<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
DATE OF REPORT (Date of earliest event reported): April 17, 1998
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
(Exact name of registrant as specified in its charter)
Commission File Number: 1934 Act File Number: 1-13174
Maryland 54-1681655
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2345 Crystal Drive
Crystal City, VA 22202
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number including area code: (703) 920-8500
<PAGE>
Item 7. Financial Statements and Exhibits
- -------------------------------------------
The following pro forma financial information is included as an amendment to the
Form 8-K dated April 17, 1998 and filed on April 22, 1998 for Charles E. Smith
Residential Realty, Inc. (the "Company") which is the general partner of Charles
E. Smith Residential Realty L.P. (the "Operating Partnership"):
(A) Pro forma financial information beginning at page F-2
(B) Historical financial information for McClurg Court beginning at page F-8
(C) Exhibits
99.1 Consent of Independent Auditors dated April 17, 1998
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, hereunto duly authorized, on this 23rd day of
April 1998.
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
By: /s/ W. D. Minami
----------------
W. D. Minami
Senior Vice President and Chief Financial
Officer of the Registrant
By: /s/ Steven. E. Gulley
---------------------
Steven E. Gulley
Vice President and Chief Accounting Officer
of the Registrant
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND PRO FORMA INFORMATION
Page
----
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
Pro Forma (unaudited) Consolidated Balance Sheet F-3
as of December 31, 1997
Pro Forma (unaudited) Consolidated Statement of F-4
Operations for the year ended December 31, 1997
Pro Forma (unaudited) Consolidated Statement of F-5
Operations for the year ended December 31, 1996
Notes and Management's Assumptions to Unaudited Pro Forma
Consolidated Financial Information F-6
ACQUISITION PROPERTIES
Independent Auditors' Report - McClurg Court F-8
Associates Limited Partnership
Consolidated Financial Statements for McClurg Court Associates F-9
Limited Partnership as of December 31, 1997 and 1996 and
for the years then ended (audited)
F-1
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The unaudited Pro Forma Consolidated Balance Sheet as of December 31, 1997 and
the unaudited Pro Forma Consolidated Statements of Operations for the years
ended December 31, 1997 and 1996 are based on the historical financial
statements of the Company and the Operating Partnership.
The unaudited Pro Forma Consolidated Balance Sheet as of December 31, 1997 is
presented as if the McClurg Court acquisition had occurred on December 31, 1997.
The unaudited Pro Forma Consolidated Statements of Operations for the years
ended December 31, 1997 and 1996 are presented as if the acquisitions of Crystal
Plaza, Crystal Towers, The Kenmore, Lincoln Towers, One East Delaware, 2000
Commonwealth, McClurg Court and related offerings had occurred at the beginning
of the periods. The unaudited pro forma information should be read in
conjunction with the historical financial statements and notes related thereto
appearing in the Company's Form 10-K.
Preparation of the pro forma financial information was based on assumptions
considered appropriate by the Company's management. The pro forma financial
information is unaudited and is not necessarily indicative of the results which
would have occurred if the acquisitions had been consummated at the beginning
of the periods presented, nor does it purport to represent the future financial
position and results of operations for future periods. In management's opinion,
all adjustments necessary to reflect the effects of these transactions have been
made.
F-2
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1997
(UNAUDITED) (IN THOUSANDS)
<TABLE>
<CAPTION>
Pro forma Adjustments
-----------------------------
Acquisitions
----------------
McClurg Other
Historical Court (A) Adjustments Pro Forma
-------------- ----------- ------------- --------------
<S> <C> <C> <C> <C>
ASSETS
Rental property, at predecessor cost, net $ 261,609 $ 261,609
Rental property, acquired and developed, net 489,621 75,400 (B) 565,021
Rental property under development 53,093 53,093
Cash and cash equivalents 0 0
Tenants' security deposits 2,453 791 3,244
Escrow funds 7,606 7,606
Investment in and advances to Property Service Businesses and other 15,905 15,905
Deferred charges, net 16,047 16,047
Other assets 19,172 19,172
-------------- --------------
Total assets $ 865,506 $ 941,697
============== ==============
LIABILITIES AND EQUITY
Liabilities
Mortgage loans $ 500,435 $ 500,435
Lines of credit 105,000 74,400 179,400
Construction loan 5,536 5,536
Accounts payable and accrued expenses 13,732 1,000 14,732
Tenants' security deposits 2,453 791 3,244
-------------- --------------
Total liabilities 627,156 703,347
-------------- --------------
Minority Interest 80,036 80,036
-------------- --------------
Shareholders' equity
Preferred stock
Series A Cumulative Convertible Redeemable Preferred Stock 45,000 45,000
Series B Cumulative Convertible Redeemable Preferred Stock 34,675 34,675
Common stock 150 150
Additional paid-in capital 84,861 84,861
Retained deficit (6,372) (6,372)
-------------- --------------
Total shareholders' equity 158,314 158,314
-------------- --------------
Total liabilities and shareholders' equity $ 865,506 $ 941,697
============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Pro forma Adjustments
--------------------------------------------------------------
Acquisitions
--------------------------------------------------------------
Crystal Crystal The Lincoln
Historical Plaza (A) Towers (A) Kenmore (A) Towers
------------- ---------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C>
Rental properties
Revenues $ 200,104 1,058 1,893 517 8,378
Expenses
Operating costs 71,425 440 625 258 2,743
Real estate taxes 12,402 58 116 37 530
Depreciation and amortization 20,666 - - - -
------------ ---------- ------------ -------------- -------------
Total expenses 104,493 498 741 295 3,273
Equity in income of Property Service Businesses 7,597
Corporate general and administrative expenses (6,563)
Interest income 1,063
Interest expense (45,411) (451)(D) (576)(D) (18)(D) (638)(D)
------------- ---------- ------------ -------------- -------------
Net income of the Operating Partnership before
extraordinary item 52,297 109 576 204 4,467
Extraordinary item - loss on extinguishment of debt (87)
-------------
Net income of the Operating Partnership 52,210
Minority Interest (25,617)
-------------
Net income 26,593
Less: Income attributable to preferred shares (1,881)
-------------
Net income attributable to common shares $ 24,712
=============
Net income per common share -basic $ 1.87
=============
Net income per common share -diluted $ 1.86
=============
Wgtd avg common shares outstanding -basic 13,218
=============
Wgtd avg common shares outstanding - diluted 13,379
=============
<CAPTION>
Pro forma Adjustments
------------------------------------------------------------------
Acquisitions
------------------------------------------------------------------
One East 2000 McClurg Other
(A) Delaware (A) Commonwealth (A) Court Adjustments Pro Forma
-------------- ------------------- ------------ ------------- ----------
<S> <C> <C> <C> <C> <C>
Rental properties
Revenues 4,789 2,624 16,076 $ 235,439
Expenses
Operating costs 1,333 1,045 6,463 (775)(B) 83,557
Real estate taxes 725 182 3,106 17,156
Depreciation and amortization - - - 4,803 (C) 25,469
-------------- ------------------- ------------ --------- ----------
Total expenses 2,058 1,227 9,569 4,028 126,182
Equity in income of Property Service Businesses (141)(B) 7,456
Corporate general and administrative expenses (6,563)
Interest income 1,063
Interest expense (2,260)(D) (581)(D) (5,275)(D) 853 (D) (54,357)
-------------- ------------------- ------------ --------- -----------
Net income of the Operating Partnership before
extraordinary item 471 816 1,232 (3,316) 56,856
Extraordinary item - loss on extinguishment of debt (87)
----------
Net income of the Operating Partnership 56,769
Minority Interest (2,277)(E) (27,894)
-----------
Net income 28,875
Less: Income attributable to preferred shares (1,861)(G) (3,742)
-----------
Net income attributable to common shares $ 25,133
===========
Net income per common share -basic $ 1.90
===========
Net income per common share -diluted (H) $ 1.89
===========
Wgtd avg common shares outstanding -basic 13,218
===========
Wgtd avg common shares outstanding - diluted 13,379
===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Proforma Adjustments
-------------------------------------------------------------
Acquisitions
-------------------------------------------------------------
Crystal Crystal The Lincoln One East
Historical Plaza Towers Kenmore Towers Delaware
------------ --------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Rental properties
Revenues $ 163,959 7,557 11,463 3,058 11,001 6,308
Expenses
Operating costs 60,796 2,772 4,199 1,311 3,575 2,015
Real estate taxes 10,429 390 671 229 669 925
Depreciation and amortization 17,931 - - - - -
----------- --------- -------- --------- --------- ---------
Total expenses 89,156 3,162 4,870 1,540 4,244 2,940
Equity in income of Property Service Businesses 7,846
Corporate general and administrative expenses (5,255)
Interest income 1,029
Interest expense (43,606) (2,704)(D) (3,456)(D) (109)(D) (860)(D) (3,047)(D)
------------ --------- -------- --------- --------- ---------
Net income of the Operating Partnership 34,817 1,691 3,137 1,409 5,897 321
Minority Interest (19,062)
Distributions in excess of earnings allocated to
Minority Interest (4,778)
------------
Net income 10,977
Less: Income attributable to preferred shares -
------------
Net income attributable to common shares $ 10,977
============
Net income per common share - basic $ 1.11
============
Net income per common share - diluted $ 1.11
============
Wgtd avg common shares outstanding - basic 9,875
============
Wgtd avg common shares outstanding - diluted 9,913
============
<PAGE>
<CAPTION>
Proforma Adjustments
-----------------------------------------
Acquisitions
-----------------------------------------
2000 McClurg Other
Commonwealth Court Adjustments Pro Forma
------------ --------- ----------- --------------
<S> <C> <C> <C> <C>
Rental properties
Revenues 3,353 14,932 $ 221,631
Expenses
Operating costs 1,375 6,419 (1,287)(B) 81,175
Real estate taxes 282 2,739 16,334
Depreciation and amortization - 7,840 (C) 25,771
------------ --------- ----------- ------------
Total expenses 1,657 9,158 6,553 123,280
Equity in income of Property Service Businesses (475)(B) 7,371
Corporate general and administrative expenses (5,255)
Interest income 1,029
Interest expense (904)(D) (5,334)(D) 5,174 (D) (54,846)
------------ --------- ----------- --------------
Net income of the Operating Partnership 792 440 (1,854) 46,650
Minority Interest (5,607)(E) (24,669)
Distributions in excess of earnings allocated to
Minority Interest 4,778 (F) 0
--------------
Net income 21,981
Less: Income attributable to preferred shares (2,421)(G) (2,421)
--------------
Net income attributable to common shares $ 19,560
==============
Net income per common share - basic $ 1.73
==============
Net income per common share - diluted (H) $ 1.73
==============
Wgtd avg common shares outstanding - basic 11,325
==============
Wgtd avg common shares outstanding - diluted 11,363
==============
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
CHARLES E. SMITH RESIDENTIAL REALTY, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL INFORMATION
(DOLLAR AMOUNTS IN THOUSANDS)
1. Adjustments to Pro Forma Consolidated Balance Sheet:
(A) Acquisition of McClurg Court:
Purchase price of rental property $70,100
Initial capital improvements 4,300
Acquisition costs 1,000
-------
Cost basis of rental property $75,400
=======
(B) Historical and Pro Forma balances for each rental property acquired
subsequent to December 31, 1997 are as follows:
Total Assets
------------------------------------
Historical Purchase Pro Forma
@12/31/97 Adjustment @12/31/97
--------- ---------- ---------
McClurg Court 23,577 51,823 75,400
2. Adjustments to Pro Forma Consolidated Statements of Operations:
(A) Crystal Plaza, Crystal Towers, The Kenmore, Lincoln Towers, One East
Delaware and 2000 Commonwealth were all purchased during 1997.
Therefore, the respective pro forma adjustments represent the operating
results from January 1, 1997 through the date of purchase.
(B) Operating expenses have been adjusted to eliminate management fees
since the Company's affiliate manages owned properties. For Crystal
Plaza and Crystal Towers, Equity in Income of Property Service
Businesses has also been adjusted to eliminate management fee income
earned on these properties prior to purchase.
(C) Depreciation and amortization has been adjusted based on the allocated
purchase price of the assets acquired and an estimated useful life of
40 years, as if the purchases occurred on January 1, 1997 and 1996 for
the respective periods.
F-6
<PAGE>
(D) Represents interest expense for draws on the line-of-credit (assuming a
weighted average interest rate of 7.09% and 7.17% for the years ended
December 31, 1997 and 1996, respectively) and interest expense for
assumed mortgage loans. The adjustment to reduce interest expense is
based on the line-of-credit interest rates and is due to the pay down
of notes payable with proceeds from the February 1997 common stock
offering.
(E) To adjust the Minority Interest for the issuance of common and
preferred stock and Operating Partnership Units.
(F) There are no distributions in excess of earnings allocated to Minority
Interest as a result of the issuance of common and preferred stock and
units in the Operating Partnership restoring a balance in the Minority
Interest account.
(G) Represents dividends on the 1,216,666 shares of Series B Preferred
Stock issued to finance the Lincoln Tower acquisition. Dividends
declared were $2.05 and $1.99 per share, respectively, for the years
ended December 31, 1997 and 1996.
(H) Minority Interest is adjusted in the calculation of diluted earnings
per common share to reflect the change in ownership interest after
inclusion of common stock equivalents.
F-7
<PAGE>
[LETTERHEAD OF ALTSCHULER, MELVOIN AND GLASSER LLP APPEARS HERE]
INDEPENDENT AUDITORS' REPORT
To the Partners of
McClurg Court Associates Limited Partnership
We have audited the accompanying consolidated balance sheets of McCLURG COURT
ASSOCIATES LIMITED PARTNERSHIP (a limited partnership) and its wholly owned
subsidiary as of December 31, 1997 and 1996, and the related consolidated
statements of income, changes in partners' capital (deficit) accounts and cash
flows for the years then ended. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of McClurg Court
Associates Limited Partnership and its wholly owned subsidiary as of December
31, 1997 an 1996, and their consolidated results of operations and cash flows
for the years then ended in confirmity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the consolidated
financial statements taken as a whole. The additional financial data, listed in
the Table of Contents, are presented for purposes of additional analysis and are
not a required part of the consolidated financial statements. Such information,
except for the schedule of changes in partners' capital (deficit) accounts
(income tax basis) on pages 17 through 19 on which we express no opinion, has
been subjected to the auditing procedures applied in the audit of the
consolidated financial statements and, in our opinion, is fairly stated in all
material respects in relation to the consolidated financial statements taken as
a whole.
/s/ Altschuler, Melvoin and Glasser LLP
Chicago, Illinois
February 17, 1998
F-8
<PAGE>
McCLURG COURT ASSOCIATES LIMITED PARTNERSHIP
Consolidated Balance Sheets
December 31, 1997 and 1996
Assets 1997 1996
----------- -----------
Rental Properties and Equipment (at cost
less accumulated depreciation; subject to
encumbrances; Note 2) $17,273,444 $17,109,772
Cash and Cash Equivalents 4,122,138 2,268,824
Tenants' Security Deposit Funds 790,819 1,037,332
Accounts Receivable (net of allowance for
doubtful accounts of $11,000 and $11,900) 150,032 142,661
Escrow Funds Held by Mortgagee 1,034,502 1,253,928
Prepaid Expenses and Other Assets 57,431 65,948
Deferred Charges 148,795 168,778
----------- -----------
$23,577,161 $22,047,243
----------- -----------
Liabilities and Partners' Capital
Liabilities:
Mortgages payable (Note 3) $13,099,969 $14,261,414
Bank promissory note (Note 3) 405,000 675,000
Accounts payable 153,909 239,248
Advance rentals received from tenants 239,543 179,548
Deferred revenue--memberships and
prepaid reservations 72,949 105,069
Ground rent payable 47,576 55,923
Accrued expenses:
Real estate taxes 3,284,000 2,800,000
Interest 67,948 73,009
Other 144,089 168,519
Tenants' security deposits 770,880 902,053
----------- -----------
18,285,813 19,459,783
Commitments and Contingencies (Note 5)
Partners' Capital 5,291,348 2,587,460
----------- -----------
$23,577,161 $22,047,243
----------- -----------
The accompanying notes are an integral part of this statement.
F-9
<PAGE>
McCLURG COURT ASSOCIATES LIMITED PARTNERSHIP
Consolidated Statement of Income
Years Ended December 31, 1997 and 1996
1997 1996
----------- -----------
Revenue:
Rentals:
Apartment $13,184,663 $12,384,018
Commercial 805,953 745,250
Garage (net of operating expenses) 533,474 539,387
Sports Center:
Membership and use fees 1,397,877 1,102,349
Sundry 153,746 161,326
----------- -----------
16,075,713 14,932,330
----------- -----------
Operating Expenses (excluding financial
and depreciation expenses):
Operating expenses 3,255,173 3,059,893
Rental expenses 344,863 376,664
Administrative expenses 1,035,060 1,217,615
Maintenance expenses 837,351 797,125
Taxes and insurance 3,322,373 2,977,553
----------- -----------
8,794,820 8,428,850
----------- -----------
Income before Financial Expenses, Other
Income and Depreciation 7,280,893 6,503,480
----------- -----------
Financial Expenses and Other Income:
Financial expenses 2,041,121 2,115,410
Interest income ( 190,726) ( 113,529)
----------- -----------
1,850,395 2,001,881
----------- -----------
Income before Depreciation 5,430,498 4,501,599
Provision for Depreciation 1,526,610 1,264,354
----------- -----------
Net Income $ 3,903,888 $ 3,237,245
=========== ===========
The accompanying notes are an integral part of this statement.
F-10
<PAGE>
McCLURG COURT ASSOCIATES LIMITED PARTNERSHIP
Consolidated Statement of Changes in Partners' Capital (Deficit) Accounts
Years Ended December 31, 1997 and 1996
General Limited
Total Partner Partners
----------- ----------- -----------
Partners' Capital (Deficit),
January 1, 1996 ($ 49,785) $ 6,906 ($ 56,691)
1996 Net Income 3,237,245 822,189 2,415,056
Distributions ( 600,000) ( 152,388) ( 447,612)
---------- ---------- ----------
Partners' Capital,
December 31, 1996 2,587,460 676,707 1,910,753
1997 Net Income 3,903,888 991,509 2,912,379
Distributions ( 1,200,000) ( 304,776) ( 895,224)
---------- ---------- ----------
Partners' Capital,
December 31, 1997 $5,291,348 $1,363,440 $3,927,908
========== ========== ==========
The accompanying notes are an integral part of this statement.
F-11
<PAGE>
McCLURG COURT ASSOCIATES LIMITED PARTNERSHIP
Consolidated Statement of Cash Flows
Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $3,903,888 $3,237,245
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 1,526,610 1,264,354
Amortization of deferred charges 19,983 19,015
Increase (Decrease) in cash arising from
changes in:
Tenants' security deposit fund 246,513 336,740
Accounts receivable ( 7,371) 78,312
Escrow funds held by mortgagee 219,426 147,004
Prepaid expenses and other assets 8,517 79,437
Accounts payable, accrued expenses
and other liabilities 360,823 316,690
Advance Rentals 59,995
Deferred revenue ( 32,120) ( 147,290)
Tenants' security deposits ( 131,223) ( 48,886)
---------- ----------
Net cash provided by operating activities 6,175,041 5,282,621
---------- ----------
Cash Flows Used in Investing Activities:
Property and equipment additions (1,690,282) (1,818,992)
---------- ----------
Cash Flows from Financing Activities:
Principal payments on mortgage indebtedness (1,161,445) ( 981,630)
Principal payments on bank promissory note ( 270,000) ( 270,000)
Distributions to partners (1,200,000) ( 600,000)
---------- ----------
Net cash used in financing activities (2,631,445) (1,851,630)
---------- ----------
Net Increase in Cash and Cash Equivalents 1,853,314 1,611,999
Cash and Cash Equivalents, Beginning of Year 2,268,824 656,825
---------- ----------
Cash and Cash Equivalents, End of Year $4,122,138 $2,268,824
========== ==========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for interest $1,262,533 $1,273,372
========== ==========
Cash paid during the year for income taxes $ 20,343 $ 20,625
========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-12
<PAGE>
McCLURG COURT ASSOCIATES LIMITED PARTNERSHIP
Notes to the Consolidated Financial Statements
December 31, 1997 and 1996
Note 1--Nature of Activities and Summary of Significant Accounting Policies:
- ----------------------------------------------------------------------------
McClurg Court Associates Limited Partnership operates an apartment complex
consisting of two 45-story buildings containing 1,075 residential
apartments, a Sports Center facility and certain commercial space, located
on approximately 103,000 square feet of land bounded by McClurg Court,
Ontario Street and Ohio Street in Chicago, Illinois. The property is
encumbered by three land leases which expire in 2067, at which time the
buildings and improvements are to revert to the lessors. In 1994, the
Partnership purchased a portion of land comprising approximately 13,000
square feet previously owned by a fourth lessor. No amount is reflected in
the balance sheet for the remaining leasehold interests in the land.
The partnership agreement provides that profits, losses, gains and sales
proceeds are to be allocated in the ratio of Partnership interests.
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements,
as well as the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
A summary of significant accounting policies is as follows:
Consolidation--The financial statements include the accounts of McClurg
-------------
Court Associates Limited Partnership (the Partnership) and its wholly
owned subsidiary, McClurg Court Sports Center, Inc. (Sports Center).
All intercompany accounts and transactions have been eliminated.
Accounting for Costs Incurred--For financial reporting purposes, all
-----------------------------
development costs (including financing fees, interest, real estate
taxes, ground rents and other carrying charges and expenses, as reduced
by rentals and other operating income) incurred during the building
construction period were capitalized. For income tax reporting
purposes, the Partnership deducted all development costs as incurred,
to the extent permitted under the Internal Revenue Code.
Depreciation and Amortization--For financial reporting purposes
-----------------------------
depreciation is computed primarily under the straight-line method over
the estimated useful lives of the assets, which range from 5 to 40
years. For income tax reporting purposes depreciation is computed under
accelerated methods in accordance with the provisions of the Internal
Revenue Code.
Deferred Membership Revenue--Sports Center membership fees are billed
---------------------------
in advance and are deferred and recorded in income ratably over the
membership periods. Beginning in 1996, the Sports Center started
billing dues on a monthly rather than an annual basis. Charges for
advance reservations of facilities are similarly deferred, and included
in income in the period in which the facilities are used.
F-13
<PAGE>
McCLURG COURT ASSOCIATES LIMITED PARTNERSHIP
Notes to the Consolidated Financial Statements
December 31, 1997 and 1996
Note 1 -- Nature of Activities and Summary of Significant Accounting Policies,
- ------------------------------------------------------------------------------
Continued:
- ---------
Deferred Charges -- Deferred expenses are being amortized under the
----------------
straight-line method and consist of financing expenses, which are being
amortized over the terms of the mortgages, and leasing expenses, which
are being amortized over the terms of the respective leases.
Cash and Cash Equivalents -- For purposes of the statement of cash
-------------------------
flows, the Partnership considers all highly liquid debt instruments
acquired with an original maturity of three months or less, including
money market funds to be cash equivalents.
Note 2 -- Rental Properties and Equipment:
- -----------------------------------------
Rental properties and equipment are reflected at cost and consist of the
following:
1997 1996
------------ ------------
Land $ 1,515,898 $ 1,515,898
Buildings 27,970,708 27,970,708
Building improvements:
Sports center 1,444,683 1,401,948
Garage 851,013 814,788
Other 1,909,226 1,657,866
Tenant leasehold improvements 108,883 108,883
Appliances and furniture 4,010,260 2,651,385
Maintenance and office equipment 904
Landscaping 23,040 23,040
Exercise and fitness equipment 190,713 188,723
------------ ------------
38,024,424 36,334,143
Less accumulated depreciation 20,750,980 19,224,371
------------ ------------
$ 17,273,444 $ 17,109,772
============ ============
Approximately 97% and 98% of the apartments in the complex were under lease
to tenants at December 31, 1997 and 1996, respectively, generally for one-
year periods.
F-14
<PAGE>
McCLURG COURT ASSOCIATES LIMITED PARTNERSHIP
Notes to the Consolidated Financial Statements
December 31, 1997 and 1996
Note 2 -- Rental Properties and Equipment, Continued:
- -----------------------------------------------------
The commercial spaces in the complex are fully leased, generally for
periods in excess of one year. Fixed rents for future periods under
noncancellable leases with commercial tenants in effect at December 31,
1997 approximate the following:
Year Amount
---- ----------
1998 $ 811,000
1999 789,000
2000 711,000
2001 700,000
2002 556,000
Subsequent years 1,797,000
----------
$5,364,000
----------
Fixed rents are exclusive of real estate tax and operating expense
escalations, utility charges and additional "percentage" rents and do not
include rents which will become payable upon exercise by lessees of renewal
options contained in certain leases.
Note 3 -- Real Estate Mortgage Loans and Other Debt Agreements:
- ---------------------------------------------------------------
The Partnership's real estate mortgage loans and other debt agreements are
as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
First mortgage, payable in monthly installments
until maturity, October 15, 2005 with interest at
7 7/8% per annum; secured by the leasehold and
improvements. $11,001,569 $11,979,414
Junior wraparound mortgage (in an amount inclusive
of the first mortgage obligation) payable in
monthly installments until maturity on October 15,
2005, with interest at 8 1/2% per annum. 2,098,400 2,282,000
----------- -----------
13,099,969 14,261,414
Bank promissory note, payable in quarterly install-
ments of $67,500, including interest at the bank's
"alternate base rate" (as defined), through
June 21, 1999, at which date the remaining balance
is due; guaranteed by Jupiter Industries, Inc., an
affiliate of the Partnership's general partner
(Note 7). 405,000 675,000
----------- -----------
$13,504,969 $14,936,414
=========== ===========
</TABLE>
F-15
<PAGE>
McCLURG COURT ASSOCIATES LIMITED PARTNERSHIP
Notes to the Consolidated Financial Statements
December 31, 1997 and 1996
Note 3 -- Real Estate Mortgage Loans and Other Debt Agreements Continued:
- ------------------------------------------------------------------------
Future aggregate annual principal maturities of the mortgage and other
indebtedness are as follows:
Year Amount
---- ------
1998 $ 1,534,103
1999 1,510,839
2000 1,497,450
2001 1,629,811
2002 1,773,879
Thereafter (through 2005) 5,558,887
-----------
$13,504,969
-----------
Note 4 -- Long-term Ground Leases:
- ----------------------------------
The ground leases require fixed annual rental payments totaling $155,000 plus
the payment of real estate taxes and insurance costs, and provide for (a)
additional rentals based on percentages of revenue derived from the project
and (b) increased rentals in the event of increased land values, to be
determined at specified future dates, the earliest of which is April 30,
1998.
The following is a summary of fixed and percentage ground rent expense:
1997 1996
---------- ---------
Minimum fixed rent $ 155,000 $ 155,000
Percentage rent 619,033 574,373
---------- ---------
$ 774,033 $ 729,373
========== =========
Note 5 -- Commitments and Contingencies:
- ----------------------------------------
The Partnership and its subsidiary have agreements with the owner of the
Chicago City Centre Holiday Inn, which provide for the lease of a corridor
within the partnership's property for (a) access from the hotel, which is
located on an adjoining parcel of land to the Sports Center and (b) a
license for the use of the Sport Center facilities by hotel patrons upon
payment of fees.
F-16
<PAGE>
McCLURG COURT ASSOCIATES LIMITED PARTNERSHIP
Notes to the Consolidated Financial Statements
December 31, 1997 and 1996
Note 5--Commitments and Contingencies, Continued:
- -------------------------------------------------
The Partnership has contracted, effective in September 1995, with an
unaffiliated management company to operate the Sports Center. Monthly
management fees for the Sports Center are $3,500 or 6% of total revenue, if
higher, plus a possible incentive fee. Management fees totaled $83,597 and
$70,763 for 1997 and 1996, respectively. Incentive management fees totaled
$15,524 for 1997.
The Partnership and its subsidiary are defendants in various litigation
matters arising in the normal course of business. In the opinion of
management, the ultimate resolution of all such litigation matters will not
have a material effect on the financial position or results of activities
of the Partnership.
Note 6--Income Taxes:
- ---------------------
McClurg Court Associates and its subsidiary file separate federal and state
income tax returns.
Under the provisions of the Internal Revenue Code, the Partnership's net
income or loss is not subject to federal income tax but is allocable to and
is includable in the income tax returns of the partners. The Partnership is
subject to a 1.5% Illinois Replacement Tax which is included in
administrative expenses.
The amounts reported by the Partnership for income tax reporting purposes
for 1997 and 1996 were $3,807,757 and $2,509,416, respectively, which
differ from net income as reported herein due to differences in the
accounting for costs incurred and the depreciation methods (Note 1), and
separate taxation of income (losses) from the Sports Center. Additionally,
partners' capital accounts for income tax reporting purposes were adjusted
during 1996 from book basis to tax basis, resulting in increases to IRC
Section 754 additional basis and amortization thereof.
No federal income taxes were payable by the Sports Center in 1997 or 1996.
As of December 31, 1997, the Sports Center had available carryovers of
approximately $228,000 of net operating losses and $136 of unused tax
credits (the oldest of which expires in 1998), which may be applied to
reduce federal income taxes which may become payable in the future.
Deferred tax assets of approximately $74,000 relating to the corporate net
operating loss carryforwards and unused tax credit carryforwards have been
fully reserved by a valuation allowance.
F-17
<PAGE>
McCLURG COURT ASSOCIATES LIMITED PARTNERSHIP
Notes to the Consolidated Financial Statements
December 31, 1997 and 1996
Note 7 -- Related-party Transactions:
- -------------------------------------
The general partner of McClurg Court Associates is a wholly owned
subsidiary of Jupiter Industries, Inc. In addition to the loan guarantee
(Note 3), services have been provided to the Partnership by Jupiter
Industries, Inc. and one of its affiliates as follows:
1997 1996
-------- --------
Economy Mechanical Industries, Inc.
(repair and maintenance services) $ 20,156 $ 14,483
Jupiter Industries, Inc. (employee
health care and other miscellaneous) 68,945 42,635
Jupiter Industries, Inc. (legal services) 3,039 0
-------- --------
$ 92,140 $ 57,118
======== ========
Note 8 -- Subsequent Event:
- ---------------------------
Pursuant to a Purchase and Sale Agreement dated January 26, 1998,
McClurg Court Center and McClurg Court Sports Center will be sold for a
purchase price of $70,100,000. The Partnership has received the
necessary general and limited partners approval. The transaction is
scheduled to close on April 7, 1998. The estimated gain on sale is
approximately $48,000,000.
F-18
<PAGE>
Exhibit 99.1
------------
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation of our report dated February 17, 1998
with respect to the consolidated balance sheets of McClurg Court Associates
Limited Partnership as of December 31, 1997 and 1996, and the related
consolidated statements of income, changes in partners' capital and cash flows
for the years then ended, which report appears in the Form 8-K/A for Charles E.
Smith Residential Realty, Inc. dated April 17, 1998 filed with the Securities
and Exchange Commission.
/s/ ALTSCHULER, MELVOIN & GLASSER LLP
Chicago, Illinois
April 17, 1998
