<PAGE>
PROSPECTUS SUPPLEMENT
(To Prospectus dated July 22, 1998)
1,400,000 Shares
Charles E. Smith Residential Realty, Inc.
Common Stock
(par value $.01 per share)
---------------------
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 primarily in the
Washington, D.C. metropolitan area and certain other targeted urban areas.
All of the common stock of the Company, par value $.01 per share (the "Common
Stock"), offered hereby are being sold by the Company. The Common Stock is
listed on the New York Stock Exchange (the "NYSE") under the symbol "SRW."
The last reported sale price of the Common Stock on the NYSE on July 21, 1998
was $32.875 per share.
The Common Stock is being sold by the Company in negotiated
transactions with institutional investors. The price at which the purchasers
have agreed to purchase the Common Stock on the terms and conditions set
forth in purchase agreements is $32.625 per share, resulting in aggregate
proceeds to the Company of $45,675,000 before payment of expenses (including
broker commissions) by the Company estimated to be $30,000. Lehman Brothers
Inc. is acting as agent for the Company in connection with the sale of
800,000 shares to certain institutional investors and, in that capacity, will
receive commissions from the Company of $.025 per share. The Company has
agreed to indemnify Lehman Brothers Inc. against certain liabilities,
including liabilities under the Securities Act of 1933, as amended, or to
contribute to payments that Lehman Brothers Inc. may be required to make in
respect thereof.
Ownership of more than 5% of the Common Stock generally is restricted
in order to preserve the Company's status as a REIT for federal income tax
purposes. See "Federal Income Tax Considerations--Requirements for
Qualification" in the accompanying Prospectus.
See "Risk Factors" beginning on page 2 of the accompanying Prospectus
for a discussion of certain factors relating to an investment in the Common
Stock.
---------------------
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.
---------------------
The date of this Prospectus Supplement is July 22, 1998.
<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 July 22, 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
primarily in the Washington, D.C. metropolitan area and certain other
targeted urban areas. 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
53.5% of the units of limited partnership interest ("Units") in Charles E.
Smith Residential Realty L.P. (the "Operating Partnership") as of June 30,
1998. 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 July 1, 1998, the Company,
through the Operating Partnership, owned 49 multifamily apartment communities
containing a total of 19,951 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, and had over 2,500 units under construction. The
Company also manages over 3,500 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
2
<PAGE>
interest, the risks of rising interest rates on the Company's floating rate
debt, the risk that the Company will not be 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 July 1, 1998, twelve of the Properties,
representing 3,772 units or 18.9% 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
3
<PAGE>
tenants have a right of first refusal to purchase the property as well as a
right to match offers made on the property 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
4
<PAGE>
without permanent financing, further development activities or acquisitions may
be curtailed or cash available for 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 June 30, 1998 was 38.3%. 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.
5
<PAGE>
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 June 30, 1998, the Company had outstanding 15,820,722 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 June 30, 1998,
the Company had outstanding 3,766,024 shares of preferred stock ("Preferred
Shares"). As of June 30, 1998, the Company had reserved for possible issuance
upon redemption of Units approximately 17.9 million
6
<PAGE>
additional shares of Common Stock. 14,902,117 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, July 1996 and April 1998,
respectively or the Registration Statement of which this Prospectus is a
part. 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.
7
<PAGE>
RATIOS OF EARNINGS TO FIXED CHARGES
The Company's ratio of earnings to fixed charges for the twelve months
ended December 31, 1997, and for the years ended December 31, 1996 and 1995 were
2.27, 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
8
<PAGE>
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
9
<PAGE>
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
10
<PAGE>
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).
11
<PAGE>
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
12
<PAGE>
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).
14
<PAGE>
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).
14
<PAGE>
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,
15
<PAGE>
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
16
<PAGE>
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
17
<PAGE>
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.
18
<PAGE>
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 June 30, 1998, 3,766,024 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
19
<PAGE>
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.
20
<PAGE>
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).
21
<PAGE>
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.
22
<PAGE>
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
23
<PAGE>
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.
24
<PAGE>
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
25
<PAGE>
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
26
<PAGE>
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.
27
<PAGE>
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 June 30, 1998, there were 15,820,722 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.
28
<PAGE>
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 1999 annual meeting of shareholders;
the term of office of the next class of directors (2 directors) will expire at
the 2000 annual meeting of shareholders; and the term of office of the third
class of directors (3 directors) will expire at the 2001 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.
29
<PAGE>
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
30
<PAGE>
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
31
<PAGE>
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
32
<PAGE>
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 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
qualified in its entirety by the applicable Code provisions, Treasury
Regulations, and administrative and judicial interpretations thereof.
33
<PAGE>
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, 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. 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. In addition, for its taxable years ending on or before December 31,
1997, the Company was required to derive 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).
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 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
34
<PAGE>
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.
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 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
35
<PAGE>
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.
On February 2, 1998, the Clinton administration released its budget
proposal for fiscal year 1999. The proposal includes a number of provisions
affecting REITs. One proposed provision would amend the 10% limitation described
above. Pursuant to the Clinton administration proposal, a REIT would remain
subject to the current restriction and also would be precluded from owning more
than 10% of the value of all classes of stock of any one issuer. If the proposal
were enacted as currently drafted, it would be effective with respect to stock
acquired on or after the date of first committee action. To the extent that the
Company's current stock ownership in a subsidiary (e.g., the Property Service
Businesses) is grandfathered by virtue of this effective date, the grandfathered
status would terminate with respect to the subsidiary if the subsidiary engaged
in a new trade or business or acquired substantial new assets. Accordingly, if
the proposal were enacted as currently drafted and the Property Service
Businesses (in which the Company's stock ownership exceeds 10% of the value of
the securities) were to engage in a new trade or business or acquire substantial
new assets after the effective date, the grandfathered status of the Company's
ownership of stock in these entities would terminate and the Company would fail
to qualify as a REIT. Moreover, the Company would not be able to own more than
10% of the vote or value of any subsidiary formed after the effective date of
the proposal. Thus, the proposal, if enacted as currently drafted, would
materially impede the ability of the Company to engage in new third-party
management or similar activities.
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
36
<PAGE>
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 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
37
<PAGE>
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 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% gain distribution (which would be taxable to taxable
non-corporate U.S. Shareholders at a maximum rate of 28%). In light of the
IRS Restructuring and Reform Act of 1998, which eliminates the 18-month
holding period that was required to be met to take advantage of the lowest
capital gain tax rates, the IRS is expected to issue clarifying guidance
regarding the designation of REIT capital gain dividends. Notice 97-64
provides that a REIT must determine the maximum amounts that it may designate
as 20% and 25% 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) for dispositions occurring after December 31, 1997, at
a maximum rate of 20%; and (ii) 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 Taxpayer Relief Act of 1997 (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.
38
<PAGE>
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.
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
40
<PAGE>
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 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. 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.
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
40
<PAGE>
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.
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.
41
<PAGE>
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, 1997 (the "10-K ").
2. The Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998 (as amended on Form 10-Q/A).
3. The Company's Current Reports on Form 8-K dated April 17, 1998
(as amended on Form 8-K/A) and July 1, 1998.
42
<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 Gregory A. Samay, the Company's Vice
President and Treasurer, at 2345 Crystal Drive, Arlington, Virginia 22202,
telephone number (703) 769-1029.
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.
43
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus Supplement and the
accompanying Prospectus, and, if given or made, such information or
representations must not be relied upon as having been authorized. Neither this
Prospectus Supplement nor the accompanying Prospectus constitutes an offer to
sell or the solicitation of an offer to buy any securities other than the
securities to which each 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 or the
accompanying 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.
----------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Supplement
Cover Page.................................Cover Page
Prospectus
The Company.........................................2
Risk Factors........................................2
Use of Proceeds.....................................7
Ratios of Earnings to Fixed Charges.................8
Description of Debt Securities......................8
Description of Preferred Stock.....................19
Description of Depositary Shares...................25
Description of Common Stock........................28
Description of Common Stock Warrants...............32
Federal Income Tax Considerations..................33
Plan of Distribution...............................41
Legal Matters......................................42
Experts............................................42
Available Information..............................42
Incorporation of Certain Documents
by Reference....................................42
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1,400,000 Shares
Charles E. Smith
Residential Realty, Inc.
Common Stock
(par value $.01 per share)
------------------
PROSPECTUS SUPPLEMENT
------------------
July 22, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
