thereunder, each with respect to one or more series of Debt
Securities. Any Trustee under an Indenture may resign or be removed with
respect to one or more series of Debt Securities, and a successor Trustee may be
appointed to act with respect to such series. In the event that two or more
persons are acting as Trustee with respect to different series of Debt
Securities, each such Trustee shall be a trustee of a trust under the applicable
Indenture separate and apart from the trust administered by any other Trustee,
and, except as otherwise indicated herein, any action described herein to be
taken by each Trustee may be taken by each such Trustee with respect to, and
only with respect to, the one or more series of Debt Securities for which it is
Trustee under the applicable Indenture.
The Prospectus Supplement relating to any series of Debt Securities being
offered will contain the specific terms thereof, including, without limitation:
(1) The title of such Debt Securities and whether such Debt Securities are
Senior Securities or Subordinated Securities;
(2) The aggregate principal amount of such Debt Securities and any limit
on such aggregate principal amount;
(3) The percentage of the principal amount at which such Debt Securities
will be issued and, if other than the principal amount thereof, the
portion of the principal amount thereof payable upon declaration of
acceleration of the maturity thereof;
(4) If convertible in whole or in part into Common Stock or Preferred
Stock, the terms on which such Debt Securities are convertible,
including the initial conversion price or rate (or method for
determining the same), the portion that is convertible and the
conversion period, and any applicable limitations on the ownership or
transferability of the Common Stock or Preferred Stock receivable on
conversion;
(5) The date or dates, or the method for determining such date or dates,
on which the principal of such Debt Securities will be payable;
(6) The rate or rates (which may be fixed or variable), or the method by
which such rate or rates shall be determined, at which such Debt
Securities will bear interest, if any;
(7) The date or dates, or the method for determining such date or dates,
from which any such interest will accrue, the dates on which any such
interest will be payable, the regular record dates for such interest
payment dates, or the method by which such dates shall be determined,
the persons to whom such interest shall be payable, and the basis upon
which interest shall be calculated if other than that of a 360-day
year of twelve 30-day months;
(8) The place or places where the principal of (and premium, if any) and
interest, if any, on such Debt Securities will be payable, where such
Debt Securities may be surrendered for conversion or registration of
transfer or exchange and where notices or demands to or upon the
Company in respect of such Debt Securities and the applicable
Indenture may be served;
(9) The period or periods within which, the price or prices at which and
the other terms and conditions upon which such Debt Securities may be
redeemed, in whole or in part, at the option of the Company, if the
Company is to have such an option;
(10) The obligation, if any, of the Company to redeem, repay or purchase
such Debt Securities pursuant to any sinking fund or analogous
provision or at the option of a Holder thereof, and the period or
periods within which or the date and dates on which, the price or
prices at which and the other terms and
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conditions upon which such Debt Securities will be redeemed, repaid or
purchased, in whole or in part, pursuant to such obligation;
(11) If other than U.S. dollars, the currency or currencies in which such
Debt Securities are denominated and payable, which may be a foreign
currency or units of two or more foreign currencies or a composite
currency or currencies, and the terms and conditions relating thereto;
(12) Whether the amount of payments of principal of (and premium, if any)
or interest, if any, on such Debt Securities may be determined with
reference to an index, formula or other method (which index, formula
or method may, but need not be, based on a currency, currencies,
currency unit or units or composite currency or currencies) and the
manner in which such amounts shall be determined;
(13) Any additions to, modifications of or deletions from the terms of such
Debt Securities with respect to Events of Default or covenants set
forth in the applicable Indenture;
(14) Whether such Debt Securities will be issued in certificate or
book-entry form;
(15) Whether such Debt Securities will be in registered or bearer form and,
if in registered form, the denominations thereof if other than $1,000
and any integral multiple thereof and, if in bearer form, the
denominations thereof and terms and conditions relating thereto;
(16) The applicability, if any, of the defeasance and covenant defeasance
provisions of Article Fourteen of the applicable Indenture;
(17) Whether and under what circumstances the Company will pay any
additional amounts on such Debt Securities in respect of any tax,
assessment or governmental charge and, if so, whether the Company will
have the option to redeem such Debt Securities in lieu of making such
payment; and
(18) Any other terms of such Debt Securities not inconsistent with the
provisions of the applicable Indenture (Section 301).
The Debt Securities may provide for less than the entire principal amount
thereof to be payable upon declaration of acceleration of the maturity thereof
("Original Issue Discount Securities"). Special federal income tax,
accounting and other considerations applicable to Original Issue Discount
Securities will be described in the applicable Prospectus Supplement.
Except as set forth in the applicable Indenture or in one or more
indentures supplemental thereto, the applicable Indenture will not contain any
provisions that would limit the ability of the Company to incur indebtedness or
that would afford Holders of Debt Securities protection in the event of a highly
leveraged or similar transaction involving the Company or in the event of a
change of control. Restrictions on ownership and transfers of the Company's
Common Stock and Preferred Stock are designed to preserve its status as a REIT
and, therefore, may act to prevent or hinder a change of control. See
"Description of Preferred Stock--Restrictions on Ownership" and "Description
of Common Stock--Restrictions on Transfer." Reference is made to the applicable
Prospectus Supplement for information with respect to any deletions from,
modifications of or additions to the Events of Default or covenants of the
Company that are described below, including any addition of a covenant or other
provision providing event risk or similar protection.
"Significant Subsidiary" means any Subsidiary that is a "significant
subsidiary" (within the meaning of Regulation S-X promulgated under the
Securities Act) of the Company.
"Subsidiary" means a corporation or a partnership a majority of the
outstanding voting stock or partnership interests, as the case may be, of which
is owned or controlled, directly or indirectly, by the Company or by one or more
other Subsidiaries of the Company. For the purposes of this definition,
"voting stock" means stock having
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voting power for the election of directors, or trustees, as the case may be,
whether at all times or only so long as no senior class of stock has such voting
power by reason of any contingency.
Denomination, Interest, Registration and Transfer
Unless otherwise described in the applicable Prospectus Supplement, the
Debt Securities of any series will be issuable in denominations of $1,000 and
integral multiples thereof (Section 302).
Unless otherwise specified in the applicable Prospectus Supplement, the
principal of (and applicable premium, if any) and interest on any series of Debt
Securities will be payable at the corporate trust office of the Trustee, the
address of which will be stated in the applicable Prospectus Supplement;
provided that, at the option of the Company, payment of interest may be made by
check mailed to the address of the person entitled thereto as it appears in the
applicable register for such Debt Securities or by wire transfer of funds to
such person at an account maintained within the United States (Sections 301,
305, 306, 307 and 1002).
Any interest not punctually paid or duly provided for on any Interest
Payment Date with respect to a Debt Security ("Defaulted Interest") will
forthwith cease to be payable to the Holder on the applicable regular record
date and may either be paid to the person in whose name such Debt Security is
registered at the close of business on a special record date (the "Special
Record Date") for the payment of such Defaulted Interest to be fixed by the
Trustee, notice whereof shall be given to the Holder of such Debt Security not
less than ten days prior to such Special Record Date, or may be paid at any time
in any other lawful manner, all as more completely described in the Indenture
(Section 307).
Subject to certain limitations imposed upon Debt Securities issued in
book-entry form, the Debt Securities of any series will be exchangeable for
other Debt Securities of the same series and of a like aggregate principal
amount and tenor of different authorized denominations upon surrender of such
Debt Securities at the corporate trust office of the applicable Trustee referred
to above. In addition, subject to certain limitations imposed upon Debt
Securities issued in book-entry form, the Debt Securities of any series may be
surrendered for conversion or registration of transfer or exchange thereof at
the corporate trust office of the applicable Trustee. Every Debt Security
surrendered for conversion, registration of transfer or exchange must be duly
endorsed or accompanied by a written instrument of transfer. No service charge
will be made for any registration of transfer or exchange of any Debt
Securities, but the Company may require payment of a sum sufficient to cover any
tax or other governmental charge payable in connection therewith. If the
applicable Prospectus Supplement refers to any transfer agent (in addition to
the applicable Trustee) initially designated by the Company with respect to any
series of Debt Securities, the Company may at any time rescind the designation
of any such transfer agent or approve a change in the location through which any
such transfer agent acts, except that the Company will be required to maintain a
transfer agent in each place of payment for such series. The Company may at any
time designate additional transfer agents with respect to any series of Debt
Securities (Section 1002).
Neither the Company nor any Trustee shall be required to (i) issue,
register the transfer of or exchange Debt Securities of any series during a
period beginning at the opening of business 15 days before any selection of Debt
Securities of that series to be redeemed and ending at the close of business on
the day of mailing of the relevant notice of redemption; (ii) register the
transfer of or exchange any Debt Security, or portion thereof, called for
redemption, except the unredeemed portion of any Debt Security being redeemed in
part; or (iii) issue, register the transfer of or exchange any Debt Security
that has been surrendered for repayment at the option of the Holder, except the
portion, if any, of such Debt Security not to be so repaid (Section 305).
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Merger, Consolidation or Sale
The Company will be permitted to consolidate with, or sell, lease or convey
all or substantially all of its assets to, or merge with or into, any other
entity provided that (a) either the Company shall be the continuing entity, or
the successor entity (if other than the Company) formed by or resulting from any
such consolidation or merger or which shall have received the transfer of such
assets shall expressly assume payment of the principal of (and premium, if any)
and interest on all of the Debt Securities and the due and punctual performance
and observance of all of the covenants and conditions contained in each
Indenture; (b) immediately after giving effect to such transaction and treating
any indebtedness that becomes an obligation of the Company or any Subsidiary as
a result thereof as having been incurred by the Company or Subsidiary at the
time of such transaction, no Event of Default under the Indentures, and no event
which, after notice or the lapse of time, or both, would become such an Event of
Default, shall have occurred and be continuing; and (c) an officer's certificate
and legal opinion covering such conditions shall be delivered to each Trustee
(Sections 801 and 803).
Certain Covenants
Existence. Except as described above under "Merger, Consolidation or
Sale", the Company will be required to do or cause to be done all things
necessary to preserve and keep in full force and effect its existence, rights
(by declaration of trust, by-laws and statute) and franchises; provided,
however, that the Company shall not be required to preserve any right or
franchise if it determines that the preservation thereof is no longer desirable
in the conduct of its business and that the loss thereof is not disadvantageous
in any material respect to the Holders of the Debt Securities.
Maintenance of Properties. The Company will be required to cause all of
its material properties used or useful in the conduct of its business or the
business of any Subsidiary to be maintained and kept in good condition, repair
and working order and supplied with all necessary equipment and will cause to be
made all necessary repairs, renewals, replacements, betterments and improvements
thereof, all as in the judgment of the Company may be necessary so that the
business carried on in connection therewith may be properly and advantageously
conducted at all times (Section 1007).
Insurance. The Company will be required to, and will be required to cause
each of its Subsidiaries to, keep all of its insurable properties insured
against loss or damage at least equal to their then full insurable value with
insurers of recognized responsibility and, if described in the applicable
Prospectus Supplement, having a specified rating from a recognized insurance
rating service (Section 1008).
Payment of Taxes and Other Claims. The Company will be required to pay or
discharge or cause to be paid or discharged, before the same shall become
delinquent, (i) all taxes, assessments and governmental charges levied or
imposed upon it or any Subsidiary or upon the income, profits or property of the
Company or any Subsidiary, and (ii) all lawful claims for labor, materials and
supplies which, if unpaid, might by law become a lien upon the property of the
Company or any Subsidiary; provided, however, that the Company shall not be
required to pay or discharge or cause to be paid or discharged any such tax,
assessment, charge or claim whose amount, applicability or validity is being
contested in good faith by appropriate proceedings (Section 1009).
Provision of Financial Information. Whether or not the Company is subject
to Section 13 or 15(d) of the Exchange Act, the Company will be required, to the
extent permitted under the Exchange Act, to file with the Commission the annual
reports, quarterly reports and other documents which the Company would have been
required to file with the Commission pursuant to such Sections 13 or 15(d) if
the Company were so subject (the "Financial Information"), such documents to
be filed with the Commission on or prior to the respective dates (the "Required
Filing Dates") by which the Company would have been required so to file such
documents if the Company were so subject. The Company also will in any event
(x) within 15 days of each Required Filing Date (i) to transmit by mail to all
Holders of Debt Securities, as their names and addresses appear in the Security
Register, without cost to such Holders, copies of the Financial Information and
(ii) to file with the Trustee copies of the Financial Information, and (y) if
filing such documents by the Company with the Commission is not permitted
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under the Exchange Act, promptly upon written request and payment of the
reasonable cost of duplication and delivery, to supply copies of such documents
to any prospective Holder (Section 1010).
Additional Covenants and/or Modifications to the Covenants Described Above
Any additional covenants of the Company and/or modifications to the
covenants described above with respect to any Debt Securities or series thereof,
including any covenants relating to limitations on incurrence of indebtedness or
other financial covenants, will be set forth in the applicable Indenture or an
indenture supplemental thereto and described in the Prospectus Supplement
relating thereto.
Events of Default, Notice and Waiver
Each Indenture will provide that the following events are "Events of
Default" with respect to any series of Debt Securities issued thereunder: (i)
default for 30 days in the payment of any installment of interest on any Debt
Security of such series; (ii) default in the payment of principal of (or
premium, if any, on) any Debt Security of such series at its maturity; (iii)
default in making any sinking fund payment as required for any Debt Security of
such series; (iv) default in the performance or breach of any other covenant or
warranty of the Company contained in the applicable Indenture (other than a
covenant added to the Indenture solely for the benefit of a series of Debt
Securities issued thereunder other than such series), continued for 60 days
after written notice as provided in the applicable Indenture; (v) default in the
payment of an aggregate principal amount exceeding $10,000,000 of any
indebtedness of the Company or any mortgage, indenture or other instrument under
which such indebtedness is issued or by which such indebtedness is secured, such
default having occurred after the expiration of any applicable grace period and
having resulted in the acceleration of the maturity of such indebtedness, but
only if such indebtedness is not discharged or such acceleration is not
rescinded or annulled; (vi) certain events of bankruptcy, insolvency or
reorganization, or court appointment of a receiver, liquidator or trustee of the
Company or any Significant Subsidiary or either of its property; and (vii) any
other Event of Default provided with respect to a particular series of Debt
Securities (Section 501).
If an Event of Default under any Indenture with respect to Debt Securities
of any series at the time outstanding occurs and is continuing, then in every
such case the applicable Trustee or the Holders of not less than 25% of the
principal amount of the Outstanding Debt Securities of that series will have the
right to declare the principal amount (or, if the Debt Securities of that series
are Original Issue Discount Securities or indexed securities, such portion of
the principal amount as may be specified in the terms thereof) of all the Debt
Securities of that series to be due and payable immediately by written notice
thereof to the Company (and to the applicable Trustee if given by the Holders).
However, at any time after such a declaration of acceleration with respect to
Debt Securities of such series (or of all Debt Securities then Outstanding under
any Indenture, as the case may be) has been made, but before a judgment or
decree for payment of the money due has been obtained by the applicable Trustee,
the Holders of not less than a majority in principal amount of Outstanding Debt
Securities of such series (or of all Debt Securities then Outstanding under the
applicable Indenture, as the case may be) may rescind and annul such declaration
and its consequences if (a) the Company shall have deposited with the applicable
Trustee all required payments of the principal of (and premium, if any) and
interest on the Debt Securities of such series (or of all Debt Securities then
Outstanding under the applicable Indenture, as the case may be), plus certain
fees, expenses, disbursements and advances of the applicable Trustee and (b) all
events of default, other than the non-payment of accelerated principal (or
specified portion thereof), with respect to Debt Securities of such series (or
of all Debt Securities then Outstanding under the applicable Indenture, as the
case may be) have been cured or waived as provided in such Indenture (Section
502). Each Indenture also will provide that the Holders of not less than a
majority in principal amount of the Outstanding Debt Securities of any series
(or of all Debt Securities then Outstanding under the applicable Indenture, as
the case may be) may waive any past default with respect to such series and its
consequences, except a default (x) in the payment of the principal of (or
premium, if any) or interest on any Debt Security of such series or (y) in
respect of a covenant or provision contained in the applicable Indenture that
cannot be modified or amended without the consent of the Holder of each
Outstanding Debt Security affected thereby (Section 513).
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Each Trustee will be required to give notice to the Holders of Debt
Securities within 90 days of a default under the applicable Indenture unless
such default shall have been cured or waived; provided, however, that such
Trustee may withhold notice to the Holders of any series of Debt Securities of
any default with respect to such series (except a default in the payment of the
principal of (or premium, if any) or interest on any Debt Security of such
series or in the payment of any sinking fund installment in respect of any Debt
Security of such series) if specified responsible officers of such Trustee
consider such withholding to be in the interest of such Holders (Section 601).
Each Indenture will provide that no Holders of Debt Securities of any
series may institute any proceedings, judicial or otherwise, with respect to
such Indenture or for any remedy thereunder, except in the cases of failure of
the applicable Trustee, for 60 days, to act after it has received a written
request to institute proceedings in respect of an Event of Default from the
Holders of not less than 25% in principal amount of the Outstanding Debt
Securities of such series, as well as an offer of indemnity reasonably
satisfactory to it (Section 507). This provision will not prevent, however, any
Holder of Debt Securities from instituting suit for the enforcement of payment
of the principal of (and premium, if any) and interest on such Debt Securities
at the respective due dates thereof (Section 508).
Subject to provisions in each Indenture relating to its duties in case of
default, no Trustee will be under any obligation to exercise any of its rights
or powers under an Indenture at the request or direction of any Holders of any
series of Debt Securities then Outstanding under such Indenture, unless such
Holders shall have offered to the Trustee thereunder reasonable security or
indemnity (Section 602). The Holders of not less than a majority in principal
amount of the Outstanding Debt Securities of any series (or of all Debt
Securities then Outstanding under an Indenture, as the case may be) shall have
the right to direct the time, method and place of conducting any proceeding for
any remedy available to the applicable Trustee, or of exercising any trust or
power conferred upon such Trustee. However, a Trustee may refuse to follow any
direction which is in conflict with any law or the applicable Indenture, which
may involve such Trustee in personal liability or which may be unduly
prejudicial to the Holders of Debt Securities of such series not joining therein
(Section 512).
Within 120 days after the close of each fiscal year, the Company will be
required to deliver to each Trustee a certificate, signed by one of several
specified officers, stating whether or not such officer has knowledge of any
default under the applicable Indenture and, if so, specifying each such default
and the nature and status thereof (Section 1011).
Modification of the Indentures
Modifications and amendments of an Indenture will be permitted to be made
only with the consent of the Holders of not less than a majority in principal
amount of all Outstanding Debt Securities issued under such Indenture which are
affected by such modification or amendment; provided, however, that no such
modification or amendment may, without the consent of the Holder of each such
Debt Security affected thereby, (a) change the stated maturity of the principal
of, or any installment of interest (or premium, if any) on, any such Debt
Security; (b) reduce the principal amount of, or the rate or amount of interest
on, or any premium payable on redemption of, any such Debt Security, or reduce
the amount of principal of an Original Issue Discount Security that would be due
and payable upon declaration of acceleration of the maturity thereof or would be
provable in bankruptcy, or adversely affect any right of repayment of the Holder
of any such Debt Security; (c) change the place of payment, or the coin or
currency, for payment of principal or premium, if any, or interest on any such
Debt Security; (d) impair the right to institute suit for the enforcement of any
payment on or with respect to any such Debt Security; (e) reduce the
above-stated percentage of Outstanding Debt Securities of any series necessary
to modify or amend the applicable Indenture, to waive compliance with certain
provisions thereof or certain defaults and consequences thereunder or to reduce
the quorum or voting requirements set forth in the applicable Indenture; or (f)
modify any of the foregoing provisions or any of the provisions relating to the
waiver of certain past defaults or certain covenants, except to increase the
required percentage to effect such action or to provide that certain other
provisions may not be modified or waived without the consent of the Holder of
such Debt Security (Section 902).
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The Holders of not less than a majority in principal amount of Outstanding
Debt Securities of each series affected thereby will have the right to waive
compliance by the Company with certain covenants in such Indenture (Section
1013).
Modifications and amendments of an Indenture will be permitted to be made
by the Company and the respective Trustee thereunder without the consent of any
Holder of Debt Securities for any of the following purposes: (i) to evidence the
succession of another person to the Company as obligor under such Indenture;
(ii) to add to the covenants of the Company for the benefit of the Holders of
all or any series of Debt Securities or to surrender any right or power
conferred upon the Company in the Indenture; (iii) to add Events of Default for
the benefit of the Holders of all or any series of Debt Securities; (iv) to add
or change any provisions of an Indenture to facilitate the issuance of, or to
liberalize certain terms of, Debt Securities in bearer form, or to permit or
facilitate the issuance of Debt Securities in uncertificated form, provided that
such action shall not adversely affect the interests of the Holders of the Debt
Securities of any series in any material respect; (v) to change or eliminate any
provisions of an Indenture, provided that any such change or elimination shall
become effective only when there are no Debt Securities Outstanding of any
series created prior thereto which are entitled to the benefit of such
provision; (vi) to secure the Debt Securities; (vii) to establish the form or
terms of Debt Securities of any series, including the provisions and procedures,
if applicable, for the conversion of such Debt Securities into Common Stock or
Preferred Stock of the Company; (viii) to provide for the acceptance of
appointment by a successor Trustee or facilitate the administration of the
trusts under an Indenture by more than one Trustee; (ix) to cure any ambiguity,
defect or inconsistency in an Indenture, provided that such action shall not
adversely affect the interests of Holders of Debt Securities of any series
issued under such Indenture in any material respect; or (x) to supplement any of
the provisions of an Indenture to the extent necessary to permit or facilitate
defeasance and discharge of any series of such Debt Securities, provided that
such action shall not adversely affect the interests of the Holders of the Debt
Securities of any series in any material respect (Section 901).
Each Indenture will provide that in determining whether the Holders of the
requisite principal amount of Outstanding Debt Securities of a series have given
any request, demand, authorization, direction, notice, consent or waiver
thereunder or whether a quorum is present at a meeting of Holders of Debt
Securities, (i) the principal amount of an Original Issue Discount Security that
shall be deemed to be Outstanding shall be the amount of the principal thereof
that would be due and payable as of the date of such determination upon
declaration of acceleration of the maturity thereof, (ii) the principal amount
of any Debt Security denominated in a foreign currency that shall be deemed
Outstanding shall be the U.S. dollar equivalent, determined on the issue date
for such Debt Security, of the principal amount (or, in the case of Original
Issue Discount Security, the U.S. dollar equivalent on the issue date of such
Debt Security of the amount determined as provided in (i) above), (iii) the
principal amount of an indexed security that shall be deemed Outstanding shall
be the principal face amount of such indexed security at original issuance,
unless otherwise provided with respect to such indexed security pursuant to the
applicable Indenture, and (iv) Debt Securities owned by the Company or any other
obligor upon the Debt Securities or any affiliate of the Company or of such
other obligor shall be disregarded.
Each Indenture will contain provisions for convening meetings of the
Holders of Debt Securities of a series (Section 501). A meeting will be
permitted to be called at any time by the applicable Trustee, and also, upon
request, by the Company or the Holders of at least 10% in principal amount of
the Outstanding Debt Securities of such series, in any such case upon notice
given as provided in the Indenture. Except for any consent that must be given
by the Holder of each Debt Security affected by certain modifications and
amendments of an Indenture, any resolution presented at a meeting or adjourned
meeting duly reconvened at which a quorum is present may be adopted by the
affirmative vote of the Holders of a majority in principal amount of the
Outstanding Debt Securities of that series; provided, however, that, except as
referred to above, any resolution with respect to any request, demand,
authorization, direction, notice, consent, waiver or other action that may be
made, given or taken by the Holders of a specified percentage, which is less
than a majority, in principal amount of the Outstanding Debt Securities of a
series may be adopted at a meeting or adjourned meeting or adjourned meeting
duly reconvened at which a quorum is present by the affirmative vote of the
Holders of such specified percentage in principal amount of the Outstanding Debt
Securities of that series. Any resolution passed or decision taken at any
meeting of Holders of Debt Securities of any series duly held in accordance with
an Indenture will be binding on all Holders of Debt Securities of that series.
The quorum at any meeting called to adopt a resolution, and at any reconvened
meeting,
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will be persons holding or representing a majority in principal amount of the
Outstanding Debt Securities of a series; provided, however, that if any action
is to be taken at such meeting with respect to a consent or waiver which may be
given by the Holders of not less than a specified percentage in principal amount
of the Outstanding Debt Securities of a series, the persons holding or
representing such specified percentage in principal amount of the Outstanding
Debt Securities of such series will constitute a quorum.
Notwithstanding the foregoing provisions, each Indenture will provide that
if any action is to be taken at a meeting of Holders of Debt Securities of any
series with respect to any request, demand, authorization, direction, notice,
consent, waiver and other action that such Indenture expressly provides may be
made, given or taken by the Holders of a specified percentage in principal
amount of all Outstanding Debt Securities affected thereby, or the Holders of
such series and one or more additional series: (i) there shall be no minimum
quorum requirement for such meeting, and (ii) the principal amount of the
Outstanding Debt Securities of such series that vote in favor of such request,
demand, authorization, direction, notice, consent, waiver or other action shall
be taken into account in determining whether such request, demand,
authorization, direction, notice, consent, waiver or other action has been made,
given or taken under such Indenture.
Subordination
Upon any distribution to creditors of the Company in a liquidation,
dissolution or reorganization, the payment of the principal of and interest on
any Subordinated Securities will be subordinated to the extent provided in the
applicable Indenture in right of payment to the prior payment in full of all
Senior Debt (Sections 1601 and 1602 of the Subordinated Indenture), but the
obligation of the Company to make payment of the principal and interest on such
Subordinated Securities will not otherwise be affected (Section 1608 of the
Subordinated Indenture). No payment of principal or interest will be permitted
to be made on Subordinated Securities at any time if a default on Senior Debt
exists that permits the Holders of such Senior Debt to accelerate its maturity
and the default is the subject of judicial proceedings or the Company receives
notice of the default (Section 1603 of the Subordinated Indenture). After all
Senior Debt is paid in full and until the Subordinated Securities are paid in
full, Holders will be subrogated to the right of Holders of Senior Debt to the
extent that distributions otherwise payable to Holders have been applied to the
payment of Senior Debt (Section 1607 of the Subordinated Indenture). By reason
of such subordination, in the event of a distribution of assets upon insolvency,
certain general creditors of the Company may recover more, ratably, than Holders
of Subordinated Securities.
Senior Debt will be defined in the Subordinated Indenture as the principal
of and interest on, or substantially similar payments to be made by the Company
in respect of, the following, whether outstanding at the date of execution of
the applicable Indenture or thereafter incurred, created or assumed: (i)
indebtedness of the Company for money borrowed or represented by purchase-money
obligations, (ii) indebtedness of the Company evidenced by notes, debentures, or
bonds or other securities issued under the provisions of an indenture, fiscal
agency agreement or other agreement, (iii) obligations of the Company as lessee
under leases of property either made as part of any sale and leaseback
transaction to which the Company is a party or otherwise, (iv) indebtedness of
partnerships and joint ventures which is included in the consolidated financial
statements of the Company, (v) indebtedness, obligations and liabilities of
others in respect of which the Company is liable contingently or otherwise to
pay or advance money or property or as guarantor, endorser or otherwise or which
the Company has agreed to purchase or otherwise acquire, and (vi) any binding
commitment of the Company to fund any real estate investment or to fund any
investment in any entity making such real estate investment, in each case other
than (1) any such indebtedness, obligation or liability referred to in clauses
(i) through (vi) above as to which, in the instrument creating or evidencing the
same pursuant to which the same is outstanding, it is provided that such
indebtedness, obligation or liability is not superior in right of payment to the
Subordinated Securities or ranks pari passu with the Subordinated Securities,
(2) any such indebtedness, obligation or liability which is subordinated to
indebtedness of the Company to substantially the same extent as or to a greater
extent than the Subordinated Securities are subordinated, and (3) the
Subordinated Securities. As used in the preceding sentence, the term "purchase
money obligations" shall mean indebtedness or obligations evidenced by a note,
debenture, bond or other instrument (whether or not secured by any lien or other
security interest but excluding indebtedness or obligations for which recourse
is limited to the property purchased) issued or assumed as all or a part of the
consideration for the acquisition of property, whether
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by purchase, merger, consolidation or otherwise, but shall not include any trade
accounts payable. There will not be any restrictions in an Indenture relating
to Subordinated Securities upon the creation of additional Senior Debt.
If this Prospectus is being delivered in connection with a series of
Subordinated Securities, the accompanying Prospectus Supplement or the
information incorporated herein by reference will contain the approximate amount
of Senior Debt outstanding as of the end of the Company's most recent fiscal
quarter.
Discharge, Defeasance and Covenant Defeasance
The Company may be permitted under the applicable Indenture to discharge
certain obligations to Holders of any series of Debt Securities issued
thereunder that have not already been delivered to the applicable Trustee for
cancellation and that either have become due and payable or will become due and
payable within one year (or scheduled for redemption within one year) by
irrevocably depositing with the applicable Trustee, in trust, funds in such
currency or currencies, currency unit or units or composite currency or
currencies in which such Debt Securities are payable in an amount sufficient to
pay the entire indebtedness on such Debt Securities in respect of principal (and
premium, if any) and interest to the date of such deposit (if such Debt
Securities have become due and payable) or to the stated maturity or redemption
date, as the case may be.
Each Indenture will provide that, if the provisions of Article Fourteen are
made applicable to the Debt Securities of or within any series pursuant to
Section 301 of such Indenture, the Company may elect either (a) to defease and
be discharged from any and all obligations with respect to such Debt Securities
(except for the obligation to pay additional amounts, if any, upon the
occurrence of certain events of tax, assessment or governmental charge with
respect to payments on such Debt Securities, and the obligations to register the
transfer or exchange of such Debt Securities, to replace temporary or mutilated,
destroyed, lost or stolen Debt Securities, to maintain an office or agency in
respect of such Debt Securities and to hold moneys for payment in trust)
("defeasance") (Section 1402) or (b) to be released from its obligations with
respect to such Debt Securities under certain specified sections of Article Ten
of such Indenture as specified in the applicable Prospectus Supplement and any
omission to comply with such obligations shall not constitute an Event of
Default with respect to such Debt Securities ("covenant defeasance") (Section
1403), in either case upon the irrevocable deposit by the Company with the
applicable Trustee, in trust, of an amount, in such currency or currencies,
currency unit or units or composite currency or currencies in which such Debt
Securities are payable at stated maturity, or Government Obligations (as defined
below), or both, applicable to such Debt Securities which through the scheduled
payment of principal and interest in accordance with their terms will provide
money in an amount sufficient without reinvestment to pay the principal of (and
premium, if any) and interest on such Debt Securities, and any mandatory sinking
fund or analogous payments thereon, on the scheduled due dates therefor.
Such a trust will only be permitted to be established if, among other
things, the Company has delivered to the applicable Trustee an opinion of
counsel (as specified in the applicable Indenture) to the effect that the
Holders of such Debt Securities will not recognize income, gain or loss for
federal income tax purposes as a result of such defeasance or covenant
defeasance and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such defeasance
or covenant defeasance had not occurred, and such opinion of counsel, in the
case of defeasance, will be required to refer to and be based upon a ruling of
the Internal Revenue Service or a change in applicable U.S. federal income tax
law occurring after the date of the Indenture (Section 1404).
"Government Obligations" means securities which are (i) direct
obligations of the United States of America or the government which issued the
foreign currency in which the Debt Securities of a particular series are
payable, for the payment of which its full faith and credit is pledged or (ii)
obligations of a person controlled or supervised by and acting as an agency or
instrumentality of the United States of America or such government which issued
the foreign currency in which the Debt Securities of such series are payable,
the timely payment of which is unconditionally guaranteed as a full faith and
credit obligation of the United States of America or such government, which, in
either case, are not callable or redeemable at the option of the issuer thereof,
and shall also include a depository receipt issued by a bank or trust company as
custodian with respect to any such Government Obligation or a specific payment
of interest on or principal of any such Government Obligation held by such
custodian for the
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account of the Holder of a depository receipt, provided that (except as required
by law) such custodian is not authorized to make any deduction from the amount
payable to the Holder of such depository receipt from any amount received by the
custodian in respect of the Government Obligation or the specific payment of
interest on or principal of the Government Obligation evidenced by such
depository receipt (Section 101 of each Indenture).
Unless otherwise provided in the applicable Prospectus Supplement, if after
the Company has deposited funds and/or Government Obligations to effect
defeasance or covenant defeasance with respect to Debt Securities of any series,
(a) the Holder of a Debt Security of such series is entitled to, and does, elect
pursuant to the applicable Indenture or the terms of such Debt Security to
receive payment in a currency, currency unit or composite currency other than
that in which such deposit has been made in respect of such Debt Security, or
(b) a Conversion Event (as defined below) occurs in respect of the currency,
currency unit or composite currency in which such deposit has been made, the
indebtedness represented by such Debt Security will be deemed to have been, and
will be, fully discharged and satisfied through the payment of the principal of
(and premium, if any) and interest on such Debt Security as they become due out
of the proceeds yielded by converting the amount so deposited in respect of such
Debt Security into the currency, currency unit or composite currency in which
such Debt Security becomes payable as a result of such election or such
cessation of usage based on the applicable market exchange rate. "Conversion
Event" means the cessation of use of (i) a currency, currency unit or composite
currency both by the government of the country which issued such currency and
for the settlement of transactions by a central bank or other public
institutions of or within the international banking community, (ii) the ECU both
within the European Monetary System and for the settlement of transactions by
public institutions of or within the European Communities or (iii) any currency
unit or composite currency other than the ECU for the purposes for which it was
established. Unless otherwise provided in the applicable Prospectus Supplement,
all payments of principal of (and premium, if any) and interest on any Debt
Security that is payable in a foreign currency that ceases to be used by its
government of issuance shall be made in U.S. dollars.
In the event the Company effects covenant defeasance with respect to any
Debt Securities and such Debt Securities are declared due and payable because of
the occurrence of any Event of Default other than the Event of Default described
in clause (iv) under "Events of Default, Notice and Waiver" with respect to
certain specified sections of Article Ten of each Indenture (which sections
would no longer be applicable to such Debt Securities as a result of such
covenant defeasance) or described in clause (vii) under "Events of Default,
Notice and Waiver" with respect to any other covenant as to which there has
been covenant defeasance, the amount in such currency, currency unit or
composite currency in which such Debt Securities are payable, and Government
Obligations on deposit with the applicable Trustee, will be sufficient to pay
amounts due on such Debt Securities at the time of their stated maturity but may
not be sufficient to pay amounts due on such Debt Securities at the time of the
acceleration resulting from such Default. However, the Company would remain
liable to make payment of such amounts due at the time of acceleration.
The applicable Prospectus Supplement may further describe the provisions,
if any, permitting such defeasance or covenant defeasance, including any
modifications to the provisions described above, with respect to the Debt
Securities of or within a particular series.
Conversion Rights
The terms and conditions, if any, upon which the Debt Securities are
convertible into Common Stock or Preferred Stock will be set forth in the
applicable Prospectus Supplement relating thereto. Such terms will include
whether such Debt Securities are convertible into Common Stock or Preferred
Stock, the conversion price (or manner of calculation thereof), the conversion
period, provisions as to whether conversion will be at the option of the Holders
or the Company, the events requiring an adjustment of the conversion price and
provisions affecting conversion in the event of the redemption of such Debt
Securities and any restrictions on conversion, including restrictions directed
at maintaining the Company's REIT status.
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Redemption of Securities
The Indenture provides that the Debt Securities may be redeemed at any
time at the option of the Company, in whole or in part, at the Redemption
Price, except as may otherwise be provided in connection with any Debt
Securities or series thereof.
From and after notice has been given as provided in the Indenture, if
funds for the redemption of any Debt Securities called for redemption shall
have been made available on such redemption date, such Debt Securities will
cease to bear interest on the date fixed for such redemption specified in
such notice, and the only right of the Holders of the Debt Securities will be
to receive payment of the Redemption Price.
Notice of any optional redemption of any Debt Securities will be given
to Holders at their addresses, as shown in the Security Register, not more
than 60 nor less than 30 days prior to the date fixed for redemption. The
notice of redemption will specify, among other items, the Redemption Price
and the principal amount of the Debt Securities held by such Holder to be
redeemed.
If the Company elects to redeem Debt Securities, it will notify the
Trustee at least 45 days prior to the redemption date (or such shorter period
as satisfactory to the Trustee) of the aggregate principal amount of Debt
Securities to be redeemed and the redemption date. If less than all the Debt
Securities are to be redeemed, the Trustee shall select the Debt Securities
to be redeemed pro rata, by lot or in such manner as it shall deem fair and
appropriate.
Global Securities
The Debt Securities of a series may be issued in whole or in part in the
form of one or more global securities (the "Global Securities") that will
be deposited with, or on behalf of, a depository identified in the applicable
Prospectus Supplement relating to such series. Global Securities may be
issued in either registered or bearer form and in either temporary or
permanent form. The specific terms of the depository arrangement with respect
to a series of Debt Securities will be described in the applicable Prospectus
Supplement relating to such series.
DESCRIPTION OF PREFERRED STOCK
The Company is authorized to issue 145,000,000 shares of capital stock,
$.01 par value, of which 95,000,000 shares are classified as Common Stock,
45,000,000 shares are classified as Excess Stock, 3,860,067 are classified as
Preferred Stock and 1,139,933 shares are not classified. The 1,139,933
shares that are not classified as part of an existing class of stock could be
classified by the Board of Directors into one or more series of Preferred
Stock. As of October 4, 1997, 3,860,067 shares of Preferred Stock were
outstanding.
Under the Company's Charter, the Board of Directors may from time to
time establish and issue one or more series of Preferred Stock. The
Directors may classify or reclassify any unissued Preferred Stock by setting
or changing the number, designation, preference, conversion or other rights,
voting powers, restrictions, limitations as to dividends, qualifications and
terms or conditions of redemption of such series.
The following description of the Preferred Stock sets forth certain
general terms and provisions of the Preferred Stock to which any Prospectus
Supplement may relate. The statements below describing the Preferred Stock
are in all respects subject to and qualified in their entirety by reference
to the applicable provisions of the Company's Charter and the Company's
amended and restated bylaws (the "Bylaws").
General
The Board of Directors is empowered by the Company's Charter to
designate and issue from time to time one or more series of Preferred Stock
without shareholder approval. The Board of Directors may determine the
relative rights, preferences and privileges of each series of Preferred Stock
so issued. Because the Board of Directors has
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the power to establish the preferences and rights of each series of Preferred
Stock, it may afford the holders of any series of Preferred Stock
preferences, powers and rights, voting or otherwise, senior to the rights of
holders of Common Stock. The Preferred Stock will, when issued, be fully
paid and nonassessable.
The Prospectus Supplement relating to any Preferred Stock offered
thereby will contain the specific terms thereof, including, without
limitation:
(l) The title and stated value of such Preferred Stock;
(2) The number of shares of such Preferred Stock offered, the liquidation
preference per share and the offering price of such Preferred Stock;
(3) The dividend rate(s), period(s) and/or payment date(s) or method(s) of
calculation thereof applicable to such Preferred Stock;
(4) The date from which dividends on such Preferred Stock shall
accumulate, if applicable;
(5) The procedures for any auction and remarketing, if any, for such
Preferred Stock;
(6) The provision for a sinking fund, if any, for such Preferred Stock;
(7) The provision for redemption, if applicable, of such Preferred Stock;
(8) Any listing of such Preferred Stock on any securities exchange;
(9) The terms and conditions, if applicable, upon which such Preferred
Stock will be convertible into shares of Common Stock of the Company,
including the conversion price (or manner of calculation thereof);
(10) Any other specific terms, preferences, rights, limitations or
restrictions of such Preferred Stock;
(11) A discussion of federal income tax considerations applicable to such
Preferred Stock;
(12) The relative ranking and preferences of such Preferred Stock as to
dividend rights and rights upon liquidation, dissolution or winding up
of the affairs of the Company;
(13) Any limitations on issuance of any series of Preferred Stock ranking
senior to or on a parity with such series of Preferred Stock as to
dividend rights and rights upon liquidation, dissolution or winding up
of the affairs of the Company; and
(14) Any limitations on direct or beneficial ownership and restrictions on
transfer, in each case as may be appropriate to preserve the status of
the Company as a REIT.
Rank
Unless otherwise specified in the Prospectus Supplement, the Preferred
Stock will, with respect to dividend rights and rights upon liquidation,
dissolution or winding up of the Company, rank (i) senior to all classes or
series of Common Stock of the Company, and to all equity securities ranking
junior to such Preferred Stock; (ii) on a parity with all equity securities
issued by the Company the terms of which specifically provide that such equity
securities rank on a parity with the Preferred Stock; and (iii) junior to all
equity securities issued by the Company the terms of which specifically provide
that such equity securities rank senior to the Preferred Stock. The term
"equity securities" does not include convertible Debt Securities.
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Dividends
Holders of the Preferred Stock of each series will be entitled to
receive, when, as and if declared by the Board of Trustees of the Company,
out of assets of the Company legally available for payment, cash dividends
(or dividends in kind or in other property if expressly permitted and
described in the applicable Prospectus Supplement) at such rates and on such
dates as will be set forth in the applicable Prospectus Supplement. Each
such dividend shall be payable to holders of record as they appear on the
share transfer books of the Company on such record dates as shall be fixed by
the Board of Trustees of the Company.
Dividends on any series of Preferred Stock may be cumulative or
non-cumulative, as provided in the applicable Prospectus Supplement.
Dividends, if cumulative, will be cumulative from and after the date set
forth in the applicable Prospectus Supplement. If the Board of Trustees of
the Company fails to declare a dividend payable on a dividend payment date on
any series of the Preferred Stock for which dividends are non-cumulative,
then the holders of such series of the Preferred Stock will have no right to
receive a dividend in respect of the dividend period ending on such dividend
payment date, and the Company will have no obligation to pay the dividend
accrued for such period, whether or not dividends on such series are declared
payable on any future dividend payment date.
Unless otherwise specified in the Prospectus Supplement, if any shares
of Preferred Stock of any series are outstanding, no full dividends shall be
declared or paid or set apart for payment on any capital shares of the
Company of any other series ranking, as to dividends, on a parity with or
junior to the Preferred Stock of such series for any period unless (i) if
such series of Preferred Stock has a cumulative dividend, 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 Preferred Stock of such series for all past dividend periods and the then
current dividend period or (ii) if such series of Preferred Stock does not
have a cumulative dividend, full dividends for the then current dividend
period 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
Preferred Stock of such series. When dividends are not paid in full (or a
sum sufficient for such full payment is not so set apart) upon Preferred
Stock of any series and the shares of any other series of Preferred Stock
ranking on a parity as to dividends with the Preferred Stock of such series,
all dividends declared upon Preferred Stock of such series and any other
series of Preferred Stock ranking on a parity as to dividends with such
Preferred Stock shall be declared pro rata so that the amount of dividends
declared per share of Preferred Stock of such series and such other series of
Preferred Stock shall in all cases bear to each other the same ratio that
accrued dividends per share on the Preferred Stock of such series (which
shall not include any accumulation in respect of unpaid dividends for prior
dividend periods if such Preferred Stock does not have a cumulative dividend)
and such other series of Preferred Stock bear to each other. No interest, or
sum of money in lieu of interest, shall be payable in respect of any dividend
payment or payments on Preferred Stock of such series which may be in
arrears.
Except as provided in the immediately preceding paragraph, unless (i) if
such series of Preferred Stock has a cumulative dividend, full cumulative
dividends on the Preferred Stock of such series have been or
contemporaneously are declared and paid or declared and a sum sufficient for
the payment thereof set apart for payment for all past dividend periods and
the then current dividend period, and (ii) if such series of Preferred Stock
does not have a cumulative dividend, full dividends on the Preferred Stock of
such series have been or contemporaneously are declared and paid or declared
and a sum sufficient for the payment thereof set apart for payment for the
then current dividend period, no dividends (other than in shares of Common
Stock or other capital shares ranking junior to the Preferred Stock of such
series as to dividends and upon liquidation) shall be declared or paid or set
aside for payment or other distribution upon the Common Stock, or any other
capital shares of the Company ranking junior to or on a parity with the
Preferred Stock of such series as to dividends or upon liquidation, nor shall
any Common Stock, or any other capital shares of the Company ranking junior
to or on a parity with the Preferred Stock of such series as to dividends or
upon liquidation be redeemed, purchased or otherwise acquired for any
consideration (or any moneys be paid to or made available for a sinking fund
for the redemption of any such shares) by the Company (except by conversion
into or exchange for other capital shares of the Company ranking junior to
the Preferred Stock of such series as to dividends and upon liquidation).
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Redemption
If so provided in the applicable Prospectus Supplement, the Preferred
Stock will be subject to mandatory redemption or redemption at the option of
the Company, in whole or in part, in each case upon the terms, at the times
and at the redemption prices set forth in such Prospectus Supplement.
The Prospectus Supplement relating to a series of Preferred Stock that
is subject to mandatory redemption will specify the number of shares of such
Preferred Stock that shall be redeemed by the Company in each year commencing
after a date to be specified, at a redemption price per share to be
specified, together with an amount equal to all accrued and unpaid dividends
thereon (which shall not, if such Preferred Stock does not have a cumulative
dividend, include any accumulation in respect of unpaid dividends for prior
dividend periods) to the date of redemption. The redemption price may be
payable in cash or other property, as specified in the applicable Prospectus
Supplement. If the redemption price for Preferred Stock of any series is
payable only from the net proceeds of the issuance of capital shares of the
Company, the terms of such Preferred Stock may provide that, if no such
capital shares shall have been issued or to the extent the net proceeds from
any issuance are insufficient to pay in full the aggregate redemption price
then due, such Preferred Stock shall automatically and mandatorily be
converted into the applicable capital shares of the Company pursuant to
conversion provisions specified in the applicable Prospectus Supplement.
Notwithstanding the foregoing, unless (i) if such series of Preferred
Stock has a cumulative dividend, full cumulative dividends on all outstanding
shares of any series of Preferred Stock have been or contemporaneously are
declared and paid or declared and a sum sufficient for the payment thereof
set apart for payment for all past dividends periods and the then current
dividend period, and (ii) if such series of Preferred Stock does not have a
cumulative dividend, full dividends on the Preferred Stock of any series have
been or contemporaneously are declared and paid or declared and a sum
sufficient for the payment thereof set apart for payment for the then current
dividend period, the Company shall not (a) redeem any shares of Preferred
Stock of any series unless all outstanding shares of Preferred Stock of such
series are simultaneously redeemed or (b) purchase or otherwise acquire
directly or indirectly any shares of Preferred Stock of such series (except
by conversion into or exchange for capital shares of the Company ranking
junior to the Preferred Stock of such series as to dividends and upon
liquidation); provided, however, that the foregoing shall not prevent the
purchase or acquisition of shares of Preferred Stock of such series to
preserve the REIT status of the Company or pursuant to a purchase or exchange
offer made on the same terms to holders of all outstanding shares of
Preferred Stock of such series.
If fewer than all of the outstanding shares of Preferred Stock of any
series are to be redeemed, the number of shares to be redeemed will be
determined by the Company and such shares may be redeemed pro rata from the
holders of record of such shares in proportion to the number of such shares
held or for which redemption is requested by such holder (with adjustments to
avoid redemption of fractional shares) or by lot in a manner determined by
the Company.
Notice of redemption will be mailed at least 30 days but not more than
60 days before the redemption date to each holder of record of Preferred
Stock of any series to be redeemed at the address shown on the share transfer
books of the Company. Each notice shall state: (i) the redemption date; (ii)
the number and series of shares of Preferred Stock to be redeemed; (iii) the
redemption to be surrendered for payment of the redemption price; (iv) that
dividends on the shares to be redeemed will cease to accrue on such
redemption date; and (v) the date upon which the holder's conversion rights,
if any, as to such shares shall terminate. If fewer than all of the shares
of Preferred Stock of any series are to be redeemed, the notice mailed to
each such holder thereof shall also specify the number of shares of Preferred
Stock to be redeemed from each such holder. If notice of redemption of any
shares of Preferred Stock has been given and if the funds necessary for such
redemption have been set aside by the Company in trust for the benefit of the
holders of any shares of Preferred Stock so called for redemption, then from
and after the redemption date dividends will cease to accrue on such
Preferred Stock, and all rights of the holders of such shares will terminate,
except the right to receive the redemption price.
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Liquidation Preference
Upon any voluntary or involuntary liquidation, dissolution or winding up
of the affairs of the Company, then, before any distribution or payment shall
be made to the holders of any Common Stock or any other class or series of
capital shares of the Company ranking junior to the Preferred Stock in the
distribution of assets upon any liquidation, dissolution or winding up of the
Company, the holders of each series of Preferred Stock shall be entitled to
receive out of assets of the Company legally available for distribution to
shareholders liquidating distributions in the amount of the liquidation
preference per share (set forth in the applicable Prospectus Supplement),
plus an amount equal to all dividends accrued and unpaid thereon (which shall
not include any accumulation in respect of unpaid dividends for prior
dividend periods if such Preferred Stock does not have a cumulative
dividend). After payment of the full amount of the liquidating distributions
to which they are entitled, the holders of Preferred Stock will have no right
or claim to any of the remaining assets of the Company. In the event that,
upon any such voluntary or involuntary liquidation, dissolution or winding
up, the available assets of the Company are insufficient to pay the amount of
the liquidating distributions on all outstanding shares of Preferred Stock
and the corresponding amounts payable on all shares of other classes or
series of capital shares of the Company ranking on a parity with the
Preferred Stock in the distribution of assets, then the holders of the
Preferred Stock and all other such classes or series of capital shares shall
share ratably in any such distribution of assets in proportion to the full
liquidating distributions to which they would otherwise be respectively
entitled.
If liquidating distributions shall have been made in full to all holders
of Preferred Stock, the remaining assets of the Company shall be distributed
among the holders of any other classes or series of capital shares ranking
junior to the Preferred Stock upon liquidation, dissolution or winding up,
according to their respective rights and preferences and in each case
according to their respective number of shares. For such purposes, the
consolidation or merger of the Company with or into any other corporation,
trust or entity, or the sale, lease or conveyance of all or substantially all
of the property or business of the Company, shall not be deemed to constitute
a liquidation, dissolution or winding up of the Company.
Voting Rights
Holders of Preferred Stock will not have any voting rights, except as
set forth below or as otherwise from time to time required by law or as
indicated in the applicable Prospectus Supplement.
Whenever dividends on any Preferred Stock shall be in arrears for six or
more consecutive quarterly periods, the holders of such Preferred Stock
(voting separately as a class with all other series of Preferred Stock upon
which like voting rights have been conferred and are exercisable) will be
entitled to vote for the election of two additional Directors of the Company
at a special meeting called by the holders of record of at least ten percent
(10%) of any series of Preferred Stock so in arrears (unless such request is
received less than 90 days before the date fixed for the next annual or
special meeting of the shareholders) or at the next annual meeting of
shareholders, and at each subsequent annual meeting until (i) if such series
of Preferred Stock has a cumulative dividend, all dividends accumulated on
such shares of Preferred Stock for the past dividend periods and the then
current dividend period shall have been fully paid or declared and a sum
sufficient for the payment thereof set aside for payment or (ii) if such
series of Preferred Stock does not have a cumulative dividend, four
consecutive quarterly dividends shall have been fully paid or declared and a
sum sufficient for the payment thereof set aside for payment. In such case,
the entire Board of Directors of the Company will be increased by two
Directors.
Unless provided otherwise for any series of Preferred Stock, so long as
any shares of Preferred Stock remain outstanding, the Company will not,
without the affirmative vote or consent of the holders of at least two-thirds
of each series of Preferred Stock outstanding at the time, given in person or
by proxy, either in writing or at a meeting (such series voting separately as
a class), (i) authorize or create, or increase the authorized or issued
amount of, any class or series of capital shares ranking prior to such series
of Preferred Stock with respect to the payment of dividends or the
distribution of assets upon liquidation, dissolution or winding up or
reclassify any authorized capital shares of the Company into such shares, or
create, authorize or issue any obligation or security convertible into or
evidencing the right to purchase any such shares; or (ii) amend, alter or
repeal the provisions of the
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Company's Charter or the Designating Amendment for such series of Preferred
Stock, whether by merger, consolidation or otherwise (an "Event"), so as to
materially and adversely affect any right, preference, privilege or voting
power of such series of Preferred Stock or the holders thereof; provided,
however, with respect to the occurrence of any of the Events set forth in
(ii) above, so long as the shares of Preferred Stock remain outstanding with
the terms thereof materially unchanged, taking into account that upon the
occurrence of an Event, the Company may not be the surviving entity, the
occurrence of any such Event shall not be deemed to materially and adversely
affect such rights, preferences, privileges or voting power of holders of
Preferred Stock and provided further that (x) any increase in the amount of
the authorized Preferred Stock or the creation or issuance of any other
series of Preferred Stock, or (y) any increase in the amount of authorized
shares of such series or any other series of Preferred Stock, in each case
ranking on a parity with or junior to the Preferred Stock of such series with
respect to payment of dividends or the distribution of assets upon
liquidation, dissolution or winding up, shall not be deemed to materially and
adversely affect such rights, preferences, privileges or voting powers.
The foregoing voting provisions will not apply if, at or prior to the
time when the act with respect to which such vote would otherwise be required
shall be effected, all outstanding shares of Preferred Stock of such series
shall have been redeemed or called for redemption and sufficient funds shall
have been deposited in trust to effect such redemption.
Conversion Rights
The terms and conditions, if any, upon which any series of Preferred
Stock is convertible into Common Stock will be set forth in the applicable
Prospectus Supplement relating thereto. Such terms will include the number
of shares of Common Stock into which the Preferred Stock is convertible, the
conversion price (or manner of calculation thereof), the conversion period,
provisions as to whether conversion will be at the option of the holders of
the Preferred Stock or the Company, the events requiring an adjustment of the
conversion price and provisions affecting conversion in the event of the
redemption of such series of Preferred Stock.
Shareholder Liability
As discussed below under "Description of Common Stock," applicable
Maryland law provides that no shareholder, including holders of shares of
Preferred Stock, shall be personally liable for the acts and obligations of
the Company and that the funds and property of the Company shall be the only
recourse for such acts or obligations.
Restrictions on Ownership
As discussed below under "Description of Common Stock--Ownership
Limits," for the Company to qualify as a REIT under the Internal Revenue
Code of 1986, as amended (the "Code"), not more than 50% in value of its
outstanding capital shares may be owned, directly or indirectly, by five or
fewer individuals (as defined in the Code to include certain entities) during
the last half of a taxable year. In addition to the ownership limitations
described under "Description of Common Stock -- Restrictions on Transfer;
Excess Stock -- Ownership Limits" (which limits may impact on the acquisition,
holding and/or disposition of Preferred Stock), the Designating Amendment for
each series of Preferred Stock may contain specific provisions restricting
the ownership and transfer of shares of Preferred Stock.
Registrar and Transfer Agent
The Registrar and Transfer Agent for the Preferred Stock will be set
forth in the applicable Prospectus Supplement.
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DESCRIPTION OF DEPOSITARY SHARES
General
The Company may issue receipts ("Depositary Receipts") for Depositary
Shares, each of which will represent a fractional interest of a share of a
particular series of Preferred Stock, as specified in the applicable
Prospectus Supplement. Shares of Preferred Stock of each series represented
by Depositary Shares will be deposited under a separate deposit agreement
(each, a "Deposit Agreement") among the Company, the depositary named therein
(a "Preferred Stock Depositary") and the holders from time to time of the
Depositary Receipt will be entitled, in proportion to the fractional interest
of a share of a particular series of Preferred Stock represented by the
Depositary Shares evidenced by such Depositary Receipt, to all the rights and
preferences of the Preferred Stock represented by such Depositary Shares
(including dividend, voting, conversion, redemption and liquidation rights).
The Depositary Shares will be evidenced by Depositary Receipts issued
pursuant to the applicable Deposit Agreement. Immediately following the
issuance and delivery of the Preferred Stock by the Company to a Preferred
Stock Depositary, the Company will cause such Preferred Stock Depositary to
issue, on behalf of the Company, the Depositary Receipts. Copies of the
applicable form of Deposit Agreement and Depositary Receipt may be obtained
from the Company upon request, and the statements made hereunder relating to
Deposit Agreements and the Depositary Receipts to be issued thereunder are
summaries of certain anticipated provisions thereof and do not purport to be
complete and are subject to, and qualified in their entirety by reference to,
all of the provisions of the applicable Deposit Agreement and related
Depositary Receipts.
Dividends and Other Distributions
A Preferred Stock Depositary will be required to distribute all cash
dividends or other cash distributions received in respect of the applicable
Preferred Stock to the record holders of Depositary Receipts evidencing the
related Depositary Shares in proportion to the number of such Depositary
Receipts owned by such holders, subject to certain obligations of holders to
file proofs, certificates and other information and to pay certain charges
and expenses to such Preferred Stock Depositary.
In the event of a distribution other than in cash, a Preferred Stock
Depositary will be required to distribute property received by it to the
record holders of Depositary Receipts entitled thereto, subject to certain
obligations of holders to file proofs, certificates and other information and
to pay certain charges and expenses to such Preferred Stock Depositary,
unless such Preferred Stock Depositary determines that it is not feasible to
make such distribution, in which case such Preferred Stock Depositary may,
with the approval of the Company, sell such property and distribute the net
proceeds from such sale to such holders.
No distribution will be made in respect of any Depositary Share to the
extent that it represents any Preferred Stock which has been converted or
exchanged.
Withdrawal
Upon surrender of the Depositary Receipts at the corporate trust office
of the applicable Preferred Stock Depositary (unless the related Depositary
Shares have previously been called for redemption or converted), the holders
thereof will be entitled to delivery at such office, to or upon each such
holder's order, of the number of whole or fractional shares of the applicable
Preferred Stock and any money or other property represented by the Depositary
Shares evidenced by such Depositary Receipts. Holders of Depositary Receipts
will be entitled to receive whole or fractional shares of the related
Preferred Stock on the basis of the proportion of Preferred Stock represented
by each Depositary Share as specified in the applicable Prospectus
Supplement, but holders of such shares of Preferred Stock will not thereafter
be entitled to receive Depositary Shares therefor. If the Depositary
Receipts delivered by the holder evidence a number of Depositary Shares in
excess of the number of Depositary Shares representing the number of shares
of Preferred Stock to be withdrawn, the applicable Preferred Stock
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Depositary will be required to deliver to such holder at the same time a new
Depositary Receipt evidencing such excess number of Depositary Shares.
Redemption
Whenever the Company redeems shares of Preferred Stock held by a
Preferred Stock Depositary, such Preferred Stock Depositary will be required
to redeem as of the same redemption date the number of Depositary Shares
representing shares of the Preferred Stock so redeemed, provided the Company
shall have paid in full to such Preferred Stock Depositary the redemption
price of the Preferred Stock to be redeemed plus an amount equal to any
accrued and unpaid dividends thereon to the date fixed for redemption. The
redemption price per Depositary Shares will be equal to the redemption price
and any other amounts per share payable with respect to the Preferred Stock.
If fewer than all the Depositary Shares are to be redeemed, the Depositary
Shares to be redeemed will be selected pro rata (as nearly as may be
practicable without creating fractional Depositary Shares) or by any other
equitable method determined by the Company that preserves the REIT status of
the Company. See "Description of Preferred Stock-Redemption."
Voting
Upon receipt of notice of any meeting at which the holders of the
applicable Preferred Stock are entitled to vote, a Preferred Stock Depositary
will be required to mail the information contained in such notice of meeting
to the record holders of the Depositary Receipts evidencing the Depositary
Shares which represent such Preferred Stock. Each record holder of
Depositary Receipts evidencing Depositary Shares on the record date (which
will be the same date as the record date for the Preferred Stock) will be
entitled to instruct such Preferred Stock Depositary as to the exercise of
the voting rights pertaining to the amount of Preferred Stock represented by
such holder's Depositary Shares. Such Preferred Stock Depositary will be
required to vote the amount of Preferred Stock represented by such Depositary
Shares in accordance with such instructions, and the Company will agree to
take all reasonable action which may be deemed necessary by such Preferred
Stock Depositary in order to enable such Preferred Stock Depositary to do so.
Such Preferred Stock Depositary will be required to abstain from voting the
amount of Preferred Stock represented by such Depositary Shares to the extent
it does not receive specific instructions from the holders of Depositary
Receipts evidencing such Depositary Shares. A Preferred Stock Depositary
will not be responsible for any failure to carry out any instruction to vote,
or for the manner or effect of any such vote made, as long as any such action
or non-action is in good faith and does not result from negligence or willful
misconduct of such Preferred Stock Depositary.
Liquidation Preference
In the event of the liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary, the holders of each Depositary
Receipt will be entitled to the fraction of the liquidation preference
accorded each share of Preferred Stock represented by the Depositary Share
evidenced by such Depositary Receipt, as set forth in the applicable
Prospectus Supplement.
Conversion
The Depositary Shares, as such, will not be convertible into shares of
Common Stock or any other securities or property of the Company, except in
connection with certain conversions in connection with the preservation of
the Company's status as a REIT. See "Description of Preferred
Stock-Restrictions on Ownership." Nevertheless, if so specified in the
applicable Prospectus Supplement relating to an offering of Depositary
Shares, the Depositary Receipts may be surrendered by holders thereof to the
applicable Preferred Stock Depositary with written instructions to such
Preferred Stock Depositary to instruct the Company to cause conversion of the
Preferred Stock represented by the Depositary Shares evidenced by such
Depositary Receipts into whole shares of Common Stock, other shares of
Preferred Stock of the Company or other shares of stock, and the Company will
agree that upon receipt of such instructions and any amounts payable in
respect thereof, it will cause the conversion thereof utilizing the same
procedures as those provided for delivery of Preferred Stock to effect such
conversion. If the Depositary Shares evidenced by a Depositary Receipt are
to be converted in part only, a new Depositary Receipt or
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Receipts will be issued for any Depositary Shares not to be converted. No
fractional shares of Common Stock will be issued upon conversion, and if such
conversion will result in a fractional share being issued, an amount will be
paid in cash by the Company equal to the value of the fractional interest
based upon the closing price of the Common Stock on the last business day
prior to the conversion.
Amendment and Termination of a Deposit Agreement
Any form of Depositary Receipt evidencing Depositary Shares which will
represent Preferred Stock and any provision of a Deposit Agreement will be
permitted at any time to be amended by agreement between the Company and the
applicable Preferred Stock Depositary. However, any amendment that
materially and adversely alters the rights of the holders of Depositary
Receipts or that would be materially and adversely inconsistent with the
rights granted to the holders of the related Preferred Stock will not be
effective unless such amendment has been approved by the existing holders of
at least two-thirds of the applicable Depositary Shares evidenced by the
applicable Depositary Receipts then outstanding. No amendment shall impair
the right, subject to certain anticipated exceptions in the Deposit
Agreements, of any holder of Depositary Receipts to surrender any Depositary
Receipt with instructions to deliver to the holder the related Preferred
Stock and all money and other property, if any, represented thereby, except
in order to comply with law. Every holder of an outstanding Depositary
Receipt at the time any such amendment becomes effective shall be deemed, by
continuing to hold such Depositary Receipt, to consent and agree to such
amendment and to be bound by the applicable Deposit Agreement as amended
thereby.
A Deposit Agreement will be permitted to be terminated by the Company
upon not less than 30 days' prior written notice to the applicable Preferred
Stock Depositary if (i) such termination is necessary to preserve the
Company's status as a REIT or (ii) a majority of each series of Preferred
Stock affected by such termination consents to such termination, whereupon
such Preferred Stock Depositary will be required to deliver or make available
to each holder of Depositary Receipts, upon surrender of the Depositary
Receipts held by such holder, such number of whole or fractional shares of
Preferred Stock as are represented by the Depositary Shares evidenced by such
Depositary Receipts together with any other property held by such Preferred
Stock Depositary with respect to such Depositary Receipts. The Company will
agree that if a Deposit Agreement is terminated to preserve the Company's
status as a REIT, then the Company will use its best efforts to list the
Preferred Stock issued upon surrender of the related Depositary Shares on a
national securities exchange. In addition, a Deposit Agreement will
automatically terminate if (i) all outstanding Depositary Shares thereunder
shall have been redeemed, (ii) there shall have been a final distribution in
respect of the related Preferred Stock in connection with any liquidation,
dissolution or winding up of the Company and such distribution shall have
been distributed to the holders of Depositary Receipts evidencing the
Depositary Shares representing such Preferred Stock or (iii) each share of
the related Preferred Stock shall have been converted into stock of the
Company not so represented by Depositary Shares.
Charges of Preferred Stock Depositary
The Company will pay all transfer and other taxes and governmental
charges arising solely from the existence of a Deposit Agreement. In
addition, the Company will pay the fees and expenses of a Preferred Stock
Depositary in connection with the performance of its duties under a Deposit
Agreement. However, holders of Depositary Receipts will pay the fees and
expenses of a Preferred Stock Depositary for any duties requested by such
holders to be performed which are outside of those expressly provided for in
the applicable Deposit Agreement.
Resignation and Removal of Depositary
A Preferred Stock Depositary will be permitted to resign at any time by
delivering to the Company notice of its election to do so, and the Company
will be permitted at any time to remove a Preferred Stock Depositary, any
such resignation or removal to take effect upon the appointment of a
successor Preferred Stock Depositary. A successor Preferred Stock Depositary
will be required to be appointed within 60 days after delivery of the notice
of resignation or removal and will be required to be a bank or trust company
having its principal office in the United States and having a combined
capital and surplus of at least $50,000,000.
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Miscellaneous
A Preferred Stock Depositary will be required to forward to holders of
Depositary Receipts any reports and communications from the Company which are
received by such Preferred Stock Depositary with respect to the related
Preferred Stock.
Neither a Preferred Stock Depositary nor the Company will be liable if
it is prevented from or delayed in, by law or any circumstances beyond its
control, performing its obligations under a Deposit Agreement. The
obligations of the Company and a Preferred Stock Depositary under a Deposit
Agreement will be limited to performing their duties thereunder in good faith
and without negligence (in the case of any action or inaction in the voting
of Preferred Stock represented by the applicable Depositary Shares), gross
negligence or willful misconduct, and neither the Company nor any applicable
Preferred Stock Depositary will be obligated to prosecute or defend any legal
proceeding in respect of any Depositary Receipts, Depositary Shares or shares
of Preferred Stock represented thereby unless satisfactory indemnity is
furnished. The Company and any Preferred Stock Depositary will be permitted
to rely on written advice of counsel or accountants, or information provided
by persons presenting shares of Preferred Stock represented thereby for
deposit, holders of Depositary Receipts or other persons believed in good
faith to be competent to give such information, and on documents believed in
good faith to be genuine and signed by a proper party.
In the event a Preferred Stock Depositary shall receive conflicting
claims, requests or instructions from any holders of Depositary Receipts, on
the one hand, and the Company, on the other hand, such Preferred Stock
Depositary shall be entitled to act on such claims, requests or instructions
received from the Company.
DESCRIPTION OF COMMON STOCK
General
The authorized capital stock of the Company consists of 145,000,000
shares of capital stock, $.01 par value, of which 95,000,000 shares are
classified as Common Stock, 45,000,000 shares are classified as Excess Stock,
3,860,067 are classified as Preferred Stock, and 1,139,933 shares are not
classified. At October 7, 1997, there were 14,895,693 shares of Common Stock
outstanding. Under the Company's Charter, the Board of Directors may issue,
without any further action by the shareholders, shares of capital stock in
one or more series having such preferences, conversion and other rights,
voting powers, restrictions, limitations as to dividends, qualifications and
terms and conditions of redemption as the Board of Directors may determine
and as may be evidenced by articles supplementary to the Charter adopted by
the Board of Directors. The following description of the terms and
provisions of the shares of capital stock of the Company and certain other
matters does not purport to be complete and is subject to and qualified in
its entirety by reference to the applicable provisions of Maryland law and
the Company's Charter.
Subject to such preferential rights as may be granted by the Board of
Directors in connection with the future issuance of Preferred Stock, holders
of Common Stock are entitled to one vote per share on all matters to be voted
on by shareholders and are entitled to receive ratably such dividends as may
be declared on the Common Stock by the Board of Directors in its discretion
from funds legally available therefor. Neither the Charter nor the Bylaws
provide for cumulative voting for the election of directors. The Company
depends upon distributions from the Operating Partnership to fund its
dividends to shareholders. In the event of the liquidation, dissolution or
winding up of the Company, holders of Common Stock are entitled to share
ratably in all assets remaining after payment of all debts and other
liabilities and any liquidation preference of the holders of Preferred Stock.
Matters submitted for shareholder approval generally require a majority vote
of the shares present and voting thereon. Holders of Common Stock do not
have any preemptive rights or other rights to subscribe for additional shares.
Common Stock currently outstanding is listed for trading on the New York
Stock Exchange (the "NYSE"). The Company will apply to the NYSE to list
the additional Common Stock to be sold pursuant to any Prospectus Supplement,
and the Company anticipates that such shares will be so listed.
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Both the Maryland general corporation law and the Company's Charter
provide that no shareholder of the Company will be personally liable for any
obligations of the Company. The Company's Bylaws further provide that the
Company shall indemnify each shareholder against any claim or liability to
which the shareholder may become subject by reason of his being or having
been a shareholder, and that the Company shall reimburse each shareholder for
all legal and other expenses reasonably incurred by him in connection with
any such claim or liability. In addition, it will be the Company's policy to
include a clause in its contracts which provides that shareholders assume no
personal liability for obligations entered into on behalf of the Company.
However, with respect to tort claims, contractual claims where shareholder
liability is not so negated, claims for taxes and certain statutory
liability, the shareholder may, in some jurisdictions, be personally liable
to the extent that such claims are not satisfied by the Company. Inasmuch as
the Company will carry public liability insurance which it considers
adequate, any risk of personal liability to shareholders is limited to
situations in which the Company's assets plus its insurance coverage would be
insufficient to satisfy the claims against the Company and its shareholders.
Classification and Removal of Board of Directors; Other Provisions
The Charter of the Company provides for the Board of Directors to be
divided into three classes of directors, with each class to consist as nearly
as possible of an equal number of the directors. The term of office of one
class of directors (2 directors) will expire at the 1998 annual meeting of
shareholders; the term of office of the next class of directors (2 directors)
will expire at the 1999 annual meeting of shareholders; and the term of
office of the third class of directors (3 directors) will expire at the 2000
annual meeting of shareholders. At each annual meeting of shareholders, the
class of directors to be elected at such meeting will be elected for a three
year term, and the directors in the other two classes will continue in
office. Because holders of Common Stock have no right to cumulative voting
for the election of directors, at each annual meeting of shareholders, the
holders of a majority of the shares of Common Stock will be able to elect all
of the successors of the class of directors whose term expires at that
meeting.
The Charter also provides that, except for any directors who may be
elected by holders of a class or series of capital stock other than Common
Stock, directors may be removed only for cause and only by the affirmative
vote of shareholders holding at least 80% of all the votes entitled to be
cast for the election of directors. Vacancies on the Board of Directors may
be filled by the affirmative vote of the remaining directors and, in the case
of a vacancy resulting from the removal of a director, by the shareholders by
a majority of the votes entitled to be cast for the election of directors. A
vote of shareholders holding at least 80% of all the votes entitled to be
cast thereon is required to amend, alter, change, repeal or adopt any
provisions inconsistent with the foregoing classified board and director
removal provisions. Under the Charter, the power to amend the Bylaws of the
Company is vested exclusively in the Board of Directors, and the shareholders
will not have any power to adopt, alter or repeal the Bylaws absent amendment
to the Charter. These provisions may make it more difficult and time
consuming to change majority control of the Board of Directors of the Company
and, thus, reduce the vulnerability of the Company to an unsolicited proposal
for the takeover of the Company or the removal of incumbent management.
Because the Board of Directors has the power to establish the
preferences and rights of additional series of capital stock without further
shareholder vote, the Board of Directors may afford the holders of any series
of senior capital stock preferences, powers and rights, voting or otherwise,
senior to the rights of holders of Common Stock. The issuance of any such
senior capital stock could have the effect of delaying or preventing a change
in control of the Company. The Board of Directors, however, currently does
not contemplate the issuance of any series of capital stock other than the
Common Stock and Excess Stock (see "--Restrictions on Transfer; Excess Stock"
below).
The Bylaws of the Company provide that, with respect to an annual
meeting of shareholders, the proposal of business to be considered by
shareholders may be made only (i) by or at the direction of the Board of
Directors or (ii) by a shareholder who has complied with the advance notice
procedures set forth in the Bylaws. In addition, with respect to any meeting
of shareholders, nominations of persons for election to the Board of
Directors may be made only (i) by or at the direction of the Board of
Directors or (ii) by any shareholder of the Company who is entitled to vote
at the meeting and has complied with the advance notice provisions set forth
in the Bylaws.
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Special Statutory Requirements for Certain Transactions
Business Combination Statute. The MGCL establishes special requirements
with respect to "business combinations" between Maryland corporations and
"interested shareholders" unless exemptions are applicable. Among other
things, the law prohibits for a period of five years a merger and other
specified or similar transactions between a Company and an interested
shareholder and requires a supermajority vote for such transactions after the
end of the five-year period.
"Interested Shareholders" are all persons owning beneficially, directly
or indirectly, more than 10% of the outstanding voting stock of the Maryland
corporation. "Business Combinations" include any merger or similar
transaction subject to a statutory vote and additional transactions involving
transfers of assets or securities in specified amounts to Interested
Shareholders or their affiliates. Unless an exemption is available,
transactions of these types may not be consummated between a Maryland
corporation and an Interested Shareholder or its affiliates for a period of
five years after the date on which the shareholder first became an Interested
Shareholder. Thereafter, the transaction may not be consummated unless
recommended by the board of directors and approved by the affirmative vote of
at least 80% of the votes entitled to be cast by all holders of outstanding
shares of voting stock and 66-2/3% of the votes entitled to be cast by all
holders of outstanding shares of voting stock other than the Interested
Shareholder. A Business Combination with an Interested Shareholder that is
approved by the board of directors of a Maryland corporation at any time
before an Interested Shareholder first becomes an Interested Shareholder is
not subject to the special voting requirements. An amendment to a Maryland
corporation's charter electing not to be subject to the foregoing
requirements must be approved by the affirmative vote of at least 80% of the
votes entitled to be cast by all holders of outstanding shares of voting
stock and 66-2/3% of the votes entitled to be cast by holders of outstanding
shares of voting stock who are not Interested Shareholders. Any such
amendment is not effective until 18 months after the vote of shareholders and
does not apply to any Business Combination of a corporation with a
shareholder who was an Interested Shareholder on the date of the shareholder
vote.
As permitted by Maryland law, the Company has exempted from the Maryland
business corporation statute any Business Combination with Messrs. Smith or
Kogod, and all persons, firms and corporations affiliated with, or acting in
concert or as a group with, either of them, as well as any Business
Combination that involves the redemption of Units for shares of Common Stock.
Control Share Acquisition Statute. Maryland law imposes limitations on
the voting rights in a "control share acquisition." The Maryland statute
defines a "control share acquisition" at the 20%, 33-1/3% and 50% acquisition
levels, and requires a 2/3 shareholder vote (excluding shares owned by the
acquiring person and certain members of management) to accord voting rights
to stock acquired in a control share acquisition. The statute also requires
Maryland corporations to hold a special meeting at the request of an actual
or proposed control share acquirer generally within 50 days after a request
is made with the submission of an "acquiring person statement," but only if
the acquiring person (a) posts a bond for the cost of a meeting and (b)
submits a definitive financing agreement to the extent that financing is not
provided by the acquiring person. In addition, unless the charter or by-laws
provide otherwise, the statute gives the Maryland corporation, within certain
time limitations, various redemption rights if there is a shareholder vote on
the issue and the grant of voting rights is not approved, or if an acquiring
person statement is not delivered to the target within 10 days following a
control share acquisition. Moreover, unless the charter or by-laws provide
otherwise, the statute provides that if, before a control share acquisition
occurs, voting rights are accorded to control shares that result in the
acquiring person having majority voting power, then minority shareholders
have appraisal rights. An acquisition of shares may be exempted from the
control share statute, provided that a charter or bylaw provision is adopted
for such purpose prior to the control share acquisition. Pursuant to the
foregoing, the Company's Charter provides that any acquisition of shares of
capital stock of the Company that is not prohibited by the terms of the
restrictions on transfer described below under "--Restrictions on Transfer;
Excess Stock" is exempted from the provisions of the control share
acquisition statute.
Restrictions on Transfer; Excess Stock
Ownership Limits. The Charter contains certain restrictions on the
number of shares of capital stock that individual shareholders may own. For
the Company to qualify as a REIT under the Code, no more than 50% in
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value of its outstanding shares of capital stock may be owned, directly or
constructively under the applicable attribution rules of the Code, by five or
fewer individuals (as defined in the Code to include certain entities) during
the last half of a taxable year (other than the first taxable year in which
the Company qualifies as a REIT). In addition, the capital stock must be
beneficially owned by 100 or more persons during at least 335 days of a
taxable year or during a proportionate part of a shorter taxable year.
Because the Company expects to qualify as a REIT, the Charter of the Company
contains restrictions on the acquisition of capital stock, including Common
Stock.
Subject to certain exceptions specified in the Charter, no holder may
own, or be deemed to own by virtue of the attribution provisions of the Code,
either (i) more than 9.8% in number or value of the issued and outstanding
shares of Common Stock, or (ii) 9.8% in number or value of the issued and
outstanding shares of capital stock of the Company (including both Common
Stock and Preferred Stock), which even is more restrictive (the "Ownership
Limit"). The Board of Directors in its discretion may waive the Ownership
Limit with respect to a holder if such holder's ownership will not then or in
the future jeopardize the Company's status as a REIT.
Messrs. Smith and Kogod, members of their families and entities that
they control are subject to the Ownership Limit, and they also are subject to
certain additional special ownership limitations. Messrs. Smith and Kogod,
members of their families and entities that they control are prohibited from
acquiring additional shares of Common Stock (or rights to acquire shares),
if, as a result of, and giving effect to, such acquisition, any tenant would
be regarded as a Related Party Tenant for purposes of Section 856(b)(2)(B) of
the Code (see "Federal Income Tax Considerations--Requirements for
Qualification--Gross Income Tests") and the Company would be considered to
receive more than 0.5% of its gross annual revenue from Related Party
Tenants.
Notwithstanding any of the foregoing ownership limits, no holder may own
or acquire, either directly or constructively under the applicable
attribution rules of the Code, any shares of any class of the Company's stock
if such ownership or acquisition (i) would cause more than 50% in value of
the Company's outstanding stock to be owned, either directly or
constructively under the applicable attribution rules of the Code, by five or
fewer individuals (as defined in the Code to include certain tax-exempt
entities, other than, in general, qualified domestic pension funds), (ii)
would result in the Company's stock being beneficially owned by less than 100
persons (determined without reference to any rules of attribution), or (iii)
would otherwise result in the Company failing to qualify as REIT.
If any shareholder purports to transfer shares to a person and either
the transfer would result in the Company failing to qualify as a REIT, or
such transfer would cause the transferee to hold shares in excess of more
than the applicable Ownership Limit or Existing Holder Limit, the purported
transfer shall be null and void, and the intended transferee will acquire no
rights or economic interest in the shares, and the shareholder will be deemed
to have transferred the shares of Common Stock to the Company in exchange for
shares of Excess Stock, which will be deemed to be held by the Company as
trustee of a trust for the exclusive benefit of the person or persons to whom
the shares can be transferred without violating the ownership limit. In
addition, if any person owns, either directly or constructively under the
applicable attribution rules of the Code, shares of capital stock in excess
of the applicable Ownership Limit, such person will be deemed to have
exchanged the shares of capital stock that cause the Ownership Limit to be
exceeded for an equal number of shares of Excess Stock, which will be deemed
to be held by the Company as trustee of a trust for the exclusive benefit of
the person or persons to whom the share can be transferred without violating
the Ownership Limit.
A person who holds or transfers shares such that shares of capital stock
shall have been deemed to be exchanged for Excess Stock will not be entitled
to vote the Excess Stock and will not be entitled to receive any dividends or
distributions (any dividend or distribution paid on shares of capital stock
prior to the discovery by the Company that such shares have been exchanged
for Excess Stock shall be repaid to the Company upon demand, and any dividend
or distribution declared but unpaid shall be rescinded). Such person shall
have the right to designate a transferee of such Excess Stock so long as
consideration received for designating such transferee does not exceed a
price that is equal to the lesser of (i) in the case of a deemed exchange for
Excess Stock resulting from a transfer, the price paid for the shares in such
transfer or, in the case of a deemed exchange for Excess Stock resulting from
some other event, the fair market value, on the date of the deemed exchange,
of the shares deemed exchanged, and (ii) the fair market value of the shares
for which such Excess Stock will be deemed to be exchanged on the date of the
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designation of the transferee. For these purposes, fair market value on a
given date is determined by reference to the average closing price for the
five preceding days. The share of Excess Stock so transferred will
automatically be deemed to be exchanged for shares of capital stock. Excess
Stock may be purchased by the Company for the lesser of the price paid or the
average closing price for the five days immediately preceding such purchase.
The Company may elect to redeem the Excess Stock for Units.
If the foregoing transfer restrictions are determined to be void or
invalid by virtue of any legal decisions, statute, rule or regulation, then
the intended transferee of any Excess Stock may be deemed, at the option of
the Company, to have acted as an agent on behalf of the Company in acquiring
such Excess Stock and to hold such Excess Stock on behalf of the Company.
All certificates representing shares of Common Stock will bear a legend
referring to the restrictions described above.
Every owner (or deemed owner) of more than 5% (or such lower percentage
as required by the Code or regulations thereunder) in number or value of the
issued and outstanding shares of capital stock, including Common Stock, must
file a written notice with the Company containing the information specified
in the Charter no later than January 31 of each year. In addition, each
shareholder shall be required upon demand to disclose to the Company in
writing such information as the Company may request in order to determine the
effect on the Company's status as a REIT of such shareholder's direct,
indirect and constructive ownership of the shares.
The foregoing ownership limitations also may have the effect of
preventing or hindering any attempt to acquire control of the Company without
the consent of the Board of Directors.
Transfer Agent and Registrar
The Transfer Agent, Registrar and Dividend Disbursing Agent for the
shares of Common Stock is First Union National Bank of North Carolina.
DESCRIPTION OF COMMON STOCK WARRANTS
The Company may issue Common Stock Warrants for the purchase of Common
Stock. Common Stock Warrants may be issued independently or together with
any other Securities offered by any Prospectus Supplement and may be attached
to or separate from such Securities. Each series of Common Stock Warrants
will be issued under a separate warrant agreement (each, a "Warrant
Agreement") to be entered into between the Company and a warrant agent
specified in the applicable Prospectus Supplement (the "Warrant Agent").
The Warrant Agent will act solely as an agent of the Company in connection
with the Common Stock Warrants of such series and will not assume any
obligation or relationship of agency or trust for or with any holders or
beneficial owners of Common Stock Warrants. The following sets forth certain
general terms and provisions of the Common Stock Warrants offered hereby.
Further terms of the Common Stock Warrants and the applicable Warrant
Agreements will be set forth in the applicable Prospectus Supplement.
The applicable Prospectus Supplement will describe the terms of the
Common Stock Warrants in respect of which this Prospectus is being delivered,
including, where applicable, the following: (1) the title of such Common
Stock Warrants; (2) the aggregate number of such Common Stock Warrants; (3)
the price or prices at which such Common Stock Warrants will be issued; (4)
the designation, number and terms of the shares of Common Stock purchasable
upon exercise of such Common Stock Warrants; (5) the designation and terms of
the other Securities offered thereby with which such Common Stock Warrants
are issued and the number of such Common Stock Warrants issued with each such
Security offered thereby; (6) the date, if any, on and after which such
Common Stock Warrants and the related shares of Common Stock will be
separately transferable; (7) the price at which each of the shares of Common
Stock purchasable upon exercise of such Common Stock Warrants may be
purchased; (8) the date on which the right to exercise such Common Stock
Warrants shall commence and the date on which such right shall expire; (9)
the minimum or maximum number of such Common Stock Warrants which may be
exercised
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at any one time; (10) information with respect to book entry procedures, if
any; (11) a discussion of certain federal income tax considerations; and (12)
any other terms of such Common Stock Warrants, including terms, procedures
and limitations relating to the exchange and exercise of such Common Stock
Warrants.
FEDERAL INCOME TAX CONSIDERATIONS
General
The following discussion summarizes the material federal income tax
considerations to a prospective holder of Common Stock. The following
discussion, which is not exhaustive of all possible tax considerations, does
not include a detailed discussion of any state, local or foreign tax
considerations. Nor does it discuss all of the aspects of federal income
taxation that may be relevant to a prospective shareholder in light of its
particular circumstances or to certain types of shareholders (including
insurance companies, tax-exempt entities, financial institutions or
broker-dealers, foreign corporations and persons who are not citizens or
residents of the United States) who are subject to special treatment under
the federal income tax laws. In addition, if the Company offers one or more
series of Debt Securities, Preferred Stock, Depositary Shares, or Common
Stock Warrants, then there may be tax consequences for the holders of such
Securities not discussed herein. For a discussion of any such additional
consequences, see the applicable Prospectus Supplement. As discussed below,
the Taxpayer Relief Act of 1997 (the "1997 Act") contains certain changes to
the REIT qualification requirements and to the taxation of REITs, which
became effective for the Company's taxable years commencing on or after
January 1, 1998, that may be material to a holder of Common Stock.
As used in this discussion, the term "Company" refers solely to Charles
E. Smith Residential Realty, Inc.
EACH PROSPECTIVE PURCHASER OF COMMON STOCK IS URGED TO CONSULT WITH ITS
OWN TAX ADVISOR TO DETERMINE THE IMPACT OF SUCH PROSPECTIVE PURCHASER'S
PERSONAL TAX SITUATION ON THE ANTICIPATED TAX CONSEQUENCES OF THE PURCHASE,
OWNERSHIP AND SALE OF COMMON STOCK IN AN ENTITY ELECTING TO BE TAXED AS A
REIT, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES
OF SUCH PURCHASE, OWNERSHIP, SALE AND ELECTION, AND OF POTENTIAL CHANGES IN
APPLICABLE TAX LAWS.
Taxation of the Company
General. The Company has elected to be taxed as a REIT under Sections
856 through 860 of the Code commencing with its taxable year ending December
31, 1994. The Company believes that it was organized and has operated in
conformity with the requirements for qualification and taxation as a REIT
under the Code for its taxable years ended December 31, 1994, December 31,
1995, December 31, 1996, and December 31, 1997, and the Company believes that
its current organization and method of operation should enable it to continue
to meet the requirements for qualification and taxation as a REIT. No
assurances, however, can be provided that the Company has operated in a
manner so as to qualify as a REIT or that it will continue to operate in such
a manner in the future. The Company's qualification and taxation as a REIT
depend upon the Company's ability to meet on a continuing basis (through
actual annual operating results, distribution levels and diversity of stock
ownership) the various qualification tests imposed under the Code, which are
summarized below. While the Company intends to operate so that it qualifies
as a REIT, given the highly complex nature of the rules governing REITs, the
ongoing importance of factual determinations, and the possibility of future
changes in the circumstances of the Company, no assurance can be given that
the actual results of the operations of the Company for any taxable year has
satisfied or will satisfy the requirements under the Code for qualification
and taxation as a REIT. Further, the anticipated income tax treatment
described herein may be changed, perhaps retroactively, by legislative,
administrative or judicial action at any time. See "--Failure to Qualify."
The following is a general summary of the Code provisions that govern
the federal income tax treatment of a REIT and its shareholders. These
provisions of the Code are highly technical and complex. This summary is
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qualified in its entirety by the applicable Code provisions, Treasury
Regulations, and administrative and judicial interpretations thereof.
In any year in which the Company qualifies for taxation as a REIT, it
generally will not be subject to federal corporate income taxes on net income
that it distributes currently to shareholders. This treatment substantially
eliminates the "double taxation" (at the corporate and shareholder levels)
that generally results from investment in a corporation. However, the
Company will be subject to federal income tax on any income that it does not
distribute, and in some circumstances, on certain types of income even though
that income is distributed. In addition, the Property Services Businesses,
which do not qualify as REITs, are subject to federal corporate income tax on
their net income.
Requirements for Qualification.
Organizational Requirements. The Code defines a REIT as a corporation,
trust or association (1) that is managed by one or more trustees or
directors; (2) the beneficial ownership of which is evidenced by transferable
shares, or by transfer certificates of beneficial interest; (3) that would be
taxable as a domestic corporation, but for Sections 856 through 859 of the
Code; (4) that is neither a financial institution nor an insurance company
subject to certain provisions of the Code; (5) the beneficial ownership of
which is held by 100 or more persons; (6) during the last half of each
taxable year not more than 50% in value of the outstanding stock of which is
owned, directly or indirectly, by five or fewer individuals (as defined in
the Code to include certain entities); and (7) that meets certain other
tests, described below, regarding the nature of its income and assets. The
Code provides that conditions (1) through (4), inclusive, must be met during
the entire taxable year and that condition (5) must be met during at least
335 days of a taxable year of 12 months, or during a proportionate part of a
taxable year of less than 12 months. The Company believes that it currently
satisfies requirements (1) through (6). In addition, the Company's Charter
includes restrictions regarding the transfer of its shares that are intended
to assist the Company in continuing to satisfy the share ownership
requirements described in (5) and (6) above. See "Description of Common
Stock Restrictions on Transfer; Excess Stock." Moreover, pursuant to the
1997 Act, for the Company's taxable years commencing on or after January 1,
1998, if the Company complies with regulatory rules pursuant to which it is
required to send annual letters to holders of Common Stock requesting
information regarding the actual ownership of the Common Stock, and the
Company does not know, or exercising reasonable diligence would not have
known, whether it failed to meet requirement (6) above, the Company will be
treated as having met the requirement.
Gross Income Tests. In order to maintain qualification as a REIT, the
Company must satisfy two gross income requirements, which are applied on an
annual basis, and it must have satisfied a third gross income requirement for
each taxable year ending on or before December 31, 1997. First, at least 75%
of the Company's gross income (excluding gross income from prohibited
transactions) for each taxable year must be derived directly or indirectly
from investments relating to real property or mortgages on real property
(including "rents from real property" and, in certain circumstances,
interest) or from certain types of temporary investments. Second, at least
95% of the Company's gross income (excluding gross income from prohibited
transactions) for each taxable year must be derived from sources that qualify
for purposes of the 75% test, and from dividends, interest and gain from the
sale or disposition of stock or securities, or from any combination of the
foregoing. Third, for its taxable years ending on or before December 31,
1997, the Company must have derived less than 30% of the its gross income
(including gross income from prohibited transactions) from short-term gain
from the sale or other disposition of stock or securities, gain from
prohibited transactions and gain on the sale or other disposition of real
property held for less than four years (apart from involuntary conversions
and sales of foreclosure property). The Company does not have to meet the
30% test for its taxable years commencing on or after January 1, 1998.
Rents received by the Company will qualify as "rents from real property"
in satisfying the gross income requirements for a REIT described above only
if several conditions (relating to the identity of the tenant, the
computation of the rent payable, and the nature of the property leased) are
met. The Company believes that the portion, if any, of the rents that it
receives that fails to qualify as "rents from real property" has been and
will continue to be sufficiently small that the Company will satisfy the 75%
and 95% gross income tests. The Company's belief with respect to this
matter, however, is based upon the advice of counsel with respect to certain
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technical issues regarding the determination of "rents from real property"
that are not definitively answered under the Code, the Treasury Regulations,
and published administrative interpretations. There can be no assurance that
the Internal Revenue Service (the "IRS") will agree with these conclusions.
In addition, for rents received to qualify as "rents from real
property," the Company generally must not operate or manage the property or
furnish or render services to tenants, other than through an "independent
contractor" from whom the Company derives no revenue. The "independent
contractor" requirement, however, does not apply to the extent the services
are "usually or customarily rendered" in connection with the rental space for
occupancy only and are not otherwise considered "rendered to the occupant"
("Permissible Services"). The Operating Partnership itself and the Property
Service Businesses, which are not independent contractors, provide certain
services with respect to the Properties. The Company received rulings from
the IRS that the provision of certain of these services will not cause the
rents received with respect to the Properties to fail to qualify as "rents
from real property." The Company also received rulings from the IRS to the
effect that certain revenues (including rents from corporate apartments,
revenues from laundry equipment, certain parking revenues, and certain
revenues related to the provision of telephone and CATV services) will
qualify as "rents from real property." Based upon its experience in the
multifamily and retail property rental markets in which the Company's
properties are located, the Company believes that all services provided to
tenants by the Company (whether through the Operating Partnership or through
the Property Services Businesses) should be considered "usually or
customarily rendered" in connection with the rental of apartments or retail
space, as applicable, for occupancy only, although there can be no assurance
that the IRS will not contend otherwise. In this regard, if the Operating
Partnership contemplates providing services that reasonably might be expected
not to meet the "usual or customary" standard, it will arrange to have such
services provided by an independent contractor from which neither the Company
nor the Operating Partnership receives any income.
Pursuant to the 1997 Act, for the Company's taxable years commencing on
or after January 1, 1998, rents received generally will qualify as rents from
real property notwithstanding the fact that the Company provides services
that are not Permissible Services so long as the amount received for such
services meets a de minimis standard. The amount received for "impermissible
services" with respect to a property (or, if services are available only to
certain tenants, possibly with respect to such tenants) cannot exceed one
percent of all amounts received, directly or indirectly, by the REIT with
respect to such property (or, if services are available only to certain
tenants, possibly with respect to such tenants). The amount that a REIT will
be deemed to have received for performing "impermissible services" will be
the greater of the actual amount so received or 150% of the direct cost to
the REIT of providing those services.
The Operating Partnership may receive fees for the performance of
property management and other services with respect to properties in which
the Operating Partnership has a partial interest. Only the portion of the
management fee that corresponds to the Operating Partnership's interest in
such properties will qualify as "rents from real property," with the balance
being nonqualifying income. The Operating Partnership also may receive
certain other types of non-qualifying income (including, for example, certain
expense reimbursements, and dividends and interest from the Property Service
Businesses (which qualify under the 95% gross income test but not under the
75% gross income test)). The Company believes, however, that the aggregate
amount of such fees and other non-qualifying income in any taxable year will
not cause the Company to exceed the limits on non-qualifying income under the
75% and 95% gross income tests.
If the Company fails to satisfy one or both of the 75% or the 95% gross
income tests for any taxable year, it may nevertheless qualify as a REIT for
such year if it is entitled to relief under certain provisions of the Code.
It is not possible, however, to state whether in all circumstances the
Company would be entitled to the benefit of these relief provisions. Even if
these relief provisions were to apply, a 100% tax would be imposed with
respect to the "excess net income" attributable to the failure to satisfy the
75% and 95% gross income tests.
Asset Tests. At the close of each quarter of the Company's taxable
year, the Company must satisfy three tests relating to the nature of its
assets. First, at least 75% of the value of the Company's total assets must
be represented by "real estate assets," cash, cash items, and government
securities. Second, not more than 25% of the Company's total assets may be
represented by securities, other than those in the 75% asset class. Third,
of the
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investments included in the 25% asset class, the value of any one issuer's
securities owned by the Company may not exceed 5% of the value of the
Company's total assets, and the Company may not own more than 10% of any one
issuer's outstanding voting securities. The Operating Partnership owns 100%
of the nonvoting stock of each of the Property Service Businesses. In
addition, the Operating Partnership holds notes from each of the Property
Service Businesses, and by virtue of its ownership of Units, the Company will
be considered to own its pro rata share of the assets of the Operating
Partnership, including the securities of each of the Property Service
Businesses described above. The Operating Partnership, however, does not own
more than 10% of the voting securities of any of the Property Service
Businesses. In addition, the Company believes that the Company's pro rata
share of the value of the securities of each of the Property Service
Businesses does not exceed 5% of the total value of the Company's assets.
There can be no assurance, however, that the IRS might not contend either
that the value of the securities of one or more of the Property Service
Businesses exceeds the 5% value limitation, or that all or some of the
Property Service Businesses shall be viewed as a single corporation for
purposes of the 5% value limitation and that the value of the securities of
that corporation exceeds the 5% limitation, or that the nonvoting stock of
one or more of the Property Service Businesses should be considered "voting
securities" for purposes of the 10% limitation.
The 5% value requirement must be satisfied not only on the date the
Company acquired securities of the Property Service Businesses, but also each
time the Company increases its ownership of securities of the Property
Service Businesses (including as a result of increasing its interest in the
Operating Partnership as Limited Partners exercise their rights to have Units
redeemed for shares of Common Stock or, at the option of the Company, cash).
Although the Company plans to take steps to ensure that it satisfies the 5%
value test for any quarter with respect to which retesting is to occur, there
can be no assurance that such steps always will be successful or will not
require a reduction in the Operating Partnership's overall interest in the
Property Service Businesses.
Annual Distribution Requirements. To qualify as a REIT, the Company
generally must distribute to its shareholders at least 95% of its income
(excluding any net capital gains) from each taxable year either during such
taxable year or, if certain procedures are followed, during the subsequent
taxable year. The Company will be subject to tax on amounts not distributed
at regular capital gains and ordinary income rates. With respect to income
distributed during a year subsequent to the year in which it was earned by
the Company, if the Company does not pay federal income tax with respect to
such income, the Company may be subject to a 4% excise tax on such income.
The Company believes that it has made, and intends to continue to make,
timely distributions sufficient to satisfy the annual distribution
requirements. It is possible, however, that the Company, from time to time,
may not have sufficient cash or other liquid assets to meet the 95%
distribution requirement. In that event, the Company may cause the Operating
Partnership to arrange for short-term, or possibly long-term, borrowing to
permit the payments of required dividends.
Failure to Qualify. If the Company fails to qualify for taxation as a
REIT in any taxable year and the relief provisions do not apply, the Company
will be subject to tax (including any applicable alternative minimum tax) on
its taxable income at regular corporate rates. Unless entitled to relief
under specific statutory provisions, the Company also will be disqualified
from taxation as a REIT for the four taxable years following the year during
which qualification was lost. It is not possible to state whether in all
circumstances the Company would be entitled to such statutory relief.
Tax Aspects of the Company's Investments in the Operating Partnership and
Property Service Businesses
General. All of the Company's investments are through the Operating
Partnership, and the Operating Partnership holds substantially all of the
Properties through certain subsidiary partnerships. This structure may
involve special tax considerations. These tax considerations include: (a)
the allocations of income and expense items of the Operating Partnership and
such subsidiary partnerships, which could affect the computation of taxable
income of the Company, (b) the status of the Operating Partnership and each
such subsidiary partnership as partnership (as opposed to an association
taxable as a corporation) for income tax purposes, and (c) the taking of
actions by the Operating Partnership or any of such subsidiary partnerships
that could adversely affect the Company's qualification as a REIT. The
Company believes that the Operating Partnership and each of the
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subsidiary partnerships will be treated for tax purposes as a partnership
(and not as an association taxable as a corporation). If, however, the
Operating Partnership or any of such subsidiary partnerships were treated as
an association taxable as a corporation, the Company would fail to qualify
as a REIT for a number of reasons.
Tax Allocations with Respect to the Properties. The Operating
Partnership was formed by way of contributions of appreciated property
(including certain of the Properties) to the Partnership at the time of its
formation, and it has acquired a number of properties by contribution since
that time. When property is contributed to a partnership in exchange for an
interest in the partnership, the partnership generally takes a carryover
basis in that property for tax purposes equal to the adjusted basis of the
contributing partner in the property, rather than a basis equal to the fair
market value of the property at the time of contribution (this difference is
referred to as a "Book-Tax Difference"). The Partnership Agreement requires
such allocations to be made in a manner consistent with Section 704(c) of the
Code and the regulations thereunder, which allocations will tend to eliminate
the Book-Tax Differences with respect to the contributed Properties over the
life of the Operating Partnership. However, because of certain technical
limitations, the special allocation rules of Section 704(c) of the Code may
not always entirely eliminate the Book-Tax Difference on an annual basis or
with respect to a specific taxable transaction such as a sale. Thus, the
carryover basis of the contributed Properties in the hands of the Operating
Partnership could cause the Company (i) to be allocated lower amounts of
depreciation and other deductions for tax purposes than would be allocated to
the Company if all Properties were to have a tax basis equal to their fair
market value at the time of the Formation Transactions or a subsequent
acquisition, and (ii) possibly to be allocated taxable gain in the event of a
sale of such contributed Properties in excess of the economic or book income
allocated to the Company as a result of such sale.
Property Service Businesses. A substantial portion of the amounts used
by the Operating Partnership to fund distributions to partners (which in turn
are used by the Company to fund distributions to holders of Common Stock)
comes from the Property Service Businesses, through payments on notes issued
by the Property Service Businesses and dividends on non-voting stock of the
Property Service Businesses held by the Operating Partnership. The Property
Service Businesses do not qualify as REITs and thus pay federal, state and
local income taxes on their net income at normal corporate rates. The
Property Service Businesses attempt to limit the amount of such taxes. There
can be no assurance, however, whether or the extent to which measures taken
to limit taxes will be successful. Moreover, even if those measures are
successful, future increases in the income of the Property Service Businesses
inevitably will be subject to income tax. To the extent that the Property
Service Businesses are required to pay federal, state and local income taxes,
the cash available for distribution to shareholders will be reduced
accordingly. In addition, as described above, the value of the securities of
each of the Property Service Businesses held by the Operating Partnership
cannot exceed 5% of the value of the Operating Partnership's assets at a time
when a Limited Partner exercises his or her redemption right (or the Company
otherwise is considered to acquire additional securities of a Property
Service Business) and the Company cannot own 10% or more of the voting
securities of the Property Service Businesses. See " Requirements for
Qualification Asset Tests." These limitations may restrict the ability of
the Property Service Businesses to increase the size of their respective
businesses unless the value of the assets of the Operating Partnership is
increasing at a commensurate rate, and they prohibit the Operating
Partnership from exercising control over the Property Service Businesses.
Taxation of Shareholders
Taxation of Taxable Domestic Shareholders. As used herein, the term
"U.S. Shareholder" means a holder of Common Stock who (for United States
federal income tax purposes) is (i) a citizen or resident of the United
States, (ii) a corporation, partnership, or other entity created or organized
in or under the laws of the United States or of any political subdivision
thereof, (iii) an estate or trust the income of which is subject to United
States federal income taxation regardless of its source, or (iv) a trust
whose administration is subject to the primary supervision of a United States
court and which has one or more United States persons who have the authority
to control all substantial decisions of the trust.
As long as the Company qualifies as a REIT, distributions made to the
Company's taxable U.S. Shareholders out of current or accumulated earnings
and profits (and not designated as capital gain dividends) will
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be taken into account by them as ordinary income, and corporate shareholders
will not be eligible for the dividends received deduction as to such amounts.
Distributions that are designated as capital gain dividends will be
taxed to taxable non-corporate (i.e., individuals, estates, or trusts) U.S
shareholders as gains from the sale or exchange of a capital asset held for
more than one year (to the extent they do not exceed the Company's actual net
capital gain for the taxable year) without regard to the period for which
such shareholders have held their stock. On November 10, 1997, the IRS
issued Notice 97-64, which provides generally that the Company may classify
portions of its designated capital gain dividend as (i) a 20% gain
distribution (which would be taxable to taxable non-corporate U.S.
Shareholders at a maximum rate of 20%), (ii) an unrecaptured Section 1250
gain distribution (which would be taxable to taxable non-corporate U.S.
Shareholders at a maximum rate of 25%), or (iii) a 28% rate gain distribution
(which would be taxable to taxable non-corporate U.S. Shareholders at a
maximum rate of 28%). (If no designation is made, the entire designated
capital gain dividend will be treated as a 28% rate gain distribution.)
Notice 97-64 provides that a REIT must determine the maximum amounts that it
may designate as 20% and 25% rate capital gain dividends by performing the
computation required by the Code as if the REIT were an individual whose
ordinary income were subject to a marginal tax rate of at least 28%. Notice
97-64 further provides that designations made by the REIT only will be
effective to the extent that they comply with Revenue Ruling 89-81, which
requires that distributions made to different classes of shares be composed
proportionately of dividends of a particular type.
Distributions made by the Company that are properly designated as
capital gain dividends will be taxable to taxable corporate U.S. Shareholders
as long-term gain (to the extent that they do not exceed the Company's actual
net capital gain for the taxable year) without regard to the period for which
such corporate U.S. Shareholders have held their Common Stock. Such
corporate U.S. Shareholders, however, may be required to treat up to 20% of
certain capital gain dividends as ordinary income.
Distributions in excess of current and accumulated earnings and profits
will not be taxable to a taxable U.S. Shareholder to the extent that they do
not exceed the adjusted basis of such U.S. Shareholder's Common Stock, but
rather will reduce the adjusted basis of such Common Stock. To the extent
that such distributions exceed the adjusted basis of a taxable U.S.
Shareholder's Common Stock, they will be included in income as capital gains,
assuming the Common Stock is a capital asset in the hands of the shareholder.
In general, a taxable U.S. Shareholder will realize gain or loss on the
disposition of Common Stock equal to the difference between (i) the amount of
cash and the fair market value of any property received on such disposition
and (ii) the U.S. Shareholder's adjusted basis of such Common Stock. Such
gain or loss will be capital gain or loss if the Common Stock has been held
as a capital asset. In the case of a taxable U.S. Shareholder that is a
corporation, such capital gain or loss will be long-term capital gain or loss
if such Common Stock has been held for more than one year. Generally, in the
case of a taxable non-corporate U.S. Shareholder, such capital gain or loss
will be taxed (i) at a maximum rate of 20% if such Common Stock has been held
for more than 18 months; (ii) at a maximum rate of 28% if such Common Stock
has been held for more than one year but not more than 18 months; and (iii)
for dispositions occuring after December 31, 2000, at a maximum rate of 18%
if the Common Stock has been held for more than five years. The 1997 Act
allows the IRS to issue regulations relating to how the 1997 Act's new
capital gain rates will apply to sales of capital assets by "pass-through
entities," which include REITs such as the Company, and to sales of interests
in "pass-through entities." To date, the IRS has not issued such
regulations, but if issued, such regulations could affect the taxaction of
gain and loss realized on the disposition of Common Stock. Shareholders are
urged to consult with their own tax advisors with respect to the new rules
contained in the 1997 Act.
Loss upon a sale or exchange of Common Stock by a taxable U.S.
Shareholder who has held such Common Stock for six months or less (after
applying certain holding period rules) will be treated as long-term capital
loss to the extent of distributions from the Company required to be treated
by such shareholder as long-term capital gain. For a taxable non-corporate
U.S. Shareholder, the long-term capital loss will be apportioned among the
applicable long-term capital gain groups to the extent that distributions
received by such U.S. Shareholder were previously so treated.
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The Company may elect to require the holders of Common Stock to include
the Company's undistributed net capital gains in their income. If the
Company makes such an election, the holders of Common Stock will (i) include
in their income as long-term capital gains their proportionate share of such
undistributed capital gains and (ii) be deemed to have paid their
proportionate share of the tax paid by the Company on such undistributed
capital gains and thereby receive a credit or refund for such amount. A
holder of Common Stock will increase the basis in its Common Stock by the
difference between the amount of capital gain included in its income and the
amount of the tax it is deemed to have paid. The earnings and profits of the
Company will be adjusted appropriately.
Under certain circumstances, U.S. Shareholders may be subject to backup
withholding at the rate of 31% with respect to dividends paid.
Taxation of Tax-Exempt Shareholders. The Company does not expect the
distributions by the Company to a shareholder that is a tax-exempt entity
will constitute "unrelated business taxable income" ("UBTI"), provided that
the tax-exempt entity has not financed the acquisition of its Common Stock
with "acquisition indebtedness" within the meaning of the Code, and the
Common Stock is not otherwise used in an unrelated trade or business of the
tax-exempt entity. For tax-exempt shareholders that are social clubs,
voluntary employee benefit associations, supplemental unemployment benefit
trusts, and qualified group legal services plans exempt from federal income
taxation under Code Sections 501 (c)(7), (c)(9), (c)(17) and (c)(20),
respectively, income from an investment in the Company will constitute UBTI
unless the organization is able to properly deduct amounts set aside or
placed in reserve for certain purposes so as to offset the income generated
by its investment in the Company. Such prospective shareholders should
consult their own tax advisors concerning these "set aside" and reserve
requirements.
Taxation of Non-U.S. Shareholders. The rules governing U.S. federal
income taxation of nonresident alien individuals, foreign corporations,
foreign partnerships and other foreign shareholders (collectively, "Non-U.S.
Shareholders") are complex, and no attempt will be made herein to provide
more than a limited summary of such rules. Prospective Non-U.S. Shareholders
should consult with their own tax advisors to determine the impact of U.S.
federal, state and local income tax laws with regard to an investment in
Common Stock, including any reporting requirements.
Distributions that are not attributable to gain from sales or exchanges
by the Company of U.S. real property interests and not designated by the
Company as capital gain dividends will be treated as dividends of ordinary
income to the extent that they are made out of current or accumulated
earnings and profits of the Company. Such distributions, ordinarily, will be
subject to a withholding tax equal to 30% of the gross amount of the
distribution unless an applicable tax treaty reduces that tax. Distributions
in excess of current and accumulated earnings and profits of the Company will
not be taxable to a shareholder to the extent that they do not exceed the
adjusted basis of the shareholder's Common Stock, but rather will reduce the
adjusted basis of such Common Stock. To the extent that such distributions
exceed the adjusted basis of a Non-U.S. Shareholder's Common Stock, they will
give rise to tax liability if the Non-U.S. Shareholder otherwise would be
subject to tax on any gain from the sale or disposition of his Common Stock
as described below. To the extent that such distributions exceed the adjusted
basis of a Non-U.S. Shareholder's Common Stock, they will give rise to gain
from the sale or exchange of its Common Stock, the tax treatment of which is
described below. As a result of a legislative change made by the Small
Business Job Protection Act of 1996, it appears that the Company will be
required to withhold 10% of any distribution in excess of the Company's
current and accumulated earnings and profits. Consequently, although the
Company intends to withhold at a rate of 30% on the entire amount of any
distribution (or a lower applicable treaty rate), to the extent that the
Company does not do so, any portion of a distribution not subject to
withholding at a rate of 30% (or a lower applicable treaty rate) will be
subject to withholding at a rate of 10%. However, the Non-U.S. Shareholder
may seek a refund of such amounts from the IRS if it subsequently determined
that such distribution was, in fact, in excess of current or accumulated
earnings and profits of the Company, and the amount withheld exceeded the
Non-U.S. Shareholder's United States tax liability, if any, with respect to
the distribution.
For any year in which the Company qualifies as a REIT, distributions
that are attributable to gain from sales or exchanges by the Company of U.S.
real property interests will be taxed to a Non-U.S. Shareholder under the
provisions of the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"), at the normal capital gain
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rates applicable to U.S. shareholders (subject to applicable alternative
minimum tax and a special alternative minimum tax in the case of nonresident
alien individuals). Also, distributions subject to FIRPTA may be subject to
a 30% branch profits tax in the hands of a corporate Non-U.S. Shareholder not
entitled to treaty relief or exemption. The Company is required by
applicable Treasury Regulations to withhold 35% of any distribution that
could be designated by the Company as a capital gain dividend. This amount
is creditable against the Non-U.S. Shareholder's FIRPTA tax liability.
Although the law is not entirely clear on the matter, it appears that
amounts designated by the Company pursuant to the 1997 Act as undistributed
capital gains in respect of shares of Common Stock (see "Taxation of
Shareholders -- Taxation of Taxable Domestic Shareholders" above) would be
treated with respect to Non-U.S. Shareholders in the manner outlined in the
preceding paragraph for actual distributions by the Company of capital gain
dividends. Under that approach, the Non-U.S. Shareholders would be able to
offset as a credit against their United States federal income tax liability
resulting therefrom their proportionate share of the tax paid by the Company
on such undistributed capital gains (and to receive from the IRS a refund to
the extent their proportionate share of such tax paid by the Company were to
exceed their actual United States federal income tax liability).
Gain recognized by a Non-U.S. Shareholder upon a sale of Common Stock
generally will not be taxed under FIRPTA if the Company is a "domestically
controlled REIT," defined generally as a REIT in which at all times during a
specified testing period less than 50% in value of the stock was held
directly or indirectly by foreign persons. The Company believes that it
currently is a "domestically controlled REIT," and, therefore, the sale of
Common Stock will not be subject to taxation under FIRPTA. If the gain on
the sale of Common Stock were to be subject to tax under FIRPTA, the Non-U.S.
Shareholder would be subject to the same treatment as U.S. shareholders with
respect to such gain (subject to applicable alternative minimum tax and a
special alternative minimum tax in the case of nonresident alien
individuals), and the purchaser of the Common Stock would be required to
withhold and remit to the IRS 10% of the purchase price.
Other Tax Considerations
Recent Legislation. In addition to the provisions discussed above, the
1997 Act contains a number of technical provisions that either (i) reduce the
risk that the Company will inadvertently cease to qualify as a REIT, or (ii)
provide additional flexibility with which the Company can meet the REIT
qualification requirements. These provisions are effective for the Company's
taxable years commencing on or after January 1, 1998.
State and Local Taxes; District of Columbia Unincorporated Business Tax.
The Company and its shareholders may be subject to state or local taxation in
various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of the
Company and its shareholders may not conform to the federal income tax
consequences discussed above. Consequently, prospective shareholders should
consult their own tax advisors regarding the effect of state and local tax
laws on an investment in Common Stock.
In this regard, the District of Columbia imposes an unincorporated
business income tax, at an effective rate of 9.975% on the "District of
Columbia taxable income" of partnerships doing business in the District of
Columbia. Because certain of the Properties are located in the District of
Columbia, the subsidiary partnership owning these properties will be subject
to this tax. Thus, in effect, the Company's share of the "District of
Columbia taxable income" attributable to the Properties located in the
District of Columbia will be subject to this tax. The Operating Partnership
and such subsidiary partnership will attempt to reduce the amount of income
that is considered "District of Columbia taxable income," but it is likely
that some portion of the income attributable to the Properties located in the
District of Columbia will be subject to the District of Columbia tax. To the
extent the Operating Partnership or such subsidiary partnership is required
to pay the District of Columbia unincorporated business income tax, the cash
available for distribution to the Company and, therefore, to its shareholders
as dividends will be reduced accordingly. Moreover, a shareholder of the
Company will not receive a credit against its own state income tax liability
for its share of any District of Columbia unincorporated business income tax
paid by the Operating Partnership or such subsidiary partnership. This tax
would not apply if the Company were to own and operate its assets directly,
rather than through the Operating Partnership; however, the Company's ability
to eliminate the Operating Partnership and thus own its assets directly is
severely limited.
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PLAN OF DISTRIBUTION
The Company may sell Securities in or through underwriters for public
offer and sale by them, and also may sell Securities offered hereby to
investors directly or through agents. Any such underwriter or agent involved
in the offer and sale of the Securities will be named in the applicable
Prospectus Supplement.
Underwriters may offer and sell the Securities at a fixed price or
prices, which may be changed, at prices related to the prevailing market
prices at the time of sale or at negotiated prices. The Company also may,
from time to time, authorize underwriters acting as the Company's agents to
offer and sell Securities upon terms and conditions set forth in the
applicable Prospectus Supplement. In connection with the sale of the
Securities, underwriters may be deemed to have received compensation from the
Company in the form of underwriting discounts or commissions and may also
receive commissions from purchasers of the Securities for whom they may act
as agent. Underwriters may sell Securities to or through dealers, and such
dealers may receive compensation in the form of discounts, concessions or
commissions from the underwriters and/or commissions from the purchasers for
whom they may act as agent.
Any underwriting compensation paid by the Company to underwriters or
agents in connection with the offering of the Securities, and any discounts,
concessions or commissions allowed by underwriters to participating dealers,
will be set forth in the applicable Prospectus Supplement. Underwriters,
dealers and agents participating in the distribution of the Securities may be
deemed to be underwriters, and any discounts and commissions received by them
and any profit realized by them on resale of the Securities may be deemed to
be underwriting discounts and commissions under the Securities Act.
Underwriters, dealers and agents may be entitled, under agreements to be
entered into with the Company, to indemnification against and contribution
toward certain civil liabilities, including liabilities under the Securities
Act.
If so indicated in the applicable Prospectus Supplement, the Company
will authorize underwriters or other persons acting as the Company's agents
to solicit offers by certain institutions to purchase Securities from the
Company at the public offering price set forth in such Prospectus Supplement
pursuant to delayed delivery contracts ("Contracts") providing for payment
and delivery on the date or dates stated in such Prospectus Supplement. Each
Contract will be for an amount not less than, and the aggregate principal
amount of Securities sold pursuant to Contracts shall be not less nor more
than, the respective amounts stated in the applicable Prospectus Supplement.
Institutions with whom Contracts, when authorized, may be made include
commercial and savings banks, insurance companies, pension funds, investment
companies, educational and charitable institutions, and other institutions
but will in all cases be subject to the approval of the Company. Contracts
will not be subject to any conditions except (i) the purchase by an
institution of the Securities covered by its Contracts shall not at the time
of delivery be prohibited under the laws of any jurisdiction in the United
States to which such institution is subject, and (ii) if the Securities are
being sold to underwriters, the Company shall have sold to such underwriters
the total principal amount of the Securities less the principal amount
thereof covered by Contracts.
Certain of the underwriters and their affiliates may be customers of,
engage in transactions with and perform services for the Company and its
Subsidiaries in the ordinary course of business.
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LEGAL MATTERS
The legality of the Debt Securities, the Preferred Stock, the Depositary
Shares, the Common Stock and the Common Stock Warrants offered hereby will be
passed upon for the Company by Hogan & Hartson L.L.P., Washington, D.C.
EXPERTS
The Company's financial statements and related schedule incorporated by
reference herein and elsewhere in the Registration Statement have been
audited by Arthur Andersen LLP, independent public accountants, as indicated
in their report with respect thereto, and are included herein in reliance
upon the authority of said firm as experts in giving said report.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports and other information with the Securities
and Exchange Commission (the "Commission"). Such reports, proxy statements
and other information can be inspected at the Public Reference Section
maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and the following regional offices of the Commission:
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and Seven
World Trade Center, 13th Floor, New York, New York 10048. Copies of such
material can be obtained from the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. In
addition, the Company's Common Stock is listed on the New York Stock Exchange
and such reports, proxy statements and other information concerning the
Company can be inspected at the offices of the New York Stock Exchange, 20
Broad Street, New York, New York 10005.
The Company has filed with the Commission a registration statement on
Form S-3 (the "Registration Statement"), of which this Prospectus is a
part, under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the Securities offered hereby. This Prospectus does not
contain all of the information set forth in the Registration Statement,
certain portions of which have been omitted as permitted by the rules and
regulations of the Commission. Statements contained in this Prospectus as to
the contents of any contract or other documents are not necessarily complete,
and in each instance, reference is made to the copy of such contract or
documents filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference and the exhibits
and schedules thereto. For further information regarding the Company and the
Securities, reference is hereby made to the Registration Statement and such
exhibits and schedules which may be obtained from the Commission at its
principal office in Washington, D.C. upon payment of the fees prescribed by
the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The documents listed below have been filed by the Company under the
Exchange Act with the Commission and are incorporated herein by reference:
1. The Company's Annual Report on Form 10-K for the year ended December
31, 1996 (the "10-K").
2. The Company's Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1997, June 30, 1997 and September 30, 1997.
3. The Company's Current Reports on Form 8-K dated January 31, 1997 (as
amended on Form 8-K/A) and October 3, 1997 (as amended on Form
8-K/A).
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<PAGE>
All documents filed subsequent to the date of this Prospectus pursuant
to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act and prior to
termination of the offering of all Securities to which this Prospectus
relates shall be deemed to be incorporated by reference in this Prospectus
and shall be part hereof from the date of filing of such document.
Any statement contained herein or in a document incorporated or deemed
to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained in this Prospectus (in the case of a statement in a previously
filed document incorporated or deemed to be incorporated by reference
herein), in any accompanying Prospectus Supplement relating to a specific
offering of Securities or in any other subsequently filed document that is
also incorporated or deemed to be incorporated by reference herein, modifies
or supersedes such statement. Any such statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a
part of this Prospectus or any accompanying Prospectus Supplement. Subject to
the foregoing, all information appearing in this Prospectus and each
accompanying Prospectus Supplement is qualified in its entirety by the
information appearing in the documents incorporated by reference.
The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, upon their
written or oral request, a copy of any or all of the documents incorporated
herein by reference (other than exhibits to such documents, unless such
exhibits are specifically incorporated by reference in such documents).
Written requests for such copies should be addressed to Mr. Brian A. Cass, the
Company's Director of Corporate Finance, at 2345 Crystal
Drive, Arlington, Virginia 22202, telephone number (703) 769-1159.
As used herein, the term "Company" includes Charles E. Smith
Residential Realty, Inc., a Maryland corporation, and one or more of its
subsidiaries (including Charles E. Smith Residential Realty L.P., Smith
Realty Company, Consolidated Engineering Services, Inc. and Smith Management
Construction, Inc.) or, as the context may require, Charles E. Smith
Residential Realty, Inc. only or Charles E. Smith Residential Realty L.P.
(the "Operating Partnership") only.
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<PAGE>
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus, and, if given
or made, such information or representations must not be relied upon as
having been authorized. This Prospectus does not constitute an offer to sell
or the solicitation of an offer to buy any securities other than the
securities to which it relates or an offer to sell or the solicitation of an
offer to buy such securities in any circumstances in which such offer or
solicitation is unlawful. Neither the delivery of this Prospectus nor any
sale made hereunder shall, under any circumstances, create any implication
that there has been no change in the affairs of the Company since the date
hereof or that the information contained herein is correct as of any time
subsequent to its date.
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TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Page
The Company................................... S-3
Description of Series C Preferred Shares...... S-4
Federal Income Tax Considerations............. S-22
Use Of Proceeds............................... S-24
Plan of Distribution.......................... S-24
Legal Matters................................. S-24
Prospectus
The Company................................... 2
Risk Factors.................................. 2
Use of Proceeds............................... 7
Ratios of Earnings to Fixed Charges........... 7
Description of Debt Securities................ 8
Description of Preferred Stock................ 19
Description of Common Stock................... 24
Description of Common Stock Warrants.......... 28
Redemption of Units........................... 32
Federal Income Tax Considerations............. 29
Plan of Distribution.......................... 35
Legal Matters................................. 36
Experts....................................... 36
Available Information......................... 36
Incorporation of Certain Documents
by Reference............................. 37
500 Shares
Charles E. Smith
Residential Realty, Inc.
Series C Cumulative
Redeemable Preferred Stock
(par value $.01 per share)
(Liquidation Preference $100,000 per share)
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PROSPECTUS SUPPLEMENT
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