0000950131-01-503879.txt : 20011031
0000950131-01-503879.hdr.sgml : 20011031
ACCESSION NUMBER: 0000950131-01-503879
CONFORMED SUBMISSION TYPE: S-4
PUBLIC DOCUMENT COUNT: 2
FILED AS OF DATE: 20011026
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: ARCHSTONE SMITH TRUST
CENTRAL INDEX KEY: 0001156826
STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798]
IRS NUMBER: 841592064
STATE OF INCORPORATION: MD
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: S-4
SEC ACT: 1933 Act
SEC FILE NUMBER: 333-72348-01
FILM NUMBER: 1768217
MAIL ADDRESS:
STREET 1: 7620 SOUTH CHESTER STREET
STREET 2: SUITE 100
CITY: ENGLEWOOD
STATE: CA
ZIP: 80112
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: ARCHSTONE COMMUNITIES TRUST/
CENTRAL INDEX KEY: 0000080737
STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798]
IRS NUMBER: 746056896
STATE OF INCORPORATION: MD
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: S-4
SEC ACT: 1933 Act
SEC FILE NUMBER: 333-72348
FILM NUMBER: 1768216
BUSINESS ADDRESS:
STREET 1: 7777 MARKET CENTER AVE
STREET 2: SUITE 100
CITY: EL PASO
STATE: TX
ZIP: 79912
BUSINESS PHONE: 3037085959
MAIL ADDRESS:
STREET 1: 7670 SOUTH CHESTER ST
CITY: ENGLEWOOD
STATE: CO
ZIP: 80012
FORMER COMPANY:
FORMER CONFORMED NAME: EL PASO REAL ESTATE INVESTMENT TRUST
DATE OF NAME CHANGE: 19700108
FORMER COMPANY:
FORMER CONFORMED NAME: PROPERTY TRUST OF AMERICA
DATE OF NAME CHANGE: 19920703
FORMER COMPANY:
FORMER CONFORMED NAME: SECURITY CAPITAL PACIFIC TRUST
DATE OF NAME CHANGE: 19950417
S-4
1
ds4.txt
FORM S-4
As filed with the Securities and Exchange Commission on October 26, 2001
Registration No.
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
REGISTRATION STATEMENT ON
FORM S-4
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
----------------
ARCHSTONE-SMITH TRUST
ARCHSTONE COMMUNITIES TRUST
(Exact Name of Registrant as Specified in Its Governing Instrument)
Maryland 6798 84-1592064
Maryland 6798 74-6056896
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction Industrial Identification Number)
of Incorporation or Classification Code
Organization) Number)
----------------
7670 South Chester Street, Suite 100
Englewood, Colorado 80112
(303) 708-5959
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
Caroline Brower, Esq.
Senior Vice President and General Counsel
Archstone Communities Trust
7670 South Chester Street, Suite 100
Englewood, Colorado 80112
(303) 708-5959
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent For Service)
----------------
Copies to:
Edward J. Schneidman, Esq. J. Warren Gorrell, Jr., Esq.
Michael T. Blair, Esq. Bruce W. Gilchrist, Esq.
Mayer, Brown & Platt Hogan & Hartson L.L.P.
190 South LaSalle Street 555 Thirteenth Street, N.W.
Chicago, IL 60603 Washington, D.C. 20004
(312) 782-0600 (202) 637-5600
----------------
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after the effective date of this Registration
Statement.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
----------------
--------------------------------------------------------------------------------------------------------------
CALCULATION OF REGISTRATION FEE
--------------------------------------------------------------------------------------------------------------
Proposed Proposed
Title of Each Class Maximum Maximum
of Securities to be Amount to be Offering Price Aggregate Amount of
Registered Registered (1) Per Unit Offering Price Registration Fee
--------------------------------------------------------------------------------------------------------------
Archstone-Smith Operating Trust
Class A-1 common units, $0.01
par value per unit 26,800,413 Not Applicable Not Applicable $0 (2)
--------------------------------------------------------------------------------------------------------------
Archstone-Smith Trust common
shares of beneficial interest,
$0.01 par value per share (3) 26,800,413 Not Applicable Not Applicable Not Applicable (4)
--------------------------------------------------------------------------------------------------------------
Total Not Applicable Not Applicable Not Applicable $0
--------------------------------------------------------------------------------------------------------------
(1) Represents the maximum number of Class A-1 common units of Archstone-Smith
Operating Trust and common shares of Archstone-Smith Trust, respectively,
that may be issued to persons other than Archstone-Smith Trust pursuant to
the transaction described in this Registration Statement. Archstone has
previously registered 15,204,441 Class A-1 common units. This amendment is
being filed to register an additional 11,595,972 Class A-1 common units.
Pursuant to Rule 429 under the Securities Act, the Prospectus filed as part
of this Registration Statement relates to the securities registered hereby
and the securities previously registered under the Registration Statement
on Form S-4 (File No. 333-64540). The Archstone Class A-1 common units are
redeemable at the option of the holder thereof for cash in accordance with
the Archstone declaration of trust. Archstone-Smith may elect to satisfy
this redemption request by delivering Archstone-Smith common shares or
their cash equivalent. No additional consideration is payable in connection
with the redemption of Archstone Class A-1 common units.
(2) The registration fee was previously paid by Archstone-Smith (File No.
333-63734).
(3) Includes the related preferred share and unit purchase rights.
(4) Pursuant to Rule 457(i), no additional registration fee is required.
----------------
The Registrants hereby amend this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrants
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
[LOGO]
[Logo]
PARTNERSHIP MERGER PROPOSED -- YOUR VOTE IS VERY IMPORTANT
The board of trustees of Archstone Communities Trust and the board of
directors of Charles E. Smith Residential Realty, Inc., the general partner of
Charles E. Smith Residential Realty L.P., have unanimously approved and
adopted a merger agreement that provides for the merger of Smith Residential
with and into Archstone-Smith Trust, which we refer to as the "merger," and
the merger of Smith Partnership with and into Archstone, which we refer to as
the "partnership merger."
To accomplish the merger pursuant to the merger agreement, the following
transactions will occur in the following sequence:
(1) Archstone Communities Trust, which we refer to as "Archstone," will
reorganize into an umbrella partnership real estate investment trust, or
"UPREIT," structure through one of two methods of reorganization, as
described more fully in this consent solicitation statement/prospectus;
(2) Charles E. Smith Residential Realty, Inc., which we refer to as
"Smith Residential," will merge with and into Archstone-Smith Trust, which
we refer to as "Archstone-Smith," a recently organized Maryland REIT
created to facilitate the merger which will become the parent company of
Archstone as part of the reorganization of Archstone into an UPREIT
structure, with Archstone-Smith as the surviving entity; and
(3) Charles E. Smith Residential Realty L.P., which we refer to as
"Smith Partnership," through which Smith Residential holds substantially
all of its assets and conducts all of its business, will merge with and
into Archstone, with Archstone as the surviving entity which will continue
under the name "Archstone-Smith Operating Trust."
In the partnership merger, each outstanding Smith Partnership Class A
common unit, other than units owned by Archstone-Smith, as successor to Smith
Residential as a result of the merger, will be exchanged for 1.975 Archstone
Class A-1 common units and each outstanding Smith Partnership Class B common
unit will be exchanged for 1.975 Archstone Class B common units. Each
Archstone Class A-1 common unit issued in the partnership merger, or issuable
upon conversion of an Archstone Class B common unit issued in the partnership
merger, is subject to a unit redemption right at the option of the holder
thereof immediately following the partnership merger. Upon exercise by a
unitholder of the redemption right, Archstone is required to acquire the
unitholder's Class A-1 common units for an amount of cash per unit based on
the market price of Archstone-Smith common shares in accordance with the
Archstone declaration of trust. However, Archstone-Smith, in its sole
discretion, may elect to assume and directly satisfy Archstone's redemption
obligation, in which case Archstone-Smith will pay the redeeming unitholder in
Archstone-Smith common shares, or their cash equivalent. Archstone Class B
common units will automatically convert on a one-for-one basis into Archstone
Class A-1 common units on the day immediately following the record date for
the distribution period during which such Archstone Class B common units were
issued. Upon the completion of the merger, the Archstone-Smith common shares
will be listed on the New York Stock Exchange under the symbol "ASN." The
Archstone Class A-1 common units and Archstone Class B common units will not
be listed on a national securities exchange or quoted on The Nasdaq Stock
Market, Inc.
After careful consideration, the Smith Residential board on behalf of Smith
Residential, in its capacity as general partner of Smith Partnership, has
determined that the partnership merger and the amendment to the partnership
agreement of Smith Partnership are in your best interest, and the board
recommends, on behalf of Smith Partnership, that you consent to the
partnership merger and the amendment to the partnership agreement of Smith
Partnership.
The partnership agreement of Smith Partnership requires the approval of the
partnership merger by holders of at least a majority of the outstanding common
units of Smith Partnership, including common units owned by Smith Residential.
By authority granted to Smith Residential, as general partner of Smith
Partnership, Smith Residential has approved the partnership merger and intends
to deliver its written consent to the partnership merger, as permitted under
the partnership agreement of Smith Partnership. Since Smith Residential owns a
majority in percentage interest of the outstanding common units of Smith
Partnership, the approval of the partnership merger is assured.
Unless holders of a majority of the outstanding common units of Smith
Partnership, excluding common units owned by Smith Residential, timely submit
executed consent forms indicating that such holders wish to vote against the
amendment to the partnership agreement of Smith Partnership, such inaction
will constitute a vote in favor of the recommendation of Smith Residential, as
general partner of Smith Partnership, regarding the amendment to the
partnership agreement of Smith Partnership. Smith Residential, as general
partner of Smith Partnership, recommends that Smith Partnership unitholders
approve the amendment to the partnership agreement. All of the Smith
Residential directors, who beneficially owned in the aggregate 2,141,832
common units of Smith Partnership, or approximately 5.5% of the outstanding
units of Smith Partnership as of August 31, 2001, have entered into voting
agreements agreeing to consent to the partnership merger and the amendment to
the partnership agreement of Smith Partnership.
We encourage you to read this entire document carefully, including the
section entitled "Risk Factors" beginning on page 30.
EACH VOTE IS IMPORTANT. PLEASE COMPLETE, SIGN, DATE AND RETURN YOUR CONSENT.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the securities to be issued in
the partnership merger or passed upon the adequacy or accuracy of this
consent solicitation statement/prospectus. Any representation to the
contrary is a criminal offense.
This consent solicitation statement/prospectus is dated September 20, 2001 and
it is first being mailed on or about September 25, 2001.
TABLE OF CONTENTS
Page
----
QUESTIONS & ANSWERS ABOUT THE PARTNERSHIP MERGER.......................... i
SUMMARY................................................................... 1
The Companies and the Partnership....................................... 1
The Combined Companies.................................................. 2
Smith Partnership Unitholders' Consent.................................. 2
Approval of the Merger Agreement and the Merger by Archstone-Smith
Common Shareholders and Smith Residential Common Stockholders.......... 3
Recommendation of Smith Residential Board............................... 4
Risks Associated with the Merger and the Partnership Merger............. 4
The Merger Agreement.................................................... 6
Summary of Federal Income Tax Consequences.............................. 13
Regulatory Approvals.................................................... 13
Accounting Treatment.................................................... 13
Interests of Smith Residential Directors and Executive Officers in the
Merger and the Partnership Merger...................................... 13
Trustees and Executive Officers of Archstone and Archstone-Smith After
the Merger............................................................. 17
Comparison of Unitholder and Shareholder Rights......................... 17
Archstone-Smith Trust 2001 Long-Term Incentive Plan..................... 18
Summary Historical Financial Data of Archstone.......................... 19
Summary Historical Financial Data of Smith Partnership.................. 21
Partnership Merger Equivalent Per Unit Data............................. 23
Values of Archstone Units and Smith Partnership Units................... 24
Archstone-Smith Operating Trust Pro Forma Summary Financial Data........ 25
Summary Historical Financial Data of Smith Residential.................. 26
Equivalent Per Share Data............................................... 28
Market Prices of Archstone Common Shares and Smith Residential Common
Stock.................................................................. 28
Archstone-Smith Trust Pro Forma Summary Financial Data.................. 29
RISK FACTORS.............................................................. 30
The value of the Archstone Class A-1 common units you receive in the
partnership merger, or issuable upon conversion of Archstone Class B
common units issued in the partnership merger, will fluctuate based on
the market price of Archstone-Smith common shares and may have a value
lower than expected.................................................... 30
Archstone historically has not owned or operated high-rise apartment
buildings and the value of the Archstone common units you receive in
the partnership merger may decline if Archstone fails to successfully
operate the high-rise apartment buildings acquired in the partnership
merger................................................................. 31
Archstone-Smith will be restricted in its ability to sell the properties
located in the Crystal City area of Arlington, Virginia without the
consent of Messrs. Smith and Kogod, which could result in the inability
of Archstone-Smith to sell these properties at an opportune time and
increased costs to Archstone-Smith..................................... 31
The operations of Archstone and Smith Residential may not be integrated
successfully and intended benefits of the merger and the partnership
merger may not be realized, which could have a negative impact on the
market price of Archstone-Smith common shares after the merger and the
value of the Archstone units after the partnership merger.............. 31
No public market for Archstone Class A-1 common units is expected to
develop, which may cause some difficulty in selling any Archstone Class
A-1 common units you receive in the partnership merger................. 32
i
Page
----
The directors and executive officers of Smith Residential may have
interests in the completion of the merger and the partnership merger
that may conflict with the interests of Smith Residential stockholders
and Smith Partnership unitholders...................................... 32
Archstone, Smith Residential and Smith Partnership may incur substantial
expenses and payments if the merger and the partnership merger do not
occur.................................................................. 34
The termination fee of up to $95 million payable by Smith Residential
and Smith Partnership may discourage some third party proposals to
acquire Smith Residential that Smith Residential stockholders may
otherwise find desirable............................................... 34
No fairness opinion was obtained in connection with the partnership
merger................................................................. 34
The merger may result in dilution in Archstone's expected funds from
operations and net earnings............................................ 35
Archstone-Smith's outstanding debt obligations could adversely affect
our future financial performance....................................... 35
Smith Partnership unitholders who have a taxable year other than a
calendar year may be required to include their Smith Partnership
distributions as income sooner than they otherwise would have as a
result of the merger................................................... 35
Smith Partnership unitholders may recognize taxable gain at the time of
the partnership merger if they receive a distribution that exceeds
their aggregate adjusted basis in their units.......................... 36
Future events could cause Smith Partnership unitholders to recognize
gain and, in determining whether to take actions with respect to future
events Archstone-Smith is not required to take into account the tax
consequences to unitholders............................................ 36
If Archstone fails to qualify as a partnership for federal income tax
purposes, unitholders could recognize a substantial amount of taxable
gain................................................................... 37
Archstone unitholders may be subject to taxes and may be required to
file tax returns in each state or jurisdiction where Archstone owns
properties or does business............................................ 37
Archstone unitholders who exercise control over Archstone may have
personal liability in some jurisdictions if Archstone were treated as a
common law trust....................................................... 37
A WARNING ABOUT FORWARD-LOOKING STATEMENTS................................ 38
SMITH PARTNERSHIP CONSENT SOLICITATION.................................... 39
Purpose of the Consent Solicitation..................................... 39
Who Can Consent......................................................... 39
Consent Procedures...................................................... 39
Required Vote........................................................... 39
Voting Agreements....................................................... 40
How You May Revoke Your Consent......................................... 40
Cost of This Consent Solicitation....................................... 40
APPROVAL OF AMENDMENT TO PARTNERSHIP AGREEMENT OF SMITH PARTNERSHIP....... 41
THE MERGER AND THE PARTNERSHIP MERGER..................................... 42
Structure of the Merger and the Partnership Merger; Partnership Merger
Exchange Ratio......................................................... 42
Background of the Merger and the Partnership Merger..................... 44
Archstone's Reasons for the Merger and the Partnership Merger........... 52
Smith Residential's Reasons for the Merger and the Partnership Merger;
Recommendation of the Smith Residential Board.......................... 54
Trustees and Executive Officers of Archstone-Smith After the Merger..... 58
Interests of Smith Residential Directors and Executive Officers in the
Merger and the Partnership Merger...................................... 58
Regulatory Approvals.................................................... 62
Accounting Treatment.................................................... 62
Restrictions on Resales by Affiliates................................... 62
ii
Page
----
No Dissenters' Rights................................................... 63
Archstone-Smith Trust 2001 Long-Term Incentive Plan..................... 63
THE MERGER AGREEMENT...................................................... 69
Closing; Effective Time of the Partnership Merger and the Merger........ 69
Archstone Reorganization................................................ 69
Merger Consideration and Partnership Merger Consideration............... 71
Treatment of Smith Residential Stock Options............................ 72
Representations and Warranties of Archstone, Archstone-Smith, Smith
Residential and Smith Partnership...................................... 73
Conduct of Business Pending the Merger and the Partnership Merger....... 74
Pre-Merger Dividends and Distributions.................................. 77
Conditions to the Merger and the Partnership Merger..................... 78
No Solicitation by Smith Residential or Smith Partnership............... 81
Termination of the Merger Agreement..................................... 84
Waiver and Amendment of the Merger Agreement............................ 88
Indemnification; Directors' and Officers' Insurance..................... 89
Assumption of Smith Residential's Obligations Under Registration Rights
Agreements............................................................. 90
Voting Agreements....................................................... 90
Acquisition of Non-Controlled Subsidiaries.............................. 91
Shareholders' Agreement................................................. 92
Tax Related Undertakings of Archstone................................... 95
FEDERAL INCOME TAX CONSEQUENCES........................................... 100
Overview................................................................ 100
Summary of Tax Opinions Relating to the Partnership Merger.............. 101
Summary of the Federal Income Tax Consequences of the Merger and the
Partnership Merger to Smith Partnership Unitholders.................... 103
Tax Status of Archstone-Smith Operating Trust........................... 104
Federal Income Tax Consequences to the Smith Partnership Unitholders of
the Merger Between Smith Residential and Archstone-Smith .............. 106
Tax Consequences of the Partnership Merger to Smith Partnership
Unitholders............................................................ 107
Effect of Subsequent Events............................................. 115
Tax Consequences of Ownership of Archstone-Smith Operating Trust Units
After the Partnership Merger........................................... 117
REIT Qualification of Archstone-Smith Following the Partnership Merger
and the Merger......................................................... 126
FEDERAL INCOME TAX CONSIDERATIONS WITH RESPECT TO ARCHSTONE-SMITH AS
A REIT................................................................... 127
Taxation of Archstone-Smith............................................. 128
Taxation of Its Shareholders............................................ 136
Other Tax Considerations................................................ 138
DESCRIPTION OF ARCHSTONE SHARES OF BENEFICIAL INTEREST.................... 140
General................................................................. 140
Common Units............................................................ 141
Unitholder Purchase Rights.............................................. 142
Preferred Units......................................................... 143
Power to Issue Additional Common Units and Preferred Units.............. 153
Transfer Agent and Registrar............................................ 154
Anti-Takeover Considerations............................................ 154
Capital Contributions................................................... 155
Distributions........................................................... 155
iii
Page
----
Preemptive Rights....................................................... 156
Conversion; Redemption.................................................. 156
Management.............................................................. 158
Sale of Substantially All of Archstone's Assets......................... 158
Transfers............................................................... 159
Amendment of Declaration of Trust....................................... 160
Meetings................................................................ 161
COMPARISON OF UNITHOLDER RIGHTS........................................... 162
Capitalization.......................................................... 162
Issuance of Additional Partnership or Unit Interests.................... 163
Capital Contributions................................................... 164
Distributions........................................................... 164
Preemptive Rights....................................................... 165
Conversion; Redemption.................................................. 166
Management.............................................................. 169
Sale of Substantially All of Archstone's Assets......................... 169
Indemnification......................................................... 170
Transfers............................................................... 172
Amendment of Declaration of Trust or Partnership Agreement.............. 174
Meetings................................................................ 176
Financial Statements and Reports........................................ 176
Appraisal/Dissenters' Rights............................................ 177
Unitholder Protection Rights Agreements................................. 177
DESCRIPTION OF ARCHSTONE-SMITH SHARES OF BENEFICIAL INTEREST.............. 178
General................................................................. 178
Common Shares........................................................... 179
Shareholder Purchase Rights............................................. 180
Preferred Shares........................................................ 180
New Series H, I, J, K and L Preferred Shares............................ 186
REIT Ownership Limitations and Transfer Restrictions Applicable to
Archstone-Smith Common Shares and Series A, C, D, E, F and G Preferred
Shares................................................................. 192
REIT Ownership Limitations and Transfer Restrictions Applicable to
Archstone-Smith Series H, I, J, K and L Preferred Shares............... 194
Transfer Agent and Registrar............................................ 195
Anti-Takeover Considerations............................................ 195
COMPARISON OF SHAREHOLDER RIGHTS.......................................... 197
Authorized Shares....................................................... 197
Voting Rights........................................................... 199
Classification of the Board; Removal of Directors/Trustees.............. 199
Number of Directors/Trustees; Vacancies................................. 200
Limitation of Trustee/Director and Officer Liability.................... 201
Indemnification......................................................... 201
Duties of Trustees and Directors........................................ 203
204
Call of Special Meetings of Shareholders................................
Advance Notice Provisions for Shareholder Nominations and Shareholder
New Business Proposals................................................. 204
Amendment of the Smith Residential Charter and the Archstone and
Archstone-Smith Declarations of Trust.................................. 205
Amendment of the Bylaws................................................. 205
iv
Page
----
Mergers, Consolidations and Sales of Assets............................ 205
Dissolution of Smith Residential, Archstone or Archstone-Smith;
Termination of REIT Status............................................ 206
Business Combinations with Interested Shareholders..................... 206
Control Share Acquisitions............................................. 207
Distributions.......................................................... 207
Board Committees....................................................... 208
Shareholder Rights Plans............................................... 208
REIT Ownership Limitations............................................. 211
LEGAL MATTERS............................................................ 215
EXPERTS.................................................................. 215
WHERE YOU CAN FIND MORE INFORMATION...................................... 216
WHAT INFORMATION YOU SHOULD RELY ON...................................... 218
INDEX TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS............... F-1
Annex A--Amended and Restated Agreement and Plan of Merger............... A-1
Annex B--Amendment to Partnership Agreement of Smith Partnership......... B-1
Annex C--Archstone-Smith Trust 2001 Long-Term Incentive Plan............. C-1
v
QUESTIONS & ANSWERS ABOUT THE PARTNERSHIP MERGER
Q: Why are Archstone and Smith Partnership proposing the partnership merger?
A: The boards of both Archstone and Smith Residential believe that the merger
and the partnership merger represent a strategic combination of two premier
real estate organizations that will be in the best interests of all of their
respective shareholders and the unitholders of Smith Partnership. The
combination brings together two of the most respected brands in the
apartment industry. The combined company will own approximately 82,500
apartment units, including approximately 4,500 apartment units in the
development pipeline, concentrated in protected markets which have high
barriers to entry. The combined company will be the second largest publicly
traded REIT in the apartment industry and the fourth largest publicly traded
REIT overall in the United States based on total equity market
capitalization.
Archstone-Smith, a recently organized Maryland REIT created to facilitate
the transaction, and Smith Residential are merging and Archstone and Smith
Partnership are merging in a two-step transaction. As a result of the
reorganization of Archstone into an UPREIT structure occurring immediately
before the merger, Archstone-Smith will be the sole shareholder of
Archstone. The first step of the transaction involves the merger of Smith
Residential with and into Archstone-Smith, which we refer to as the
"merger" following which Archstone-Smith will be the sole general partner
of Smith Partnership and the sole shareholder of Archstone. Smith
Residential is currently the sole general partner, and as of August 31,
2001 held approximately 70% of the outstanding common and preferred units,
of Smith Partnership. The second step of the transaction involves the
merger of Smith Partnership with and into Archstone, which we refer to as
the "partnership merger." In connection with the partnership merger,
Archstone will be renamed "Archstone-Smith Operating Trust." The
partnership merger will be completed at least one hour after the completion
of the merger.
Q: What will I receive in the partnership merger?
A: Each outstanding Smith Partnership Class A common unit, other than units
owned by Archstone-Smith, as successor to Smith Residential as a result of
the merger, will be exchanged for 1.975 Archstone Class A-1 common units and
each Smith Partnership Class B common unit will be exchanged for 1.975
Archstone Class B common units. Each outstanding Smith Partnership Class A
common unit owned by Archstone-Smith, as successor to Smith Residential as a
result of the merger, will be exchanged for 1.975 Archstone Class A-2 common
units.
Subject to the exchange provisions of the Archstone declaration of trust
regarding ownership limitations and restrictions on transfer, Archstone
Class A-1, Class A-2 and Class B common units have equal liquidation,
voting and other rights, except that only the holders of Class A-2 common
units have the right to vote in an election of trustees. Archstone Class A-
1 and Class A-2 common units have equal distribution rights while Archstone
Class B common units will only receive a distribution based on the portion
of the period during which they are outstanding.
Based on the number of Archstone common units expected to be outstanding
immediately following the partnership merger, we estimate that
approximately 14% of the outstanding Archstone common units will be owned
by former Smith Partnership unitholders other than Smith Residential and
approximately 86% will be owned by Archstone-Smith. All of the outstanding
Archstone preferred units will be owned by Archstone-Smith.
Q: Will I have the right to redeem or convert the Archstone units that I
receive in the partnership merger?
A: Yes. You will have the right to redeem the Archstone Class A-1 common units
that you receive in the partnership merger in accordance with the
declaration of trust of Archstone. Under the Archstone declaration of trust,
each
i
Archstone Class A-1 common unit issued in the partnership merger, or
issuable upon conversion of an Archstone Class B common unit issued in the
partnership merger, is subject to a unit redemption right at the option of
the holder thereof immediately following the partnership merger. Upon
exercise by a unitholder of the redemption right, Archstone is required to
acquire the unitholder's Class A-1 common units for an amount of cash per
unit based on the market price of Archstone-Smith common shares in
accordance with the Archstone declaration of trust. However, Archstone-
Smith, in its sole discretion, may elect to assume and directly satisfy
Archstone's redemption obligation, in which case Archstone-Smith will pay
the redeeming unitholder in Archstone-Smith common shares, or their cash
equivalent. Archstone Class B common units will automatically convert on a
one-for-one basis into Archstone Class A-1 common units on the day
immediately following the record date for the distribution period during
which such Archstone Class B common units were issued.
Q: What happens if the value of Archstone units and/or Smith Partnership units
changes before the closing of the transaction?
A: The exchange ratio is fixed and no change will be made to the exchange ratio
applicable to the partnership merger. Because the market value of Archstone-
Smith common shares into which Archstone Class A-1 common units are
redeemable will fluctuate before and after the closing of the merger, the
value of any Archstone Class A-1 common units that you will receive in the
partnership merger, or issuable upon conversion of any Archstone Class B
common units you will receive in the partnership merger, will fluctuate as
well. On September 19, 2001, Archstone common shares closed at $26.10 per
share. You should obtain current market prices for Archstone common shares
and shares of Smith Residential common stock, to which the current value of
Smith Partnership units correspond, before determining whether to consent to
the partnership merger and the amendment to the partnership agreement of
Smith Partnership.
Q: Will any fractional Archstone units be issued in the partnership merger?
A: No. A Smith Partnership common unitholder who, based on the 1.975 exchange
ratio applicable to the partnership merger, would be entitled to receive a
number of Archstone common units that is not a whole number, will receive a
number of Archstone common units that is rounded to the nearest whole unit,
with 0.5 of a unit rounded up.
Q: Why is Smith Partnership proposing to amend its partnership agreement?
A: In order to complete the partnership merger and the merger, Smith
Partnership unitholders are being asked to approve an amendment to the
partnership agreement of Smith Partnership. The partnership agreement
contains a provision that restricts Smith Residential from engaging in any
merger or business combination transaction unless the transaction also
includes a merger or sale of substantially all of the assets of Smith
Partnership which has been approved by the requisite consent of the Smith
Partnership unitholders and which will result in Smith Partnership
unitholders receiving the same consideration for each unit as is paid to
stockholders of Smith Residential. Because the Smith Partnership unitholders
will be receiving consideration in the partnership merger that will be
different in form, in other words, Archstone units instead of Archstone-
Smith shares, from the consideration specified in the partnership agreement
of Smith Partnership, Smith Partnership is proposing to amend the
partnership agreement to permit the partnership merger to occur pursuant to
the terms and for the consideration set forth in the merger agreement.
Q: To what am I being asked to consent?
A: You are being asked to consent to the partnership merger and an amendment to
the partnership agreement of Smith Partnership necessary to complete the
merger of Smith Residential with and into Archstone-Smith and the merger of
Smith Partnership with and into Archstone.
ii
Approval of the partnership merger requires the consent of holders of at
least a majority of the outstanding common units of Smith Partnership,
including common units owned by Smith Residential. By authority granted to
Smith Residential, as general partner of Smith Partnership, Smith
Residential has approved the partnership merger and intends to deliver its
written consent to the partnership merger, as permitted under the
partnership agreement of Smith Partnership. Since Smith Residential owns a
majority in percentage interest of the outstanding common units of Smith
Partnership, the approval of the partnership merger is assured.
Approval of the amendment to the partnership agreement of Smith Partnership
requires the consent of holders of at least a majority of the outstanding
common units of Smith Partnership, excluding common units owned by Smith
Residential. Pursuant to the terms of the partnership agreement of Smith
Partnership, if you do not complete, execute and return to Smith
Partnership the consent form attached to this consent solicitation
statement/prospectus prior to 3:00 p.m. Eastern time on Friday, October 26,
2001, such inaction on your part will constitute a vote in favor of the
recommendation of Smith Residential, as general partner of Smith
Partnership, regarding the amendment to the partnership agreement of Smith
Partnership. Smith Residential, as general partner of Smith Partnership,
recommends that you approve the amendment to the partnership agreement of
Smith Partnership. As a result, if you wish to vote against the amendment
to the partnership agreement of Smith Partnership, you must submit an
executed consent form indicating such intent not later than the date and
time set forth above. Unless holders of a majority of the outstanding
common units of Smith Partnership, excluding common units owned by Smith
Residential, timely submit executed consent forms indicating that such
holders wish to vote against the amendment to the partnership agreement of
Smith Partnership, the amendment to the partnership agreement of Smith
Partnership will be approved.
All of the Smith Residential directors, who beneficially owned in the
aggregate 2,141,832 common units of Smith Partnership, or approximately
5.5% of the outstanding common units of Smith Partnership as of August 31,
2001, have entered into voting agreements agreeing to consent to the
partnership merger and the amendment to the partnership agreement of Smith
Partnership.
The Smith Residential board on behalf of Smith Residential, in its capacity
as general partner of Smith Partnership, has determined that the
partnership merger and the amendment to the partnership agreement of Smith
Partnership are in your best interest, and the board recommends, on behalf
of Smith Partnership, that you consent to the partnership merger and the
amendment to the partnership agreement of Smith Partnership.
Q: As a Smith Partnership unitholder, do I have dissenters' rights?
A: No. Smith Partnership is organized under Delaware law. Under Delaware law
and the terms of the partnership agreement of Smith Partnership, Smith
Partnership unitholders have no rights to dissent and receive the appraised
value of their units in the partnership merger.
Q. How soon after the consent of unitholders of Smith Partnership is obtained
will the partnership merger occur?
A. If the merger agreement, the merger and the partnership merger are approved
at both the Archstone and Smith Residential special meetings, as applicable,
and the unitholders of Smith Partnership consent to the partnership merger
and the amendment to the partnership agreement of Smith Partnership, we
anticipate that the merger and the partnership merger will occur as soon as
practicable after the special meetings, the receipt of the written consent
of Smith Partnership unitholders and satisfaction or waiver of the
conditions set forth in the merger agreement. We currently expect that it
will take at least three days to close all of the transactions involved in
the reorganization of Archstone into an UPREIT, the merger of Smith
Residential with and into Archstone-Smith and the merger of Smith
Partnership with and into Archstone.
iii
Q: As a Smith Partnership unitholder, will I recognize gain or loss as a
result of the partnership merger?
A: The partnership merger generally is intended to qualify as a nonrecognition
transaction for federal income tax purposes for Smith Partnership
unitholders. However, if you experience a reduction in your share of
partnership liabilities of Smith Partnership when compared to your share of
partnership liabilities following the partnership merger, you will
recognize taxable gain to the extent that the amount of that reduction in
partnership liabilities exceeds your adjusted tax basis in your Smith
Partnership units immediately before the partnership merger. In addition,
other circumstances present at the time of the partnership merger and/or
subsequent events could cause you to recognize taxable gain as a result of
the partnership merger.
In general, a Smith Partnership unitholder who acquires Archstone units in
the partnership merger will have an initial basis in his, her or its
Archstone common units equal to its basis in his, her or its Smith
Partnership units, adjusted to reflect the effects of the partnership
merger. For example, a Smith Partnership unitholder's adjusted basis in
his, her or its Smith Partnership units will be adjusted upward or downward
to reflect any increase or decrease, respectively, in the unitholder's
share of liabilities immediately after the partnership merger. See "Federal
Income Tax Consequences--Tax Consequences of Ownership of Archstone-Smith
Operating Trust Units After the Partnership Merger" beginning on page 117.
The tax consequences of the partnership merger are very complicated and
will vary for each of you according to your own circumstances. Therefore,
it is important that you consult with your own tax advisor for a full
understanding of the tax consequences of the partnership merger to you.
Q: What will my distributions be before and after the partnership merger?
A: Until the partnership merger is completed, Smith Partnership unitholders
will continue to receive regular distributions in accordance with the
partnership agreement of Smith Partnership. Smith Partnership's current
quarterly distributions are $0.585 per common unit. In addition, Smith
Partnership will pay, if necessary, a final distribution in an amount equal
to the minimum amount necessary to maintain Smith Residential's REIT status
under the Internal Revenue Code and to avoid the payment by Smith
Residential of any corporate level tax with respect to undistributed income
or gain, as required by the merger agreement.
In the partnership merger, each outstanding Smith Partnership Class A
common unit, other than units owned by Archstone-Smith, as successor to
Smith Residential as a result of the merger, will be exchanged for 1.975
Archstone Class A-1 common units, and each outstanding Smith Partnership
Class B common unit will be exchanged for 1.975 Archstone Class B common
units.
After the completion of the partnership merger, as an Archstone unitholder
you will receive distributions in accordance with the declaration of trust
of Archstone. Archstone's current quarterly distributions are $0.41 per
common share. Upon completion of the partnership merger, you will not
receive any further distributions on your units of Smith Partnership, other
than any distributions declared but not yet paid.
Q: What should I do now?
A: You should indicate on your consent form whether or not you consent to the
partnership merger and the amendment to the partnership agreement of Smith
Partnership, and sign and mail it in the enclosed postage-paid envelope as
soon as possible. If you sign and send in your consent form and do not
indicate whether you consent, your consent will be deemed to have been
given in favor of the proposal to approve the partnership merger and the
proposal to approve the amendment to the partnership agreement of Smith
Partnership.
In order to be counted, your consent form must be received by Smith
Partnership prior to 3:00 p.m. Eastern time on Friday, October 26, 2001. As
set forth above, if you do not complete,
iv
execute and return to Smith Partnership the consent form attached to this
consent solicitation statement/prospectus prior to 3:00 p.m. Eastern time
on Friday, October 26, 2001, such inaction on your part will be deemed to
constitute a vote in favor of the recommendation of Smith Residential, as
general partner of Smith Partnership, regarding the amendment to the
partnership agreement of Smith Partnership. Smith Residential, as general
partner of Smith Partnership, recommends that you approve the amendment to
the partnership agreement of Smith Partnership. As a result, if you wish to
vote against the amendment to the partnership agreement of Smith
Partnership, you must
submit an executed consent form indicating such intent not later than the
date and time set forth above.
Q: Should I send in my unit certificates now?
A: No. After the partnership merger, Archstone will send to former Smith
Partnership common unitholders a letter of transmittal explaining what you
must do to exchange your Smith Partnership common unit certificates for
Archstone common unit certificates.
Q: Who can answer my questions?
A: If you have questions about the partnership merger or the amendment to the
partnerships agreement of Smith Partnership, or desire additional copies of
this consent solicitation statement/prospectus or the consent form, you
should contact:
Charles E. Smith Residential Realty L.P.
c/o Charles E. Smith Residential Realty, Inc.
2345 Crystal Drive
Arlington, Virginia 22202
Attention: Greg Samay
Telephone: (703) 769-1029
or
Archstone Communities Trust
7670 South Chester Street, Suite 100
Englewood, Colorado 80112
Attention: Julie Brubaker
Telephone: (800) 982-9293
v
SUMMARY
This summary highlights selected information from this consent solicitation
statement/prospectus. It may not contain all of the detailed information that
may be important to you. To understand the partnership merger and the merger
fully and for a more complete description of the legal terms of the merger and
the partnership merger, you should read carefully this entire document and the
other documents to which we refer, including the merger agreement. As used in
this consent solicitation statement/prospectus, references to "Archstone" after
completion of the partnership merger mean "Archstone-Smith Operating Trust."
References to "shares" of Archstone mean shares of beneficial interest of
Archstone Communities Trust prior to completion of the partnership merger and
references to "units" of Archstone mean shares of beneficial interest of
Archstone-Smith Operating Trust after completion of the partnership merger. For
more information about Archstone-Smith, Archstone, Smith Residential and Smith
Partnership, see "Where You Can Find More Information" beginning on page 216.
Each item in this summary refers to the first page where that subject is
discussed more fully.
The Companies and the Partnership
Archstone Communities Trust
7670 South Chester Street
Suite 100
Englewood, Colorado 80112
(303) 708-5959
Archstone Communities Trust is a real estate operating company focused on
the operation, development, acquisition, redevelopment and long-term ownership
of apartment communities in protected markets which have high barriers to
entry. As of July 31, 2001, Archstone's portfolio comprised of 179 communities
representing 54,659 apartment units, including 3,746 apartment units in the
development pipeline. Archstone's principal focus is to maximize shareholder
value by:
. Owning apartment communities in protected markets with strong economic
growth;
. Generating long-term sustainable growth in cash flow from operations;
. Managing its invested capital, through the disposition of assets that no
longer meet its investment objectives, in an effort to maximize long-
term value creation; and
. Strengthening its brand position and reputation for quality through
superior customer service to its residents.
Archstone was formed in 1963 and is organized as a real estate investment
trust under the laws of the State of Maryland.
Charles E. Smith Residential Realty, Inc.
Charles E. Smith Residential Realty L.P.
2345 Crystal Drive
Arlington, Virginia 22202
(703) 920-8500
Charles E. Smith Residential Realty, Inc. is a self-managed equity REIT that
acquires, develops, manages and operates multifamily properties primarily in
the Washington, D.C., Chicago, Illinois and Boston, Massachusetts metropolitan
areas and in southeast Florida. Smith Residential is a fully integrated real
estate organization with in-house acquisition, development, financing,
marketing, property management and leasing expertise. Its primary strategy for
growth is to acquire, develop, own and manage high quality multifamily
properties to generate long-term income and increases in value.
As an UPREIT, Smith Residential owns substantially all of its assets and
conducts all of its operations through Charles E. Smith Residential Realty L.P.
and its subsidiaries. Smith Residential is the sole general partner of Smith
Partnership. As of August 31, 2001, Smith Residential owned approximately 70%
of the outstanding common and preferred units of Smith Partnership.
As of July 31, 2001, Smith Residential, through Smith Partnership and its
subsidiaries, owned 59 operating apartment properties containing 27,186
apartment units, had 480 apartment units under construction at one owned site,
had 226 apartment units under construction at one site for which Smith
Residential owned substantially all of the economic interest, and had an
agreement to purchase 383 units at one additional site. Smith Residential also
had
1
interests in three operating apartment properties totaling 1,267 apartment
units and in one property under construction totaling 630 apartment units. In
addition, Smith Residential owns one freestanding retail shopping center
aggregating 205,000 square feet, and through controlled and non-controlled
subsidiaries, conducts property service businesses for its own properties and
residential and commercial properties owned by third parties.
Smith Residential was incorporated in 1993 as a corporation under the laws
of the State of Maryland. Smith Partnership was formed in 1993 as a limited
partnership under the laws of the State of Delaware.
The Combined Companies
Archstone-Smith Trust
Archstone-Smith Operating Trust
7670 South Chester Street
Suite 100
Englewood, Colorado 80112
(303) 708-5959
Upon completion of the reorganization of Archstone into an umbrella
partnership real estate investment trust, or "UPREIT," the merger and the
partnership merger, Archstone-Smith will own substantially all of its assets
and will conduct all of its operations through Archstone, which will be renamed
"Archstone-Smith Operating Trust." Archstone-Smith will be the sole trustee of,
and own approximately an 86% interest in, Archstone, assuming that,
. none of the common unitholders of Smith Partnership redeem their units
for cash or Smith Residential common stock, and
. each holder of convertible securities, other than options, of Archstone,
Smith Residential or Smith Partnership, or any of their respective
subsidiaries, converts or exercises those securities for Archstone
common shares, shares of Smith Residential common stock or common units
of Smith Partnership.
Archstone-Smith will own a portfolio comprising approximately 240
communities representing approximately 82,500 apartment units, including
approximately 4,500 apartment units in the development pipeline. The Archstone-
Smith portfolio will include approximately 62,500 garden apartment units and
approximately 20,000 high-rise apartment units. Based on the $26.10 per share
closing price of Archstone common shares on the New York Stock Exchange on
September 19, 2001, the latest practicable date before mailing this consent
solicitation statement/prospectus, the total debt and equity market
capitalization of Archstone-Smith is estimated to be approximately $9.6 billion
immediately following the merger.
Archstone-Smith, currently a wholly owned subsidiary of Archstone, was
organized in May 2001 as a real estate investment trust under the laws of the
State of Maryland in connection with entering into the merger agreement and in
order to facilitate the transactions contemplated thereby.
Smith Partnership Unitholders' Consent (see page 39)
The partnership agreement of Smith Partnership requires the approval of the
partnership merger by holders of at least a majority of the outstanding common
units of Smith Partnership, including common units owned by Smith Residential.
By authority granted to Smith Residential, as general partner of Smith
Partnership, Smith Residential has approved the partnership merger and intends
to take action by written consent, as permitted under the partnership agreement
of Smith Partnership, to approve the partnership merger. Since Smith
Residential owns a majority in percentage interest of the outstanding common
units of Smith Partnership, the approval of the partnership merger is assured.
In addition, in order to complete the partnership merger, an amendment to
the partnership agreement of Smith Partnership must be approved by holders of
at least a majority of the outstanding common units of Smith Partnership,
excluding common units owned by Smith Residential.
The partnership agreement of Smith Partnership contains a provision that
restricts Smith Residential from engaging in any merger or business combination
transaction unless the transaction also includes a merger or sale of
substantially all of the assets of Smith Partnership which has been approved by
the requisite consent of Smith Partnership
2
unitholders and which will result in Smith Partnership unitholders receiving
the same consideration for each unit as is paid to stockholders of Smith
Residential. Because the Smith Partnership unitholders will be receiving
consideration in the partnership merger that will be different in form, in
other words, Archstone units instead of Archstone- Smith shares, from the
consideration specified in the partnership agreement of Smith Partnership,
Smith Partnership is proposing to amend the partnership agreement to permit the
merger and the partnership merger to occur pursuant to the terms and for the
consideration set forth in the merger agreement.
Pursuant to the terms of the partnership agreement of Smith Partnership, any
Smith Partnership common unitholder that does not complete, execute and return
to Smith Partnership the consent form attached to this consent solicitation
statement/prospectus prior to 3:00 p.m. Eastern time on Friday, October 26,
2001, will be deemed to have voted in favor of the recommendation of Smith
Residential, as general partner of Smith Partnership, regarding amendment to
the partnership agreement of Smith Partnership. Smith Residential, as general
partner of Smith Partnership, recommends that Smith Partnership unitholders
approve the amendment to the partnership agreement of Smith Partnership. As a
result, any common unitholder that wishes to vote against the amendment to the
partnership agreement of Smith Partnership must submit an executed consent form
indicating such intent not later than the date and time set forth above. Unless
holders of a majority of the outstanding common units of Smith Partnership,
excluding common units owned by Smith Residential, timely submit executed
consent forms indicating that such holders wish to vote against the amendment
to the partnership agreement of Smith Partnership, the amendment to the
partnership agreement of Smith Partnership will be approved.
All of the Smith Residential directors, who beneficially owned in the
aggregate 2,141,832 common units of Smith Partnership, or approximately 5.5% of
the outstanding common units of Smith Partnership as of August 31, 2001, have
entered into voting agreements agreeing to consent to the partnership merger
and the amendment to the partnership agreement of Smith Partnership.
Approval of the Merger Agreement and the Merger by Archstone-Smith Common
Shareholders and Smith Residential Common Stockholders
By separate joint proxy statement/prospectus, the Archstone board is
soliciting the approval of the amendment to the Archstone declaration of trust,
the reorganization of Archstone into an UPREIT, including the mergers
contemplated thereby, and the merger agreement, the merger and the partnership
merger from the Archstone common shareholders and the Smith Residential board
is soliciting the approval of the merger agreement and the merger from the
Smith Residential common stockholders. The joint proxy statement/prospectus
also constitutes a prospectus of Archstone-Smith with regard to the Archstone-
Smith common and preferred shares to be issued to the Smith Residential common
and preferred stockholders in the merger.
Approval of the merger agreement and the merger requires the affirmative
vote of the holders of at least two-thirds of the outstanding shares of Smith
Residential common stock as of the record date for the Smith Residential
special meeting. As of the record date for the Smith Residential special
meeting, the Smith Residential directors, executive officers and their
affiliates beneficially owned, excluding stock options and Smith Partnership
units held by them, 305,985 shares of Smith Residential common stock
representing approximately 1% of the outstanding shares of Smith Residential
common stock entitled to be voted at the Smith Residential special meeting. All
of the Smith Residential directors, who in the aggregate beneficially owned,
excluding stock options held by them, 242,664 shares of Smith Residential
common stock, or approximately 1% of the outstanding shares of Smith
Residential common stock as of the record date, have entered into voting
agreements agreeing to vote these shares in favor of the merger agreement and
the merger at the Smith Residential special meeting and agreeing to consent to
the partnership merger and the amendment to the partnership agreement of Smith
Partnership. The vote of Smith Residential preferred stockholders is
3
not required for approval of the merger agreement and the merger and such
stockholders are not entitled to vote thereon.
Approval of the amendment to the Archstone declaration of trust, the
reorganization of Archstone into an UPREIT, including the mergers contemplated
thereby, and the merger agreement and the merger each requires the affirmative
vote of the holders of at least a majority of the outstanding Archstone common
shares as of the record date for the special meeting. As of the record date for
the Archstone special meeting, the Archstone trustees, executive officers and
their affiliates beneficially owned, excluding share options held by them,
927,478 Archstone common shares representing less than 1% of the outstanding
Archstone common shares entitled to be voted at the Archstone special meeting.
All of the Archstone trustees, who beneficially owned in the aggregate 572,230
Archstone common shares, excluding share options held by them, or less than 1%
of the outstanding Archstone common shares as of the record date, have entered
into voting agreements agreeing to vote these shares in favor of the merger
agreement, the merger and the transactions contemplated thereby at the
Archstone special meeting. The vote of Archstone preferred shareholders is not
required for approval of any of the proposals.
The consummation of the partnership merger is conditioned upon completion of
the merger and the partnership merger will not be completed if the merger
agreement, the merger and the partnership merger do not receive the required
approval of the Archstone common shareholders and the Smith Residential
stockholders, as applicable.
Recommendation of Smith Residential Board (see page 54)
The Smith Residential board of directors, on behalf of Smith Residential, in
its capacity as general partner of Smith Partnership, has unanimously adopted
and approved the merger agreement, the partnership merger and the amendment to
the partnership agreement of Smith Partnership, has determined that the merger
agreement, the partnership merger and the amendment to the partnership
agreement of Smith Partnership are advisable and in the best interests of Smith
Partnership and its unitholders and recommends that Smith Partnership
unitholders consent to the partnership merger and the amendment to the
partnership agreement of Smith Partnership. Smith Partnership unitholders also
should refer to the reasons that the Smith Residential board considered in
determining whether to consent to the partnership merger beginning on page 54.
Risks Associated with the Merger and the Partnership Merger (see page 30)
The Smith Residential board believes that the merger is in the best interest
of its stockholders and that the partnership merger is in the best interest of
Smith Partnership unitholders. There are, however, risks associated with the
merger and the partnership merger that you should consider in deciding whether
to consent to the partnership merger and the amendment to the partnership
agreement of Smith Partnership. These risks include, among others:
. the fact that the value of Archstone Class A-1 common units that Smith
Partnership unitholders will receive in the partnership merger, or
issuable upon conversion of Archstone Class B common units issued in the
partnership merger, will fluctuate based on the market price of
Archstone common shares through the closing of the merger and the
Archstone-Smith common shares thereafter, and may have a value lower
than expected;
. the fact that Archstone historically has not owned or operated high-rise
apartment buildings and that the value of the Archstone common units you
receive in the partnership merger may decline if Archstone fails to
operate successfully the high-rise apartment buildings acquired in the
partnership merger;
. Archstone-Smith will be restricted in its ability to sell the properties
located in the Crystal City area of Arlington, Virginia without the
consent of Messrs. Smith and Kogod, which could result in the inability
of Archstone-Smith to sell these properties at an opportune time and
increased costs to Archstone-Smith;
4
. the potential inability of Archstone and Archstone-Smith to merge and
integrate successfully the operations of Smith Residential and Smith
Partnership and to realize the cost savings expected from the merger and
the partnership merger, including economies of scale, which could have a
negative impact on the market price of Archstone-Smith common shares
after the merger and the value of Archstone units after the partnership
merger;
. the fact that there is not expected to be a public market for the
Archstone Class A-1 common units issued in the partnership merger, or
issuable upon conversion of Archstone Class B units issued in the
partnership merger, which may cause some difficulty in selling any
Archstone Class A-1 or Class B common units you receive in the
partnership merger;
. the fact that the directors and executive officers of Smith Residential
may have interests in, and will continue to receive benefits from, the
merger and the partnership merger that are different from, or in
addition to, and, therefore, may conflict with, the interests of Smith
Partnership unitholders in the merger and the partnership merger;
. the fact that Smith Residential and Smith Partnership may have already
incurred substantial expenses in connection with the merger and the
partnership merger, and may incur additional expenses in the event that
the merger and the partnership merger are not completed;
. the fact that Smith Residential and Smith Partnership may be required to
pay a termination fee of up to $95 million under specified circumstances
and that the threat of such payment may discourage some third-party
proposals to acquire Smith Residential or Smith Partnership that Smith
Partnership unitholders may otherwise find desirable;
. the fact that no fairness opinion was obtained by Smith Partnership in
connection with the partnership merger;
. the fact that the merger is anticipated to result in dilution to
Archstone's expected 2002 funds from operation of approximately $.03 per
share and dilution to net earnings per share of $0.20 on a pro forma
basis for the six months ended June 30, 2001;
. the fact that Archstone-Smith's outstanding debt obligations could
adversely affect our future financial performance;
. Smith Partnership unitholders who have a taxable year other than a
calendar year may be required to include their Smith Partnership
distributions as income sooner than they otherwise would have as a
result of the merger;
. Smith Partnership unitholders may recognize taxable gain at the time of
the partnership merger if they receive a distribution that exceeds their
aggregate adjusted basis in their units;
. Future events could cause Smith Partnership unitholders to recognize
gain and, in determining whether to take actions with respect to future
events Archstone-Smith is not required to take into account the tax
consequences to unitholders;
. If Archstone fails to qualify as a partnership for federal income tax
purposes, unitholders could recognize a substantial amount of taxable
gain; and
. Archstone unitholders may be subject to taxes and may be required to
file tax returns in each state or jurisdiction where Archstone owns
properties or does business.
. Archstone unitholders who exercise control over Archstone may have
personal liability in some jurisdictions if Archstone were treated as a
common law trust.
5
The Merger Agreement (see page 69)
The merger agreement is attached at the back of this document as Annex A. We
urge you to read the merger agreement because it is the legal document that
governs the merger and the partnership merger.
The merger agreement contemplates the following transactions:
. the reorganization of Archstone into an UPREIT
-- Archstone will be reorganized into an UPREIT in a transaction pursuant
to which Archstone, or, in the alternative structure, a newly created
Maryland real estate investment trust that will be the successor to
Archstone's assets and liabilities, which we also refer to as
"Archstone," will become a subsidiary of Archstone-Smith, followed by
-- the election by Archstone to be treated for federal income tax
purposes as either a domestic eligible entity with a single owner
disregarded as a separate entity or as a partnership, followed by
. the merger of Smith Residential with Archstone-Smith
-- the merger, in which Smith Residential will merge with and into
Archstone-Smith and Smith Residential will cease to exist, followed by
. the merger of Smith Partnership with Archstone
-- the partnership merger, in which Smith Partnership will merge with and
into Archstone and Smith Partnership will cease to exist, with
Archstone thereafter being treated as a partnership for federal income
tax purposes.
The partnership merger will be completed at least one hour following the
merger.
Structure Diagrams
The following diagrams depict in summary form the structure of Archstone and
Smith Residential as of August 31, 2001, and the steps that will be necessary
to complete the reorganization of Archstone into an UPREIT, the merger and the
partnership merger, and the resulting structure of Archstone-Smith, assuming
that:
. none of the common unitholders of Smith Partnership redeem their units
for cash or Smith Residential common stock; and
. each holder of convertible securities, other than options of Archstone,
Smith Residential or Smith Partnership, or any of their respective
subsidiaries, converts or exercises those securities for Archstone
common shares, shares of Smith Residential common stock or common units
of Smith Partnership.
Each outstanding unit of Smith Partnership, other than those owned by Smith
Residential, is subject to a redemption right exercisable by the holder. Upon
exercise by a unitholder of the redemption right, Smith Partnership is required
to acquire the unitholder's units for an amount in cash per unit based on the
market price of Smith Residential common stock. However, Smith Residential, in
its sole discretion, may elect to assume and directly satisfy Smith
Partnership's redemption obligation, in which case Smith Residential will pay
the redeeming unitholder in shares of Smith Residential common stock or their
cash equivalent.
The diagrams labeled Step 1 and Step 2 show the reorganization of Archstone
into an UPREIT using the primary structure. The reorganization of Archstone
into an UPREIT may also be completed using an alternative structure if
specified conditions are not met. For more information, please read "The Merger
Agreement--Archstone Reorganization" beginning on page 69. The diagram labeled
Step 3 shows the merger and the partnership merger. The percentages in the
diagrams reflect the expected ownership of Smith Partnership units as of
August 31, 2001, and of Archstone units following the partnership merger.
6
[GRAPH]
Current Structure
Smith Shareholders Archstone Shareholders
Charles E. Smith Archstone
Residential Realty Inc. Communities Trust
66% GP
Charles E. Smith
Residential
Realty, L.P.
Step 1 Step 2
Archstone Archstone
Shareholders Shareholders
Archstone Archstone
Communities Trust Communities Trust
Archstone Archstone
forms merges with
Archstone-Smith Merger Sub
Archstone-Smith Archstone Smith
Archstone-Smith
forms
Merger Sub
Merger Sub Merger Sub
7
[GRAPH]
Step 3
Smith Stockholders Archstone Shareholders
Merger
into
Archstone-Smith
Charles E. Smith
Residential Realty, Archstone-Smith
Inc.
66% GP
Merger
into Archstone
Charles E. Smith Archstone
Residential Communities Trust
Realty, L.P.
Result
Former Smith Former Archstone
Stockholders Shareholders
28.4% 71.6%
Archstone-Smith
87.3% Owner
Archstone-Smith
Operating Trust
8
Conditions to the Partnership Merger and the Merger (see page 78)
Before the partnership merger and the merger can be completed, a number of
conditions must be satisfied. These include:
. the approval of the partnership merger by the unitholders of Smith
Partnership, including Smith Residential, which is assured, and the
approval of an amendment to the partnership agreement of Smith
Partnership by Smith Partnership unitholders, excluding Smith
Residential;
. the approval of the merger agreement and the merger, which includes the
reorganization of Archstone into an UPREIT, by Archstone common
shareholders;
. the approval of the merger agreement and the merger by Smith Residential
common stockholders;
. the absence of a court order or law preventing the completion of the
Archstone reorganization, the partnership merger or the merger; and
. other customary closing conditions.
Where the law permits, Archstone, or Archstone-Smith on the one hand, or
Smith Residential or Smith Partnership, on the other hand, could decide to
complete the partnership merger and the merger even though one or more
conditions are not satisfied. By law, neither Archstone or Archstone-Smith, on
the one hand, nor Smith Residential or Smith Partnership, on the other hand,
can waive:
. the requirement that unitholders of Smith Partnership approve the
partnership merger and the amendment to the partnership agreement of
Smith Partnership;
. the requirement that Archstone common shareholders and Smith Residential
common stockholders approve the merger agreement and the merger; or
. any court order or law preventing the closing of the merger or the
partnership merger.
Whether any of the other conditions would be waived would depend on the
facts and circumstances as determined by the reasonable business judgment of
the Archstone-Smith board acting on its own behalf or in its capacity as sole
trustee of Archstone, or the Smith Residential board, acting on its own behalf
or in its capacity as general partner of Smith Partnership. If Archstone and
Archstone-Smith or Smith Residential and Smith Partnership waived compliance
with one or more of the other conditions and the condition was deemed material
to a vote of Archstone common shareholders, Smith Residential common
stockholders and/or Smith Partnership unitholders, then Archstone, Smith
Residential and/or Smith Partnership would have to resolicit shareholder,
stockholder and/or unitholder approval, as applicable, before closing the
merger or the partnership merger. Smith Partnership does not intend to
resolicit unitholders for any waiver that, in the judgment of Smith
Residential, as general partner of Smith Partnership, does not require
resolicitation of Smith Partnership unitholders.
It is a condition to the closing of the merger and the partnership merger
that Mayer, Brown & Platt, counsel to Archstone and Archstone-Smith, and Hogan
& Hartson L.L.P., counsel to Smith Residential and Smith Partnership, deliver
opinions regarding various issues, including opinions that the merger qualifies
as a reorganization under the provisions of section 368(a) of the Internal
Revenue Code, and that the partnership merger will not result in the
recognition of taxable gain or loss at the time of the partnership merger to a
Smith Partnership unitholder:
. who is a U.S. person;
. who does not exercise its redemption right with respect to Archstone
Class A-1 common units under the Archstone declaration of trust on a
date sooner than the date two years after the partnership merger;
. who does not receive a cash distribution in connection with the
partnership merger, or a deemed cash distribution resulting from relief
or a deemed relief from liabilities, including as a result of the
prepayment of indebtedness of Smith Partnership in connection with or
following the
9
partnership merger, in excess of such holder's adjusted basis in its
Smith Partnership units at the time of the partnership merger;
. who is not required to recognize gain by reason of the application of
section 707(a) of the Internal Revenue Code and the Treasury regulations
thereunder to the partnership merger, with the result that the
partnership merger is treated as part of a "disguised sale" by reason of
any transactions undertaken by Smith Partnership prior to or in
connection with the partnership merger or any debt of Smith Partnership
that is assumed or repaid in connection with the partnership merger; and
. whose "at risk" amount does not fall below zero as a result of the
merger and the partnership merger.
In addition, it is a condition to the closing of the merger and the
partnership merger, that Mayer, Brown & Platt deliver an opinion that the
reorganization of Archstone into an UPREIT will qualify as a reorganization
under section 368(a)(1)(F) of the Internal Revenue Code.
It is also a condition to the closing of the merger and the partnership
merger that Hogan & Hartson L.L.P. deliver an opinion that Smith Partnership
has been, since June 30, 1994 through and including its taxable year ending at
the time of the partnership merger, treated for federal income tax purposes as
a partnership and not as a corporation or association taxable as a corporation,
and that Mayer, Brown & Platt deliver an opinion that immediately prior to, and
at the time of, the partnership merger, Archstone, or an entity that Archstone
will merge into as part of Archstone's reorganization into an UPREIT, is and
will be treated for federal income tax purposes pursuant to Treasury regulation
section 301.7701-3 as a partnership or an entity disregarded as a separate
entity and not as a corporation or association taxable as a corporation.
It is also a condition to the closing of the merger and the partnership
merger that Hogan & Hartson L.L.P. deliver an opinion that commencing with its
taxable year ended December 31, 1994 through and including its taxable year
ending at the time of the merger, Smith Residential was organized and has
operated in conformity with the requirements for qualification as a REIT under
the Internal Revenue Code and that Mayer, Brown & Platt deliver an opinion that
commencing with Archstone's taxable year ended December 31, 1994, until either
the time Archstone makes an election to be treated as a partnership or the time
that Archstone merges into a wholly owned subsidiary of Archstone-Smith into
which Smith Partnership will merge, Archstone was organized and has operated in
conformity with the requirements for qualification as a REIT under the Internal
Revenue Code and that Archstone-Smith's organization and proposed method of
operation will enable it to meet the requirements for qualification and
taxation as a REIT under the Internal Revenue Code commencing with its taxable
year ending December 31, 2001.
The delivery of these opinions, although waiveable under the terms of the
merger agreement, will not be waived.
Termination of the Merger Agreement (see page 84)
Archstone and Smith Residential may terminate the merger agreement, whether
before or after the required shareholder and unitholder approvals are obtained,
by mutual written consent duly authorized by the Archstone board and the Smith
Residential board, or if:
. a judgment, injunction, order, decree or action by any governmental
entity preventing the consummation of either the merger or the
partnership merger becomes final and non-appealable;
. the merger and the partnership merger have not been completed before
March 31, 2002; however, neither Archstone nor Smith Residential may
terminate the merger agreement if its breach is the reason that the
merger or the partnership merger have not been completed by that date;
. the holders of at least two-thirds of the outstanding shares of Smith
Residential common stock fail to approve the merger and the merger
agreement, or if the holders of Smith Partnership units fail to approve
the partnership merger or the amendment to the partnership agreement
10
of Smith Partnership by the required consent, but Smith Residential may
not terminate for either of these reasons if it is in breach in any
material respect of its obligations contained in the merger agreement
relating to obtaining the required stockholder votes and unitholder
consents; or
. the holders of at least a majority of the outstanding Archstone common
shares fail to approve the merger and the merger agreement, but
Archstone may not terminate for either of these reasons if it is in
breach in any material respect of its obligations contained in the
merger agreement relating to obtaining the required shareholder votes.
Archstone also may terminate the merger agreement if:
. Smith Residential or Smith Partnership breaches or fails to perform any
of its covenants, obligations or agreements contained in the merger
agreement, or upon a breach of any representation or warranty of Smith
Residential or Smith Partnership or if any representation or warranty of
Smith Residential or Smith Partnership is or becomes untrue, in either
case so that the conditions to the consummation of the merger contained
in the merger agreement would be incapable of being satisfied by March
31, 2002, or as otherwise extended by the parties;
. the Smith Residential board has failed to recommend or has withdrawn,
modified, amended or qualified, or proposed publicly not to recommend or
to withdraw, modify, amend or qualify, in any manner adverse to
Archstone, its approval or recommendation of the merger, the partnership
merger or the merger agreement, or approved or recommended any superior
alternative acquisition proposal or the Smith Residential board or any
committee of the Smith Residential board has resolved to do any of the
foregoing; or
. following the announcement or receipt of an alternative acquisition
proposal, Smith Residential has failed to call a special meeting of
stockholders or failed to prepare and mail to its stockholders its joint
proxy statement/prospectus, or the Smith Residential board or any
committee of the Smith Residential board has resolved to do any of the
foregoing.
Smith Residential also may terminate the merger agreement if:
. Archstone or Archstone-Smith breaches or fails to perform any of its
covenants, obligations or agreements contained in the merger agreement,
or upon a breach of any representation or warranty of Archstone or
Archstone-Smith, or if any representation or warranty of Archstone or
Archstone-Smith is or becomes untrue, in either case so that the
conditions to the consummation of the merger contained in the merger
agreement would be incapable of being satisfied by March 31, 2002, or as
otherwise extended by the parties; or
. the Smith Residential board has withdrawn, modified, amended or
qualified in any manner adverse to Archstone its approval or
recommendation of the merger, the partnership merger or the merger
agreement in connection with, or approved or recommended, any superior
alternative acquisition proposal, or in order to enter into a binding
written agreement with respect to a superior alternative acquisition
proposal, so long as, in each case, Smith Residential has complied with
the terms of the no solicitation provisions contained in the merger
agreement and, at the same time as or before terminating the merger
agreement, has paid to Archstone the termination fee.
Termination Fee and Termination Expenses (see page 85)
Smith Residential and Smith Partnership have agreed to pay to Archstone a
termination fee of up to $95 million prior to or upon such termination if the
merger agreement is terminated:
. by Smith Residential under the circumstances described above where it is
permitted to terminate the merger
11
agreement because its board of directors has withdrawn, modified,
amended or qualified in any manner adverse to Archstone its approval or
recommendation of the merger, the partnership merger or the merger
agreement in connection with, or approved or recommended, any superior
alternative acquisition proposal, or in order to enter into a binding
written agreement with respect to a superior alternative acquisition
proposal, so long as, in each case, Smith Residential complied with the
terms of the no solicitation provisions contained in the merger
agreement; or
. by Archstone, if the Smith Residential board has failed to recommend or
has withdrawn, modified, amended or qualified, or proposed publicly not
to recommend or to withdraw, modify, amend or qualify, in any manner
adverse to Archstone its approval or recommendation of the merger, the
partnership merger or the merger agreement or approved or recommended
any superior alternative acquisition proposal, or has resolved to do any
of the foregoing.
The termination fee of up to $95 million would also be payable by Smith
Residential and Smith Partnership if:
. Smith Residential or Smith Partnership has received a proposal for an
alternative acquisition transaction before the termination of the merger
agreement;
. before or within 12 months after the termination of the merger
agreement, Smith Residential or Smith Partnership enters into an
agreement regarding any alternative acquisition transaction that is
later completed whether or not the agreement is related to the pre-
termination proposal described above; and
. Archstone or Archstone-Smith terminated the merger agreement because:
--Smith Residential or Smith Partnership breaches or fails to perform its
covenants, obligations and agreements in the merger agreement, upon a
breach of any representation or warranty of Smith Residential or Smith
Partnership, or if any of its representations or warranties is or
becomes untrue, in either case so that the conditions to the
consummation of the merger contained in the merger agreement, relating
to performance of covenants and breach of representations and
warranties would be incapable of being satisfied by March 31, 2002, or
as otherwise extended by the parties,
--the holders of at least two-thirds of the outstanding Smith Residential
common stock fail to approve the merger and the merger agreement or if
the holders of Smith Partnership units fail to approve the partnership
merger or the amendment to the partnership agreement of Smith
Partnership by the required consent, or
--following the announcement or receipt of an alternative acquisition
proposal, Smith Residential has failed to call a special meeting of
stockholders or failed to prepare and mail to its stockholders its
joint proxy statement/prospectus.
Any termination fee to be paid under the foregoing will be paid upon the
completion of the alternative acquisition transaction.
Finally, the termination fee of up to $95 million would be payable by Smith
Residential and Smith Partnership upon completion of a transaction described
below if:
. Smith Residential terminates the merger agreement because the merger and
the partnership merger have not been completed before March 31, 2002 and
Smith Residential shall not have breached in any material respect its
obligations under the merger agreement in any manner that shall have
caused either the merger or the partnership merger to not be completed
by March 31, 2002;
. Smith Residential or Smith Partnership has received a proposal for an
alternative acquisition transaction before the termination of the merger
agreement;
12
. prior to termination of the merger agreement but after receipt of a
proposal for an alternative acquisition transaction, Archstone and/or
Archstone-Smith does not announce, enter into or agree to effect any
merger, acquisition, exchange offer, consolidation, reorganization or
other business combination with any third party; and
. before or within 12 months after the termination of the merger agreement
above, Smith Residential or Smith Partnership enters into an agreement
regarding any alternative acquisition transaction that is later
completed.
Archstone has not agreed to pay any termination fee under the merger
agreement.
Under the merger agreement, Smith Residential and Smith Partnership, on the
one hand, and Archstone, on the other, also may become obligated under
specified circumstances to reimburse up to $7.5 million of the other parties'
expenses if the merger agreement is terminated. The amount of any termination
fee paid by Smith Residential and Smith Partnership would be reduced by any
expense reimbursement paid by them.
Summary of Federal Income Tax Consequences (see page 100)
A Smith Partnership unitholder who receives only Archstone units in the
partnership merger generally will not recognize taxable gain at the time of the
partnership merger, except to the extent that the unitholder experiences a
reduction in his, her or its share of partnership liabilities that exceeds his,
her or its adjusted basis in his, her or its Smith Partnership units
immediately before the partnership merger. Whether a particular Smith
Partnership unitholder will experience a reduction in his, her or its share of
partnership liabilities in connection with the partnership merger will depend
upon a number of variables, which are discussed more fully under the heading
"Federal Income Tax Consequences --Tax Consequences of the Partnership Merger
to Smith Partnership Unitholders" beginning on page 107. In addition,
subsequent events and transactions could cause a former Smith Partnership
unitholder to be required to recognize all or part of the gain deferred at the
time of the partnership merger. See "Federal Income Tax Consequences--Effect of
Subsequent Events" beginning on page 115. Archstone has agreed to provide
certain tax protections for the benefit of Smith Partnership unitholders and to
assume existing tax protection agreements in the partnership merger, as
described in "The Merger Agreement--Tax Related Undertakings of Archstone"
beginning on page 95.
The tax consequences of the partnership merger to each Smith Partnership
unitholder will depend on the particular situation of that unitholder.
Therefore, each Smith Partnership unitholder is urged to consult with his, her
or its own tax advisor for a full understanding of the tax consequences of the
partnership merger.
Regulatory Approvals (see page 62)
No material federal or state regulatory requirements must be complied with
and no approvals must be obtained by Archstone-Smith, Archstone, Smith
Residential or Smith Partnership in connection with the reorganization of
Archstone into an UPREIT, the merger or the partnership merger.
Accounting Treatment (see page 62)
The partnership merger and the merger will be treated as a purchase for
financial accounting purposes.
Interests of Smith Residential Directors and Executive Officers in the Merger
and the Partnership Merger (see page 58)
In considering the recommendation of the Smith Residential board on behalf
of Smith Residential, in its capacity as general partner of Smith Partnership,
with respect to the partnership merger and the amendment to the partnership
agreement of Smith Partnership, Smith Partnership unitholders should be aware
that, as described below, some Smith Residential directors and executive
officers have interests in the merger and in the partnership merger that differ
from, or are in addition to, and, therefore, may conflict with the interests of
Smith Partnership unitholders generally.
Trustees of Archstone-Smith After the Merger. Under the merger agreement,
Robert H. Smith, chairman of the board and chief executive
13
officer of Smith Residential, Robert P. Kogod, chairman of the executive
committee of the board of Smith Residential, and Ernest A. Gerardi, Jr., a
Smith Residential director and the former president and chief executive officer
of Smith Residential, will become members of the Archstone-Smith board
following the merger. Mr. Smith's initial term will expire in 2003, Mr. Kogod's
initial term will expire in 2002 and Mr. Gerardi's term will expire in 2004.
Each of Messrs. Smith and Kogod, or their replacement nominees, will have the
right to be nominated to serve on the Archstone-Smith board for a period of ten
years from the date of the closing of the merger, provided that such person or
his related persons or entities continue to beneficially own at least 1,000,000
Archstone-Smith common shares. See "The Merger and the Partnership Merger--
Trustees and Executive Officers of Archstone-Smith After the Merger" and "--
Interests of Smith Residential Directors and Executive Officers in the Merger
and the Partnership Merger" beginning on page 58. Messrs. Smith and Kogod, or
their replacement nominees, also will serve as members of the executive
committee of the Archstone-Smith board of trustees for so long as such persons
have the right to be nominated as trustees. Messrs. Smith and Kogod have agreed
not to sell any Archstone-Smith common shares beneficially owned by them for a
period of three years after completion of the merger, subject to various
exceptions.
Indemnification and Insurance. The merger agreement provides that Archstone
and Archstone-Smith will provide exculpation and indemnification for current
and former directors and officers of Smith Residential and specified
subsidiaries, including for actions taken in connection with the merger, which
is the same as the exculpation and indemnification provided by Smith
Residential and specified subsidiaries as of May 3, 2001, the date of the
merger agreement. The merger agreement also provides that Archstone and
Archstone-Smith will indemnify and hold harmless current and former directors
and officers of Smith Residential and Smith Partnership after the merger to the
fullest extent permitted by law. In addition, Archstone and Archstone-Smith
have agreed to provide directors' and officers' insurance covering acts or
omissions occurring before the merger, for the benefit of those individuals
currently covered by Smith Residential's insurance for a period of six years
after the merger.
Equity-Based Awards. Unvested options to purchase an aggregate of 878,761
shares of Smith Residential common stock at an average exercise price of $38.22
per share previously awarded to Smith Residential directors and executive
officers will vest in connection with the merger pursuant to the plans under
which they were issued and in any event no later than the day before the merger
closes. These Smith Residential directors and officers also currently hold
vested options to purchase an aggregate of an additional 379,337 shares of
Smith Residential common stock at an average exercise price of $32.06. All
Smith Residential stock options will be converted in the merger into options to
purchase Archstone-Smith common shares under the terms of the merger agreement.
Under the merger agreement, holders of Smith Residential stock options will be
entitled to tender the Archstone-Smith options that they will receive in the
merger to Archstone for a cash payment equal to the excess, if any, of $49.48
per share over the exercise price of the Smith Residential stock options
multiplied by the number of shares of Smith Residential common stock converted
in the merger subject to their options, which acquisition and payment, less any
applicable withholding taxes, will be made within seven business days after the
closing of the merger. In the event that all Smith Residential directors and
executive officers tender all of their options for cash, such persons would
receive an aggregate payment from Archstone of approximately $17.2 million
before any applicable withholding taxes. Options to purchase Archstone-Smith
common shares that are not tendered to Archstone as described above would
remain outstanding under the same terms and conditions of the Smith Residential
stock options from which such options were converted but the exercise price of
each option will be adjusted to reflect the merger and all options will be
fully vested.
Severance Agreements. Smith Residential and specified subsidiaries have
entered into severance agreements with specified executive officers, other than
Mr. Smith and Mr. Kogod, that provide for the payment of severance benefits if
such executive officers are terminated from employment other than for "cause"
or if such executive officers voluntarily terminate their employment for "good
reason." These agreements currently automatically renew for consecutive one-
year terms unless there is a "change in control" in which case the term
automatically
14
resets for a two-year period from the date of the change of control. In
exchange for entering into the severance agreements, all but one covered
executive officer have agreed to a covenant not to compete for the lesser of
one year following termination of employment or the period for which severance
is paid following termination, and to be subject to various confidentiality and
"anti-raid" covenants. One covered executive officer has agreed to be bound by
such provisions for the lesser of six months following termination of
employment or the period for which severance is paid following termination.
Each covered executive officer also is entitled to receive reasonable
outplacement services and immediate vesting of all of his or her Smith
Residential stock options, from the date of such change of control event, and
the removal of any restrictions on any restricted stock or units held.
In the event a covered executive officer's employment is terminated
following a change in control, such as the merger, the amount of severance pay
and other benefits to which each covered executive would be entitled will be
calculated based upon his or her current base annual salary and his or her
highest annual cash bonus amount in the previous three years. The covered
executives would be entitled to a payment equal to one year's annual salary and
bonus, or two years' annual salary and bonus if the covered executive is
terminated within two years following the closing of the merger. The covered
executives would be entitled to continued coverage for up to one year under any
medical and other welfare plans in which the covered executive officer
participated, or two years' coverage if the covered officer is terminated
within the two-year period following the closing of the merger. If any of these
payments would constitute excess parachute payments under section 280G of the
Internal Revenue Code, the covered executive would also receive gross-up
payments in an amount sufficient to offset the 20% excise tax applicable to
such amounts.
For purposes of the severance agreements, a termination following a change
in control will be considered "voluntary for good reason" if it is the direct
result of:
. a reduction in base salary, fringe benefits or bonus eligibility, except
when generally applicable to peer employees,
. a substantial reduction of responsibilities or areas of supervision or
an instruction to report to a lower level supervisor after a "change in
control,"
. a substantial increase in responsibilities or areas of supervision
without an appropriate increase in compensation, or
. after a "change in control," a required change of office location
outside of the metropolitan area in which the executive was previously
located.
Under the severance agreements, the specified executive officers of Smith
Residential, if they are terminated within the two years following the closing
of the merger, other than for cause or if they voluntarily terminate their
employment for good reason, would be entitled to receive estimated cash
payments ranging from approximately $864,000 to $1.4 million as a base amount,
or approximately $5.3 million in the aggregate. In the event that these
executive officers become entitled to tax gross-up payments as described above,
the tax reimbursement amounts could range from $0 to $493,000 per individual,
or approximately $1.3 million in the aggregate. The calculation of the
estimated cash payments under the severance agreements assumes that the
obligations under the agreements are triggered immediately upon the closing of
the merger, which they are, that the applicable persons are terminated, which
they are not currently expected to be, and that the merger will close on
October 1, 2001. The amounts described above include estimated 2001 bonuses
through the closing date. Neither Smith Residential nor Archstone has yet
determined that any tax gross-up payments would be required.
Tax Related Undertakings of Archstone. Under the Archstone declaration of
trust that will be in effect following the closing of the partnership merger,
Archstone has agreed, for the benefit of the holders of Smith Partnership
units, not to sell, exchange or otherwise dispose of, except in tax-free or
tax-deferred transactions, any of the Smith Partnership properties or any
interest therein, or any of Archstone's interest in Smith Realty Company, a
wholly owned subsidiary of Smith Partnership that provides property management
services to Smith
15
Partnership and third parties. These restrictions, which benefit Messrs. Smith
and Kogod, among others, are effective until January 1, 2022. In addition,
Archstone has agreed to maintain specified levels of borrowings outstanding
with respect to the Smith Partnership properties for the same period, and has
made other specified undertakings. These provisions are intended to ensure that
the holders of Smith Partnership units will be able to continue to defer the
gain that would be recognized by them for tax purposes upon a sale by Archstone
of any one or more of the Smith Partnership properties, upon the sale by
Archstone of any of its interest in Smith Realty Company, or upon the repayment
of borrowings relating to the Smith Partnership properties. If Archstone sells
any of the Smith Partnership properties or any interest therein or its interest
in Smith Realty Company, or repays borrowings relating to the Smith Partnership
properties, Archstone may be liable for monetary damages for engaging in these
undertakings.
Employment. Messrs. Smith and Kogod will be employed by Archstone-Smith
following the closing of the merger. Mr. Smith will be paid an annual minimum
salary of $300,000 and an annual minimum bonus of $150,000 for each year during
his employment. Mr. Smith will also be entitled to receive options to purchase
100,000 Archstone-Smith common shares for each year during his term of
employment, with the number of options granted in each year being equal to
100,000 multiplied by the same percentage of the base option level as the
number of options granted to the chief executive officer of Archstone-Smith
increases or decreases in that year beyond the target amount established for
such officer. Mr. Kogod will be paid an annual minimum salary of $150,000 for
each year during his employment. Mr. Gerardi will be employed by Consolidated
Engineering Services, Inc., one of Smith Residential's non-controlled property
services subsidiaries, and will be paid an annual salary of $200,000 for each
year during his employment and an annual bonus to be determined by the
Consolidated Engineering Services, Inc. board. Mr. Gerardi will be entitled to
maintain his existing company-provided apartment and whole life insurance
policy, both of which are to be paid by Consolidated Engineering Services, Inc.
Mr. Gerardi will also be granted options to purchase restricted, non-voting
stock of Consolidated Engineering Services, Inc. and shares of restricted, non-
voting common stock of Consolidated Engineering Services, Inc., although no
determination has been made as to the number of shares subject to such awards.
Messrs. Smith, Kogod and Gerardi will also be able to participate in other
benefit plans generally made available to trustees and officers, as applicable,
of Archstone-Smith. In addition, Mr. W.D. Minami, president of Smith
Residential, will become the president of the Charles E. Smith Residential
division of Archstone-Smith. Mr. Minami will receive an annual salary of
$360,000 for the balance of 2001 and for 2002, plus a target bonus for 2001 of
not less than $450,000, subject to approval by the management development and
compensation committee of the Archstone-Smith board of trustees. Mr. Minami
will also be entitled to receive an award of 25,000 restricted share units
under the Archstone-Smith 2001 Long-Term Incentive Plan. The restricted share
units will be priced at the closing price of the Archstone-Smith common shares
on the day of the merger and will vest over a four-year period in 25%
increments beginning on the first anniversary of the merger. Mr. Minami's
current severance agreement with Smith Residential will remain in effect
subject to the following two modifications:
. if, during the first six months following the merger, Mr. Minami
terminates his employment with Archstone-Smith for any reason, he will
be entitled to the benefits he would have been entitled to receive under
his existing severance agreement with Smith Residential had his
employment been terminated by Smith Residential immediately prior to the
merger for good reason; and
. Mr. Minami will not be subject to the non-competition provisions of the
severance arrangement.
Mr. Minami's severance agreement will terminate six months after the closing
of the merger and, provided he is still employed by Archstone-Smith at that
time, Mr. Minami and Archstone-Smith will enter into a change-in-control
agreement substantially similar to those then currently in effect with officers
of Archstone-Smith. Mr. Minami will
16
be entitled to the same benefits as other division presidents of Archstone-
Smith.
Acquisition of Smith Management Construction, Inc. In connection with the
merger, Archstone will purchase 100% of the voting common stock of Smith
Management Construction, Inc., a non-controlled property service subsidiary of
Smith Partnership, for an aggregate of $70,560 in cash from Smith Management
Construction Partnership. Smith Management Construction Partnership is a
general partnership controlled by Mr. Gerardi and the children of Messrs. Smith
and Kogod. Prior to the closing, Archstone will assign Archstone's right to
acquire the shares of voting common stock to a non-controlled subsidiary of
Archstone created specifically to hold these shares.
Acquisition of Consolidated Engineering Services, Inc. In connection with
the partnership merger, Consolidated Engineering Services, Inc., a non-
controlled subsidiary of Smith Partnership, will undertake a recapitalization
of its capital stock. Consolidated Engineering Services Partnership, a general
partnership controlled by Mr. Gerardi and the children of Messrs. Smith and
Kogod, is currently the sole voting stockholder of Consolidated Engineering
Services, Inc., and will remain the sole voting stockholder until the closing
of the partnership merger. As a result of the recapitalization, upon the
closing of the partnership merger, Archstone, as successor to Smith Partnership
by the partnership merger, will own 51% of the outstanding voting common stock
immediately following the recapitalization, representing a value of $381,865,
and Consolidated Engineering Services Partnership will own 49% of the
outstanding voting common stock of Consolidated Engineering Services, Inc.
Archstone, as successor to Smith Partnership in the partnership merger, and
Consolidated Engineering Services Partnership will each own the same proportion
of the outstanding equity of Consolidated Engineering Services, Inc.
immediately following the closing of the partnership merger as Smith
Partnership and Consolidated Engineering Services Partnership owned prior to
the partnership merger. Consolidated Engineering Services Partnership will not
receive any payments and Smith Partnership will not be required to make any
payments in connection with the recapitalization of Consolidated Engineering
Services, Inc. It is also contemplated that, prior to the merger, Consolidated
Engineering Services, Inc. will issue up to an aggregate of 100,000 shares of
restricted non-voting common stock to its officers and will grant options to
purchase up to an aggregate of 588,600 shares of its restricted non-voting
common stock to its directors and officers. Such non-voting stock will convert
into voting common stock upon the occurrence of various corporate events
involving Consolidated Engineering Services, Inc. Of this amount, it is
expected that Mr. Gerardi will receive shares of restricted stock and options
to purchase shares, although no determination has been made as to the number of
shares subject to such awards.
Legal Counsel. Roger J. Kiley, Jr., a director of Smith Residential, is also
a partner in Mayer, Brown & Platt, legal counsel to Archstone and Archstone-
Smith.
Trustees and Executive Officers of Archstone and Archstone-Smith After the
Merger (see page 58)
Following the merger, the current trustees of Archstone will become trustees
of Archstone-Smith. In addition, the merger agreement provides that Messrs.
Smith, Kogod and Gerardi will become members of the Archstone-Smith board of
trustees as described above. Following the merger, the current executive
officers of Archstone will become executive officers of Archstone-Smith.
Mr. W.D. Minami, president of Smith Residential, will become the president of
the Charles E. Smith Residential division of Archstone-Smith. It is not
expected that other officers of Smith Residential will become executive
officers of Archstone-Smith. Immediately before the merger, Archstone-Smith
will be the sole trustee of Archstone. Immediately following the merger the
executive officers of Archstone-Smith will also be executive officers of
Archstone.
Comparison of Unitholder and Shareholder Rights (see pages 162 and 197)
Delaware law and the partnership agreement of Smith Partnership currently
govern the rights of Smith Partnership unitholders. Upon completion of the
partnership merger, Smith Partnership unitholders will become Archstone
unitholders, and
17
their rights will be governed by Maryland law and the declaration of trust of
Archstone. While the partnership agreement of Smith Partnership and Archstone-
Smith's declaration of trust and bylaws are substantially similar, there are
some material differences between the rights of unitholders of Smith
Partnership and unitholders of Archstone-Smith. For a discussion of these
differences, refer to "Comparison of Unitholder Rights" beginning on page 162.
Archstone-Smith Trust 2001 Long-Term Incentive Plan (see page 63)
The Archstone-Smith Trust 2001 Long-Term Incentive Plan will be effective
upon the reorganization of Archstone into an UPREIT. The plan provides for the
automatic grant of replacement awards in substitution of awards outstanding
under the Archstone 1997 Long-Term Incentive Plan, the Charles E. Smith
Residential Realty, Inc. Directors Stock Option Plan and the Charles E. Smith
Residential Realty, Inc. First Amended and Restated 1994 Employee Stock and
Unit Option Plan, as amended.
In addition to issuing replacement awards, a committee appointed by the
board of trustees of Archstone-Smith may award non-qualified options, incentive
share options, share appreciation rights, bonus shares, share units,
performance shares, performance units, restricted shares and restricted share
units after the effective time of the merger.
18
Summary Historical Financial Data of Archstone
The following table sets forth selected consolidated financial data on a
historical basis for Archstone (in thousands, except per share data). This
data, which is derived from Archstone's consolidated financial statements,
should be read together with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
and related notes, which are incorporated by reference into this document. See
"Where You Can Find More Information" beginning on page 216.
Six Months
Ended Years Ended December 31,
June 30, ------------------------------------------------------
2001 2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ---------- ----------
Operations Summary:
Total revenues.......... $ 335,835 $ 723,234 $ 667,022 $ 513,645 $ 355,662 $ 326,246
Property operating
expenses............... 104,095 225,608 217,527 173,760 123,051 128,122
Net operating income.... 223,247 462,936 420,281 310,779 212,009 193,924
Depreciation on real
estate investments..... 61,495 143,694 132,437 96,337 52,893 44,887
Interest expense........ 67,076 145,173 121,494 83,350 61,153 35,288
General and
administrative
expense................ 11,806 23,157 22,156 16,092 18,350 23,268
Nonrecurring
expenses(1)............ -- -- -- 2,193 71,707 --
Earnings from
operations(1).......... 80,422 176,466 169,339 134,571 24,686 94,089
Gains on dispositions of
depreciated real
estate, net............ 70,521 93,071 62,093 65,531 48,232 37,492
Preferred share cash
dividends paid......... 11,211 25,340 23,733 20,938 19,384 24,167
Net earnings
attributable to common
shares:
--basic................ 135,820 236,045 204,526 177,022 53,534 106,544
--diluted.............. 140,161 244,625 204,526 186,999 53,534 121,261
Common share cash
distributions paid..... $ 99,844 $ 201,257 $ 208,018 $ 165,190 $ 105,547 $ 90,728
Per Share Data:
Net earnings
attributable to common
shares:
--basic(1)............. $ 1.12 $ 1.79 $ 1.46 $ 1.49 $ 0.65 $ 1.46
--diluted(1)........... 1.10 1.78 1.46 1.49 0.65 1.44
Common share cash
distributions paid(2).. 0.82 1.54 1.48 1.39 1.30 1.24
Series A convertible
preferred share cash
dividends paid......... 1.10 2.07 1.99 1.87 1.75 1.75
Series B preferred share
cash dividends
paid(3)................ 0.79 2.25 2.25 2.25 2.25 2.25
Series C preferred share
cash dividends paid.... 1.08 2.16 2.16 1.08 -- --
Series D preferred share
cash dividends paid.... $ 1.10 $ 2.19 $ 0.88 $ -- $ -- $ --
Weighted average common
shares outstanding:
--basic................ 121,569 131,874 139,801 118,592 81,870 73,057
--diluted.............. 127,306 137,730 139,829 125,825 81,908 84,340
December 31,
June 30, ------------------------------------------------------
2001 2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ---------- ----------
Financial Position:
Real estate owned, at
cost................... $4,349,595 $5,058,910 $5,086,486 $4,771,315 $2,567,599 $2,133,207
Investments in and
advances to
unconsolidated real
estate entities........ 212,649 226,020 130,845 98,486 37,320 20,156
Mortgage notes
receivable, net........ 23 124 210,357 211,967 285,238 189,829
Total assets............ 4,650,591 5,016,131 5,302,437 5,059,898 2,805,686 2,282,432
Unsecured credit
facilities(4).......... -- 193,719 493,536 264,651 231,500 110,200
Long-term unsecured
debt................... 1,390,519 1,401,262 1,276,572 1,231,167 630,000 580,000
Mortgages payable....... 831,653 875,804 694,948 676,613 265,652 217,188
Total liabilities....... 2,362,536 2,671,188 2,679,628 2,410,114 1,265,250 1,014,924
Redeemable preferred
shares................. 179,701 286,856 297,635 272,515 240,210 267,374
Shareholders' equity.... $2,194,725 $2,251,606 $2,567,506 $2,628,325 $1,540,436 $1,267,508
Number of common shares
outstanding............ 121,246 122,838 139,008 143,313 92,634 75,511
19
Six Months
Ended June Years Ended December 31,
30, -----------------------------------------------------
2001 2000 1999 1998 1997 1996
---------- --------- --------- --------- --------- ---------
Other Data:
Cash Flows:
Net cash provided by
operating activities.. $ 140,305 $ 322,320 $ 296,010 $ 231,153 $ 159,724 $ 143,939
Net cash provided by
(used in) investing
activities............ 432,951 105,563 (223,914) (318,764) (403,112) (360,935)
Net cash provided by
(used in) financing
activities............ $(493,171) $(428,878) $ (72,143) $ 92,803 $ 242,672 $ 195,720
Ratio of earnings to
combined fixed charges
and preferred share
dividends(5)........... 1.7 1.7 1.6 1.6 0.9 1.7
Computation of Funds
From Operations:(6)(7)
Net earnings
attributable to common
shares:
--basic................ $ 135,820 $ 236,045 $ 204,526 $ 177,022 $ 53,534 $ 106,544
Add (Deduct):
Depreciation on real
estate investments.... 61,495 143,694 132,437 96,337 52,893 44,887
Provision for possible
loss on depreciated
real estate........... 2,000 5,200 450 282 1,500 --
Gains on dispositions
of depreciated real
estate, net........... (70,521) (93,071) (62,793) (65,531) (48,232) (37,492)
Extraordinary items--
loss on early
extinguishment of
debt.................. -- 911 1,113 1,497 -- 739
Other, net............. 3,446 2,544 610 (462) (650) (73)
--------- --------- --------- --------- --------- ---------
Funds from operations
attributable to common
shares:
--basic................ 132,240 295,323 276,343 209,145 59,045 114,605
Series A convertible
preferred share
dividends............. 3,563 7,254 8,206 9,332 -- 14,717
Minority interest...... 778 1,326 1,118 645 -- --
--------- --------- --------- --------- --------- ---------
Funds from operations
attributable to common
shares:
--diluted.............. $ 136,581 $ 303,903 $ 285,667 $ 219,122 $ 59,045 $ 129,322
========= ========= ========= ========= ========= =========
Weighted average common
shares outstanding:
--diluted.............. 127,306 137,730 146,087 125,825 81,908 84,340
========= ========= ========= ========= ========= =========
--------
(1) Non-recurring expenses in 1998 include $1.1 million in transaction
integration costs associated with the merger of Security Capital Atlantic
Incorporated with and into Archstone and $1.1 million associated with the
introduction of Archstone's national branding strategy. Both are included
within the "other expense" category in Archstone's Statement of Earnings
for 1998. In 1997, the non-recurring expense represents the impact of a
one-time, non-cash charge of $71.7 million associated with the costs
incurred in acquiring Archstone's REIT and property management companies
from Security Capital Group Incorporated.
(2) In addition to the quarterly cash distributions shown, the following
distributions were made to Archstone's shareholders in 1996 and 1997: (i)
in November 1996, Archstone made a distribution to its shareholders of the
shares of common stock of Homestead Village Incorporated and warrants to
purchase common stock of Homestead that it owned and in the aggregate were
valued at $3.032 per Archstone common share; and (ii) in September 1997,
Security Capital Group Incorporated distributed .052646 warrants for each
Archstone common share held by Archstone's common shareholders. Each
warrant entitled the holder to acquire one share of Security Capital Group
Incorporated Class B common stock at a price of $28 per share.
(3) On May 7, 2001, Archstone redeemed all of its outstanding Series B
preferred shares. The cash dividend paid for the first quarter of 2001 and
for the period from April 1, 2001 to May 7, 2001 were $0.5625 and $0.23125
per share, respectively.
(4) At September 19, 2001, Archstone had no balance outstanding under its $580
million unsecured credit facility and under its $100 million short-term
unsecured borrowing facility.
(5) Earnings from operations were insufficient to cover combined fixed charges
and preferred share dividends by $12.3 million for the year ended December
31, 1997. This shortage was a result of a one-time, non-cash charge of
$71.7 million, recorded in 1997 associated with costs incurred in acquiring
Archstone's REIT and property management companies from Security Capital
Group Incorporated. Excluding the charge, the ratio of earnings to combined
fixed charges and preferred share dividends for the year ended December 31,
1997 would have been 1.6.
(6) Funds from operations has been an industry-wide standard used to measure
operating performance of a REIT since its adoption by the National
Association of Real Estate Investment Trusts in 1991. In October 1999,
NAREIT revised the definition of funds from operations. We have restated
the amounts for 1996 to 1999 to reflect NAREIT's revised definition. Funds
from operations should not be considered as an alternative to net earnings
or any other generally accepted accounting principles measurement of
performance or as an alternative to cash flow from operating, investing or
financing activities as a measure of liquidity. The funds from operations
measure presented by Archstone, while consistent with NAREIT's definition,
will not be comparable to similarly titled measures of other REITs that do
not compute funds from operations in a manner consistent with Archstone.
(7) Funds from operations in 1997 includes the impact of a one-time, non-cash
charge of $71.7 million associated with the costs incurred in acquiring
Archstone's REIT and property management companies from Security Capital
Group Incorporated.
20
Summary Historical Financial Data of Smith Partnership
The following table sets forth selected consolidated financial data and
operating information on a historical basis for Smith Partnership (in
thousands, except per unit data). This data, which is derived primarily from
Smith Partnership's consolidated financial statements, should be read together
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the consolidated financial statements and related notes,
which are incorporated by reference into this document. See "Where You Can Find
More Information" beginning on page 216.
Six Months Years Ended December 31,
Ended June ------------------------------------------------------------
30, 2001 2000 1999(1) 1998(1) 1997 1996
---------- ---------- ---------- ---------- --------- ---------
Operating Data:
Rental properties
Revenues............... $ 215,721 $ 383,233 $ 301,233 $ 250,067 $ 199,944 $ 163,939
Expenses............... 114,696 191,574 152,856 130,449 104,333 89,136
Equity in income of
property service
businesses before
gains/losses........... 6,990 8,373 5,740 8,433 7,597 7,846
Corporate general and
administrative
expenses............... 7,135 11,290 9,607 8,947 6,563 5,255
Interest income......... 190 345 1,091 809 1,063 1,029
Interest expense........ 44,489 78,371 57,094 47,334 45,411 43,606
Income before
gains/losses and
extraordinary items.... 55,781 113,181 89,699 73,027 52,297 34,817
Net income of the
Operating Partnership.. 55,781 179,248 153,814 69,870 52,210 34,817
Per Unit Data:
Earnings per common
unit--basic:
Before extraordinary
item.................. $ 1.26 $ 4.44 $ 4.25 $ 2.50 $ 1.89 $ 1.59
Extraordinary item..... -- -- (0.01) (0.54) -- --
---------- ---------- ---------- ---------- --------- ---------
$ 1.26 $ 4.44 $ 4.24 $ 1.96 $ 1.89 $ 1.59
========== ========== ========== ========== ========= =========
Earnings per common
unit--diluted:
Before extraordinary
item.................. $ 1.24 $ 4.09 $ 4.05 $ 2.49 $ 1.88 $ 1.59
Extraordinary item..... -- -- (0.01) (0.54) -- --
---------- ---------- ---------- ---------- --------- ---------
$ 1.24 $ 4.09 $ 4.04 $ 1.95 $ 1.88 $ 1.59
========== ========== ========== ========== ========= =========
Other Data:
Funds from
operations(2):
Net income of the
Operating Partnership.. $ 55,781 $ 179,248 $ 153,814 $ 69,870 $ 52,210 $ 34,817
Less: Preferred
dividends.............. (1,946) (3,955) (8,093) (3,647) -- --
Gain on sales......... -- (66,067) (64,475) (18,150) -- --
Plus: Depreciation and
amortization of rental
property............... 24,970 44,778 33,906 28,958 20,666 17,931
Depreciation from
unconsolidated
properties............ 668 1,015 570 -- -- --
Other................. 2,901 434 430 5,173 -- --
Extraordinary item--
loss on
extinguishment of
debt................. -- -- 360 16,384 87 --
---------- ---------- ---------- ---------- --------- ---------
Funds from operations of
the Operating
Partnership............ $ 82,374 $ 155,453 $ 116,512 $ 98,588 $ 72,963 $ 52,748
========== ========== ========== ========== ========= =========
Net cash flows provided
by (used in):
Operating activities... $ 63,896 $ 183,256 $ 141,185 $ 118,566 $ 75,223 $ 50,958
Investing activities... (148,363) (356,825) (298,490) (289,995) (196,924) (72,742)
Financing activities... 84,467 163,012 167,862 171,429 117,803 16,204
Cash dividends per
unit................... $ 1.170 $ 2.235 $ 2.155 $ 2.095 $ 2.035 $ 1.975
Average core occupancy
rate(3)................ 96.2 % 97.2 % 97.5 % 96.6 % 96.4 % 97.0 %
Apartment units--core
portfolio(4)........... 17,830 16,435 15,482 14,301 14,198 12,462
Apartment units--total
portfolio.............. 28,910 28,453 24,948 19,279 18,236 15,200
Balance Sheet Data:
Rental properties,
net(5)................. $1,983,973 $1,911,767 $1,539,042 $1,093,963 $ 804,323 $ 470,093
Total assets............ 2,221,206 2,075,232 1,704,778 1,185,399 865,506 522,211
Total mortgage loans and
notes payable.......... 1,340,584 1,223,704 969,323 790,579 610,971 546,544
Other limited partners'
interest, at redemption
value(6)............... 658,284 679,675 535,135 426,258 502,719 351,873
General partner's
general and limited
partnership interest... 161,935 115,659 151,782 (56,676) (264,369) (389,252)
--------
(1) Certain reclassifications have been made to conform to the current year's
presentation.
(2) Funds from operations is defined by NAREIT as net income (loss), computed
in accordance with accounting principles generally accepted in the United
States of America, excluding gains (or losses) from debt restructuring and
property sales, plus
21
depreciation/amortization of assets unique to the real estate industry. Funds
from operations does not represent cash flow from operating activities in
accordance with accounting principles generally accepted in the United States
of America (which, unlike funds from operations, generally reflects all cash
effects of transactions in the determination of net income) and should not be
considered an alternative to net income as an indication of the Smith
Partnership performance or to cash flow as a measure of liquidity or ability
to make distributions. Smith Partnership considers funds from operations a
meaningful, additional measure of operating performance because it excludes
the assumption that the value of real estate assets diminishes predictably
over time, and because industry analysts have accepted it as a performance
measure. A comparison of Smith Partnership's presentation of funds from
operations, using the NAREIT definition, to similarly titled measures for
other REITs may not necessarily be meaningful due to possible differences in
the application of the NAREIT definition used by such REITs.
(3) Average occupancy is defined as gross potential rent for the core portfolio
less vacancy allowance divided by gross potential rent for the period,
expressed as a percentage.
(4) Core portfolio represents operating properties fully owned or stabilized by
Smith Partnership as of December 31, two years prior to the reporting date.
Total portfolio represents all operating properties fully or partially-
owned by Smith Partnership at the reporting date.
(5) At the formation of Smith Partnership, all contributed rental properties
were recorded at historical cost which was significantly less than market
value resulting in diluted shareholders' equity.
(6) Common limited partnership units of the other limited partners may be
redeemed at the unitholder's discretion. Consequently, the other limited
partners' interest, measured at redemption value, is not included in
partner's equity. Partner's equity has been adjusted to reflect the
redemption value of other limited partners' interest.
22
Partnership Merger Equivalent Per Unit Data
We have summarized below specified per unit information for Archstone and
Smith Partnership on a historical basis, pro forma combined basis and pro forma
combined equivalent basis. The pro forma combined summary amounts are based on
the purchase method of accounting. The Smith Partnership per unit pro forma
combined equivalents are calculated by multiplying the pro forma combined per
unit amounts by the exchange ratio of 1.975.
The following information should be read together with the historical and
pro forma financial statements included or incorporated by reference into this
document. See "Where You Can Find More Information" beginning on page 216.
For the Year
For the Six Ended
Months Ended December 31,
June 30, 2001 2000
------------- -------------
Basic Diluted Basic Diluted
----- ------- ----- -------
Net earnings from continuing operations per unit:
Archstone......................................... $1.12 $1.10 $1.80 $1.78
Archstone-Smith Operating Trust pro forma
combined......................................... 0.94 0.91 1.91 1.86
Smith Partnership................................. 1.26 1.24 4.44 4.09
Smith Partnership pro forma combined equivalent... 1.86 1.80 3.77 3.67
For the Six
Months Ended For the Year
June Ended
30, 2001 December 31, 2000
------------ -----------------
Cash distributions declared per unit:
Archstone...................................... $ 0.82 $ 1.54
Archstone-Smith Operating Trust pro forma
combined...................................... N/A N/A
Smith Partnership.............................. 1.170 2.235
Smith Partnership pro forma combined
equivalent.................................... N/A N/A
Unitholders' equity (book value) per unit (end
of period):
Archstone...................................... $16.62 $15.99
Archstone-Smith Operating Trust pro forma
combined...................................... $19.48 N/A
Smith Partnership.............................. $(1.76) $(6.20)
Smith Partnership pro forma combined
equivalent.................................... $38.47 N/A
23
Values of Archstone Units and Smith Partnership Units
The Archstone units and the Smith Partnership units are not listed on any
national securities exchange or quoted in the over the counter market, and
there is no established public trading market for either the Archstone units or
the Smith Partnership units. Each Archstone Class A-1 common unit issued in the
partnership merger, or issuable upon conversion of an Archstone Class B common
unit issued in the partnership merger, is subject to a unit redemption right at
the option of the holder thereof immediately following the partnership merger.
Upon exercise by a unitholder of the redemption right, Archstone is required to
acquire the unitholder's Class A-1 common units for an amount of cash per unit
based on the market price of Archstone-Smith common shares in accordance with
the Archstone declaration of trust. However, Archstone-Smith, in its sole
discretion, may elect to assume and directly satisfy Archstone's redemption
obligation, in which case Archstone-Smith will pay the redeeming unitholder in
Archstone-Smith common shares, or their cash equivalent. Archstone Class B
common units will automatically convert on a one-for-one basis into Archstone
Class A-1 common units on the day immediately following the record date for the
distribution period during which such Archstone Class B common units were
issued. The following table sets forth the price per share of Archstone common
shares and Smith Residential common stock based on the last reported sale
prices per share on the New York Stock Exchange on May 3, 2001, the last
trading day before the public announcement of the execution of the merger
agreement, and on September 19, 2001, the latest practicable date before
mailing this consent solicitation statement/prospectus.
Price per share
---------------------------------------------
Smith Residential
pro forma
Archstone Smith Residential equivalent(1)
--------- ----------------- -----------------
May 3, 2001....................... $25.18 $45.56 $49.73
September 19, 2001................ $26.10 $51.18 $51.55
--------
(1) Computed by multiplying the Archstone common share closing price by the
1.975 merger exchange ratio.
24
Archstone-Smith Operating Trust
Pro Forma Summary Financial Data
The following table sets forth the summary unaudited pro forma condensed
financial information as of and for the six months ended June 30, 2001 and year
ended December 31, 2000, giving effect to the partnership merger as if it had
occurred on January 1, 2000 for both the operations summary and per unit data
and as of June 30, 2001 for financial position information. The pro forma
financial information for the year ended December 31, 2000 also gives effect to
certain acquisitions and dispositions of operating communities by Smith
Partnership during 2000. Pro forma adjustments made to arrive at the pro forma
amounts set forth below are described in the Archstone-Smith Operating Trust
pro forma condensed financial statements included elsewhere in this consent
solicitation statement/prospectus. The following information should be read in
conjunction with the Archstone and Smith Partnership historical financial
statements incorporated by reference into this consent solicitation
statement/prospectus and the Archstone-Smith Operating Trust pro forma
condensed financial statements included in this document.
The summary unaudited pro forma information is intended for informational
purposes and is not necessarily indicative of the future financial position or
future results of operations of Archstone-Smith Operating Trust or of the
financial position or the results of operations of Archstone-Smith Operating
Trust that would have actually occurred had the noted transactions been
completed as of the date or for the periods presented (dollar amounts in
thousands, except per unit data).
Six Months Year Ended
Ended June December 31,
30, 2001 2000
---------- ------------
Operations Summary:
Total revenues......................................... $560,837 $1,128,387
Property operating expenses (rental expenses and real
estate taxes)......................................... 193,391 378,003
Net operating income................................... 349,672 704,511
Depreciation on real estate investments................ 90,449 201,603
Interest expense....................................... 108,620 223,110
General and administrative expenses.................... 17,723 33,312
Earnings from operations............................... 135,594 282,088
Total minority interest................................ 3,912 7,241
Gains on dispositions of depreciated real estate, net.. 70,521 159,138
Preferred unit cash distributions paid................. 21,740 49,243
Net earnings from continuing operations attributable to
common units:
Basic................................................ 180,463 384,742
Diluted.............................................. 193,387 413,270
Per Unit Data:
Net earnings from continuing operations per common
unit:
Basic................................................ $ 0.94 $ 1.91
Diluted.............................................. $ 0.91 $ 1.86
Weighted average common units outstanding--basic....... 192,406 200,993
Weighted average common units outstanding--diluted..... 213,137 221,734
June 30,
2001
------------
Financial Position:
Real estate owned, at cost........................... $7,788,944
Investment in and advances to unconsolidated property
service businesses.................................. 114,015
Investment in and advances to unconsolidated real
estate entities..................................... 268,148
Total assets......................................... 8,242,675
Unsecured credit facilities.......................... 64,000
Long-term unsecured debt............................. 1,390,219
Mortgages payable.................................... 2,138,950
Total liabilities.................................... 3,794,236
Minority interest.................................... 93,330
Other limited unitholders' interest.................. 632,283
Redeemable preferred units........................... 386,201
Unitholders' equity.................................. 3,722,826
Number of common units outstanding................... 171,298
25
Summary Historical Financial Data of Smith Residential
The following table sets forth selected consolidated financial data and
operating information on a historical basis for Smith Residential (in
thousands, except per share data). This data, which is derived primarily from
Smith Residential's consolidated financial statements, should be read together
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the consolidated financial statements and related notes,
which are incorporated by reference into this document. See "Where You Can Find
More Information" beginning on page 216.
Six Months
Ended June
30, Years Ended December 31,
---------- ------------------------------------------------------
2001 2000 1999(1) 1998(1) 1997 1996
---------- ---------- ---------- ---------- -------- --------
Operating Data:
Rental properties
Revenues............... $ 215,721 $ 383,233 $ 301,233 $ 250,067 $199,944 $163,939
Expenses............... 114,696 191,574 152,856 130,449 104,333 89,136
Equity in income of
property service
businesses before
gains/losses........... 6,990 8,373 5,740 8,433 7,597 7,846
Corporate general and
administrative
expenses............... 7,135 11,290 9,607 8,947 6,563 5,255
Interest income......... 190 345 1,091 809 1,063 1,029
Interest expense........ 44,489 78,371 57,094 47,334 45,411 43,606
Income before
gains/losses and
extraordinary items.... 58,682 113,181 89,699 73,027 52,297 34,817
Net income of the
Operating Partnership.. 55,781 179,248 153,814 69,870 52,210 34,817
Net income attributable
to common
stockholders(2)........ 28,612 94,692 82,237 30,407 24,712 10,977
Per Share Data:
Earnings per common
share--basic:
Before extraordinary
item.................. $ 1.26 $ 4.44 $ 4.25 $ 2.40 $ 1.87 $ 1.11
Extraordinary item..... -- -- (0.01) (0.54) -- --
---------- ---------- ---------- ---------- -------- --------
$ 1.26 $ 4.44 $ 4.24 $ 1.86 $ 1.87 $ 1.11
========== ========== ========== ========== ======== ========
Earnings per common
share--diluted:
Before extraordinary
item.................. $ 1.24 $ 4.09 $ 4.05 $ 2.39 $ 1.86 $ 1.11
Extraordinary item..... -- -- (0.01) (0.54) -- --
---------- ---------- ---------- ---------- -------- --------
$ 1.24 $ 4.09 $ 4.04 $ 1.85 $ 1.86 $ 1.11
========== ========== ========== ========== ======== ========
Other Data:
Funds from
operations(3):
Net income of the
Operating Partnership.. $ 55,781 $ 179,248 $ 153,814 $ 69,870 $ 52,210 $ 34,817
Less: Preferred
dividends.............. (1,946) (3,955) (8,093) (3,647) -- --
Gain on sales......... -- (66,067) (64,475) (18,150) -- --
Plus: Depreciation and
amortization of
rental property...... 24,970 44,778 33,906 28,958 20,666 17,931
Depreciation from
unconsolidated
properties........... 668 1,015 570 -- -- --
Other................. 2,901 434 430 5,173 -- --
Extraordinary item--
loss on
extinguishment of
debt................. -- -- 360 16,384 87 --
---------- ---------- ---------- ---------- -------- --------
Funds from operations of
the Operating
Partnership............ 82,374 155,453 116,512 98,588 72,963 52,748
Minority interest....... (27,477) (54,606) (44,048) (40,554) (35,799) (28,879)
---------- ---------- ---------- ---------- -------- --------
Funds from operations
attributable to
stockholders(4)........ $ 54,897 $ 100,847 $ 72,464 $ 58,034 $ 37,164 $ 23,869
========== ========== ========== ========== ======== ========
Net cash flows provided
by (used in):
Operating activities... $ 63,896 $ 183,256 $ 141,185 $ 118,566 $ 75,223 $ 50,958
Investing activities... (148,363) (356,825) (298,490) (289,995) (196,924) (72,742)
Financing activities... 84,467 163,012 167,862 171,429 117,803 16,204
Cash dividends per
share.................. $ 1.170 $ 2.235 $ 2.155 $ 2.095 $ 2.035 $ 1.975
Average core occupancy
rate(5)................ 96.2% 97.2% 97.5% 96.6% 96.4% 97.0%
Apartment units--core
portfolio(6)........... 17,830 16,435 15,482 14,301 14,198 12,462
Apartment units--total
portfolio.............. 28,910 28,453 24,948 19,279 18,236 15,200
Rental properties,
net(7)................. $1,983,973 $1,911,767 $1,539,042 $1,093,963 $804,323 $470,093
Total assets............ 2,221,206 2,075,232 1,704,778 1,185,399 865,506 522,211
Total mortgage loans and
notes payable.......... 1,340,584 1,223,704 969,323 790,579 610,971 546,544
Shareholder's equity
(deficit)(7)........... 594,169 555,569 481,364 264,977 158,314 (37,379)
26
--------
(1) Certain reclassifications have been made to conform to the current year's
presentation.
(2) Reflects Smith Residential's pro rata share of net income attributable to
all shareholders of 64.1% in 2000, 61.9% in 1999, 58.9% in 1998, 50.9% in
1997 and 45.3% in 1996, less preferred dividends and distributions in
excess of earnings allocated to minority interest.
(3) Funds from operations is defined by NAREIT as net income (loss), computed
in accordance with accounting principles generally accepted in the United
States of America, excluding gains (or losses) from debt restructuring and
property sales, plus depreciation/amortization of assets unique to the real
estate industry. Funds from operations does not represent cash flow from
operating activities in accordance with accounting principles generally
accepted in the United States of America (which, unlike funds from
operations, generally reflects all cash effects of transactions in the
determination of net income) and should not be considered an alternative to
net income as an indication of Smith Residential's performance or to cash
flow as a measure of liquidity or ability to make distributions. Smith
Residential considers funds from operations a meaningful, additional
measure of operating performance because it excludes the assumption that
the value of real estate assets diminishes predictably over time, and
because industry analysts have accepted it as a performance measure. A
comparison of Smith Residential's presentation of funds from operations,
using the NAREIT definition, to similarly titled measures for other REITs
may not necessarily be meaningful due to possible differences in the
application of the NAREIT definition used by such REITs.
(4) Reflects Smith Residential's pro rata shares of 64.9% in 2000, 62.2% in
1999, 58.9% in 1998, 50.9% in 1997 and 45.3% in 1996.
(5) Average occupancy is defined as gross potential rent for the core portfolio
less vacancy allowance divided by gross potential rent for the period,
expressed as a percentage.
(6) Core portfolio represents operating properties fully owned or stabilized by
Smith Residential as of December 31, two years prior to the reporting date.
Total portfolio represents all operating properties fully or partially-
owned by Smith Residential at the reporting date.
(7) At the formation of Smith Residential, all contributed rental properties
were recorded at historical cost which was significantly less than market
value resulting in diluted shareholders' equity.
27
Equivalent Per Share Data
We have summarized below specified per common share information for Smith
Residential and Archstone on a historical basis, pro forma combined basis and
pro forma combined equivalent basis. The pro forma combined amounts are based
on the purchase method of accounting. The Smith Residential per common share
pro forma combined equivalents are calculated by multiplying the pro forma
combined per common share amounts by the exchange ratio of 1.975 per share.
The following information should be read together with the historical and
pro forma financial statements included or incorporated by reference in this
document. See "Where You Can Find More Information" beginning on page 216.
For the
Six Months For the
Ended Year Ended
June 30, 2001 December 31, 2000
------------- ------------------
Basic Diluted Basic Diluted
----- ------- -------- ---------
Net earnings from continuing operations per
common share:
Archstone.................................... $1.12 $1.10 $ 1.80 $ 1.78
Archstone-Smith pro forma combined........... 0.94 0.90 1.91 1.86
Smith Residential............................ 1.26 1.24 4.44 4.09
Smith Residential pro forma combined
equivalent.................................. 1.86 1.78 3.77 3.67
For the
Six Months
Ended For the
June 30, Year Ended
2001 December 31, 2000
---------- -----------------
Cash distributions declared per common share:
Archstone........................................ $ 0.82 $ 1.54
Archstone-Smith pro forma combined............... N/A N/A
Smith Residential................................ 1.170 2.235
Smith Residential pro forma combined equivalent.. N/A N/A
Shareholders' equity (book value) per common
share (end of period):
Archstone........................................ $16.62 $15.99
Archstone-Smith pro forma combined............... $20.13 N/A
Smith Residential................................ $15.30 $13.87
Smith Residential pro forma combined equivalent.. $39.76 N/A
Market Prices of Archstone Common Shares and Smith Residential Common Stock
The following table sets forth the price per share of Archstone common
shares and Smith Residential common stock based on the last reported sale
prices per share on the New York Stock Exchange on May 3, 2001, the last
trading day before the public announcement of the execution of the merger
agreement, and on September 19, 2001, the latest practicable date before
mailing this consent solicitation statement/prospectus.
Price per share
-----------------------------------
Smith
Residential
Smith pro forma
Archstone Residential equivalent(1)
--------- ----------- -------------
May 3, 2001................................. $25.18 $45.56 $49.73
September 19, 2001.......................... $26.10 $51.18 $51.55
--------
(1) Computed by multiplying the Archstone common share closing price by the
1.975 exchange ratio.
28
Archstone-Smith Trust
Pro Forma Summary Financial Data
The following table sets forth the summary unaudited pro forma condensed
financial information as of and for the six months ended June 30, 2001 and year
ended December 31, 2000, giving effect to the merger and the partnership merger
as if it had occurred on January 1, 2000 for both the operations summary and
per share data and as of June 30, 2001 for financial position information. The
pro forma financial information for the year ended December 31, 2000 also gives
effect to certain acquisitions and dispositions of operating communities by
Smith Residential during 2000. Pro forma adjustments made to arrive at the pro
forma amounts set forth below are described in the Archstone-Smith pro forma
condensed financial statements included elsewhere in this consent solicitation
statement/prospectus. The following information should be read in conjunction
with the Archstone and Smith Residential historical pro forma financial
statements incorporated by reference into this consent solicitation
statement/prospectus and the Archstone-Smith pro forma condensed financial
statements included in this document.
The summary unaudited pro forma information is intended for informational
purposes and is not necessarily indicative of the future financial position or
future results of operations of Archstone-Smith or of the financial position or
the results of operations of Archstone-Smith that would have actually occurred
had the noted transactions been completed as of the date or for the periods
presented (dollar amounts in thousands, except per share data).
Six Months Year Ended
Ended December 31,
June 30, 2001 2000
------------- ------------
Operations Summary:
Total revenues..................................... $560,837 $1,128,387
Property operating expenses (rental expenses and
real estate taxes)................................ 193,391 378,003
Net operating income............................... 349,672 704,511
Depreciation on real estate investments............ 90,449 201,603
Interest expense................................... 108,620 223,110
General and administrative expenses................ 17,723 33,312
Earnings from operations........................... 135,594 282,088
Total minority interest............................ 29,469 62,555
Gains on dispositions of depreciated real estate,
net............................................... 70,521 159,138
Preferred share cash dividends paid................ 20,631 45,587
Net earnings from continuing operations
attributable to common shares:
Basic............................................ 156,015 333,084
Diluted.......................................... 168,911 361,612
Per Share Data:
Net earnings from continuing operations per common
share:
Basic............................................ $ 0.94 $ 1.91
Diluted.......................................... $ 0.90 $ 1.86
Weighted average common shares outstanding--basic.. 166,314 174,006
Weighted average common shares outstanding--
diluted........................................... 187,045 194,747
June 30,
2001
----------
Financial Position:
Real estate owned, at cost......................................... $7,788,944
Investment in and advances to unconsolidated property service
businesses........................................................ 114,015
Investment in and advances to unconsolidated real estate entities.. 268,148
Total assets....................................................... 8,242,675
Unsecured credit facilities........................................ 64,000
Long-term unsecured debt........................................... 1,390,219
Mortgages payable.................................................. 2,138,950
Total liabilities.................................................. 3,794,236
Minority interest.................................................. 614,096
Redeemable preferred shares........................................ 386,201
Shareholders' equity............................................... 3,834,343
Number of common shares outstanding................................ 171,298
29
RISK FACTORS
In addition to the risks relating to the businesses of Archstone, Archstone-
Smith Smith, Residential and Smith Partnership, descriptions of which are
incorporated by reference in this consent solicitation statement/prospectus
from Archstone's Annual Report on Form 10-K for the year ended December 31,
2000 as filed with the SEC on March 9, 2001 and the other information included
in, or incorporated into, this document, including the matters addressed in "A
Warning About Forward-Looking Statements" on page 38, you should carefully
consider the following risk factors. The risk factors are considered by
Archstone and Smith Residential, on behalf of itself and in its capacity as
general partner of Smith Partnership, based on the information available to
them, to be all of the material risk factors relating to the partnership merger
and unitholders of Smith Partnership should take these risk factors into
account in determining whether or not to consent to the partnership merger and
the amendment to the partnership agreement of Smith Partnership.
The value of the Archstone Class A-1 common units you receive in the
partnership merger, or issuable upon conversion of Archstone Class B common
units issued in the partnership merger, will fluctuate based on the market
price of Archstone-Smith common shares and may have a value lower than
expected.
Each Archstone Class A-1 common unit to be received by Smith Partnership
unitholders, other than units owned by Archstone-Smith, as successor to Smith
Residential as a result of the merger, in the partnership merger, or issuable
upon conversion of an Archstone Class B common unit issued in the partnership
merger, is redeemable at the option of the holder thereof for cash in
accordance with the Archstone declaration of trust. Archstone-Smith may elect
to satisfy this redemption request by delivering Archstone-Smith common shares
or their cash equivalent. Consequently, the redemption value of Archstone Class
A-1 common units you receive in the partnership merger, or issuable upon
conversion of Archstone Class B common units issued in the partnership merger,
will be directly affected by price fluctuations of the Archstone common shares
through the closing of the merger and the Archstone-Smith common shares
thereafter. The redemption value of the Archstone Class A-1 common units and
the Smith Partnership units, as reflected in the relative market prices of the
Archstone-Smith common shares and the shares of Smith Residential common stock,
may vary significantly from the redemption value, in the case of Archstone-
Smith, or the conversion value, in the case of Smith Partnership, as reflected
in those prices as of the date of execution of the merger agreement, the date
of this consent solicitation statement/prospectus or the date the merger and
the partnership merger are completed. These variances may arise due to, among
other things, changes in the business, operations and prospects of Archstone,
market assessments of the likelihood that the merger and the partnership merger
will be completed, demand for apartment units in a specific geographic area or
nationwide, and interest rates, general market and economic conditions and
other factors.
Substantially all of these factors are beyond the control of Archstone,
Archstone-Smith, Smith Residential and Smith Partnership. It should be noted
that during the 12-month period ending on September 19, 2001, the most recent
date practicable before the mailing of this consent solicitation
statement/prospectus, the closing per share price of Archstone common shares
varied from a low of $21.88 to a high of $27.85 and ended that period at
$26.10. Historical trading prices are not necessarily indicative of future
performance.
The exchange ratio for Smith Partnership units to be exchanged into
Archstone units in the partnership merger was fixed at the time of the signing
of the merger agreement and is not subject to adjustment based on changes in
the trading price of Archstone common shares or Smith Residential common stock
before the closing of the partnership merger. Accordingly, the value of the
Archstone Class A-1 units you receive in the partnership merger, or issuable
upon conversion of Archstone Class B common units issued in the partnership
merger, will depend on the market price of Archstone-Smith common shares at the
time of the closing of the partnership merger and thereafter.
30
Archstone historically has not owned or operated high-rise apartment buildings
and the value of the Archstone common units you receive in the partnership
merger may decline if Archstone fails to successfully operate the high-rise
apartment buildings acquired in the partnership merger.
In the merger and the partnership merger, Archstone will acquire Smith
Partnership's interest in approximately 50 high-rise apartment buildings. The
high-rise apartment building properties will represent approximately 25% of the
combined portfolio based on number of apartment units. Archstone historically
has not owned or operated high-rise apartment buildings. If Archstone fails to
operate successfully these apartment buildings, the market price of Archstone-
Smith common shares and the redemption value of Archstone Class A-1 common
units could decline. In addition, if Archstone determines to liquidate these
high-rise apartment buildings over time, it may not be successful in doing so
or may not do so at attractive prices, which could adversely affect the market
price of Archstone-Smith common shares and the redemption value of Archstone
Class A-1 common units.
Archstone-Smith will be restricted in its ability to sell the properties
located in the Crystal City area of Arlington, Virginia without the consent of
Messrs. Smith and Kogod, which could result in the inability of Archstone-Smith
to sell these properties at an opportune time and increased costs to Archstone-
Smith.
Under the shareholders' agreement, for a period of 15 years, Archstone and
Archstone-Smith are restricted from transferring specified Smith Partnership
high-rise properties located in the Crystal City area of Arlington, Virginia
without the consent of Messrs. Smith and Kogod, which could result in the
inability of Archstone-Smith to sell these properties at an opportune time and
increased costs to Archstone-Smith. Notwithstanding, Archstone and Archstone-
Smith are permitted to transfer these properties in connection with a sale of
all of the properties in a single transaction or pursuant to a bona fide
mortgage of any or all of such properties in order to secure a loan or other
financing of Archstone-Smith. Also, a sale of any of the Smith Partnership
properties prior to January 1, 2022 could result in increased costs to
Archstone-Smith in light of the tax related undertakings made to the Smith
Partnership unitholders in connection with the partnership merger.
The operations of Archstone and Smith Residential may not be integrated
successfully and intended benefits of the merger and the partnership merger may
not be realized, which could have a negative impact on the market price of
Archstone-Smith common shares after the merger and the value of Archstone units
after the partnership merger.
The completion of the merger and the partnership merger poses risks for the
ongoing operations of Archstone-Smith and Archstone, including that:
. following the merger and the partnership merger, Archstone-Smith and
Archstone may not achieve the expected cost savings and operating
efficiencies, including the ability to realize economies of scale;
. the Smith Residential and Archstone portfolios may not perform as well
as currently anticipated;
. the concentration of Archstone's properties in a few identified markets
may increase Archstone's exposure to the economic conditions of those
markets;
. Archstone-Smith and Archstone may experience difficulties and incur
expenses related to the assimilation and retention of Smith Residential
employees;
. Archstone-Smith and Archstone may incur increased costs, due to required
consents, transfer taxes and other similar expenses, if it completes the
Archstone reorganization into an UPREIT using the alternative merger
structure described later in this consent solicitation
statement/prospectus under the heading "The Merger Agreement--Archstone
Reorganization" beginning on page 69; and
. Archstone-Smith and Archstone may not effectively merge and integrate
the operations of Smith Residential and Smith Partnership.
31
If Archstone-Smith and Archstone fail to integrate successfully the
operations of Smith Residential and Smith Partnership and/or fail to realize
the intended benefits of the merger and the partnership merger, the market
price of Archstone-Smith common shares and the redemption value of Archstone
Class A-1 common units could decline from their market price and redemption
value, as applicable, at the time of completion of the merger and the
partnership merger.
No public market for Archstone Class A-1 common units is expected to develop,
which may cause some difficulty in selling any Archstone Class A-1 common units
you receive in the partnership merger.
No public market for Archstone Class A-1 common units is expected to
develop. However, each Archstone Class A-1 common unit issued in the
partnership merger, or issuable upon conversion of an Archstone Class B common
unit issued in the partnership merger, is subject to a unit redemption right at
the option of the holder thereof immediately following the partnership merger.
Upon exercise by a unitholder of the redemption right, Archstone is required to
acquire the unitholder's Class A-1 common units for an amount of cash per unit
based on the market price of Archstone-Smith common shares in accordance with
the Archstone declaration of trust. However, Archstone-Smith, in its sole
discretion, may elect to assume and directly satisfy Archstone's redemption
obligation, in which case Archstone-Smith will pay the redeeming unitholder in
Archstone-Smith common shares, or their cash equivalent. Archstone Class B
common units will automatically convert on a one-for-one basis into Archstone
Class A-1 common units on the day immediately following the record date for the
distribution period during which such Archstone Class B common units were
issued. If you are unable to redeem your Archstone Class A-1 common units, you
may have difficulty selling those common units because of the lack of a public
market and the restrictions on transfer contained in the declaration of trust
of Archstone.
The directors and executive officers of Smith Residential may have interests in
the completion of the merger and the partnership merger that may conflict with
the interests of Smith Residential stockholders and Smith Partnership
unitholders.
In considering the recommendation of the Smith Residential board with
respect to the merger agreement and the merger and on behalf of Smith
Residential, in its capacity as general partner of Smith Partnership, with
respect to the partnership merger and the amendment to the partnership
agreement of Smith Partnership, Smith Residential stockholders and Smith
Partnership unitholders should be aware that some of Smith Residential's
directors and executive officers have interests in, and will receive benefits
from, the merger and the partnership merger that differ from, or are in
addition to, and, therefore, may conflict with the interests of Smith
Residential stockholders and Smith Partnership unitholders generally, including
the following:
. Three current directors of Smith Residential, Messrs. Smith, Kogod and
Gerardi, will become trustees of Archstone-Smith, and Messrs. Smith and
Kogod, or their replacement nominees, will have the right to be
nominated to serve on the Archstone-Smith board for a period of ten
years from the date of the closing of the merger provided such person or
his related persons or entities continue to beneficially own at least
1,000,000 Archstone-Smith common shares;
. Archstone-Smith and Archstone will provide exculpation and
indemnification for current and former directors and officers of Smith
Residential and specified subsidiaries, including for actions taken in
connection with the merger, which is the same as the exculpation and
indemnification provided by Smith Residential and specified subsidiaries
as of the date of the merger agreement;
. Archstone-Smith and Archstone will indemnify and hold harmless current
and former directors and officers of Smith Residential and Smith
Partnership after the merger to the fullest extent permitted by law;
. Archstone-Smith and Archstone have agreed to provide directors' and
officers' insurance covering acts or omissions occurring before the
merger, for the benefit of those individuals currently covered by Smith
Residential's insurance for a period of six years after the merger;
32
. Unvested options to purchase an aggregate of 878,761 shares of Smith
Residential common stock at an average exercise price of $38.22 per
share previously awarded to Smith Residential directors and executive
officers will vest in connection with the merger pursuant to the plans
under which they were issued and in any event no later than the day
before the merger closes. These Smith Residential directors and
executive officers also currently hold vested options to purchase an
aggregate of an additional 379,377 shares of Smith Residential common
stock at an average exercise price of $32.06. All Smith Residential
stock options will be converted in the merger into options to purchase
Archstone-Smith common shares under the terms of the merger agreement.
Under the merger agreement, holders of Smith Residential stock options
will be entitled to tender the Archstone-Smith options that they will
receive in the merger to Archstone for a cash payment equal to the
excess, if any, of $49.48 per share over the exercise price of the Smith
Residential stock options multiplied by the number of shares of Smith
Residential common stock converted in the merger, subject to their
options, which acquisition and payment, less applicable withholding
taxes, will be made within seven business days of the closing of the
merger. In the event that all Smith Residential directors and officers
tender all of their options for cash, such persons would receive an
aggregate payment from Archstone of approximately $17.2 million, before
any applicable withholding taxes. Options to purchase Archstone-Smith
common shares that are not tendered to Archstone as described above
would remain outstanding under the same terms and conditions of the
Smith Residential stock options from which such options were converted
but the exercise price of each option will be adjusted to reflect the
merger and all options will be fully vested.
. Under severance agreements that Smith Residential and specified
subsidiaries have entered into with specified executive officers, these
executive officers will be entitled to receive estimated cash payments
ranging from approximately $864,000 to $1.4 million as a base amount, or
approximately $5.3 million in the aggregate, if their employment with
Archstone-Smith is terminated within two years following the closing of
the merger, other than for cause or if they voluntarily terminate their
employment for good reason. In the event that these executive officers
become entitled to receive the tax gross-up payment as described under
"The Merger and the Partnership Merger--Interests of Smith Residential
Directors and Executive Officers in the Merger and the Partnership
Merger--Severance Agreements" beginning on page 59, the tax
reimbursement amounts could range from $0 to $493,000 per individual or
$1.3 million in the aggregate. The calculation of the estimated cash
payments under the severance agreements assumes that the obligations
under the agreements are triggered immediately upon the closing of the
merger, which they are, that the applicable persons are terminated,
which they are not currently expected to be, and that the merger will
close on October 1, 2001. The amounts described above include estimated
2001 bonuses through the closing date. Neither Smith Residential nor
Archstone-Smith has yet determined that any tax gross-up payments would
be required;
. Under the Archstone declaration of trust that will be in effect
following the closing of the partnership merger, Archstone has agreed,
for the benefit of the Smith Partnership unitholders, not to sell,
exchange or otherwise dispose of, except in tax-free or tax-deferred
transactions, any of the Smith Partnership properties or any interest
therein or any interest in Smith Realty Company until at least January
1, 2022 and to maintain specified levels of borrowings outstanding with
respect to the Smith Partnership properties for the same period;
. Following the completion of the merger, Mr. Smith will be employed by
Archstone-Smith at a minimum annual salary of $300,000 with a minimum
annual bonus of $150,000 for each year during his employment. Mr. Smith
will also be entitled to receive an annual grant of options to purchase
Archstone-Smith common shares and participation in Archstone-Smith's
benefit plans. Mr. Kogod will be employed by Archstone-Smith at a
minimum annual salary of $150,000 and will be entitled to participate in
Archstone-Smith's benefit plans. Mr. Gerardi will be employed by
Consolidated Engineering Services, Inc. at an annual salary of $200,000
with an annual bonus to be determined, and he will also be entitled to
maintain his existing company-provided apartment and whole life
insurance policy. Mr. Gerardi will be entitled to participate in
Archstone-Smith benefit plans. Mr. Minami will be employed by Archstone-
Smith at an annual salary of $360,000 for the balance of
33
2001 and 2002, plus a target bonus for 2001 of not less than $450,000,
subject to approval by the management development and compensation
committee of the Archstone-Smith board of trustees. Mr. Minami will also
be entitled to receive a grant of 25,000 restricted share units upon
closing of the merger, will have his current severance agreement,
subject to specified exceptions, remain in effect until six months after
the closing of the merger and will be entitled to the same benefits as
other division presidents of Archstone-Smith;
. In connection with the merger, Archstone will purchase 100% of the
voting common stock of Smith Management Construction, Inc., a non-
controlled property service subsidiary of Smith Partnership, for an
aggregate of $70,561 in cash from Smith Management Construction
Partnership, the holder of its voting common stock. Smith Management
Construction Partnership is a general partnership controlled by
Mr. Gerardi and the children of Messrs. Smith and Kogod; and
. A general partnership controlled by Mr. Gerardi and the children of
Messrs. Smith and Kogod will continue to own its interest in
Consolidated Engineering Services, Inc. and, it is contemplated that
prior to the closing of the merger, Consolidated Engineering Services,
Inc. will issue up to an aggregate of 100,000 shares of restricted non-
voting stock to its officers and will grant options to purchase up to an
aggregate of 588,600 shares of its non-voting common stock to its
officers and directors. Such non-voting common stock will convert into
voting common stock upon the occurrence of various corporate events
involving Consolidated Engineering Services, Inc. Of this amount, it is
expected that Mr. Gerardi will receive shares of restricted stock and
options to purchase shares, although no determination has been made as
to the number of shares subject to such awards.
Archstone, Smith Residential and Smith Partnership may incur substantial
expenses and payments if the merger and the partnership merger do not occur.
It is possible that the merger and the partnership merger may not be
completed. If the merger and the partnership merger are not completed,
Archstone, Smith Residential and Smith Partnership will have incurred
substantial expenses. In addition, Smith Residential and Smith Partnership may
incur a termination fee of up to $95 million if the merger agreement is
terminated under specified circumstances. Further, the parties also may become
obligated to reimburse up to $7.5 million of the other parties' expenses if
the merger agreement is terminated for specified reasons. The amount of any
termination fee paid by Smith Residential and Smith Partnership would be
reduced by any expense reimbursement paid by them.
The termination fee of up to $95 million payable by Smith Residential and
Smith Partnership may discourage some third party proposals to acquire Smith
Residential that Smith Residential stockholders may otherwise find desirable.
The termination fee of up to $95 million payable by Smith Residential and
Smith Partnership if the merger agreement is terminated under specified
circumstances represents approximately 2.6% of the approximate $3.6 billion
debt and equity market capitalization of Smith Residential at the time the
merger agreement was entered into. This termination fee of up to $95 million
may discourage some third party proposals to acquire Smith Residential in the
12 months following termination of the merger agreement that Smith Residential
stockholders may otherwise find desirable.
No fairness opinion was obtained in connection with the partnership merger.
Smith Partnership did not obtain a fairness opinion in connection with the
partnership merger. Therefore, no third party has passed on the fairness, from
a financial point of view, of the consideration to be received by the holders
of Smith Partnership Class A common units or Smith Partnership Class B common
units pursuant to the merger agreement.
34
The merger may result in dilution in Archstone's expected funds from operations
and net earnings.
Archstone anticipates that the merger will result in dilution to Archstone's
expected 2002 funds from operations of approximately $0.03 per share. There can
be no assurance, however, as to the amount of dilution to Archstone's expected
2002 funds from operations that will result from the merger. As noted in the
accompanying pro forma financial statements for Archstone-Smith, the merger
results in $0.08 of accretion to diluted net earnings from continuing
operations before extraordinary items per common share, during the year ended
December 31, 2000 and $0.20 of dilution per common share for the six months
ended June 30, 2001, primarily as a result of the inclusion of gains from the
disposition of depreciated real estate. Although the Archstone board of
trustees was aware of this dilution, the board did not consider the dilution as
relevant to the merger, primarily because of the volatility inherent in the
gains on dispositions of depreciated real estate between periods.
Archstone-Smith's outstanding debt obligations could adversely affect our
future financial performance.
As of June 30, 2001 on a pro-forma basis, Archstone-Smith had approximately
$3.6 billion in total debt outstanding, of which $2.1 billion was secured by
real estate assets and $518.9 million was subject to variable interest rates,
including $64 million outstanding on our short-term credit facilities.
Archstone-Smith's approximate principal payments, including amortization and
final maturities due during each of the next five calendar years and
thereafter, as of June 30, 2001 are as follows:
Total
Principal
Payments(1)
(in 000's)
-----------
2001 (July through December)..................................... $ 93,268
2002............................................................. 132,826
2003............................................................. 191,530
2004............................................................. 121,723
2005............................................................. 285,144
Thereafter....................................................... 2,704,678
----------
Total.......................................................... $3,529,169
==========
--------
(1) Includes outstanding long-term unsecured debt and mortgages payable on a
pro forma basis, as of June 30, 2001. Archstone-Smith also has $730 million
of available capacity on its unsecured credit facilities, of which $150
million of capacity matures in February 2004 and $580 million of capacity
matures in December 2003. The $580 million facility also has a one-year
extension option.
As a result of these debt obligations, Archstone-Smith may not have
sufficient cash flow from operations to meet required payments of principal and
interest, pay distributions on our securities at expected rates or make
necessary investments in new business initiatives due to lack of available
funds. In addition, increases in interest rates would increase our interest
expense under our variable interest rate instruments and would increase the
cost of refinancing these instruments and issuing new debt. As a result, higher
interest rates also would adversely affect cash flow and our ability to service
our indebtedness.
The shareholders agreement entered into in connection with the merger places
restrictions on Archstone-Smith's ability to refinance outstanding indebtedness
without the consent of Messrs. Smith and Kogod.
Smith Partnership unitholders who have a taxable year other than a calendar
year may be required to include their Smith Partnership distributions as income
sooner than they otherwise would have as a result of the merger.
A Smith Partnership unitholder generally is not expected to recognize gain
or loss as a result of the merger. However, because the merger results in a
deemed termination of Smith Partnership for federal income tax purposes, Smith
Partnership unitholders who have a taxable year other than a calendar year may
be required
35
to include the distributions from Smith Partnership for the short tax year
beginning January 1, 2000 and ending at the time of the partnership merger at
an earlier time than they otherwise would be required. Each Smith Partnership
unitholder is urged to consult with his, her or its own tax advisor to
determine the anticipated tax consequences of the merger for that Smith
Partnership unitholder in light of his, her or its specific circumstances.
Smith Partnership unitholders may recognize taxable gain at the time of the
partnership merger if they receive a distribution that exceeds their aggregate
adjusted basis in their units.
A Smith Partnership unitholder generally is not expected to recognize
taxable income or gain at the time of the partnership merger unless the Smith
Partnership unitholder receives, in connection with the partnership merger, a
cash distribution, including a deemed cash distribution resulting from the
relief from liabilities, that exceeds the Smith Partnership unitholder's
aggregate adjusted tax basis in his, her or its Smith Partnership units
immediately before the partnership merger. However, the particular tax
consequences of the partnership merger for each Smith Partnership unitholder
will depend on a number of factors related to the tax situation of that
individual unitholder. These factors include:
. the Smith Partnership unitholder's adjusted tax basis in his, her or its
Smith Partnership units at the time of the partnership merger;
. the assets that the Smith Partnership unitholder originally contributed
to Smith Partnership in exchange for his, her or its Smith Partnership
units;
. the indebtedness, if any, of Smith Partnership secured by the
contributed assets at the time of the partnership merger;
. the tax basis of these assets in the hands of Smith Partnership at the
time of the partnership merger;
. the Smith Partnership unitholder's share of the "unrealized gain" with
respect to Smith Partnership's assets at the time of the partnership
merger; and
. the extent to which the Smith Partnership unitholder includes in his,
her or its basis for his, her or its Smith Partnership units a share of
Smith Partnership's liabilities by reason of any guarantees,
indemnifications or "deficit restoration obligations" that will be
eliminated by reason of the partnership merger.
See "Federal Income Tax Consequences--Tax Consequences of the Partnership
Merger to Smith Partnership Unitholders" beginning on page 107. Although the
partnership merger is intended to permit Smith Partnership unitholders to defer
the taxable gain that they otherwise would recognize in a fully taxable
transaction, the Internal Revenue Service might contend that Smith Partnership
unitholders must recognize gain in connection with the partnership merger. Each
Smith Partnership unitholder is urged to consult with his, her or its own tax
advisor to determine the anticipated tax consequences of the partnership merger
for that Smith Partnership unitholder in light of his, her or its specific
circumstances.
Future events could cause Smith Partnership unitholders to recognize gain and,
in determining whether to take actions with respect to future events Archstone-
Smith is not required to take into account the tax consequences to unitholders.
Future events and transactions could cause some or all of the former Smith
Partnership unitholders holding Archstone units as a result of the partnership
merger to recognize part or all of the taxable gain that has been deferred
either through the original contribution of assets to Smith Partnership in
exchange for Smith Partnership units or through the partnership merger. See
"Federal Income Tax Consequences--Effect of Subsequent Events" beginning on
page 115. Archstone-Smith is not required to take into account the tax
consequences to the unitholders of Archstone in deciding whether to cause
Archstone to undertake specific transactions that could cause the unitholders
of Archstone to recognize gain, and the unitholders of Archstone generally have
no right to approve or disapprove these transactions, except to the extent
specifically required by
36
tax protections that Archstone has agreed to provide and the existing tax
protection agreements that Archstone will assume in the partnership merger, as
described in "The Merger Agreement--Tax Related Undertakings of Archstone"
beginning on page 95. The same risk of gain recognition upon the occurrence of
future events and transactions exists currently with respect to Smith
Partnership unitholders' ownership of their Smith Partnership units.
If Archstone fails to qualify as a partnership for federal income tax purposes,
unitholders could recognize a substantial amount of taxable gain.
While Archstone currently is classified as a corporation for federal income
tax purposes, prior to the merger and the partnership merger, Archstone will
file an election to be treated as a partnership or as a disregarded entity for
federal income tax purposes. As a result, Archstone believes that, and will
receive an opinion of its counsel to the effect that, immediately prior to and
at the time of the partnership merger, Archstone will qualify as a partnership
or a disregarded entity for federal income tax purposes and Archstone intends
to continue to operate so as to qualify as a partnership or as a disregarded
entity for federal income tax purposes after the partnership merger. If,
however, Archstone were to be taxed as a corporation, either at the time of the
partnership merger or later, Smith Partnership unitholders could recognize
substantial amounts of taxable gain. In addition, Archstone-Smith would fail to
qualify as a REIT, which would have a material adverse effect on the Smith
Partnership unitholders.
Even if Archstone is treated as a partnership for federal income tax
purposes, Archstone may be considered to be a "publicly traded partnership"
that is taxed as a corporation in certain circumstances. While Archstone does
not expect that it would be taxed as a corporation in that event, if Archstone
is a publicly traded partnership, a former unitholder of Smith Partnership
would be subject to restrictions with respect to the use of passive losses. See
"Federal Income Tax Consequences--Summary of Tax Opinions Relating to the
Partnership Merger" and "--Tax Status of Archstone-Smith Operating Trust"
beginning on pages 101 and 104, respectively.
Archstone unitholders may be subject to taxes and may be required to file tax
returns in each state or jurisdiction where Archstone owns properties or does
business.
In addition to the federal income tax aspects described above, a Smith
Partnership unitholder should consider the potential state and local tax
consequences of owning Archstone units. Tax returns may be required to be filed
and tax liability may be imposed both in the state or local jurisdictions where
a unitholder resides and in each state or local jurisdiction in which Archstone
has assets or otherwise does business. Archstone will hold assets and/or
otherwise conduct business in approximately 24 states and the District of
Columbia. A Smith Partnership unitholder should consult with his, her or its
personal tax advisor with respect to the state and local income tax
implications of their ownership of Archstone units.
Archstone unitholders who exercise control over Archstone-Smith may have
personal liability in some jurisdictions if Archstone were treated as a common
law trust.
In jurisdictions other than Maryland, some courts have found beneficiaries
of a common law business trust personally liable for obligations of the trust
to the extent those obligations are not paid by the trust in circumstances
where the beneficiaries exercised the authority to control properties or
activities of the trust or its trustees. Both Maryland statutory law governing
Maryland REITs and Archstone's declaration of trust provide that unitholders
will not be personally liable for any debt, act, omission or obligation
incurred by Archstone or its trustees by reason of his or her status as a
unitholder. In addition, the Archstone declaration of trust contains a
provision indemnifying unitholders against personal liability as a result of
being a unitholder. However, if a court in a jurisdiction other than Maryland
did not apply Maryland statutory law, did not give effect to the unitholder
protections set forth in the Archstone declaration of trust, extended the
control doctrine for common law business trusts described above to a statutory
real estate investment trust such as Archstone and determined that one or more
unitholders of Archstone in fact exercised such control, those unitholders
could be held personally liable for obligations of Archstone to the extent that
such obligations are not satisfied by Archstone. See "Description of Archstone
Shares of Beneficial Interest--General" beginning on page 140.
37
A WARNING ABOUT FORWARD-LOOKING STATEMENTS
Statements made in this document or incorporated by reference into this
document that are not historical facts are "forward-looking statements" as that
term is defined under the Private Securities Litigation Reform Act of 1995.
These forward-looking statements are based on Archstone's, Smith Residential's
and Smith Partnership's current expectations, beliefs, assumptions, estimates
and projections about the industry and markets in which they operate. Words
such as "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates" and variations of such words and similar expressions are intended
to identify such forward-looking statements. Information concerning expected
investment balances, expected funding sources, planned investments, forecasted
dates and revenue and expense growth assumptions are examples of forward-
looking statements. These statements are not guarantees of future performance
and involve certain risks, uncertainties and assumptions, which are difficult
to predict and many of which are beyond the control of Archstone, Smith
Residential or Smith Partnership. Therefore, actual outcomes and results may
differ materially from what is expressed, forecasted or implied in such
forward-looking statements. None of Archstone, Smith Residential or Smith
Partnership undertakes any obligation to update publicly any forward-looking
statements, whether as a result of new information, future events or otherwise,
except as required by applicable law.
The operating results of Archstone, Smith Residential and Smith Partnership
depend primarily on income from apartment communities, which is substantially
influenced by supply and demand for apartment units, operating expense levels,
property level operations and the pace and price at which Archstone, Smith
Residential and Smith Partnership can develop, acquire or dispose of apartment
communities. Capital and credit market conditions, which affect cost of
capital, also influence operating results.
Important factors that could cause actual results to differ materially from
current expectations reflected in these forward-looking statements include,
among others, the factors discussed under the caption "Risk Factors" beginning
on page 30 of this consent solicitation/prospectus, and factors discussed in
filings made by Archstone, Smith Residential and Smith Partnership that are
identified on pages 216 and 217 and incorporated in this document.
38
SMITH PARTNERSHIP CONSENT SOLICITATION
The partnership agreement of Smith Partnership requires the approval of the
partnership merger by holders of at least a majority of the outstanding common
units of Smith Partnership, including common units owned by Smith Residential.
By authority granted to Smith Residential, as general partner of Smith
Partnership, Smith Residential has approved the partnership merger and intends
to deliver its written consent to the partnership merger, as permitted under
the partnership agreement of Smith Partnership. Since Smith Residential owns a
majority in percentage interest of the outstanding common units of Smith
Partnership, the approval of the partnership merger is assured.
In addition, in order to complete the partnership merger, an amendment to
the partnership agreement of Smith Partnership must be approved by holders of
at least a majority of the outstanding common units of Smith Partnership,
excluding common units owned by Smith Residential. As discussed below, unless
holders of a majority of the outstanding common units of Smith Partnership,
excluding common units owned by Smith Residential, timely submit executed
consent forms indicating that such holders wish to vote against the amendment
to the partnership agreement of Smith Partnership, the amendment to the
partnership agreement of Smith Partnership will be deemed to have been
approved.
Purpose of the Consent Solicitation
Smith Residential, as general partner of Smith Partnership, is asking Smith
Partnership unitholders to consent to the partnership merger and the amendment
to the partnership agreement of Smith Partnership.
Who Can Consent
You are entitled to consent with respect to your Smith Partnership units if
our unitholder records showed that you held your Smith Partnership units as of
the close of business on September 24, 2001. At the close of business on August
31, 2001, a total of 38,967,881 Smith Partnership common units were outstanding
and entitled to consent. Each Smith Partnership unit represents one vote. The
enclosed consent form shows the number of Smith Partnership units for which you
are entitled to consent.
Consent Procedures
To consent, simply mark your consent form, sign and date it, and return it
in the postage-paid envelope provided. In order to be counted, your consent
form must be received by Smith Partnership prior to 3:00 p.m. Eastern Time on
Friday, October 26, 2001. As set forth above, if you do not complete, execute
and return to Smith Partnership the consent form attached to this consent
solicitation statement/prospectus prior to 3:00 p.m. Eastern time on Friday,
October 26, 2001, such inaction on your part will be deemed to constitute a
vote in favor of the recommendation of Smith Residential, as general partner of
Smith Partnership, regarding the amendment to the partnership agreement of
Smith Partnership. Smith Residential, as general partner of Smith Partnership,
recommends that you approve the amendment to the partnership agreement of Smith
Partnership. As a result, if you wish to vote against the amendment to the
partnership agreement of Smith Partnership, you must submit an executed consent
form indicating such intent not later than the date and time set forth above.
Required Vote
Approval of the partnership merger requires the consent of at least a
majority of the outstanding common units of Smith Partnership, including common
units owned by Smith Residential. Approval of the amendment to the partnership
agreement of Smith Partnership requires the consent of at least a majority of
the outstanding common units of Smith Partnership, excluding common units owned
by Smith Residential.
39
Voting Agreements
All of the Smith Residential directors, who beneficially owned in the
aggregate 2,141,832 common units of Smith Partnership, or approximately 5.5% of
the outstanding common units of Smith Partnership as of August 31, 2001, have
entered into voting agreements agreeing to consent to the partnership merger
and the amendment to the partnership agreement of Smith Partnership.
How You May Revoke Your Consent
To revoke your consent, you must:
. so advise Smith Residential's secretary, Robert Zimet, c/o Charles E.
Smith Residential Realty, Inc., 2345 Crystal Drive, Arlington, Virginia
2202, in writing or by facsimile before 3:00 p.m. Eastern time on
Friday, October 26, 2001; or
. deliver to Mr. Zimet before 3:00 Eastern time on Friday, October 26,
2001 a consent form dated after your initial consent form.
Cost of This Consent Solicitation
Smith Partnership will pay the cost of its consent solicitation. In addition
to soliciting consent forms by mail, Smith Partnership has engaged Morrow &
Co., Inc., a consent solicitation firm, to assist in obtaining consents from
its common unitholders on a timely basis. Smith Partnership will pay Morrow &
Co., Inc.'s reasonable out of pocket expenses plus a $4,500 fee for these
services. Smith Partnership also expects that some of its officers or other
representatives of its general partner, Smith Residential, may solicit Smith
Partnership unitholders in person and by telephone. None of these employees or
representatives will receive any additional or special compensation for doing
this.
40
APPROVAL OF AMENDMENT TO PARTNERSHIP AGREEMENT OF SMITH PARTNERSHIP
In order to complete the partnership merger, Smith Partnership is proposing
to its unitholders an amendment to the partnership agreement of Smith
Partnership.
The partnership agreement of Smith Partnership contains a provision that
restricts Smith Residential from engaging in any merger or business combination
transaction unless the transaction also includes a merger or sale of
substantially all of the assets of Smith Partnership which has been approved by
the requisite consent of Smith Partnership unitholders and which will result in
Smith Partnership unitholders receiving the same consideration for each unit as
is paid to stockholders of Smith Residential. Because the Smith Partnership
unitholders will be receiving consideration in the partnership merger that will
be different in form, in other words, units instead of shares, from the
consideration specified in the partnership agreement of Smith Partnership,
Smith Partnership is proposing to amend the partnership agreement to permit the
partnership merger to occur pursuant to the terms and for the consideration set
forth in the merger agreement.
Please read Annex B to this consent solicitation statement/prospectus for
the complete text of the proposed amendment to the partnership agreement of
Smith Partnership.
The affirmative vote of holders of at least a majority of the outstanding
common units of Smith Partnership, excluding common units owned by Smith
Residential, is required to approve the amendment to the partnership agreement
of Smith Partnership.
Pursuant to the terms of the partnership agreement of Smith Partnership,
however, any Smith Partnership common unit holder that does not complete,
execute and return to Smith Partnership the consent form attached to this
consent solicitation statement/prospectus prior to 3:00 p.m. Eastern time on
Friday, October 26, 2001, will be deemed to have voted in favor of the
amendment to the partnership agreement of Smith Partnership. As a result, any
common unitholder that wishes to vote against the amendment to the partnership
agreement of Smith Partnership must submit an executed consent form indicating
such intent not later than the date and time set forth above. Unless holders of
a majority of the outstanding common units of Smith Partnership, excluding
common units owned by Smith Residential, timely submit executed consent forms
indicating that such holders wish to vote against the amendment to the
partnership agreement of Smith Partnership, the amendment to the partnership
agreement of Smith Partnership will be approved.
All of the Smith Residential directors, who beneficially owned in the
aggregate 2,141,832 common units of Smith Partnership, or approximately 5.5% of
the outstanding common units of Smith Partnership as of August 31, 2001, have
entered into voting agreements agreeing to consent to the partnership merger
and the amendment to the partnership agreement of Smith Partnership.
The Smith Residential board on behalf of Smith Residential, in its capacity
as general partner of Smith Partnership, has determined that the amendment to
the partnership agreement of Smith Partnership is in your best interest, and
the board recommends on behalf of Smith Partnership that you consent to the
amendment to the partnership agreement of Smith Partnership.
41
THE MERGER AND THE PARTNERSHIP MERGER
Structure of the Merger and the Partnership Merger; Partnership Merger Exchange
Ratio
General
The merger agreement contemplates the following transactions:
. the reorganization of Archstone into an UPREIT
-- Archstone will be reorganized into an UPREIT in a transaction
pursuant to which Archstone, or in the alternative structure, a
newly created Maryland real estate investment trust that will be the
successor to Archstone's assets and liabilities, will become a
subsidiary of Archstone-Smith, and thereafter will be named
"Archstone-Smith Operating Trust," followed by
-- the election by Archstone to be treated for federal income tax
purposes as either a domestic eligible entity with a single owner
disregarded as a separate entity or as a partnership, followed by
. the merger of Smith Residential with Archstone-Smith
-- the merger, in which Smith Residential will merge with and into
Archstone-Smith and Smith Residential will cease to exist, followed
by
. the merger of Smith Partnership with Archstone
-- the partnership merger, in which Smith Partnership will merge with
and into Archstone and Smith Partnership will cease to exist, with
Archstone thereafter being treated as a partnership for federal
income tax purposes.
The partnership merger will be completed at least one hour following the
merger.
Merger and Partnership Merger Consideration
In the reorganization of Archstone into an UPREIT:
. holders of Archstone common shares will receive, for each Archstone
common share issued and outstanding immediately prior to the
reorganization, one Archstone-Smith common share; and
. holders of Archstone preferred shares will receive, for each Archstone
preferred share issued and outstanding immediately prior to the
reorganization, one Archstone-Smith preferred share of a series with
equivalent rights and preferences.
In the merger:
. holders of Smith Residential common stock will receive, for each share
of Smith Residential common stock issued and outstanding immediately
before the merger, 1.975 Archstone-Smith common shares;
. holders of Smith Residential Series A preferred stock will receive, for
each share of Smith Residential Series A preferred stock issued and
outstanding immediately before the merger, one Archstone-Smith Series H
preferred share;
. holders of Smith Residential Series C preferred stock will receive, for
each share of Smith Residential Series C preferred stock issued and
outstanding immediately before the merger, one Archstone-Smith Series I
preferred share;
. holders of Smith Residential Series E preferred stock will receive, for
each share of Smith Residential Series E preferred stock issued and
outstanding immediately before the merger, one Archstone-Smith Series J
preferred share;
42
. holders of Smith Residential Series F preferred stock will receive, for
each share of Smith Residential Series F preferred stock issued and
outstanding immediately before the merger, one Archstone-Smith Series K
preferred share; and
. holders of Smith Residential Series G preferred stock will receive, for
each share of Smith Residential Series G preferred stock issued and
outstanding immediately before the merger, one Archstone-Smith Series L
preferred share.
The Archstone-Smith Series H, I, J, K and L preferred shares issued in the
merger will have preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms or
conditions of redemption identical to those of the shares of the corresponding
series of Smith Residential preferred stock adjusted as necessary to reflect
the exchange ratio, except for changes that do not materially and adversely
affect the holders of Smith Residential preferred stock.
Upon conversion of the outstanding shares of Smith Residential common stock
and preferred stock and the Smith Partnership common units and preferred units
into the merger consideration, the Smith Residential common stock and preferred
stock and the Smith Partnership common units and preferred units will be
cancelled and retired and will cease to exist.
Holders of Smith Residential common stock or Archstone common shares will
not receive fractional Archstone-Smith common shares. Instead, each holder
otherwise entitled to a fractional share interest in Archstone-Smith will be
paid an amount in cash, without interest, rounded to the nearest cent, with 0.5
of a cent rounded up, determined by multiplying:
. the average closing price of an Archstone common share on the New York
Stock Exchange for the 20 trading days immediately preceding the closing
date of the merger by
. the fraction of an Archstone-Smith common share which such holder would
otherwise be entitled to receive.
In the partnership merger:
. holders of Class A common units in Smith Partnership, other than
Archstone-Smith, as successor to Smith Residential as a result of the
merger, will receive, for each Smith Partnership Class A common unit
issued and outstanding immediately before the partnership merger, 1.975
Archstone Class A-1 common units, rounded to the nearest whole unit,
with 0.5 of a unit rounded up;
. holders of Class B common units in Smith Partnership will receive, for
each Smith Partnership Class B common unit issued and outstanding
immediately before the partnership merger, 1.975 Archstone Class B
common units, rounded to the nearest whole unit, with 0.5 of a unit
rounded up;
. Archstone-Smith, as successor to Smith Residential as a result of the
merger, will receive, for each Smith Partnership Class A common unit
issued and outstanding held by it immediately before the partnership
merger, 1.975 Archstone Class A-2 common units, rounded to the nearest
whole unit, with 0.5 of a unit rounded up;
. the Series A preferred units of Smith Partnership held by Archstone-
Smith will be exchanged for an equivalent number of Series H preferred
units of Archstone;
. the Series C preferred units of Smith Partnership held by Archstone-
Smith will be exchanged for an equivalent number of Series I preferred
units of Archstone;
. the Series E preferred units of Smith Partnership held by Archstone-
Smith will be exchanged for an equivalent number of Series J preferred
units of Archstone;
. the Series F preferred units of Smith Partnership held by Archstone-
Smith will be exchanged for an equivalent number of Series K preferred
units of Archstone; and
. the Series G preferred units of Smith Partnership held by Archstone-
Smith will be exchanged for an equivalent number of Series L preferred
units of Archstone.
43
Background of the Merger and the Partnership Merger
In pursuing their strategies for enhancing shareholder value, each of
Archstone and Smith Residential regularly consider opportunities for
acquisitions, joint ventures and other significant transactions.
Smith Residential and Smith Partnership were formed to succeed to the
residential and retail property assets and various asset management and
property service businesses of the Charles E. Smith Companies. On June 30,
1994, Smith Residential completed an initial public offering of its common
stock and used the proceeds to purchase the sole general partnership and a
proportionate limited partnership interest in Smith Partnership. On the same
date, in exchange for Smith Partnership units, Smith Partnership acquired
various properties, all of the non-voting common stock of the property service
businesses, which include Smith Realty Company, Consolidated Engineering
Services, Inc. and Smith Management Construction, Inc., and various obligations
of the property service businesses.
Since that time, Smith Residential has substantially increased its portfolio
by acquiring or developing new residential properties for cash, Smith
Partnership units or through partnership or joint ventures in the Washington,
D.C., Chicago, Illinois, and Boston, Massachusetts metropolitan areas and in
southeast Florida.
Over the last several years, representatives of Smith Residential management
have investigated and evaluated a number of strategic opportunities for the
purpose of enhancing value for Smith Residential stockholders. The strategic
opportunities considered have included mergers with other entities,
acquisitions of other entities and businesses, divestiture and repositioning of
various portions of Smith Residential's assets and joint venture opportunities.
Among other activities, Messrs. Smith, Kogod and Gerardi evaluated acquisition
and merger opportunities in various major metropolitan markets throughout the
United States and reported on these opportunities to the Smith Residential
board of directors as appropriate. In addition, during various meetings, the
Smith Residential board of directors discussed and considered the general
status of the economy, the REIT industry, Smith Residential's markets and
opportunities for growth and diversification into other markets, and Smith
Residential's stock price performance.
During early 1998, members of Smith Residential management surveyed and
analyzed the real estate investment trusts in the residential sector, focusing
on strategic fit, management philosophy, market presence, quality of
portfolios, geographic distribution, development pipeline, financial status and
various other criteria. Based on its analysis, Smith Residential management
identified three companies, one of which was Archstone, with which it would
consider exploring a potential transaction. Beginning in 1998, Smith
Residential management had preliminary discussions with principals of these
companies to explore the possibility of potential strategic transactions.
During the first half of 1998, Archstone was formulating its strategy for
the combination with Security Capital Atlantic Incorporated, including
Archstone's strategy for entering the Boston, Chicago and New York City
markets, and expanding its presence in Washington, D.C. On July 7, 1998,
Archstone completed its combination with Security Capital Atlantic and launched
its national branding strategy. After completion of the combination with
Security Capital Atlantic, Archstone began to explore strategic options to
facilitate implementation of its strategies.
In July 1998, R. Scot Sellers, chairman and chief executive officer of
Archstone, contacted Smith Residential management concerning a potential
strategic transaction between Smith Residential and Archstone. In mid-July
1998, Mr. Sellers met with Messrs. Smith and Kogod in Washington, D.C. to
present Archstone's strategic plan and to provide Smith Residential with
specified background information regarding Archstone. These discussions led to
a meeting on July 27, 1998 between Mr. Smith, Mr. Sellers and Mr. C. Ronald
Blankenship, a member of the board of Archstone at that time. At that meeting,
Mr. Smith, Mr. Sellers and Mr. Blankenship discussed their strategic plans for
their respective companies, the markets that each company was involved in and
the future visions of each company. On August 6, 1998, Mr. Smith and Mr.
Gerardi met again with Mr. Sellers to further explore the discussions that Mr.
Sellers had initiated in July 1998. After these meetings, members of Smith
Residential management had several discussions to evaluate a possible strategic
44
combination with Archstone and concluded that, in view of Archstone's strategic
plan at that time and its presence in secondary markets, a combination of the
two companies at that time was not in the best interests of Smith Residential
stockholders and Smith Partnership unitholders. On August 11, 1998, during a
telephone conversation, Messrs. Smith and Sellers determined that pursuing a
strategic transaction at that time was not in the interests of either company
or their respective shareholders.
During the latter part of 1998, Smith management had preliminary discussions
with other companies they had identified regarding potential strategic
transactions. Mr. Smith, Mr. Kogod and Mr. Gerardi met with the chairman and
chief executive officer and other executives of one of these companies,
referred to in this description as "company A," to discuss conceptually the
possibility of a strategic transaction. Similar to Smith Residential, company A
was a residential property REIT, although larger than Smith Residential. At
that time, Smith Residential management concluded that a strategic combination
with company A was not in the best interests of Smith Residential stockholders
and Smith Partnership unitholders. Smith Residential reached this conclusion
based upon, among other factors, the differences between the culture and
business visions of the two companies and company A's strategic plan to focus
on the acquisition of Smith Residential's assets without preserving the Smith
Residential brand and organization.
In December 1998, Mr. Smith and Mr. Kogod met with the president and chief
executive officer and the chairman of the board of another entity, referred to
in this description as "company B," to discuss the possibility of a strategic
transaction. Similar to Smith Residential, company B was a residential property
REIT, although larger than Smith Residential. The meeting between Mr. Smith,
Mr. Kogod and the executives of company B included discussions relating to
market presence, strategies of the two companies, synergies between the two
companies and pricing. The president and chief executive officer of company B
informed Mr. Smith and Mr. Kogod that the management of company B would
evaluate the potential of a strategic transaction with Smith Residential and
would call them in early January 1999 to follow-up on their discussions. In
mid-January 1999, the president and chief executive officer of company B
contacted Mr. Smith to inform him that due to the stock price of company B at
that time, a potential combination with Smith Residential would result in a
large dilution to their current stockholders and therefore that it was not in
the best interest of their stockholders for company B to pursue such a
strategic transaction with Smith Residential at that time.
During 1999 and 2000, Mr. Smith and Mr. Sellers had conversations from time
to time to update one another on the status and future outlook of their
respective companies. In October 1999, Mr. Sellers, Mr. Smith and Mr. Kogod had
a conversation relating to an update on the progress of Archstone's strategic
plan to redeploy its capital into protected markets.
During 1999 and 2000, Messrs. Smith, Kogod and Gerardi had discussions
concerning Smith Residential's strategic alternatives, the challenges that
Smith Residential might face in meeting its long-term growth targets as a
stand-alone business given the projected size of Smith Residential, the markets
in which Smith Residential conducts its operations and the need to raise
capital to fulfill Smith Residential's growth strategy.
During this period, Messrs. Smith, Kogod and Gerardi met with the chief
executive officer of another entity, referred to in this description as
"company C," to discuss their respective companies and business philosophies.
Similar to Smith Residential, company C was a residential property REIT. The
meeting between Messrs. Smith, Kogod and Gerardi and the chief executive
officer of company C included discussions relating to the portfolios, markets,
strategies and management philosophies of the two companies. Following the
meeting, Messrs. Smith, Kogod and Geradi concluded that a strategic combination
with company C would not be in the best interests of Smith Residential
stockholders and Smith Residential unitholders because company C's portfolio
was heavily concentrated in a single metropolitan area and because of
differences in management philosophies between the two companies.
In 2000, the chief executive officer of company A contacted Mr. Smith to
further pursue discussions regarding a strategic transaction. Messrs. Smith,
Kogod and Gerardi met with the chairman and the president and chief executive
officer of company A to reconsider a potential business combination. However,
once again,
45
as a result of company A's interest in acquiring specified assets of Smith
Residential and the differences in corporate culture between the two companies,
the Smith Residential management concluded that a potential strategic
transaction with company A was not in the best interests of Smith Residential
stockholders and the Smith Partnership unitholders.
In October 2000, Mr. Sellers met with Mr. Smith and Mr. Kogod in Washington,
D.C. regarding Archstone's continued interest in a strategic transaction with
Smith Residential. At this meeting, Mr. Sellers updated Mr. Smith on
Archstone's program of redeploying its capital into protected markets,
particularly the greater northeast region, and Archstone's long-term strategy
and opportunities.
In February 2001, Smith Residential announced that, for health reasons, Mr.
Gerardi would reduce his work schedule and would step down as the president and
chief executive officer of Smith Residential when a replacement was appointed.
At that time, in addition to facilitating the transition, Mr. Gerardi stated he
would remain on the board of directors and continue assisting in strategic
planning and special projects for Smith Residential.
During February 2001, Mr. Sellers contacted Mr. Smith to set up a meeting to
resume their discussions relating to a potential strategic transaction.
However, since the Smith Residential management was conducting a national
search to find a replacement for Mr. Gerardi at that time, Mr. Smith decided to
postpone having discussions with Mr. Sellers until a later date.
In early March 2001, management of company B again contacted Smith
Residential management to resume discussions relating to a potential strategic
transaction between Smith Residential and company B. On March 20, 2001, Mr.
Smith, Mr. Kogod, and the president and chief executive officer and the
chairman of the board of company B met to discuss the terms of a possible
strategic combination. At that meeting, the representatives of company B
presented a proposal to Mr. Smith and Mr. Kogod to acquire the company for
consideration consisting of a combination of cash, common stock and convertible
preferred units. On April 4, 2001, Smith Residential and company B entered into
a confidentiality agreement under which Smith Residential and company B agreed
to exchange confidential information for the purposes of evaluating a business
transaction between the two companies. Pursuant to that confidentiality
agreement, each party agreed to keep confidential information provided by the
other and to use that information only for purposes of considering a
transaction between the two companies. In addition, each company agreed that it
would not seek to acquire the voting securities of the other company or take
other related actions for a period of two years from the date of the agreement.
After the exchange of confidential information, management of Smith Residential
and company B continued discussions regarding the terms of a possible
transaction. The principal disagreement between the managements of Smith
Residential and company B was the form of the merger consideration. The parties
also were concerned about the level of dilution to the common shareholders of
company B that would result from a merger. On April 10, 2001, after further
discussions on the pricing, valuation and structure of a potential business
combination transaction between Smith Residential and company B, management of
Smith Residential determined not to pursue a potential strategic transaction
with company B.
In March 2001, at the direction of Smith Residential management,
representatives of Goldman, Sachs & Co. contacted Mr. Sellers to discuss
whether Archstone would be interested in pursuing a potential business
combination with Smith Residential. Smith Residential management decided to
pursue discussions with Archstone at that time because they were impressed by
the improvement in the overall quality of Archstone's portfolio, resulting from
its active disposition program and strategy of repositioning the portfolio in
markets that Smith Residential management believed had greater growth
potential, and they believed that the risks associated with Security Capital's
large equity investment in Archstone had been eliminated as a result of
Security Capital's disposition of its investment in Archstone in February 2001.
From Archstone's perspective, the magnitude of Smith Residential's unfunded
development commitments was now significantly less than in 1998. The resulting
impact from funding such commitments on Archstone's balance sheet was
previously of concern to Archstone's management given the capital constrained
environment both companies were operating in at the time. As such, Archstone
elected to pursue discussions with Smith Residential.
46
On April 3, 2001, at a special telephonic meeting of the Archstone board,
Mr. Sellers briefed the members of the board of trustees on his discussions
with representatives of Goldman Sachs regarding a potential business
combination with Smith Residential. The Archstone board discussed the potential
effects of a business combination with Smith Residential on Archstone and its
financial results and operations and directed Mr. Sellers to determine the
general terms on which Smith Residential would consider a potential business
combination.
Smith Residential executed an engagement letter with Goldman Sachs, dated as
of April 5, 2001, to act as its financial advisor in connection with a possible
strategic business combination involving, or possible sale of all or a portion
of, Smith Residential. On April 9, 2001, at the direction of Smith Residential,
Goldman Sachs contacted company A to discuss once again potential business
combinations with Smith Residential. Company A responded that it was not
interested in pursing a transaction with Smith Residential at this time.
On April 10, 2001, at a special telephonic meeting of the Archstone board,
Mr. Sellers and Charles E. Mueller, Jr., the chief financial officer of
Archstone, discussed with members of the board of trustees the general terms
under which Archstone should offer to enter into a potential business
combination with Smith Residential. After extensive discussion and review of
the general structure of such a transaction, the impact of such a transaction
on Archstone's financial position and operations, Smith Residential's
properties, the markets in which Smith Residential operates and the anticipated
market perception of such a transaction, the Archstone board of trustees
authorized Mr. Sellers to make a proposal to Smith Residential reflecting a
merger of Smith Residential with Archstone in which the holders of Smith
Residential common stock would receive merger consideration with a value per
share of $47.80. The proposed merger consideration, which could possibly
include a cash portion which would be determined at a later date, represented
an exchange ratio of 1.9429 Archstone common shares for each share of Smith
Residential common stock, reflecting a 6% premium over Smith Residential's 10-
day trailing average closing share price on April 9, 2001.
On April 12, 2001, Mr. Gerardi met with Mr. Sellers in Boston for a general
discussion of Archstone's strategic business plan, the corporate culture of the
two companies, the general business environment, their respective vision of a
combined company, the strategic fit between Smith Residential and Archstone,
and the general structure of a potential strategic transaction between Smith
Residential and Archstone. At that meeting, Mr. Sellers also presented
Archstone's proposal with respect to a business combination transaction between
the two companies. Later that day, Mr. Gerardi had a telephone conference with
Mr. Smith and Mr. Kogod to update them on the status of his discussions with
Mr. Sellers.
On April 13, 2001, at a special telephonic meeting of the Archstone board of
trustees, Mr. Sellers briefed the members of the board on his discussions with
Mr. Gerardi. After a full discussion of the state of negotiations, including
Smith Residential's requirement that the high-rise operations of Smith
Residential be conducted through a semi-autonomous division of the combined
company, Mr. Sellers indicated that he would meet with Mr. Smith on April 18,
2001 to continue negotiations. The Archstone board of trustees authorized Mr.
Sellers to offer terms for a business combination with Smith Residential
consistent with those discussed at the meeting.
Between April 13, 2001 and April 15, 2001, the management of Smith
Residential, the management of Archstone and representatives of Goldman Sachs
had various discussions relating to the terms of a potential strategic
combination of the two companies. Smith Residential management and
representatives of Goldman Sachs, on behalf of Smith Residential, provided
Archstone management with additional data and information regarding the value
of Smith Residential's portfolio, as well as a draft of the proposed
confidentiality agreement. At the direction of Smith Residential management,
representatives of Goldman Sachs contacted Mr. Sellers on April 14, 2001 and
indicated that Smith Residential considered Archstone's offer to be too low,
but that Smith Residential was still interested in pursuing a transaction at a
higher price.
After Archstone management reviewed the additional information provided at
the meeting between Mr. Gerardi and Mr. Sellers on April 15 to further discuss
the proposed terms of a potential strategic transaction,
47
Archstone increased the proposed merger consideration to a value per share
equal to $48.50. The proposed merger consideration, which could possibly
include a cash portion to be determined at a later date, represented an
exchange ratio of 1.975 Archstone common shares for each share of Smith
Residential common stock, reflecting a 7.2% premium over Smith Residential's
10-day trailing average closing share price on April 10, 2001.
At a regularly scheduled meeting of the Smith Residential board on April 17,
2001, Mr. Gerardi briefed the Smith Residential directors regarding prior
discussions with company B and the discussions with Archstone and advised the
board of directors that he and Mr. Smith would meet Mr. Sellers on April 18,
2001 to continue their discussions.
On April 18, 2001, Mr. Smith, Mr. Gerardi and a representative of Goldman
Sachs met with Mr. Sellers in Chicago to further discuss the key operational
and strategic issues relating to a potential strategic transaction. Following
these discussions, Mr. Sellers and Mr. Gerardi agreed to commence detailed
business and legal due diligence.
On April 19, 2001, members of Smith Residential management discussed with
their counsel, Hogan & Hartson L.L.P., the terms of the Archstone proposal, and
members of Archstone management discussed with their counsel, Mayer, Brown &
Platt, the terms of the Archstone proposal. In addition, representatives of
Hogan & Hartson had an extensive discussion with Mayer, Brown & Platt regarding
various issues relating to the proposed terms of the merger. On April 19, 2001,
Archstone and Smith Residential also entered into a confidentiality agreement.
Pursuant to that confidentiality agreement, each party agreed to keep
confidential information provided by the other and to use that information only
for purposes of considering a transaction between the two companies. In
addition, each company agreed that it would not seek to acquire the voting
securities of the other company or take other related actions for a period of
two years from the date of the agreement. Thereafter, the representatives of
the two parties exchanged information concerning their respective businesses.
Between April 20, 2001 and April 22, 2001, Mr. Gerardi called each member of
the board of directors individually to brief such director regarding the
discussions that had occurred between Mr. Sellers and Mr. Smith and Mr. Gerardi
in their meeting on April 18, 2001. Between April 19 and April 24, 2001, Mr.
Sellers held various discussions with Mr. Smith, Mr. Kogod and Mr. Gerardi and
representatives of Goldman Sachs to clarify various terms of the proposed
transaction. In addition, during that same period, Mr. Sellers had a discussion
with each member of the Archstone board of trustees regarding the discussions
between the parties on April 18, 2001.
On April 25, 2001, following a meeting of the Archstone board called for
such purpose, Archstone engaged Morgan Stanley & Co. Incorporated to act as its
financial advisor in connection with the proposed transaction.
On April 25, 2001, at a special meeting of the Smith Residential board of
directors held at the offices of Hogan & Hartson, Mr. Smith and Mr. Gerardi
discussed with the members of the board of directors the status of the proposed
merger of Smith Residential with Archstone. The strategic alternatives that
Goldman Sachs discussed with the board included Smith Residential continuing
operations as a stand-alone entity, merging with a nationwide or specialized
apartment company, and acquiring another apartment company. After considering
the strategic alternatives presented by Goldman Sachs, the Smith Residential
board of directors, on behalf of Smith Residential, for itself and as general
partner of Smith Partnership, determined that merging with a nationwide
apartment company would enable Smith Residential to realize the strategic and
operational benefits derived from a larger and more diverse property portfolio
with an expanded geographic scope and was therefore in the best interests of
Smith Residential and its stockholders and Smith Partnership and its
unitholders. In addition, Hogan & Hartson discussed the board's fiduciary
duties in considering a strategic business combination. Various members of the
board had questions for Smith Residential management relating to, among other
things, the risks of the transaction, the long term strategy of Smith
Residential, the quality of management at Archstone, and the synergies between
Smith Residential and Archstone. Representatives of
48
Hogan & Hartson and Goldman Sachs, at the request of Smith Residential
management, participated in these discussions in advising the Smith Residential
board. The Smith Residential board of directors also discussed, among other
things, the business and operations of Archstone and certain of the matters
described below under "--Smith Residential's Reasons for the Merger;
Recommendation of the Smith Residential Board." After further discussion of the
Archstone proposal and after receiving the recommendation of Smith Residential
management that Smith Residential pursue continued discussions with Archstone,
the board authorized Smith Residential management to continue discussions
regarding a strategic combination of Smith Residential and Archstone. On April
25, 2001, Mayer, Brown & Platt provided to Smith Residential and its counsel an
initial draft of the merger agreement.
On April 27 and April 28, 2001, Mr. Smith traveled to California to meet
with Richard A. Banks, the president of Archstone's west region, and to tour
some of the Archstone properties in the San Francisco Bay area, the Los Angeles
area and San Diego to observe the architecture, location, quality, maintenance,
service, operating personnel and other aspects of such properties. Upon his
return, Mr. Smith updated the management of Smith Residential as to his
observations regarding the Archstone portfolio.
At a special telephonic meeting of the Archstone board held on April 29,
2001, Mr. Sellers and Mr. Mueller updated the board on the status of the
negotiations regarding a possible merger of Smith Residential with Archstone.
The Archstone board discussed various topics relating to the proposed merger
transaction, including the impact of the proposed transaction on Archstone's
financial results, the potential dilutive effect of the transaction on
Archstone's short-term funds from operations per share, the effect of the
transaction on outstanding Smith Residential stock options, compensation of
senior management of Smith Residential by the combined company, expected cost
savings as a result of the transaction, the costs of completing the transaction
in light of the proposed structure of the transaction, the benefits of a
substantially greater concentration of assets in protected markets with better
long-term growth rates, the benefits of having a significant high-rise
franchise and the strong differentiated position of the combined company. The
Archstone board of trustees also discussed the strategic fit with Smith
Residential and their similar business philosophies, as well as the acquisition
of high-rise apartment operations and the potential impact of those operations
on Archstone. The Archstone board of trustees also discussed, among other
things, the matters described below under "--Archstone's Reasons for the
Merger; Recommendation of the Archstone Board."
On April 30 and May 1, 2001, Mr. Sellers went to Florida and Washington,
D.C. to meet with Messrs. Smith, Gerardi and W.D. Minami, then the executive
vice president and chief operating officer of Smith Residential, and to observe
the architecture, quality, location, maintenance, service, operating personnel
and other aspects of properties located in various markets which Smith
Residential operates. Upon his return, Mr. Sellers updated the management of
Archstone as to his observations regarding the Smith Residential portfolio.
Following the meetings of the boards of Smith Residential and Archstone,
representatives of Smith Residential, Archstone, Goldman Sachs, Hogan & Hartson
and Mayer, Brown & Platt continued to have various discussions and negotiations
concerning the terms of the proposed merger of Smith Residential with
Archstone. Management of Smith Residential and management of Archstone and
their representatives continued to conduct due diligence with respect to each
other and to exchange additional information on the structure, management and
personnel of their respective organizations. Following these discussions and
additional financial analysis and review of balance sheet ratios, Archstone
elected to proceed with an all-stock offer with merger consideration having a
value per share of $50.01. This represented an exchange ratio of 1.975
Archstone common shares for each share of Smith Residential common stock
reflecting a 10.1% premium over Smith Residential's 10-day trailing average
closing share price on May 1, 2001. The possibility of a cash component to the
merger consideration was withdrawn due to Archstone's desire to maintain a
strong balance sheet and preserve the financial flexibility of the combined
company.
During the next several days, representatives of Smith Residential,
Archstone, Goldman Sachs, Morgan Stanley, Mayer, Brown & Platt and Hogan &
Hartson had numerous discussions and negotiations relating to the terms of the
merger agreement and various ancillary agreements including, among other
things, voting
49
agreements, a shareholder agreement and various other agreements. The
negotiations on the terms and conditions of the merger agreement included
discussions regarding the structure of the mergers as a three-step transaction
involving the reorganization of Archstone into an UPREIT structure, the merger
of Smith Residential with and into Archstone-Smith, the merger of Smith
Partnership with and into Archstone and the terms of the Archstone declaration
of trust to be in effect after completion of the merger. Representatives of
Smith Residential, Archstone and their legal advisors also discussed the manner
by which Archstone would reorganize into an UPREIT structure using one of two
alternative structures--either the merger of Archstone into a wholly-owned
subsidiary of Archstone-Smith resulting in Archstone becoming a wholly-owned
subsidiary of Archstone-Smith or an alternative structure which would involve
several more steps to reach essentially the same result.
On May 2, 2001, at a special telephonic meeting of the Archstone board, Mr.
Sellers updated the board on the status of the negotiations regarding the
proposed transaction. The Archstone board discussed the various topics related
to the proposed merger transaction, including the composition of the board of
trustees of the combined company, compensation expectations for senior
management of Smith Residential, the structure of the transaction and
organizational and operational issues that may arise in connection with
implementing the transaction.
On May 3, 2001, the Archstone board held a special meeting at which all of
the Archstone trustees, members of management and representatives of Morgan
Stanley and Mayer, Brown & Platt were present in person or by telephone
conference call. The special meeting was held in order for the Archstone board
to consider and act upon the proposed merger with Smith Residential. At this
meeting, Archstone's senior management reviewed with the board financial and
business terms of the proposed transaction. Mayer, Brown & Platt discussed the
board's fiduciary duties in considering the proposed transaction and explained
the material terms of the proposed merger agreement and related agreements,
including closing conditions, termination rights, provisions regarding break-up
fees, the primary and alternative structure and termination expenses, and
briefed the board on open items.
Following these presentations, the Archstone trustees asked numerous
questions of management and representatives of Morgan Stanley and Mayer, Brown
& Platt and discussed at length the issues raised by the presentations. After
discussion by the Archstone board of trustees concerning, among other things,
the matters described below under "--Archstone's Reasons for the Merger and the
Partnership Merger; Recommendation of the Archstone Board," the Archstone board
concluded that the proposed merger was fair to and in the best interests of
Archstone and its shareholders and unanimously approved the proposed amendment
to Archstone's declaration of trust, the reorganization of Archstone into an
UPREIT structure, including the mergers contemplated thereby, the merger
agreement, the merger and the partnership merger and all the transactions in
connection with the merger agreement on substantially the terms discussed at
the meeting. The Archstone board further resolved to recommend that the
Archstone common shareholders approve and adopt the proposals. The Archstone
board also authorized management to complete negotiations of, and execute, the
merger agreement.
On May 3, 2001, at a special meeting of the Smith Residential board of
directors at Smith Residential's headquarters at which all Smith Residential
directors were present in person or by telephone conference call, Smith
Residential management reviewed with the directors the terms and conditions of
the proposed merger agreement with Archstone. Representatives of Arthur
Andersen and Hogan & Hartson then reviewed with the board the results of their
due diligence investigation of Archstone. Representatives of Hogan & Hartson
then reviewed with the board the terms of the merger agreement and ancillary
agreements and answered questions from the directors regarding those terms. In
addition, a representative of Hogan & Hartson reviewed with the board its
fiduciary duties in considering the proposed merger transaction. After this
discussion, the Smith Residential directors determined to proceed to approve
the merger and adopt the proposed merger agreement. The initial merger
agreement provided that the parties would amend and restate such agreement at a
later date to set forth in greater detail the terms of the alternative
structure. After further discussion, the Smith Residential board of directors,
including all of its disinterested directors, on behalf of Smith Residential,
for itself and as general partner of Smith Partnership, concluded that the
proposed merger, the partnership merger and the
50
amendment to the partnership agreement of Smith Partnership, were fair to and
in the best interests of Smith Residential and its stockholders and Smith
Partnership and its unitholders, as applicable, authorized and unanimously
approved the merger agreement, the merger, the partnership merger and the
amendment to the partnership agreement of Smith Partnership, and resolved to
recommend that the Smith Residential stockholders approve and adopt the merger
agreement and the merger and that the Smith Partnership unitholders consent to
the partnership merger and the amendment to the partnership agreement of Smith
Partnership.
In acting upon the merger, the partnership merger and the amendment to the
partnership agreement of Smith Partnership, the Smith Residential board of
directors considered the interests of its directors as described below under
"--Interests of Smith Residential Directors and Executive Officers in the
Merger and the Partnership Merger." The Smith Residential board of directors
complied with the Maryland law requirements on transactions with interested
directors by providing full disclosure of the interests of certain directors
and by having the disinterested directors approve the merger, the partnership
merger and the amendment to the partnership agreement of Smith Partnership.
Under Maryland law, a contract or other transaction between a corporation and
one of its directors, or between the corporation and any entity in which the
director has a material financial interest or is a director, is not void or
voidable as a matter of Maryland law because of the existence of this
conflicting interest if specified steps are taken. Among the steps available
under Maryland law is if a majority of the disinterested directors, upon
disclosure of the interest or interests of the director, authorizes, approves
or ratifies the contract or transaction. If the contract or transaction is not
approved by the disinterested directors, or by a vote of disinterested
stockholders following disclosure of the interest or interests, the person
asserting the validity of the contract or transaction must prove in any
subsequent litigation that the contract or transaction was fair and reasonable
to the corporation at the time it was authorized, approved or ratified.
Shortly after the conclusion of the special meeting of the board of
directors of each of Smith Residential and Archstone on May 3, 2001, Smith
Residential, Smith Partnership, Archstone and Archstone-Smith executed the
merger agreement.
Mr. Gerardi resigned as president and chief executive officer of Smith
Residential effective as of May 16, 2001.
After execution of the merger agreement, the parties amended and restated
the terms of the merger agreement primarily to provide the additional details
through which the alternative structure could be implemented. At a special
meeting of the Smith Residential board of directors on May 31, 2001, at which
all Smith Residential directors were present in person or by telephone
conference call, the Smith Residential board of directors unanimously approved
the execution and delivery of the merger agreement as amended and restated.
Thereafter, on May 31, 2001, each of Smith Residential, Smith Partnership,
Archstone and Archstone-Smith executed the amended and restated merger
agreement dated as of May 3, 2001.
As a result of the proposed merger, Smith Residential abandoned its plans to
raise additional equity capital to fund operations. In order to avoid
encumbering additional Smith Partnership assets and to avoid incurring third
party financing fees, on July 27, 2001, Archstone funded a $100 million loan to
Smith Partnership. Under the terms of the loan agreement, through the maturity
date of the loan, Smith Partnership will pay interest monthly in arrears upon
the unpaid outstanding principal at an interest rate equal to the London
Interbank Offered Rate, or the average of such rates if more than one rate is
quoted, plus 100 basis points until 60 days after the termination of the merger
agreement, if applicable, and thereafter will pay interest at LIBOR plus 200
basis points. The loan matures on the earlier of the effective date of the
merger or 180 days after the merger agreement is terminated. Under the loan
agreement, Smith Partnership's (i) failure to make required principal and
interest payments, subject to its limited right to cure; (ii) default under
certain line of credit agreements; (iii) commencement of voluntary or
involuntary bankruptcy proceedings; and (iv) occurrence of an event of default
under certain mortgages or deeds of trust securing the loan, shall constitute
an event of default. Upon the occurrence of an event of default, Archstone
shall have the right to cause the entire unpaid balance under the loan to
become immediately due and payable by Smith Partnership and may, whether or not
it elects to
51
accelerate the unpaid principal balance, raise the rate of interest accruing on
the unpaid principal to LIBOR plus 600 basis points per annum. The loan may be
prepaid by Smith Partnership at anytime in whole or in part without penalty.
The loan and Smith Partnership's performance has been guaranteed by certain
property holding entities related to Smith Partnership. The guarantors'
performance is secured by specified properties having a value of approximately
$153 million. Smith Partnership may not pledge such real property as collateral
for any other loan until the loan by Archstone has been paid in full.
Archstone's Reasons for the Merger and the Partnership Merger
The Archstone board of trustees has unanimously adopted and approved the
merger agreement, the merger and the partnership merger. The Archstone board
believes that the terms of the merger agreement, the merger, the partnership
merger and the other transactions contemplated by the merger agreement,
including the amendment to the Archstone declaration of trust, the related
reorganization of Archstone into an UPREIT and the issuance of Archstone-Smith
shares to Smith Residential stockholders, are advisable and in the best
interests of Archstone and its shareholders.
Set forth below is a discussion of the material positive and negative
factors considered by the Archstone board in making its determination to adopt
and approve the merger agreement, the merger and the partnership merger. As
used in this discussion, references to the assets and business activities of
Smith Residential mean the assets and business activities of Smith Partnership.
Smith Residential has no material assets other than its interest in Smith
Partnership and it conducts all of its business activities through that
partnership and its subsidiaries.
Positive Factors Considered by the Archstone Board
In making its determination with respect to the merger agreement, the merger
and the partnership merger, the Archstone board discussed with Archstone senior
management a number of factors, including the following material positive
factors:
. the transaction will increase Archstone's presence in protected markets
such as Washington, D.C., Chicago, Boston and southeast Florida, with
access to what the Archstone board believes to be a high quality
portfolio of well-located assets in these protected markets;
. the Archstone board believes that the Smith Residential portfolio is one
of the most desirable apartment portfolios and is the largest high-rise
apartment portfolio outside of Manhattan, New York;
. the Archstone board believes that the merger transaction represented an
attractive valuation for the real estate assets based on an 8.3%
capitalization rate (using the May 3, 2001 closing price of $25.18 per
Archstone common share to value Archstone common shares to be issued in
the merger), given the geographic distribution of the Smith Residential
portfolio which is located exclusively in protected markets;
. Smith Residential's net operating income for its same-store portfolio--
meaning the group of apartments that were fully operating during the
periods being compared--has had a higher growth rate than Archstone has
had for its same-store portfolio. Therefore management believes that the
net operating income of the combined company's same-store portfolio will
grow at a greater rate than did Archstone's same-store portfolio on a
stand alone basis, which should also enhance the long-term growth rate
of Archstone's net earnings. The following table shows same-store
revenue and net operating income growth rates for each of the last three
years:
Smith
Residential Archstone
---------------- ----------------
2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ----
Revenue.................................... 7.7% 6.5% 4.8% 6.7% 3.6% 3.6%
Net operating income....................... 10.7% 8.8% 7.4% 7.7% 6.2% 5.6%
52
. the combination of the two companies creates the potential for
substantial revenue increases and approximately $7 million to $8 million
of anticipated cost synergies through the adoption of best practices of
each party and the elimination of public company costs and other
redundant expenses;
. the acquisition of the Smith Residential portfolio and management team
will add what the Archstone board believes to be well-located high-rise
assets as well as high-rise development and management capability to
allow expansion of Archstone's high-rise business into its west coast
markets;
. the transaction should result in improved liquidity for Archstone
shareholders as a result of the increased equity capitalization and the
increased shareholder base, while at the same time allowing Archstone to
retain a strong balance sheet. The combined company will have a combined
total debt to total undepreciated book capitalization ratio of 42.6%;
. the transaction will give Archstone access to another high-quality brand
name in Archstone's operating platform;
. the transaction would create the second largest publicly traded
apartment REIT and the fourth largest publicly traded REIT overall in
the United States, based on total equity market capitalization, with a
pro forma total market capitalization of approximately $9.3 billion
based on the closing market price of Archstone common shares on May 3,
2001;
. Archstone will be reorganized into a more typical UPREIT structure which
will give the combined company a greater ability to acquire assets using
a tax deferred acquisition currency;
. Archstone believes that the high quality of the portfolio of the
combined company together with Archstone-Smith's desirable national
platform will make Archstone-Smith one of the most sought after
purchasers of properties in the real estate market using UPREIT currency
and therefore will increase the opportunity of the combined company to
acquire attractive properties;
. the exchange ratio, which determines the number of Archstone-Smith
common shares required to be issued in the merger and the number of
Archstone units required to be issued in the partnership merger, is
fixed and will not be adjusted in the event of a decline in the trading
price of Archstone common shares;
. the due diligence review of Smith Residential and its assets conducted
by Archstone management and its advisors, including, among other things,
site tours of a significant number of Smith Residential's properties,
and Archstone management's favorable assessment of the high quality of
Smith Residential's assets; and
. historical and prospective information concerning Archstone's and Smith
Residential's respective businesses, operations and financial
performance, including, among other things, the earnings prospects of
Archstone and its debt service and financial obligations, both before
and after the merger.
Negative Factors Considered by the Archstone Board
The Archstone board also considered the following potentially negative
factors in its deliberations concerning the merger, the partnership merger and
the merger agreement:
. the risk that the anticipated benefits of the merger and the partnership
merger to Archstone and its shareholders may not be realized as a result
of possible changes in the real estate market in the Washington, D.C.
and other markets;
. the risk that anticipated benefits of the merger and the partnership
merger to Archstone and its shareholders may not be realized as a result
of any inability to achieve the anticipated cost savings and expense
reduction and other potential difficulties in integrating the two
companies and their respective operations;
53
. the limitations on Archstone's ability to sell the Smith Residential
properties resulting from the tax related undertakings, the tax
protection agreement and other tax protection agreements between Smith
Partnership and various unitholders to be assumed in connection with the
merger and the partnership merger as described under "The Merger
Agreement--Tax Related Undertakings of Archstone-- Assumption of Smith
Partnership Tax Protection Agreements" beginning on page 97;
. the significant cost involved in connection with completing the merger
and the partnership merger, estimated to be approximately $40 million in
the aggregate, and the substantial management time and effort required
to effect the merger and the partnership merger and integrate the
businesses of Archstone and Smith Residential;
. the estimated $0.03 dilution to Archstone's 2002 funds from operations
per share in connection with the transaction;
. the fact that the exchange ratio is fixed and will not be adjusted in
the event of an increase in the trading price of Archstone common shares
or a decrease in the trading price of Smith Residential common stock;
. the risk that the merger and the partnership merger could be viewed
negatively by investors or analysts and, as a result, the Archstone or
Archstone-Smith share price could be adversely affected;
. the risk that rating agencies may view the merger and the partnership
merger unfavorably and decrease Archstone's rating thereby potentially
increasing Archstone's cost of debt; and
. the risk that the merger and the partnership merger might not be
completed based upon the failure to satisfy covenants or closing
conditions.
The above discussion of the material factors considered by the Archstone
board is not intended to be exhaustive, but does set forth the material
positive and negative factors considered by the Archstone board. The Archstone
trustees unanimously adopted and approved the merger agreement, the merger and
the partnership merger and recommended approval of the merger agreement, the
merger and the partnership merger in light of the various factors described
above and other factors that each such member of the Archstone board felt were
appropriate. In view of the wide variety of factors considered by the Archstone
board in connection with its evaluation of the merger and the partnership
merger and the complexity of these matters, the Archstone board did not
consider it practical, and did not attempt, to quantify, rank or otherwise
assign relative weights to the specific factors it considered in reaching its
decision. Rather, the Archstone board made its recommendation based on the
totality of information presented to and the investigation conducted by it. In
considering the factors discussed above, individual trustees may have given
different weights to different factors.
Smith Residential's Reasons for the Merger and the Partnership Merger;
Recommendation of the Smith Residential Board
The Smith Residential board of directors, on behalf of Smith Residential,
for itself and in its capacity as general partner of Smith Partnership, has
unanimously adopted and approved the merger agreement, the merger, the
partnership merger and the amendment to the partnership agreement of Smith
Partnership. The Smith Residential board, on behalf of Smith Residential, for
itself and in its capacity as general partner of Smith Partnership, believes
that the merger agreement, the merger, the partnership merger, the amendment to
the partnership agreement of Smith Partnership and the other transactions
contemplated by the merger agreement are advisable and in the best interests of
Smith Residential and its stockholders and Smith Partnership and its
unitholders, as applicable. Accordingly, after careful consideration, the Smith
Residential board, on behalf of Smith Residential, for itself and in its
capacity as general partner of Smith Partnership, recommends that Smith
Partnership unitholders consent to the partnership merger and the amendment to
the partnership agreement of Smith Partnership.
54
In considering the recommendation of the Smith Residential board with
respect to the partnership merger and the amendment to the partnership
agreement of Smith Partnership, Smith Partnership unitholders should be aware
that some Smith Residential directors and executive officers have interests in
the merger, the partnership merger and the other transactions contemplated
thereby, which differ from, or are in addition to, and, therefore, may conflict
with, the interests of Smith Partnership unitholders generally. See "--
Interests of Smith Residential Directors and Executive Officers in the Merger
and the Partnership Merger" beginning on page 58.
Set forth below is a discussion of all material positive and negative
factors considered by the Smith Residential board of directors in making its
determination to adopt and approve the merger agreement, the merger and the
partnership merger. As used in this discussion, references to the assets and
business activities of Smith Residential mean the assets and business
activities of Smith Partnership. Smith Residential has no material assets other
than its interest in Smith Partnership and it conducts all of its business
activities through that partnership.
Positive Factors Considered by the Smith Residential Board
In making its determination with respect to the merger agreement, the merger
and the partnership merger, the Smith Residential board of directors discussed
with Smith Residential senior management, as well as its financial and legal
advisors, and considered a number of factors, including the following material
positive factors:
. the terms of the merger agreement, including that each share of Smith
Residential common stock will be converted into 1.975 common shares of
Archstone-Smith, which based on the implied $49.73 per share price
represents a premium of 9.15% over the closing price for Smith
Residential common stock as of May 3, 2001;
. the terms of the partnership merger, including that each Smith
Partnership common unit will be exchanged for 1.975 Archstone Class A-1
common units, which based on the implied $49.73 per Smith Partnership
Class A common unit represents a premium of 9.15% over the closing price
for Smith Residential common stock as of May 3, 2001, into which a Smith
Partnership unit is convertible on a one-for-one basis;
. the fact that holders of Smith Residential common stock currently
receive a dividend of $0.585 per share per quarter and that, as adjusted
to reflect the 1.975 Archstone-Smith common shares to be received in the
merger for each outstanding share of Smith Residential common stock,
such holders will receive a distribution of approximately $0.810 per
quarter for such share following the merger;
. a combined company would own and operate an exceptional apartment
portfolio concentrated in high barrier-to-entry markets, including more
than 70% of its property investments located in some of the nation's
most desirable protected markets, including the Washington, D.C.
metropolitan area, Boston, Chicago, the San Francisco Bay area, southern
California, southeast Florida and Seattle;
. the presence of Archstone's complementary garden apartment properties in
desirable protected geographic markets outside of markets in which Smith
Residential primarily operates its high-rise operations would result in
a strong and varied property portfolio with an expanded geographic scope
and would increase Archstone-Smith's ability to expand its high-rise
product to new markets;
. the ability to maintain Smith Residential's high-rise residential
operations as a semi-autonomous division of Archstone-Smith and the
preservation of the brand name, culture and traditions of the Smith
Residential organization, which the Smith Residential board of directors
believes add value to the Smith Residential assets;
. the strong recognition and industry respect for the Archstone brand and
the prospect of Archstone-Smith creating the preeminent residential
apartment industry brand following the merger and the partnership
merger;
55
. the ability to maintain Smith Residential's primary business operations
in the Crystal City area of Arlington, Virginia which increases the
likelihood of retaining talented employees and maintaining Smith
Residential's long-time presence in the Washington, D.C. metropolitan
area;
. the similarity of the corporate cultures and philosophies of Smith
Residential and Archstone promotes employee retention and facilitates
the integration of the companies;
. management's belief that the complementary nature of Archstone's garden
apartment operations with Smith Residential's high-rise operations
facilitates the companies' integration efforts and benefits each
company's employees;
. the reputation, strength and expertise of Archstone's management team;
. management's assessment that a merger of Smith Residential with another
entity with a complementary property portfolio and a strong presence in
among the most desirable protected geographic markets was Smith
Residential's most attractive strategic alternative, and that a
combination of Smith Residential and Archstone would be expected to
produce a combined company with enhanced, long-term, sustainable growth
due to, among other things:
-- Archstone's strong market position in some of the most desirable
protected real estate markets in the nation;
-- Archstone's internally funded expansion opportunities, which allow
for enhanced development capability and enable the national
extension of Smith Residential's high-rise business to additional
markets including, New York City, Los Angeles, San Francisco and
Seattle; and
-- the operational efficiencies expected to result from the merger,
which are estimated at $7 million dollars annually, allowing a
stronger, sustainable growth rate;
. the fact that a combined company would result in a larger, more diverse
and more liquid stockholder base for the Smith Residential stockholders,
including any Smith Partnership unitholders who receive shares of Smith
Residential common stock by converting their units into those shares
before the partnership merger or who receive Archstone-Smith shares upon
redemption of their Archstone common units after the partnership merger,
and the likelihood that the larger, more diverse stockholder base of the
combined company would result in a lower cost of capital for the
combined company, enhance liquidity and increase financial flexibility;
. the fact that two of the three representatives of Smith Residential, or
their nominees, to be elected to the Archstone-Smith board of trustees
will be nominated to continue to serve on such board for a period of ten
years, increasing the likelihood that Smith Residential stockholders'
interests will continue to be represented following the merger and the
partnership merger;
. the fact that the initial president of the Smith Residential high-rise
division of Archstone-Smith will be W.D. Minami, president of Smith
Residential, which should benefit employees of Smith Residential and
therefore help to preserve the special characteristics and value of the
Smith Residential business;
. the due diligence review of Archstone and its assets conducted by or on
behalf of Smith Residential management by its advisors, including, among
other things, site tours of a number of Archstone's properties, and
Smith Residential management's assessment of the high quality of
Archstone's assets;
. the social and economic effect on the employees of Smith Residential and
its subsidiaries, including, among other things, similar corporate
cultures and philosophies of Smith Residential and Archstone and that
the merger agreement requires Archstone-Smith to allow former Smith
Residential employees to participate in Archstone-Smith plans in
substantially the same manner as other similarly situated employees of
Archstone-Smith or, if not practicable in the determination of
Archstone-Smith, to allow former Smith Residential employees to continue
to be eligible to participate in Smith Residential employee benefit
plans;
56
. the fact that the consideration to be received by Smith Partnership
unitholders in the partnership merger will generally be a tax-free
transaction to those unitholders; and
. the likelihood that the transactions contemplated by the merger
agreement would be successfully completed.
Negative Factors Considered by the Smith Residential Board
The Smith Residential board of directors also considered the following
potentially negative factors in determining whether to adopt and approve the
merger agreement, the merger and the partnership merger.
. the fact that the consideration to be received by Smith Partnership
unitholders consists of Archstone common units, the exact number of
which is based on a fixed exchange ratio of 1.975 Archstone common units
for each Smith Partnership common unit. As a result, a decrease in the
trading price of Archstone common shares before the closing of the
merger will reduce the value of the per unit and aggregate consideration
that will be received by the Smith Partnership unitholders;
. the risk that the anticipated benefits of the merger to Smith
Residential stockholders discussed above under "--Positive Factors
Considered by the Smith Residential Board" may not be realized as a
result of possible changes in the real estate market or as a result of
potential difficulties in integrating the two companies and their
respective operations;
. the risk that the market may not perceive the combination of Smith
Residential's high-rise residential operations and Archstone's garden
apartment operations as a positive factor;
. the possibility that the public announcement of the merger and the
partnership merger would lead to a decrease in the trading price of
Archstone's common shares which, due to the fact that the consideration
to be received by Smith Residential common stockholders consists
entirely of Archstone-Smith common shares, would reduce the overall
value of the merger consideration;
. the possibility that a public announcement of the merger and the
partnership merger would make it more difficult for Smith Residential to
retain employees because of the likelihood that some Smith Residential
employees would anticipate that they would not have a position with the
combined company and would begin to search for new employment even
before the merger and the partnership merger closed;
. the estimated dilution of funds from operations per share for Archstone
common shares in 2002, which the Smith Residential board estimated to be
approximately $0.045 per share, as a result of the merger and the
partnership merger;
. the significant cost involved in connection with completing the merger
and the partnership merger, which the Smith Residential board estimated
at $40 million in the aggregate, the substantial management time and
effort required to effectuate the merger and the partnership merger and
to integrate the businesses of the companies and the related disruption
to Smith Residential's operations; and
. the termination fee of up to $95 million payable by Smith Residential
and Smith Partnership to Archstone under certain circumstances, which
might discourage some proposals to acquire Smith Residential because of
the increased price that the acquiror would have to pay.
The above discussion is not intended to be exhaustive of all factors
considered by the Smith Residential board, but does set forth the material
positive and negative factors considered by the Smith Residential board of
directors. At the May 3, 2001 and May 31, 2001 special meetings of the Smith
Residential board of directors, the board unanimously approved the merger
agreement, the merger, the partnership merger and the amendment to the
partnership agreement of Smith Partnership and recommended approval of the
partnership merger and the amendment to the partnership agreement of Smith
Partnership to the unitholders of Smith Partnership in light of the various
factors described above and other factors that each such member of the Smith
Residential board
57
of directors felt were appropriate. In view of the wide variety of factors
considered by the Smith Residential board in connection with its evaluation of
the merger and the partnership merger and the complexity of these matters, the
Smith Residential board did not consider it practical, and did not attempt, to
quantify, rank or otherwise assign relative weights to the specific factors it
considered in reaching its decision. Rather, the Smith Residential board made
its recommendation based on the totality of information presented to and the
investigation conducted by it. In considering the factors discussed above,
individual directors may have given different weights to different factors.
Trustees and Executive Officers of Archstone-Smith After the Merger
Following the merger, the six current trustees of Archstone will become
trustees of Archstone-Smith. In addition, three current directors of Smith
Residential, Messrs. Smith, Kogod and Gerardi, will become trustees of
Archstone-Smith. Mr. Smith's initial term will expire in 2003, Mr. Kogod's
initial term will expire in 2002 and Mr. Gerardi's term will expire in 2004.
Following the merger and the partnership merger, the current executive
officers of Archstone will become executive officers of Archstone-Smith. Mr.
Minami, president of Smith Residential, will become the president of the
Charles E. Smith Residential division of Archstone-Smith. It is expected that
no other officers of Smith Residential will become executive officers of
Archstone-Smith.
Interests of Smith Residential Directors and Executive Officers in the Merger
and the Partnership Merger
In considering the recommendation of the Smith Residential board, on behalf
of Smith Residential, for itself and in its capacity as general partner of
Smith Partnership, with respect to the partnership merger and the amendment to
the partnership agreement of Smith Partnership, Smith Partnership unitholders
should be aware that, as described below, some Smith Residential directors and
executive officers have interests in the merger and in the partnership merger
that differ from, or are in addition to, and, therefore, may conflict with, the
interests of Smith Partnership unitholders generally.
Trustees of Archstone-Smith After the Merger. Under the merger agreement,
Robert H. Smith, chairman of the board and chief executive officer of Smith
Residential, Robert P. Kogod, chairman of the executive committee of the board
of Smith Residential, and Ernest A. Gerardi, Jr., a Smith Residential director
and the former president and chief executive officer of Smith Residential, will
become members of the Archstone-Smith board following the merger and the
partnership merger. Mr. Smith's initial term will expire in 2003, Mr. Kogod's
initial term will expire in 2002 and Mr. Gerardi's term will expire in 2004.
Each of Messrs. Smith and Kogod, or their replacement nominees, will have the
right to be nominated to serve on the Archstone-Smith board for a period of ten
years from the date of the closing of the merger, provided that such person or
his related persons or entities continue to beneficially own at least 1,000,000
Archstone-Smith common shares. Messrs. Smith and Kogod, or their replacement
nominees, also will serve as members of the executive committee of the
Archstone-Smith board for so long as such persons have the right to be
nominated as trustees. Such persons identified above will be entitled to fees
and other compensation and participation in options, share or other benefit
plans for which trustees or officers of Archstone-Smith, as applicable, are
eligible. Messrs. Smith and Kogod have agreed not to sell any Archstone-Smith
common shares beneficially owned by them for a period of three years after
completion of the merger, subject to various exceptions.
Indemnification and Insurance. The merger agreement provides that Archstone
and Archstone-Smith will provide exculpation and indemnification for current
and former directors and officers of Smith Residential and specified
subsidiaries, including for actions taken in connection with the merger, which
is the same as the exculpation and indemnification provided by Smith
Residential and specified subsidiaries as of the date of the merger agreement.
The merger agreement also provides that Archstone and Archstone-Smith will
indemnify and hold harmless current and former directors and officers of Smith
Residential and Smith Partnership after the merger to the fullest extent
permitted by law. In addition, Archstone and Archstone-Smith have agreed to
58
provide directors' and officers' insurance covering acts or omissions occurring
before the merger, for the benefit of those individuals currently covered by
Smith Residential's insurance for a period of six years after the merger.
Equity-Based Awards. Unvested options to purchase an aggregate of 878,761
shares of Smith Residential common stock at an average exercise price of $38.22
per share previously awarded to Smith Residential directors and executive
officers will vest in connection with the merger pursuant to the plans under
which they were issued and in any event no later than the day before the merger
closes. These Smith Residential directors and executive officers also currently
hold vested options to purchase an aggregate of an additional 379,337 shares of
Smith Residential common stock at an average exercise price of $32.06. All
Smith Residential stock options will be converted in the merger into options to
purchase Archstone-Smith common shares under the terms of the merger agreement.
Under the merger agreement, holders of Smith Residential stock options will be
entitled to tender the Archstone-Smith options that they will receive in the
merger to Archstone for a cash payment equal to the excess, if any, of $49.48
per share over the exercise price of the Smith Residential stock options
multiplied by the number of shares of Smith Residential common stock converted
in the merger subject to their options, which acquisition and payment, less any
applicable withholding taxes, will be made within seven business days of the
closing of the merger. In the event that all Smith Residential directors and
executive officers tender all of their options for cash, such persons would
receive an aggregate payment from Archstone of approximately $17.2 million,
before any applicable withholding taxes. Options to purchase Archstone-Smith
common shares that are not tendered to Archstone as described above would
remain outstanding under the same terms and conditions of the Smith Residential
stock options from which such options were converted but the exercise price of
each option will be adjusted to reflect the merger and all options will be
fully vested.
The following table sets forth as of September 5, 2001 the unvested Smith
Residential stock options held by Smith Residential directors and executive
officers which will vest in connection with the merger.
Average Exercise Cash Value of
Price of Tender of
Unvested Smith Total Outstanding Outstanding Smith Outstanding Smith
Residential Smith Residential Residential Stock Residential Stock
Name Stock Options Stock Options Options Options
---- -------------- ----------------- ----------------- -----------------
Ernest A. Gerardi,
Jr. ................... 206,566 269,350 $38.08 $ 3,071,914
Roger J. Kiley, Jr...... 0 5,000 $38.00 $ 57,400
Robert P. Kogod......... 219,816 325,100 $32.96 $ 5,369,242
R. Michael McCullough... 0 5,000 $35.06 $ 72,100
Robert H. Smith......... 219,816 325,100 $32.96 $ 5,369,242
Karen Hastie Williams... 0 5,000 $38.00 $ 57,400
W.D. Minami............. 55,966 99,800 $36.85 $ 1,249,382
Alfred G. Neely......... 47,023 64,340 $37.16 $ 792,890
Charles B. Gill......... 0 0 N/A N/A
Matthew B. McCormick.... 65,996 65,966 $38.96 $ 694,101
Robert D. Zimet......... 33,608 33,608 $38.01 $ 365,631
Steve F. Hallsey........ 30,000 30,000 $45.77 $ 113,100
All directors and
executive
officers as a group (12
persons)............... 878,761 1,228,294 $35.44 $17,212,402
Severance Agreements. Smith Residential and specified subsidiaries have
entered into severance agreements with specified executive officers, other than
Mr. Smith and Mr. Kogod, that provide for the payment of severance benefits if
such executive officers are terminated from employment other than for "cause"
or if such executive officers voluntarily terminate their employment for "good
reason." These agreements currently automatically renew for consecutive one-
year terms unless there is a "change in control" in which case the term
automatically resets for a two year period from the date of the change of
control. In exchange for entering into the severance agreements, all but one
covered executive officer have agreed to a covenant not to compete for the
lesser of one year following termination of employment or the period for which
severance is paid
59
following termination, and to be subject to various confidentiality and "anti-
raid" covenants. One covered executive officer has agreed to be bound by such
provisions for the lesser of six months following termination of employment or
the period for which severance is paid following termination. Each covered
executive officer also is entitled to receive reasonable outplacement services,
an immediate vesting of all of his or her Smith Residential stock options from
the date of such change of control event and the removal of any restrictions on
any restricted stock or units held.
In the event a covered executive officer's employment is terminated
following a change in control, such as the merger, the amount of severance pay
and other benefits to which each covered executive would be entitled will be
calculated based upon his or her current base annual salary and his or her
highest annual cash bonus amount in the previous three years. The covered
executives would be entitled to a payment equal to one year's annual salary and
bonus, or two years' salary and bonus if the covered executive is terminated
within two years following the closing of the merger. The covered executives
would be entitled to continued coverage for up to one year under any medical
and other welfare plans in which the covered executive officer participated, or
two years' coverage if the covered officer is terminated within the two-year
period following the closing of the merger. If any of these payments would
constitute excess parachute payments under section 280G of the Internal Revenue
Code, the covered executive would also receive gross-up payments in an amount
sufficient to offset the 20% excise tax applicable to such amounts.
For purposes of the severance agreements, a termination following a change
in control will be considered "voluntary for good reason" if it is the direct
result of:
. a reduction in base salary, fringe benefits or bonus eligibility, except
when generally applicable to peer employees,
. a substantial reduction of responsibilities or areas of supervision or
an instruction to report to a lower level supervisor after a "change in
control,"
. a substantial increase in responsibilities or areas of supervision
without an appropriate increase in compensation, or
. after a "change in control," a required change of office location
outside of the metropolitan area in which the executive was previously
located.
Under the severance agreements, the specified executive officers of Smith
Residential, if they are terminated within the two years following the closing
of the merger, other than for cause or if they voluntarily terminate their
employment for good reason, would be entitled to receive estimated cash
payments ranging from approximately $864,000 to $1.4 million as a base amount,
or approximately $5.3 million in the aggregate. In the event that these
executive officers become entitled to tax gross-up payments as described above,
the tax reimbursement amounts could range from $0 to $493,000 per individual,
or approximately $1.3 million in the aggregate. The calculation of the
estimated cash payments under the severance agreements assumes that the
obligations under the agreements are triggered immediately upon the closing of
the merger, which they are, that the applicable persons are terminated, which
they are not currently expected to be, and that the merger will close on
October 1, 2001. The amounts described above include estimated 2001 bonuses
through the closing date. Neither Smith Residential nor Archstone has yet
determined that any tax gross-up payments would be required.
Tax Related Undertakings of Archstone. Under the Archstone declaration of
trust that will be in effect following the closing of the partnership merger,
Archstone has agreed, for the benefit of the holders of Smith Partnership
units, not to sell, exchange or otherwise dispose of, except in tax-free or
tax-deferred transactions, any of the Smith Partnership properties or any
interest therein, or any of Archstone's interest in Smith Realty Company, a
wholly owned subsidiary of Smith Partnership that provides property management
services to Smith Partnership and third parties. These restrictions, which
benefit Messrs. Smith and Kogod, among others, are effective until January 1,
2022. In addition, Archstone has agreed to maintain specified levels of
borrowings outstanding with respect to the Smith Partnership properties for the
same period, and has made other specified
60
undertakings. These provisions are intended to ensure that the holders of Smith
Partnership units will be able to continue to defer the gain that would be
recognized by them for tax purposes upon a sale by Archstone of any one or more
of the Smith Partnership properties, upon the sale by Archstone of any of its
interest in Smith Realty Company, or upon the repayment of borrowings relating
to the Smith Partnership properties. If Archstone sells any of the Smith
Partnership properties or any interest therein or its interest in Smith Realty
Company, or repays borrowings relating to the Smith Partnership properties,
Archstone may be liable for monetary damages for engaging in these
undertakings.
Employment. Messrs. Smith and Kogod will be employed by Archstone-Smith
following the closing of the merger. Mr. Smith will be paid an annual minimum
salary of $300,000 and an annual minimum bonus of $150,000 for each year during
his employment. Mr. Smith will also be entitled to receive options to purchase
100,000 Archstone-Smith common shares for each year during his term of
employment, with the number of options granted in each year being equal to
100,000 multiplied by the same percentage of the base option level as the
number of options granted to the chief executive officer of Archstone-Smith
increases or decreases in that year beyond the target amount established for
such officer. Mr. Kogod will be paid an annual minimum salary of $150,000 for
each year during his employment. Mr. Gerardi will be employed by Consolidated
Engineering Services, Inc., one of Smith Residential's non-controlled property
services subsidiaries, and will be paid an annual salary of $200,000 for each
year during his employment and an annual bonus to be determined by the
Consolidated Engineering Services, Inc. board. Mr. Gerardi will also be
entitled to maintain his existing company-provided apartment and whole life
insurance policy, both of which are to be paid by Consolidated Engineering
Services, Inc. Mr. Gerardi will also be granted options to purchase restricted,
non-voting stock of Consolidated Engineering Services, Inc. and shares of
restricted, non-voting common stock of Consolidated Engineering Services, Inc.,
although no determination has been made as to the number of shares subject to
such awards. Messrs. Smith, Kogod and Gerardi will also be able to participate
in other benefit plans generally made available to trustees and officers, as
applicable, of Archstone-Smith. In addition, Mr. Minami will become the
president of the Charles E. Smith Residential division of Archstone-Smith.
Mr. Minami will receive an annual salary of $360,000 for the balance of 2001
and for 2002, plus a target bonus for 2001 of not less than $450,000, subject
to approval by the management development and compensation committee of the
Archstone-Smith board of trustees. Mr. Minami will also be entitled to receive
an award of 250,000 restricted share units under the Archstone-Smith 2001 Long-
Term Incentive Plan. The restricted share units will be priced at the closing
price of the Archstone-Smith common shares on the day of the merger and will
vest in 25% increments beginning on the first anniversary of the merger. Mr.
Minami's current severance agreement with Smith Residential will remain in
effect, subject to the following modifications:
. if, during the first six months following the merger Mr. Minami
terminates his employment with Archstone-Smith for any reason, he will
be entitled to the benefits he would have been entitled to receive under
his existing severance agreement with Smith Residential had his
employment terminated immediately prior to the merger for good reason;
and
. Mr. Minami will not be subject to the non-competition provisions of the
severance arrangement.
Mr. Minami's severance agreement will terminate six months after the closing
of the merger and, provided he is still employed by Archstone-Smith at that
time, Mr. Minami and Archstone-Smith will enter into a change-in-control
agreement substantially similar to those then currently in effect with officers
of Archstone-Smith. Mr. Minami will be entitled to the same benefits as other
division presidents of Archstone-Smith.
Acquisition of Smith Management Construction, Inc. In connection with the
merger, Archstone will purchase 100% of the voting common stock of Smith
Management Construction, Inc., a non-controlled property service subsidiary of
Smith Partnership, for an aggregate of $70,560 in cash from Smith Management
Construction Partnership, the holder of its voting common stock. Smith
Management Construction Partnership is a general partnership controlled by Mr.
Gerardi and the children of Messrs. Smith and Kogod. Prior to the closing,
Archstone will assign Archstone's right to acquire the shares of voting common
stock to a non-controlled subsidiary of Archstone created specifically to hold
these shares.
61
Acquisition of Consolidated Engineering Services, Inc. In connection with
the partnership merger, Consolidated Engineering Services, Inc., a non-
controlled subsidiary of Smith Partnership, will undertake a recapitalization
of its capital stock. Consolidated Engineering Services Partnership, a general
partnership controlled by Mr. Gerardi and the children of Messrs. Smith and
Kogod, is currently the sole voting stockholder of Consolidated Engineering
Services, Inc. and will remain the sole voting stockholder until the closing of
the partnership merger. As a result of the recapitalization, upon the closing
of the partnership merger, Archstone, as successor to Smith Partnership by the
partnership merger, will own 51% of the outstanding voting common stock of
Consolidated Engineering Services, Inc. immediately following the
recapitalization, representing a value of $381,865, and Consolidated
Engineering Services Partnership will own 49% of the outstanding voting common
stock of Consolidated Engineering Services, Inc. Archstone, as successor to
Smith Partnership in the partnership merger, and Consolidated Engineering
Services Partnership will each own the same proportion of the outstanding
equity of Consolidated Engineering Services, Inc. immediately following the
closing of the partnership merger as Smith Partnership and Consolidated
Engineering Services Partnership owned prior to the partnership merger.
Consolidated Engineering Services Partnership will not receive any payments and
Smith Partnership will not be required to make any payments in connection with
the recapitalization of Consolidated Engineering Services, Inc. It is also
contemplated that, prior to the merger, Consolidated Engineering Services, Inc.
will issue up to an aggregate of 100,000 shares of restricted non-voting common
stock to its officers and will grant options to purchase up to an aggregate of
588,600 shares of its non-voting common stock to its directors and officers.
Such non-voting common stock will convert into voting common stock upon the
occurrence of various corporate events involving Consolidated Engineering
Services, Inc. Of this amount, it is expected that Mr. Gerardi will receive
shares of restricted stock and options to purchase shares, although no
determination has been made as to the number of shares subject to such awards.
Legal Counsel. Roger J. Kiley, Jr., a director of Smith Residential, is also
a partner in Mayer, Brown & Platt, legal counsel to Archstone and Archstone-
Smith.
Regulatory Approvals
No material federal or state regulatory requirements must be complied with
and no approvals must be obtained by Archstone, Archstone-Smith, Smith
Residential or Smith Partnership in connection with either the merger or the
partnership merger.
Accounting Treatment
Archstone and Archstone-Smith will treat the partnership merger and the
merger, respectively, as a purchase for financial accounting purposes. This
means that Archstone and Archstone-Smith, respectively, will record the assets
acquired and the liabilities assumed at their estimated fair values at the time
the partnership merger and the merger, respectively, are completed.
Restrictions on Resales by Affiliates
The Archstone common and preferred units to be issued to Smith Partnership
unitholders in the partnership merger will be transferable subject to the
restrictions contained in the Archstone declaration of trust, except for units
issued to any person who may be deemed to be an "affiliate" of Smith
Partnership within the meaning of Rule 145 under the Securities Act or who will
become an "affiliate" of Archstone within the meaning of Rule 144 under the
Securities Act after the partnership merger. See "Description of Archstone
Shares of Beneficial Interest--Transfers" beginning on page 159. The Archstone-
Smith common shares to be issued to Smith Residential common stockholders in
the merger and Smith Partnership unitholders upon redemption of their Archstone
units received in the partnership merger, in each case, will be freely
transferable under the Securities Act, except for shares issued to any person
who may be deemed to be an "affiliate" of Smith Residential, within the meaning
of Rule 145 under the Securities Act or who will become an "affiliate" of
Archstone-Smith within the meaning of Rule 144 under the Securities Act after
the merger and the partnership merger. Archstone units or Archstone-Smith
shares received by persons who are deemed to be an
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affiliate of Smith Partnership or Smith Residential, as applicable, or who
become Archstone or Archstone-Smith affiliates, as applicable, may be resold by
these persons only in transactions permitted by the limited resale provisions
of Rule 145 or as otherwise permitted under the Securities Act. Persons who may
be deemed to be affiliates of Smith Partnership or Smith Residential, as
applicable, generally include individuals or entities that, directly or
indirectly through one or more intermediaries, control, are controlled by or
are under common control with Smith Partnership or Smith Residential, as
applicable, and may include officers, directors, stockholders or unitholders of
Smith Partnership or Smith Residential. All Smith Partnership unitholders or
Smith Residential stockholders who may be deemed to be affiliates of Smith
Partnership or Smith Residential will be so advised before the completion of
the merger and the partnership merger, as applicable.
Under the merger agreement, Smith Residential will use commercially
reasonable efforts to obtain an affiliate agreement from each affiliate of
Smith Residential before the completion of the merger and the partnership
merger by which each Smith Residential affiliate will agree not to sell,
transfer, pledge or otherwise dispose of any of the Archstone-Smith common
shares received in the merger or upon a redemption of Archstone units received
in the partnership merger in violation of the Securities Act or the rules and
regulations promulgated under the Securities Act. Generally, this will require
that all sales be made as provided by Rule 145 under the Securities Act, which
in turn requires that, for specified periods, sales be made in compliance with
the volume limitations, manner of sale provisions and current information
requirements of Rule 144 under the Securities Act.
Archstone-Smith has the right to place legends on the certificates
evidencing Archstone-Smith common shares issued to Smith Residential affiliates
in the merger or upon a redemption of their Archstone units received in the
partnership merger summarizing the foregoing restrictions until a sale,
transfer, pledge or other disposition of the Archstone-Smith common shares
represented by these certificates has been registered under the Securities Act
or is made in compliance with Rule 145 under the Securities Act.
Persons who are not affiliates of Smith Residential generally may sell their
Archstone-Smith common shares without restrictions.
No Dissenters' Rights
Smith Partnership is organized under Delaware law. Under Delaware law and
the terms of the partnership agreement of Smith Partnership, Smith Partnership
unitholders have no rights to dissent and receive the appraised value of their
units in the partnership merger.
Archstone-Smith Trust 2001 Long-Term Incentive Plan
The Archstone-Smith Trust 2001 Long-Term Incentive Plan has been approved by
the Archstone-Smith board of trustees and has been approved by the sole
shareholder of Archstone-Smith. The plan will be effective upon the
reorganization of Archstone into an UPREIT. A summary of the material
provisions of the plan is set forth below. A copy of the plan is attached as
Annex C.
The plan will continue in effect until it is terminated by the Archstone-
Smith board of trustees; provided, however, that no awards may be granted under
the plan after the ten-year anniversary of the effective date, except for
awards granted pursuant to commitments entered into prior to such ten-year
anniversary. Any awards that are outstanding after plan termination will remain
subject to the terms of the plan.
Purpose
The plan has been established by Archstone-Smith for the following purposes:
. to attract and retain persons eligible to participate in the plan;
. to motivate participants, by means of appropriate incentives, to achieve
long-range goals;
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. to provide incentive compensation opportunities that are competitive
with those of other similar companies; and
. to further identify participants' interests with those of Archstone-
Smith's other shareholders through compensation that is based on
Archstone-Smith common shares, and to thereby promote the long-term
financial interest of Archstone-Smith and its subsidiaries, including
the growth in value of Archstone-Smith's equity and enhancement of long-
term shareholder return.
To achieve these objectives, the plan provides for the grant of non-qualified
options, incentive share options, share appreciation rights, bonus shares,
share units, performance shares, performance units, restricted shares and
restricted share units.
The plan also provides for the automatic grant of replacement awards in
substitution of awards outstanding upon the reorganization of Archstone into an
UPREIT under the Archstone 1997 Long-Term Incentive Plan, and as of the
effective time of the merger and the partnership merger under the Charles E.
Smith Residential Realty, Inc. Directors Stock Option Plan and the Charles E.
Smith Residential Realty, Inc. First Amended and Restated 1994 Employee Stock
and Unit Option Plan, as amended.
General
The plan is administered by a committee selected by the board of trustees of
Archstone-Smith. The committee selects from the eligible individuals those
persons to whom awards under the plan will be granted, the types of awards to
be granted and the applicable terms, conditions, performance criteria,
restrictions and other provisions of such awards. The committee may delegate
all or any portion of its responsibilities or powers under the plan to persons
selected by it, except to the extent inconsistent with Rule 16b-3 promulgated
under section 16 of the Securities Exchange Act of 1934 or other applicable
rules. Rule 16b-3 exempts employee plan transactions meeting certain
requirements from the short-swing trading profit recovery provisions of section
16. Replacement awards will be made automatically under the terms of the plan.
No more than 20,000,000 Archstone-Smith common shares may be issued to
participants and their beneficiaries under the plan, including to individuals
who are participants solely with respect to replacement awards. Any shares
allocated to an award that expires, lapses, is forfeited or terminated for any
reason without issuance of the shares, whether or not cash or other
consideration is paid to the participant in respect of such shares, may again
become subject to awards under the plan. The following additional limits apply
to awards, other than replacement awards, under the plan:
. no more than 1,000,000 common shares may be issued for options and share
appreciation rights granted to any one individual in any one calendar-
year period; and
. no more than 1,000,000 common shares may be issued for bonus shares,
share unit awards, performance share awards, performance unit awards,
restricted share awards and restricted share unit awards that are
intended to be "performance-based compensation," as described below,
granted to any one individual during any one calendar-year period.
The common shares with respect to which awards may be made under the plan will
be shares currently authorized but unissued, or currently held or subsequently
acquired by Archstone-Smith as treasury shares, including shares purchased in
the open market or in private transactions. At the discretion of the committee,
an award under the plan may be settled in cash rather than common shares.
The committee may use common shares available under the plan as the form of
payment for compensation, grants or rights earned or due under any other
compensation plans or arrangements of Archstone-Smith or a subsidiary,
including the plans and arrangements of Archstone-Smith or a subsidiary assumed
in business combinations.
64
In the event of transactions involving Archstone-Smith, including any share
dividend, share split, extraordinary cash dividend, recapitalization,
reorganization, merger, consolidation, split-up, spin-off, combination or
exchange of shares, the committee may make adjustments to the plan and awards
to preserve the benefits or potential benefits of the plan and awards. Action
by the committee may include:
. adjustment of the number and kind of shares which may be delivered under
the plan;
. adjustment of the number and kind of shares subject to outstanding
awards;
. adjustment of the exercise price of outstanding options and share
appreciation rights; and
. any other adjustments that the committee determines to be equitable.
Except as otherwise provided by the committee, awards under the plan are not
transferable except as designated by the participant by will or by laws of
descent and distribution.
All employees of Archstone-Smith and its subsidiaries are eligible to become
participants in the plan. The specific employees who initially will be granted
awards under the plan, other than those receiving replacement awards, and the
type and amount of any such awards will be determined by the committee.
Pursuant to the plan, Archstone-Smith may deduct from any payment or
distribution of shares under the plan the amount of any tax required by law to
be withheld with respect to such payment, or may require the participant to pay
such amount to Archstone-Smith prior to, and as a condition of, making such
payment or distribution. Subject to rules and limitations established by the
committee, a participant may elect to satisfy the withholding required, in
whole or in part, either by having Archstone-Smith withhold Archstone-Smith
common shares from any payment under the plan or by the participant delivering
Archstone-Smith common shares to Archstone-Smith; provided, however, that the
number of such shares used to satisfy the withholding obligation with respect
to the exercise of an option may not be more than the number required to
satisfy Archstone-Smith's minimum statutory withholding obligation, based on
minimum statutory withholding rates for Federal and state tax purposes,
including payroll taxes, that are applicable to such supplemental taxable
income.
Replacement Awards
At the effective time of the reorganization of Archstone into an UPREIT, any
prior Archstone awards outstanding under the prior Archstone plan will be
substituted with replacement awards under the plan. With respect to prior
Archstone awards, the number of common shares subject to each replacement award
will be equal to the number of Archstone common shares subject to the
corresponding prior Archstone award and, to the extent applicable, the exercise
price with respect to the replacement award will be equal to the exercise price
of the corresponding prior Archstone award.
At the effective time of the merger, any prior Smith Residential awards
outstanding under the prior Smith Residential plans will be substituted with
replacement awards under the plan. With respect to prior Smith Residential
awards, the number of common shares subject to each replacement award will be
equal to the number of shares of Smith Residential common stock that could have
been purchased, assuming full vesting, under the applicable prior Smith
Residential award multiplied by 1.975, rounded down to the nearest whole
number, and, to the extent applicable, the exercise price with respect to the
replacement award will be equal to the per share or unit exercise price of the
corresponding prior Smith Residential award divided by 1.975, rounded up to the
nearest whole cent.
Other than the number of shares and the exercise price, all replacement
awards granted pursuant to the plan will be subject to the same terms and
conditions as the related prior Archstone award or prior Smith Residential
award, as applicable.
65
Options
The committee may grant options to purchase the common shares which may be
either incentive share options or non-qualified options. The purchase price of
a common share under each option will not be less than the fair market value of
a common share on the date the option is granted. The option will be
exercisable in accordance with the terms established by the committee. The full
purchase price of each share purchased upon the exercise of any option will be
paid at the time of exercise. Except as otherwise determined by the committee,
the purchase price will be payable in cash or in common shares, valued at fair
market value as of the day of exercise, or in any combination thereof. The
committee, in its discretion, may impose such conditions, restrictions, and
contingencies on common shares acquired pursuant to the exercise of an option
as the committee determines to be desirable.
Share Appreciation Rights
The committee may grant a share appreciation right in connection with all or
any portion of a previously or contemporaneously granted option or independent
of any option grant. A share appreciation right entitles the participant to
receive the amount by which the fair market value of a specified number of
shares on the exercise date exceeds an exercise price established by the
committee, which will not be less than the fair market value of the common
shares at the time the share appreciation right is granted. Such excess amount
will be payable in common shares, in cash, or in a combination thereof, as
determined by the committee. The committee, in its discretion, may impose such
conditions, restrictions, and contingencies on common shares acquired pursuant
to the exercise of a share appreciation right as the committee determines to be
desirable.
Other Share Awards
The committee may grant the following awards:
. bonus shares--a grant of common shares in return for previously
performed services, or in return for the participant surrendering other
compensation that may be due;
. share units--a right to receive common shares in the future;
. performance shares and performance units--a right to receive common
shares or share units, or the right to receive a designated dollar value
of common shares that is contingent upon achievement of performance or
other objectives;
. restricted shares and restricted share units--a grant of common shares
and a grant of the right to receive common shares in the future, with
such shares or rights subject to a risk of forfeiture or other
restrictions that lapse upon the achievement of one or more goals
relating to completion of service by
the participant or the achievement of performance or other objectives,
as determined by the committee.
Any such awards will be subject to such conditions, restrictions and
contingencies as the committee determines.
Amendment and Termination
The plan, and any award granted under the plan, may be amended or terminated
at any time by the board of trustees of Archstone-Smith, provided that no
amendment or termination may adversely affect the rights of any participant
without the participant's written consent.
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Federal Income Tax Considerations
Under present federal income tax laws, options granted under the plan will
have the following tax consequences:
Non-Qualified Options
The grant of a non-qualified option will not result in taxable income to the
participant. Except as described below, the participant will realize ordinary
income at the time of exercise in an amount equal to the excess of the fair
market value of the shares acquired over the exercise price for those shares,
and Archstone-Smith will be entitled to a corresponding deduction. Gains or
losses realized by the participant upon disposition of such shares will be
treated as capital gains and losses, with the basis in such shares equal to the
fair market value of the shares at the time of exercise.
The exercise of a non-qualified option through the delivery of previously
acquired shares will generally be treated as a non-taxable, like-kind exchange
as to the number of shares surrendered and the identical number of shares
received under the option. That number of shares will take the same basis and,
for capital gains purposes, the same holding period as the shares that are
given up. The value of the shares received upon such an exchange that are in
excess of the number given up will be includible as ordinary income to the
participant at the time of the exercise. The excess shares will have a new
holding period for capital gains purposes and a basis equal to the value of
such shares determined at the time of exercise.
Incentive Share Options
The grant of an incentive share option will not result in taxable income to
the participant. The exercise of an incentive share option will not result in
taxable income to the participant provided that the participant was, without a
break in service, an employee of Archstone-Smith or a subsidiary during the
period beginning on the date of the grant of the option and ending on the date
three months prior to the date of exercise--one year prior to the date of
exercise if the participant is disabled, as that term is defined in the
Internal Revenue Code.
The excess of the fair market value of the shares at the time of the
exercise of an incentive share options over the exercise price is an adjustment
that is included in the calculation of the participant's alternative minimum
taxable income for the tax year in which the incentive share option is
exercised. For purposes of determining the participant's alternative minimum
tax liability for the year of disposition of the shares acquired pursuant to
the incentive share option exercise, the participant will have a basis in those
shares equal to the fair market value of the shares at the time of exercise.
If the participant does not sell or otherwise dispose of the shares within
two years from the date of the grant of the incentive share option or within
one year after receiving the transfer of such shares, then, upon disposition of
such shares, any amount realized in excess of the exercise price will be taxed
to the participant as capital gain, and Archstone-Smith will not be entitled to
any deduction for federal income tax purposes. A capital loss will be
recognized to the extent that the amount realized is less than the exercise
price.
If the foregoing holding period requirements are not met, the participant
will generally realize ordinary income, and a corresponding deduction will be
allowed to Archstone-Smith, at the time of the disposition of the shares, in an
amount equal to the lesser of the excess of the fair market value of the shares
on the date of exercise over the exercise price, or the excess, if any, of the
amount realized upon disposition of the shares over the exercise price. If the
amount realized exceeds the value of the shares on the date of exercise, any
additional amount will be taxed as capital gain. If the amount realized is less
than the exercise price, the participant will recognize no income, and a
capital loss will be recognized equal to the excess of the exercise price over
the amount realized upon the disposition of the shares.
The exercise of an incentive share option through the exchange of previously
acquired shares will generally be treated in the same manner as such an
exchange would be treated in connection with the exercise
67
of a non-qualified option. Special rules apply, however, to application of the
holding period with respect to the shares acquired upon exercise of the
incentive share option and in the case of dispositions outside of the holding
periods described above.
Replacement Awards
The grant of a replacement award to any individual will not result in
taxable income to the individual and Archstone-Smith will not be entitled to a
deduction as a result of the grant. The tax consequences upon exercise of the
replacement award are the same as described above.
Change In Control
Any acceleration of the vesting or payment of awards under the plan in the
event of a change in control in Archstone-Smith may cause part or all of the
consideration involved to be treated as an "excess parachute payment" under the
Internal Revenue Code, which may subject the participant to a 20% excise tax
and which may not be deductible by Archstone-Smith.
Tax Advice
The preceding discussion is based on federal tax laws and regulations
presently in effect, which are subject to change, and the discussion does not
purport to be a complete description of the federal income tax aspects of the
plan. A participant may also be subject to state and local taxes in connection
with the grant of awards under the plan. Archstone-Smith suggests that
participants consult with their individual tax advisors to determine the
applicability of the tax rules to the awards granted to them in their personal
circumstances.
68
THE MERGER AGREEMENT
The following is a summary of the material terms of the merger agreement,
but does not describe all the terms of the merger agreement. The full text of
the merger agreement is attached at the back of this consent solicitation
statement/prospectus as Annex A. You should read the merger agreement because
it is the legal document that governs the merger and the partnership merger.
Closing; Effective Time of the Partnership Merger and the Merger
The reorganization of Archstone into an UPREIT pursuant to which Archstone
will become a subsidiary of Archstone-Smith will occur no later than the third
business day after the satisfaction or waiver of the conditions set forth in
the merger agreement or on such other date as may be agreed in writing by
Archstone and Smith Residential. On the business day after Archstone
reorganizes into an UPREIT or as soon thereafter as is practicable, Archstone
will elect to be treated for federal income tax purposes as either a domestic
eligible entity with a single owner disregarded as a separate entity or as a
partnership. The merger and the partnership merger will occur on the business
day after Archstone makes this election or as soon thereafter as is practicable
after the satisfaction or waiver of the conditions under the merger agreement
or on another date as may be agreed in writing by Archstone and Smith
Residential. If the merger agreement, the merger and the partnership merger are
approved at the special meetings, and the unitholders of Smith Partnership
consent to the partnership merger and the amendment to the partnership
agreement of Smith Partnership, Archstone and Smith Residential currently
expect to complete the merger and the partnership merger as soon as practicable
following receipt of the necessary shareholder and unitholder approvals and
satisfaction or waiver of the conditions set forth in the merger agreement.
Following the reorganization of Archstone into an UPREIT structure,
Archstone-Smith and Smith Residential will execute and file articles of merger
with the State Department of Assessments and Taxation of Maryland relating to
the merger. As soon thereafter as is practicable, Archstone and Smith
Partnership will execute and file articles of merger with the State Department
of Assessments and Taxation of Maryland and a certificate of merger with the
Secretary of State of Delaware relating to the partnership merger. The
effective time of the merger will be the later of the acceptance for record of
the articles of merger or the time specified in the articles of merger. The
effective time of the partnership merger will be the latest of the filing of
the certificate of merger with the State of Delaware, the acceptance for record
by the State of Maryland of the articles of merger for the partnership merger
or the date and time specified in either the articles of merger or the
certificate of merger.
Archstone Reorganization
Primary Structure
Under the primary structure for reorganizing Archstone into an UPREIT,
Archstone-Smith, which is currently a wholly owned subsidiary of Archstone,
will create a wholly owned subsidiary. Archstone will then merge with the newly
created subsidiary with Archstone surviving the merger and becoming a wholly
owned subsidiary of Archstone-Smith. Holders of shares of beneficial interest
in Archstone will receive shares of beneficial interest in Archstone-Smith as
follows:
. holders of Archstone common shares will receive, for each Archstone
common share issued and outstanding immediately before the merger, one
Archstone-Smith common share;
. holders of Archstone Series A preferred shares will receive, for each
Archstone Series A preferred share issued and outstanding immediately
before the merger, one Archstone-Smith Series A preferred share;
. holders of Archstone Series C preferred shares will receive, for each
Archstone Series C preferred share issued and outstanding immediately
before the merger, one Archstone-Smith Series C preferred share;
69
. holders of Archstone Series D preferred shares will receive, for each
Archstone Series D preferred share issued and outstanding immediately
before the merger, one Archstone-Smith Series D preferred share;
. holders of Archstone Series E preferred shares, if any, will receive,
for each Archstone Series E preferred share issued and outstanding
immediately before the merger, one Archstone-Smith Series E preferred
share;
. holders of Archstone Series F preferred shares, if any, will receive,
for each Archstone Series F preferred share issued and outstanding
immediately before the merger, one Archstone-Smith Series F preferred
share; and
. holders of Archstone Series G preferred shares, if any, will receive,
for each Archstone Series G preferred share issued and outstanding
immediately before the merger, one Archstone-Smith Series G preferred
share.
The Archstone-Smith Series A, C, D, E, F and G preferred shares issued in
connection with the Archstone reorganization will have preferences, conversion
and other rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms or conditions of redemption identical to those of the
shares of the corresponding series of Archstone preferred shares, except for
changes that do not materially and adversely affect the holders of the
Archstone preferred shares. At August 31, 2001, no Archstone Series E, F or G
preferred shares were outstanding. The Series E, F and G preferred shares are
issuable upon exchange of preferred partnership interests in two limited
partnerships of which Archstone is the general partner.
Each option to acquire Archstone common shares under Archstone's 1997 Long-
Term Incentive Plan will be converted into an option to acquire the same number
of Archstone-Smith common shares under the Archstone-Smith Trust 2001 Long-Term
Incentive Plan. The options to acquire Archstone-Smith common shares will have
the same exercise price, vesting and other terms as the Archstone options for
which they are substituted. See "The Merger--Archstone-Smith Trust 2001 Long-
Term Incentive Plan."
Archstone-Smith will assume the Archstone 1987 Share Option Plan for Outside
Trustees and the Archstone 1996 Share Option Plan for Outside Trustees. Each
option to acquire Archstone common shares under the plans will remain
outstanding and will be exercisable with respect to Archstone-Smith common
shares. The exercise price, vesting and other terms of the options will remain
the same.
Holders of fractional Archstone common shares will not receive fractional
Archstone-Smith common shares. Instead, each holder of Archstone common shares
otherwise entitled to a fractional share interest in Archstone-Smith will be
paid an amount in cash, without interest, rounded to the nearest cent, with 0.5
of a cent rounded up, determined by multiplying:
. the average closing price of an Archstone common share on the New York
Stock Exchange for the 20 trading days immediately preceding the closing
date of the Archstone reorganization by
. the fraction of an Archstone-Smith common share which such holder would
otherwise be entitled to receive.
Alternative Structure
Archstone will be organized into an UPREIT through the alternative structure
only if one of the following conditions exists:
. the Archstone shareholders either disapprove or fail to approve the
proposed amendment to the Archstone declaration of trust within 110 days
after the matter is submitted for their approval or, if earlier, by
March 1, 2002; or
70
. the Archstone shareholders approve the proposed amendment to the
Archstone declaration of trust, the merger agreement, the merger and the
partnership merger, but the reorganization of Archstone into an UPREIT
through the primary structure is not consummated within 60 days after
the Archstone shareholders' approval.
Under the alternative structure for reorganizing Archstone into an UPREIT,
Archstone would form a corporation as a wholly owned subsidiary and Archstone-
Smith, which is currently a wholly owned subsidiary of Archstone, would form a
Maryland real estate investment trust as a wholly owned subsidiary. Archstone
would then merge with and into its wholly owned corporate subsidiary with the
corporation as the surviving entity. In this merger, each existing common and
preferred shareholder of Archstone would receive securities of the corporation
in the same number and of the same series as the securities they currently hold
in Archstone.
The corporation and Archstone-Smith would then enter into a share exchange
in which each existing common and preferred stockholder of the corporation
would receive securities of Archstone-Smith in the same number and of the same
series as the securities they held in the corporation.
The corporation would then merge with and into the Maryland real estate
investment trust with the Maryland real estate investment trust as the
surviving entity. In connection with this merger, all of the existing shares of
common stock and preferred stock of the corporation would be cancelled. The
Maryland real estate investment trust would issue to its parent, Archstone-
Smith, a number and series of common and preferred shares of beneficial
interest such that the number and series of common and preferred shares of
beneficial interest of the Maryland real estate investment trust is equal to
the number and series of shares of common and preferred stock in the
corporation being cancelled in this merger. The former holders of Archstone
common and preferred shares would receive securities of Archstone-Smith in the
same number and of the same series as the securities they held in Archstone.
Holders of fractional Archstone common shares will not receive fractional
Archstone-Smith common shares. Instead, each holder of Archstone common shares
otherwise entitled to a fractional share interest in Archstone-Smith will be
paid an amount in cash, without interest, rounded to the nearest cent, with 0.5
of a cent rounded up, determined by multiplying:
. the average closing price of an Archstone common share on the New York
Stock Exchange for the 20 trading days immediately preceding the closing
date of the Archstone reorganization by
. the fraction of an Archstone-Smith common share which such holder would
otherwise be entitled to receive.
The end result of this alternative structure is essentially the same as that
in the primary structure. Archstone would become a wholly owned subsidiary of
Archstone-Smith and each existing common and preferred shareholder of Archstone
would receive common or preferred shares of Archstone-Smith, as applicable, as
described above under "--Primary Structure." Additionally, holders of options
to acquire Archstone common shares or shares of Smith Residential common stock
will be treated no differently than under the primary structure.
Merger Consideration and Partnership Merger Consideration
In the partnership merger:
. holders of Class A common units in Smith Partnership, other than
Archstone-Smith, as successor to Smith Residential as a result of the
merger, will receive, for each Smith Partnership Class A common unit
issued and outstanding immediately before the partnership merger, 1.975
Archstone Class A-1 common units, rounded to the nearest whole unit,
with 0.5 of a unit rounded up;
. holders of Class B common units in Smith Partnership will receive for
each Smith Partnership Class B common unit issued and outstanding
immediately before the partnership merger, 1.975 Archstone Class B
common units, rounded to the nearest whole unit, with 0.5 of a unit
rounded up;
71
. Archstone-Smith, as successor to Smith Residential as a result of the
merger, will receive, for each Smith Partnership Class A common unit
issued and outstanding held by it immediately before the partnership
merger, 1.975 Archstone Class A-2 common units, rounded to the nearest
whole unit, with 0.5 of a unit rounded up;
. the Series A preferred units of Smith Partnership held by Archstone-
Smith will be exchanged for an equivalent number of Series H preferred
units of Archstone;
. the Series C preferred units of Smith Partnership held by Archstone-
Smith will be exchanged for an equivalent number of Series I preferred
units of Archstone;
. the Series E preferred units of Smith Partnership held by Archstone-
Smith will be exchanged for an equivalent number of Series J preferred
units of Archstone;
. the Series F preferred units of Smith Partnership held by Archstone-
Smith will be exchanged for an equivalent number of Series K preferred
units of Archstone; and
. the Series G preferred units of Smith Partnership held by Archstone-
Smith will be exchanged for an equivalent number of Series L preferred
units of Archstone.
In the merger:
. holders of Smith Residential common stock will receive, for each share
of Smith Residential common stock issued and outstanding immediately
before the merger, 1.975 Archstone-Smith common shares;
. holders of Smith Residential Series A preferred stock will receive, for
each share of Smith Residential Series A preferred stock issued and
outstanding immediately before the merger, one Archstone-Smith Series H
preferred share;
. holders of Smith Residential Series C preferred stock will receive, for
each share of Smith Residential Series C preferred stock issued and
outstanding immediately before the merger, one Archstone-Smith Series I
preferred share;
. holders of Smith Residential Series E preferred stock will receive, for
each share of Smith Residential Series E preferred stock issued and
outstanding immediately before the merger, one Archstone-Smith Series J
preferred share;
. holders of Smith Residential Series F preferred stock will receive, for
each share of Smith Residential Series F preferred stock issued and
outstanding immediately before the merger, one Archstone-Smith Series K
preferred share; and
. holders of Smith Residential Series G preferred stock will receive, for
each share of Smith Residential Series G preferred stock issued and
outstanding immediately before the merger, one Archstone-Smith Series L
preferred share.
Except as otherwise agreed, the merger and the partnership merger will be
completed on the closing date of the merger with the partnership merger
occurring at least one hour after the merger. Upon conversion of the
outstanding shares of Smith Residential common stock and preferred stock into
the merger consideration, the Smith Residential common stock and preferred
stock will be cancelled and retired and will cease to exist.
Treatment of Smith Residential Stock Options
Each Smith Residential stock option outstanding under the Charles E. Smith
Residential Realty, Inc. Directors Stock Option Plan and each award outstanding
under the Charles E. Smith Residential Realty, Inc. First Amended and Restated
1994 Employee Stock and Unit Option Plan, as amended, whether or not then
vested or exercisable, will become fully vested immediately prior to the date
on which the Smith Residential stockholders approve the merger agreement and
the merger. Each outstanding Smith Residential stock option will be
automatically converted upon the completion of the merger into an option to
purchase Archstone-Smith
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common shares under the Archstone-Smith Trust 2001 Long-Term Incentive Plan.
The substituted Archstone-Smith option will permit its holder to purchase a
number of Archstone-Smith common shares equal to the number of shares of Smith
Residential common stock that could have been purchased, under the
corresponding Smith Residential stock option, multiplied by 1.975, rounded down
to the nearest whole number of shares. The exercise price per Archstone-Smith
common share of the substituted option will be equal to the per-share option
exercise price specified in the Smith Residential stock option divided by
1.975, rounded up to the nearest whole cent. Each substituted option will
otherwise be subject to the same terms and conditions as the corresponding
Smith Residential stock option. However, the exercise price of each option will
be adjusted to reflect the merger and all options will be fully vested. For a
description of the Archstone-Smith Trust 2001 Long-Term Incentive Plan, see
"The Merger and the Partnership Merger--Archstone-Smith Trust 2001 Long-Term
Incentive Plan" beginning on page 63.
Under the merger agreement, Archstone will offer to purchase, subject to the
completion of the merger and the partnership merger, all Smith Residential
awards which have been converted into Archstone-Smith options for an amount in
cash, less applicable withholding taxes, equal to:
. the excess, if any, of $49.48 over the exercise price of the Smith
Residential stock option, multiplied by
. the number of shares of Smith Residential common stock subject to that
Smith Residential stock option.
Options to purchase Archstone-Smith common shares that are not tendered to
Archstone as described above would remain outstanding under their terms,
however, the exercise price of each option will be adjusted to reflect the
merger and all options will be fully vested.
Representations and Warranties of Archstone, Archstone-Smith, Smith Residential
and Smith Partnership
The merger agreement contains customary representations and warranties by
each of Smith Residential, Smith Partnership, Archstone and Archstone-Smith
relating to, among other things:
. due organization and good standing;
. capital structure;
. authorization to enter into the merger agreement and to consummate the
merger or the partnership merger, as applicable;
. enforceability of the merger agreement;
. no breach of organizational documents or material agreements as a result
of the merger agreement or the consummation of the merger or the
partnership merger, as applicable;
. required governmental and third-party consents;
. compliance with SEC reporting requirements;
. no material undisclosed liabilities;
. no changes since December 31, 2000 that would have a material adverse
effect;
. no material legal proceedings;
. real property;
. environmental matters;
. tax matters, including qualification as a REIT;
73
. finders' fees;
. compliance with laws;
. contracts and debt instruments;
. receipt of opinion of financial advisor;
. exemption from anti-takeover statutes;
. inapplicability of the Investment Company Act of 1940; and
. required stockholder and unitholder approvals.
In addition to these representations and warranties made by all parties to
the merger agreement, the merger agreement contains additional representations
and warranties made by each of Smith Residential and Smith Partnership relating
to, among other things:
. disclosure of all related party transactions;
. appropriate funding of employee benefit plans and compliance with
applicable regulations;
. disclosure of all payments to employees, officers and directors as a
result of the merger or the partnership merger or a termination of
service after the merger or the partnership merger; and
. action by Smith Residential's board of directors to render the
stockholder rights plan inapplicable to the merger and the partnership
merger.
Conduct of Business Pending the Merger and the Partnership Merger
Until the completion of the merger and the partnership merger, Archstone,
Smith Residential and Smith Partnership have each agreed that, unless permitted
by obtaining the other party's prior written consent or except as otherwise
expressly contemplated by the merger agreement, it will, and will cause its
subsidiaries to, among other things:
. conduct its business only in the ordinary course and in a manner which
is substantially consistent with past practice;
. use commercially reasonable efforts to preserve intact its business
organizations and goodwill;
. use commercially reasonable efforts to keep available the services of
its officers and employees, provided that, in the case of Smith
Residential, such efforts do not require additional compensation;
. confer on a regular basis with the other party to report material
operational matters and, subject to the non-solicitation provision of
the merger agreement as discussed in "--No Solicitation by Smith
Residential" below, any proposals to engage in material transactions;
. promptly notify the other party of the occurrence or existence of any
circumstance, event, occurrence, change or effect that has had or would
reasonably be expected to have a material adverse effect on the
business, properties, assets, financial condition or results of
operations of the party providing such notice and its subsidiaries taken
as a whole;
. promptly deliver to the other party true and correct copies of any
report, statement, schedule or other document filed with the SEC;
. maintain its books and records in accordance with generally accepted
accounting principles consistently applied, and not change any of its
methods, principles or practices of accounting in any material manner,
except as required by the SEC, applicable law or generally accepted
accounting principles;
74
. duly and timely file all reports, tax returns and other documents
required to be filed with federal, state, local and other authorities,
subject to extensions permitted by law, provided that notice of the
party's availing itself to such extension is provided to the other party
and that such extensions do not adversely affect its status as a REIT
under the Internal Revenue Code; and
. maintain in full force and effect insurance coverage substantially
similar to insurance coverage maintained on the date of the merger
agreement.
In addition, pending the merger and the partnership merger, Archstone, Smith
Residential and Smith Partnership have each agreed that, unless permitted by
obtaining the other party's prior written consent or except as otherwise
expressly contemplated by the merger agreement, it will not, and will cause its
subsidiaries not to, among other things:
. unless required by law or necessary either to preserve a party's status
as a REIT or to qualify or preserve the status of any subsidiary of a
party as a partnership for federal income tax purposes, as a qualified
REIT subsidiary or as a taxable REIT subsidiary as defined under the
Internal Revenue Code, as the case may be:
-- make or rescind any express or deemed election relating to taxes; or
-- change in any material respect any of its methods of reporting
income or deductions for federal income tax purposes from those
employed in the preparation of its federal income tax returns that
have been filed for prior taxable years, except as may be required
by applicable law or except for changes that are reasonably expected
not to have a material adverse effect on Archstone and its
subsidiaries or Smith Residential and its subsidiaries,
respectively;
. amend its organizational documents except in specified instances,
including, in the case of Archstone, the proposed amendment to
Archstone's declaration of trust and the amendment and restatement of
its charter documents in connection with the transactions contemplated
by the merger agreement;
. classify or reclassify any unissued shares of beneficial interest, with
respect to Archstone, or shares of stock, with respect to Smith
Residential, except in specified circumstances;
. make any change in the number of shares of beneficial interest with
respect to Archstone, and the number of shares of stock, membership
interests or units with respect to Smith Residential and Smith
Partnership, issued and outstanding, except in specified instances;
. authorize, declare, set aside or pay any dividend, or make any other
distribution or payment with respect to Archstone common or preferred
shares or the Smith Residential common or preferred stock or the common
or preferred units of Smith Partnership, except quarterly distributions,
with respect to Smith Residential common stock and Archstone common
shares, or regular distributions under the partnership agreement of
Smith Partnership, redemptions of Smith Partnership units under the
partnership agreement of Smith Partnership where solely Smith
Residential common stock is used and in connection with the use of Smith
Residential common stock to pay the exercise price or tax withholding in
connection with equity-based employee benefit plans, or as necessary to
maintain REIT status and avoid corporate level taxation with respect to
any undistributed income or gain;
. directly or indirectly redeem, purchase or acquire any shares of capital
stock or any option, warrant or right to acquire, or security
convertible into, shares of capital stock, of Archstone or units of
partnership interest of Smith Residential or any Smith Residential
subsidiary, other than the use of Archstone common stock in connection
with equity-based employee benefit plans or other than redemptions of
Smith Partnership units under the partnership agreement of Smith
Partnership where solely Smith Residential common stock is used, the use
of Smith Residential common stock to pay the exercise price or tax
withholding in connection with equity-based employee benefit plans or as
necessary to maintain REIT status and avoid corporate level taxation
with respect to any undistributed income or gain;
75
. adopt any new employee benefit plan, policy, program or arrangement, or
amend any existing employee plans or rights, except in specified
instances;
. settle any stockholder derivative or class action claims arising out of
or in connection with any of the transactions contemplated by the merger
agreement;
. with respect to Archstone only, enter into or agree to effect:
-- any merger, acquisition, consolidation, reorganization or other
business combination with any third party in which Archstone is not
the surviving party to the transaction, or
-- any merger, acquisition, exchange offer or other business
combination with a third party in which Archstone is the surviving
party that would result in the issuance of equity securities
representing in excess of 15% of the outstanding Archstone common
shares on the date any business combination is entered into or
agreed to;
unless, in either case, the business combination is approved by
Smith Residential, which approval will not be unreasonably withheld
or delayed, or
. authorize or publicly announce an intention to do any of the prohibited
actions in this "Conduct of Business Pending the Merger and the
Partnership Merger" section, or enter into any contract, agreement,
commitment or arrangement to do any of the foregoing prohibited actions.
Until the completion of the merger and the partnership merger, each of Smith
Residential and Smith Partnership has agreed that, unless permitted by
obtaining Archstone's prior written consent or except as contemplated by the
merger agreement, it will not, and will cause its subsidiaries not to, among
other things:
. unless required by law or necessary to preserve Smith Residential's
status as a REIT or to qualify or preserve the status of any subsidiary
of Smith Residential as a partnership for federal income tax purposes,
as a qualified REIT subsidiary or as a taxable REIT subsidiary as
defined under the Internal Revenue Code, as the case may be, settle or
compromise any material claim, action, suit, litigation, proceeding,
arbitration, investigation, audit or controversy relating to taxes,
except where such settlement or compromise will not materially and
adversely affect Smith Residential and its subsidiaries taken as a
whole;
. acquire, enter into any option to acquire, or exercise an option or
other right or election or enter into any commitment for the acquisition
of any real property, except as permitted in a property capital budget
approved in writing by Archstone, or transactions involving
consideration of less than $10,000,000 in the aggregate for all such
transactions;
. encumber assets, commence construction of or enter into any commitment
to develop or construct real estate projects, except for specified
ongoing renovations or capital repair projects or in the ordinary course
of its leasing activities consistent with past practice;
. incur or enter into any commitment to incur additional debt, except for
refinancings of specified debt in the ordinary course of its business
consistent with past practices and on commercially reasonable terms,
working capital under its revolving line(s) of credit or other debt that
is secured by a second mortgage on any property of Smith Residential or
its subsidiaries and commitments for debt for specified purposes so long
as their consolidated debt does not exceed specified amounts;
. materially modify, amend or terminate, or enter into any commitment to
materially modify, amend or terminate, any debt in existence on the date
of the merger agreement, except in specified instances;
. grant options or any other rights or commitments relating to its shares
of capital stock, membership interests or units, or any security
convertible into its shares of capital stock, membership interests or
units, or any security the value of which is measured by shares of
beneficial interest, or any security subordinated to the claim of its
general creditors, except in specified instances;
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. amend or waive any rights under any options or other stock rights;
. sell, lease, mortgage, subject to lien or otherwise dispose of any real
property, except in specified instances, in the ordinary course of
business and in connection with real property that is the subject of a
binding contract in existence on May 3, 2001, or in connection with
leasing activities consistent with past practice and good business
judgment;
. sell, lease, mortgage, subject to lien or otherwise dispose of any
personal property or intangible property, except in the ordinary course
of business and as is not material, individually or in the aggregate;
. make any loans, advances or capital contributions to, or investments in,
any other person, except in specified instances;
. enter into any new, or amend or supplement any existing, contract, lease
or other agreement with Smith Management Construction, Inc. or
Consolidated Engineering Services, Inc.;
. pay, discharge or satisfy any claims, liabilities or obligations whether
absolute, accrued, asserted or unasserted, contingent or otherwise,
except in specified instances;
. guarantee the debt of another person, enter into any "keep well" or
other agreement to maintain any financial statement condition of another
person or enter into any arrangement having the same economic effect,
except in specified instances;
. enter into any commitment with any officer, director or affiliate of
Smith Residential or any of its subsidiaries or Smith Management
Construction, Inc. or Consolidated Engineering Services, Inc., or with a
consultant, except in specified instances;
. increase any compensation, pay any bonuses or enter into or amend any
employment, severance or other arrangement with any of its officers,
directors or employees earning more than $100,000 per year, other than
as required by any contract or employee plan;
. change the ownership of any of its subsidiaries or Smith Management
Construction, Inc. or Consolidated Engineering Services, Inc., except in
specified instances;
. accept a promissory note in payment of the exercise price payable under
any option to purchase shares of Smith Residential common stock;
. enter into any "tax protection agreement";
. settle or compromise any material federal, state, local or foreign tax
liability; or
. authorize or publicly announce an intention to do any of the prohibited
actions in this "Conduct of Business Pending the Merger" section, or
enter into any contract, agreement, commitment or arrangement to do any
of the foregoing prohibited actions.
Pre-Merger Dividends and Distributions
Regular Dividends
Under the merger agreement, Smith Residential and Smith Partnership are
permitted to continue to pay regular quarterly dividends and distributions on
their common stock and units, other than preferred units, as applicable, of
$0.585 per share or unit and on its preferred stock or units, as applicable, at
the stated rate. On April 17, 2001, Smith Residential declared a dividend of
$0.585 per share payable on May 10, 2001 to holders of record of its common
stock on May 2, 2001. Smith Partnership declared a distribution of $0.585 per
unit payable on May 10, 2001 to holders of record of its common units on May 2,
2001. Smith Residential and Smith Partnership currently intend to continue to
pay regular quarterly dividends or distributions for any additional quarterly
periods ending before the closing of the merger and the partnership merger.
77
Final Dividend
In addition to regular quarterly distributions, as described above, the
merger agreement provides that Smith Residential will declare a final dividend
to holders of shares of Smith Residential common stock, and each series of
Smith Residential preferred stock, if and to the extent required by the terms
of the preferred stock, in an amount equal to the minimum amount necessary for
Smith Residential to maintain its REIT status and satisfy the REIT distribution
requirements under section 857(a)(1) of the Internal Revenue Code and to avoid
the payment of corporate level tax with respect to any undistributed income or
gain for Smith Residential's short taxable year ending at the time of the
merger. Section 857(a)(1) requires a REIT to distribute to its stockholders
each taxable year an amount equal to 90% of its "REIT taxable income." In
addition, a REIT is required to pay tax on any income or gain that it does not
distribute to its shareholders, even if it satisfies the 90% distribution
requirement.
If Smith Residential pays a pre-merger dividend to satisfy the distribution
requirements described above, Archstone will be entitled to declare a dividend
to holders of Archstone common shares in an amount per share equal to the
amount per share of the pre-merger dividend paid by Smith Residential to
holders of Smith Residential common stock, divided by 1.975.
If Smith Residential and Archstone declare pre-merger dividends to satisfy
the REIT distribution requirements as described above, the Smith Residential
and Archstone dividends will be paid on the last business day before the
closing of the merger. The record date for the Archstone and Smith Residential
dividends will also be on the last business day before the closing of the
merger.
If Smith Residential declares a pre-merger dividend to satisfy the REIT
distribution requirements as described above, Smith Partnership will
simultaneously declare a distribution to the holders of common units of Smith
Partnership in an amount per unit equal to the dividend per share to be paid to
the holders of Smith Residential common stock, together with any distributions
required to be paid to holders of preferred units of Smith Partnership because
of any of the dividends described above. The record date for the Smith
Partnership distribution will be on the last business day before the closing of
the partnership merger. If the terms of any Archstone preferred shares require
the payment of a dividend because of the corresponding dividends to holders of
Archstone common shares, Archstone will declare the required dividends and
distributions.
Conditions to the Merger and the Partnership Merger
Conditions to Each Party's Obligations to Effect the Merger and the
Partnership Merger
The obligations of Smith Residential, Smith Partnership, Archstone and
Archstone-Smith to complete the merger and the partnership merger are subject
to the satisfaction or, where permissible, waiver of the following conditions:
. the approval of the merger and the merger agreement, as applicable, by
the affirmative vote of the holders of:
-- at least a majority of the outstanding Archstone common shares;
-- at least two-thirds of the outstanding shares of Smith Residential
common stock; and
. the approval of the partnership merger by the consent of at least a
majority of the outstanding common units of Smith Partnership, including
common units owned by Smith Residential;
. the approval of the amendment to the partnership agreement of Smith
Partnership by at least a majority of the outstanding common units of
Smith Partnership, excluding common units owned by Smith Residential;
. the waiting period, if any, under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 will have expired or been terminated;
78
. the New York Stock Exchange will have approved for listing the
Archstone-Smith common shares, the Archstone-Smith Series A preferred
shares, the Archstone-Smith Series C preferred shares and the Archstone-
Smith Series D preferred shares to be issued in the merger;
. the registration statement on Form S-4 of which this consent
solicitation statement/prospectus forms a part will have become
effective and will not be the subject of any stop order or proceedings
by the SEC seeking a stop order;
. the registration statement on Form S-4 relating to the merger of which
the joint proxy statement/ prospectus forms a part will have become
effective and will not be the subject of any stop order or proceedings
by the SEC seeking a stop order;
. no temporary restraining order, preliminary or permanent injunction or
other order issued by any court of competent jurisdiction or other legal
restraint or prohibition preventing the completion of the Archstone
reorganization, the merger or the partnership merger, or any of the
other transactions contemplated by the merger agreement will be in
effect; and
. Archstone and Archstone-Smith will have received all state securities or
"blue sky" permits and other authorizations necessary to issue the
Archstone-Smith common and preferred shares issuable in the Archstone
reorganization and the merger and the Archstone common and preferred
units issuable in the partnership merger.
Conditions to the Obligations of Archstone-Smith and Archstone to Effect the
Merger and the Partnership Merger
The obligations of Archstone and Archstone-Smith to complete the merger and
the partnership merger are subject to the satisfaction or, where permissible,
waiver of the following conditions:
. each of the representations and warranties of Smith Residential and
Smith Partnership contained in the merger agreement, disregarding
exceptions relating to materiality or a Smith Residential material
adverse effect, as described below, will be true and correct as of the
date of the merger agreement and as of the closing of the merger and the
partnership merger except:
-- to the extent that these representations and warranties are
expressly limited by their terms to another date, in which case
these representations and warranties will be true and correct as of
that other date; and
-- where the failure of these representations and warranties to be true
and correct would not, individually or in the aggregate, reasonably
be expected to have a Smith Residential material adverse effect, as
described below;
. Smith Residential and Smith Partnership will have performed in all
material respects all obligations required to be performed by them under
the merger agreement at or before the completion of the merger and the
partnership merger;
. since May 3, 2001, there will have been no Smith Residential material
adverse effect, as described below;
. Archstone will have received a certificate of an officer of Smith
Residential certifying to each of the above;
. Archstone will have received an opinion, dated as of the closing date of
the merger and the partnership merger, from counsel:
-- to Smith Residential relating to the REIT status of Smith
Residential and the partnership status of Smith Partnership;
-- to Archstone relating to the REIT status of Archstone and Archstone-
Smith;
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-- to Archstone relating to the federal income tax treatment of the
merger and the partnership merger; and
-- to Archstone relating to the federal income tax treatment of the
reorganization of Archstone into an UPREIT.
. Archstone will have received a comfort letter from Arthur Andersen LLP;
. all of the voting shares of Smith Management Construction, Inc. will
have been transferred to an Archstone subsidiary designated by
Archstone;
. the recapitalization of Consolidated Engineering Services, Inc. as
described in "--Acquisition of Consolidated Engineering Services, Inc."
will have occurred; and
. each of Messrs. Robert H. Smith and Robert P. Kogod will have entered
into the shareholders' agreement with Archstone and Archstone-Smith.
As used in the merger agreement, a "Smith Residential material adverse
effect" means any circumstance, event, occurrence, change or effect that is
materially adverse to the business, properties, assets (tangible or
intangible), financial condition or results of operations of Smith Residential,
Smith Partnership and the Smith Residential subsidiaries, taken as a whole,
except, in each case, as a result of:
. changes in general economic conditions nationally or regionally;
. changes affecting the real estate industry generally which do not affect
Smith Residential or Smith Partnership, as the case may be, materially
disproportionately relative to other participants in the real estate
industry similarly situated; or
. in and of itself and without the occurrence of any other Smith
Residential material adverse effect, changes in the trading prices of
Smith Residential common stock or any series of Smith Residential
preferred stock.
Conditions to the Obligations of Smith Residential and Smith Partnership to
Effect the Merger and the Partnership Merger
The obligations of Smith Residential and Smith Partnership to complete the
merger and the partnership merger are subject to the satisfaction or, where
permissible, waiver of the following conditions:
. each of the representations and warranties of Archstone and Archstone-
Smith contained in the merger agreement, disregarding exceptions
relating to materiality or an Archstone material adverse effect, as
described below, will be true and correct as of the date of the merger
agreement and as of the closing of the merger and the partnership merger
except:
-- to the extent that these representations and warranties are
expressly limited by their terms to another date, in which case
these representations and warranties will be true and correct as of
that other date; and
-- where the failure of these representations and warranties to be true
and correct would not reasonably be expected to have an Archstone
material adverse effect, as described below;
. Archstone and Archstone-Smith will have performed in all material
respects all obligations required to be performed by them under the
merger agreement at or before the completion of the merger and the
partnership merger;
. since May 3, 2001, there will have been no Archstone material adverse
effect, as described below;
. Smith Residential will have received a certificate of an officer of
Archstone and Archstone-Smith certifying to each of the foregoing;
80
. Smith Residential will have received opinions, dated as of the closing
date of the merger and the partnership merger from counsel:
-- to Archstone relating to the REIT status of Archstone and Archstone-
Smith;
-- to Archstone relating to the federal income tax treatment of the
reorganization of Archstone into an UPREIT;
-- to Archstone relating to the treatment of Archstone as a partnership
for federal income tax purposes immediately prior to, and at the
time of, the partnership merger;
-- to Smith Residential relating to the federal income tax treatment of
the merger and the partnership merger;
. Smith Residential and Smith Partnership will have received a comfort
letter from KPMG LLP;
. Archstone will have properly filed an election with the IRS to be
treated as a domestic eligible entity with a single owner disregarded as
a separate entity or as a partnership for federal income tax purposes;
. the reorganization of Archstone into an UPREIT will have been completed
not less than two days prior to the closing date of the merger;
. Archstone will have completed a restructuring of assets in which it or
any of its subsidiaries owns an interest that on the day after the
merger closing would be considered owned by Archstone-Smith pursuant to
applicable Treasury regulations so that Archstone-Smith will satisfy all
of the asset requirements applicable to REITs; and
. Archstone and Archstone-Smith will have entered into the shareholders'
agreement with Messrs. Smith and Kogod.
As used in the merger agreement, an "Archstone material adverse effect"
means any circumstance, event, occurrence, change or effect that is materially
adverse to the business, properties, assets (tangible or intangible), financial
condition or results of operations of Archstone and the Archstone subsidiaries,
taken as a whole, except, in each case, as a result of:
. changes in general economic conditions nationally or regionally;
. changes affecting the real estate industry generally which do not affect
Archstone materially disproportionately relative to other participants
in the real estate industry similarly situated; or
. in and of itself and without the occurrence of any other Archstone
material adverse effect, changes in the trading prices of Archstone
common shares or any series of Archstone preferred shares.
No Solicitation by Smith Residential or Smith Partnership
Smith Residential has agreed, for itself and for Smith Partnership, that
neither Smith Residential nor any Smith Residential subsidiary will, and Smith
Residential will use its best efforts to cause its officers, directors,
employees, affiliates, agents, investment bankers, financial advisors,
attorneys, accountants, brokers, finders, consultants or other agents or
representatives, which we collectively refer to as "Smith Residential's
representatives," not to:
. invite, initiate, solicit or encourage, directly or indirectly, any
inquiries, proposals, discussions or negotiations or the making or
implementation of any proposal or offer, including any proposal or offer
to its stockholders, with respect to an "alternative acquisition
proposal," as defined below;
. engage in any discussions or negotiations with or provide any
confidential or non-public information or data to, or afford access to
properties, books or records to, any person relating to, or that may
reasonably be expected to lead to, an alternative acquisition proposal;
81
. enter into any letter of intent, agreement in principle or agreement
relating to an alternative acquisition proposal;
. propose publicly to agree to do any of the foregoing; or
. otherwise facilitate any effort or attempt to make or implement an
alternative acquisition proposal, including by amending or granting any
waiver under the Smith Residential stockholder rights plan.
Smith Residential has agreed, for itself and for Smith Partnership, that it
will:
. immediately cease and cause to be terminated any existing activities,
discussions or negotiations with any persons or entities conducted
before the merger agreement with respect to any alternative acquisition
proposal, and inform each Smith Residential representative and cause
each of them to comply with this obligation;
. request that each person, if any, that has executed a confidentiality
agreement in the twenty-four months before the date of the merger
agreement in connection with the consideration by the person of any
alternative acquisition proposal to return or destroy all confidential
information furnished to that person by or on behalf of Smith
Residential and its subsidiaries; and
. notify Archstone promptly if Smith Residential or any of its
subsidiaries or any Smith Residential representative receives:
-- an alternative acquisition proposal or any amendment or change in
any previously received alternative acquisition proposal;
-- any request for confidential or nonpublic information or data
relating to, or for access to the properties, books or records of,
Smith Residential or any of its subsidiaries by any person that has
made or to its knowledge may be considering making an alternative
acquisition proposal; or
-- any oral or written expression that any activities, discussions or
negotiations described above are sought to be initiated or continued
with it;
and, as applicable, include in that notice the identity of the person
making the alternative acquisition proposal, indication or request,
the material terms of that alternative acquisition proposal,
indication or request and, if in writing, promptly deliver to
Archstone copies of any proposal, indication or request along with
all other related documentation and correspondence and keep Archstone
informed of the status and material terms, including all changes to
the status or material terms, of any alternative acquisition
proposal, indication or request.
However, under specified circumstances, Smith Residential, including in its
capacity as the sole general partner of Smith Partnership, may furnish
information to, or enter into discussions or negotiations with, any person that
makes a bona fide written alternative acquisition proposal after the date of
the merger agreement which was not invited, initiated, solicited or encouraged,
directly or indirectly, by Smith Residential or any of its subsidiaries,
including Smith Partnership, provided that:
. a majority of the board of directors of Smith Residential determines in
good faith, after consultation with its financial advisors of nationally
recognized reputation and outside legal counsel, that the alternative
acquisition proposal is reasonably likely to result in a "superior
acquisition proposal," as defined below;
. each of Smith Residential and Smith Partnership complies with all its
obligations under the merger agreement;
. before furnishing that information to, or entering into discussions or
negotiations with, that person, Smith Residential provides written
notice to Archstone which states that it is furnishing information to,
or entering into discussions with, that person; and
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. Smith Residential enters into a confidentiality agreement with that
person the terms of which are in all material respects no less favorable
to Smith Residential and no less restrictive to the person making the
alternative acquisition proposal, than the terms of the confidentiality
agreement entered into with Archstone.
For purposes of the merger agreement, an "alternative acquisition proposal"
means any direct or indirect:
. merger, consolidation, business combination, reorganization,
recapitalization, liquidation, dissolution or similar transaction;
. sale, acquisition, tender offer, exchange offer, or the filing of a
registration statement under the Securities Act in connection with an
exchange offer, share exchange or other transaction or series of related
transactions, that, if completed, would result in the issuance of
securities representing, or the sale, exchange or transfer of, 15% or
more of the outstanding voting equity securities of Smith Residential or
outstanding units of Smith Partnership, except an underwritten public
offering of Smith Residential common stock for cash; or
. sale, lease, exchange, mortgage, pledge, transfer or other disposition
of any assets of Smith Residential or Smith Partnership in one or a
series of related transactions that, if completed, would result in the
transfer of more than 15% of the assets of Smith Residential or Smith
Partnership, other than the merger and the partnership merger.
If an alternative acquisition proposal constitutes a superior alternative
acquisition proposal, as described below, the board of directors of Smith
Residential may withdraw, modify, amend or qualify its recommendation of the
merger agreement and the merger and recommend the superior alternative
acquisition proposal to its stockholders provided that:
. Smith Residential complies fully with the non-solicitation provisions
and provides Archstone with at least three business days' prior written
notice of its intent to withdraw, modify, amend or qualify its
recommendation of the merger agreement or the merger;
. if during those three business days Archstone makes a counter proposal
to the superior alternative acquisition proposal, Smith Residential's
board of directors in good faith, taking into account the advice of its
outside financial advisors of nationally recognized reputation,
determines that the Archstone counter proposal is not at least as
favorable:
-- to Smith Residential's stockholders as the superior alternative
acquisition proposal, from a financial point of view; or
-- generally to Smith Residential's stockholders, taking into account
all financial and strategic considerations and other relevant
factors, including relevant legal, financial, regulatory and other
aspects of the proposals, and the conditions, prospects and time
required for completion of that proposal; and
. Smith Residential terminates the merger agreement under the terms of the
merger agreement and pays to Archstone the termination fee of up to $95
million.
For purposes of the merger agreement, a "superior alternative acquisition
proposal" means a bona fide written proposal made by a third party to acquire,
directly or indirectly, Smith Residential and/or Smith Partnership in a tender
or exchange offer, merger, share exchange, consolidation or sale of all or
substantially all of the assets of Smith Residential, Smith Partnership, and
their subsidiaries or otherwise:
. on terms which a majority of the board of directors of Smith Residential
determines in good faith, after consultation with Smith Residential's
financial advisors of nationally recognized reputation, are superior,
from a financial point of view, to Smith Residential's stockholders to
those provided for in the merger;
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. on terms which a majority of the board of directors of Smith Residential
determines in good faith to be more favorable generally to Smith
Residential's stockholders than those provided for in the merger, taking
into account all financial and strategic considerations and other
relevant factors, including relevant legal, financial, regulatory and
other aspects of the proposals, and the conditions, prospects and time
required for completion of the proposal;
. for which financing, to the extent required, in the reasonable judgment
of the board of directors of Smith Residential is capable of being
obtained; and
. which the board of directors of Smith Residential determines in good
faith is reasonably capable of being consummated.
Termination of the Merger Agreement
Right to Terminate
The merger agreement may be terminated at any time before the completion of
the merger, whether before or after approvals by the Archstone shareholders,
Smith Residential stockholders or Smith Partnership unitholders, as applicable,
as follows:
. by mutual written consent duly authorized by the Archstone board of
trustees and the Smith Residential board of directors;
. by Archstone or Smith Residential if:
-- any judgment, injunction, order, decree or action by any
governmental entity preventing the consummation of the
reorganization of Archstone into an UPREIT, or either the merger or
the partnership merger becomes final and non-appealable;
-- the merger and the partnership merger have not been completed before
March 31, 2002; however, neither Archstone nor Smith Residential may
terminate the merger agreement if its breach is the reason that the
merger or partnership merger has not been completed by that date;
-- the holders of at least two-thirds of the outstanding shares of
Smith Residential common stock fail to approve the merger and the
merger agreement at the Smith Residential special meeting, or if the
holders of the Smith Partnership units fail to approve the
partnership merger and the amendment to the partnership agreement by
the required consent, but Smith Residential may not terminate for
either of these reasons if it is in breach in any material respect
of its obligations contained in the merger agreement relating to
obtaining the required stockholder votes and unitholder consents; or
-- the holders of at least a majority of the outstanding Archstone
common shares fail to approve the merger and the merger agreement at
the Archstone special meeting, but Archstone may not terminate for
either of these reasons if it is in breach in any material respect
of its obligations contained in the merger agreement relating to
obtaining the required shareholder votes.
. by Archstone:
-- upon a breach of or failure to perform any covenant, obligation or
agreement on the part of Smith Residential or Smith Partnership
contained in the merger agreement, or upon a breach of any
representation or warranty of Smith Residential or Smith Partnership
or if any representation or warranty of Smith Residential or Smith
Partnership is or becomes untrue, in either case so that the
conditions to the consummation of the merger contained in the merger
agreement would be incapable of being satisfied by March 31, 2002,
or as otherwise extended by the parties; or
-- if
. the Smith Residential board of directors has failed to recommend or
has withdrawn, modified, amended or qualified, or proposed publicly
not to recommend or to withdraw, modify, amend
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or qualify, in any manner adverse to Archstone, its approval or
recommendation of the merger, the partnership merger or the merger
agreement, or approved or recommended any superior alternative
acquisition proposal,
. following the announcement or receipt of an alternative acquisition
proposal, Smith Residential has failed to call a special meeting of
stockholders or failed to prepare and mail to its stockholders its
joint proxy statement/prospectus, or
. the Smith Residential board of directors or any committee of the
Smith Residential board of directors has resolved to do any of the
foregoing.
. by Smith Residential:
-- upon a breach of or failure to perform any covenant, obligation or
agreement on the part of Archstone or Archstone-Smith contained in
the merger agreement, or upon a breach of any representation or
warranty of Archstone or Archstone-Smith or if any representation or
warranty of Archstone or Archstone-Smith is or becomes untrue, in
either case so that the conditions to the consummation of the merger
contained in the merger agreement would be incapable of being
satisfied by March 31, 2002 or as otherwise extended by the parties;
or
-- if the Smith Residential board has withdrawn, modified, amended or
qualified in any manner adverse to Archstone its approval or
recommendation of the merger, the partnership merger or the merger
agreement in connection with, or approved or recommended, any
superior alternative acquisition proposal, or to enter into a binding
written agreement with respect to a superior alternative acquisition
proposal, so long as, in each case, Smith Residential has complied
with the terms of the no solicitation provisions contained in the
merger agreement and, at the same time as or before terminating the
merger agreement, has paid to Archstone the termination fee.
Effect of Termination
Except for provisions in the merger agreement regarding confidentiality of
nonpublic information, payment of fees and expenses, the effect of termination
and specified miscellaneous provisions, if the merger agreement is terminated
as described above, the merger agreement will become void and have no effect.
In addition, if the merger agreement is so terminated, there will be no
liability on the part of Archstone, Archstone-Smith, Smith Residential or
Smith Partnership, except to the extent that the termination results from a
material breach by any party of any of its representations, warranties,
covenants or agreements contained in the merger agreement. The confidentiality
agreement, dated April 19, 2001, between Smith Residential and Archstone will
continue in effect notwithstanding any termination of the merger agreement.
Expenses; Termination Fee
Except as described below, each party to the merger agreement will bear its
own fees and expenses in connection with the transactions contemplated by the
merger agreement.
Smith Residential and Smith Partnership will pay to Archstone a termination
fee of up to $95 million if the merger agreement is terminated:
. by Smith Residential,
-- if the Smith Residential board of directors has withdrawn, modified,
amended or qualified in any manner adverse to Archstone its approval
or recommendation of the merger, the partnership merger or the merger
agreement in connection with, or approved or recommended, any
superior alternative acquisition proposal, or
-- in order to enter into a binding written agreement with respect to a
superior alternative acquisition proposal, so long as, in each case,
Smith Residential complied with the terms of the nonsolicitation
provisions contained in the merger agreement;
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. by Archstone, if the Smith Residential board of directors has failed to
recommend or has withdrawn, modified, amended or qualified, or proposed
publicly not to recommend or to withdraw, modify, amend or qualify, in
any manner adverse to Archstone its approval or recommendation of the
merger, the partnership merger or the merger agreement or approved or
recommended any superior alternative acquisition proposal, or has
resolved to do any of the foregoing; or
. by such party and under the circumstances listed below, but only if (a)
Smith Residential or Smith Partnership has received a proposal for an
alternative acquisition transaction before the termination of the merger
agreement and (b) before or within 12 months after the termination of
the merger agreement, Smith Residential or Smith Partnership enters into
an agreement regarding any alternative acquisition transaction that is
later completed whether or not the agreement is related to the pre-
termination proposal described above:
-- by Archstone, if Smith Residential or Smith Partnership breaches or
fails to perform in all material respects its covenants, obligations
and agreements in the merger agreement and the failure cannot be
rectified by March 31, 2002, or as otherwise extended by the
parties;
-- by Archstone, if Smith Residential or Smith Partnership is in breach
of any of its representations or warranties in the merger agreement,
or if any representation or warranty is or becomes untrue, and the
breach reasonably would be expected to have a material adverse
effect on the business, properties, assets, financial condition or
results of operations of Smith Residential, Smith Partnership and
their subsidiaries taken as a whole and cannot be rectified by March
31, 2002, or as otherwise extended by the parties;
-- by Archstone or Smith Residential, if the holders of at least two-
thirds of the outstanding shares of Smith Residential common stock
fail to approve the merger and the merger agreement at the Smith
Residential special meeting, or the holders of units of Smith
Partnership fail to approve the partnership merger and the amendment
to the partnership agreement by the required consent; or
-- by Archstone, if following Smith Residential's receipt or
announcement of an alternative acquisition proposal, Smith
Residential fails to call the Smith Residential special meeting or
fails to prepare and mail to its stockholders its joint proxy
statement/prospectus.
. by Smith Residential, if the merger and the partnership merger are not
completed before March 31, 2002, Smith Residential has not breached in
any material respect its obligations under the merger agreement in any
manner that shall have caused either the merger or the partnership
merger to not be completed by March 31, 2002, or as otherwise extended
by the parties, and each of the following conditions is present:
-- Smith Residential or Smith Partnership has received a proposal for
an alternative acquisition transaction before the termination of the
merger agreement;
-- after Smith Residential or Smith Partnership receives this proposal
for an alternative acquisition transaction and before the
termination of the merger agreement, Archstone and/or Archstone-
Smith does not announce, enter into or agree to effect any merger,
acquisition, exchange offer, consolidation, reorganization or other
business combination with any third party; and
-- before or within 12 months after the termination of the merger
agreement, Smith Residential or Smith Partnership enters into an
agreement regarding any alternative acquisition transaction that is
later completed whether or not the agreement is related to the pre-
termination proposal above.
The termination fee that Archstone may be entitled to receive will be an
amount equal to the lesser of
. $95 million less termination expenses, as described below, paid or
payable under the merger agreement; and
. the maximum amount that can be paid to Archstone without causing
Archstone to fail to meet the REIT income requirements under the
Internal Revenue Code.
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The unpaid amount, if any, will be paid in subsequent years to the extent the
payment would not cause Archstone to fail to meet the REIT income requirements
under the Internal Revenue Code. Smith Residential's and Smith Partnership's
obligation to pay any unpaid portion of the termination fee will terminate on
May 3, 2008. Archstone has not agreed to pay any termination fee under the
merger agreement.
Smith Residential and Smith Partnership will pay to Archstone termination
expenses if the merger agreement is terminated:
. by Archstone, if Smith Residential or Smith Partnership breaches or
fails to perform in all material respects all of its covenants,
obligations and agreements in the merger agreement and the failure
cannot be rectified by March 31, 2002, or if Smith Residential or Smith
Partnership is in breach of any of its representations or warranties in
the merger agreement, and the breach reasonably would be expected to
have a material adverse effect on the business, properties, assets,
financial condition or results of operations of Smith Residential, Smith
Partnership and their subsidiaries taken as a whole, and the breach
cannot be rectified by March 31, 2002, or as otherwise extended by the
parties, in each case, so long as Smith Residential was not entitled to
terminate the merger agreement because Archstone failed to perform in
all material respects all of its covenants, obligations and agreements
in the merger agreement, or because Archstone is in breach of any of its
representations or warranties in the merger agreement; or
. by either Archstone or Smith Residential, if the holders of at least
two-thirds of the outstanding shares of Smith Residential common stock
fail to approve the merger and the merger agreement at the Smith
Residential special meeting, or the holders of the units of Smith
Partnership fail to approve the partnership merger and the amendment to
the partnership agreement by the required vote, but neither Archstone
nor Smith Residential may terminate for any of these reasons if it is in
breach in any material respect of its obligations contained in the
merger agreement relating to obtaining the required shareholder and
unitholder votes.
Archstone will pay to Smith Partnership termination expenses if the merger
agreement is terminated:
. by Smith Residential, if Archstone fails to perform in all material
respects all of its covenants, obligations and agreements in the merger
agreement and the failure cannot be rectified by March 31, 2002, or as
otherwise extended by the parties, or if Archstone is in breach of any
of its representations or warranties in the merger agreement, and the
breach reasonably would be expected to have a material adverse effect on
the business, properties, assets, financial condition or results of
operations of Archstone, Archstone-Smith and the subsidiaries of
Archstone taken as a whole, and the breach cannot be rectified by March
31, 2002, or as otherwise extended by the parties, in each case, so long
as Archstone was not entitled to terminate the merger agreement because
Smith Residential or Smith Partnership failed to perform in all material
respects all of its covenants, obligations and agreements in the merger
agreement, or because Smith Residential or Smith Partnership is in
breach of any of its representations or warranties in the merger
agreement; or
. by either Smith Residential or Archstone, if the holders of a majority
of the outstanding Archstone common shares fail to approve the merger
and the merger agreement at the Archstone special meeting, but neither
Archstone nor Smith Residential may terminate for this reason if it is
in breach in any material respect of its obligations contained in the
merger agreement relating to obtaining the required shareholder and
unitholder votes, so long as Archstone was not entitled to terminate the
merger agreement because Smith Residential or Smith Partnership failed
to perform in all material respects all of its covenants, obligations
and agreements in the merger agreement, or because Smith Residential or
Smith Partnership is in breach of any of its representations or
warranties in the merger agreement.
The termination expenses that Archstone or Smith Partnership may be entitled
to receive in these cases will be an amount equal to the lesser of (a)
$7,500,000 or (b) the applicable party's out-of-pocket expenses incurred in
connection with the merger agreement and the transactions contemplated by the
merger agreement,
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including all attorneys', accountants' and investment bankers' fees and
expenses. If the termination expenses payable to that party exceed the maximum
amount that can be paid to that party without causing that party to fail to
meet the REIT income requirements under the Internal Revenue Code, then the
amount initially payable to that party will be that maximum amount, and the
unpaid amount will be placed in escrow and paid in subsequent years to the
extent the payment would not cause Archstone to fail to meet the REIT income
requirements under the Internal Revenue Code. The paying party's obligation to
pay any unpaid portion of the termination expenses will terminate on May 3,
2008.
In addition, if Archstone prevails in a suit for a breach by Smith
Residential and Smith Partnership of their obligation to pay the termination
fee or termination expenses under the merger agreement, Archstone will be
entitled to its costs and expenses in connection with the suit, with interest.
Waiver and Amendment of the Merger Agreement
The merger agreement may be amended by the parties in writing by action of
the Archstone board of trustees and the Smith Residential board of directors
at any time before the filing of the articles of merger relating to the merger
with the State of Maryland. However, after the shareholder and unitholder
approvals are obtained, no such amendment may be made which by law requires
the further approval of shareholders or unitholders without obtaining such
further approval.
At any time before the completion of the merger and the partnership merger,
the parties may, in writing:
. extend the time for the performance of any of the obligations or other
acts of the other party;
. waive any inaccuracies in the representations and warranties of the
other party contained in the merger agreement or in any document
delivered under the merger agreement; or
. waive compliance with any of the agreements or conditions of the other
party contained in the merger agreement, except as specified.
By law, neither Archstone or Archstone-Smith, on the one hand, nor Smith
Residential or Smith Partnership, on the other hand, can waive:
. the requirement that Archstone common shareholders and Smith Residential
common stockholders approve the merger agreement and the merger;
. the requirement that unitholders of Smith Partnership approve the
partnership merger and the amendment to the partnership agreement of
Smith Partnership; or
. any court order or law preventing the closing of the merger or the
partnership merger.
Whether any of the other conditions would be waived would depend on the
facts and circumstances as determined by the reasonable business judgment of
the Archstone board of trustees, acting on its own behalf or in its capacity
as trustee of Archstone-Smith, or the Smith Residential board of directors,
acting on its own behalf or in its capacity as general partner of Smith
Partnership. If Archstone and Archstone-Smith or Smith Residential and Smith
Partnership waived compliance with one or more of the other conditions and the
conditions were deemed material to a vote of Archstone common shareholders,
Smith Residential common stockholders and/or Smith Partnership unitholders,
Archstone, Smith Residential and/or Smith Partnership would have to resolicit
shareholder, stockholder and/or unitholder approval, as applicable, before
closing the merger or the partnership merger. Smith Partnership does not
intend to resolicit unitholders for any waiver that, in the judgment of Smith
Residential, as general partner of Smith Partnership, does not require
resolicitation of unitholders.
It is a condition to the closing of the merger and the partnership merger
that Mayer, Brown & Platt, counsel to Archstone and Archstone-Smith, and Hogan
& Hartson L.L.P., counsel to Smith Residential and Smith Partnership, deliver
opinions regarding various issues, including opinions that the merger
qualifies as a
88
reorganization under the provisions of section 368(a) of the Internal Revenue
Code, and that the partnership merger will not result in the recognition of
taxable gain or loss at the time of the partnership merger to a Smith
Partnership unitholder
. who is a U.S. person;
. who does not exercise its redemption right with respect to Archstone
Class A-1 common units under the Archstone declaration of trust on a
date sooner than the date two years after the partnership merger;
. who does not receive a cash distribution in connection with the
partnership merger, or a deemed cash distribution resulting from relief
or a deemed relief from liabilities, including as a result of the
prepayment of indebtedness of Smith Partnership in connection with or
following the partnership merger, in excess of such holder's adjusted
basis in its Smith Partnership units at the time of the partnership
merger;
. who is not required to recognize gain by reason of the application of
section 707(a) of the Internal Revenue Code and the Treasury regulations
thereunder to the partnership merger, with the result that the
partnership merger is treated as part of a "disguised sale" by reason of
any transactions undertaken by Smith Partnership prior to or in
connection with the partnership merger or any debt of Smith Partnership
that is assumed or repaid in connection with the partnership merger; and
. whose "at risk" amount does not fall below zero as a result of the
merger and the partnership merger.
In addition, it is a condition to the closing of the merger and the
partnership merger, that Mayer, Brown & Platt deliver an opinion that the
reorganization of Archstone into an UPREIT will qualify as a reorganization
under section 368(a)(1)(F) of the Internal Revenue Code.
It is also a condition to the closing of the merger and the partnership
merger that Hogan & Hartson L.L.P. deliver an opinion that Smith Partnership
has been, since June 30, 1994 through and including its taxable year ending at
the time of the partnership merger, treated for federal income tax purposes as
a partnership and not as a corporation or association taxable as a corporation
and that Mayer, Brown & Platt deliver an opinion that immediately prior to, and
at the time of, the partnership merger, Archstone or an entity that Archstone
will merge into as part of Archstone's reorganization into an UPREIT, is and
will be treated for federal income tax purposes pursuant to Treasury regulation
section 301.7701-3 as a partnership or an entity disregarded as a separate
entity and not as a corporation or association taxable as a corporation.
It is also a condition to the closing of the merger and the partnership
merger that Hogan & Hartson L.L.P. deliver an opinion that commencing with its
taxable year ended December 31, 1994 through and including its taxable year
ending at the time of the merger, Smith Residential was organized and has
operated in conformity with the requirements for qualification as a REIT under
the Internal Revenue Code and that Mayer, Brown & Platt deliver an opinion that
commencing with Archstone's taxable year ended December 31, 1994, until either
the time Archstone makes an election to be treated as a partnership or the time
that Archstone merges into a wholly owned subsidiary of Archstone-Smith into
which Smith Partnership will merge, Archstone was organized and has operated in
conformity with the requirements for qualification as a REIT under the Internal
Revenue Code and that Archstone-Smith's organization and proposed method of
operation will enable it to meet the requirements for qualification and
taxation as a REIT under the Internal Revenue Code commencing with its taxable
year ending December 31, 2001.
The delivery of these opinions, although waiveable under the terms of the
merger agreement, will not be waived.
Indemnification; Directors' and Officers' Insurance
Under the merger agreement, Archstone and Archstone-Smith will provide
exculpation and indemnification for each person who has been at any time on or
before May 3, 2001, or who becomes before the completion of the merger, an
officer or director of Smith Residential or specified subsidiaries. This
89
exculpation and indemnification will be the same as provided to these persons
by Smith Residential and specified subsidiaries immediately before the
completion of the merger in each entity's respective charter, bylaws,
partnership, operating or similar agreement, as applicable, as in effect on May
3, 2001. This exculpation and indemnification covers actions only on or before
the completion of the merger, including all transactions contemplated by the
merger agreement.
In addition, Archstone and Archstone-Smith will indemnify and hold harmless,
to the full extent permitted by applicable law, each of the persons described
above against any losses, claims, liabilities, expenses, judgments, fines and
amounts paid in settlement in connection with any threatened or actual claim,
action, suit, proceeding or investigation, whether civil, criminal or
administrative, including any action by or on behalf of any or all security
holders of Smith Residential, Smith Partnership, Archstone, Archstone-Smith, or
any of their subsidiaries, or by or in the right of Smith Residential, Smith
Partnership, Archstone, Archstone-Smith, or any of their subsidiaries, in which
any of these persons is, or is threatened to be, made a party based in whole or
in part on, or arising in whole or in part out of, or pertaining to:
. the fact that he or she is or was an officer, employee or director of
Smith Residential or any of its subsidiaries or any action or omission
by that person in his or her capacity as a director; or
. the merger agreement or the transactions contemplated by the merger
agreement, whether in any case asserted or arising before or after the
completion of the merger.
After the completion of the merger, Archstone and Archstone-Smith will be
obligated to promptly pay and advance reasonable expenses and costs incurred by
each of these persons as they become due and payable in advance of the final
disposition of the claim, action, suit, proceeding or investigation to the
fullest extent and in the manner permitted by law. Archstone and Archstone-
Smith are also obligated to purchase, at or before the completion of the
merger, directors' and officers' liability insurance policy coverage for Smith
Residential's directors and officers for a period of six years which will
provide the directors and officers with coverage on substantially similar terms
as currently provided by Smith Residential to these directors and officers.
Assumption of Smith Residential's Obligations Under Registration Rights
Agreements
Under the merger agreement, Archstone-Smith has agreed to assume Smith
Residential's obligations under existing registration rights agreements between
Smith Residential and several holders of Smith Partnership common units, Smith
Partnership preferred units and shares of Smith Residential preferred stock.
Voting Agreements
As of August 31, 2001, Smith Residential held 30,838,922, or approximately
70% of the outstanding common and preferred units of Smith Partnership. Since
Smith Residential owns a majority in percentage interest of the outstanding
common units of Smith Partnership, the approval of the partnership merger is
assured.
Each of the directors of Smith Residential, consisting of Messrs. Gerardi,
Kiley, Kogod, McCullough and Smith and Ms. Williams, has entered into a voting
agreement with Archstone agreeing to vote all shares of Smith Residential
common stock, and, if applicable, all Smith Partnership units, owned of record
by him or her, or that he or she otherwise has the power to vote:
. for adoption and approval of the merger agreement, the merger, the
partnership merger, the amendment to the partnership agreement of Smith
Partnership and the transactions contemplated thereby; and
. against approval or adoption of any action or agreement, other than the
merger agreement or the transactions contemplated thereby, made or taken
in opposition to or in competition with the merger or the partnership
merger.
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As of August 22, 2001, the directors of Smith Residential beneficially
owned, excluding stock options held by them, 242,664 shares of Smith
Residential common stock, representing approximately 1% of the outstanding
shares of Smith Residential common stock entitled to be voted at the Smith
Residential special meeting and a total of 2,141,832 Smith Partnership common
units representing approximately 5.5% of the outstanding Smith Partnership
common units as of August 31, 2001.
The voting agreements prohibit these individuals from, directly or
indirectly, selling, transferring, hypothecating, pledging, encumbering or
otherwise disposing of their Smith Residential common stock or Smith
Partnership units or granting any option or other right with respect thereto.
Each of the trustees of Archstone, consisting of Messrs. Cardwell, Holmes,
Polk, Richman, Schweitzer and Sellers, has entered into a voting agreement with
Smith Residential agreeing to vote all Archstone common shares owned of record
by him, or that he otherwise has the power to vote:
. for adoption and approval of the merger agreement, the merger, the
partnership merger and the transactions contemplated thereby; and
. against approval or adoption of any action or agreement, other than the
merger agreement or the transactions contemplated thereby, made or taken
in opposition to or in competition with the merger or the partnership
merger.
As of August 31, 2001, the trustees of Archstone beneficially owned,
excluding share options held by them, 572,230 Archstone common shares,
representing less than 1% of the outstanding Archstone common shares entitled
to vote at the Archstone special meeting.
Acquisition of Non-Controlled Subsidiaries
Smith Management Construction, Inc. Smith Management Construction
Partnership owns all of the outstanding shares of voting common stock of Smith
Partnership's non-controlled subsidiary, Smith Management Construction, Inc.,
which represents 100% of the voting power in Smith Management Construction,
Inc. Smith Management Construction Partnership has entered into a stock
purchase agreement with Archstone that provides for the sale of all of the
shares of voting common stock of Smith Management Construction, Inc. to
Archstone in exchange for $70,560. Prior to the closing of the merger,
Archstone will assign the stock purchase agreement to a non-controlled
subsidiary of Archstone.
Consolidated Engineering Services, Inc. In connection with the partnership
merger, Consolidated Engineering Services, Inc., a non-controlled subsidiary of
Smith Partnership, will undertake a recapitalization of its capital stock.
Consolidated Engineering Services Partnership, a general partnership controlled
by Mr. Gerardi and the children of Messrs. Smith and Kogod, is currently the
sole voting stockholder of Consolidated Engineering Services, Inc. and will
remain the sole voting stockholder until the closing of the partnership merger.
As a result of the recapitalization, upon the closing of the partnership
merger, Archstone, as successor to Smith Partnership by the partnership merger,
will own 51% of the outstanding voting common stock of Consolidated Engineering
Services, Inc. immediately following the recapitalization, representing a value
of $381,865, and Consolidated Engineering Services Partnership will own 49% of
the outstanding voting common stock of Consolidated Engineering Services, Inc.
Archstone, as successor to Smith Partnership in the partnership merger, and
Consolidated Engineering Services Partnership will each own the same proportion
of the outstanding equity of Consolidated Engineering Services, Inc.
immediately following the closing of the partnership merger as Smith
Partnership and Consolidated Engineering Services Partnership owned prior to
the partnership merger. Consolidated Engineering Services Partnership will not
receive any payments and Smith Partnership will not be required to make any
payments in connection with the recapitalization of Consolidated Engineering
Services, Inc. It is also contemplated that, prior to the merger, Consolidated
Engineering Services, Inc. will issue up to an aggregate of 100,000 shares of
restricted non-voting common stock to its officers and will grant options to
purchase up to an aggregate of 588,600 shares of its restricted non-voting
common stock
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to its director and officers. Such non-voting common stock will convert into
voting common stock upon the occurrence of various corporate events involving
Consolidated Engineering Services, Inc. Of this amount, it is expected that Mr.
Gerardi will receive shares of restricted stock and options to purchase shares,
although no determination has been made as to the number of shares subject to
such awards. Immediately following the closing of the merger, Archstone, as
successor to Smith Partnership by the partnership merger, will contribute the
voting stock of Consolidated Engineering Services, Inc. to a non-controlled
subsidiary of Archstone.
Shareholders' Agreement
In connection with the merger and the partnership merger, Archstone-Smith
and Archstone will enter into a shareholders' agreement with Robert H. Smith,
the chairman of the board and chief executive officer of Smith Residential, and
Robert P. Kogod, the chairman of the executive committee of the Smith
Residential board.
Composition of the Archstone-Smith Board of Trustees. Under the
shareholders' agreement, Messrs. Smith, Kogod, and Gerardi will become members
of the Archstone-Smith board following the merger. Mr. Smith's initial term
will expire in 2003, Mr. Kogod's initial term will expire in 2002, and Mr.
Gerardi's term will expire in 2004. In the case of the death, disability,
resignation, or removal of Messrs. Smith or Kogod, a person designated as a
replacement nominee by their representative, will have the right to be
nominated to serve on the Archstone-Smith board for a period of ten years. Any
successor nominee is subject to the reasonable approval of the Archstone-Smith
board. Archstone-Smith will take all actions necessary to cause the board to
nominate Messrs. Smith and Kogod, and each of their replacement nominees, as
the case may be, and to recommend his or her election by the shareholders.
Archstone-Smith and Messrs. Smith and Kogod will take all actions necessary to
cause the individuals so nominated to be elected to the board, including,
without limitation, by voting their common shares and causing the vote of all
common shares beneficially owned thereby, the execution of written consents,
the calling of special meetings, the removal of trustees, the filling of
vacancies on the board, and the waiving of notice and the attending of
meetings. Mr. Gerardi will be appointed to the board for a single, three-year
term. In the event of Mr. Gerardi's death, disability, resignation or removal
during this term, Messrs. Smith and Kogod, or any replacement nominee then
serving as a successor trustee on the board, as the case may be, acting
unanimously, will be entitled to designate Mr. Gerardi's replacement on the
board, provided that such person is reasonably acceptable to the board. See
"The Merger and the Partnership Merger--Trustees and Executive Officers of
Archstone-Smith After the Merger," beginning on page 58.
Termination of Nomination Rights. The nomination rights of Messrs. Smith and
Kogod detailed above will cease and Messrs. Smith or Kogod, or any replacement
nominee then serving as a successor trustee on the board, will immediately
offer his or her unconditional resignation from the board if:
. such person is employed by, or has equity investment interests, directly
or indirectly, in, any material competitor of Archstone-Smith or
Archstone, unless such investment constitutes less than one-half of one
percent (0.50%) of the equity ownership in a public company;
. such person is not reasonably experienced in business, financial, or
real estate industry matters;
. such person has been convicted of, or has pled nolo contendere to, a
felony;
. the election of such person would violate any law; or
. such person is involved in specified legal proceedings, including, but
not limited to
-- any conviction or being named the subject of a pending criminal
proceeding, excluding traffic violations and minor offenses;
-- being the subject of certain orders, judgments, or decrees
temporarily or permanently enjoining such person from engaging in
certain business activities, including those related to the purchase
or sale of securities or commodities; or
-- any finding by a court or administrative body of a violation of any
federal or state securities law or federal commodities law, not
subsequently reversed, suspended, or vacated.
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Board of Trustees Compensation and Benefits. Except during any period in
which Messrs. Smith, Kogod, or Gerardi, or any replacement nominee of Messrs.
Smith and Kogod serving as a successor trustee on the board, serves as an
officer or employee of Archstone-Smith or Archstone, such persons will be
entitled to fees and other compensation, participation in option, share or
other benefit plans for which trustees are eligible, reimbursement of expenses,
and trustees' and officers' liability insurance and indemnities on an equal
basis with other members of Archstone-Smith's board.
Size of Archstone-Smith Board of Trustees. For so long as Messrs. Smith and
Kogod, or their representatives, as the case may be, have the right to nominate
one or more trustees, Archstone-Smith's board will consist of no more than 10
members; provided that the size of the board may be increased beyond 10
members, in the sole discretion of the board, in connection with any future
mergers, acquisitions, business combinations, or other strategic transactions
of Archstone-Smith or Archstone, and the size of the board may be increased
beyond 10 members as may be required pursuant to the terms of any class or
series of preferred shares of Archstone-Smith. Additionally, the size of the
board may be increased beyond 10 members, in the sole discretion of the board,
other than in connection with any mergers, acquisitions, business combinations
or other strategic transactions of Archstone-Smith or Archstone and other than
as may be required pursuant to the terms of a class or series of preferred
shares of Archstone-Smith, only as follows:
. if the board desires to increase its size by one additional member,
then, at the time the board adds such additional member, Messrs. Smith
and Kogod, or their representatives, as the case may be, as a group,
will be entitled to nominate one additional member at the same time the
board adds such additional member; and
. thereafter, Messrs. Smith and Kogod, or their representatives, as the
case may be, as a group, will be entitled to nominate one additional
member for every second additional member added by the board and at the
time thereof.
Any additional board members that Messrs. Smith and Kogod, or their
representatives, as the case may be, may be entitled to nominate as a result of
an increase in the size of the board contemplated above are subject to the
reasonable approval of the board, and such additional board member(s) will
serve in the appropriate class as determined by the board. Archstone-Smith and
Messrs. Smith and Kogod, or their representatives, as the case may be, will
take such actions detailed above in "--Composition of the Board of Trustees,"
in connection with the nomination and election of such additional board
members.
Executive Committee of the Board of Trustees. Pursuant to the terms of the
shareholders' agreement, Archstone-Smith will establish and maintain, in
accordance with its bylaws, an executive committee of the board, the members of
which will include Messrs. Smith and Kogod, and any replacement nominee then
serving as a successor trustee, for so long as such persons will have the right
to nominate themselves for election as trustees. In the event that the number
of members of the executive committee is more than seven, Messrs. Smith and
Kogod, and any replacement nominee then serving as a successor trustee, as a
group, will be entitled to designate the eighth member, at the time the ninth
member is designated, and every third member thereafter, at the time the second
member thereafter is designated, from among the trustees then serving on the
board.
Creation of a High-Rise Division. The shareholders' agreement provides that
all of Archstone-Smith's high-rise apartments, including those owned by Smith
Residential on May 3, 2001, the date of the merger agreement, will be operated
under the name "Charles E. Smith Residential." Archstone-Smith will create a
separate operating division, similar to its current East and West Regions,
under the name "Charles E. Smith Residential" through which it will conduct
substantially all of its high-rise business. Unless otherwise agreed in writing
by Messrs. Smith and Kogod, or their representatives, as the case may be, for a
period of 15 years, or until the earlier termination of the shareholders'
agreement pursuant to the provisions discussed below:
. neither Archstone-Smith nor any subsidiary thereof will conduct
operations related to its high-rise business, including the high-rise
business formerly operated by Smith Residential, except through the
newly created Charles E. Smith Residential division, other than as may
be determined by the chief
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executive officer of Archstone-Smith with respect to high-rise
apartments not owned by Smith Residential prior to the merger; and
. Archstone-Smith will use the name "Charles E. Smith Residential" in the
operation of all high-rise apartments. As to any mid-rise apartments
that Archstone-Smith may acquire or develop after the merger, the chief
executive officer of Archstone-Smith will determine whether such assets
should be operated as part of the high-rise business or as part of the
garden apartment business.
Charles E. Smith Residential Division Headquarters. Under the shareholders'
agreement, the Charles E. Smith Residential division will maintain the current
headquarters of Smith Residential in the Crystal City area of Arlington,
Virginia, for a period of 15 years, so long as the lease terms for those
offices are consistent with local market terms, unless otherwise agreed to in
writing by Messrs. Smith and Kogod, or their representatives, as the case may
be.
Charles E. Smith Residential Division Management. Under the shareholders'
agreement, the Charles E. Smith Residential division will be operated under the
direction of a president. The initial person serving as such officer will be
W.D. Minami, president of Smith Residential, who will report directly to R.
Scot Sellers, Archstone-Smith's chairman and chief executive officer. Messrs.
Smith and Kogod, will be employed by Archstone-Smith and Mr. Gerardi will be
employed by Consolidated Engineering Services, Inc. following the closing of
the merger. Mr. Smith will serve as chairman of the Charles E. Smith
Residential division and will be paid an annual minimum salary of $300,000 and
an annual minimum bonus of $150,000 for each year during his employment. Mr.
Smith will also be entitled to receive options to purchase 100,000 Archstone-
Smith common shares for each year during his term of employment, with the
number of options granted in each year being equal to 100,000 multiplied by the
same percentage of the base option level as the number of options granted to
the chief executive officer of Archstone-Smith increases or decreases in that
year beyond the target amount established for such officer. Mr. Kogod will be
paid an annual minimum salary of $150,000 for each year during his employment.
Mr. Gerardi will be paid an annual salary of $200,000 from Consolidated
Engineering Services, Inc. for each year during his employment and an annual
bonus to be determined by the Consolidated Engineering Services, Inc. board of
directors. Mr. Gerardi will also be entitled to maintain his existing company-
provided apartment and whole life insurance policy. Messrs. Smith, Kogod and
Gerardi will also be able to participate in other benefit plans generally made
available to trustees and officers of Archstone-Smith, as applicable.
Smith and Kogod Share Transfer Restrictions. Pursuant to the shareholders'
agreement, Messrs. Smith and Kogod will agree not to sell any Archstone-Smith
common shares, or securities convertible or exchangeable for Archstone-Smith
common shares, beneficially owned by them after the merger for a period of
three years. This restriction will not apply to the sale by Messrs. Smith and
Kogod and their affiliates of up to 400,000 shares between the first and second
anniversaries of the merger and up to an aggregate of 800,000 shares between
the first and third anniversaries of the merger. Provided such transferees
agree in writing to be bound by the terms of the shareholders' agreement, the
transfer restrictions above will not apply to any transfer by Messrs. Smith and
Kogod to their:
. affiliates;
. respective spouses and descendants, whether natural or adopted, and any
trust for the benefit of Messrs. Smith or Kogod or their respective
spouses and/or descendants or any entity controlled by Messrs. Smith or
Kogod's respective spouses and/or descendants; and
. charitable foundations.
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For purposes of this summary of the shareholders' agreement, the persons
contemplated by the clauses above will be referred to as "permitted
transferees." In addition, Messrs. Smith and Kogod and their affiliates will be
permitted to transfer any common shares beneficially owned, including
securities convertible or exchangeable for such common shares, to:
. any existing or future lender to whom such securities are pledged,
hypothecated, mortgaged or encumbered pursuant to a bona fide financing
incurred for investment or other valid business purposes upon customary
commercial terms; and
. any person to whom such shares are transferred upon foreclosure, or in
lieu of foreclosure of any loan contemplated by the first clause above.
Property Transfer Restrictions. For a period of 15 years, without the prior
written consent of Messrs. Smith and Kogod, or their representatives, as the
case may be, Archstone-Smith and its subsidiaries will not directly or
indirectly transfer any interest in specified properties located in the Crystal
City area of Arlington, Virginia, formerly owned by Smith Partnership, except
in the case of a sale of all of the specified Crystal City properties in a
single transaction and other than pursuant to a bona fide mortgage of any or
all of such properties to secure a loan or other financing of Archstone-Smith
or its subsidiaries upon customary commercial terms.
Termination. The shareholders' agreement will terminate:
. with respect to Mr. Smith, at such time as Mr. Smith and his permitted
transferees, other than charitable foundations, beneficially own less
than 1,000,000 common shares of Archstone-Smith; and
. with respect to Mr. Kogod, at such time as Mr. Kogod and his permitted
transferees, other than charitable foundations, beneficially own less
than 1,000,000 common shares of Archstone-Smith.
It is a condition of the merger and the partnership merger that each of
Messrs. Smith and Kogod enter into the shareholders' agreement with Archstone
and Archstone-Smith.
Tax Related Undertakings of Archstone
Lock-up Agreements. Archstone has agreed that it will not sell, exchange or
otherwise dispose of, except in tax-free or tax-deferred transactions, any of
the properties that Smith Partnership transfers to Archstone including the
Smith Partnership properties, any interest therein and Archstone's interest in
Smith Realty Company and other assets covered by Exhibit D to Annex A of the
amended and restated declaration of trust of Archstone.
These restrictions, which are for the benefit of the Smith Partnership
unitholders, are effective until January 1, 2022.
If Archstone sells any of the protected properties other than through tax-
free or tax-deferred exchange transactions that do not result in taxable income
or gain to the former holders of Smith Partnership units, for example, through
a tax-deferred exchange transaction under section 1031 of the Internal Revenue
Code, Archstone will be required to pay each former Smith Partnership
unitholder an amount equal to any income taxes incurred by the unitholder as a
result of the sale, to the extent that any of the built in gain on the date of
the merger with respect to protected properties is allocated to the unitholder
as a result of that sale, plus a gross-up for taxes payable by the unitholder.
Therefore, even if it were otherwise in the best interest of Archstone to sell
any of the protected properties, such a sale would cause Archstone to be liable
for significant damages.
Debt Maintenance. Archstone has agreed to maintain specified levels of
borrowings outstanding with respect to the Smith Partnership properties until
January 1, 2022, which borrowings constitute nonrecourse liabilities. A
nonrecourse liability is a liability for which no unitholder of Archstone
"bears the economic risk
95
of loss." After the merger and the partnership merger, if a nonrecourse
liability is repaid, Archstone must replace such nonrecourse liability with a
replacement borrowing also constituting a nonrecourse liability. The amount of
nonrecourse liabilities that Archstone must retain will be reduced until
January 1, 2022 in accordance with amortization schedules attached as schedules
to Exhibit D of Annex A of the amended and restated declaration of trust of
Archstone.
To the extent that the debt being refinanced has been guaranteed by one or
more Smith Partnership unitholders, the Smith Partnership unitholders must be
offered the opportunity to guarantee the replacement debt. In such case,
replacement debt must have collateral value, as determined in good faith by
Archstone-Smith, that is not less than the value, as determined in good faith
by Archstone-Smith, of the collateral for the debt being repaid. The guarantee
for such replacement debt must be an "acceptable guarantee." An acceptable
guarantee is a guarantee meeting the following criteria:
. the guarantee agreement is substantially in the form of the guarantee
agreement being replaced;
. the guarantee is given to the lender in connection with, and in
consideration for, the replacement debt;
. the guarantee must be executed and delivered by the lender;
. the aggregate amount of guarantees, indemnities and other similar
undertakings for the replacement debt does not exceed the face amount of
the replacement debt; and
. no other person would be considered to "bear the economic risk of loss"
with respect to the portion of the debt being guaranteed.
If Archstone fails to comply with its obligations described above, Archstone
will be required to pay each former Smith Partnership unitholder an amount
equal to any income taxes incurred by the unitholder as a result of income or
gain actually recognized by the unitholder as a result of the sale or debt
repayment, plus a gross-up for taxes payable by the unitholder. Therefore, even
if it were otherwise in the best interest of Archstone to pay down or refinance
all or a portion of the existing nonrecourse debt outstanding with respect to
the Smith Partnership properties, such prepayment or repayment would cause
Archstone to be liable for significant damages.
Allocations of Nonrecourse Liabilities Under Treasury Regulation Section
1.752-3. Archstone-Smith Operating Trust has agreed pursuant to Exhibit D to
Annex A of the Archstone-Smith Operating Trust declaration of trust, which we
refer to as the tax protection agreement, to make allocations of liabilities
under section 752 of the Internal Revenue Code taking into account the
following:
. existing Smith Partnership nonrecourse debt, or any replacement debt
therefor, is treated as allocable to specified contributed Smith
Partnership properties in amounts not less than the amounts set forth on
a schedule to the tax protection agreement at the time of the merger,
subject to reduction for scheduled amortization;
. ""excess nonrecourse liabilities" are allocated to the Smith Partnership
unitholders to the extent that section 704(c) gain of any Smith
Partnership unitholder exceeds such unitholder's section 704(c) minimum
gain with respect to Smith Partnership properties;
. Smith Partnership unitholders that are shown on a schedule to the tax
protection agreement as having liability for a specified dollar amount
of an existing nonrecourse debt that is "partner nonrecourse debt" are
allocated a dollar amount of such debt equal to the amount shown on the
schedule with respect to such unitholder, subject to reduction for
scheduled amortization; and
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. in making allocations of debt under Treasury regulation section 1.752-
3(a)(2) with respect to a specific property contributed by Smith
Partnership, allocations are made
-- first to the Smith Partnership unitholders in an amount equal to the
lesser of
. the "section 704(c) minimum gain" that such Smith Partnership
unitholder would have been allocated by Smith Partnership under
Treasury regulation section 1.752-3(a)(2) immediately prior to
the partnership merger, or
. the "section 704(c) minimum gain" that such Smith Partnership
unitholder would have been allocated by Smith Partnership under
Treasury regulation section 1.752-3(a)(2) immediately after the
unitholder acquired an interest in Smith Partnership by reason of
the contribution of an interest in the contributed property to
Smith Partnership in exchange for an interest in Smith
Partnership, and
-- thereafter pro rata among the Smith Partnership unitholders based
upon the number of Archstone-Smith Operating Trust units that they
hold and their proportionate shares of the "section 704(c) minimum
gain" existing immediately after the partnership merger in excess of
amounts described in the second arrow above.
Archstone-Smith Operating Trust will be prohibited from using a method of
allocating excess nonrecourse liabilities to Smith Partnership unitholders that
is less favorable than methods used with respect to other Archstone-Smith
Operating Trust unitholders in the future without offering former Smith
Partnership unitholders the opportunity to participate in that allocation
method. Archstone-Smith Operating Trust is not required to make allocations of
nonrecourse liabilities in accordance with the foregoing, however, if there has
been an applicable change in law that would no longer permit such allocations.
See "--Tax Related Undertakings of Archstone" beginning on page 95. Although
Archstone-Smith Operating Trust intends to use allocation methods that are
authorized by applicable Treasury regulations, Archstone-Smith Operating Trust
cannot guarantee that the Internal Revenue Service will respect these methods
of allocation of excess nonrecourse liabilities following the partnership
merger. These methods also could result in changes from year to year in an
Archstone-Smith Operating Trust unitholder's share of excess nonrecourse
liabilities of Archstone-Smith Operating Trust.
Section 708 Termination; Section 704(c) Method. Pursuant to tax-related
agreements, Archstone has agreed to treat the merger as a transfer of a greater
than fifty percent interest in the capital and profits of Smith Partnership
that resulted in a termination of Smith Partnership pursuant to section
708(b)(1)(B) of the Internal Revenue Code at the effective time of the merger.
In addition, Archstone has agreed to use the traditional method with
specific and limited curative allocations for purposes of making allocations
under Section 704(c) of the Internal Revenue Code with respect to all
properties acquired in connection with the merger, including the assets of
Archstone owned prior to the partnership merger and the assets of Smith
Partnership.
Assumption of Smith Partnership Tax Protection Agreements. Under the merger
agreement, Archstone also has expressly agreed to assume the obligations of
Smith Partnership to Smith Partnership unitholders under existing tax
protection agreements between Smith Partnership and these unitholders:
. Smith Partnership's obligation with respect to property formerly managed
by Commonwealth Atlantic Properties, Inc. and acquired by Smith
Partnership in 1999 pursuant to an asset contribution agreement dated
March 3, 1999 not to dispose of the property in a taxable transaction
prior to January 2, 2004, and to maintain specified debt obligations
relating to the property.
. Smith Partnership's obligation with respect to property formerly managed
by Infinity/Terrace, L.L.C. and acquired by Smith Partnership in 1998
pursuant to a real estate contribution agreement dated August 19, 1998
not to dispose of the property in a taxable transaction during the 19-
year tax protection period, for the 10 years following the expiration of
the tax protection period, to use
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diligent efforts to effectuate any sale of the property without
recognition of taxable gain, and during the 19-year tax protection
period to maintain, and the 10-year period following the expiration of
the tax protection period to endeavor to maintain, specified debt
obligations relating to the property.
. Smith Partnership's obligation with respect to property formerly managed
by 2470 N. Clark Street Venture and acquired by Smith Partnership in
1998 pursuant to a real estate contribution agreement dated August 19,
1998 not to dispose of the property in a taxable transaction during the
19-year tax protection period, for the 10-year period following the
expiration of the tax protection period, to use diligent efforts to
effectuate any sale of the property without recognition of taxable gain,
and during the 19-year tax protection period to maintain, and the 10-
year period following the expiration of the tax protection period to
endeavor to maintain, specified debt obligations relating to the
property.
. Smith Partnership's obligation with respect to property formerly managed
by Somerset Limited Partnership and acquired by Smith Partnership in
1998 pursuant to a real estate contribution agreement dated August 19,
1998 not to dispose of the property in a taxable transaction during the
19-year tax protection period, for the 10-year period following the
expiration of the tax protection period, to use diligent efforts to
effectuate any sale of the property without recognition of taxable gain,
and during the 19-year tax protection period to maintain, and the 10-
year period following the expiration of the tax protection period to
endeavor to maintain, specified debt obligations relating to the
property.
. Smith Partnership's obligation with respect to property formerly managed
by Countryside Operating Partnership I and Countryside Residential
Partners, Ltd. and acquired by Smith Partnership in 1998 pursuant to a
real estate contribution agreement dated August 19, 1998 not to dispose
of the property in a taxable transaction during the 19-year tax
protection period, for the 10-year period following the expiration of
the tax protection period, to use diligent efforts to effectuate any
sale of the property without recognition of taxable gain, and during the
19-year tax protection period to maintain, and during the 10-year period
following the expiration of the tax protection period to endeavor to
maintain, specified debt obligations relating to the property.
. Smith Partnership's obligation with respect to partnership interest of
Dearborn Delaware Associates acquired by Smith Partnership in 1997
pursuant to an agreement to acquire partnership interests dated October
7, 1997 is subject to no restriction of sale, but includes a need to
maintain specified debt obligations relating to the partnership
interest.
. Smith Partnership's obligation with respect to property formerly managed
by R&B Executive Investments--Charter Oak Associates, The Edward R.
Broida Trust No. 1, The R.J. Franks Trust No. 1, The Howard F. Ruby
Trust and Connecticut General Life Insurance Company and acquired by
Smith Partnership in 1996 pursuant to an agreement to acquire
partnership interests dated February 20, 1996 not to dispose of the
property in a taxable transaction during six years after the closing
date, and to maintain specified debt obligations relating to the
property.
. Smith Partnership's obligation with respect to property formerly managed
by 1841 Columbia Road Limited Partnership and acquired by Smith
Partnership in 1995 pursuant to a real estate contribution agreement
dated December 12, 1995 not to dispose of the property in a taxable
transaction during ten years after the closing date, and to maintain
specified debt obligations relating to the property.
. Smith Partnership's obligation with respect to property formerly managed
by Kenmore Apartments Joint Venture and acquired by Smith Partnership in
1996 pursuant to a real estate contribution agreement dated December 26,
1996 not to dispose of the property in a taxable transaction during ten
years after the closing date, and to maintain specified debt obligations
relating to the property.
. Smith Partnership's obligation with respect to property formerly managed
by Tower Associates Limited Partnership and acquired by Smith
Partnership in 1997 pursuant to a real estate contribution agreement
dated January 30, 1997 not to dispose of the property in a taxable
transaction during seven years after the closing date, and to maintain
specified debt obligations relating to the property.
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. Smith Partnership's obligation with respect to property formerly managed
by Plaza Associates Limited Partnership and acquired by Smith
Partnership in 1997 pursuant to a real estate contribution agreement
dated January 30, 1997 not to dispose of the property in a taxable
transaction during seven years after the closing date, and to maintain
specified debt obligations relating to the property.
. Smith Partnership's obligation with respect to property formerly managed
by Commonwealth Reservoir Park Limited Partnership and acquired by Smith
Partnership in 1997 pursuant to a real estate acquisition agreement
dated October 10, 1997 not to dispose of the property in a taxable
transaction during eight and one half years after the closing date, and
to maintain specified debt obligations relating to the property.
. Smith Partnership's obligation with respect to property formerly managed
by Janet Burstein Svirsky, Maralyn Burstein Milgrom, Aaron Milgrom and
Joseph Burstein and acquired by Smith Partnership in 1997 pursuant to a
real estate acquisition agreement dated June 30, 1997 not to dispose of
the property in a taxable transaction during ten years after the
closing, and to maintain specified debt obligations relating to the
property.
. Smith Partnership's obligation with respect to property formerly managed
by certain partners in Tunlaw Apartments Company Limited Partnership and
acquired by Smith Partnership in 1998 pursuant to a contribution
agreement dated January 1, 1998 not to dispose of the property in a
taxable transaction during seven years after the closing.
. Smith Partnership's obligation with respect to property formerly managed
by Roy S. MacDowell, Jr. and the Boulder Company, Inc. and acquired by
Smith Partnership in 1998 pursuant to an asset contribution agreement
dated February 2, 1998 not to dispose of the property in a taxable
transaction during eight years after the closing date, and to maintain
specified debt obligations relating to the property.
Requirement for Delivery of Evidence of Filing of Form 8832. Archstone has
agreed that within 30 days following the merger, Archstone-Smith will provide
to Messrs. Smith and Kogod, as representatives of the former Smith Partnership
unitholders, evidence in the form of a certified mail return receipt, that
Archstone filed with the Internal Revenue Service Form 8832 electing to be
treated either as a domestic eligible entity with a single owner disregarded as
a separate entity or a partnership, as applicable, not later than one day prior
to the closing of the merger and the partnership merger.
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FEDERAL INCOME TAX CONSEQUENCES
Overview
The following discussion describes the material federal income tax
consequences to the unitholders of Smith Partnership of:
. the merger;
. the partnership merger; and
. the subsequent ownership and disposition of Archstone common units by
former Smith Partnership unitholders.
For purposes of the discussion in this section only, the term "Archstone"
refers to Archstone Communities Trust, a Maryland real estate investment trust,
that is currently a publicly traded REIT, the term "Archstone-Smith" refers to
"Archstone-Smith," the entity that will be the publicly traded REIT following
consummation of the merger and the term "Archstone-Smith Operating Trust"
refers to the entity that will be the successor to Smith Partnership and the
surviving entity in the partnership merger. As described further in "The Merger
Agreement--Archstone Reorganization," Archstone-Smith Operating Trust will be
reorganized as a Maryland real estate investment trust. However, as described
below under "--Tax Status of Archstone-Smith Operating Trust," Archstone-Smith
Operating Trust will be treated as a partnership for federal income tax
purposes following the partnership merger.
Mayer, Brown & Platt, counsel to Archstone and Archstone-Smith, and Hogan &
Hartson L.L.P., counsel to Smith Residential and Smith Partnership, have
reviewed this discussion and are of the opinion that it sets forth the material
federal income tax consequences to a Smith Partnership unitholder as a result
of the merger and the partnership merger. The information in this section is
based on the current provisions of the Internal Revenue Code of 1986, as
amended, current, temporary and proposed Treasury regulations, the legislative
history of the Internal Revenue Code, and current administrative
interpretations and practices of the Internal Revenue Service, including its
practices and policies as endorsed in private letter rulings, which are not
binding on the Internal Revenue Service except with respect to the taxpayer
that receives such a ruling, and court decisions. However, future legislation,
Treasury regulations, administrative interpretations and court decisions could
significantly change current law or adversely affect current interpretations of
existing law. Changes in the applicable law could apply retroactively. Neither
Archstone-Smith Operating Trust nor Smith Partnership has requested or plans to
request any rulings from the Internal Revenue Service concerning the tax
treatment of Archstone-Smith Operating Trust, the partnership merger or the
ownership of interests in Archstone-Smith Operating Trust. Thus, it is possible
that the Internal Revenue Service would challenge the statements in this
discussion, which do not bind the Internal Revenue Service or the courts, and
that a court would agree with the Internal Revenue Service.
Because this is a discussion that is intended to address only the U.S.
federal income tax consequences of the partnership merger and ownership of
Archstone-Smith Operating Trust units that would apply to all Smith Partnership
unitholders, it may not contain all the information that may be important to
you. As you review this discussion, you should keep in mind that:
. the tax consequences to you may vary depending on your particular tax
situation, including the circumstances under which you originally
acquired your Smith Partnership units and subsequent events that may
have affected your Smith Partnership units;
. you may be subject to special rules that are not discussed below if you
are:
-- a tax-exempt organization;
-- broker-dealer;
-- a person who does not hold its Smith Partnership units as a capital
asset;
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-- a non-U.S. corporation, non-U.S. partnership, non-U.S. trust, non-
U.S. estate or individual who is not taxed as a citizen or resident
of the United States, all of which may be referred to collectively
as "non-U.S. persons";
-- a trust;
-- an estate;
-- a regulated investment company;
-- a real estate investment company;
-- an insurance company;
-- a U.S. expatriate; or
-- otherwise subject to special tax treatment under the Internal
Revenue Code;
. this summary does not address any state, local, or non-U.S. tax
consequences; and
. this discussion is not intended to be, and should not be construed as,
tax advice.
You are urged both to review the following discussion and to consult with
your own tax advisor to determine, among other things, the effect of the
merger, the partnership merger and the subsequent ownership and disposition of
Archstone-Smith Operating Trust units on your individual tax situation,
including any state, local or non-U.S. tax consequences that may apply to you.
As noted above, this discussion does not address any tax consequences to
Smith Partnership unitholders that are non-U.S. persons. Furthermore, special
tax considerations may apply to a Smith Partnership unitholder that itself is a
U.S. partnership or limited liability company but which has non-U.S. persons as
partners or members with respect to the partnership merger. Accordingly, any
Smith Partnership unitholder that is a partnership or limited liability company
and whose partners or members include non-U.S. persons should consult with its
own tax advisor regarding any special U.S. tax consequences to it and its
partners or members that may result from these transactions.
Summary of Tax Opinions Relating to the Partnership Merger
In connection with the filing of this consent solicitation
statement/prospectus, Mayer, Brown & Platt, counsel to Archstone and Archstone-
Smith, has delivered the specific opinion described below to Archstone and
Archstone-Smith regarding the material federal income tax consequences of the
partnership merger to the Smith Partnership unitholders and has delivered an
opinion to Archstone and Smith Partnership that the entity into which Smith
Partnership will merge will be treated for federal income tax purposes pursuant
to Treasury regulation section 301.7701-3 as a partnership or as a disregarded
entity immediately prior to, and at the time of the partnership merger, and not
as a corporation or association taxable as a corporation. In addition, as a
condition to the partnership merger, Mayer, Brown & Platt will deliver an
opinion to Archstone regarding the material federal income tax consequences of
the partnership merger to the Smith Partnership unitholders and will deliver an
opinion to Smith Residential that the entity into which Smith Partnership will
merge will be treated for federal income tax purposes pursuant to Treasury
regulation section 301.7701-3 as a partnership or as a disregarded entity
immediately prior to, and at the time of, the partnership merger, and not as a
corporation or association taxable as a corporation. Mayer, Brown & Platt's
opinions rely upon customary representations made by Archstone-Smith and
Archstone about factual matters relating to the income, organization and
operation of Archstone and their subsidiaries. In addition, these opinions are
based upon factual representations of Archstone concerning its business and
properties as set forth in this consent solicitation statement/prospectus and
the other documents incorporated by reference in this consent solicitation
statement/prospectus. In addition, for purposes of the opinion regarding the
consequences of the partnership merger, Mayer, Brown & Platt has relied on the
opinion of Hogan & Hartson L.L.P. regarding the treatment of Smith Partnership
as a partnership
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and not as a corporation or an association taxable as an association. If any of
the factual assumptions or representations relied upon by counsel are
inaccurate, the opinions may not accurately describe the consequences of the
partnership merger or the treatment of Archstone-Smith Operating Trust as a
partnership for federal income tax purposes.
In connection with the filing of this consent solicitation
statement/prospectus, Hogan & Hartson L.L.P., counsel to Smith Residential and
Smith Partnership, has delivered the specific opinion described below to Smith
Partnership regarding the material federal income tax consequences of the
partnership merger to the Smith Partnership unitholders and has delivered an
opinion to Smith Partnership and Archstone to the effect that Smith Partnership
is treated as a partnership for federal income tax purposes. Also, as a
condition to the partnership merger, Hogan & Hartson L.L.P. will deliver the
specific opinion described below to Smith Residential regarding the material
federal income tax consequences of the partnership merger to Smith Partnership
unitholders and will deliver an opinion to Archstone and Archstone-Smith to the
effect that Smith Partnership has been since June 30, 1994, through and
including its taxable year ending as of the merger closing date, treated for
federal income tax purposes as a partnership and not as a corporation or
association taxable as a corporation. Hogan & Hartson L.L.P.'s opinions rely
upon customary representations made by Smith Partnership about factual matters
relating to the income, organization and operation of Smith Partnership and its
subsidiaries. In addition, these opinions are based upon factual
representations of Smith Residential and Smith Partnership concerning its
business and properties as set forth in this consent solicitation
statement/prospectus and the other documents incorporated by reference in this
consent solicitation statement/prospectus. In addition, Hogan & Hartson L.L.P.
has relied on the opinion of Mayer, Brown & Platt regarding the treatment of
Archstone-Smith Operating Trust as a partnership or a disregarded entity and
not as a corporation or an association taxable as an association at the time of
the partnership merger. If any of the factual assumptions or representations
relied upon by counsel are inaccurate, the opinions may not accurately describe
the consequences of the partnership merger or the treatment of Smith
Partnership as a partnership for federal income tax purposes.
In the opinion of Mayer, Brown & Platt and Hogan & Hartson L.L.P., neither
the merger nor the partnership merger will result in the recognition of taxable
gain or loss to a holder of Smith Partnership units:
. who is a U.S. person (as defined for purposes of sections 897 and 1445
of the Internal Revenue Code);
. who does not exercise his, her or its redemption right with respect to
Archstone-Smith Operating Trust units under the declaration of trust of
Archstone-Smith Operating Trust during the two-year period beginning on
the day after the partnership merger becomes effective;
. who does not receive a cash distribution in connection with the
partnership merger, or a deemed cash distribution resulting from relief
from liabilities or a deemed relief from liabilities, including as a
result of the prepayment of indebtedness of Smith Partnership in
connection with or following the partnership merger, in excess of such
unitholder's adjusted basis in its Smith Partnership units at the time
of the partnership merger;
. who is not required to recognize gain by reason of the application of
section 707(a) of the Internal Revenue Code and the Treasury regulations
thereunder to the partnership merger, because the partnership merger is
treated as part of a disguised sale, whether by reason of any
transactions undertaken by Smith Partnership prior to or in connection
with the partnership merger, any debt of Smith Partnership that is
assumed or repaid in connection with the partnership merger, any cash or
other consideration paid, or deemed paid, to a former Smith Partnership
unitholder in connection with the partnership merger; and
. whose "at risk" amount does not fall below zero as a result of the
partnership merger.
These opinions are subject to the limitations and qualifications described
in this discussion.
Archstone-Smith Operating Trust intends to operate in a manner intended to
permit Archstone-Smith Operating Trust to be classified as a partnership
following the partnership merger, but there is no guarantee that
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Archstone-Smith Operating Trust will remain classified as a partnership.
Archstone-Smith Operating Trust's qualification for taxation as a partnership
may depend upon Archstone-Smith Operating Trust's continuing ability to meet
qualifying income requirements imposed on partnerships that are considered
"publicly traded partnerships" under the Internal Revenue Code. Neither Mayer,
Brown & Platt nor Hogan & Hartson L.L.P. will review Archstone-Smith Operating
Trust's compliance with these requirements on a continuing basis.
Summary of the Federal Income Tax Consequences of the Merger and the
Partnership Merger to Smith Partnership Unitholders
For federal income tax purposes, at the time of the merger, Smith
Partnership will be deemed to terminate under section 708(b)(1)(B) of the
Internal Revenue Code. As a result of the deemed termination, Smith Partnership
will be treated as contributing all of its assets and liabilities to a new
partnership in exchange for an interest in the new partnership. Immediately
thereafter, Smith Partnership will be treated as distributing the interests in
the new partnership to Archstone-Smith and the other Smith Partnership
unitholders. A holder of Smith Partnership units generally will not recognize
taxable gain or loss at the time of the merger as a result of the section
708(b)(1)(B) termination. However, Smith Partnership unitholders that have a
taxable year other than a calendar year may be required to include
distributions of Smith Partnership from both Smith Partnership's taxable year
ending December 31, 2000 and its short taxable year ending at the time of the
merger.
In addition, although the matter is not free from doubt, the partnership
merger should be treated for federal income tax purposes as a contribution by
Archstone-Smith of all of the Archstone assets to the Archstone-Smith Operating
Trust in exchange for units of Archstone-Smith Operating Trust and a
contribution by the new partnership of the new partnership's assets to
Archstone-Smith Operating Trust in exchange for units of Archstone Smith
Operating Trust and a distribution of the units in Archstone-Smith Operating
Trust to the Smith Partnership unitholders in liquidation of the new
partnership. There may be other alternative characterizations of the
partnership merger for federal income tax consequences, but such alternative
characterizations should not result in tax consequences that are materially
different than those described below.
A holder of Smith Partnership units at the time of the merger generally will
not recognize taxable gain or loss at the time of the partnership merger unless
the Smith Partnership unitholder receives or is considered to receive, in
connection with the partnership merger, either a cash distribution or a deemed
cash distribution resulting from relief from liabilities that exceeds the
aggregate adjusted tax basis that the Smith Partnership unitholder has in its
Smith Partnership units before the partnership merger, or is otherwise required
to recognize ordinary income under the "at-risk recapture" rules.
The determination of whether a Smith Partnership unitholder has received a
deemed cash distribution resulting from relief from liabilities and will
recognize gain in respect thereof in connection with the partnership merger
depends on the unitholder's unique circumstances, including:
. the unitholder's adjusted tax basis in its Smith Partnership units at
the time of the partnership merger;
. the assets originally contributed to Smith Partnership by the unitholder
or by an entity from which the unitholder received its Smith Partnership
units;
. the indebtedness, at the time of the partnership merger, of Smith
Partnership, if any, secured by the assets originally contributed by the
unitholder or by an entity from which the unitholder received its Smith
Partnership units;
. Smith Partnership's tax basis at the time of the partnership merger in
the assets originally contributed by the unitholder or by an entity from
which the unitholder received its Smith Partnership units;
. the share of the "unrealized gain" with respect to Smith Partnership's
assets attributable to the unitholder at the time of the partnership
merger;
. the amount of any recourse liabilities of Smith Partnership included in
the unitholder's basis by reason of indemnifications, guarantees or
"deficit restoration obligations" eliminated in the partnership merger;
and
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. in the case of a unitholder that has a share of recourse liabilities of
Smith Partnership by reason of an indemnification, guarantee or deficit
restoration obligation, whether that obligation will continue with
respect to Archstone-Smith Operating Trust following the partnership
merger, or the unitholder elects to enter into a new indemnification,
guarantee or deficit restoration obligation with respect to Archstone-
Smith Operating Trust at the time of the partnership merger, and whether
that indemnification, guarantee or deficit restoration obligation is
respected and will continue to be respected for federal income tax
purposes.
Even if a holder of Smith Partnership units does not recognize taxable gain
at the time of the merger or the partnership merger, the occurrence of
subsequent events could cause the unitholder to recognize all or part of the
gain that was deferred either through the original contribution of assets to
Smith Partnership or through the merger or the partnership merger. Archstone-
Smith, which will be the sole trustee of Archstone-Smith Operating Trust
following the Archstone reorganization into an UPREIT, generally will not be
required to take into account the tax consequences to, or obtain the consent
of, the unitholders of Archstone-Smith Operating Trust in deciding whether to
cause Archstone-Smith Operating Trust to undertake specific transactions that
could have adverse tax consequences to the holders of Archstone-Smith Operating
Trust units.
However, the Archstone-Smith Operating Trust declaration of trust provides
that Archstone-Smith Operating Trust will not undertake specified transactions
that would result in the recognition of gain to Smith Partnership unitholders.
For descriptions of the agreements that Archstone-Smith and Archstone-Smith
Operating Trust are entering into with respect to Smith Partnership unitholders
in connection with the merger and the partnership merger and the existing
agreements of Smith Partnership related to tax matters that Archstone-Smith and
Archstone-Smith Operating Trust have agreed to assume in connection with the
merger and the partnership merger, see "The Merger Agreement--Tax Related
Undertakings of Archstone" beginning on page 95. Except for these specific
undertakings, Archstone-Smith Operating Trust and Archstone-Smith have not made
any commitment to Smith Residential, Smith Partnership or any Smith Partnership
unitholders not to undertake transactions that will cause the former Smith
Partnership unitholders to recognize all or part of the taxable gain that was
deferred either through the original contribution of assets to Smith
Partnership or through the partnership merger.
Tax Status of Archstone-Smith Operating Trust
The entity that will survive the partnership merger is organized for state
law purposes as a Maryland real estate investment trust. Prior to the
partnership merger, this entity will make an election to be treated either as a
partnership or as a disregarded entity for federal income tax purposes. Once
such election is made, this entity automatically will be treated as a
disregarded entity when it has solely one owner and a partnership when it has
more than one owner.
In order for Archstone to be able to make this election, it cannot have made
an election to change its entity classification status after December 31, 1996.
An entity that files an election to be treated as a REIT for federal income tax
purposes is treated as having made an election to be treated as an association
for federal income tax purposes. As a result, if Archstone made an election to
be treated as a REIT for federal income tax purposes after December 31, 1996,
it would be deemed to have made an election regarding its entity classification
and would not be eligible to make an election to be treated as a partnership or
a disregarded entity. If this were the case, Archstone-Smith Operating Trust
would not qualify as a partnership and the tax implications to the Smith
Partnership unitholders would be significant.
Mayer, Brown & Platt, counsel to Archstone-Smith Operating Trust and
Archstone-Smith will provide opinions to Smith Residential as a condition to
the merger to the effect that Archstone has been organized and operated in
conformity with the requirements for qualification as a REIT commencing with
Archstone's taxable year ending December 31, 1994 and that the entity into
which Smith Partnership will merge will be treated for federal income tax
purposes as a partnership or an entity disregarded as a separate entity
immediately prior to,
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and at the time of, the partnership merger. Mayer, Brown & Platt's opinions
rely upon customary representations by Archstone and Archstone-Smith about
factual matters relating to the income, organization and operation of
Archstone, Archstone-Smith and their subsidiaries, including that Archstone
filed its initial election to be treated as a REIT prior to December 31, 1996
and that Archstone has made no election to change its classification since
filing such initial election other than the election to be made prior to the
partnership merger as described above.
An entity that is classified as a partnership for federal income tax
purposes generally is not a taxable entity and incurs no federal income tax
liability. Instead, each partner is required to take into account its allocable
share of income, gains, losses, deductions and credits of the partnership in
computing its federal income tax liability, even if no cash distributions are
made by the partnership to the partner. Distributions of money by a partnership
to a partner generally are not taxable unless the amount of the distribution
exceeds the partner's adjusted basis in its partnership interest.
An entity that is classified as a partnership under these regulations
nevertheless will be taxable as a corporation if it is a "publicly traded
partnership" within the meaning of section 7704 of the Internal Revenue Code
that fails to satisfy a "90% qualifying income" test under section 7704 of the
Internal Revenue Code. A partnership is a publicly traded partnership under
section 7704 of the Internal Revenue Code if:
. interests in the partnership are traded on an established securities
market; or
. interests in the partnership are readily tradable on a "secondary
market" or the "substantial equivalent" of a secondary market.
Under the relevant Treasury regulations, interests in a partnership will not
be considered readily tradable on a secondary market or on the substantial
equivalent of a secondary market if the partnership qualifies for specified
"safe harbors," which look to the specific facts and circumstances relating to
the partnership and to transfers of interests in the partnership.
Archstone-Smith Operating Trust intends to take the reporting position for
federal income tax purposes that it is not a publicly traded partnership. There
is a significant risk, however, that the rights of Archstone-Smith Operating
Trust unitholders to redeem the Archstone-Smith Operating Trust units for
Archstone-Smith common shares could cause the Archstone-Smith Operating Trust
units to be considered readily tradable on the substantial equivalent of a
secondary market. Moreover, if the Archstone-Smith Operating Trust units were
considered to be tradable on the substantial equivalent of a secondary market
either now or in the future, Archstone-Smith Operating Trust cannot guarantee
that it would qualify for any of the safe harbors mentioned above. For example,
Archstone-Smith Operating Trust will not be able to satisfy the "private
placement" safe harbor because it will have more than 100 partners and will
issue units in registered offerings, such as the units to be issued in
connection with the partnership merger, and Archstone-Smith Operating Trust
will not impose limitations on transfers of Archstone-Smith Operating Trust
units that would ensure it could qualify for other safe harbors.
If Archstone-Smith Operating Trust is a publicly traded partnership, it will
not be taxed as a corporation if at least 90% of its gross income consists of
qualifying income under section 7704 of the Internal Revenue Code. Qualifying
income generally includes real property rents and other specified types of
passive and portfolio income. Archstone-Smith Operating Trust believes that it
will have sufficient qualifying income so that it will be taxed as a
partnership, even if it were a publicly traded partnership. The income
requirements applicable to Archstone-Smith in order for it to qualify as a REIT
under the Internal Revenue Code and the definition of qualifying income under
the publicly traded partnership rules are very similar in many respects. In
addition, failure of Archstone-Smith Operating Trust to qualify as a
partnership for tax purposes would cause Archstone-Smith to fail to qualify as
a REIT. Therefore, it is likely that Archstone-Smith will manage Archstone-
Smith Operating Trust in such a way that Archstone-Smith will meet the gross
income tests applicable to REITs and Archstone-Smith Operating Trust will have
qualifying income sufficient for it to avoid being taxed as a corporation.
105
If Archstone-Smith Operating Trust were a publicly traded partnership, but
were not taxed as a corporation for federal income tax purposes because it
satisfies the 90% qualifying income requirement, holders of Archstone-Smith
Operating Trust units nevertheless would be subject to special passive loss
rules applicable to publicly traded partnerships. In particular, if Archstone-
Smith Operating Trust were a publicly traded partnership, an Archstone-Smith
Operating Trust unitholder would be unable to use passive losses from other
passive activities to offset the unitholder's share of Archstone income and
gains. Similarly, any Archstone-Smith Operating Trust losses allocable to an
Archstone-Smith Operating Trust unitholder could be used only to offset the
unitholder's allocable share of Archstone-Smith Operating Trust income and
gains and not against income and gains from other passive activities.
This entire discussion assumes that Archstone-Smith Operating Trust will be
treated as a partnership for federal income tax purposes, in accordance with
the opinion of Mayer, Brown & Platt referred to beginning on page 101, under
the heading "--Summary of Tax Opinions Relating to the Partnership Merger." If
Archstone-Smith Operating Trust were instead taxable as a corporation, most, if
not all, of the tax consequences described below would not apply and
distributions to Archstone-Smith Operating Trust unitholders could be
materially reduced. In addition, if Archstone-Smith Operating Trust were
taxable as a corporation, Archstone-Smith would fail to qualify as a REIT under
the Internal Revenue Code and would be taxable as a regular corporation. This
would likely have the effect of reducing the value of Archstone-Smith common
shares, which, in turn, would adversely affect the value of Archstone-Smith
Operating Trust units because Archstone-Smith Operating Trust units are
convertible into Archstone-Smith common shares or their cash equivalent, at the
election of Archstone-Smith.
Federal Income Tax Consequences to the Smith Partnership Unitholders of the
Merger Between Smith Residential and Archstone-Smith
Prior to the partnership merger, Smith Residential will merge into
Archstone-Smith. Pursuant to section 708(b)(1)(B) of the Internal Revenue Code,
a partnership will be considered to have terminated if within a twelve-month
period there is a sale or exchange of 50% or more of the interests in
partnership capital and profits. Because Smith Residential owns more than 50%
in Smith Partnership's capital and profits and because this interest will be
transferred to Archstone-Smith as a result of the merger, there will be a
termination of the Smith Partnership before the partnership merger.
The termination under section 708(b)(1)(B) will result in a closing of Smith
Partnership's taxable year for all partners as of the date of the merger. At
the time of the merger, Smith Partnership will be treated as contributing all
of its assets and liabilities to a new partnership, in exchange for an interest
in the new partnership. Immediately thereafter, Smith Partnership will be
treated as distributing the interests in the new partnership to Archstone-Smith
and the other Smith Partnership unitholders.
Generally, Smith Partnership unitholders will not recognize gain or loss as
a result of the merger and the 708(b)(1)(B) termination. However, if a
unitholder of Smith Partnership has a different taxable year than Smith
Partnership, that unitholder may be required to include Smith Partnership's
distributions from both Smith Partnership's taxable year ending December 31,
2000 and Smith Partnership's taxable year ending at the time of the merger in
one tax return. For example, a Smith Partnership unitholder whose current
taxable year began before December 31, 2000 and ends after the closing of the
merger will have to include in the unitholder's current taxable year the
unitholder's distributive share of Smith Partnership income, gain, loss,
deduction, credits and other items for both Smith Partnership's taxable year
ending December 31, 2000 and the short taxable year ending on the date of the
merger.
Smith Partnership currently has in place an election under section 754 of
the Code. This election is irrevocable without the consent of the IRS. In
connection with the section 708 termination of Smith Partnership, the section
754 election generally will permit Archstone-Smith to adjust its share of the
basis in Smith Partnership's properties, which we refer to as "inside basis,"
pursuant to section 743(b) of the Internal Revenue Code to fair market value,
as if Archstone-Smith had acquired a direct interest in Smith Partnership's
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assets. The section 743(b) adjustment would be attributed solely to Archstone-
Smith, as the deemed purchaser of Smith Partnership units, and is not added to
the bases of Smith Partnership assets associated with all of the unitholders in
Smith Partnership.
The section 708 termination generally will result in a reduction in
depreciation deductions of Smith Partnership for the portion of the year prior
to the partnership merger due to tax conventions applicable upon a disposition
or deemed disposition of depreciable property and will reduce the depreciation
deductions available in the future to Archstone-Smith Operating Trust with
respect to properties owned by Smith Partnership at the time of the partnership
merger.
Tax Consequences of the Partnership Merger to Smith Partnership Unitholders
As described above, for federal income tax purposes, the partnership merger
will be treated as a contribution by Archstone-Smith of the Archstone assets to
Archstone-Smith Operating Trust in exchange for Archstone-Smith Operating Trust
units and a contribution by the new partnership of the new partnership assets
to Archstone-Smith Operating Trust in exchange for Archstone-Smith Operating
Trust units followed by a distribution of such units to the Smith Partnership
unitholders in liquidation of the new partnership. In general, the Smith
Partnership unitholders will not recognize gain or loss due to the partnership
merger. However, nonrecognition treatment will not apply if one of the
following situations applies.
. The Smith Partnership unitholder receives a deemed cash distribution
from Archstone-Smith Operating Trust as a result of a decrease in the
unitholder's share of Smith Partnership liabilities that is not offset
by the unitholder's share of Archstone-Smith Operating Trust liabilities
attributable to the Archstone-Smith Operating Trust units held following
the partnership merger. Under these circumstances, the Smith Partnership
unitholder will recognize gain if the deemed cash distribution from the
partnership merger exceeds the unitholder's adjusted basis in its Smith
Partnership units immediately before the merger. Similarly, gain could
also be recognized by a Smith Partnership unitholder if the unitholder's
share of Archstone-Smith Operating Trust liabilities is decreased after
the partnership merger by an amount that exceeds its basis in the
Archstone-Smith Operating Trust units held following the time of the
partnership merger, whether the decrease is due to the repayment by
Archstone-Smith Operating Trust of all or part of its liabilities or
some other event.
. The contribution of Smith Partnership assets to Archstone-Smith
Operating Trust is treated in whole or in part as a "disguised sale" of
the Smith Partnership assets under section 707 of the Internal Revenue
Code.
. The unitholder is considered to receive a taxable distribution of
"marketable securities" under section 731(c) of the Internal Revenue
Code to which an exception does not apply.
. The unitholder is required to recognize income under the recapture rules
of section 465(e) of the Internal Revenue Code.
These potential gain recognition situations are discussed more fully below.
In addition, as mentioned above, subsequent events or transactions could
cause a former Smith Partnership unitholder to recognize all or part of its
deferred gain that is not recognized in the partnership merger. See "--Effect
of Subsequent Events" beginning on page 115.
Reduction in Share of Partnership Liabilities/Deemed Cash Distribution. If
a Smith Partnership unitholder's share of Smith Partnership liabilities is
reduced as a result of the partnership merger, the unitholder will be
considered to receive a deemed cash distribution in connection with the
partnership merger and, accordingly, the Smith Partnership unitholder could
recognize taxable gain at the time of the partnership merger. The Smith
Partnership unitholder, however, will recognize gain only to the extent that
the deemed cash distribution exceeds the Smith Partnership unitholder's
adjusted tax basis in its Smith Partnership units immediately before the
partnership merger.
107
In order to determine whether a Smith Partnership unitholder's share of
liabilities is reduced as a result of the partnership merger, the Smith
Partnership unitholder's share of liabilities in Smith Partnership immediately
before the partnership merger will be compared to the unitholder's share of
liabilities as an Archstone-Smith Operating Trust unitholder immediately after
the partnership merger. Any reduction in a former Smith Partnership
unitholder's share of liabilities will be considered to result in a deemed cash
distribution from Archstone-Smith Operating Trust to that unitholder, which
will be taxable to the extent that it exceeds the Smith Partnership
unitholder's adjusted tax basis in the Smith Partnership units immediately
before the partnership merger. It is essential that each Smith Partnership
unitholder consult with its own tax advisor and take into account its own
particular circumstances in order to assess the potential impact of a reduction
of the unitholder's partnership liabilities and the resulting deemed receipt of
a cash distribution as a result of the partnership merger.
Under section 752 of the Internal Revenue Code and the relevant Treasury
regulations, the determination of a partner's share of partnership liabilities
depends on whether the liabilities are "recourse" or "non-recourse." A
partnership liability is a recourse liability to the extent that any partner,
or a person related to any partner, bears the economic risk of loss for that
liability. A partnership liability is nonrecourse to the extent that no
partner, and no person related to any partner, bears the economic risk of loss
for that liability.
Recourse Liabilities. A former Smith Partnership unitholder will not have
any share of the recourse liabilities of Archstone-Smith Operating Trust
unless, and only to the extent that, the unitholder either:
. has guaranteed or guarantees specified debt of Smith Partnership that
remains outstanding following the partnership merger and such guarantee
is effective for federal income tax purposes to cause the former Smith
Partnership unitholder to be considered to bear the risk of loss with
respect to those liabilities; or
. enters into a "deficit restoration obligation" with respect to any
deficit in its capital account as an Archstone-Smith Operating Trust
unitholder and that deficit restoration obligation is effective for
federal income tax purposes to cause the former Smith Partnership
unitholder to be considered to bear the risk of loss with respect to
Archstone-Smith Operating Trust recourse liabilities.
Nonrecourse Liabilities. A partner's share of partnership nonrecourse
liabilities equals the sum of:
. the partner's share of "partnership minimum gain" under section 704(b)
of the Internal Revenue Code and the relevant Treasury regulations;
. the partner's "section 704(c) minimum gain," which is the amount of any
taxable gain that would be allocated to the partner under section 704(c)
of the Internal Revenue Code or in the same manner as section 704(c) of
the Internal Revenue Code in connection with a revaluation of
partnership property if the partnership disposed of all partnership
property subject to one or more nonrecourse liabilities of the
partnership in full satisfaction of those liabilities and for no other
consideration in a taxable transaction; and
. the partner's share of "excess nonrecourse liabilities" that are not
allocable to the partners under one of the two preceding rules.
Immediately after the partnership merger, Archstone-Smith Operating Trust
will not have any partnership minimum gain, and, thus, no Archstone-Smith
Operating Trust unitholder will be allocated any share of nonrecourse debt that
is attributable to partnership minimum gain.
The amount of any liabilities attributable to section 704(c) minimum gain
allocable to a Smith Partnership unitholder who becomes an Archstone-Smith
Operating Trust unitholder will depend on several factors, including:
. the Smith Partnership unitholder's share of the section 704(c) gain of
Smith Partnership immediately prior to the partnership merger, which
depends, among other things, upon the assets that the
108
unitholder originally contributed or was deemed to contribute to Smith
Partnership in exchange for its Smith Partnership units, the tax basis
of those assets at the time of the contribution to Smith Partnership
relative to their fair market value at the time, and the amount of
nonrecourse liabilities of Smith Partnership, if any, secured by those
assets at the time of the partnership merger;
. the Smith Partnership unitholder's share of any additional section
704(c) gain indirectly attributable to the assets of Smith Partnership
created by reason of the partnership merger which depends, among other
things, upon the tax basis of the Smith Partnership properties at the
time of the partnership merger relative to their fair market value at
the time of the partnership merger and the amount of nonrecourse
liabilities of Smith Partnership, if any, secured by those assets at the
time of the partnership merger; and
. the extent to which Archstone-Smith Operating Trust causes nonrecourse
liabilities of Smith Partnership as to which there exists section 704(c)
minimum gain immediately before the partnership merger to be repaid or
refinanced in connection with or subsequent to the partnership merger in
a manner that reduces or eliminates that section 704(c) minimum gain.
In connection with the partnership merger, Archstone-Smith Operating Trust
has agreed to maintain outstanding, or refinance with replacement debt, until
January 1, 2022 certain nonrecourse liabilities of Smith Partnership as set
forth on a schedule to the tax protection agreement. Archstone-Smith Operating
Trust has also agreed pursuant to the tax protection agreement to make
allocations of liabilities under section 752 of the Internal Revenue Code
taking into account the following:
. existing Smith Partnership nonrecourse debt, or any replacement debt
therefor, is treated as allocable to specified contributed Smith
Partnership properties in amounts not less than the amounts set forth on
a schedule to the tax protection agreement at the time of the merger,
subject to reduction for scheduled amortization;
. ""excess 704(c) liabilities" are allocated to the Smith Partnership
unitholders to the extent the section 704(c) gain of any Smith
Partnership unitholder exceeds such unitholder's section 704(c) minimum
gain with respect to Smith Partnership properties;
. Smith Partnership unitholders that are shown on a schedule to the tax
protection agreement as having liability for a specified dollar amount
of an existing nonrecourse debt that is "partner nonrecourse debt" are
allocated a dollar amount of such debt equal to the amount shown on the
schedule with respect to such unitholder, subject to reduction for
scheduled amortization; and
. in making allocations of debt under Treasury regulation section 1.752-
3(a)(2) with respect to a specific property contributed by Smith
Partnership, allocations are made
-- first to the Smith Partnership unitholders in an amount equal to the
lesser of
. the "section 704(c) minimum gain" that such Smith Partnership
unitholder would have been allocated by Smith Partnership under
Treasury regulation section 1.752-3(a)(2) immediately prior to
the partnership merger, or
. the "section 704(c) minimum gain" that such Smith Partnership
unitholder would have been allocated by Smith Partnership under
Treasury regulation section 1.752-3(a)(2) immediately after the
unitholder acquired an interest in Smith Partnership by reason of
the contribution of an interest in the contributed property to
Smith Partnership in exchange for an interest in Smith
Partnership, and
-- thereafter pro rata among the Smith Partnership unitholders based
upon the number of Archstone-Smith Operating Trust units that they
hold and their proportionate shares of the "section 704(c) minimum
gain" existing immediately after the partnership merger in excess of
amounts described in the second arrow above.
109
Archstone-Smith Operating Trust will be prohibited from using a method of
allocating excess nonrecourse liabilities to Smith Partnership unitholders that
is less favorable than methods used with respect to other Archstone-Smith
Operating Trust unitholders in the future without offering former Smith
Partnership unitholders the opportunity to participate in that allocation
method. Archstone-Smith Operating Trust is not required to make allocations of
nonrecourse liabilities in accordance with the foregoing, however, if there has
been an applicable change in law that would no longer permit such allocations.
See "The Merger Agreement--Tax Related Undertakings of Archstone" beginning on
page 95. Although Archstone-Smith Operating Trust intends to use allocation
methods that are authorized by applicable Treasury regulations, Archstone-Smith
Operating Trust cannot guarantee that the Internal Revenue Service will respect
these methods of allocation of excess nonrecourse liabilities following the
partnership merger. These methods also could result in changes from year to
year in an Archstone-Smith Operating Trust unitholder's share of excess
nonrecourse liabilities of Archstone-Smith Operating Trust.
Archstone-Smith Operating Trust has not made, and will not make, any
assurances to any of the former Smith Partnership unitholders as to whether
they will be allocated a sufficient amount of the nonrecourse liabilities of
Archstone-Smith Operating Trust such that the Smith Partnership unitholders
will not be deemed to receive a cash distribution in the partnership merger in
excess of the unitholder's adjusted tax basis in its Smith Partnership units
immediately before the partnership merger.
Guarantees. Specified Smith Partnership unitholders will be able to continue
to guarantee debt of Smith Partnership that is assumed by Archstone-Smith
Operating Trust in the partnership merger, or enter into replacement guarantees
of debt of Archstone-Smith Operating Trust as provided in the tax protection
agreement. For a further description of Archstone-Smith Operating Trust's
undertakings with respect to these guarantees and the remedies that would apply
if Archstone-Smith Operating Trust were to breach those undertakings, see the
discussion under the heading "The Merger Agreement--Tax Related Undertakings of
Archstone" beginning on page 95. However, Archstone-Smith Operating Trust does
not offer any assurance that these guarantees either are or will be effective
to defer taxable gain that a former Smith Partnership unitholder otherwise
would recognize either at the time of the partnership merger or thereafter.
Deficit Restoration Obligations. Archstone-Smith Operating Trust has agreed
to consider in good faith requests to enter into deficit restoration
obligations by Smith Partnership unitholders with respect to Archstone-Smith
Operating Trust units if the former Smith Partnership unitholder likely would
not be allocated sufficient liabilities to avoid recognition of gain. In
determining whether or not to grant such a request, Archstone-Smith Operating
Trust is entitled to take into account all factors relating to Archstone-Smith
Operating Trust, including, its debt structure, the tax situation of other
unitholders and its long-term business needs. In the event that Archstone-Smith
Operating Trust fails to act in good faith, the former Smith Partnership
unitholders' sole remedy will be for specific performance with no entitlement
to monetary damages.
The deficit restoration obligation is an undertaking to restore to
Archstone-Smith Operating Trust the amount of any negative capital account
balance upon liquidation or redemption of the unitholder's interest in
Archstone-Smith Operating Trust, up to the maximum amount specified in the
unitholder's deficit restoration obligation. The declaration of trust of
Archstone-Smith Operating Trust allocates net losses in excess of Archstone-
Smith Operating Trust's aggregate capital first to Archstone-Smith, in an
amount equal to the excess of the aggregate recourse debt of Archstone-Smith
Operating Trust over the aggregate deficit restoration obligations of all
Archstone-Smith Operating Trust unitholders, and then to those unitholders who
have deficit restoration obligations in proportion to and to the extent of such
restoration amounts. These special allocations of loss will be made applicable
to Smith Partnership unitholders who enter into deficit restoration obligations
with respect to the Archstone-Smith Operating Trust units received in the
partnership merger. For a more detailed discussion of allocations of income and
loss under the declaration of trust of Archstone-Smith Operating Trust, see "--
Tax Consequences of Ownership of Archstone-Smith Operating Trust Units After
the Partnership Merger--Allocations of Archstone-Smith Operating Trust Income,
Gain, Loss and Deductions" on page 119.
110
Archstone-Smith Operating Trust does not offer any assurance that the
deficit restoration obligations will be effective to defer taxable gain that a
former Smith Partnership unitholder otherwise would recognize either at the
time of the partnership merger or thereafter. Among other things, a deficit
restoration obligation would be effective to defer the recognition of gain only
if and to the extent that Archstone-Smith Operating Trust has recourse
liabilities outstanding equal to the aggregate amount of the deficit
restoration obligation of the particular unitholder and all similar obligations
undertaken by other unitholders of Archstone-Smith Operating Trust. However,
Archstone-Smith Operating Trust will not be required to maintain any specific
level of partnership recourse debt or incur any additional recourse liabilities
in order to permit Smith Partnership unitholders to be allocated recourse
liabilities of Archstone-Smith Operating Trust equal to the amount of their
deficit restoration obligations.
Archstone-Smith Operating Trust will take the position for federal income
tax reporting purposes that each former Smith Partnership unitholder that
either guarantees recourse debt obligations of Archstone-Smith Operating Trust,
including those obligations of Smith Partnership that are outstanding following
the partnership merger, or enters into a deficit restoration obligation, either
at the time of the partnership merger or at a later time, will be allocated a
share of Archstone-Smith Operating Trust recourse liabilities equal to the
amount of debt guaranteed or, as applicable, to the lesser of the amount of the
unitholder's deficit restoration obligation or the percentage of all Archstone-
Smith Operating Trust recourse liabilities that the amount of the former Smith
Partnership unitholder's deficit restoration obligation bears to the aggregate
amount of the deficit restoration obligations and similar undertakings of all
Archstone-Smith Operating Trust unitholders and other partners. The Internal
Revenue Service is not bound by such position, however, and could assert that
recourse liabilities should be allocated in a different manner. Archstone-Smith
Operating Trust does not guarantee that the Internal Revenue Service would not
successfully challenge Archstone-Smith Operating Trust's position on these
matters.
Each Smith Partnership unitholder who, pursuant to the specific agreements
described above, has guaranteed debt of Smith Partnership and will be offered
the opportunity to continue such guarantees or to enter into replacement
guarantees with respect to debt of Archstone-Smith Operating Trust or will be
offered the opportunity to enter into a deficit restoration obligation with
respect to its Archstone-Smith Operating Trust units is urged to consult with
its own tax advisor regarding the desirability and consequences of entering
into such obligations with respect to the Archstone-Smith Operating Trust units
that it will receive in the partnership merger, either at the time of the
partnership merger or at a later time.
Disguised Sale. A Smith Partnership unitholder may have taxable gain if the
partnership merger is considered to result in a "disguised sale" to Archstone-
Smith Operating Trust of some or all of the Smith Partnership assets or the
Smith Partnership unitholder's units. Section 707 of the Internal Revenue Code
and the applicable Treasury regulations, which are referred to as the disguised
sale regulations, generally provide that a disguised sale of property has
occurred if:
. a partner contributes property to a partnership; and
. the partnership transfers money or other consideration to the partner.
Under the disguised sale regulations, a contribution to a partnership and
any transfer to a partner that occur within two years of each other are
presumed to be a disguised sale unless:
. the facts and circumstances clearly establish that the contribution and
transfer do not constitute a disguised sale; or
. an exception to disguised sale treatment applies.
No direct transfers of money or of consideration other than Archstone-Smith
Operating Trust units will be made for federal income tax purposes to any Smith
Partnership unitholder in the partnership merger. However, the disguised sale
rules can apply in other circumstances as well.
111
For purposes of the disguised sale rules, either an assumption of
liabilities by the partnership or a transfer of properties subject to
liabilities is treated as a transfer of money or other property from the
partnership to the partner which may give rise to a disguised sale, even if
that transaction would not otherwise result in a taxable deemed cash
distribution in excess of the partner's basis. For purposes of this rule, a
reduction in a Smith Partnership unitholder's share of partnership liabilities
in connection with the partnership merger could be treated as a transfer of
money or property from Archstone-Smith Operating Trust to the unitholder that
gives rise to a disguised sale, even if that reduction would not otherwise
result in a taxable deemed cash distribution in excess of the Smith Partnership
unitholder's basis in his partnership interest. The method of computing the
amount of any such reduction under the disguised sale rules is different from,
and generally more onerous than, the method applied for purposes of the rules
discussed above under "--Reduction in Share of Partnership Liabilities/Deemed
Cash Distribution" on page 107.
However, in connection with a contribution to a partnership that is not
otherwise treated as part of a disguised sale, neither the assumption of
"qualified liabilities" by the partnership nor the acquisition by the
partnership of properties subject to "qualified liabilities" is treated as part
of a disguised sale. Under the disguised sale regulations, a qualified
liability includes:
. any liability incurred more than two years prior to the earlier of the
transfer of the property or the date the partner agrees in writing to
the transfer, as long as the liability has encumbered the transferred
property throughout the two-year period;
. a liability that was not incurred in anticipation of the transfer of the
property to a partnership, but that was incurred by the partner within
the two-year period prior to the earlier of the date the partner agrees
in writing to transfer the property or the date the partner transfers
the property to a partnership and that has encumbered the transferred
property since it was incurred;
. a liability that is traceable under applicable Treasury regulations to
capital expenditures with respect to the property; and
. a liability that was incurred in the ordinary course of the trade or
business in which property transferred to the partnership was used or
held, but only if all the assets related to that trade or business are
transferred, other than assets that are not material to a continuation
of the trade or business.
A liability incurred within two years of the transfer is presumed to be
incurred in anticipation of the transfer unless the facts and circumstances
clearly establish that the liability was not incurred in anticipation of the
transfer. However, to the extent that a contributing partner incurs a
refinancing liability and the proceeds thereof are allocable under the Treasury
regulations to payments discharging all or part of any other liability of that
partner or of the partnership, the refinancing debt is considered the same as
the other liability for purposes of the disguised sale regulations. Finally, if
a partner treats a liability incurred within two years of the transfer as a
qualified liability because the facts clearly establish that it was not
incurred in anticipation of the transfer, such treatment must be disclosed to
the Internal Revenue Service in the manner set forth in the disguised sale
regulations.
Smith Residential and Smith Partnership believe that all liabilities of
Smith Partnership should be considered qualified liabilities and, thus, should
not result in recognition of gain under the disguised sale rules to those Smith
Partnership unitholders who have held their Smith Partnership units for at
least two years at the time of the partnership merger. There can be no
assurance, however, that the Internal Revenue Service would not contend
otherwise.
If a Smith Partnership unitholder has held its Smith Partnership units for
less than two years, then it may be necessary to evaluate separately those
liabilities of Smith Partnership that were outstanding prior to the
unitholder's acquisition of its interest in Smith Partnership. Even under that
approach, however, those liabilities would appear to be qualified liabilities
either because the liabilities were traceable to a capital expenditure, the
112
acquisition of an interest in Smith Partnership, or because the liabilities
were not incurred in anticipation of the partnership merger. There can be no
assurance, however, that the Internal Revenue Service would not contend
otherwise. Moreover, a unitholder who acquired his interest within two years of
the partnership merger and is relying only on the second argument would be
required to disclose that position to the Internal Revenue Service in the
manner required in the disguised sale regulations. A Smith Partnership
unitholder who acquired its Smith Partnership units within two years of the
partnership merger is strongly encouraged to consult with its tax advisor
regarding the application of these rules to it.
Cash distributions from a partnership to a partner also may be treated as a
transfer of property for purposes of the disguised sale rules. However, a cash
distribution will not be treated as part of a disguised sale if it is
attributable to a reasonable preferred return or is a distribution of operating
cash flow. Archstone-Smith Operating Trust anticipates that any ongoing cash
distributions that it will make to its unitholders, including the former Smith
Partnership unitholders, will qualify as distributions of operating cash flow
and, thus, will not be considered part of a disguised sale. Archstone-Smith
Operating Trust cannot guarantee, however, that circumstances will not change
and that Archstone-Smith Operating Trust will not make one or more
extraordinary cash distributions that could be viewed as part of a disguised
sale to the extent received by former Smith Partnership unitholders.
Archstone-Smith Operating Trust unitholders have unit redemption rights,
which entitle the unitholders to require Archstone-Smith Operating Trust to pay
the unitholder the fair market value of the Archstone-Smith Operating Trust
unit in cash, unless Archstone-Smith elects to acquire the Archstone-Smith
Operating Trust unit for cash or an Archstone-Smith common share, at Archstone-
Smith's election. The existence of the unit redemption rights with respect to
the Archstone-Smith Operating Trust units issued in the partnership merger
should not be considered to be additional consideration for purposes of the
disguised sale rules, although there can be no assurance that the Internal
Revenue Service would not contend otherwise. However, if a Smith Partnership
unitholder that acquires Archstone-Smith Operating Trust units in the
partnership merger were to exercise the unit redemption right at the time of or
shortly after the partnership merger, there may be a risk that the payment of
cash by Archstone-Smith Operating Trust would result in disguised sale
treatment of the partnership merger for that unitholder. Archstone-Smith
Operating Trust intends to take the position that an exercise of a unit
redemption right by a former Smith Partnership unitholder following the
partnership merger does not result in disguised sale treatment for the
partnership merger. Archstone-Smith Operating Trust cannot guarantee, however,
that the Internal Revenue Service would not successfully challenge this
position.
If a disguised sale of all or a portion of Smith Partnership assets or of a
Smith Partnership unitholder's units to Archstone-Smith Operating Trust is
deemed to occur, a unitholder could be required to recognize some or all of the
deferred gain represented by the excess of the amount realized, which is equal
to the sum of the fair market value of the Archstone-Smith Operating Trust
units received in the partnership merger, the amount of any reduction in
liabilities attributable to the unitholders as a result of the partnership
merger, and any other consideration received in the partnership merger, over a
Smith Partnership unitholder's basis in those units. The disguised sale would
be treated as a sale for all purposes of the Internal Revenue Code and would be
considered to take place on the date that, under general principles of federal
tax law, Archstone-Smith Operating Trust becomes the owner of the property. If
the transfer of money or other consideration from Archstone-Smith Operating
Trust occurs after the partnership merger, Archstone-Smith Operating Trust
would be treated as having acquired the property at the time of the partnership
merger and having issued an obligation to transfer to the unitholders, as
applicable, money or other consideration at a later date.
Moreover, if a transfer of property to a partnership is treated as part of a
disguised sale without regard to the partnership's assumption of or taking
subject to a qualified liability, then the partnership's assumption of or
taking subject to that liability is treated as a transfer of additional
consideration to the transferring partner. The amount of a qualified liability
that will be treated as additional consideration is generally an amount
determined by multiplying the amount of the qualified liability by the
partner's "net equity percentage." The net equity percentage is generally the
amount of consideration received by the partner, other than relief from
qualified liabilities, divided by the partner's net equity in the property
sold, as calculated under the disguised sale regulations.
113
Distribution of Marketable Securities. Under section 731 of the Internal
Revenue Code, a Smith Partnership unitholder could recognize gain or loss on
the receipt of Archstone-Smith Operating Trust units if the Archstone-Smith
Operating Trust units are considered "marketable securities" unless specified
conditions are met. Archstone-Smith Operating Trust units could be considered
to be marketable securities because they are readily convertible into publicly
traded Archstone-Smith common shares or cash in accordance with the unit
redemption rights of Archstone-Smith Operating Trust unitholders.
However, Treasury regulations under section 731(c), as applied to the
partnership merger, provide that a distribution of marketable securities will
not be taxable under that section if:
. the Archstone-Smith Operating Trust units are acquired by Smith
Partnership in the partnership merger and the partnership merger
qualifies as a nonrecognition transaction for Archstone-Smith Operating
Trust and Smith Partnership, which is expected to be the case;
. the value at the time of the partnership merger of any securities and
money of Smith Partnership that are contributed to Archstone-Smith
Operating Trust in the partnership merger is less than 20% of the value
of the assets contributed by Smith Partnership to Archstone-Smith
Operating Trust in the partnership merger, which will be the case; and
. Smith Partnership distributes the Archstone-Smith Operating Trust units
to its unitholders within five years after the partnership merger, which
will be the case.
Accordingly, Archstone-Smith Operating Trust and Smith Partnership believe
that the distribution of Archstone-Smith Operating Trust units in the
partnership merger would not be treated as a taxable distribution of marketable
securities under section 731(c). If the receipt of Archstone-Smith Operating
Trust units in the partnership merger were treated as a taxable distribution of
marketable securities under section 731(c), a Smith Partnership unitholder's
gain as a result of the distribution would be limited under section
731(c)(3)(B) which provides that the value of the marketable securities treated
as a distribution of money, which would be taxable to the extent that such
amount exceeds the unitholder's basis in the Archstone-Smith Operating Trust
units, is reduced by the amount of gain that would be allocated to the Smith
Partnership unitholder upon a hypothetical sale by Smith Partnership of the
Archstone-Smith Operating Trust units received in the exchange for the
contribution by Smith Partnership of its assets to Archstone-Smith Operating
Trust.
Section 465(e) Recapture. Under section 465 of the Internal Revenue Code, a
taxpayer's ability to use losses to offset taxable income is limited by rules
that are referred to as the at-risk rules. See "--Tax Consequences of Ownership
of Archstone-Smith Operating Trust Units After the Partnership Merger--
Limitations on Deductibility of Losses; Treatment of Passive Activities and
Portfolio Income" beginning on page 121. In addition, the at-risk rules may
require a taxpayer to recapture losses that were previously used by the
taxpayer with respect to an activity if the taxpayer's at-risk amount for the
activity falls below zero at the close of the taxable year. Losses are
recaptured by including the amount of the losses previously used by the
taxpayer in the taxpayer's taxable income for the year of the recapture.
The identification and scope of an activity and the calculation of the at-
risk amount under the at-risk rules are highly complex and can involve
uncertainties. Generally, a taxpayer's at-risk amount for an activity is the
amount of the taxpayer's investment in the activity, which is increased by the
taxpayer's income from the activity and the taxpayer's share of the qualified
nonrecourse financing, as defined in section 465(b)(6) of the Internal Revenue
Code, with respect to the activity, and reduced by the taxpayer's losses and
distributions from the activity. It is possible that the partnership merger
and/or the repayment or refinancing of some outstanding indebtedness of Smith
Partnership that constitutes qualified nonrecourse financing, either at the
time of or following the partnership merger, could cause a Smith Partnership
unitholder's at-risk amount to be reduced below zero, which could, in turn,
cause the Smith Partnership unitholder to recognize taxable income as a result
of the section 465(e) recapture provisions. The definition of qualified
nonrecourse financing is different from, and sometimes more restrictive than,
the definition of nonrecourse liabilities for purposes of determining basis,
discussed above. For example, debt issued by Archstone-Smith Operating Trust in
the public debt markets may
114
not qualify as qualified nonrecourse financing even if it qualifies as a
nonrecourse liability. It is, therefore, possible that a unitholder could incur
a reduction in its share of qualified nonrecourse financing that causes it to
recognize taxable income under the section 465(e) recapture rules even if the
unitholder does not have a reduction in its nonrecourse liabilities that causes
it to recognize gain as the result of a deemed cash distribution, as described
above. In this regard, Archstone-Smith Operating Trust has not made, and will
not make, any assurances to the Smith Partnership unitholders who will
undertake deficit restoration obligations or have guaranteed debt of Smith
Partnership that will be assumed by Archstone that such obligations will be
effective to avoid gain under the section 465(e) recapture rules.
Effect of Subsequent Events
Even if a Smith Partnership unitholder is not required to recognize gain at
the time of the merger or the partnership merger, subsequent events could cause
a Smith Partnership unitholder who continues as an Archstone-Smith Operating
Trust unitholder in the partnership merger to recognize part or all of the
unitholder's gain that is not recognized at the time of the partnership merger.
Subsequent events that could cause the recognition of gain to a former Smith
Partnership unitholder include:
. the sale of individual properties by Archstone-Smith Operating Trust,
particularly those currently held by Smith Partnership and with respect
to which the former Smith Partnership unitholder had substantial
deferred gain even before the partnership merger;
. a distribution of a property held by Smith Partnership at the time of
the partnership merger with respect to which gain was deferred, either
at the time the former Smith Partnership unitholder contributed the
property to Smith Partnership or at the time of the merger or the
partnership merger;
. the refinancing, repayment or other reduction in the amount of existing
debt secured by individual properties, particularly those held by Smith
Partnership and with respect to which the former Smith Partnership
unitholder had substantial deferred gain even before the partnership
merger;
. the issuance of additional Archstone-Smith Operating Trust units, which
could reduce the former Smith Partnership unitholder's share of
Archstone-Smith Operating Trust liabilities;
. an increase in the basis of a property held by Smith Partnership, due to
capital expenditures or otherwise, with respect to which the former
Smith Partnership unitholder had substantial deferred gain even before
the partnership merger; and
. the elimination of the disparity between the current tax bases of the
Smith Partnership properties and the "book bases" of the properties,
which are based on the fair market value of the properties at the time
of the partnership merger, which has the effect of reducing the amount
of indebtedness allocable to former Smith Partnership unitholders for
basis purposes and, therefore, can result in deemed cash distributions.
See "--Tax Consequences of Ownership of Archstone-Smith Operating Trust
Units After the Partnership Merger--Tax Allocations with Respect to
Book-Tax Difference on Contributed Properties" on page 119.
As a general rule, Archstone-Smith, which will be the trustee of Archstone-
Smith Operating Trust, is not required to take into account the tax
consequences to, or obtain the consent of, the unitholders of Archstone-Smith
Operating Trust in deciding whether to cause Archstone-Smith Operating Trust to
undertake specific transactions that could have adverse tax consequences to the
Archstone-Smith Operating Trust unitholders. However, pursuant to the tax
protection agreement, Archstone-Smith Operating Trust has agreed, for the
benefit of Smith Partnership unitholders, not to sell the properties held by
Smith Partnership at the time of the partnership merger or the interests in
Smith Realty Company or to repay or prepay certain existing nonrecourse debts
outstanding at the time of the partnership merger. In addition, in connection
with the partnership merger, Archstone-Smith Operating Trust also will assume
and comply with prior agreements previously entered into by Smith Partnership
with some Smith Partnership unitholders not to undertake specified types of
transactions with respect to specified properties for a limited period of time
as set forth in those agreements. Any
115
compensation to be paid to a former Smith Partnership unitholder under these
circumstances would be determined under the existing agreement between Smith
Partnership and the unitholder. Except for these specific commitments and
commitments regarding the opportunity of some Smith Partnership unitholders to
guarantee and maintain specified types and amounts of debt of Archstone, Smith
Partnership and Archstone-Smith have not made any commitment to Smith, Smith
Partnership or any of the Smith Partnership unitholders not to undertake
transactions because they will cause the former Smith Partnership unitholders
to recognize all or part of the taxable gain that was deferred either through
the original contribution of assets to Smith Partnership or through the
partnership merger. See "The Merger Agreement--Tax Related Undertakings of
Archstone" beginning on page 95.
Sale of Individual Properties. If Archstone-Smith Operating Trust sells
assets after the partnership merger that have unrealized gain, under applicable
Treasury regulations the former Smith Partnership unitholders would be
specially allocated an amount of taxable gain equal to the unrealized gain,
reduced by any amortized amounts that existed with respect to the asset sold at
the time of the partnership merger. Those former Smith Partnership unitholders
who are specially allocated gain under these rules would report the additional
gain on their individual federal income tax returns, but would not be entitled
to any special distributions from Archstone-Smith Operating Trust in connection
with a sale by Archstone-Smith Operating Trust of any former Smith Partnership
assets. Thus, the former Smith Partnership unitholders may not receive cash
distributions from Archstone-Smith Operating Trust sufficient to pay their
additional taxes if Archstone-Smith Operating Trust sells properties that it
acquired from Smith Partnership at the time of the partnership merger. A former
Smith Partnership unitholder, however, may be able to use any passive losses or
passive loss carryforwards to offset any unrealized gain that it must
recognize, subject to any applicable passive loss limitations, including
special limitations that would apply if Archstone-Smith Operating Trust were to
be classified as a publicly traded partnership. See "--Tax Status of Archstone-
Smith Operating Trust" beginning on page 104.
If, following the partnership merger, Archstone-Smith Operating Trust sells
a property that Smith Partnership currently holds, the former Smith Partnership
unitholder(s) who contributed the property to Smith Partnership will be
allocated, for federal income tax purposes, the portion of the gain from the
sale that is attributable to the built-in gain that existed at the time the
property was contributed to Archstone-Smith Operating Trust. Moreover, the
former Smith Partnership unitholders as a group, including Archstone-Smith as
the successor to Smith Residential, may be required to be allocated, for
federal income tax purposes, the portion of the gain from any such sale that is
attributable to the built-in gain that existed at the time of the partnership
merger, the contribution of Smith Partnership assets to Archstone-Smith
Operating Trust, less the built-in gain attributable to the original
contributing Smith Partnership unitholders, if any, described in the preceding
sentence. If the disposition is not undertaken as a "like-kind" exchange under
section 1031 of the Internal Revenue Code and results in the recognition of any
taxable gain, Archstone-Smith Operating Trust will be required to pay the
former Smith Partnership unitholder an amount equal to any income taxes
incurred by the unitholder as a result of the sale, to the extent that any of
the built-in gain that existed at the time the property was contributed to
Smith Partnership.
The treatment of the unrealized gain in the absence of a sale of any Smith
Partnership assets will depend on the method that Archstone-Smith Operating
Trust uses to deal with unrealized gain. For a discussion of the impact to the
Archstone-Smith Operating Trust unitholders of unrealized gain in the absence
of a sale of a property, see "--Tax Consequences of Ownership of Archstone
Units After the Partnership Merger--Tax Allocations with Respect to Book-Tax
Difference on Contributed Properties" on page 119.
Distributions of Property. Upon the distribution by a partnership of
property to another partner within seven years of when the property was
contributed to the partnership, section 704(c)(1)(B) of the Internal Revenue
Code generally requires that the partner who contributed that property to the
partnership recognize any gain that existed, but was deferred, for federal
income tax purposes with respect to the property at the time of the
contribution. Similarly, section 737 of the Internal Revenue Code generally
requires the recognition of a contributing partner's deferred gain upon the
distribution by a partnership to that partner of other partnership
116
property within seven years of when that partner contributed appreciated
property to the partnership. Accordingly, a former Smith Partnership unitholder
who contributed appreciated property to Smith Partnership might be required to
recognize gain under either of these provisions if Archstone-Smith Operating
Trust either distributes property formerly held by Smith Partnership to one or
more Archstone-Smith Operating Trust unitholders or distributes any Archstone-
Smith Operating Trust property to that Smith Partnership unitholder within
seven years of when the contributing Smith Partnership unitholder originally
contributed the property to Smith Partnership. However, under specific
exceptions in the applicable Treasury regulations, neither of these provisions
will apply to cause the recognition of gain by a Smith Partnership unitholder
at the time of the partnership merger. Similarly, gain that is deferred at the
time of the partnership merger with respect to appreciated assets of Smith
Partnership that are contributed to Archstone-Smith Operating Trust, to the
extent allocable to a former Smith Partnership unitholder, will be subject to
gain recognition under these provisions upon a distribution of property by
Archstone-Smith Operating Trust within seven years of the partnership merger.
Refinancing of the Indebtedness Secured by Individual Properties. As
described above under "--Tax Consequences of the Partnership Merger to Smith
Partnership Unitholders--Reduction in Share of Partnership Liabilities/Deemed
Cash Distribution" on page 107, a Smith Partnership unitholder could recognize
taxable gain as a result of a reduction in the unitholder's share of
partnership liabilities either in connection with the partnership merger or due
to later events. Archstone-Smith Operating Trust cannot guarantee that a future
refinancing of the indebtedness securing a property would not result in a
reduction of the liabilities allocated to the former Smith Partnership
unitholders, causing the former Smith Partnership unitholders to recognize
taxable gain. Generally, the maximum amount of gain that any former Smith
Partnership unitholder could recognize as a result of a reduction in
liabilities is the amount by which its share of the indebtedness of Smith
Partnership exceeds its share of the tax basis of the Smith Partnership assets,
which amount is commonly referred to as a "negative tax capital account."
Tax Consequences of Ownership of Archstone-Smith Operating Trust Units After
the Partnership Merger
Income and Deductions in General. Each Archstone-Smith Operating Trust
unitholder will be required to report on its income tax return its allocable
share of income, gains, losses, deductions and credits of Archstone-Smith
Operating Trust. Each Archstone-Smith Operating Trust unitholder will be
required to include these items on its federal income tax return even if the
unitholder has not received any cash distributions from Archstone-Smith
Operating Trust. For each taxable year, Archstone-Smith Operating Trust will be
required to furnish to each Archstone-Smith Operating Trust unitholder a
Schedule K-1 that sets forth the unitholder's allocable share of any income,
gains, losses, deductions and credits of Archstone-Smith Operating Trust.
Archstone-Smith Operating Trust is not required to pay any federal income tax
directly.
Treatment of Archstone-Smith Operating Trust Distributions. Distributions of
money by Archstone-Smith Operating Trust to an Archstone-Smith Operating Trust
unitholder, including deemed distributions that result from a reduction in the
unitholder's share of Archstone-Smith Operating Trust liabilities, generally
will result in taxable gain to the unitholder only if and to the extent that
the distribution exceeds the unitholder's basis in its Archstone-Smith
Operating Trust units immediately before the distribution. A portion of the
gain may be taxable as ordinary income. Any reduction in an Archstone-Smith
Operating Trust unitholder's share of Archstone-Smith Operating Trust's
nonrecourse liabilities, whether through repayment, refinancing with recourse
liabilities, refinancing with nonrecourse liabilities secured by the other
properties as to which the unitholder does not have section 704(c) minimum
gain, or otherwise, will constitute a deemed distribution of money to the
unitholder. In addition, an issuance of additional units by Archstone-Smith
Operating Trust without a corresponding increase in Archstone-Smith Operating
Trust's nonrecourse liabilities could decrease an Archstone-Smith Operating
Trust unitholder's share of Archstone-Smith Operating Trust nonrecourse
liabilities, resulting in a deemed distribution of money to an Archstone-Smith
Operating Trust unitholder.
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A distribution of property other than money by Archstone-Smith Operating
Trust to its unitholders ordinarily does not result in the recognition of gain
or loss by either Archstone-Smith Operating Trust or the unitholder unless the
property is a marketable security for purposes of section 731(c) of the
Internal Revenue Code and the exceptions to the requirement for recognition of
gain do not apply. Marketable securities, for these purposes, include actively
traded securities or equity interests in another entity that are readily
convertible into or exchangeable for money or marketable securities. In that
event, the property would be treated as money and the unitholder would
recognize gain, but not loss, to the extent described above. There can be no
assurance that Archstone-Smith Operating Trust will not make distributions of
property that are considered marketable securities or that an exception to the
gain recognition requirement would apply to any such distribution.
Upon the distribution of property to another partner within seven years of
when the property was contributed to the partnership, section 704(c)(1)(B) of
the Internal Revenue Code generally requires that the partner who contributed
that property to the partnership recognize any gain that existed, but was
deferred, for federal income tax purposes with respect to the property at the
time of the contribution. Similarly, section 737 of the Internal Revenue Code
generally requires the recognition of a contributing partner's deferred gain
upon the distribution to that partner of other partnership property within
seven years of when that partner contributed appreciated property to the
partnership. For a discussion of these provisions with respect to the
partnership merger and former Smith Partnership unitholders, see "--Effect of
Subsequent Events--Distributions of Property" on page 115.
Initial Basis of Units. In general, a Smith Partnership unitholder who
acquires Archstone-Smith Operating Trust units in the partnership merger will
have an initial basis in its Archstone-Smith Operating Trust units equal to its
basis in its Smith Partnership units which will be adjusted to reflect the
effects of the merger and the partnership merger. A Smith Partnership
unitholder's basis in its Smith Partnership units will be adjusted upward or
downward to reflect any increase or decrease, respectively, in the unitholder's
share of Smith Partnership liabilities compared to the unitholder's share of
Archstone liabilities immediately after the partnership merger. For a
discussion of the rules applicable to the determination of whether a Smith
Partnership unitholder has experienced a reduction in its share of partnership
liabilities, see "--Tax Consequences of the Partnership Merger to Smith
Partnership Unitholders--Reduction in Share of Partnership Liabilities/Deemed
Cash Distribution" on page 107.
An Archstone-Smith Operating Trust unitholder's initial basis in its
Archstone-Smith Operating Trust units generally will be increased by the
unitholder's share of:
. Archstone-Smith Operating Trust taxable income;
. any increases in nonrecourse liabilities incurred by Archstone-Smith
Operating Trust; and
. recourse liabilities to the extent the Archstone-Smith Operating Trust
unitholder elects to take on a deficit restoration obligation or
otherwise incurs the risk of loss with respect to those liabilities,
whether through a guarantee or indemnification agreement or otherwise.
Generally, an Archstone-Smith Operating Trust unitholder's initial basis in
its units thereafter will be decreased, but not below zero, by the unitholder's
share of:
. Archstone-Smith Operating Trust distributions;
. decreases in liabilities of Archstone-Smith Operating Trust, including
any decrease in its share of the nonrecourse liabilities of Archstone-
Smith Operating Trust and any recourse liabilities for which it is
considered to bear the economic risk of loss;
. losses of Archstone-Smith Operating Trust; and
. nondeductible expenditures of Archstone-Smith Operating Trust that are
not chargeable to capital.
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Allocations of Archstone-Smith Operating Trust Income, Gain, Loss and
Deductions. The declaration of trust of Archstone-Smith Operating Trust will
generally provide that net losses will be allocated among the unitholders in
proportion to their respective percentage ownership interests in Archstone-
Smith Operating Trust. However, a holder of Archstone-Smith Operating Trust
units will not be allocated net losses that would have the effect of creating a
deficit balance in its capital account, as specially adjusted for such purpose,
which losses are referred to as excess losses. Excess losses will be allocated
first to Archstone-Smith in an amount equal to the excess of the aggregate
recourse debt of Archstone-Smith Operating Trust over the aggregate deficit
restoration obligations of the Archstone-Smith Operating Trust unitholders;
second, to Archstone-Smith Operating Trust unitholders who have deficit
restoration obligations in proportion to and to the extent of their respective
deficit restoration obligations; and thereafter, to Archstone-Smith.
The declaration of trust of Archstone will generally provide that net income
will be allocated first to Archstone-Smith to the extent that Archstone-Smith
has previously been allocated losses that exceed the aggregate recourse debt of
Archstone-Smith Operating Trust, including that portion of the recourse debt
allocated to deficit restoration obligations of the Archstone-Smith Operating
Trust unitholders. Second, net income will be allocated to Archstone-Smith
Operating Trust unitholders who have deficit restoration obligations in an
amount equal to the cumulative net losses allocated to such unitholders. Third,
net income will be allocated to Archstone-Smith in an amount equal to the
cumulative net losses allocated to Archstone-Smith that represented the excess
of the aggregate recourse debt of Archstone-Smith Operating Trust over the
aggregate deficit restoration obligations of Archstone-Smith Operating Trust
unitholders. Fourth, net income will be allocated to any preferred unitholders
to the extent necessary to reflect and preserve the economic rights associated
with the particular preferred units. Finally, any remaining net income shall be
allocated in proportion to the respective percentage ownership interests of the
unitholders.
Under section 704(b) of the Internal Revenue Code, a partnership's
allocation of any item of income, gain, loss or deduction to a partner will be
given effect for federal income tax purposes so long as it has "substantial
economic effect," or is otherwise in accordance with the "partner's interest in
the partnership." If an allocation of an item does not satisfy this standard,
it will be reallocated among the partners on the basis of their respective
interests in the partnership, taking into account all acts and circumstances.
Archstone-Smith Operating Trust believes that the allocations of items of
income, gain, loss and deduction under the declaration of trust, as described
above, will be considered to have substantial economic effect under the
applicable Treasury regulations.
Tax Allocations with Respect to Book-Tax Difference on Contributed
Properties. Under section 704(c) of the Internal Revenue Code, income, gain,
loss and deductions attributable to appreciated or depreciated property that is
contributed to a partnership must be allocated for federal income tax purposes
in a manner such that the contributor is charged with, or benefits from, the
unrealized gain or unrealized loss associated with the property at the time of
contribution. The amount of unrealized gain or unrealized loss generally is
equal to the difference between the fair market value of the contributed
property at the time of contribution and the adjusted tax basis of the property
at the time of contribution, which is referred to as the book-tax difference. A
book-tax difference also can exist with respect to an asset that has not
appreciated or depreciated in economic terms if that asset has been depreciated
for tax purposes. At the time of the partnership merger, a substantial book-tax
difference is likely to exist with respect to the assets owned by Smith
Partnership, particularly those that Smith Partnership previously acquired in
exchange for its units.
The declaration of trust of Archstone-Smith Operating Trust will require
allocations of income, gain, loss and deductions attributable to the properties
with respect to which there is book-tax difference be made in a manner that is
consistent with section 704(c) of the Internal Revenue Code. Treasury
regulations under section 704(c) require partnerships to use a reasonable
method for allocation of items affected by section 704(c) of the Internal
Revenue Code. Archstone-Smith Operating Trust has agreed to use the traditional
method, one of the three methods outlined by the Treasury regulations under
section 704(c), with no curative allocations, except as described below:
. with respect to the Smith Partnership properties, except to the extent
required under a pre-existing agreement to use another method, which
requirement is not waived, and
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. with respect to each of the properties owned by Archstone-Smith
Operating Trust immediately prior to the partnership merger.
Under the traditional method, former Smith Partnership unitholders,
including Archstone-Smith as successor to Smith Residential, will be allocated
less depreciation and, therefore, more income with respect to the assets owned
by Smith Partnership prior to the partnership merger. The effects of these
allocations will be different for different Smith Partnership unitholders and
will depend upon which, if any, properties those unitholders originally
contributed to Smith Partnership and the amount of depreciation, if any, that
remains to be claimed with respect to those properties. These reduced
allocations of depreciation and increased allocations of income will be offset
at least in part by increased allocations of depreciation and reduced
allocations of income with respect to properties owned by Archstone-Smith
Operating Trust before the partnership merger.
In order to offset the effect of certain ceiling rule disparities,
Archstone-Smith Operating Trust will make a special curative allocation of
taxable income each year through 2028 to the former Smith Partnership
unitholders in an amount per unit of Archstone-Smith Operating Trust held by
such former holders equal to $5,000,000 divided by the number of Archstone-
Smith Operating Trust units held by the former Smith Partnership unitholders
immediately following the partnership merger. A ceiling rule disparity will
generally exist if the aggregate amount of deductions for federal income tax
purposes attributable to any of the Smith Partnership properties for any year
is less than amount of depreciation attributable to such Smith Partnership
property for such year computed based on the fair market value of such Smith
Partnership property at the time of the partnership merger. Accordingly, in
addition to the effects of the traditional method described above, each former
Smith Partnership unitholder who continues to own Archstone-Smith Operating
Trust units following the partnership merger will be allocated income each year
as a result of these special curative allocations in addition to income
allocated in proportion to their respective percentage ownership interests in
Archstone-Smith Operating Trust, even though the cash flow of Archstone will be
distributed proportionately among all Archstone-Smith Operating Trust
unitholders.
To the extent that the special curative allocation described above is not
sufficient to eliminate the effect of all ceiling rule disparities with respect
to a particular Smith Partnership property, Archstone-Smith Operating Trust
will make a special curative allocation of income for federal income tax
purposes to the former Smith Partnership unitholders upon a taxable disposition
of such Smith Partnership property to offset the remaining ceiling rule
disparity with respect to such property, even though the proceeds of the sale
will be allocated proportionately among all Archstone-Smith Operating Trust
unitholders. Conversely, no gain attributable to any book-tax difference
remaining in an existing Archstone property at the time of sale will be
allocated to the former Smith Partnership unitholders. Under the traditional
method, however, the gain required to be specially allocated would not exceed
the gain that is recognized by Archstone-Smith Operating Trust on the sale. The
amount of gain allocated to specific former Smith Partnership unitholders with
respect to Smith Partnership assets would depend upon a number of variables,
including the book-tax difference that existed with respect to such assets
within Smith Partnership before the partnership merger; whether the former
Smith Partnership unitholder owns units issued in exchange for the contribution
of that asset to Smith Partnership; the amount of the additional book-tax
difference that was created as a result of the partnership merger with respect
to the asset; and the amount of the book-tax difference with respect to that
asset that has been amortized since the partnership merger and before the sale
of the asset through the special allocations of depreciation deductions
described above.
The declaration of trust of Archstone-Smith Operating Trust will also
require that any gain allocated to the Archstone-Smith Operating Trust
unitholders upon the sale or other taxable disposition of any Archstone-Smith
Operating Trust asset must, to the extent possible after taking into account
other required allocations of gain, be characterized as recapture income in the
same proportions and to the same extent as the unitholders previously have been
allocated any deductions directly or indirectly giving rise to the treatment of
the gains as recapture income.
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Liquidation of Archstone-Smith Operating Trust. If Archstone-Smith Operating
Trust liquidates and dissolves, a distribution of Archstone-Smith Operating
Trust property other than money generally will not result in taxable gain to an
Archstone-Smith Operating Trust unitholder, except to the extent provided in
sections 737, 704(c)(1)(B) and 731(c) of the Internal Revenue Code. The basis
of any property distributed to an Archstone-Smith Operating Trust unitholder
will equal the adjusted basis of the unitholder's Archstone-Smith Operating
Trust units, reduced by any money distributed in liquidation. A distribution of
money upon the liquidation of Archstone-Smith Operating Trust, however, will be
taxable to an Archstone-Smith Operating Trust unitholder to the extent that the
amount of money distributed in liquidation, including any deemed distributions
of cash as a result of a reduction in the unitholder's share of partnership
liabilities, exceeds the unitholder's tax basis in its Archstone-Smith
Operating Trust units. If Archstone-Smith issued its shares of beneficial
interest to Archstone-Smith Operating Trust unitholders upon the liquidation of
Archstone-Smith Operating Trust, it is likely that each Archstone-Smith
Operating Trust unitholder would be treated as if it had exchanged its
Archstone-Smith Operating Trust units for Archstone-Smith shares and the
unitholder would recognize gain or loss as if its Archstone-Smith Operating
Trust units were sold in a fully taxable exchange. See "--Redemptions of
Archstone-Smith Operating Trust Units" beginning on page 123.
Limitations on Deductibility of Losses; Treatment of Passive Activities and
Portfolio Income. Generally, individuals, estates, trusts and some closely held
corporations and personal service corporations can deduct losses from "passive
activities" only to the extent that those losses do not exceed the taxpayer's
income from passive activities. Generally, passive activities are activities or
investments in which the taxpayer does not materially participate, which would
include the ownership of interests in Archstone-Smith Operating Trust. If
Archstone-Smith Operating Trust were classified as a publicly traded
partnership under the Internal Revenue Code, any losses or deductions allocable
to an Archstone-Smith Operating Trust unitholder could be used only against
gains or income of Archstone-Smith Operating Trust and could not be used to
offset passive income from other passive activities. Similarly, any Archstone-
Smith Operating Trust income or gain allocable to an Archstone-Smith Operating
Trust unitholder could not be offset with losses from other passive activities
of the unitholder. For a more detailed discussion of Archstone's possible
classification as a publicly traded partnership, see "--Tax Status of
Archstone-Smith Operating Trust" beginning on page 104.
In addition, an Archstone-Smith Operating Trust unitholder may not deduct
its share of any Archstone-Smith Operating Trust losses to the extent that
those losses exceed the lesser of:
. the adjusted tax basis of its Archstone-Smith Operating Trust units at
the end of Archstone-Smith Operating Trust's taxable year in which the
loss occurs; and
. the amount for which such unitholder is considered at-risk at the end of
that year.
In general, an Archstone-Smith Operating Trust unitholder will be at-risk to
the extent of its basis in its Archstone-Smith Operating Trust units, except to
the extent that the unitholder acquired its units using nonrecourse debt. For
these purposes, however, a unitholder's basis in its Archstone-Smith Operating
Trust units will include only the unitholder's share of Archstone-Smith
Operating Trust's nonrecourse liabilities, as determined under section 752 of
the Internal Revenue Code, that are considered qualified nonrecourse financing
for purposes of these at-risk rules. Archstone-Smith Operating Trust believes
that all of the debt secured by its properties that otherwise qualifies as
nonrecourse liabilities under section 752 of the Internal Revenue Code will
constitute qualified nonrecourse financing for purposes of the at-risk rules,
but Archstone-Smith Operating Trust cannot guarantee that the Internal Revenue
Service might not successfully contend that some or all of the debt secured by
Archstone-Smith Operating Trust's properties is not qualified nonrecourse
financing. Moreover, the majority of the indebtedness of Archstone-Smith
Operating Trust that is considered to be nonrecourse under section 752 of the
Internal Revenue Code is not secured by properties of Archstone-Smith Operating
Trust and does not constitute qualified nonrecourse financing. In addition,
there can be no assurance that Archstone-Smith Operating Trust will not repay
some or all of its qualified nonrecourse financing in the future with proceeds
from equity offerings or proceeds of debt financings that do not constitute
qualified nonrecourse financing.
121
After the partnership merger, a former Smith Partnership unitholder's at-
risk amount generally will increase or decrease as the adjusted basis in its
Archstone-Smith Operating Trust units increases or decreases, except for
increases or decreases attributable to Archstone-Smith Operating Trust
liabilities that do not constitute qualified nonrecourse financing. If an
Archstone-Smith Operating Trust unitholder is not allowed to use losses in a
particular taxable year because of the application of the at-risk rules, the
losses can be carried forward and may be used by the unitholder to offset
income in a subsequent year to the extent that the unitholder's adjusted basis
or at-risk amount, whichever was the limiting factor, is increased in that
subsequent year.
The at-risk rules apply to:
. an individual unitholder;
. an individual shareholder or partner of a unitholder that is an S
corporation or partnership; and
. a unitholder that is a corporation if 50% or more of the value of that
corporation's stock is owned, directly or indirectly, by five or fewer
individuals at any time during the last half of the taxable year.
Disposition of Archstone-Smith Operating Trust Units. If an Archstone-Smith
Operating Trust unit is sold, transferred as a gift or otherwise disposed of,
gain or loss from the disposition will be based on the difference between the
amount realized on the disposition and the basis attributable to the Archstone-
Smith Operating Trust unit that is disposed of. The amount realized on the
disposition of a unit generally will equal the sum of:
. any cash received;
. the fair market value of any other property received; and
. the amount of Archstone-Smith Operating Trust liabilities allocated to
the unit.
Because the amount realized includes any amount attributable to the relief
from Archstone-Smith Operating Trust liabilities attributable to the unit, a
unitholder could have taxable income, or perhaps even a tax liability, in
excess of the amount of cash and property received upon the disposition of the
unit.
Generally, gain recognized on the disposition of an Archstone-Smith
Operating Trust unit will be capital gain. However, any portion of the
Archstone-Smith Operating Trust unitholder's amount realized on the disposition
of a unit that is attributable to "unrealized receivables" of Archstone-Smith
Operating Trust, as defined in section 751 of the Internal Revenue Code, will
give rise to ordinary income. The amount of ordinary income that would have to
be recognized would be equal to the amount by which the unitholder's share of
unrealized receivables of Archstone-Smith Operating Trust exceeds the portion
of the unitholder's basis that is attributable to those assets. Unrealized
receivables include, to the extent not previously included in Archstone-Smith
Operating Trust's income, any rights to payment for services rendered or to be
rendered. Unrealized receivables also include amounts attributable to prior
depreciation deductions that would be subject to recapture as ordinary income
if Archstone-Smith Operating Trust had sold its assets at their fair market
value at the time of the disposition.
For individuals, trusts and estates, net capital gain from the sale of an
asset held one year or less is subject to tax at the applicable rate for
ordinary income. For these taxpayers, the maximum rate of tax on the net
capital gain from a sale or exchange of an asset held for more than one year
generally is 20%. However, a 25% rate applies to the extent that net capital
gains attributable to the sale of depreciable real property are attributable to
prior depreciation deductions not otherwise recaptured as ordinary income under
other depreciation recapture rules. The applicable Treasury regulations apply
the 25% rate to a sale of an interest in a pass-through entity, such as a
partnership, to the extent that the gain realized on the sale of the interest
is attributable to prior depreciation deductions by the partnership that have
not otherwise been recaptured as ordinary income. Accordingly, any gain on the
sale of an Archstone-Smith Operating Trust unit held for more
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than one year could be treated partly as gain from the sale of a long-term
capital asset subject to a 20% tax rate, partly as gain from the sale of
depreciable real property subject to a 25% tax rate to the extent attributable
to prior depreciation deductions by Archstone-Smith Operating Trust that have
not been otherwise recaptured as ordinary income, and partly as ordinary income
to the extent attributable to unrealized receivables. Each Archstone-Smith
Operating Trust unitholder should consult with its own tax advisor regarding
the application of the 25% rate to a sale of Archstone-Smith Operating Trust
units.
Redemptions of Archstone-Smith Operating Trust Units. If an Archstone-Smith
Operating Trust unitholder exercises its unit redemption right, it is likely
that Archstone-Smith will elect to exercise its right under the declaration of
trust of Archstone-Smith Operating Trust to acquire the unitholder's Archstone-
Smith Operating Trust units in exchange for cash or Archstone-Smith common
shares. However, Archstone-Smith is under no obligation to exercise this right.
If Archstone-Smith does elect to acquire a unitholder's Archstone-Smith
Operating Trust units in exchange for cash or Archstone-Smith common shares,
the transaction will be a fully taxable sale to the unitholder. The amount
realized by a unitholder on this kind of disposition of an Archstone-Smith
Operating Trust unit will equal the sum of:
. any cash received;
. the fair market value of any Archstone-Smith common shares received; and
. the amount of Archstone-Smith Operating Trust liabilities allocated to
the unit exchanged.
The unitholder's taxable gain and the tax consequences of that gain would be
determined as described under "--Disposition of Archstone-Smith Operating Trust
Units" on page 122.
If Archstone-Smith does not elect to acquire the Archstone-Smith Operating
Trust unitholder's units in exchange for cash or Archstone-Smith common shares,
Archstone-Smith Operating Trust is required to redeem those Archstone-Smith
Operating Trust units for cash. If Archstone-Smith Operating Trust redeems
Archstone-Smith Operating Trust units for cash contributed by Archstone-Smith
in order to effect the redemption, the redemption likely will be treated as a
sale of the Archstone-Smith Operating Trust units to Archstone-Smith in a fully
taxable transaction, although the matter is not free from doubt. Under these
circumstances, the redeeming unitholder's amount realized will equal the sum
of:
. the cash received; and
. the amount of Archstone liabilities allocated to the unit redeemed.
The unitholder's taxable gain and the tax consequences of that gain would be
determined as described under "--Disposition of Archstone-Smith Operating Trust
Units" on page 122.
If an Archstone-Smith Operating Trust unit is redeemed for cash that is not
contributed by Archstone-Smith to effect the redemption, the unitholder's tax
treatment will depend upon whether or not the redemption results in a
disposition of all of the unitholder's Archstone-Smith Operating Trust units.
If all of the unitholder's Archstone-Smith Operating Trust units are redeemed,
the unitholder's taxable gain and the tax consequences of that gain will be
determined as described under "--Disposition of Archstone-Smith Operating Trust
Units" on page 122. However, if less than all of a unitholder's Archstone-Smith
Operating Trust units are redeemed, the unitholder will not be allowed to
recognize loss on the redemption and will recognize taxable gain only if and to
the extent that the unitholder's amount realized on the redemption, calculated
as described above, exceeds the unitholder's basis in all of its Archstone-
Smith Operating Trust units immediately before the redemption.
Partnership Audit Procedures. The federal income tax information returns
filed by Archstone-Smith Operating Trust may be audited by the Internal Revenue
Service. The Internal Revenue Code contains partnership audit procedures
governing the manner in which Internal Revenue Service audit adjustments of
partnership items are resolved. Unless and until Archstone-Smith Operating
Trust elects to be treated as an "electing large partnership," it is and will
continue to be subject to audit rules under the Tax Equity and Fiscal
Responsibility Act of 1982, which is referred to as TEFRA. See "--Possible
Future Election by Archstone to be Treated as an Electing Large Partnership"
below.
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Partnerships generally are treated as separate entities for purposes of
federal tax audits, judicial review of adjustments by the Internal Revenue
Service and tax settlement proceedings. The tax treatment of partnership items
of income, gain, loss, deduction and credit is determined at the partnership
level in a unified partnership proceeding, rather than in separate proceedings
with each partner. The Internal Revenue Code provides for one partner to be
designated as the "tax matters partner" for these purposes. Archstone-Smith
will be the tax matters partner for Archstone-Smith Operating Trust.
The tax matters partner is authorized, but not required, to take some
actions on behalf of Archstone-Smith Operating Trust and the unitholders and
can extend the statute of limitations for assessment of tax deficiencies
against the Archstone-Smith Operating Trust unitholders with respect to
Archstone-Smith Operating Trust items. The tax matters partner will make a
reasonable effort to keep each unitholder informed of administrative and
judicial tax proceedings with respect to Archstone-Smith Operating Trust items
in accordance with Treasury regulations issued under section 6223 of the
Internal Revenue Code. In connection with adjustments to Archstone-Smith
Operating Trust tax returns proposed by the Internal Revenue Service, the tax
matters partner may bind any unitholder with less than a 1% profits interest in
Archstone-Smith Operating Trust to a settlement with the Internal Revenue
Service unless the unitholder elects not to give that authority to the tax
matters partner by filing a statement to that effect with the Internal Revenue
Service. The tax matters partner may seek judicial review, to which all
unitholders will be bound, of a final Archstone-Smith Operating Trust
administrative adjustment. If the tax matters partner fails to seek judicial
review, it may be sought by any unitholder having at least a 1% interest in the
profits of Archstone-Smith Operating Trust and by unitholders having, in the
aggregate, at least a 5% profits interest. Only one judicial proceeding will go
forward, however, and each unitholder with an interest in the outcome may
participate.
Unitholders will generally be required to treat Archstone-Smith Operating
Trust items on their federal income tax returns in a manner consistent with the
treatment of the items on the Archstone-Smith Operating Trust information
return. In general, that consistency requirement is waived if a unitholder
files a statement with the Internal Revenue Service identifying the
inconsistency. Failure to satisfy the consistency requirement, if not waived,
will result in an adjustment to conform the treatment of the item by the
unitholder to the treatment on the Archstone-Smith Operating Trust return. Even
if the consistency requirement is waived, adjustments to the unitholder's tax
liability with respect to Archstone-Smith Operating Trust items may result from
an audit of Archstone-Smith Operating Trust's or the unitholder's tax return.
Intentional or negligent disregard of the consistency requirement may subject a
unitholder to substantial penalties. In addition, an audit of the Archstone-
Smith Operating Trust return may also lead to an audit of an individual
unitholder's tax return, which could result in adjustment of non-partnership
items.
Possible Future Election by Archstone-Smith Operating Trust to be Treated as
an Electing Large Partnership. Archstone-Smith Operating Trust has not yet
elected, but could elect in the future, to be treated as an "electing large
partnership" for federal tax purposes. This election is available to
partnerships, such as Archstone-Smith Operating Trust, that have 100 or more
partners and meet other requirements set forth in the Internal Revenue Code.
The election would entitle Archstone-Smith Operating Trust to use a simplified
flow-through reporting system and a special audit system. Although Archstone-
Smith Operating Trust has not made an election to be treated as an electing
large partnership, Archstone-Smith Operating Trust may determine to make this
election for future taxable years.
As an electing large partnership, Archstone-Smith Operating Trust would be
eligible to use a simplified flow-through reporting system, under which the
number of tax items that unitholders are required to account for separately
would be significantly reduced. For example:
. miscellaneous itemized deductions would not be separately reported to
the unitholders, but would be allowed to Archstone-Smith Operating Trust
to the extent of 30 percent of such deductions;
. charitable contributions would be deductible by Archstone-Smith
Operating Trust, instead of being reported separately to the
unitholders; and
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. capital gains and losses would be netted at the partnership level and
only net capital gain or loss would be reported to the unitholders.
For a description of the reporting rules currently applicable to Archstone-
Smith Operating Trust and its unitholders, see "--Income and Deductions in
General" on page 117.
The audit procedures that are applicable to an electing large partnership
differ from the procedures applicable under TEFRA, as described under "--
Partnership Audit Procedures" beginning on page 123. An electing large
partnership must designate a representative to act on its behalf for audit
purposes. Unlike a tax matters partner under TEFRA, the representative of an
electing large partnership would not have to be a unitholder. The Internal
Revenue Service may challenge a reporting position taken by an electing large
partnership by conducting a single administrative proceeding that will be
binding upon all partners, just as under the TEFRA audit rules. However,
partners in an electing large partnership have no individual right to notice of
the adjustment proceedings, to participate in the proceedings or to file
petitions for judicial review of a final administrative adjustment to
partnership items. Adjustments to partnership items will flow through to the
partners for the year that the adjustment "takes effect" within the meaning of
section 6242 of the Internal Revenue Code. Moreover, a partner in an electing
large partnership must report all partnership items consistently with their
treatment on the partnership's tax return. If an underpayment results from the
failure to report an item consistently with the treatment of that item on the
partnership return, the amount of the underpayment will be assessed immediately
to the partner as if the underpayment were due to a mathematical or clerical
error.
Alternative Minimum Tax on Items of Tax Preference. The Internal Revenue
Code contains alternative minimum tax rules that are applicable to corporate
and noncorporate taxpayers. Archstone-Smith Operating Trust will not be subject
to the alternative minimum tax, but Archstone-Smith Operating Trust unitholders
are required to take into account on their own tax returns their respective
shares of Archstone-Smith Operating Trust's tax preference items and
adjustments in order to compute their alternative minimum taxable income. Since
the impact of this tax depends on each Smith Partnership unitholder's
particular situation, the Smith Partnership unitholders are urged to consult
with their own tax advisors as to the applicability of the alternative minimum
tax following the partnership merger.
State and Local Taxes. In addition to the federal income tax aspects
described above, a Smith Partnership unitholder should consider the potential
state and local tax consequences of owning Archstone-Smith Operating Trust
units. Tax returns may be required and tax liability may be imposed both in the
state or local jurisdictions where a Smith Partnership unitholder resides and
in each state or local jurisdiction in which Archstone-Smith Operating Trust
will have assets or otherwise does business. Thus, persons holding Archstone-
Smith Operating Trust units either directly or through one or more partnerships
or limited liability companies may be subject to state and local taxation in a
number of jurisdictions in which Archstone-Smith Operating Trust directly or
indirectly holds real property and would be required to file periodic tax
returns in those jurisdictions. Archstone-Smith Operating Trust also may be
required to withhold state income tax from distributions otherwise payable to
the Archstone-Smith Operating Trust unitholders. After the partnership merger,
Archstone-Smith Operating Trust will hold assets and/or otherwise conduct
business in approximately 24 states and the District of Columbia. Archstone-
Smith Operating Trust anticipates providing the Archstone-Smith Operating Trust
unitholders with any information reasonably necessary to permit them to satisfy
state and local return filing requirements. To the extent that an Archstone-
Smith Operating Trust unitholder pays income tax with respect to Archstone-
Smith Operating Trust income to a state where it is not resident or Archstone-
Smith Operating Trust is required to pay such tax on behalf of such unitholder,
the unitholder may be entitled to a deduction or credit against income tax that
it otherwise would owe to its state of residence with respect to the same
income. A Smith Partnership unitholder should consult with its personal tax
advisor regarding the state and local income tax implications of owning
Archstone-Smith Operating Trust units, including return filing requirements in
the various states where Archstone-Smith Operating Trust currently owns
properties and will own properties after the partnership merger.
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REIT Qualification of Archstone-Smith Following the Partnership Merger and the
Merger
Hogan & Hartson L.L.P., counsel to Smith Residential, is of the opinion that
Smith Residential qualifies as a REIT. In addition, as a condition to the
partnership merger and the merger, Hogan & Hartson L.L.P. will deliver an
opinion to Archstone-Smith that commencing with its taxable year ended December
31, 1994 through and including its taxable year ending as of the merger closing
date, Smith Residential was organized and has operated in conformity with the
requirements for qualification as a REIT under the Internal Revenue Code. This
opinion, however, will not be binding on the Internal Revenue Service or the
courts. This opinion relies on customary representations made by Smith
Residential about factual matters relating to the organization and operation of
Smith Residential, Smith Partnership and its subsidiaries. In addition, this
opinion is based on factual representations of Smith Residential concerning its
business and properties as set forth in this document and the other documents
incorporated by reference in this document. If Smith Residential did not
qualify as a REIT in any of its prior tax years, Smith Residential would be
liable for, and, as successor to Smith Residential in the merger, Archstone-
Smith would be obligated to pay any, federal income tax on its income earned in
any year that it did not qualify as a REIT. In addition, if Smith Residential
were to fail to qualify as a REIT, Archstone-Smith would be subject to tax if,
during the 10 years following the merger, Archstone-Smith disposed of any asset
that was acquired from Smith Residential in the merger. In this event,
Archstone-Smith would generally be subject to tax at the highest regular
corporate rate on the built-in gain, if any, that existed with respect to such
asset at the time of the merger.
Mayer, Brown & Platt, counsel to Archstone and Archstone-Smith, is of the
opinion that Archstone qualifies as a REIT and that Archstone-Smith is
organized in conformity with the requirements for qualification as a REIT. In
addition, as a condition to the merger and the partnership merger, Mayer, Brown
& Platt will deliver an opinion to Archstone-Smith and Smith Residential that
Archstone-Smith's organization and proposed method of operation will enable it
to meet the requirements for qualification and taxation as a REIT under the
Internal Revenue Code commencing with its taxable year ended December 31, 2001
and either:
. commencing with Archstone's taxable year ended December 31, 1994, until
the time that Archstone makes an election to be treated as a partnership
or as an entity disregarded as separate from its owner, Archstone was
organized and has operated in conformity with the requirements for
qualification as a REIT under the Internal Revenue Code; or
. commencing with Archstone's taxable year ended December 31, 1994, until
the time that Archstone reorganizes itself into an UPREIT structure,
Archstone was organized and has operated in conformity with the
requirements for qualification as a REIT under the Internal Revenue
Code.
These opinions rely upon customary representations made by Archstone and
Archstone-Smith about factual matters relating to the organization and
operation of Archstone-Smith, Archstone and its subsidiaries. In addition, this
opinion is based upon factual representations of Archstone and Archstone-Smith
concerning its business and properties as set forth in this document and the
other documents incorporated by reference in this document. Finally, the
portion of the Mayer, Brown & Platt opinion that addresses the qualification of
Archstone-Smith as a REIT following the partnership merger and the merger will
be based in part upon the opinion of Hogan & Hartson L.L.P. described above
relating to the qualification of Smith Residential as a REIT at the closing of
the partnership merger and the merger and the representations made by Smith
Residential in connection with the Hogan & Hartson L.L.P. opinion. If Smith
Residential did not qualify as a REIT at the time of the REIT merger,
Archstone-Smith could fail to qualify as a REIT after the REIT merger.
Archstone-Smith intends to continue to operate in a manner to qualify as a
REIT following the partnership merger and the merger, but there is no guarantee
that Archstone-Smith will qualify or remain qualified as a REIT. Qualification
and taxation as a REIT depend upon Archstone-Smith's ability to meet, through
actual annual (or, in some cases, quarterly) operating results, requirements
relating to income, asset ownership, distribution levels and diversity of share
ownership, and the various REIT qualification requirements imposed under the
Internal Revenue Code. Mayer, Brown & Platt will not review Archstone-Smith's
compliance with these tests on a continuing basis. Given the complex nature of
the REIT qualification requirements, the ongoing importance of factual
determinations and the possibility of future changes in the circumstances of
Archstone-Smith, Archstone-Smith cannot guarantee that its actual operating
results will satisfy the requirements for taxation as a REIT under the Internal
Revenue Code for any particular tax year.
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FEDERAL INCOME TAX CONSIDERATIONS WITH RESPECT TO ARCHSTONE-SMITH AS A REIT
Archstone-Smith intends to operate in a manner that permits it to satisfy
the requirements for taxation as a REIT under the applicable provisions of the
Internal Revenue Code. No assurance can be given, however, that such
requirements will be met. The following is a description of the federal income
tax consequences to Archstone-Smith and its shareholders of the treatment of
Archstone-Smith as a REIT following the reorganization of Archstone into an
UPREIT, the merger and the partnership merger. In connection with the entering
into of the merger agreement, Archstone-Smith was formed as a wholly owned
subsidiary of Archstone as a Maryland REIT. Upon completion of the UPREIT
reorganization, the merger and the partnership merger, Archstone-Smith will own
substantially all of its assets and will conduct all of its operations through
Archstone-Smith Operating Trust. The following discussion assumes that all of
the actions mentioned in the previous sentence have taken place. Since these
provisions are highly technical and complex, you are urged to consult your own
tax advisor with respect to the federal, state, local, foreign and other tax
consequences of the purchase, ownership and disposition of Archstone-Smith
shares.
Based upon its representations with respect to the facts as set forth and
explained in the discussion below, in the opinion of Archstone-Smith's counsel,
Mayer, Brown & Platt, Archstone-Smith has been organized in conformity with the
requirements for qualification as a REIT, and its proposed method of operation
described in this consent solicitation statement/prospectus and as represented
by management will enable Archstone-Smith to satisfy the requirements for such
qualification.
This opinion is based on representations made by Archstone-Smith as to
certain factual matters relating to its organization and intended or expected
manner of operation. In addition, this opinion is based on the law existing and
in effect on the date of this consent solicitation statement/prospectus.
Archstone-Smith's qualification and taxation as a REIT will depend on its
ability to meet on a continuing basis, through actual operating results, asset
composition, distribution levels and diversity of share ownership and the
various qualification tests imposed under the Internal Revenue Code discussed
below. Mayer, Brown & Platt will not review compliance with these tests on a
continuing basis. No assurance can be given that Archstone-Smith will satisfy
such tests on a continuing basis.
In brief, if the conditions imposed by the REIT provisions of the Internal
Revenue Code are met, entities such as Archstone-Smith, that invest primarily
in real estate and that otherwise would be treated for federal income tax
purposes as corporations, are allowed a deduction for dividends paid to
shareholders. This treatment substantially eliminates the "double taxation" at
both the corporate and shareholder levels that generally results from the use
of corporations. However, as discussed in greater detail below, such an entity
remains subject to tax in certain circumstances even if it qualifies as a REIT.
If Archstone-Smith fails to qualify as a REIT in any year, Archstone-Smith
will be subject to federal income taxation as if Archstone-Smith was a domestic
corporation for that year and, potentially, one or more subsequent years, and
its shareholders will be taxed in the same manner as shareholders of ordinary
corporations. In this event, Archstone-Smith could be subject to potentially
significant tax liabilities, and therefore the amount of cash available for
distribution to its shareholders would be reduced or eliminated.
The board of trustees believes that Archstone-Smith has been organized and
operated and currently intends that Archstone-Smith will continue to operate in
a manner that permits Archstone-Smith to qualify as a REIT. There can be no
assurance, however, that this expectation will be fulfilled, since
qualification as a REIT depends on its continuing to satisfy numerous asset,
income and distribution tests described below, which in turn will be dependent
in part on its operating results.
The following summary is based on the Internal Revenue Code, its legislative
history, administrative pronouncements, judicial decisions and United States
Treasury Department regulations, subsequent changes to any of which may affect
the tax consequences described in this joint consent solicitation
statement/prospectus, possibly on a retroactive basis.
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The following summary is not exhaustive of all possible tax considerations
and does not give 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 his or
her particular circumstances or to various 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, subject to special treatment under the federal income tax
laws.
Taxation of Archstone-Smith
General
In any year in which Archstone-Smith qualifies as a REIT, in general
Archstone-Smith will not be subject to federal income tax on that portion of
its REIT taxable income or capital gain which is distributed to shareholders.
Archstone-Smith may, however, be subject to tax at normal corporate rates upon
any taxable income or capital gain not distributed. To the extent that
Archstone-Smith elects to retain and pay income tax on its net long-term
capital gain, shareholders are required to include their proportionate share of
its undistributed long-term capital gain in income but receive a credit for
their share of any taxes paid on such gain by Archstone-Smith.
Notwithstanding its qualification as a REIT, Archstone-Smith may also be
subject to taxation in other circumstances. If Archstone-Smith should fail to
satisfy either the 75% or the 95% gross income test, which are discussed below,
and nonetheless maintain its qualification as a REIT because other requirements
are met, Archstone-Smith will be subject to a 100% tax on the greater of either
(1) the amount by which 75% of its gross income exceeds the amount qualifying
under the 75% test for the taxable year or (2) the amount by which 90% of its
gross income exceeds the amount of its income qualifying under the 95% test for
the taxable year, multiplied in either case by a fraction intended to reflect
its profitability. Archstone-Smith will be subject to a tax of 100% on net
income from any "prohibited transaction," as described below, and if Archstone-
Smith has net income from the sale or other disposition of "foreclosure
property" which is held primarily for sale to customers in the ordinary course
of business or other non-qualifying income from foreclosure property,
Archstone-Smith will be subject to tax on such income from foreclosure property
at the highest corporate rate. Archstone-Smith will also be subject to a tax of
100% on the amount of any rents from real property, deductions or excess
interest paid by any of its "taxable REIT subsidiaries" to Archstone-Smith that
would be reduced through reapportionment under section 482 of the Internal
Revenue Code in order to more clearly reflect income of the taxable REIT
subsidiary. A taxable REIT subsidiary is any corporation for which a joint
election has been made by a REIT and such corporation to treat such corporation
as a taxable REIT subsidiary with respect to such REIT. See "Other Tax
Considerations--Investments in taxable REIT subsidiaries." In addition, if
Archstone-Smith should fail to distribute during each calendar year at least
the sum of:
(1) 85% of its REIT ordinary income for such year;
(2) 95% of its REIT capital gain net income for such year, other than
capital gains Archstone-Smith elects to retain and pay tax on as
described below; and
(3) any undistributed taxable income from prior years,
Archstone-Smith would be subject to a 4% excise tax on the excess of such
required distribution over the amounts actually distributed. To the extent that
Archstone-Smith elects to retain and pay income tax on its long-term capital
gain, such retained amounts will be treated as having been distributed for
purposes of the 4% excise tax.
A REIT is permitted to designate in a notice mailed to shareholders within
60 days of the end of the taxable year, or in a notice mailed with its annual
report for the taxable year, such amount of undistributed net long-term capital
gains it received during the taxable year, which its shareholders are to
include in their taxable income as long-term capital gains. Thus, if Archstone-
Smith made this designation, its shareholders would
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include in their income as long-term capital gains their proportionate share of
the undistributed net capital gains as designated by Archstone-Smith and
Archstone-Smith would have to pay the tax on such gains within 30 days of the
close of its taxable year. Each of its shareholders would be deemed to have
paid the shareholder's share of the tax paid by Archstone-Smith on such gains,
which tax would be credited or refunded to the shareholder. A shareholder would
increase his tax basis in his shares by the difference between the amount of
income to the holder resulting from the designation less the holder's credit or
refund for the tax paid by Archstone-Smith. Archstone-Smith may also be subject
to the corporate "alternative minimum tax," as well as tax in various
situations and on some types of transactions not presently contemplated.
Archstone-Smith will use the calendar year both for federal income tax purposes
and for financial reporting purposes.
In order to qualify as a REIT, Archstone-Smith must meet, among others, the
following requirements:
Share ownership test
Archstone-Smith's shares must be held by a minimum of 100 persons for at
least 335 days in each taxable year (or a proportional number of days in any
short taxable year). In addition, at all times during the second half of each
taxable year, no more than 50% in value of its shares may be owned, directly or
indirectly and by applying constructive ownership rules, by five or fewer
individuals, which for this purpose includes some tax-exempt entities. Any
shares held by a qualified domestic pension or other retirement trust will be
treated as held directly by its beneficiaries in proportion to their actuarial
interest in such trust rather than by such trust. For taxable years beginning
after August 5, 1997, if Archstone-Smith complies with the Treasury Department
regulations for ascertaining its actual ownership and did not know, or
exercising reasonable diligence would not have reason to know, that more than
50% in value of its outstanding shares were held, actually or constructively,
by five or fewer individuals, then Archstone-Smith will be treated as meeting
such requirement.
In order to ensure compliance with the 50% test, Archstone-Smith has placed
restrictions on the transfer of its shares to prevent additional concentration
of ownership. Moreover, to evidence compliance with these requirements under
Treasury Department regulations, Archstone-Smith must maintain records which
disclose the actual ownership of its outstanding shares and such regulations
impose penalties against Archstone-Smith for failing to do so. In fulfilling
its obligations to maintain records, Archstone-Smith must and will demand
written statements each year from the record holders of designated percentages
of its shares disclosing the actual owners of such shares as prescribed by
Treasury Department regulations. A list of those persons failing or refusing to
comply with such demand must be maintained as a part of its records. A
shareholder failing or refusing to comply with its written demand must submit
with his or her tax returns a similar statement disclosing the actual ownership
of its shares and other information. In addition, the declaration of trust of
Archstone-Smith provides restrictions regarding the transfer of shares that are
intended to assist Archstone-Smith in continuing to satisfy the share ownership
requirements. See "Description of common shares--Restriction on size of
holdings of shares." Archstone-Smith intends to enforce the 9.8% limitation on
ownership of shares to assure that its qualification as a REIT will not be
compromised.
Asset tests
At the close of each quarter of its taxable year, Archstone-Smith must
satisfy tests relating to the nature of its assets determined in accordance
with generally accepted accounting principles. Where Archstone-Smith invests in
a partnership, limited liability company or trust taxed as a partnership or as
a disregarded entity, such as Archstone-Smith Operating Trust, Archstone-Smith
will be deemed to own a proportionate share of the partnership's, limited
liability company's or trust's assets. First, at least 75% of the value of its
total assets must be represented by interests in real property, interests in
mortgages on real property, shares in other REITs, cash, cash items, government
securities, and qualified temporary investments. Second, although the remaining
25% of its assets generally may be invested without restriction, Archstone-
Smith is prohibited from owning securities representing more than 10% of either
the vote or value of the outstanding securities of any issuer other than a
qualified REIT subsidiary, another REIT or a taxable REIT subsidiary (the "10%
vote and value
test"). Further, no more than 20% of the value of its total assets may be
represented by securities of one or
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more taxable REIT subsidiaries and no more than 5% of the value of its total
assets may be represented by securities of any non-government issuer other than
a qualified REIT subsidiary, another REIT or a taxable REIT subsidiary (the
"20% and 5% asset tests").
As noted above, when Archstone-Smith invests in an entity classified as a
partnership for federal income tax purposes such as Archstone-Smith Operating
Trust, Archstone-Smith will be deemed to own a proportionate share of
Archstone-Smith Operating Trust's assets. The partnership interest does not
constitute a security for purposes of these tests. See "--Tax aspects of its
investments in partnerships." Accordingly, its investment in properties through
its interest in Archstone-Smith Operating Trust is treated as an investment in
qualified assets for purposes of the 75% asset test to the extent Archstone-
Smith Operating Trust's assets so qualify. Archstone-Smith Operating Trust
currently owns securities of issuers which are not treated as qualified REIT
subsidiaries or REITs and may acquire additional such securities in the future.
By virtue of its partnership interest in Archstone-Smith Operating Trust,
Archstone-Smith is deemed to own initially a pro rata share of such securities.
Based upon an analysis of the estimated value of the securities owned by
Archstone-Smith Operating Trust in taxable REIT subsidiaries and non-government
issuers relative to the estimated value of the total assets owned by Archstone-
Smith Operating Trust, Archstone-Smith believes that the 10% vote and value
test and the 20% and 5% asset tests on the date of this consent solicitation
statement/prospectus should be satisfied. In rendering its opinion as to its
qualification as a REIT, Mayer, Brown & Platt is relying on its representations
with respect to the value of the stock and assets and its conclusion that
Archstone-Smith satisfies each of the 10% vote and value test and the 20% and
5% asset tests.
Each of the 10% vote and value test and the 20% and 5% asset tests must be
satisfied at the end of any quarter in which Archstone-Smith acquires
additional securities of any issuer. If any unitholder of Archstone-Smith
Operating Trust exercises its redemption option to exchange units for common
shares, Archstone-Smith will thereby increase its proportionate indirect
ownership interest in Archstone-Smith Operating Trust. This will require
Archstone-Smith to meet the 10% vote and value test and the 20% and 5% asset
tests in any quarter in which the conversion option is exercised. A similar
result will follow in the case of any exchange of units by employees of
Archstone-Smith Operating Trust or any subsidiary that they received pursuant
to its long term incentive compensation plan. Archstone-Smith plans to take
steps to ensure that the 10% vote and value test and the 20% and 5% asset tests
are satisfied for any quarter in which retesting is to occur. However,
Archstone-Smith cannot give assurance that the steps will always be successful
and will not require a reduction in Archstone-Smith Operating Trust's overall
interest in the securities of any issuer.
Gross income tests
There are currently two separate percentage tests relating to the sources of
its gross income which must be satisfied for each taxable year. For purposes of
these tests, where Archstone-Smith invests in a partnership, limited liability
company or trust taxed as a partnership or as a disregarded entity, Archstone-
Smith will be treated as receiving its share of the income and loss of the
partnership, limited liability company or trust, and the gross income of the
partnership, limited liability company or trust will retain the same character
in its hands as it has in the hands of the partnership, limited liability
company or trust. The two tests are as follows:
1. The 75% Test. At least 75% of its gross income for the taxable year must
be "qualifying income." Qualifying income generally includes:
(1) rents from real property except as modified below;
(2) interest on obligations secured by mortgages on, or interests in, real
property;
(3) gains from the sale or other disposition of non "dealer property,"
which means interests in real property and real estate mortgages,
other than gain from property held primarily for sale to customers in
the ordinary course of its trade or business;
(4) dividends or other distributions on shares in other REITs, as well as
gain from the sale of such shares;
(5) abatements and refunds of real property taxes;
130
(6) income from the operation of, and gain from the sale of, "foreclosure
property," which means property acquired at or in lieu of a
foreclosure of the mortgage secured by such property;
(7) commitment fees received for agreeing to make loans secured by
mortgages on real property or to purchase or lease real property; and
(8) certain qualified temporary investment income attributable to the
investment of new capital received by Archstone-Smith in exchange for
its shares or certain publicly offered debt which income is received
or accrued during the one-year period following the receipt of such
capital.
Rents received from a resident will not, however, qualify as rents from real
property in satisfying the 75% test, or the 95% gross income test described
below, if Archstone-Smith, or an owner of 10% or more of its shares, directly
or constructively owns 10% or more of such resident unless the resident is a
taxable REIT subsidiary of Archstone-Smith and certain other requirements are
met with respect to the real property being rented. In addition, if rent
attributable to personal property leased in connection with a lease of real
property is greater than 15% of the total rent received under the lease, then
the portion of rent attributable to such personal property will not qualify as
rents from real property. Moreover, an amount received or accrued will not
qualify as rents from real property, or as interest income, for purposes of the
75% and 95% gross income tests if it is based in whole or in part on the income
or profits of any person, although an amount received or accrued generally will
not be excluded from "rents from real property" solely by reason of being based
on a fixed percentage or percentages of receipts or sales. Finally, for rents
received to qualify as rents from real property, Archstone-Smith generally must
not furnish or render services to residents, other than through a taxable REIT
subsidiary or an "independent contractor" from whom Archstone-Smith derives no
income, except that Archstone-Smith may directly provide services that are
"usually or customarily rendered" in connection with the rental of apartment
units for occupancy only, or are not otherwise considered "rendered to the
occupant for his convenience." For taxable years beginning after August 5,
1997, a REIT has been permitted to render a de minimis amount of impermissible
services to tenants, and still treat amounts received with respect to that
property as rent from real property. The amount received or accrued by the REIT
during the taxable year for the impermissible services with respect to a
property may not exceed 1% of all amounts received or accrued by the REIT
directly or indirectly from the property. The amount received for any service
or management operation for this purpose shall be deemed to be not less than
150% of the direct cost of the REIT in furnishing or rendering the service or
providing the management or operation. Furthermore, Archstone-Smith may furnish
such impermissible services to tenants through a taxable REIT subsidiary and
still treat amounts otherwise received with respect to the property as rent
from real property.
Archstone-Smith Operating Trust provides services at the properties that it
owns and may provide the services at any newly acquired properties of it.
Archstone-Smith believes that, for purposes of the 75% and 95% gross income
tests, the services provided at its properties are or will be of the type which
are usually or customarily rendered in connection with the rental of space for
occupancy only and not those rendered to the occupant for his convenience.
Archstone-Smith believes this is also true for any other services and amenities
provided by Archstone-Smith Operating Trust or its agents. Mayer, Brown &
Platt, in rendering its opinion as to its qualification as a REIT, is relying
on its representations to that effect. Archstone-Smith intends that independent
contractors or a taxable REIT subsidiary will perform services that cannot be
provided directly by Archstone-Smith Operating Trust or its agents.
2. The 95% Test. In addition to deriving 75% of its gross income from the
sources listed above, at least 95% of its gross income for the taxable year
must be derived from the above-described qualifying income, or from dividends,
interest or gains from the sale or disposition of stock or other securities
that are not dealer property. Dividends, other than on REIT shares, and
interest on any obligations not secured by an interest in real property are
included for purposes of the 95% test, but not for purposes of the 75% test. In
addition, payments to Archstone-Smith under an interest rate swap, cap
agreement, option, futures contract, forward rate agreement or any similar
financial instrument entered into by Archstone-Smith to hedge indebtedness
incurred or to be incurred, and any gain from the sale or other disposition of
these instruments, are treated as qualifying income for purposes of the 95%
test, but not for purposes of the 75% test.
131
For purposes of determining whether Archstone-Smith complies with the 75%
and 95% income tests, gross income does not include income from prohibited
transactions. A "prohibited transaction" is a sale of property held primarily
for sale to customers in the ordinary course of a trade or business, excluding
foreclosure property, unless such property is held by Archstone-Smith for at
least four years and other requirements relating to the number of properties
sold in a year, their tax bases, and the cost of improvements made to the
property are satisfied. See "--Taxation of Archstone-Smith--General."
Archstone-Smith believes that for purposes of both the 75% and the 95% gross
income tests, its investment in properties through Archstone-Smith Operating
Trust in major part gives rise to qualifying income in the form of rents.
Archstone-Smith also believes that gains on sales of the properties, or of its
interest in Archstone-Smith Operating Trust, generally will also constitute
qualifying income.
Even if Archstone-Smith fails to satisfy one or both of the 75% or 95% gross
income tests for any taxable year, Archstone-Smith may still qualify as a REIT
for such year if Archstone-Smith is entitled to relief under provisions of the
Internal Revenue Code. These relief provisions will generally be available if:
(1) its failure to comply was due to reasonable cause and not to willful
neglect;
(2) Archstone-Smith reports the nature and amount of each item of its
income included in the tests on a schedule attached to its tax return;
and
(3) any incorrect information on this schedule is not due to fraud with
intent to evade tax.
If these relief provisions apply, however, Archstone-Smith will nonetheless
be subject to a special tax upon the greater of the amount by which Archstone-
Smith fails either the 75% or 95% gross income test for that year.
Annual distribution requirements
In order to qualify as a REIT, Archstone-Smith is required to make
distributions, other than capital gain dividends, to its shareholders each year
in an amount at least equal to the sum of 90% of its REIT taxable income,
computed without regard to the dividends paid deduction and REIT net capital
gain, plus 90% of its net income after tax, if any, from foreclosure property,
minus the sum of various items of excess non-cash income.
Such distributions must be paid in the taxable year to which they relate, or
in the following taxable year if declared before Archstone-Smith timely files
its tax return for such year and if paid on or before the first regular
dividend payment after such declaration. To the extent that Archstone-Smith
does not distribute all of its net capital gain or if Archstone-Smith
distributes at least 90%, but less than 100%, of its REIT taxable income, as
adjusted, Archstone-Smith will be subject to tax on the undistributed amount at
regular capital gains or ordinary corporate tax rates, as the case may be. For
taxable years beginning after August 5, 1997, a REIT is permitted, with respect
to undistributed net long-term capital gains it received during the taxable
year, to designate in a notice mailed to shareholders within 60 days of the end
of the taxable year, or in a notice mailed with its annual report for the
taxable year, such amount of such gains which its shareholders are to include
in their taxable income as long-term capital gains. Thus, if Archstone-Smith
made this designation, its shareholders would include in their income as long-
term capital gains their proportionate share of the undistributed net capital
gains as designated by Archstone-Smith and Archstone-Smith would have to pay
the tax on such gains within 30 days of the close of its taxable year. Each of
its shareholders would be deemed to have paid the shareholder's share of the
tax paid by Archstone-Smith on such gains, which tax would be credited or
refunded to the shareholder. A shareholder would increase his tax basis in his
shares by the difference between the amount of income to the holder resulting
from the designation less the holder's credit or refund for the tax paid by
Archstone-Smith.
Archstone-Smith intends to make timely distributions sufficient to satisfy
the annual distribution requirements. In this regard, the declaration of trust
of Archstone-Smith Operating Trust authorizes Archstone-Smith in its capacity
as trustee to take the steps as may be necessary to cause Archstone-Smith
Operating Trust
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to distribute to its unitholders an amount sufficient to permit Archstone-Smith
to meet the distribution requirements. It is possible that Archstone-Smith may
not have sufficient cash or other liquid assets to meet the 90% distribution
requirement due to timing differences between the actual receipt of income and
actual payment of expenses on the one hand, and the inclusion of such income
and deduction of such expenses in computing its REIT taxable income on the
other hand. Additionally, this may be due to Archstone-Smith Operating Trust's
inability to control cash distributions from any properties over which it does
not have decision making control, or for other reasons. To avoid any problem
with the 90% distribution requirement, Archstone-Smith will closely monitor the
relationship between its REIT taxable income and cash flow and, if necessary,
intend to borrow funds or cause Archstone-Smith Operating Trust or other
affiliates to borrow funds in order to satisfy the distribution requirement.
However, there can be no assurance that such borrowing would be available at
such time.
Distributions must generally be made during the taxable year to which they
relate. Dividends may be paid in the following year in two circumstances.
First, dividends may be declared in the following year if the dividends are
declared before Archstone-Smith timely files its tax return for the year and if
made before the first regular dividend payment made after such declaration.
Second, if Archstone-Smith declares a dividend in October, November, or
December of any year with a record date in one of these months and pay the
dividend on or before January 31 of the following year, Archstone-Smith will be
treated as having paid the dividend on December 31 of the year in which the
dividend was declared. To the extent that Archstone-Smith does not distribute
all of its net capital gain or if Archstone-Smith distributes at least 90%, but
less than 100% of its REIT taxable income, as adjusted, Archstone-Smith will be
subject to tax on the undistributed amount at regular capital gains or ordinary
corporate tax rates, as the case may be.
If Archstone-Smith fails to meet the 90% distribution requirement as a
result of an adjustment to its tax return by the IRS, Archstone-Smith may
retroactively cure the failure by paying a "deficiency dividend," plus
applicable penalties and interest, within a specified period.
Tax aspects of its investments in partnerships
Archstone-Smith holds units in Archstone-Smith Operating Trust. For federal
income tax purposes, Archstone-Smith Operating Trust is classified as a
partnership. In general, a partnership is a "pass-through" entity which is not
subject to federal income tax. Rather, partners are allocated their
proportionate shares of the items of income, gain, loss, deduction and credit
of a partnership, and are potentially subject to tax thereon, without regard to
whether the partner received a distribution from the partnership. Archstone-
Smith will include its proportionate share of the foregoing partnership items
for purposes of the various REIT gross income tests and in the computation of
its REIT taxable income. See "--Taxation of Archstone-Smith--General" and "--
Taxation of Archstone-Smith--Gross income tests."
Each partner's share of a partnership's tax attributes is determined in
accordance with the declaration of trust of Archstone-Smith Operating Trust,
although the allocations will be adjusted for tax purposes if they do not
comply with the technical provisions of Internal Revenue Code section 704(b)
and the regulations under Internal Revenue Code section 704(b). Archstone-Smith
Operating Trust's allocation of tax attributes is intended to comply with these
provisions. Notwithstanding these allocation provisions, for purposes of
complying with the gross income and asset tests discussed above, Archstone-
Smith will be deemed to own its proportionate share of each of the assets of
the partnership and will be deemed to have received a share of the income of
the partnership based on its capital interest in Archstone-Smith Operating
Trust. Accordingly, any increase in its REIT taxable income from its interest
in Archstone-Smith Operating Trust, whether or not a corresponding cash
distribution is also received from Archstone-Smith Operating Trust, will
increase its distribution requirements. However, this will not be subject to
federal income tax in its hands if Archstone-Smith distributes an amount equal
to such additional income to its shareholders. Moreover, for purposes of the
REIT asset tests, Archstone-Smith will include its proportionate share of
assets held by Archstone-Smith Operating Trust. See "Taxation of Archstone-
Smith--Annual Distribution Requirements" and "--Taxation of Archstone-Smith--
Asset tests."
133
Entity Classification. Based on its representations that Archstone-Smith
Operating Trust will satisfy the conditions to avoid classification as a
"publicly traded partnership" under the Internal Revenue Code, in the opinion
of Mayer, Brown & Platt, under existing federal income tax law and regulations,
Archstone-Smith Operating Trust will be treated for federal income tax purposes
as a partnership, and not as an association taxable as a corporation. The
opinion, however, is not binding on the Internal Revenue Service.
Tax Allocations with Respect to Book-Tax Difference on Contributed
Properties. Under section 704(c) of the Internal Revenue Code, income, gain,
loss and deductions attributable to appreciated or depreciated property that is
contributed to a partnership must be allocated for federal income tax purposes
in a manner such that the contributor is charged with, or benefits from, the
unrealized gain or unrealized loss associated with the property at the time of
contribution. The amount of unrealized gain or unrealized loss generally is
equal to the difference between the fair market value of the contributed
property at the time of contribution and the adjusted tax basis of the property
at the time of contribution, which is referred to as the book-tax difference. A
book-tax difference also can exist with respect to an asset that has not
appreciated or depreciated in economic terms if that asset has been depreciated
for tax purposes. At the time of the partnership merger, a substantial book-tax
difference is likely to exist with respect to the assets owned by Smith
Partnership, particularly those that Smith Partnership previously acquired in
exchange for its units.
The declaration of trust of Archstone-Smith Operating Trust requires
allocations of income, gain, loss and deductions attributable to the properties
with respect to which there is book-tax difference be made in a manner that is
consistent with section 704(c) of the Internal Revenue Code. Treasury
regulations under section 704(c) require partnerships to use a reasonable
method for allocation of items affected by section 704(c) of the Internal
Revenue Code. Archstone-Smith Operating Trust has agreed to use the traditional
method, one of the three methods outlined by the Treasury regulations under
section 704(c), with no curative allocations, except as described below:
. with respect to the Smith Partnership properties, except to the extent
required under a pre-existing agreement to use another method, which
requirement is not waived, and
. with respect to each of the properties owned by Archstone-Smith
Operating Trust immediately prior to the partnership merger.
Under the traditional method, former Smith Partnership unitholders,
including Archstone-Smith as successor to Smith Residential, are allocated less
depreciation and, therefore, more income with respect to the assets owned by
Smith Partnership prior to the partnership merger. The effects of these
allocations are different for different Smith Partnership unitholders and
depend upon which, if any, properties those unitholders originally contributed
to Smith Partnership and the amount of depreciation, if any, that remains to be
claimed with respect to these properties. These reduced allocations of
depreciation and increased allocations of income are offset at least in part by
increased allocations of depreciation and reduced allocations of income with
respect to properties owned by Archstone-Smith Operating Trust before the
partnership merger.
In order to offset the effect of certain ceiling rule disparities,
Archstone-Smith Operating Trust will make a special curative allocation of
taxable income each year through 2028 to the former Smith Partnership
unitholders in an amount per unit of Archstone-Smith Operating Trust held by
such former holders equal to $5,000,000 divided by the number of Archstone-
Smith Operating Trust units held by the former Smith Partnership unitholders
immediately following the partnership merger. A ceiling rule disparity will
generally exist if the aggregate amount of deductions for federal income tax
purposes attributable to any of the Smith Partnership properties for any year
is less than the amount of depreciation attributable to such Smith partnership
property for such year computed based on the fair market value of such Smith
Partnership property at the time of the partnership merger. Accordingly, in
addition to the effects of the traditional method described
above, each former Smith Partnership unitholder who continues to own Archstone-
Smith Operating Trust units following the partnership merger will be allocated
income each year as a result of these special curative allocations in addition
to income allocated in proportion to their respective percentage ownership
interests in
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Archstone-Smith Operating Trust, even though its cash flow is distributed
proportionately among all Archstone-Smith Operating Trust unitholders.
To the extent there exists any remaining book-tax difference at the time of
a taxable disposition of a Smith Partnership property, Archstone-Smith
Operating Trust will make a special curative allocation of income for federal
income tax purposes to former Smith Partnership unitholders to offset the
remaining book-tax disparity with respect to such property, even though the
proceeds of the sale will be allocated proportionately among all Archstone-
Smith Operating Trust unitholders. Conversely, any book-tax difference
remaining in an existing Archstone property at the time of a taxable
disposition of such property will be allocated to Archstone-Smith and not to
the former Smith Partnership unitholders. The amount of gain allocated to
specific former Smith Partnership unitholders with respect to Smith Partnership
assets would depend upon a number of variables, including the book-tax
difference that existed with respect to such assets within Smith Partnership
before the partnership merger; whether the former Smith Partnership unitholder
owns units issued in exchange for the contribution of that asset to Smith
Partnership; the amount of the additional book-tax difference that was created
as a result of the partnership merger with respect to the asset; and the amount
of the book-tax difference with respect to that asset that has been amortized
since the partnership merger and before the sale of the asset through the
special allocations of depreciation deductions described above.
The declaration of trust of Archstone-Smith Operating Trust also requires
that any gain allocated to the Archstone-Smith Operating Trust unitholders upon
the sale or other taxable disposition of any Archstone-Smith Operating Trust
asset must, to the extent possible after taking into account other required
allocations of gain, be characterized as recapture income in the same
proportions and to the same extent as the unitholders previously have been
allocated any deductions directly or indirectly giving rise to the treatment of
the gains as recapture income.
Liquidation of Archstone-Smith Operating Trust. If Archstone-Smith Operating
Trust liquidates and dissolves, a distribution of Archstone-Smith Operating
Trust property other than money generally will not result in taxable gain to an
Archstone-Smith Operating Trust unitholder, except to the extent provided in
sections 704(c)(1)(B), 731(c) and 737 of the Internal Revenue Code. The basis
of any property distributed to an Archstone-Smith Operating Trust unitholder
will equal the adjusted basis of the unitholders' Archstone-Smith Operating
Trust units, reduced by any money distributed in liquidation. A distribution of
money upon the liquidation of Archstone-Smith Operating Trust, however, will be
taxable to an Archstone-Smith Operating Trust unitholder to the extent that the
amount of money distributed in liquidation, including any deemed distributions
of cash as a result of a reduction in the unitholder's share of partnership
liabilities, exceeds the unitholder's tax basis in its Archstone-Smith
Operating Trust units. If Archstone-Smith issued its shares of beneficial
interest to Archstone-Smith Operating Trust unitholders upon the liquidation of
Archstone-Smith Operating Trust, it is likely that each Archstone-Smith
Operating Trust unitholder would be treated as if it had exchanged its
Archstone-Smith Operating Trust units for Archstone-Smith shares and the
unitholder would recognize gain or loss as if its Archstone-Smith Operating
Trust units were sold in a fully taxable exchange.
Sale of Properties. Its share of any gain realized by Archstone-Smith
Operating Trust on the sale of any "dealer property" generally will be treated
as income from a prohibited transaction that is subject to 100% penalty tax.
See "--Taxation of Archstone-Smith--General" and "--Taxation of Archstone-
Smith--Gross income tests--The 95% Test." Under existing law, whether property
is dealer property is a question of fact that depends on all the facts and
circumstances with respect to the particular transaction. Archstone-Smith
intends to hold, and, to the extent within its control, to have any joint
venture to which Archstone-Smith Operating Trust is a partner hold, properties
for investment with a view to long-term appreciation, to engage in the business
of acquiring, owning, operating and developing the properties, and to make
sales of its properties and other properties acquired subsequent to the date
hereof as are consistent with its investment objectives. Based upon its
investment objectives, Archstone-Smith believes that overall, its properties
should not be considered dealer property and that the amount of income from
prohibited transactions, if any, will not be material.
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Failure to qualify
If Archstone-Smith fails to qualify for taxation as a REIT in any taxable
year and certain relief provisions do not apply, Archstone-Smith will be
subject to tax, including applicable alternative minimum tax, on its taxable
income at regular corporate rates. Distributions to shareholders in any year in
which Archstone-Smith fails to qualify as a REIT will not be deductible by
Archstone-Smith, nor generally will they be required to be made under the
Internal Revenue Code. In such event, to the extent of current and accumulated
earnings and profits, all distributions to shareholders will be taxable as
ordinary income, and subject to limitations in the Internal Revenue Code,
corporate distributees may be eligible for the dividends-received deduction.
Unless entitled to relief under specific statutory provisions, Archstone-Smith
also will be disqualified from re-electing taxation as a REIT for the four
taxable years following the year during which qualification was lost.
Taxation of Its Shareholders
Taxation of taxable domestic shareholders
As long as Archstone-Smith qualifies as a REIT, distributions made to its
taxable domestic 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 will not be eligible for the dividends-
received deduction for corporations. Distributions, and for tax years beginning
after August 5, 1997, undistributed amounts, that are designated as capital
gain dividends will be taxed as long-term capital gains, to the extent they do
not exceed its actual net capital gain for the taxable year, without regard to
the period for which the shareholder has held its shares. However, corporate
shareholders may be required to treat up to 20% of some capital gain dividends
as ordinary income. To the extent that Archstone-Smith makes distributions in
excess of current and accumulated earnings and profits, these distributions are
treated first as a tax-free return of capital to its shareholders, reducing the
tax basis of a shareholder's shares by the amount of such distribution, but not
below zero, with distributions in excess of the shareholder's tax basis taxable
as capital gains, if the shares are held as a capital asset. In addition, any
dividend declared by Archstone-Smith in October, November or December of any
year and payable to a shareholder of record on a specific date in any such
month shall be treated as both paid by Archstone-Smith and received by the
shareholder on December 31 of such year, provided that the dividend is actually
paid by Archstone-Smith during January of the following calendar year.
Shareholders may not include in their individual income tax returns any of its
net operating losses or capital losses. Federal income tax rules may also
require that certain minimum tax adjustments and preferences be apportioned to
its shareholders.
In general, any loss upon a sale or exchange of shares by a shareholder who
has held such shares for six months or less, after applying holding period
rules, will be treated as a long-term capital loss, to the extent of
distributions required to be treated by such shareholder as long-term capital
gains.
Gain from the sale or exchange of shares held for more than one year is
taxed at a maximum capital gain rate of 20%. Pursuant to Internal Revenue
Service guidance, Archstone-Smith may classify portions of its capital gain
dividends as gains eligible for the 20% capital gains rate or as unrecaptured
Internal Revenue Code section 1250 gain taxable at a maximum rate of 25%.
Shareholders should consult their tax advisor with respect to taxation of
capital gains and capital gain dividends and with regard to state, local and
foreign taxes on capital gains.
Backup withholding
Archstone-Smith will report to its domestic shareholders and to the Internal
Revenue Service the amount of distributions paid during each calendar year, and
the amount of tax withheld, if any, with respect to the paid distributions.
Under the backup withholding rules, a shareholder may be subject to backup
withholding at applicable rates with respect to distributions paid unless such
shareholder is a corporation or comes within
136
other exempt categories and, when required, demonstrates this fact or provides
a taxpayer identification number, certifies as to no loss of exemption from
backup withholding, and otherwise complies with applicable requirements of the
backup withholding rules. A shareholder that does not provide Archstone-Smith
with its correct taxpayer identification number may also be subject to
penalties imposed by the Internal Revenue Service. Any amount paid as backup
withholding will be credited against the shareholder's income tax liability. In
addition, Archstone-Smith may be required to withhold a portion of capital gain
distributions made to any shareholders who fail to certify their non-foreign
status to Archstone-Smith.
Taxation of tax-exempt shareholders
The Internal Revenue Service has issued a revenue ruling in which it held
that amounts distributed by a REIT to a tax-exempt employees' pension trust do
not constitute unrelated business taxable income. Subject to the discussion
below regarding a "pension-held REIT", based upon the ruling, the analysis in
the ruling and the statutory framework of the Internal Revenue Code,
distributions to a shareholder that is a tax-exempt entity should also not
constitute unrelated business taxable income, provided that the tax-exempt
entity has not financed the acquisition of its shares with "acquisition
indebtedness" within the meaning of the Internal Revenue Code, that the shares
are not otherwise used in an unrelated trade or business of the tax-exempt
entity, and that Archstone-Smith, consistent with its present intent, does not
hold a residual interest in a real estate mortgage investment conduit.
However, if any pension or other retirement trust that qualifies under
section 401(a) of the Internal Revenue Code holds more than 10% by value of the
interests in a "pension-held REIT" at any time during a taxable year, a portion
of the dividends paid to the qualified pension trust by such REIT may
constitute unrelated business taxable income. For these purposes, a "pension-
held REIT" is defined as a REIT if such REIT would not have qualified as a REIT
but for the provisions of the Internal Revenue Code which look through such a
qualified pension trust in determining ownership of stock of the REIT and at
least one qualified pension trust holds more than 25% by value of the interests
of such REIT or one or more qualified pension trusts (each owning more than a
10% interest by value in the REIT) hold in the aggregate more than 50% by value
of the interests in such REIT.
Taxation of foreign shareholders
Archstone-Smith will qualify as a "domestically-controlled REIT" so long as
less than 50% in value of its shares is held by foreign persons, for example,
nonresident aliens and foreign corporations, partnerships, trusts and estates.
Archstone-Smith currently anticipates that Archstone-Smith will qualify as a
domestically controlled REIT. Under these circumstances, gain from the sale of
shares by a foreign person should not be subject to U.S. taxation, unless such
gain is effectively connected with such person's U.S. business or, in the case
of an individual foreign person, such person is present within the U.S. for
more than 182 days in such taxable year.
Distributions of cash generated by its real estate operations, but not by
the sale or exchange of its communities, that are paid to foreign persons
generally will be subject to U.S. withholding tax at a rate of 30%, unless an
applicable tax treaty reduces that tax and the foreign shareholder files with
Archstone-Smith the required form evidencing such lower rate or unless the
foreign shareholder files an Internal Revenue Service Form W-8ECI with
Archstone-Smith claiming that the distribution is "effectively connected"
income. Under applicable Treasury Regulations, foreign shareholders generally
must provide the Internal Revenue Service Form W-8ECI beginning January 1, 2000
and every three years thereafter unless the information on the form changes
before that date.
Distributions of proceeds attributable to the sale or exchange by Archstone-
Smith of U.S. real property interests are subject to income and withholding
taxes pursuant to the Foreign Investment in Real Property Tax Act of 1980, and
may be subject to branch profits tax in the hands of a shareholder which is a
foreign corporation if it is not entitled to treaty relief or exemption.
Archstone-Smith is required by applicable Treasury
137
Regulations to withhold 35% of any distribution to a foreign person that could
be designated by Archstone-Smith as a capital gain dividend; this amount is
creditable against the foreign shareholder's Foreign Investment in Real
Property Tax Act tax liability.
The federal income taxation of foreign persons is a highly complex matter
that may be affected by many other considerations. Accordingly, foreign
investors should consult their own advisors regarding the income and
withholding tax considerations with respect to their investment.
Other Tax Considerations
Investments in taxable REIT subsidiaries
Several issuers have elected to be treated as taxable REIT subsidiaries of
Archstone-Smith effective January 1, 2001 and additional issuers will become
taxable REIT subsidiaries of Archstone-Smith as a result of the merger of Smith
Residential into Archstone-Smith. As taxable REIT subsidiaries of Archstone-
Smith, these entities will pay federal and state income taxes at the full
applicable corporate rates on their income prior to payment of any dividends.
Such taxable REIT subsidiaries will attempt to minimize the amount of such
taxes, but there can be no assurance whether or the extent to which measures
taken to minimize taxes will be successful. To the extent a taxable REIT
subsidiary of Archstone-Smith is required to pay federal, state or local taxes,
the cash available for distribution by such taxable REIT subsidiary to its
shareholders will be reduced accordingly.
Taxable REIT subsidiaries are subject to full corporate level taxation on
their earnings, but are permitted to engage in certain types of activities,
such as those performed by taxable entities in which Archstone-Smith owns an
interest, which cannot be performed directly by REITs without jeopardizing
their REIT status. Taxable REIT subsidiaries are subject to limitations on the
deductibility of payments made to the associated REIT which could materially
increase the taxable income of the taxable REIT subsidiary and are subject to
prohibited transaction taxes on certain other payments made to the associated
REIT. Archstone-Smith will be subject to a tax of 100% on the amount of any
rents from real property, deductions or excess interest paid by any of its
taxable REIT subsidiaries to Archstone-Smith that would be reduced through
reapportionment under Internal Revenue Code section 482 in order to more
clearly reflect income of the taxable REIT subsidiary.
Under the taxable REIT subsidiary provision, Archstone-Smith and any taxable
entity in which Archstone-Smith owns an interest are allowed to jointly elect
to treat such entity as a "taxable REIT subsidiary." As described above,
taxable REIT subsidiary elections have been made for certain entities in which
Archstone-Smith owns an interest. Additional taxable REIT subsidiary elections
may be made in the future for additional entities in which Archstone-Smith owns
an interest.
Tax on built-in gain
If Archstone-Smith acquires any assets from a taxable "C" corporation in a
carry-over basis transaction, Archstone-Smith could be liable for specified
liabilities that are inherited from the "C" corporation. If Archstone-Smith
recognizes gain on the disposition of such assets during the 10 year period
beginning on the date on which such assets were acquired by Archstone-Smith,
then to the extent of such assets' "built-in gain" (i.e., the excess of the
fair market value of such asset at the time of the acquisition by Archstone-
Smith over the adjusted basis in such asset, determined at the time of such
acquisition), Archstone-Smith will be subject to tax on such gain at the
highest regular corporate rate applicable. The results described herein with
respect to the recognition of built-in gain assume that Archstone-Smith made or
will make an election pursuant to Notice 88-19 or Treasury regulations that
were promulgated in 2000. Because Smith Residential acquired assets from a "C"
corporation in a carry-over basis transaction in 1999 and made the required
election with respect to any built-in gain, Archstone-Smith will inherit such
election.
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Possible legislative or other actions affecting tax consequences
Prospective shareholders should recognize that the present federal income
tax treatment of an investment in Archstone-Smith may be modified by
legislative, judicial or administrative action at any time and that any such
action may affect investments and commitments previously made. The rules
dealing with federal income taxation are constantly under review by persons
involved in the legislative process and by the Internal Revenue Service and the
Treasury Department, resulting in revisions of regulations and revised
interpretations of established concepts as well as statutory changes. Revisions
in federal tax laws and interpretations of these laws could adversely affect
the tax consequences of an investment in Archstone-Smith.
State and local taxes
Archstone-Smith and its shareholders may be subject to state or local
taxation in various jurisdictions, including those in which Archstone-Smith or
they transact business or reside. The state and local tax treatment of
Archstone-Smith 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 the common shares.
You are advised to consult with your own tax advisor regarding the specific
tax consequences to you of the ownership and sales of common shares, including
the federal, state, local, foreign, and other tax consequences of such
ownership, sale and election and of potential changes in applicable tax laws.
139
DESCRIPTION OF ARCHSTONE SHARES OF BENEFICIAL INTEREST
The following summary of the material terms of Archstone's shares of
beneficial interest, which are referred to in this document as "units," does
not include all of the terms of the units and should be read together with the
declaration of trust and bylaws of Archstone, which are incorporated by
reference in this consent solicitation statement/prospectus. See "Where You Can
Find More Information" beginning on page 216. The declaration of trust and
bylaws of Archstone are included as exhibits to the registration statement, of
which this document is a part.
General
The authorized capitalization of Archstone consists of 450,000,000 units,
par value $0.01 per unit, of which 100,000,000 are designated initially as
Class A-1 common units, 200,000,000 are designated initially as Class A-2
common units; 10,000,000 are initially designated as Class B common units;
3,174,235 are designated as Series A cumulative convertible redeemable
preferred units, 1,969,100 are designated as Series C cumulative redeemable
preferred units, 1,989,956 are designated as Series D cumulative redeemable
preferred units, 1,600,000 are designated as Series E cumulative convertible
redeemable preferred units, 800,000 are designated as Series F cumulative
convertible redeemable preferred units, 600,000 are designated as Series G
cumulative convertible redeemable preferred units, 2,640,325 are designated as
Series H cumulative convertible redeemable preferred units, 500 are designated
as Series I cumulative redeemable preferred units, 684,931 are designated as
Series J cumulative redeemable preferred units, 666,667 are designated as
Series K cumulative convertible redeemable preferred units, 641,026 are
designated as Series L cumulative convertible redeemable preferred units, and
4,500,000 are designated as Series B junior participating convertible preferred
units.
The following table sets forth the issued and outstanding common units and
preferred units of Archstone immediately after the completion of the
partnership merger, based on the number of Archstone and Smith Residential
shares and Smith Partnership units outstanding as of August 31, 2001:
Issued and
Outstanding
Class or Series of Units Units
------------------------ -----------
Class A-1 Common Units........................................... 76,961,565
Class A-2 Common Units........................................... 171,638,428
Class B Common Units............................................. 0
Series A Preferred Units......................................... 3,174,235
Series B Preferred Units......................................... 0
Series C Preferred Units......................................... 1,969,100
Series D Preferred Units......................................... 1,989,956
Series E Preferred Units......................................... 0
Series F Preferred Units......................................... 0
Series G Preferred Units......................................... 0
Series H Preferred Units......................................... 2,640,325
Series I Preferred Units......................................... 500
Series J Preferred Units......................................... 684,931
Series K Preferred Units......................................... 666,667
Series L Preferred Units......................................... 641,026
On September 19, 2001, all of the 400,000 issued and outstanding Smith
Partnership Series H preferred units were converted into 259,740 Class A common
units.
Immediately following the completion of the partnership merger, it is
expected that Archstone-Smith will own all of the outstanding Archstone Class
A-2 common units and all outstanding Archstone preferred units. Under the
Archstone declaration of trust, the Archstone board may, without unitholder
approval, amend the declaration of trust to increase or decrease the aggregate
number of units or the number of units of any class or
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series. The Archstone board also has the authority to issue authorized but
unissued common units and, unless otherwise limited by the rights of holders of
any class or series of preferred units, preferred units in one or more classes
or series, without unitholder approval. The Archstone board also is authorized
to reclassify authorized but unissued units into preferred units, and
authorized but unissued preferred units into common units, without unitholder
approval, unless otherwise limited by the rights of holders of any class or
series of preferred units.
Under Maryland law applicable to Maryland REITs, an Archstone unitholder is
not personally liable for the obligations of Archstone solely as a result of
his or her status as a unitholder. The Archstone declaration of trust provides
that unitholders will not be liable for any debt, act, omission or obligation
incurred by Archstone or its trustees and will be under no obligation to
Archstone or its creditors with respect to their units other than the
obligation to pay to Archstone the full amount of the consideration for which
the units were issued or to be issued, except under limited circumstances
specified in the Archstone declaration of trust.
However, unitholders may, in jurisdictions other than Maryland, be found by
a court to be personally liable to the extent that such claims are not
satisfied by Archstone. See "Risk Factors--Archstone unitholders who exercise
control over Archstone may have personal liability in some jurisdictions if
Archstone were treated as a common law trust" on page 37.
The Archstone declaration of trust and bylaws further provide that Archstone
will, except in cases of bad faith, deliberate dishonesty, improper personal
benefit or knowing criminal behavior, indemnify each present or former
unitholder against any claim or liability to which the unitholder may become
subject by reason of being or having been a unitholder and that Archstone will
reimburse each unitholder for all reasonable expenses incurred by him or her
relating to any such claim or liability. In addition, inasmuch as Archstone
carries public liability insurance which it considers adequate, any risk of
personal liability to unitholders is limited to situations in which Archstone's
assets plus its insurance coverage would be insufficient to satisfy the claims
against Archstone and its unitholders.
The Archstone declaration of trust provides that there may be as few as one
and as many as 15 trustees. The trustees are elected by the Class A-2
unitholders. Archstone has been structured to provide assurance that the Class
A-2 units will be held only by Archstone-Smith and certain of its affiliates,
and thus, so long as Archstone-Smith and certain of its affiliates, hold the
Class A-2 units, Archstone-Smith will be in a position to limit the number of
trustees to one and to continue to be elected as the sole trustee of Archstone.
Common Units
All Archstone Class A-1, Class A-2 and Class B common units will be duly
authorized, validly issued, fully paid and, except as described under the
caption "--Capital Contributions," nonassessable.
At the election of Archstone-Smith, as trustee, in its sole and absolute
discretion, Archstone may issue either Class A-1 common units or Class B common
units to newly admitted unitholders. The major difference between Class A-1
common units and Class B common units is that the Class A-1 common units
receive a full distribution of any cash distributed when, as and if authorized
by Archstone-Smith, as trustee, with respect to such units, without proration
to take into account the number of days that the Class A-1 common units were
outstanding, while distributions on the Class B common units are prorated based
upon the number of days in the applicable distribution period that the Class B
common units were outstanding. Any common unit that is not specifically
designated by Archstone as being of a particular class will be deemed to be a
Class A-1 common unit.
Common units issued to Archstone-Smith and certain affiliates will be Class
A-2 common units. Class A-1 common units are automatically converted into Class
A-2 units when they are held by Archstone-Smith or certain affiliates, and
Class A-2 common units are automatically converted into Class A-1 units when
transferred by Archstone-Smith or certain affiliates to a person other than
Archstone-Smith or certain affiliates.
Unless otherwise limited by preferential rights of any other units and by
the provisions of the Archstone declaration of trust regarding ownership
limitations and restrictions on transfers of units, holders of Archstone
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common units are generally entitled to receive distributions when, as and if
authorized by Archstone-Smith, as trustee, out of assets legally available for
the payment of distributions and to share ratably in the assets of Archstone
legally available for distribution to its unitholders in the event of its
liquidation, dissolution or winding-up after payment of, or adequate provision
for, all known debts and liability of Archstone. Prior to the holders of common
units being entitled to receive any distributions in any quarter, Archstone
must pay or set apart for payment on all of its outstanding preferred units an
aggregate of approximately $8.9 million.
Unless otherwise limited by the provisions of the Archstone declaration of
trust regarding ownership limitations and restrictions on transfer of units,
each outstanding Archstone common unit entitles the holder to one vote on all
matters submitted to a vote of unitholders, except that only the holders of the
Class A-2 common units are entitled to vote in the election of trustees of
Archstone. Except as provided with respect to any other class or series of
units, the holders of the Archstone Class A-1, Class A-2 and Class B common
units possess exclusive voting power. There is no cumulative voting.
Holders of Archstone common units are not entitled to the benefit of any
sinking fund. Except as described below under "--Conversion; Redemption,"
holders of common units have no conversion or redemption rights. Except as
described below under "--Unitholder Purchase Rights," holders of units do not
have preemptive rights to subscribe for any securities of Archstone. Subject to
the exchange provisions of the declaration of trust regarding ownership
limitations and restrictions on transfer, Archstone Class A-1, Class A-2 Class
B common units have equal liquidation, voting and other rights. Archstone Class
A-1 and Class A-2 common units have equal distribution rights.
The Archstone declaration of trust permits the termination of the existence
of Archstone if it is approved by at least a majority of the board of trustees,
and holders of at least a majority of the votes entitled to be cast on the
matter. From the effective date of the partnership merger through December 31,
2013, the dissolution of Archstone will occur only in the absence of a written
objection from any Smith Partnership partner that has been a partner since the
formation of Smith Partnership on June 30, 1994 and participated in the
partnership merger, including Archstone-Smith as successor to the partnership
units held by Smith Residential. From January 2014 through December 31, 2043,
the dissolution of Archstone will occur only in the absence of a written
objection from any group of Smith Partnership partners that have been partners
since the formation of the Smith Partnership on June 30, 1994 and participated
in the partnership merger, including Archstone-Smith as successor to the
partnership units held by Smith Residential, and that collectively hold a
number of Class A common units that represents 5% of the total units originally
issued upon the formation of Smith Partnership.
Unitholder Purchase Rights
If Archstone-Smith acquires any Class A-2 common units using the proceeds
from any exercise of any rights issued under a shareholder rights plan or other
arrangement having the same objective and substantially the same effect, then
. the holders of common units at that time, other than Archstone-Smith as
trustee, as a group, will have the right to acquire, at the same price
per Class A-2 common unit paid by Archstone-Smith, a total number of
additional Class A-1 common units equal to the total number of common
units held by those holders, multiplied by a fraction, the numerator of
which is the number of Class A-2 common units issued to Archstone-Smith
as a result of the exercise of those rights and the denominator of which
is the total number of Class A-2 common units held by Archstone-Smith
immediately prior to that issuance; and
. each holder of a Class A-1 common unit or Class B common unit at that
time will have the right to acquire, at the same price per Class A-2
common unit paid by Archstone-Smith, a number of Class A-1 common units
equal to the aggregate number of common units that the holder holds at
such time, multiplied by a fraction, the numerator of which is the
number of Class A-2 common units issued to Archstone-Smith as a result
of the exercise of those rights and the denominator of which is the
total number of Class A-2 common units held by Archstone-Smith
immediately prior to that issuance.
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In the event units other than Class A-2 common units are issued to
Archstone-Smith, as trustee, using proceeds of any exercise of rights issued
under a shareholder rights plan or other arrangement having the same objective
and substantially the same effect, the holders of common units will be granted
the right to acquire such other units acquired by Archstone-Smith at the same
price paid by Archstone-Smith and in such amounts as would be comparable to
such holders' rights had Class A-1 common units been issued instead. Archstone-
Smith, as trustee, will provide prompt written notice to the holders of common
units of its acquisition of Class A-2 common units or other units using
proceeds from such an exercise of rights and will establish in good faith such
procedures as it deems appropriate, including, without limitation, procedures
to eliminate the issuance of fractional units if Archstone-Smith deems
appropriate, to effectuate the purchase rights of the holders of common units
described above.
Preferred Units
Subject to Maryland law and the Archstone declaration of trust, the
Archstone board is authorized to issue, from the authorized but unissued units
of Archstone, preferred units in series and to establish from time to time the
number of preferred units to be included in such series and to fix the
designation and any preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption of the units of each series, and such other subjects
or matters as may be fixed by resolution of the board of trustees or a duly
authorized committee of the board. The Archstone declaration of trust also
authorizes the Archstone board to classify any unissued preferred units and to
reclassify any previously classified but unissued preferred units of any series
from time to time, in one or more series. The Archstone board also is
authorized to reclassify authorized but unissued common units into preferred
units, and authorized but unissued preferred units into common units, without
unitholder approval.
Series A Preferred Units
All Series A preferred units will be held by Archstone-Smith. The Archstone
Series A preferred units will rank senior to the Archstone common units and on
a parity with all other series of Archstone preferred units that will be issued
in the Archstone reorganization into an UPREIT and the partnership merger with
respect to payment of distributions and distribution of assets upon
liquidation, dissolution or winding up of Archstone.
Archstone-Smith, as the holder of the Archstone Series A preferred units is
entitled to receive, when, as and if authorized by Archstone-Smith, as trustee,
out of funds legally available for that purpose, cash distributions equal to
the greater of $1.75 per annum per unit or the distribution paid on the number
of Class A-2 common units into which a Series A preferred unit is convertible.
These distributions are cumulative and are payable quarterly in arrears on the
same date on which Archstone pays a distribution on the Class A common units
or, if no such distribution is paid, the date set by Archstone-Smith for
payment of distributions on the Archstone-Smith Series A preferred shares.
In the event that a holder of Archstone-Smith Series A preferred shares
exercises its right to convert its Series A preferred shares into Archstone-
Smith common shares, then concurrently with that conversion, an equivalent
number of Series A preferred units of Archstone will be automatically converted
into a number of Class A-2 common units equal to such number of Archstone-Smith
common shares issued upon conversion of the related Series A preferred shares,
adjusted as specified in the Archstone declaration of trust to take into
account prior share dividends or any subdivisions or combinations of common
shares. If the distributions are not paid in full or an amount sufficient for
payment in full is not set apart for payment as described above, all
distributions declared on the Series A preferred units and any other class or
series of parity units will be declared ratably in proportion to the respective
amounts of distributions accumulated and unpaid on the Series A preferred units
and accumulated and unpaid on the parity units.
The Archstone Series A preferred units are not entitled to the benefit of
any sinking fund.
Archstone-Smith may redeem its Series A preferred shares, which correspond
to the Archstone Series A preferred units, at its option, at any time on and
after November 30, 2003, in whole or in part from time to
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time, for cash at a redemption price of $25.00 per share, plus all accumulated
and unpaid distributions to the date fixed for redemption. Archstone-Smith, as
trustee, may cause Archstone to redeem its Series A preferred units, in whole
at any time or in part from time to time, for Class A-2 units, so long as
Archstone-Smith is concurrently redeeming an equal number of related Series A
preferred shares. If Archstone-Smith redeems any or all of its outstanding
Series A preferred shares, Archstone will cancel an equal number of Series A
preferred units and provide cash to Archstone-Smith with respect thereto in an
amount equal to the amount paid with respect to the Series A preferred shares
redeemed or acquired by Archstone-Smith.
So long as any Series A preferred units are outstanding, no distributions
may be declared or paid or set apart for payment on any class or series of
units of Archstone ranking, as to distributions or distribution of assets upon
liquidation, on a parity with the Series A preferred units for any period
unless full cumulative distributions have been or contemporaneously are
declared and paid or declared and a sum sufficient for the payment thereof set
apart for such payments on Series A preferred units for all distribution
periods ending on or prior to the distribution payment date for the parity
shares.
In addition, unless full cumulative distributions on the Series A preferred
units and on any class or series of units of Archstone ranking, as to
distributions or distribution of assets upon liquidation, on a parity with
Series A preferred units 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 distribution periods and the then current distribution period:
. no distributions, other than distributions paid solely in Archstone
common units or other units ranking junior to Series A preferred units
as to distributions and distribution of assets upon liquidation or
options, warrants or rights to acquire any such units, may be declared
or paid or set aside for payment or other distribution declared or made
upon the Archstone common units or any other units of Archstone ranking
junior to the Series A preferred units as to distributions or
distribution of assets upon liquidation; and
. no Archstone common units or any other units of Archstone ranking junior
to the Series A preferred units as to distributions or distribution of
assets upon liquidation may 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 units, by Archstone, except
by conversion into or exchange for other units of Archstone ranking
junior to Series A preferred units as to distributions and distribution
of assets upon liquidation, and except for redemptions, purchases or
other acquisitions of common units made for purposes of an employee
incentive or benefit plan of Archstone-Smith or Archstone.
Series C Preferred Units
All Series C preferred units will be held by Archstone-Smith. The Archstone
Series C preferred units rank senior to the Archstone common units and on a
parity with all other series of Archstone preferred units that will be issued
in the Archstone reorganization into an UPREIT and the partnership merger with
respect to the payment of distributions and distribution of assets upon
liquidation, dissolution or winding up of Archstone.
Archstone-Smith, as the holder of the Series C preferred units, is entitled
to receive, when, as and if authorized by Archstone-Smith, as trustee, out of
funds legally available for that purpose, cash distributions at a rate of
8.625% of the $25.00 liquidation preference per annum, which is equivalent to
$2.15625 per annum per unit. These distributions are cumulative and are payable
quarterly in arrears on the same date on which Archstone pays a distribution on
the Class A common units or, if no such distribution is paid, the date set by
Archstone-Smith for payment of distributions on the Archstone-Smith Series C
preferred shares.
The Archstone Series C preferred units are not convertible and are not
entitled to the benefit of any sinking fund.
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Archstone-Smith may redeem its Series C preferred shares, which correspond
to the Archstone Series C preferred units, at its option, at any time on and
after August 20, 2002, in whole or in part from time to time, for cash at a
redemption price of $25.00 per share, plus all accumulated and unpaid
distributions to the date fixed for redemption. The redemption price, other
than the portion attributable to accrued but unpaid distributions, is payable
only out of the sale proceeds of other shares of beneficial interest of
Archstone-Smith, which under the Archstone declaration of trust must be
contributed to Archstone by Archstone-Smith in exchange for additional units.
Archstone-Smith, as trustee, may cause Archstone to redeem its Series C
preferred units, in whole at any time or in part from time to time, for cash,
so long as Archstone-Smith is concurrently redeeming an equivalent number of
Series C preferred shares. If Archstone-Smith redeems any or all of its
outstanding Series C preferred shares, Archstone will cancel an equal number of
Series C preferred units and provide cash to Archstone-Smith with respect
thereto in an amount equal to the amount paid with respect to the Series C
preferred shares redeemed by Archstone-Smith. The number of Series C preferred
shares and corresponding Series C preferred units redeemed, therefore, is
limited to the aggregate sales proceeds received from the sale of other equity
shares of Archstone-Smith.
The Archstone Series C preferred units will have the same limitations on the
payment of distributions on junior and parity shares as the Archstone Series A
preferred units.
Series D Preferred Units
All Series D preferred units will be held by Archstone-Smith. The Archstone
Series D preferred units rank senior to the Archstone common units and on a
parity with all other series of the Archstone preferred units that will be
issued in the Archstone reorganization into an UPREIT and the partnership
merger with respect to payment of distributions and distribution of assets upon
liquidation, dissolution or winding up of Archstone.
Archstone-Smith, as the holder of the Series D preferred units, is entitled
to receive, when, as and if declared by Archstone-Smith, as trustee, out of
funds legally available for that purpose, cash distributions equal to $2.1875
per annum per unit. These distributions are cumulative and are payable
quarterly in arrears on the same date on which Archstone pays a distribution on
the Class A common units or, if no such distribution is paid, the date set by
Archstone-Smith for payment of distributions on the Archstone-Smith Series D
preferred shares.
The Archstone Series D preferred units are not convertible and are not
entitled to the benefit of any sinking fund.
Archstone-Smith may redeem its Series D preferred shares, which correspond
to the Archstone Series C preferred units, at any time on and after August 6,
2004, in whole or in part from time to time, for cash at a redemption price of
$25.00 per share, plus all accumulated and unpaid distributions to the date
fixed for redemption. The redemption price, other than any portion attributable
to accrued but unpaid distributions, is payable only out of the sale proceeds
of other shares of beneficial interest of Archstone-Smith, which under the
Archstone declaration of trust must be contributed to Archstone by Archstone-
Smith in exchange for additional units. Archstone-Smith, as trustee, may cause
Archstone to redeem its Series D preferred units in whole or in part from time
to time, for cash, so long as Archstone-Smith is concurrently redeeming an
equivalent number of Series D preferred shares. If Archstone-Smith redeems any
or all of its outstanding Series D preferred shares, Archstone will cancel an
equal number of Series D preferred units and provide cash to Archstone-Smith
with respect thereto in an amount equal to the amount paid with respect to the
Series D preferred shares redeemed by Archstone-Smith. The number of Series D
preferred shares and corresponding Series D preferred units redeemed,
therefore, is limited to the aggregate sales proceeds received from the sale of
other equity shares of Archstone-Smith.
The Archstone Series D preferred units will have the same limitations on the
payment of distributions on junior and parity shares as the Archstone Series A
and C preferred units.
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Series E Preferred Units
When issued, all Series E preferred units will be held by Archstone-Smith.
The Archstone Series E preferred units will rank senior to the common units and
on a parity with all other series of the Archstone preferred units that will be
issued in the Archstone reorganization into an UPREIT and the partnership
merger with respect to payment of distributions and distribution of assets upon
liquidation, dissolution or winding up of Archstone.
Archstone-Smith, as the holder of the Series E preferred units, will be
entitled to receive, when, as and if authorized by Archstone-Smith, as trustee,
out of funds legally available for that purpose, cash distributions at a rate
of 8.375% of the $25.00 liquidation preference per annum, which is equivalent
to $2.09375 per annum per unit. These distributions are cumulative and are
payable quarterly in arrears on the same date on which Archstone pays a
distribution on the Class A common units or, if no such distribution is paid,
the date set by Archstone-Smith for payment of distributions on the Archstone-
Smith Series E preferred shares.
The Archstone Series E preferred units are issuable upon exchange of Series
E preferred limited partnership interests of Archstone Communities Limited
Partnership, a limited partnership of which Archstone is the sole general
partner. Upon exchange of those partnership interests for Series E preferred
units, the Series E preferred units issued will automatically, and without any
further action, be converted into Archstone-Smith Series E preferred shares and
Archstone-Smith, as trustee, will own all of the Series E preferred units so
issued.
The Series E preferred units are not entitled to the benefit of any sinking
fund.
Archstone-Smith may redeem its outstanding Series E preferred shares, which
correspond to the Archstone Series E preferred units, at its option, at any
time on and after August 13, 2004, in whole or in part from time to time, for
cash at a redemption price of $25.00 per share, plus all accumulated and unpaid
distributions to the date fixed for redemption. The redemption price, other
than any portion attributable to accrued but unpaid distributions, is payable
only out of the sale proceeds of other shares of beneficial interest of
Archstone-Smith, which under the Archstone declaration of trust must be
contributed to Archstone by Archstone-Smith in exchange for additional units.
Archstone-Smith, as trustee, may cause Archstone to redeem its Series E
preferred units, in whole or in part from time to time, for cash, so long as
Archstone-Smith is concurrently redeeming an equivalent number of Series E
preferred shares. If Archstone-Smith redeems any or all of its outstanding
Series E preferred shares, Archstone will cancel an equal number of Series E
preferred units and provide cash to Archstone-Smith with respect thereto in an
amount equal to the amount paid with respect to the Series E preferred shares
redeemed by Archstone-Smith.
The Archstone Series E preferred units will have the same limitations on the
payment of distributions on junior and parity shares as the Archstone Series A,
C and D preferred units.
Series F Preferred Units
When issued, all Series F preferred units will be held by Archstone-Smith.
The Archstone Series F preferred units will rank senior to the common units and
on a parity with all other series of the Archstone preferred units that will be
issued in the Archstone reorganization into an UPREIT and the partnership
merger with respect to payment of distributions and distribution of assets upon
liquidation, dissolution or winding up of Archstone.
Archstone-Smith, as the holder of the Series F preferred units, will be
entitled to receive, when, as and if authorized by Archstone-Smith, as trustee,
out of funds legally available for that purpose, cash distributions at a rate
of 8.125% of the $25.00 liquidation preference per annum, which is equivalent
to $2.03125 per annum per unit. These distributions are cumulative and are
payable quarterly in arrears on the same date on which Archstone pays a
distribution on the Class A common units or, if no such distribution is paid,
the date set by Archstone-Smith for payment of distributions on the Archstone-
Smith Series F preferred shares.
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The Archstone Series F preferred units are issuable upon exchange of Series
F preferred limited partnership interests of Archstone Communities Limited
Partnership-II, a limited partnership of which Archstone is the sole general
partner. Upon exchange of those partnership interests for Series F preferred
units, the Series F preferred units issued will automatically, and without any
further action, be converted into Archstone-Smith Series F preferred shares and
Archstone-Smith will own all of the Series F preferred units so issued.
The Series F preferred units are not entitled to the benefit of any sinking
fund.
Archstone-Smith may redeem its outstanding Series F preferred shares, which
correspond to the Archstone Series F preferred units, at its option, at any
time on and after September 27, 2004, in whole or in part from time to time,
for cash at a redemption price of $25.00 per share, plus all accumulated and
unpaid distributions to the date fixed for redemption. The redemption price,
other than any portion attributable to accrued but unpaid distributions, is
payable only out of the sale proceeds of other shares of beneficial interest of
Archstone-Smith, which under the Archstone declaration of trust must be
contributed to Archstone by Archstone-Smith in exchange for additional units.
Archstone-Smith, as trustee, may cause Archstone to redeem its Series F
preferred units, in whole or in part from time to time, for cash, so long as
Archstone-Smith is concurrently redeeming an equivalent number of Series F
preferred shares. If Archstone-Smith redeems any or all of its outstanding
Series F preferred shares, Archstone will cancel an equal number of Series F
preferred units and provide cash to Archstone-Smith with respect thereto in an
amount equal to the amount paid with respect to the Series F preferred shares
redeemed by Archstone-Smith.
Series G Preferred Units
When issued, all Series G preferred units will be held by Archstone-Smith.
The Archstone Series G preferred units will rank senior to the common units and
on a parity with all other series of the Archstone preferred units that will be
issued in the Archstone reorganization into an UPREIT and the partnership
merger with respect to payment of distributions and distribution of assets upon
liquidation, dissolution or winding up of Archstone.
Archstone-Smith, as the holder of the Series G preferred units, will be
entitled to receive, when, as and if authorized by Archstone-Smith, as trustee,
out of funds legally available for that purpose, cash distributions at a rate
of 8.625% of the $25.00 liquidation preference per annum, which is equivalent
to $2.15625 per annum per unit. These distributions are cumulative and are
payable quarterly in arrears on the same date on which Archstone pays a
distribution on the Class A common units or, if no such distribution is paid,
the date set by Archstone-Smith for payment of distributions on the Archstone-
Smith Series G preferred shares.
The Archstone Series G preferred units are issuable upon exchange of Series
G preferred limited partnership interests of Archstone Communities Limited
Partnership-II, a limited partnership of which Archstone is the sole general
partner. Upon exchange of those partnership interests for Series G preferred
units, the Series G preferred units issued will automatically, and without any
further action, be converted into Archstone-Smith Series G preferred shares and
Archstone-Smith will own all of the Series G preferred units so issued.
The Series G preferred units are not entitled to the benefit of any sinking
fund.
Archstone-Smith may redeem its outstanding Series G preferred shares, which
correspond to the Archstone Series G preferred units, at its option, at any
time on and after March 3, 2005, in whole or in part from time to time, for
cash at a redemption price of $25.00 per share, plus all accumulated and unpaid
distributions to the date fixed for redemption. The redemption price, other
than any portion attributable to accrued but unpaid distributions, is payable
only out of the sale proceeds of other shares of beneficial interest of
Archstone-Smith, which under the Archstone declaration of trust must be
contributed to Archstone by Archstone-Smith in exchange for additional units.
Archstone-Smith, as trustee, may cause Archstone to redeem its Series G
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preferred units in whole or in part from time to time, for cash, so long as
Archstone-Smith is concurrently redeeming an equivalent number of Series G
preferred shares. If Archstone-Smith redeems any or all of its outstanding
Series G preferred shares, Archstone will cancel an equal number of Series G
preferred units and provide cash to Archstone-Smith with respect thereto in an
amount equal to the amount paid with respect to the Series G preferred shares
redeemed by Archstone-Smith.
Series H Preferred Units
All Series H preferred units will be held by Archstone-Smith. The Archstone
Series H preferred units will rank senior to the Archstone common units and on
a parity with all other series of Archstone preferred units that will be issued
in the Archstone reorganization into an UPREIT and the partnership merger with
respect to the payment of distributions and distribution of assets upon
liquidation, dissolution or winding up of Archstone.
Archstone-Smith, as the holder of the Archstone Series H preferred units,
will be entitled to receive when, as and if authorized by Archstone-Smith, as
trustee, out of funds legally available for that purpose, cash distributions,
equal to the greater of 7.459% of the $27.08 liquidation preference per annum,
which is equivalent to $2.02 per annum per unit, or the distribution paid on
the number of Class A-2 common units into which a Series H preferred unit is
convertible. These distributions are cumulative and are payable quarterly in
arrears on the same date on which Archstone pays a distribution on the common
units, or if no such distribution is paid, the date set by Archstone-Smith for
payment of a distribution on the Archstone-Smith Series G preferred shares.
In the event that a holder of Archstone-Smith Series H preferred shares
exercises its right to convert its Series H preferred shares into Archstone-
Smith common shares, then concurrently with that conversion, an equivalent
number of Series H preferred units of Archstone will be automatically converted
into such number of Class A-2 common units equal to the number of Archstone-
Smith common shares issued upon conversion of the related Series H preferred
shares, adjusted as specified in the Archstone declaration of trust to take
into account prior share dividends or any subdivisions or combinations of
common shares.
The Archstone Series H preferred units will not be entitled to the benefit
of any sinking fund.
Archstone-Smith may redeem its Series H preferred shares, which correspond
to the Archstone Series H preferred units, at its option, at any time on and
after May 15, 2003, in whole or in part from time to time, at a cash redemption
price of $27.08 per Archstone-Smith Series H preferred share, or in exchange
for that number of Archstone-Smith common shares as equals the liquidation
preference per Series H preferred share divided by the conversion price for the
Series H preferred shares, plus, in either case, accumulated and unpaid
distributions to the redemption date. Archstone-Smith may issue common shares
upon any such redemption only if:
. for 20 consecutive trading days, within the last 30 trading days
immediately before the date of the notice of redemption, the average
trading price of the Archstone-Smith common shares on the New York Stock
Exchange equals or exceeds $14.81 per share, which may be adjusted in
specified circumstances; and
. at least 1,000,000 common shares were traded during such 30 trading
days.
The Series H preferred units are redeemable only if Archstone-Smith
concurrently redeems an equivalent number of Series H preferred shares. If
Archstone-Smith redeems the Series H preferred shares in exchange for common
shares, an equivalent number of Series H preferred units will be converted into
a number of Class A-2 common units equal to the number of Archstone-Smith
common shares issued, adjusted as specified in the Archstone declaration of
trust to take into account prior share dividends or any subdivisions or
combinations of common shares. If Archstone-Smith redeems the Series H
preferred shares for cash, Archstone will concurrently redeem an equal number
of Series H preferred units in exchange for the amount of cash that Archstone-
Smith is required to pay in redemption of the Series H preferred shares.
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So long as any Series H preferred units are outstanding, no distributions
may be declared or paid or set apart for payment on any class or series of
units of Archstone ranking, as to distributions or distribution of assets upon
liquidation, on a parity with or junior to Series H preferred units for any
period unless full cumulative distributions have been or contemporaneously are
declared and paid or declared and a sum sufficient for the payment thereof set
apart for such payment on Series H preferred units for all distribution periods
ending on or prior to the distribution payment date for such parity shares.
In addition, unless full cumulative distributions on Series H preferred
units and on any other class or series of Archstone units ranking as to
distributions and distribution of assets upon liquidation on parity with the
Series H preferred units 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 distribution periods and the then current distribution period:
. no distributions, other than distributions paid solely in Archstone
common units or other units ranking junior to Series H preferred units
as to distributions and distribution of assets upon liquidation, or
options, warrants or rights to acquire any such units, may be declared
or paid or set aside for payment or other distribution declared or made
upon the Archstone common units or any other units of Archstone ranking
junior to the Series H preferred units as to distributions or
distribution of assets upon liquidation; and
. no Archstone common units or any other units of Archstone ranking junior
to the Series H preferred units as to distributions or distribution of
assets upon liquidation may 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 units, by Archstone, except
by conversion into or exchange for other units ranking junior to Series
H preferred units as to distributions and distribution of assets upon
liquidation, and except for redemptions, purchases or other acquisitions
of common units made for purposes of an employee incentive or benefit
plan of Archstone-Smith or Archstone.
Upon any voluntary or involuntary liquidation, dissolution or winding up of
Archstone, holders of the Archstone Series H preferred units, when issued, will
be entitled to receive an amount equal to a liquidation preference of $27.08
per unit, plus accrued and unpaid distributions to the date of payment, before
any distribution or payment is made to the holders of Archstone common units or
any other class or series of units of Archstone ranking junior to the Archstone
Series H preferred units as to liquidation rights.
If upon any voluntary or involuntary liquidation, dissolution or winding up
of Archstone, the assets of Archstone are insufficient to make such payments in
full to holders of Archstone Series H preferred units and other preferred units
ranking on a parity with the Archstone Series H preferred units, then holders
of Archstone Series H preferred units and such other preferred units will share
ratably in any distribution of assets in proportion to the full liquidating
distributions to which they would otherwise be respectively entitled. After
payment of the full amount of the liquidating distributions to which they are
entitled, the holders of Archstone Series H preferred units will not be
entitled to any further participation in any distribution of assets by
Archstone.
Series I Preferred Units
All Archstone Series I preferred units will be held by Archstone-Smith. The
Archstone Series I preferred units will rank senior to the Archstone common
units and on a parity with each other series of Archstone preferred units to be
issued in the Archstone reorganization into an UPREIT and the partnership
merger with respect to the payment of distributions and distribution of assets
upon liquidation, dissolution or winding up of Archstone.
Archstone-Smith, as the holder of the Archstone Series I preferred units,
will be entitled to receive, when, as and if authorized by Archstone-Smith, as
trustee, out of funds legally available for that purpose, cash distributions
equal to $7,660.00 per annum per unit. These distributions are cumulative and
are payable on the 15th day of February, May, August and November of each year.
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The Archstone Series I preferred units will not be convertible into
Archstone common units and will not be entitled to the benefit of any sinking
fund.
Archstone-Smith may redeem its Series I preferred shares, which correspond
to the Archstone Series I preferred units, at any time on or after February 1,
2028, for cash at a redemption price of $100,000 per share, plus all
accumulated and unpaid distributions to the redemption date. If Archstone-Smith
redeems any or all of its outstanding Series I preferred shares, Archstone will
redeem an equal number of Series I preferred units in exchange for the amount
of cash that Archstone-Smith is required to pay in redemption of the Series I
preferred shares.
The Archstone Series I preferred units will have the same limitations on the
payment of distributions on junior and parity units and the same liquidation
rights as the Archstone Series H preferred units, with the exception of a
liquidation preference of $100,000 per unit.
Series J Preferred Units
All Archstone Series J preferred units will be held by Archstone-Smith. The
Archstone Series J preferred units will rank senior to the Archstone common
units and on a parity with each other series of Archstone preferred units to be
issued in the Archstone reorganization into an UPREIT and the partnership
merger with respect to the payment of distributions and distribution of assets
upon liquidation, dissolution or winding up of Archstone.
Archstone-Smith, as the holder of Archstone Series J preferred units will be
entitled to receive, when, as and if authorized by Archstone-Smith, as trustee,
out of funds legally available for that purpose, cumulative cash distributions
equal to the greater of 8.50% of the $36.50 liquidation preference per annum,
which is the equivalent of $3.1025 per annum per unit, or the distribution paid
on the number of Class A-2 common units into which a Series J preferred unit is
convertible. Distributions on the Archstone Series J preferred units will
cumulate and will be payable quarterly in arrears on the same date on which
Archstone pays a distribution on the common units or, if no such distribution
is paid on the common units, then on such date to be set by Archstone-Smith for
payment of a distribution on the Series J preferred shares, which date will not
be later than 45 days after the end of each distribution period ending March
31, June 30, September 30 and December 31.
In the event that a holder of Archstone-Smith Series J preferred shares
exercises its right to convert its Series J preferred shares into Archstone-
Smith common shares, then concurrently with that conversion, an equivalent
number of Series J preferred units of Archstone will be automatically converted
into a number of Class A-2 common units equal to the number of Archstone-Smith
common shares issued upon conversion of the related Series J preferred shares,
adjusted as specified in the Archstone declaration of trust to take into
account prior share dividends or any subdivisions or combinations of common
shares.
The Archstone Series J preferred units will not be entitled to the benefit
of any sinking fund.
Archstone-Smith may redeem its Series J preferred shares, which correspond
to the Archstone Series J preferred units, at its option, at any time on and
after July 13, 2002, in whole or in part from time to time at a cash redemption
price of $36.50 per Archstone-Smith Series J preferred share, or in exchange
for that number of Archstone-Smith common shares as equals the liquidation
preference per Series J preferred share divided by the conversion price for the
Series J preferred shares, plus, in either case, accumulated and unpaid
distributions to the redemption date. Archstone-Smith may issue common shares
upon any such redemption only if:
. for 20 consecutive trading days, within the last 30 trading days
immediately before the date of the notice of redemption, the average
trading price of the Archstone-Smith common shares on the New York Stock
Exchange equals or exceeds $19.9584 per share, which may be adjusted in
specified circumstances; and
. at least 1,000,000 common shares were traded during such 30 trading
days.
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The Series J preferred units are redeemable only if Archstone-Smith
concurrently redeems an equivalent number of Series J preferred shares. If
Archstone-Smith redeems the Series J preferred shares in exchange for common
shares, an equivalent number of Series J preferred units will be converted into
a number of Class A-2 common units equal to the number of Archstone-Smith
common shares issued, adjusted as specified in the Archstone declaration of
trust to take into account prior share dividends or any subdivisions or
combinations of common shares. If Archstone-Smith redeems the Series J
preferred shares for cash, Archstone will concurrently redeem an equal number
of Series J preferred units in exchange for the amount of cash that Archstone-
Smith is required to pay in redemption of the Series J preferred shares.
The Archstone Series J preferred units will have the same limitations on the
payment of distributions on junior and parity preferred units and the same
liquidation rights as the Archstone Series H and I preferred units, with the
exception of a liquidation preference of $36.50 per unit.
Series K Preferred Units
All Archstone Series K preferred units will be held by Archstone-Smith. The
Archstone Series K preferred units will rank senior to the Archstone common
units and on a parity with each other series of Archstone preferred units to be
issued in the Archstone reorganization into an UPREIT and the partnership
merger with respect to the payment of distributions and distribution of assets
upon liquidation, dissolution or winding up of Archstone.
Archstone-Smith, as the holder of the Archstone Series K preferred units,
will be entitled to receive, when, as and if authorized by Archstone-Smith, as
trustee, out of funds legally available for that purpose, cash distributions
equal to the greater of 8.25% of the $37.50 liquidation preference per annum,
which is the equivalent of $3.09375 per annum per unit, through October 1,
2001, and 8.50% of the liquidation preference per annum, which is the
equivalent of $3.1875 per annum per unit, after October 1, 2001 or the
distribution on the Archstone Class A-2 common units into which a Series K
preferred unit is convertible.
Distributions on the Archstone Series K preferred units will cumulate and
will be payable quarterly in arrears on the same date on which Archstone pays a
distribution on the common units or, if no such distribution is paid on the
common units, then on such date to be set by Archstone-Smith for payment of a
distribution on the Series K preferred shares, which date will not be later
than 45 days after the end of each distribution period ending March 31, June
30, September 30 and December 31.
In the event that a holder of Archstone-Smith Series K preferred shares
exercises its right to convert its Series K preferred shares into Archstone-
Smith common shares, then concurrently with that conversion, an equivalent
number of Series K preferred units of Archstone will be automatically converted
into a number of Class A-2 common units equal to the number of Archstone-Smith
common shares issued, adjusted as specified in the Archstone declaration of
trust to take into account prior share dividends or any subdivisions or
combinations of common shares.
The Archstone Series K preferred units will not be entitled to the benefit
of any sinking fund.
Archstone-Smith may redeem its Series K preferred shares, which correspond
to the Archstone Series K preferred units, at its option, at any time on and
after October 1, 2004, in whole or in part from time to time, at a cash
redemption price of $37.50 per Archstone-Smith Series K preferred share, or in
exchange for that number of Archstone-Smith common shares as equals the
liquidation preference per Series K preferred share divided by the conversion
price for the Series K preferred shares, plus, in either case, accumulated and
unpaid distributions to the redemption date. Archstone-Smith may issue common
shares upon any such redemption only if:
. for 20 consecutive trading days, within the last 30 trading days
immediately before the date of the notice of redemption, the average
trading price of the Archstone-Smith common shares on the
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New York Stock Exchange equals or exceeds $20.5092 per share, which may
be adjusted in specified circumstances; and
. at least 1,000,000 common shares were traded during such 30 trading
days.
The Series K preferred units are redeemable only if Archstone-Smith
concurrently redeems an equivalent number of Series K preferred shares. If
Archstone-Smith redeems the Series K preferred shares in exchange for common
shares, an equivalent number of Series K preferred units will be converted into
such number of Class A-2 common units equal to the number of Archstone-Smith
common shares issued, adjusted as specified in the Archstone declaration of
trust to take into account prior share dividends or any subdivisions or
combinations of common shares. If Archstone-Smith redeems the Series K
preferred shares for cash, Archstone will concurrently redeem an equal number
of Series K preferred units in exchange for the amount of cash that Archstone-
Smith is required to pay in redemption of the Series K preferred shares.
The Archstone Series K preferred units will have the same limitations on the
payment of distributions on junior and parity preferred units and the same
liquidation rights as the Archstone Series H, I and J preferred units, with the
exception of a liquidation preference of $37.50 per unit.
Series L Preferred Units
All Archstone Series L preferred units will be held by Archstone-Smith. The
Archstone Series L preferred units will rank senior to the Archstone common
units and on a parity with each other series of Archstone preferred units to be
issued in the Archstone reorganization into an UPREIT and the partnership
merger with respect to the payment of distributions and distribution of assets
upon liquidation, dissolution or winding up of Archstone.
Archstone-Smith, as the holder of the Archstone Series L preferred units
will be entitled to receive, when, as and if authorized by Archstone-Smith, as
trustee, out of funds legally available for that purpose, cash distributions
equal to the greater of 8.25% of the $39.00 liquidation preference per annum,
which is the equivalent of $3.2175 per annum per unit, through November 5,
2001, and 8.50% of the liquidation preference per annum, which is the
equivalent of $3.315 per annum per unit after November 5, 2001, or the
distribution paid on the Class A-2 common units into which a Series L preferred
unit is convertible.
Distributions on the Archstone Series L preferred units will cumulate and
will be payable quarterly in arrears on the same date on which Archstone pays a
distribution on the common units or, if no such distribution is paid on the
common units, then on such date to be set by Archstone-Smith for payment of a
distribution on the Series L preferred shares, which date will not be later
than 45 days after the end of each distribution period ending March 31, June
30, September 30 and December 31.
In the event that a holder of Archstone-Smith Series L preferred shares
exercises its right to convert its Series L preferred shares into Archstone-
Smith common shares, then concurrently with that conversion, an equivalent
number of Series L preferred units of Archstone will be automatically converted
into a number of Class A-2 common units equal to the number of Archstone-Smith
common shares issued, adjusted as specified in the Archstone declaration of
trust to take into account prior share dividends or any subdivisions or
combinations of common shares.
The Archstone Series L preferred units will not be entitled to the benefit
of any sinking fund.
Archstone-Smith may redeem its Series L preferred shares, which correspond
to the Archstone Series L preferred units, at its option, at any time on and
after November 5, 2005, in whole or in part from time to time at a cash
redemption price of $39.00 per Archstone-Smith Series L preferred share, or in
exchange for that number of Archstone-Smith common shares as equals the
liquidation preference per Series L preferred share divided by the conversion
price for the Series L preferred shares, plus, in either case, accumulated and
unpaid
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distributions to the redemption date. Archstone-Smith may issue common shares
upon any such redemption only if:
. for 20 consecutive trading days, within the last 30 trading days
immediately before the date of the notice of redemption, the average
trading price of the Archstone-Smith common shares on the New York Stock
Exchange equals or exceeds $21.33 per share, which may be adjusted in
specified circumstances; and
. at least 1,000,000 common shares were traded during such 30 trading
days.
The Series L preferred units are redeemable only if Archstone-Smith
concurrently redeems an equivalent number of Series L preferred shares. If
Archstone-Smith redeems the Series L preferred shares in exchange for common
shares, an equivalent number of Series L preferred units will be converted into
such number of Class A-2 common units equal to the number of Archstone-Smith
common shares issued, adjusted as specified in the Archstone declaration of
trust to take into account prior share dividends or any subdivisions or
combinations of common shares. If Archstone-Smith redeems the Series L
preferred shares for cash, Archstone will concurrently redeem an equal number
of Series L preferred units in exchange for the amount of cash that Archstone-
Smith is required to pay in redemption of the Series L preferred shares.
The Archstone Series L preferred units will have the same limitations on the
payment of distributions on junior and parity preferred units and the same
liquidation rights as the Archstone-Smith Series H, I, J and K preferred units,
with the exception of a liquidation preference of $39.00 per unit.
Liquidation Rights of Preferred Units
Upon any voluntary or involuntary liquidation, dissolution or winding up of
Archstone, the Archstone preferred units are entitled to a liquidation
preference per unit plus, any accumulated and unpaid distributions to the date
of payment, before any distribution of assets is made to holders of common
units and any other class or series of units of Archstone ranking junior to the
Archstone preferred units as to liquidation rights. The liquidation preference
per unit is $25.00 for the Series A, C, D, E, F and G preferred units, $27.08
for the Series H preferred units, $100,000 for the Series I preferred units,
$36.50 for the Series J preferred units, $37.50 for the Series K preferred
units and $39.00 for the Series L preferred units. If upon any voluntary or
involuntary liquidation, dissolution or winding up of Archstone, the assets of
Archstone are insufficient to make such full payments to holders of Archstone
preferred units and other preferred units ranking on a parity with the
Archstone preferred units, then holders of Archstone preferred units and parity
preferred units will share ratably in any distribution of assets in proportion
to the full liquidating distributions to which they would otherwise be
respectively entitled. After payment of the full amount of the liquidating
distributions to which they are entitled, the holders of Archstone preferred
units will not be entitled to any further participation in any distribution of
assets by Archstone.
Voting Rights of Preferred Units
Holders of Archstone preferred units do not have any voting rights, except
as required by law.
Power to Issue Additional Common Units and Preferred Units
Archstone believes that the power of Archstone-Smith, as trustee, to issue
additional authorized but unissued common units or preferred units and to
classify or reclassify unissued common units or preferred units and thereafter
to cause Archstone to issue such classified or reclassified units provides
Archstone with increased flexibility in structuring possible future financings
and acquisitions and in meeting other needs which may arise. The additional
classes or series, as well as the common units, generally will be available for
future issuance without further action by Archstone's unitholders, unless such
action is required by applicable law.
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No Archstone common or preferred unit may be issued to Archstone-Smith
unless:
. Archstone issues the units in connection with the grant, award or
issuance of shares or other equity interests in Archstone-Smith having
designations, preferences and other rights so that the economic
interests attributable to the newly issued shares of Archstone-Smith are
substantially similar to the designations, preferences and other rights,
except voting rights, of the Archstone units issued to Archstone-Smith,
and Archstone-Smith contributes to Archstone the proceeds from the
issuance of the shares received by Archstone-Smith; or
. Archstone issues the additional units to all unitholders holding
Archstone units in the same class or series in proportion to their
respective percentage interests in the class or series.
Transfer Agent and Registrar
Archstone will be the transfer agent and registrar for the Archstone Class
A-1, Class A-2, and Class B common units and the preferred units.
Anti-Takeover Considerations
Maryland law and the Archstone declaration of trust and bylaws contain a
number of provisions that may have the effect of discouraging transactions that
involve an actual or threatened change of control of Archstone. See "Comparison
of Unitholder Rights" beginning on page 162. These provisions include:
. No rights to vote for election of trustee--Only the holders of the
Archstone Class A-2 common units have a right to vote in the election of
trustees. Under Archstone's declaration of trust, Class A-2 common units
may only be held by Archstone-Smith and related parties. This provision
may make it more difficult for a third party to gain control of the
board of trustees of Archstone except in connection with a takeover of
Archstone-Smith.
. Unsolicited Takeover Provisions of Maryland Law--Maryland law contains
provisions that may make it more difficult to effect an unsolicited
takeover of a Maryland real estate investment trust, providing that the
board of trustees is not subject to higher duties with regard to actions
taken in a takeover context. Maryland law also allows Maryland real
estate investment trusts with a class of securities registered under the
Securities Exchange Act of 1934 and with at least three independent
trustees to elect to be governed by all or any part of Maryland law
provisions relating to extraordinary actions and unsolicited takeovers.
. Call of Special Meetings of Unitholders--The Archstone declaration of
trust provides that special meetings of unitholders may be called only
by the chairman of the board, the president, the chief financial
officer, a majority of the trustees or at the request of the holders of
units entitled to cast not less than 25% of all the votes entitled to be
cast at the meeting. This provision limits the ability of unitholders to
call special meetings.
. Advance Notice Provisions for Unitholder Nominations and Unitholder New
Business Proposals--The Archstone bylaws require advance written notice
for unitholders to nominate a trustee or bring other business before a
meeting of unitholders. This provision limits the ability of unitholders
to make nominations for trustees or introduce other proposals that are
not timely received for consideration at a meeting.
. Authority of Board to Amend Bylaws--The Archstone declaration of trust
and bylaws provide that the power to amend, repeal or adopt new bylaws
is vested exclusively with the board of trustees.
. Business Combination with Interested Shareholders--The Maryland Business
Combination Act provides that, unless exempted, a Maryland real estate
investment trust may not engage in business combinations, including
mergers, dispositions of 10% or more of its assets, issuances of shares
and other specified transactions, with an "interested shareholder" or
its affiliates, for five years after the
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most recent date on which the interested shareholder became an
interested shareholder and thereafter unless specified criteria are met.
. Control Share Acquisitions--The Maryland Control Share Acquisition Act
provides that shares acquired by any person over one-tenth, one-third
and a majority of the voting power of a real estate investment trust do
not have voting rights, except to the extent approved by the vote of
two-thirds of the votes entitled to be cast on the matter. The Archstone
bylaws exempt from the provisions of the Maryland Control Share
Acquisition Act any control share acquisition with any person. However,
this provision of the bylaws, by its terms, may be altered or repealed
at any time, in whole or in part, by the board of trustees.
. Other Constituencies--Maryland law expressly codifies the authority of a
Maryland real estate investment trust to include in its charter a
provision that allows the board of trustees to consider the effect of a
potential acquisition of control on shareholders, employees, suppliers,
customers, creditors and communities in which offices or other
establishments of the trust are located. The Archstone declaration of
trust does not include a provision of this type. Maryland law also
provides, however, that the inclusion or omission of this type of
provision in the declaration of trust of a Maryland real estate
investment trust does not create an inference concerning factors that
may be considered by the board of trustees regarding a potential
acquisition of control. This law may allow the board of trustees to
reject an acquisition proposal even though the proposal was in the best
interests of Archstone unitholders.
Capital Contributions
Unitholders of Archstone, except for Archstone-Smith and certain related
parties, are not required to make additional capital contributions to
Archstone unless they have entered into a deficit restoration agreement that
requires additional contributions upon liquidation of Archstone. In addition,
Archstone-Smith generally is required to contribute net proceeds of any sale
of equity interests in Archstone-Smith to Archstone in exchange for additional
units. Limited partners of Smith Partnership receiving Archstone units in the
partnership merger will not be required to pay to Archstone any deficit or
negative balance which may exist in their capital accounts unless in
connection with or after the partnership merger they elect to enter into an
express agreement with Archstone undertaking a deficit restoration obligation.
Distributions
The Archstone declaration of trust provides for the distribution of
available cash on at least a quarterly basis when, as and if declared by the
Archstone board out of funds legally available for the payment of
distributions. Available cash means all cash revenues and funds of Archstone
plus any reduction in reserves and minus interest, principal and other debt
payments, all cash expenditures, including capital expenditures, investments
in any entity, including loans, and any additions to reserves and other
adjustments, as determined by Archstone-Smith, as trustee, in its sole
discretion. As authorized by Archstone-Smith, as trustee, Archstone will make
distributions to all unitholders who are unitholders on the record date for
the distribution in the following order:
. first, to each unitholder, including Archstone-Smith, who holds a unit
of a class or series that is entitled to a preference according to the
rights of that class or series of unit; and
. second, to the extent that there is available cash after payment of any
preferences, to the unitholders who hold a unit that is not entitled to
a preference in distributions, including Class A-1 common units, Class
A-2 common units and Class B common units, pro rata to each class or
series and, within each class or series, in proportion to the
unitholder's percentage share of that class or series.
Unless otherwise specifically provided for in the Archstone declaration of
trust or a supplement to the declaration of trust at the time a new class or
series is created, no unit will be entitled to preferential
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distribution. Distributions payable with respect to any Class B units that were
not outstanding during the entire quarterly or shorter period on which the
distribution is based will be prorated based on the portion of the period that
these units were outstanding, but distributions paid with respect to Class A-1
and Class A-2 common units will generally not be prorated. An Archstone
unitholder will not in any event receive a distribution of available cash with
respect to a unit if the unitholder is entitled to receive a distribution out
of that same available cash with respect to an Archstone-Smith share for which
that unit has been exchanged or redeemed.
Archstone will make reasonable efforts, as determined by it in its sole and
absolute discretion and consistent with Archstone-Smith's qualification as a
REIT, to distribute available cash:
. to the unitholders so as to preclude the distribution from being treated
as part of a disguised sale for federal tax purposes; and
. to all unitholders so that the amount distributed to Archstone-Smith is
sufficient to enable Archstone-Smith to pay shareholder distributions
that will:
-- satisfy the requirements for qualifying as a REIT; and
-- avoid any federal income or excise tax liability for Archstone-
Smith.
If Archstone-Smith is not publicly traded, Archstone is required make cash
distributions with respect to Class A-1 and Class A-2 common units at least
annually for each taxable year of Archstone beginning before the twentieth
anniversary of the partnership merger in an aggregate amount that reflects at
least 90% of Archstone's taxable income for that year allocable to the Class A-
1 and Class A-2 common units. These distributions will be made not later than
60 days after the end of that year.
Preemptive Rights
Except to the extent expressly granted by Archstone in an agreement other
than the Archstone declaration of trust, and except as described above under
"--Unitholder Purchase Rights," no person or entity, including any unitholder
of Archstone, has any preemptive, preferential or other similar right with
respect to:
. additional capital contributions or loans to Archstone; or
. the issuance or sale of any Archstone units or other interests of
Archstone.
Conversion; Redemption
Each Archstone Class B common unit will be converted automatically into an
Archstone Class A-1 common unit on the day immediately following the record
date for the distribution period during which the Archstone Class B common unit
was issued. Class A-1 common units are automatically converted into Class A-2
units when they are held by Archstone-Smith or certain affiliates, and Class A-
2 common units are automatically converted into Class A-1 units when
transferred by Archstone-Smith or certain affiliates to a person other than
Archstone or certain affiliates.
Except where Archstone-Smith elects to assume Archstone's obligation with
respect to unitholder redemption as provided below, each holder of Class A-1
common units has the right to require Archstone to redeem each Class A-1 common
unit held by the unitholder for cash equal to the value of an Archstone-Smith
common share. As a general rule, a unitholder may exercise the redemption right
at any time beginning on the first anniversary of the issuance of the units
held by the unitholder. Archstone-Smith may agree to a shorter waiting period,
or no waiting period, on the exercise of the unit redemption right. Smith
Partnership unitholders who receive Archstone Class A-1 common units in the
partnership merger will be permitted to exercise the unit redemption right at
any time following the partnership merger.
If Archstone-Smith gives the unitholders notice of its intention to make an
extraordinary distribution of cash or property to its shareholders or effect a
merger, a sale of all or substantially all of its assets, or any other
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similar extraordinary transaction, each unitholder may exercise its unit
redemption right, regardless of the length of time it has held its Archstone
units. This redemption right begins on the date when the notice is given, which
must be at least 20 business days before the record date for determining
shareholders eligible to receive the distribution or to vote upon the approval
of the merger, sale or other extraordinary transaction, and ends on the record
date. Archstone-Smith, in its sole discretion, may shorten the required notice
period of not less than 20 business days before the record date to determine
the shareholders eligible to vote upon a merger transaction, but not any of the
other covered transactions, by up to ten business days, thereby continuing to
afford the holders of units the opportunity to redeem units on or before the
record date for the shareholder vote on the merger transaction, so long as:
. Archstone-Smith will be the surviving entity in the merger transaction;
. immediately following the merger transaction, persons who held voting
securities of Archstone-Smith immediately before the merger transaction
will hold, solely by reason of the ownership of voting securities of
Archstone-Smith immediately before the merger transaction, voting
securities of Archstone-Smith representing at least 51% of the total
combined voting power of all outstanding voting securities of Archstone-
Smith after the merger; and
. if in connection with the merger transaction Archstone will merge with
another entity, Archstone will be the surviving entity in the merger.
If no record date is applicable, Archstone-Smith must provide notice to
unitholders at least 20 business days before the consummation of the merger,
sale or other extraordinary transaction.
A unitholder may exercise its unit redemption right by giving written notice
to Archstone and Archstone-Smith. The Archstone units specified in the notice
shall be redeemed on the tenth business day following the date Archstone-Smith
received the redemption notice or, in the case of the exercise of a unit
redemption right in connection with an extraordinary transaction, the date
Archstone and Archstone-Smith received the redemption notice.
A notice of redemption delivered to Archstone, with a copy to Archstone-
Smith, will serve to exercise the redemption right. A unitholder may not
exercise the redemption right for fewer than 1,000 Class A-1 common units, or
if the unitholder holds fewer than 1,000 Class A-1 common units, all of the
Class A-1 common units held by that unitholder. The redeeming unitholder will
have no right to receive any distributions paid on or after the redemption date
with respect to those units redeemed.
Unless Archstone-Smith elects to assume and perform Archstone's obligation
with respect to the unit redemption right, as described below, a unitholder
exercising a unit redemption right will receive cash from Archstone in an
amount equal to the market value of the Archstone-Smith common shares for which
the Archstone units to be redeemed are redeemable. The market value of an
Archstone-Smith common share for this purpose will be equal to the average of
the closing trading price of an Archstone-Smith common share on the NYSE for
the ten trading days before the day on which the redemption notice was received
by Archstone-Smith.
Instead of Archstone acquiring the units being redeemed for cash, Archstone-
Smith has the right to elect to acquire on the redemption date the Archstone
units directly from a unitholder exercising the unit redemption right in
exchange for either cash in the amount specified above or a number of
Archstone-Smith common shares equal to the number of Archstone units offered
for redemption, adjusted as specified in the declaration of trust of Archstone
to take into account prior share dividends or any subdivisions or combinations
of Archstone-Smith common shares. No redemption or exchange can occur if
delivery of common shares by Archstone-Smith would be prohibited either under
the provisions of Archstone-Smith's declaration of trust or under applicable
federal or state securities laws, in each case regardless of whether Archstone-
Smith would in fact elect to assume and satisfy the unit redemption right.
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Unless Archstone-Smith exercises its right to purchase the redeeming
unitholder's Archstone units, as described above, Archstone-Smith has no
obligation to the redeeming unitholder with respect to the redeeming
unitholder's unit redemption right. Likewise, if Archstone-Smith exercises
this purchase option, Archstone has no obligation to pay any amount to the
redeeming unitholder with respect to the unit redemption right. If Archstone-
Smith elects to assume and perform the obligations of Archstone under the unit
redemption right, each of the redeeming unitholder, Archstone and Archstone-
Smith will treat this transaction between Archstone-Smith and the redeeming
unitholder, for federal tax purposes, as a sale of the redeeming unitholder's
Archstone units to Archstone-Smith.
If any Archstone-Smith preferred shares have been called for redemption, a
number of Archstone preferred units equal to the number of Archstone-Smith
preferred shares called for redemption will be redeemed. The redemption shall
occur at a time and in a manner that allows the redemption of Archstone-Smith
preferred shares to be completed in a timely fashion to comply with the
applicable requirements related to the share redemption.
All Archstone units delivered for redemption must be delivered to Archstone
free and clear of all liens.
Management
Except as otherwise expressly provided in the Archstone declaration of
trust, the business and affairs of Archstone are managed by its trustee,
Archstone-Smith, which has the exclusive right and full authority and
responsibility to manage and operate Archstone's business. Unitholders do not
have any right to participate in or exercise control or management power over
the business and affairs of Archstone or the power to sign documents for or
otherwise bind Archstone. Archstone-Smith, as trustee, has full power and
authority to do all things it deems necessary or desirable to conduct the
business of Archstone, as described below. In particular, Archstone-Smith, as
trustee, is under no obligation to consider the tax consequences to
unitholders when making decisions for the benefit of Archstone. The
unitholders, other than the Class A-2 common unitholders, have no power to
remove Archstone-Smith or any other trustee. Archstone-Smith and any other
trustee, however, may not take any action that is contrary to an express
limitation or prohibition in the Archstone declaration of trust without an
amendment to that provision adopted under the Archstone declaration of trust.
In addition, the consent of the unitholders to some matters is necessary in
limited circumstances, as described below.
Sale of Substantially All of Archstone's Assets
A sale, exchange, transfer or other disposition of all or substantially all
of the assets of Archstone in a single transaction or a series of related
transactions, other than pursuant to a dissolution and liquidation of
Archstone, including by way of a merger, consolidation or other combination of
Archstone with another entity, will require the following:
. if the transaction is in connection with a similar transaction involving
Archstone-Smith which has also been approved by a majority of the
outstanding Archstone units, including Archstone units held directly or
indirectly by Archstone-Smith, and in connection with which all
unitholders have the right to receive consideration which, on a per unit
basis, is equivalent in value to the consideration to be received by the
shareholders of Archstone-Smith on a per share basis, approval by the
holders of a majority of the outstanding Archstone common units
outstanding and entitled to vote thereon, including any Class A-2 units
held by Archstone-Smith; or
. in the case of any other transaction, the approval of the holders of
majority of the outstanding Archstone Class A-1 common units outstanding
and entitled to vote thereon.
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Transfers
Archstone-Smith generally may not transfer any of its Class A-2 common or
other units or withdraw as trustee, except in connection with a merger,
consolidation or other combination with or into another entity, a sale of all
or substantially all of its assets or any reclassification, recapitalization or
change of its outstanding shares, other than a change in the par value of its
share. Archstone-Smith may engage in such a transaction only if:
. the transaction has been approved by Archstone-Smith, as trustee, and
the unitholders holding at least a majority of the then outstanding
Archstone units, including any units held by Archstone-Smith,
. following the transaction substantially all of the assets of the
surviving entity consist of units, and
. in the transaction all unitholders receive or have the right to receive
consideration which, on a per unit basis, is equivalent in value to the
consideration to be received by the shareholders of Archstone-Smith, on
a per share basis.
A unitholder may transfer, with or without the consent of Archstone-Smith,
all or any portion of its units or rights as a unitholder:
. to Archstone-Smith in connection with a redemption of units;
. in the event the unitholder is an individual, to an immediate family
member, a trust for the benefit of the unitholder or an immediate family
member, any partnership, limited liability company, joint venture
corporation or other business entity comprised only of the unitholder
and/or immediate family members and entities owned by or for the benefit
of the unitholder or an immediate family member;
. in the event the unitholder is a trust, to the beneficiaries of a trust;
. in the event the unitholder acquired units in the partnership merger and
is a partnership, limited liability company, joint venture, corporation
or other business entity, to its partners, owners, or stockholders who
are immediate family members or the person who transferred units to the
unitholder;
. in the event the unitholder is a partnership, limited liability company,
joint venture, corporation or other business entity to any person under
the terms of any agreement between the unitholder and Archstone under
which the units were issued;
. as a gift or other transfer without consideration;
. under applicable laws of descent or distribution;
. to another unitholder; or
. as part of a grant of a security interest or other encumbrance
effectuated in a valid transaction or as a result of the exercise of
remedies related thereto.
No other transfers may be made without the prior written consent of
Archstone-Smith, which consent may be withheld in its sole and absolute
discretion.
Archstone-Smith may prohibit any transfer of units by a unitholder unless it
receives a written opinion of legal counsel, with the opinion and counsel being
reasonably satisfactory to Archstone-Smith, that the transfer would not require
filing of a registration statement under the Securities Act or would not
otherwise violate any federal, or state securities laws or regulations
applicable to Archstone or the transfer of the units. Further, no transfer of
units by a unitholder may be made if, in the opinion of legal counsel for
Archstone:
. the transfer would result in Archstone being treated as an association
taxable as a corporation for federal income tax purposes or would result
in a termination of the partnership for federal income tax purposes;
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. the transfer could reasonably be expected to cause Archstone-Smith to no
longer qualify as a REIT or would subject Archstone-Smith to additional
taxes; or
. the transfer is effectuated through an "established securities market"
or a "secondary market," or the substantial equivalent, within the
meaning of the Internal Revenue Code.
In the case of a proposed transfer of units to a lender to Archstone or any
person related to the lender whose loan constitutes a nonrecourse liability,
the transferring unitholder must obtain the consent of Archstone-Smith.
Amendment of Declaration of Trust
In general, the Archstone declaration of trust may be amended only with the
approval of Archstone-Smith, as trustee, and unitholders holding a majority of
the common units entitled to vote thereon. However, after Archstone-Smith has
declared an amendment advisable, the holders of at least a majority of the
Class A-2 common units have the power, without the consent of the other
unitholders, to amend the declaration of trust of Archstone as may be required:
. to add to the obligations of Archstone-Smith or surrender any right or
power granted to Archstone-Smith or any affiliate of Archstone-Smith for
the benefit of the unitholders;
. to reflect any changes in the status of unitholders according to the
terms of the Archstone declaration of trust;
. to set forth the designations, rights, powers, duties and preferences of
the holders of any additional units issued in under the authority
granted to Archstone-Smith under the Archstone declaration of trust;
. to reflect a change that does not adversely affect the unitholders in
any material respect, or to cure any ambiguity, correct or supplement
any provision in the Archstone declaration of trust not inconsistent
with law or with other provisions of the Archstone declaration of trust,
or make other changes with respect to matters arising under the
Archstone declaration of trust that will not be inconsistent with law or
with the provisions of the Archstone declaration of trust; and
. to satisfy any requirements, conditions or guidelines contained in any
order, directive, opinion, ruling or regulation of a federal, state or
local agency or contained in federal, state or local law.
The approval of the holders of at least a majority of the Class A-1 common
units is necessary to amend provisions regarding, among other things:
. the restrictions imposed on the issuance of additional units to
Archstone-Smith other than in connection with the issuance by Archstone-
Smith of shares or in connection with a distribution by Archstone to all
unitholders;
. the distribution requirements with respect to the Archstone Class A-1
and Class A-2 common units if Archstone-Smith is not publicly traded;
. the restrictions on Archstone-Smith's authority described above under
"--Sale of Substantially All of Archstone's Assets";
. the restrictions on Archstone-Smith's power to conduct businesses other
than owning units of Archstone and managing the business of Archstone
and the relationship of Archstone-Smith shares to the units;
. the limitations on transactions with affiliates;
. the liability of Archstone-Smith for monetary damages to Archstone;
. the rights of unitholders to obtain specified information; or
. the transfer of units held by Archstone-Smith.
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The Archstone declaration of trust may not be amended with respect to any
unitholder adversely affected by the amendment without the consent of that
unitholder if the amendment would, among other things:
. convert a unit into a Class A-2 common unit;
. modify the limited liability of a unitholder or require a unitholder to
make additional capital contributions;
. allow Archstone-Smith to take any action in contravention of any express
prohibition or limitation of the declaration of trust;
. alter the interest of a unitholder in profits or losses, or the right to
receive any distributions, except as permitted under the declaration of
trust of Archstone with respect to the admission of new unitholders, or
the issuance of additional Archstone units;
. alter the redemption right of the unitholders of Archstone;
. alter the rights of unitholders to transfer their units;
. alter the provision requiring the approval of each unitholder adversely
affected by a proposed amendment of the Archstone declaration of trust;
or
. alter the provisions regarding the giving of notice under the
declaration of trust
Meetings
There will be an annual meeting of unitholders at a time and place as
Archstone-Smith may prescribe, at which trustees will be elected and any other
proper business may be conducted. The annual meeting of unitholders will be
held upon reasonable notice at a convenient location and within a reasonable
period following delivery of the annual report. Special meetings of unitholders
may be called by Archstone or by the chairman of the board, president or chief
financial officer of Archstone and must be called upon the written request of
unitholders holding in the aggregate 25% or more of the outstanding units of
Archstone entitled to vote. Notice stating the place, date and time of the
unitholders' meeting and, in the case of a special meeting, the purpose or
purposes for which the meeting is called, must be delivered not less than 10
nor more than 60 days before the day of the meeting either personally or by
mail to each unitholder of record entitled to vote at the meeting. No
unitholder not entitled to vote at a meeting will have any rights to notice of
a meeting except as expressly provided for in the Archstone declaration of
trust or under law. No other business than that which is stated in the call for
a special meeting will be considered at that meeting.
Only Class A-2 common unitholders have the right to vote in the election of
trustees. Exclusive voting power is vested in the common units, except to the
extent that the Archstone declaration of trust or Maryland law provides voting
rights to any other class of units.
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COMPARISON OF UNITHOLDER RIGHTS
Archstone is a Maryland real estate investment trust and, accordingly, the
rights of Archstone unitholders will be governed by the declaration of trust of
Archstone and Maryland law. Smith Partnership is a Delaware limited partnership
and, accordingly, the rights of Smith Partnership unitholders are governed by
the partnership agreement of Smith Partnership and Delaware law.
At the time of the partnership merger, Smith Partnership unitholders
automatically will become Archstone unitholders and their rights as unitholders
will be determined by the declaration of trust of Archstone and Maryland law.
The following is a summary of the material differences in the rights of
unitholders of Archstone and the rights of partners of Smith Partnership.
Archstone-Smith is the sole trustee of Archstone and Smith Residential is the
sole general partner of Smith Partnership. Thus, Archstone-Smith and Smith
Residential have the exclusive right to manage the business and affairs of
Archstone and Smith Partnership, respectively.
The following comparison of the rights of unitholders of Archstone and Smith
Partnership summarizes the material differences between the rights of
unitholders of Archstone and Smith Partnership but is not intended to list all
of the differences. When reading this comparison, you should refer to the
partnership agreement, including all amendments, of Smith Partnership and the
declaration of trust, including all amendments, of Archstone for complete
information.
Capitalization
Archstone. Immediately before the completion of the partnership merger, it
is expected that Archstone will have the following outstanding units:
Class A-2 Common Units........................................ 171,638,428
Series A Preferred Units...................................... 3,174,235
Series C Preferred Units...................................... 1,969,100
Series D Preferred Units...................................... 1,989,956
Archstone-Smith is expected to own all of these units. In the partnership
merger, Archstone-Smith will take all necessary actions to cause Archstone to
issue 76,961,565 Class A-1 common units, 171,638,428 Class A-2 common units, 0
Class B common units, 2,640,325 Series H preferred units, 500 Series I
preferred units, 684,931 Series J preferred units, 666,667 Series K preferred
units and 641,026 Series L preferred units. Archstone will issue the Class A-1
common units in the partnership merger in exchange for the Class A common units
of Smith Partnership, other than those held by Smith Residential, and will
issue the Class A-2 common units in the partnership merger in exchange for the
Class A common units of Smith Partnership held by Smith Residential. Archstone
will issue the Class B common units in the partnership merger in exchange for
the Class B common units of Smith Partnership. Archstone will issue the new
Series H, I, J, K and L preferred units in the partnership merger in exchange
for the respective Smith Partnership Series A, C, E, F and G preferred
interests. All of the Archstone preferred units to be issued in the partnership
merger will be issued to Archstone-Smith.
Smith Partnership. As of August 31, 2001, Smith Partnership has the
following outstanding units and interests:
. 38,967,881 Class A common units;
. 0 Class B common units;
. 2,640,325 Series A preferred units;
. 500 Series C preferred units;
. 684,931 Series E preferred units;
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. 666,667 Series F preferred units;
. 641,026 Series G preferred units; and
. 400,000 Series H Preferred Units.
On September 19, 2001, all of the issued and outstanding Series H preferred
units of Smith Partnership were converted into 259,740 Class A common units.
Smith Residential owns all of the Series A, C, E, F and G preferred units and
25,805,473, or 67.2% of the Class A common units.
Issuance of Additional Partnership or Unit Interests
Archstone. Archstone is authorized to issue additional units, including to
Archstone-Smith and its affiliates. These units may be issued in one or more
classes or in one or more series of any class, with designations, preferences,
rights, powers and duties, as determined by Archstone-Smith, as trustee, in its
sole and absolute discretion without the approval of any unitholder, unless
otherwise limited as described below.
No Archstone common or preferred unit may be issued to Archstone-Smith
unless:
. Archstone issues the units in connection with the grant, award or
issuance of shares or other equity interests in Archstone-Smith having
designations, preferences and other rights so that the economic
interests attributable to the newly issued shares of Archstone-Smith are
substantially similar to the designations, preferences and other rights,
except voting rights, of the Archstone units issued to Archstone-Smith,
and Archstone-Smith contributes to Archstone the proceeds from the
issuance of the shares received by Archstone-Smith; or
. Archstone issues the additional units to all unitholders holding
Archstone units in the same class or series in proportion to their
respective percentage interests in the class or series.
Smith Partnership. Smith Residential is authorized to cause Smith
Partnership to issue additional partnership units or interests to its partners,
including Smith Residential and its affiliates, or other persons. These units
may be issued in one or more classes or in one or more series of any class,
with designations, preferences and relative, participating, optional or other
special rights, powers and duties, including rights, powers and duties senior
to those of the Class A common units, as determined by Smith Residential in its
sole and absolute discretion without the approval of any limited partner,
unless otherwise limited, as described below.
No partnership unit or interest may be issued to Smith Residential as
general partner or limited partner unless:
. Smith Partnership issues the units or other partnership interests in
connection with the grant, award or issuance of shares or other equity
interests in Smith Residential having designations, preferences and
other rights so that the economic interests attributable to the newly
issued shares or other equity interests are substantially similar to the
designations, preferences and other rights, except voting rights, of the
Smith Partnership units or other partnership interests issued to Smith
Residential, and Smith Residential contributes to Smith Partnership the
proceeds from the issuance of the shares or other equity interests
received by Smith Residential; or
. Smith Partnership issues the additional Smith Partnership units or other
partnership interests to all partners holding Smith Partnership units or
other partnership interests in the same class or series in proportion to
their respective percentage interests in that class or series.
At the election of Smith Residential, in its sole and absolute discretion,
Smith Partnership may issue either Class A units or Class B units to newly
admitted partners. The major difference between Class A units and Class B units
is that the Class A units receive a full distribution of any cash distributed
by Smith Partnership with respect to its units, without any proration to take
into account the number of days that the Class A units were outstanding, while
distributions to the Class B units are prorated based upon the number of days
in the
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applicable distribution period that the Class B units were outstanding. Class B
units automatically convert into Class A units at the end of any distribution
period in which the Class B units were issued, and any Smith Partnership unit
that is not specifically designated by Smith Residential as being of a
particular class will be deemed to be a Class A unit. In the partnership
merger, Archstone Class A-1 common units will be issued in exchange for Class A
units of Smith Partnership other than the Smith Partnership preferred units,
and new series of Archstone's preferred units will be issued for the Smith
Partnership series of preferred interests or units as described above under "--
Capitalization."
Capital Contributions
Archstone. Unitholders of Archstone, except Archstone-Smith, are not
required to make additional capital contributions to Archstone unless they have
entered into a deficit restoration agreement that requires additional
contributions upon, liquidation of Archstone. In addition, Archstone-Smith
generally is required to contribute net proceeds of any sale of equity
interests in Archstone-Smith to Archstone in exchange for additional units.
Limited partners of Smith Partnership receiving Archstone units in the
partnership merger will not be required to pay to Archstone any deficit or
negative balance which may exist in their capital accounts unless in connection
with or after the partnership merger they elect to enter into an express
agreement with Archstone undertaking a deficit restoration obligation.
Smith Partnership. Unitholders of Smith Partnership are not required to make
additional capital contributions to Smith Partnership. However, Smith
Residential generally is required to contribute net proceeds of any sale of
equity interests in Smith Residential to Smith Partnership in exchange for
additional partnership units, as described above.
As described in "The Merger Agreement--Tax Related Undertakings of
Archstone--Tax Protection Agreements," under the merger agreement, Archstone-
Smith and Archstone will assume the obligations of Smith Residential and Smith
Partnership under any existing tax protection agreements for the benefit of the
individuals and entities who are intended to be protected by the provisions of
those agreements.
Distributions
Archstone. The Archstone declaration of trust provides for the distribution
of available cash on at least a quarterly basis when, as and if declared by the
Archstone board out of funds legally available for the payment of
distributions. Available cash means all cash revenues and funds of Archstone
plus any reduction in reserves and minus interest, principal and other debt
payments, all cash expenditures, including capital expenditures, investments in
any entity, including loans, and any additions to reserves and other
adjustments, as determined by Archstone in its sole discretion. Archstone makes
distributions to all unitholders who are unitholders on the record date for the
distribution in the following order:
. first, to each unitholder, including Archstone-Smith, who holds a unit
of a class or series that is entitled to a preference according to the
rights of that class or series of unit; and
. second, to the extent that there is available cash after payment of any
preferences, to the unitholders who hold a unit that is not entitled to
a preference in distributions, including Class A-1 common units, Class
A-2 common units and Class B common units, pro rata to each class or
series and, within each class or series, in proportion to the
unitholder's percentage share of that class or series.
Unless otherwise specifically provided for in the Archstone declaration of
trust or a supplement to the declaration of trust, at the time a new class or
series is created, no unit will be entitled to preferential distribution.
Distributions payable with respect to any Class B units that were outstanding
during the entire quarterly or shorter period on which the distribution is
based will be prorated based on the portion of the period that these units were
outstanding, but distributions paid with respect to Class A-1 and Class A-2
common units will generally not be prorated. An Archstone unitholder will not
in any event receive a distribution of available cash with respect to a unit if
the unitholder is entitled to receive a distribution out of that same available
cash with respect to an Archstone-Smith share for which that unit has been
exchanged or redeemed.
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Archstone will make reasonable efforts, as determined by it in its sole and
absolute discretion and consistent with Archstone-Smith's qualification as a
REIT, to distribute available cash:
. to the unitholders so as to preclude the distribution from being treated
as part of a disguised sale for federal tax purposes; and
. to all unitholders so that the amount distributed to Archstone-Smith is
sufficient to enable Archstone-Smith to pay shareholder distributions
that will:
-- satisfy the requirements for qualifying as a REIT; and
-- avoid any federal income or excise tax liability for Archstone-
Smith.
If Archstone-Smith is not publicly traded, Archstone is required make cash
distributions with respect to Class A-1 and Class A-2 common units at least
annually for each taxable year of Archstone beginning before the twentieth
anniversary of the partnership merger in an aggregate amount that reflects at
least 90% of Archstone's taxable income for that year allocable to the Class A-
1 and Class A-2 common units. These distributions will be made not later than
60 days after the end of that year.
Smith Partnership. The partnership agreement of Smith Partnership requires
the distribution of available cash on at least a quarterly basis. Available
cash is the net operating cash flow plus any reduction in reserves and minus
interest and principal payments on debt, all cash expenditures, including
capital expenditures, any additions to reserves and other adjustments, as
determined by Smith Residential in its sole discretion. Smith Partnership makes
distributions to all partners who are partners on the record date for the
distribution in the following order:
. first, to each partner, including Smith Residential, who holds a
partnership interest of a class or series that is entitled to a
preference according to the rights of that class or series of
partnership interest; and
. second, to the extent that there is available cash after payment of any
preferences, to the partners who hold a partnership interest that is not
entitled to a preference in distribution, including Class A units and
Class B units, pro rata to each class or series and, within each class
or series, in proportion to the partner's percentage share of that class
or series.
Unless otherwise specifically agreed to by Smith Residential in the
partnership agreement of Smith Partnership or an agreement at the time a new
class or series is created, no partnership interest will be entitled to a
distribution in preference to any other. As a general rule, distributions
payable with respect to any Class A units that were not outstanding during the
entire quarterly or shorter period on which the distribution is based will not
be prorated based on the portion of the period that these units were
outstanding, but distributions paid with respect to Class B units will be
prorated. A Smith Partnership partner will not in any event receive a
distribution of available cash with respect to a partnership unit if the
partner is entitled to receive a distribution out of that same available cash
with respect to a Smith Residential share for which that partnership unit has
been exchanged or redeemed.
Smith Residential will make reasonable efforts, as determined by it in its
sole and absolute discretion and consistent with Smith Residential's
qualification as a REIT, to distribute available cash to the limited partners
so as to preclude the distribution from being treated as part of a disguised
sale for federal tax purposes.
Preemptive Rights
Archstone. Except to the extent expressly granted by Archstone, in an
agreement other than the Archstone declaration of trust, and except as
described above under "--Unitholder Purchase Rights," no person or entity,
including any unitholder of Archstone, has any preemptive, preferential or
other similar right with respect to:
. additional capital contributions or loans to Archstone; or
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. the issuance or sale of any Archstone units or other interests of
Archstone.
Smith Partnership. Except to the extent expressly granted by Smith
Partnership, in an agreement other than the partnership agreement of Smith
Partnership, no person or entity, including any partner of Smith Partnership,
has any preemptive, preferential or other similar right with respect to:
. additional capital contributions or loans to Smith Partnership; or
. the issuance or sale by Smith Partnership of any Smith Partnership units
or other partnership interests of Smith Partnership.
Conversion; Redemption
Archstone. Each Archstone Class B common unit will be converted
automatically into an Archstone Class A-1 common unit on the day immediately
following the record date for the distribution period during which the
Archstone Class B common unit was issued. Class A-1 common units are
automatically converted into Class A-2 units when they are held by Archstone-
Smith or related parties, and Class A-2 common units are automatically
converted into Class A-1 units when transferred by Archstone-Smith or related
parties.
Except where Archstone-Smith elects to assume Archstone's obligation with
respect to unitholder redemption as provided below, each holder of Class A-1
common units has the right to require Archstone to redeem each Class A-1 common
unit held by the unitholder for cash equal to the value of an Archstone-Smith
common share. As a general rule, a unitholder other than Archstone Smith may
exercise the redemption right at any time beginning on the first anniversary of
the issuance of the units held by the unitholder. Archstone-Smith may agree to
a shorter waiting period, or no waiting period, on the exercise of the unit
redemption right. Smith Partnership unitholders who receive Archstone Class A-1
common units in the partnership merger will be permitted to exercise the unit
redemption right at any time following the partnership merger.
If Archstone-Smith gives the unitholders notice of its intention to make an
extraordinary distribution of cash or property to its shareholders or effect a
merger, a sale of all or substantially all of its assets, or any other similar
extraordinary transaction, each unitholder may exercise its unit redemption
right, regardless of the length of time it has held its Archstone units. This
redemption right begins on the date when the notice is given, which must be at
least 20 business days before the record date for determining shareholders
eligible to receive the distribution or to vote upon the approval of the
merger, sale or other extraordinary transaction, and ends on the record date.
Archstone-Smith, in its sole discretion, may shorten the required notice period
of not less than 20 business days before the record date to determine the
shareholders eligible to vote upon a merger transaction, but not any of the
other covered transactions, by up to ten business days (thereby continuing to
afford the holders of units the opportunity to redeem units on or before the
record date for the shareholder vote on the merger transaction) so long as:
. Archstone-Smith will be the surviving entity in the merger transaction;
. immediately following the merger transaction, persons who held voting
securities of Archstone-Smith immediately before the merger transaction
will hold, solely by reason of the ownership of voting securities of
Archstone-Smith immediately before the merger transaction, voting
securities of Archstone-Smith representing at least 51% of the total
combined voting power of all outstanding voting securities of Archstone-
Smith after the merger; and
. if in connection with the merger transaction Archstone will merge with
another entity, Archstone will be the surviving entity in the merger.
If no record date is applicable, Archstone-Smith must provide notice to the
unitholders at least 20 business days before the consummation of the merger,
sale or other extraordinary transaction.
A unitholder may exercise its unit redemption right by giving written notice
to Archstone and Archstone-Smith. The Archstone units specified in the notice
shall be redeemed on the 10th business day following the
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date Archstone-Smith received the redemption notice or, in the case of the
exercise of a unit redemption right in connection with an extraordinary
transaction, the date Archstone and Archstone-Smith received the redemption
notice.
A notice of redemption delivered to Archstone, with a copy to Archstone-
Smith, will serve to exercise the redemption right. A unitholder may not
exercise the redemption right for fewer than 1,000 Class A-1 common units, or
if the unitholder holds fewer than 1,000 Class A-1 common units, all of the
Class A-1 common units held by that unitholder. The redeeming unitholder will
have no right to receive any distributions paid on or after the redemption
date with respect to those units redeemed.
Unless Archstone-Smith elects to assume and perform Archstone's obligation
with respect to the unit redemption right, as described below, a unitholder
exercising a unit redemption right will receive cash from Archstone in an
amount equal to the market value of the Archstone-Smith common shares for
which the Archstone units to be redeemed are redeemable. The market value of
an Archstone-Smith common share for this purpose will be equal to the average
of the closing trading price of an Archstone-Smith common share on the NYSE
for the ten trading days before the day on which the redemption notice was
received by Archstone-Smith.
Instead of Archstone acquiring the units being redeemed for cash,
Archstone-Smith has the right to elect to acquire on the redemption date the
Archstone units directly from a unitholder exercising the unit redemption
right in exchange for either cash in the amount specified above or a number of
Archstone-Smith common shares equal to the number of Archstone units offered
for redemption, adjusted as specified in the declaration of trust of Archstone
to take into account prior share dividends or any subdivisions or combinations
of Archstone-Smith common shares. No redemption or exchange can occur if
delivery of common shares by Archstone-Smith would be prohibited either under
the provisions of Archstone-Smith's declaration of trust or under applicable
federal or state securities laws, in each case regardless of whether
Archstone-Smith would in fact elect to assume and satisfy the unit redemption
right.
Unless Archstone-Smith exercises its right to purchase the redeeming
unitholder's Archstone units, as described above, Archstone-Smith has no
obligation to the redeeming unitholder with respect to the redeeming
unitholder's unit redemption right. Likewise, if Archstone-Smith exercises
this purchase option, Archstone has no obligation to pay any amount to the
redeeming unitholder with respect to the unit redemption right. If Archstone-
Smith elects to assume and perform the obligations of Archstone under the unit
redemption right, each of the redeeming unitholder, Archstone and Archstone-
Smith will treat this transaction between Archstone-Smith and the redeeming
unitholder, for federal tax purposes, as a sale of the redeeming unitholder's
Archstone units to Archstone-Smith.
If any Archstone-Smith preferred shares have been called for redemption, a
number of Archstone preferred units equal to the number of Archstone-Smith
preferred shares called for redemption will be redeemed. The redemption will
occur at a time and in a manner that allows the redemption of Archstone-Smith
preferred shares to be completed in a timely fashion to comply with the
applicable requirements related to the share redemption.
All Archstone units delivered for redemption must be delivered to Archstone
free and clear of all liens.
Smith Partnership. Each Smith Partnership Class B unit will be converted
automatically into a Smith Partnership Class A unit on the day immediately
following the record date for the distribution period during which the Smith
Partnership Class B unit was issued.
Except as provided below, each holder of Class A units, other than Smith
Residential and some of its affiliates, has the right to require Smith
Partnership to redeem the holder's Class A units for either cash or Smith
Residential common shares, at the election of Smith Residential. As a general
rule, a limited partner may
167
exercise the redemption right at any time beginning on the first anniversary of
the issuance of the partnership units held by the limited partner. Smith
Residential may agree to a shorter waiting period, or no waiting period, on the
exercise of the unit redemption right. Smith Partnership limited partners who
receive Archstone Class A-1 common units in the partnership merger will be
permitted to exercise the unit redemption right at any time following the
partnership merger.
A limited partner may exercise its unit redemption right by giving written
notice to Smith Partnership and Smith Residential. The Smith Partnership units
specified in the notice shall be redeemed on the 10th business day following
the date Smith Residential received the redemption notice.
A notice of redemption delivered to Smith Partnership, with a copy to Smith
Residential, will serve to exercise the redemption right. A limited partner may
not exercise the redemption right for fewer than 1,000 partnership units, or if
the limited partner holds fewer than 1,000 partnership units, all of the
partnership units held by that limited partner. The redeeming partner will have
no right to receive any distributions paid on or after the redemption date with
respect to those partnership units redeemed.
Unless Smith Residential elects to assume and perform Smith Partnership's
obligation with respect to the unit redemption right, as described below, a
limited partner exercising a unit redemption right will receive cash from Smith
Partnership in an amount equal to the market value of the Smith Residential
common shares for which the Smith Partnership units to be redeemed are
redeemable. The market value of an Smith Residential common share for this
purpose will be equal to the average of the closing trading price of a Smith
Residential common share on the NYSE for the ten trading days before the day on
which the redemption notice was received by Smith Residential.
Instead of Smith Partnership acquiring the units being redeemed for cash,
Smith Residential has the right to elect to acquire on the redemption date the
Smith Partnership units directly from a limited partner exercising the unit
redemption right in exchange for either cash in the amount specified above or a
number of Smith Residential common shares equal to the number of Smith
Partnership units offered for redemption, adjusted as specified in the
partnership agreement of Smith Partnership to take into account prior share
dividends or any subdivisions or combinations of Smith Residential common
shares. No redemption or exchange can occur if delivery of common shares by
Smith Residential would be prohibited either under the provisions of Smith
Residential's charter or under applicable federal or state securities laws, in
each case regardless of whether Smith Residential would in fact elect to assume
and satisfy the unit redemption right.
Unless Smith Residential exercises its right to purchase the redeeming
partner's Smith Partnership units, as described above, Smith Residential has no
obligation to the redeeming partner with respect to the redeeming partner's
unit redemption right. Likewise, if Smith Residential exercises this purchase
option, Smith Partnership has no obligation to pay any amount to the redeeming
partner with respect to the unit redemption right. If Smith Residential elects
to assume and perform the obligations of Smith Partnership under the unit
redemption right, each of the redeeming partner, Smith Partnership and Smith
Residential will treat this transaction between Smith Residential and the
redeeming partner, for federal tax purposes, as a sale of the redeeming
partner's Smith Partnership units to Smith Residential.
If any Smith Residential preferred shares have been called for redemption, a
number of Smith Partnership preferred units equal to the number of Smith
Residential preferred shares called for redemption will be redeemed. The
redemption shall occur at a time and in a manner that allows the redemption of
Smith Residential preferred shares to be completed in a timely fashion to
comply with the applicable requirements related to the share redemption.
All Smith Partnership units delivered for redemption must be delivered to
Smith Partnership free and clear of all liens.
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Management
Archstone. Except as otherwise expressly provided in the Archstone
declaration of trust, the business and affairs of Archstone are managed by its
trustee, Archstone-Smith, which has the exclusive right and full authority and
responsibility to manage and operate Archstone's business. Unitholders do not
have any right to participate in or exercise control or management power over
the business and affairs of Archstone or the power to sign documents for or
otherwise bind Archstone. Archstone-Smith, as trustee, has full power and
authority to do all things it deems necessary or desirable to conduct the
business of Archstone, as described below. In particular, Archstone-Smith, as
trustee, is under no obligation to consider the tax consequences to unitholders
when making decisions for the benefit of Archstone. The unitholders, other than
the Class A-2 common unitholders, have no power to remove Archstone-Smith or
any other trustee. Archstone-Smith and any other trustee, however, may not take
any action that is contrary to an express limitation or prohibition in the
Archstone declaration of trust without an amendment to that provision adopted
under the Archstone declaration of trust.
In addition, the consent of the unitholders to some matters is necessary in
limited circumstances, as described below.
Smith Partnership. Except as otherwise expressly provided in the partnership
agreement of Smith Partnership, the business and affairs of Smith Partnership
are managed by Smith Residential, which has the exclusive right and full
authority and responsibility to manage and operate the partnership's business.
Limited partners do not have any right to participate in or exercise control or
management power over the business and affairs of Smith Partnership or the
power to sign documents for or otherwise bind Smith Partnership. Smith
Residential has full power and authority to do all things it deems necessary or
desirable to conduct the business of Smith Partnership, as described below. In
particular, Smith Residential is under no obligation to consider the tax
consequences to limited partners when making decisions for the benefit of Smith
Partnership. The limited partners have no power to remove Smith Residential as
general partner. Smith Residential, however, may not take any action that is
contrary to an express limitation or prohibition in the partnership agreement
of Smith Partnership without the written consent of:
. all limited partners; or
. the lower percentage of the limited partners as may be specifically
provided for in the partnership agreement of Smith Partnership or under
Delaware law.
In addition, the consent of the limited partners to some matters is
necessary in limited circumstances, as described below.
Sale of Substantially All of Archstone's Assets
Archstone. A sale, exchange, transfer or other disposition of all or
substantially all of the assets of Archstone in a single transaction or a
series of related transactions, other than pursuant to a dissolution and
liquidation of Archstone, including by way of a merger, consolidation or other
combination of Archstone with another entity, will require the following:
. if the transaction is in connection with a similar transaction involving
Archstone-Smith which has also been approved by a majority of the
outstanding Archstone units, including Archstone units held directly or
indirectly by Archstone-Smith, and in connection with which all
unitholders have the right to receive consideration which, on a per unit
basis, is equivalent in value to the consideration to be received by the
shareholders of Archstone-Smith on a per share basis, approval by the
holders of a majority of the outstanding Archstone common units
outstanding and entitled to vote thereon, including any Class A-2 units
held by Archstone-Smith; or
. in the case of any other transaction, the approval of the holders of
majority of the outstanding Archstone Class A-1 common units outstanding
and entitled to vote thereon.
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Smith Partnership. A sale, exchange, transfer or other disposition of all or
substantially all of the assets of Smith Partnership in a single transaction or
a series of related transactions, including by way of a merger, consolidation
or other combination of Smith Partnership with another entity, will require the
following:
. if the transaction is in connection with a similar transaction involving
Smith Residential which has also been approved by a majority of the
outstanding Smith Partnership units, including Smith Partnership units
held directly or indirectly by Smith Residential, and in connection with
which all limited partners have the right to receive consideration
which, on a per unit basis, is equivalent in value to the consideration
to be received by the shareholders of Smith Residential on a per share
basis, approval by a majority of the outstanding Smith Partnership
units, including Smith Partnership units held directly or indirectly by
Smith Residential; or
. in the case of any other transaction, the approval of a majority of the
outstanding Smith Partnership units including those held by Smith
Residential and some of its affiliates.
Indemnification
Archstone. Archstone will indemnify, to the fullest extent provided by law,
any person or entity made a party to a proceeding by reason of its status as a
unitholder or a trustee, director or officer of Archstone-Smith or Archstone
and any other persons or entities as Archstone-Smith may designate, in its sole
discretion, from and against any and all losses, claims, damages, liabilities,
joint or several, and expenses. Expenses include, without limitation,
attorneys' fees and other legal fees and expenses, judgments, fines,
settlements and other amounts arising from or in connection with any and all
claims, demands, actions, suits or proceedings, civil, criminal, administrative
or investigative, incurred by the indemnitee and relating to Archstone or
Archstone-Smith or the operation of, or the ownership of property by, either
Archstone-Smith or Archstone, as described in the declaration of trust of
Archstone, in which the indemnitee may be involved, or is threatened to be
involved, as a party or otherwise, unless it is established by a final
determination of a court of competent jurisdiction that:
. the act or omission of the indemnitee was material to the matter giving
rise to the proceeding and either was committed in bad faith or was the
result of active and deliberate dishonesty;
. the indemnitee actually received an improper personal benefit in money,
property or services, or
. in the case of any criminal proceeding, the indemnitee had reasonable
cause to believe that the act or omission was unlawful.
Any indemnification will be made only out of the assets of Archstone and any
insurance proceeds from the liability policy covering Archstone-Smith or
Archstone. Indemnitees, Archstone-Smith, and limited partners will have no
obligation to contribute to the capital of Archstone or otherwise provide funds
to enable Archstone to fund its indemnity obligations.
Archstone may advance amounts to an indemnitee for expenses upon receipt of:
. a written affirmation of the indemnitee that it believes it has met the
standard of conduct necessary to entitle it to indemnification, and
. a written undertaking of the indemnitee that it will repay any advances
if it shall be ultimately determined that the indemnitee did not meet
the appropriate standard of conduct.
These indemnification rights are in addition to any other rights afforded to
an indemnitee under any other agreement, by vote of the unitholders, under
applicable law or otherwise. These rights will continue as to an indemnitee who
has ceased to serve unless otherwise provided in a written agreement under
which indemnitees are indemnified. Archstone is authorized to purchase and
maintain insurance on behalf of the indemnitees with respect to the foregoing
matters.
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Excise taxes assessed on an indemnitee with respect to an employee benefit
plan according to applicable law will constitute fines. Actions taken or
omitted by the indemnitee with respect to an employee benefit plan in the
performance of its duties for a purpose reasonably believed by it to be in the
interest of the participants and beneficiaries of the plan will be deemed to be
for a purpose which is not opposed to the best interests of Archstone.
An indemnitee will not be denied indemnification in whole or in part because
the indemnitee had an interest in the transaction with respect to which the
indemnification applies if the transaction was otherwise permitted by the terms
of the declaration of trust of Archstone.
Smith Partnership. Smith Partnership will indemnify, to the fullest extent
provided by law, any person or entity made a party to a proceeding by reason of
its status as a general partner, a limited partner or a trustee, director or
officer of Smith Residential or Smith Partnership and any other persons or
entities as Smith Residential may designate, in its sole discretion, from and
against any and all losses, claims, damages, liabilities, joint or several, and
expenses. Expenses include, without limitation, attorneys' fees and other legal
fees and expenses, judgments, fines, settlements and other amounts arising from
or in connection with any and all claims, demands, actions, suits or
proceedings, civil, criminal, administrative or investigative, incurred by the
indemnitee and relating to Smith Partnership or Smith Residential or the
operation of, or the ownership of property by, either Smith Residential or
Smith Partnership, as described in the partnership agreement of Smith
Partnership, in which the indemnitee may be involved, or is threatened to be
involved, as a party or otherwise, unless it is established by a final
determination of a court of competent jurisdiction that:
. the act or omission of the indemnitee was material to the matter giving
rise to the proceeding and either was committed in bad faith or was the
result of active and deliberate dishonesty;
. the indemnitee actually received an improper personal benefit in money,
property or services, or
. in the case of any criminal proceeding, the indemnitee had reasonable
cause to believe that the act or omission was unlawful.
Any indemnification will be made only out of the assets of Smith Partnership
and any insurance proceeds from the liability policy covering Smith Residential
or Smith Partnership. Indemnitees, Smith Residential, and limited partners will
have no obligation to contribute to the capital of Smith Partnership or
otherwise provide funds to enable Smith Partnership to fund its indemnity
obligations.
Smith Partnership is obligated to advance amounts to an indemnitee for
expenses upon receipt of:
. a written affirmation of the indemnitee that it believes it has met the
standard of conduct necessary to entitle it to indemnification, and
. a written undertaking of the indemnitee that it will repay any advances
if it shall be ultimately determined that the indemnitee did not meet
the appropriate standard of conduct.
These indemnification rights are in addition to any other rights afforded to
an indemnitee under any other agreement, by vote of the partners, under
applicable law or otherwise. These rights will continue as to an indemnitee who
has ceased to serve unless otherwise provided in a written agreement under
which indemnitees are indemnified. Smith Partnership is authorized to purchase
and maintain insurance on behalf of the indemnitees with respect to the
foregoing matters.
Smith Partnership will be deemed to have requested an indemnitee to serve as
fiduciary of an employee benefit plan whenever the performance by it of its
duties to Smith Partnership also imposes duties on it, or otherwise involves
services by it, to the plan or participants or beneficiaries of the plan.
Excise taxes assessed on an indemnitee with respect to an employee benefit plan
according to applicable law will constitute fines. Actions taken or omitted by
the indemnitee with respect to an employee benefit plan in the performance of
its duties for a purpose reasonably believed by it to be in the interest of the
participants and beneficiaries of the plan will be deemed to be for a purpose
which is not opposed to the best interests of Smith Partnership.
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An indemnitee will not be denied indemnification in whole or in part because
the indemnitee had an interest in the transaction with respect to which the
indemnification applies if the transaction was otherwise permitted by the terms
of the partnership agreement of Smith Partnership.
Transfers
Archstone. Archstone-Smith generally may not transfer any of its Class A-2
common or other units or withdraw as trustee, except in connection with a
merger, consolidation or other combination with or into another entity, a sale
of all or substantially all of its assets or any reclassification,
recapitalization or change of its outstanding shares, other than a change in
the par value of its share. Archstone-Smith may engage in such a transaction
only if:
. the transaction has been approved by Archstone-Smith, as trustee, and
the unitholders holding at least a majority of the then outstanding
Archstone units, including any units held by Archstone-Smith;
. following the transaction, substantially all of the assets of the
surviving entity consist of units; and
. in the transaction, all unitholders receive or have the right to receive
consideration which, on a per unit basis, is equivalent in value to the
consideration to be received by the shareholders of Archstone-Smith, on
a per share basis.
A unitholder may transfer, with or without the consent of Archstone-Smith,
all or any portion of its units or rights as a unitholder:
. to Archstone-Smith in connection with a redemption of units;
. in the event the unitholder is an individual, to an immediate family
member, a trust for the benefit of the unitholder or an immediate family
member, any partnership, limited liability company, joint venture
corporation or other business entity comprised only of the unitholder
and/or immediate family members and entities owned by or for the benefit
of the unitholder or an immediate family member;
. in the event the unitholder is a trust, to the beneficiaries of a trust;
. in the event the unitholder acquired units in the partnership merger and
is a partnership, limited liability company, joint venture, corporation
or other business entity, to its partners, owners, or stockholders who
are immediate family members or the person who transferred units to the
unitholder;
. in the event the unitholder is a partnership, limited liability company,
joint venture, corporation or other business entity to any person by the
terms of any agreement between the unitholder and Archstone under which
the units were issued;
. as a gift or other transfer without consideration;
. under applicable laws of descent or distribution;
. to another unitholder; or
. as part of a grant of a security interest or other encumbrance
effectuated in a valid transaction or as a result of the exercise of
remedies related thereto.
No other transfers may be made without the prior written consent of
Archstone-Smith, which consent may be withheld in its sole and absolute
discretion.
Archstone-Smith may prohibit any transfer of units by a unitholder unless it
receives a written opinion of legal counsel, with the opinion and counsel being
reasonably satisfactory to Archstone-Smith, that the transfer would not require
filing of a registration statement under the Securities Act or would not
otherwise violate any federal, or state securities laws or regulations
applicable to Archstone or the transfer of the units. Further, no transfer of
units by a unitholder may be made if, in the opinion of legal counsel for
Archstone:
. the transfer would result in Archstone being treated as an association
taxable as a corporation for federal income tax purposes or would result
in a termination of the partnership for federal income tax purposes;
172
. the transfer could reasonably be expected to cause Archstone-Smith to no
longer qualify as a REIT or would subject Archstone-Smith to additional
taxes; or
. the transfer is effectuated through an "established securities market"
or a "secondary market" or the substantial equivalent, within the
meaning of the Internal Revenue Code.
In the case of a proposed transfer of units to a lender to Archstone or any
person related to the lender whose loan constitutes a nonrecourse liability,
the transferring unitholder must obtain the consent of Archstone-Smith.
Smith Partnership. Smith Residential generally may not transfer any of its
partnership interests, including any of its limited partnership interests,
except in connection with a merger, consolidation or other combination with or
into another person, a sale of all or substantially all of its assets or any
reclassification, recapitalization or change of its outstanding shares. Smith
Residential may engage in this type of transaction only if the transaction has
been approved by the consent of the partners holding at least a majority of the
then outstanding Smith Partnership units, including any Smith Partnership units
held by Smith Residential and in connection with which all limited partners
have the right to receive consideration which, on a per unit basis, is
equivalent in value to the consideration to be received by the shareholders of
Smith Residential, on a per share basis. Smith Residential will not withdraw
from Smith Partnership except in connection with a transaction as described in
the preceding sentence.
A limited partner may transfer, with or without the consent of Smith
Residential, all or any portion of its partnership interest or rights as a
limited partner:
. to an immediate family member; or
. to a trust for the benefit of the members of its immediate family or any
partnership comprised only of members of the unitholder's immediate
family.
Smith Residential may prohibit any transfer of partnership units by a
limited partner unless it receives a written opinion of legal counsel that the
transfer would not require filing of a registration statement under the
Securities Act or would not otherwise violate any federal, or state securities
laws or regulations applicable to the partnership or the partnership units.
Further, no transfer of partnership units by a limited partner may be made if,
in the opinion of legal counsel for the partnership:
. the transfer would result in the partnership being treated as an
association taxable as a corporation for federal income tax purposes or
would result in a termination of the partnership for federal income tax
purposes; or
. the transfer would adversely affect the ability of Smith Residential to
continue to qualify as a REIT or would subject Smith Residential to
additional taxes or would subject the partnership to adverse tax
consequences.
Except with the consent of Smith Residential to the admission of the
transferee as a limited partner, no transferee shall have any rights by virtue
of the transfer other than the rights of an assignee, and will not be entitled
to vote the partnership units in any matter presented to the limited partners
for a vote. Smith Residential will, however, have the right to consent to the
admission of a transferee of the interest of a limited partner, which consent
may be given or withheld by Smith Residential in its sole and absolute
discretion.
In the case of a proposed transfer of units to a lender to Smith Partnership
or any person related to the lender whose loan constitutes a nonrecourse
liability, the transferring partner must obtain the consent of Smith
Residential.
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Amendment of Declaration of Trust or Partnership Agreement
Archstone. In general, the declaration of trust of Archstone may be amended
only with the approval of Archstone-Smith, as trustee, and unitholders holding
a majority of the outstanding common units entitled to vote thereon. However,
after Archstone-Smith has declared an amendment advisable, the holders of at
least a majority of the outstanding Class A-2 common units have the power,
without the consent of the other unitholders, to amend the declaration of trust
of Archstone as may be required:
. to add to the obligations of Archstone-Smith or surrender any right or
power granted to Archstone-Smith or any affiliate of Archstone-Smith for
the benefit of the unitholders;
. to reflect any changes in the status of unitholders under the
declaration of trust of Archstone;
. to set forth the designations, rights, powers, duties and preferences of
the holders of any additional units issued according to the authority
granted to Archstone-Smith under the Archstone declaration of trust;
. to reflect a change that does not adversely affect the unitholders in
any material respect, or to cure any ambiguity, correct or supplement
any provision in the Archstone declaration of trust of not inconsistent
with law or with other provisions of the Archstone declaration of trust,
or make other changes with respect to matters arising under the
Archstone declaration of trust that will not be inconsistent with law or
with the provisions of the Archstone declaration of trust; and
. to satisfy any requirements, conditions or guidelines contained in any
order, directive, opinion, ruling or regulation of a federal, state or
local agency or contained in federal, state or local law.
The approval of the holders of at least a majority of the outstanding Class
A-1 common units is necessary to amend provisions regarding, among other
things:
. the restrictions imposed on the issuance of additional units to
Archstone-Smith other than in connection with the issuance by Archstone-
Smith of shares or in connection with a distribution by Archstone to all
unitholders;
. the distribution requirements with respect to the Archstone Class A-1
and Class A-2 common units if Archstone-Smith is not publicly traded;
. the restrictions on Archstone-Smith's authority described above under
"--Sale of Substantially All of Archstone's Assets";
. the restrictions on Archstone-Smith's power to conduct businesses other
than owning units of Archstone and managing the business of Archstone
and the relationship of Archstone-Smith shares to the units;
. the limitations on transactions with affiliates;
. the liability of Archstone-Smith for monetary damages to Archstone;
. the rights of unitholders to obtain specified information; or
. the transfer of units held by Archstone-Smith.
The Archstone declaration of trust may not be amended with respect to any
unitholder adversely affected by the amendment without the consent of that
unitholder if the amendment would, among other things:
. convert a unit into a Class A-2 common unit;
. modify the limited liability of a unitholder or require a unitholder to
make additional capital contributions;
. allow Archstone-Smith to take any action in contravention of any express
prohibition or limitation of the declaration of trust;
174
. alter the interest of a unitholder in profits or losses, or the right to
receive any distributions, except as permitted under the declaration of
trust of Archstone with respect to the admission of new unitholders, or
the issuance of additional Archstone units;
. alter the redemption right of the unitholders of Archstone;
. alter the rights of unitholders to transfer their units;
. alter the time periods before which Archstone-Smith may cause a
dissolution of Archstone or before which it may permit a termination of
Archstone's status as a partnership for federal income tax purposes;
. alter the provision requiring the approval of each unitholder adversely
affected by a proposed amendment of the Archstone declaration of trust;
or
. alter the provisions regarding the giving of notice under the
declaration of trust.
Smith Partnership. Amendments to the partnership agreement of Smith
Partnership may be proposed by Smith Residential or by limited partners owning
at least 25% of the total partnership interests. In general, the partnership
agreement of Smith Partnership may be amended only with the approval of Smith
Residential and limited partners holding a majority of the partnership
interests held by the limited partners, including Smith Residential. However,
Smith Residential has the power, without the consent of the limited partners,
to amend the partnership agreement of Smith Partnership as may be required:
. to add to the obligations of Smith Residential or surrender any right or
power granted to Smith Residential or any affiliate of Smith Residential
for the benefit of the limited partners;
. to reflect the admission, substitution, termination or withdrawal of
partners in compliance with the partnership agreement of Smith
Partnership;
. to set forth the designations, rights, powers, duties and preferences of
the holders of any additional partnership interests issued by the
authority granted to Smith Residential;
. to reflect a change that does not adversely affect the limited partners
in any material respect, or to cure any ambiguity, correct or supplement
any provision in the partnership agreement of Smith Partnership not
inconsistent with law or with other provisions of the partnership
agreement of Smith Partnership, or make other changes with respect to
matters arising under the partnership agreement of Smith Partnership
that will not be inconsistent with law or with the provisions of the
partnership agreement of Smith Partnership; and
. to satisfy any requirements, conditions or guidelines contained in any
order, directive, opinion, ruling or regulation of a federal, state or
local law.
The approval of a majority of the partnership interests held by limited
partners other than Smith Residential is necessary to amend provisions
regarding, among other things:
. the issuance of partnership interests in general and the restrictions
imposed on the issuance of additional partnership interests to Smith
Residential in particular;
. restrictions on Smith Residential's power to conduct businesses other
than owning partnership interests of Smith Partnership and the
relationship of Smith Residential shares to the partnership units;
. limitations on transactions with affiliates;
. partnership consent requirements for the sale of substantially all the
assets of Smith Partnership;
. the transfer of partnership interests held by Smith Residential; or
. the procedures for meetings of the unitholders.
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In addition, Smith Residential, as general partner of Smith Partnership, may
require that consents to an amendment to the partnership agreement be submitted
within a reasonable specified time period but not less than 15 days, and
failure to respond in such time period would constitute a vote which is
consistent with the general partner's recommendation with respect to the
proposal.
Meetings
Archstone. There will be an annual meeting of unitholders at a time and
place as Archstone-Smith shall prescribe, at which trustees may be elected and
any other proper business may be conducted. The annual meeting of unitholders
will be held upon reasonable notice at a convenient location and within a
reasonable period following delivery of the annual report. Special meetings of
unitholders may be called by Archstone or by the chairman of the board,
president or chief financial officer of Archstone, and must be called upon the
written request of unitholders holding in the aggregate 25% or more of the
outstanding units of Archstone entitled to vote. Notice stating the place, date
and time of the unitholders' meeting and, in the case of a special meeting, the
purpose or purposes for which the meeting is called, must be delivered not less
than 10 nor more than 60 days before the day of the meeting either personally
or by mail to each unitholder of record entitled to vote at the meeting. No
unitholder not entitled to vote at a meeting will have any rights to notice of
a meeting except as expressly provided for in the Archstone declaration of
trust or under law. No other business than that which is stated in the call for
a special meeting will be considered at the meeting.
Only Class A-2 common unitholders have the right to vote in the election of
trustees. Exclusive voting power is vested in the common units, except to the
extent that the Archstone declaration of trust or Maryland law provides voting
rights to any other class of units.
Smith Partnership. Meetings of the partners may be called by Smith
Residential by written request by limited partners holding 25% or more of the
partnership interests. The call must state the nature of the business to be
transacted. Notice of any meeting is required to be given to all partners not
less than seven days nor more than 30 days before the date of the meeting.
Partners may vote in person or by proxy at the meeting. Whenever the vote or
consent of partners is permitted or required under the partnership agreement of
Smith Partnership, this vote or consent may be given at a meeting of partners.
Except as otherwise expressly provided in the partnership agreement of Smith
Partnership, the consent of a majority of the percentage interests held by
limited partners, including limited partnership interests held by Smith
Residential, shall control.
Any action required or permitted to be taken at a meeting of the partners
may be taken without a meeting if a written consent showing the action taken is
signed by a majority of the percentage interests of the partners or another
percentage as required by the partnership agreement of Smith Partnership. In
addition, Smith Residential, as general partner of Smith Partnership, may
require that consents to an amendment to the partnership agreement be submitted
within a reasonable specified time period but not less than 15 days, and
failure to respond in such time period would constitute a vote which is
consistent with the general partner's recommendation with respect to the
proposal.
Financial Statements and Reports
Archstone. On or before the date on which Archstone-Smith mails its annual
report to its shareholders, Archstone-Smith is required to mail to each
unitholder an annual report, as of the close of the most recently ended fiscal
year of Archstone, containing financial statements of Archstone, or of
Archstone-Smith if the Archstone-Smith statements are prepared solely on a
consolidated basis with Archstone, for that fiscal year.
In addition, if Archstone-Smith mails quarterly reports to its shareholders,
Archstone-Smith is required to mail to each unitholder a report containing
unaudited financial statements, as of the last day of the calendar quarter, of
Archstone, or of Archstone-Smith if the Archstone-Smith statements are prepared
solely on a consolidated basis with Archstone.
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Smith Partnership. On or before 150 days after the close of each fiscal
year of the Smith Partnership, Smith Residential is required to mail to each
limited partner an annual report, as of the close of the most recently ended
fiscal year of Smith Partnership, containing financial statements of Smith
Partnership, or of Smith Residential if the Smith Residential statements are
prepared solely on a consolidated basis with Smith Partnership, for that
fiscal year.
In addition, on or before 150 days after the close of each calendar
quarter, except the last calendar quarter, Smith Residential is required to
mail to each limited partner a report containing unaudited financial
statements, as of the last day of the calendar quarter, of Smith Partnership,
or of Smith Residential if the Smith Residential statements are prepared
solely on a consolidated basis with Smith Partnership.
Appraisal/Dissenters' Rights
Archstone. Under Maryland law, a declaration of trust or an agreement of
merger or consolidation may provide that contractual appraisal rights with
respect to a unit will be available for any class or group of unitholders in
connection with any amendment of a declaration of trust or the sale of all or
substantially all of Archstone's assets. The declaration of trust of Archstone
does not provide for appraisal rights. Shareholders of a Maryland REIT have
statutory appraisal rights identical to those of a Maryland corporation with
respect to any merger or consolidation in which the REIT is a constituent
party.
Smith Partnership. Under Delaware law, a partnership agreement or an
agreement of merger or consolidation may provide that contractual appraisal
rights with respect to a partnership interest or another interest in a limited
partnership will be available for any class or group of partners in connection
with any amendment of a partnership agreement, any merger or consolidation in
which the limited partnership is a constituent party, or the sale of all or
substantially all of the limited partnership's assets. The partnership
agreement of Smith Partnership does not provide for appraisal rights.
Unitholder Protection Rights Agreements
Archstone. Archstone does not have a unitholder protection rights plan or
"poison pill." However, in the event that Archstone-Smith acquires additional
units upon the exercise by shareholders of Archstone-Smith of rights issued
under the Archstone-Smith shareholder rights plan, unitholders will have the
right to acquire additional units in Archstone as described above under
"Description of Archstone Shares of Beneficial Interest--Unitholder Purchase
Rights."
Smith Partnership. Smith Partnership does not have a unitholder protection
rights plan or "poison pill."
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DESCRIPTION OF ARCHSTONE-SMITH SHARES OF BENEFICIAL INTEREST
The following summary of the material terms of Archstone-Smith's shares of
beneficial interest does not include all of the terms of the shares and should
be read together with the declaration of trust and bylaws of Archstone-Smith,
which are incorporated by reference in this consent solicitation
statement/prospectus, and applicable Maryland law. See "Where You Can Find More
Information" beginning on page 216. The declaration of trust and bylaws of
Archstone-Smith are included as exhibits to the registration statement, of
which this document is a part.
General
The authorized shares of beneficial interest of Archstone-Smith consist of
450,000,000 shares, par value $0.01 per share, of which 430,333,260 shares are
designated as common shares, 3,174,235 shares are designated as Series A
cumulative convertible preferred shares, 1,969,100 shares are designated as
Series C cumulative redeemable preferred shares, 1,989,956 shares are
designated as Series D cumulative redeemable preferred shares, 1,600,000 shares
are designated as Series E cumulative redeemable preferred shares of beneficial
interest, 800,000 shares are designated as Series F cumulative redeemable
preferred shares of beneficial interest, 600,000 shares are designated as
Series G cumulative redeemable preferred shares of beneficial interest,
2,640,325 shares are designated as Series H cumulative convertible redeemable
preferred shares of beneficial interest, 500 shares are designated as Series I
cumulative redeemable preferred shares of beneficial interest, 684,931 shares
are designated as Series J cumulative convertible redeemable preferred shares
of beneficial interest, 666,667 shares are designated as Series K cumulative
convertible redeemable preferred shares of beneficial interest, 641,026 shares
are designated as Series L cumulative convertible redeemable preferred shares
of beneficial interest and 4,500,000 shares are designated as Series B junior
participating preferred shares.
The following table sets forth the issued and outstanding common shares and
preferred shares of Archstone-Smith immediately after the completion of the
merger, based on the number of Archstone and Smith Residential shares
outstanding as of August 31, 2001:
Issued and
Outstanding
Class or Series of Shares Shares
------------------------- -----------
Common Shares.................................................... 172,638,428
Series A Preferred Shares........................................ 3,174,235
Series B Preferred Shares........................................ 0
Series C Preferred Shares........................................ 1,969,100
Series D Preferred Shares........................................ 1,989,956
Series E Preferred Shares........................................ 0
Series F Preferred Shares........................................ 0
Series G Preferred Shares........................................ 0
Series H Preferred Shares........................................ 2,640,325
Series I Preferred Shares........................................ 500
Series J Preferred Shares........................................ 684,931
Series K Preferred Shares........................................ 666,667
Series L Preferred Shares........................................ 641,026
On September 19, 2001, all of the 400,000 issued and outstanding shares of
Smith Residential Series H preferred stock were converted into 259,740 shares
of Smith Residential common stock.
Under the Archstone-Smith declaration of trust, the Archstone-Smith board of
trustees has the authority to issue authorized but unissued shares and, subject
to the rights of holders of any class or series of preferred shares, preferred
shares in one or more classes or series, without shareholder approval. The
Archstone-Smith board of trustees also is authorized to reclassify authorized
but unissued common shares into preferred shares,
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and authorized but unissued preferred shares into common shares, without
shareholder approval, subject to the rights of holders of any class or series
of preferred shares. Absent an express provision to the contrary in the terms
of any class or series of authorized shares, under the Archstone-Smith
declaration of trust, the Archstone-Smith board of trustees also has the power
to divide or combine the outstanding shares of any class or series, without
shareholder approval.
The board of trustees may amend the Archstone-Smith declaration of trust
without shareholder approval to increase or decrease the aggregate number of
shares or the number of shares of any class or series.
Archstone-Smith believes that the power of its board of trustees to issue
additional authorized but unissued common shares or preferred shares and to
classify or reclassify unissued common shares or preferred shares and
thereafter to cause Archstone-Smith to issue such classified or reclassified
shares of beneficial interest provides Archstone-Smith with increased
flexibility in structuring possible future financings and acquisitions and in
meeting other needs which may arise. The additional classes or series, as well
as the common shares, generally will be available for future issuance without
further action by Archstone-Smith's shareholders, unless such action is
required by applicable law or the rules of the New York Stock Exchange.
Although the Archstone-Smith board of trustees has no present intention of
doing so, it could authorize Archstone-Smith to issue a class or series that
could, depending upon the terms of such class or series, delay, defer or
prevent a transaction or a change in control of Archstone-Smith that might
involve a premium price for holders of common shares or otherwise be in their
best interests.
Under Maryland law applicable to Maryland REITs, a shareholder is not
personally liable for the obligations of Archstone-Smith solely as a result of
his or her status as a shareholder. The Archstone-Smith declaration of trust
provides that no shareholder will be personally or individually liable for any
debt, act, omission or obligation of Archstone-Smith by reason of being a
shareholder.
The Archstone-Smith declaration of trust further provides that Archstone-
Smith will indemnify each shareholder against any claim or liability to which
the shareholder may become subject by reason of being or having been a
shareholder and that Archstone-Smith will reimburse each shareholder for all
reasonable expenses incurred by him or her relating to any such claim or
liability. However, with respect to tort claims, contractual claims where
shareholder liability is not so negated, claims for taxes and certain
statutory liability, the shareholders may, in some jurisdictions, be
personally liable to the extent that such claims are not satisfied by
Archstone-Smith.
Inasmuch as Archstone-Smith will carry public liability insurance, any risk
of personal liability to shareholders is limited to situations in which
Archstone-Smith's assets plus its insurance coverage would be insufficient to
satisfy the claims against Archstone-Smith and its shareholders.
Common Shares
All Archstone-Smith common shares will be duly authorized, validly issued,
fully paid and nonassessable.
Subject to the preferential rights of any other shares of beneficial
interest and to the provisions of the Archstone-Smith declaration of trust
regarding ownership limitations and restrictions on transfers of shares of
beneficial interest, holders of Archstone-Smith common shares are entitled to
receive distributions if, as and when authorized and declared by the
Archstone-Smith board of trustees out of assets legally available therefor and
to share ratably in the assets of Archstone-Smith legally available for
distribution to its shareholders in the event of its liquidation, dissolution
or winding-up after payment of, or adequate provision for, all known debts and
liability of Archstone-Smith. Before holders of Archstone-Smith common shares
are entitled to receive any distributions in any quarter, Archstone-Smith must
pay or set apart for payment on all of its outstanding series of preferred
shares an aggregate amount of approximately $8.0 million.
Subject to the provisions of the Archstone-Smith declaration of trust
regarding ownership limitations and restrictions on transfer of shares of
beneficial interest, and except for any special voting rights of any other
class or series of shares of beneficial interest, each outstanding Archstone-
Smith common share entitles the
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holder to one vote on all matters submitted to a vote of shareholders,
including the election of trustees. Except as provided with respect to any
other class or series of shares of beneficial interest, the holders of the
Archstone-Smith common shares possess the exclusive voting power.
There is no cumulative voting in the election of trustees, which means that
the holders of a majority of the outstanding common shares can elect all of the
trustees then standing for election and the holders of the remaining shares of
beneficial interest, except as provided with respect to any other class or
series of shares of beneficial interest, will not be able to elect any
trustees.
Holders of Archstone-Smith common shares have no preferences, conversion,
sinking fund, redemption rights or preemptive rights to subscribe for any
securities of Archstone-Smith. Subject to the exchange provisions of the
declaration of trust regarding ownership limitations and restrictions on
transfer, Archstone-Smith common shares have equal distribution, liquidation,
voting and other rights.
The Archstone-Smith declaration of trust permits the termination of the
existence of Archstone-Smith if it is approved by:
. at least a majority of the board of trustees, and
. holders of not less than a majority of the outstanding shares of
beneficial interest entitled to vote on the matter.
Shareholder Purchase Rights
On August 31, 2001 the board of trustees of Archstone-Smith declared a
dividend on its outstanding common shares of one preferred share purchase right
for each common share to be paid to the holders of record of its common shares
on the effective date of the reorganization of Archstone into an UPREIT. The
holders of common shares issued in the merger and any additional common shares
issued after the merger and before the redemption or expiration of the
preferred share purchase rights will also be entitled to receive one preferred
share purchase right for each such additional common share. Each preferred
share purchase right entitles the holder in various circumstances to purchase
from Archstone-Smith one one-hundredth of a Series B junior participating
preferred share at a price of $75 per one one-hundredth of a Series B junior
participating preferred share, subject to adjustment to prevent dilution.
Preferred share purchase rights are exercisable when a person or group of
persons acquires 15% of the outstanding common shares or announces a tender
offer or exchange offer for 15% or more of the outstanding common shares. In
some circumstances, each preferred share purchase right entitles the holder to
purchase, at the preferred share purchase right's then current exercise price,
a number of common shares having a market value of twice the preferred share
purchase right's then current exercise price. The acquisition of Archstone-
Smith pursuant to specified mergers or other business transactions would
entitle each holder of a preferred share purchase right to purchase, at the
then current exercise price of the preferred share purchase right, a number of
the acquiring company's common shares having a market value at the time equal
to twice the preferred share purchase right's exercise price. The preferred
share purchase rights held by 15% shareholders would not be exercisable. The
preferred share purchase rights will expire on August 31, 2011. All, but not
less than all of the preferred share purchase rights may be redeemed at a price
of $0.001 per preferred share purchase right, payable in cash, shares or any
other form of consideration determined by Archstone-Smith's board of trustees.
Preferred Shares
Subject to limitations prescribed by Maryland law and the Archstone-Smith
declaration of trust, the Archstone-Smith board of trustees is authorized to
issue, from the authorized but unissued shares of beneficial interest of
Archstone-Smith, preferred shares in series and to establish from time to time
the number of preferred shares to be included in such series and to fix the
designation and any preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption of the shares of each series, and any other relative
rights, preferences, limitations and powers of such series. The Archstone-Smith
declaration of trust also authorizes the Archstone-Smith board of trustees to
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classify any unissued preferred shares and to reclassify any previously
classified but unissued preferred shares of any series from time to time, in
one or more series. The Archstone-Smith board of trustees also is authorized to
reclassify authorized but unissued common shares into preferred shares, and
authorized but unissued preferred shares into common shares, without
shareholder approval.
Series A Preferred Shares
The Archstone-Smith Series A preferred shares to be established before or at
the time of the merger will have preferences, conversion and other rights,
voting powers, restrictions, limitations as to dividends, qualifications and
terms or conditions of redemption identical to those of the existing Archstone
Series A preferred shares, except for changes that do not materially and
adversely affect the holders of such shares. The Archstone-Smith Series A
preferred shares will rank senior to the Archstone-Smith common shares and on a
parity with all other series of Archstone-Smith preferred shares that will be
issued in the merger with respect to the payment of distributions and
distribution of assets upon liquidation, dissolution or winding up of
Archstone-Smith.
Holders of the Archstone-Smith Series A preferred shares are entitled to
receive, when, as and if authorized by the Archstone-Smith board of trustees
out of funds legally available for that purpose, cash distributions equal to
the greater of $1.75 per share per year or the dividend on the common shares
into which a Series A preferred share is convertible. These distributions are
cumulative and are payable quarterly in arrears on the last calendar day of
March, June, September and December of each year.
Unless previously redeemed, the Archstone-Smith Series A preferred shares
are convertible at any time, at the option of the holder, into the number of
Archstone-Smith common shares obtained by dividing the aggregate liquidation
preference of such Series A preferred shares by the conversion price of
$18.561, which is equivalent to a conversion rate of 1.3469 common shares for
each Archstone-Smith Series A preferred share. The conversion rate may be
adjusted in specified circumstances.
The Archstone-Smith Series A preferred shares are not entitled to the
benefit of any sinking fund.
On and after November 30, 2003, Archstone-Smith may redeem the Series A
preferred shares, in whole or from time to time in part, for cash at a
redemption price of $25.00 per share, plus any accumulated and unpaid
distributions to the date fixed for redemption.
So long as any Series A preferred shares are outstanding, no distributions
may be declared or paid or set apart for payment on any class or series of
shares of beneficial interest of Archstone-Smith ranking, as to distributions
and distribution of assets upon liquidation, on a parity with the Series A
preferred shares for any period unless full cumulative distributions have been
or contemporaneously are declared and paid or declared and a sum sufficient for
the payment thereof set apart for such payments on Series A preferred shares
for all distribution periods ending on or prior to the distribution payment
date for the parity shares.
In addition, unless full cumulative distributions on the Series A preferred
shares and on any class or series of shares of beneficial interest of
Archstone-Smith ranking, as to distributions and distribution of assets upon
liquidation, on a parity with the Series A preferred shares 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:
. no distributions, other than distributions paid solely in Archstone-
Smith common shares, other shares of beneficial interest ranking junior
to Series A preferred shares as to distributions and distribution of
assets upon liquidation or options, warrants or rights to acquire any
such shares, may be declared or paid or set aside for payment or other
distribution declared or made upon the Archstone-Smith common shares,
or any other shares of beneficial interest of Archstone-Smith ranking
junior to the Series A preferred shares as to distributions or
distribution of assets upon liquidation; and
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. no Archstone-Smith common shares or any other shares of beneficial
interest of Archstone-Smith ranking junior to the Series A preferred
shares as to distributions or distribution of assets upon liquidation
may 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 of beneficial interest, by Archstone-
Smith, except by conversion into or exchange for other shares of
beneficial interest of Archstone-Smith ranking junior to Series A
preferred shares as to distributions and distribution of assets upon
liquidation, and except for redemptions, purchases or other
acquisitions of common shares made for purposes of an employee
incentive or benefit plan of Archstone-Smith or its subsidiaries.
Series C Preferred Shares
The Archstone-Smith Series C preferred shares to be established before or at
the time of the merger will have preferences, conversion and other rights,
voting powers, restrictions, limitations as to dividends, qualifications and
terms and conditions of redemption identical to those of the existing Archstone
Series C preferred shares, except for changes that do not materially and
adversely affect the holders of such shares. The Archstone-Smith Series C
preferred shares rank senior to the Archstone-Smith common shares and on a
parity with all other series of Archstone-Smith preferred shares that will be
issued in the merger with respect to the payment of distributions and
distribution of assets upon liquidation, dissolution or winding up of
Archstone-Smith.
Holders of the Archstone-Smith Series C preferred shares are entitled to
receive, when, as and if authorized by the Archstone-Smith board of trustees
out of funds legally available for that purpose, cash distributions at a rate
of 8.625% of the $25.00 liquidation preference per annum, which is equivalent
to $2.15625 per share. These distributions are cumulative and are payable
quarterly in arrears on the last calendar day of March, June, September and
December of each year.
The Archstone-Smith Series C preferred shares are not convertible and are
not entitled to the benefit of any sinking fund.
On and after August 20, 2002, Archstone-Smith may redeem the Archstone-Smith
Series C preferred shares, in whole at any time, or in part from time to time,
at a price of $25.00 per Archstone-Smith Series C preferred share, plus any
accumulated and unpaid distributions to the redemption date. The redemption
price, other than the portion consisting of accrued and unpaid distributions,
is payable only out of the sale proceeds of other shares of beneficial interest
of Archstone-Smith.
The Archstone-Smith Series C preferred shares will have the same limitations
on the payment of distributions on junior and parity shares as the Archstone-
Smith Series A preferred shares.
Series D Preferred Shares
The Archstone-Smith Series D preferred shares to be established before or at
the time of the merger will have preferences, conversion and other rights,
voting powers, restrictions, limitations as to dividends, qualifications and
terms or conditions of redemption identical to those of the existing Archstone
Series D preferred shares, except for changes that do not materially and
adversely affect the holders of such shares. The Archstone-Smith Series D
preferred shares rank senior to the common shares and on a parity with all
other series of the Archstone-Smith preferred shares that will be issued in the
merger with respect to payment of distributions and distribution of assets upon
liquidation, dissolution or winding up of Archstone-Smith.
Holders of the Archstone-Smith Series D preferred shares are entitled to
receive, when, as and if authorized by the Archstone-Smith board of trustees
out of funds legally available for that purpose, cash distributions at a rate
of 8.75% of the $25.00 liquidation preference per annum, which is equivalent to
$2.1875 per share. These distributions are cumulative and are payable quarterly
in arrears on the last calendar day of March, June, September and December of
each year.
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The Archstone-Smith Series D preferred shares are not convertible and are
not entitled to the benefit of any sinking fund.
On or after August 6, 2004, Archstone-Smith may redeem the Archstone-Smith
Series D preferred shares, in whole or in part, at any time or from time to
time, at a redemption price of $25.00 per share, plus any accumulated and
unpaid distributions to the date of redemption. The redemption price, other
than any portion thereof consisting of accumulated and unpaid distributions,
may be paid only from sale proceeds of other equity securities of Archstone-
Smith.
The Archstone-Smith Series D preferred shares will have the same limitations
on the payment of distributions on junior and parity shares as the Archstone-
Smith Series A and C preferred shares.
Series E Preferred Shares
The Archstone-Smith Series E preferred shares to be established before or at
the time of the merger will have preferences, conversion and other rights,
voting powers, restrictions, limitations as to dividends, qualifications and
terms or conditions of redemption identical to those of the authorized
Archstone Series E preferred shares, except for such changes that do not
materially and adversely affect the holders of such shares. As of the date of
this consent solicitation statement/prospectus, there are no Archstone Series E
preferred shares issued or outstanding.
The Archstone-Smith Series E preferred shares, when issued, will rank senior
to the common shares and on a parity with all other series of the Archstone-
Smith preferred shares that will be issued in the merger with respect to
payment of distributions and distribution of assets upon liquidation,
dissolution or winding up of Archstone-Smith.
Holders of the Archstone-Smith Series E preferred shares will be entitled to
receive, when, as and if authorized by the Archstone-Smith board of trustees
out of funds legally available for that purpose, cash distributions equal to
8.375% of the $25.00 liquidation preference per annum, which is equivalent to
$2.09375 per share. These distributions are cumulative and are payable
quarterly in arrears on the last calendar day of March, June, September and
December of each year.
The Archstone-Smith Series E preferred shares are not convertible and are
not entitled to the benefit of any sinking fund.
On and after August 13, 2004, Archstone-Smith may redeem the Archstone-Smith
Series E preferred shares, in whole at any time or in part from time to time,
at a price of $25.00 per Archstone-Smith Series E preferred share, plus any
accumulated and unpaid distributions to the redemption date. The redemption
price, other than the portion consisting of accrued and unpaid distributions,
is payable only out of the sale proceeds of other shares of beneficial interest
of Archstone-Smith.
The Archstone-Smith Series E preferred shares will have the same limitations
on the payment of distributions on junior and parity shares as the Archstone-
Smith Series A, C and D preferred shares.
Series F Preferred Shares
The Archstone-Smith Series F preferred shares to be established before or at
the time of the merger will have preferences, conversion and other rights,
voting powers, restrictions, limitations as to dividends, qualifications and
terms or conditions of redemption identical to those of the authorized
Archstone Series F preferred shares, except for such changes that do not
materially and adversely affect the holders of such shares. As of the date of
this consent solicitation statement/prospectus, there are no Archstone Series F
preferred shares issued or outstanding.
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The Archstone-Smith Series F preferred shares, when issued, will rank senior
to the common shares and on a parity with all other series of the Archstone-
Smith preferred shares that will be issued in the merger with respect to
payment of distributions and distribution of assets upon liquidation,
dissolution or winding up of Archstone-Smith.
Holders of the Archstone-Smith Series F preferred shares will be entitled to
receive, when, as and if authorized by the Archstone-Smith board of trustees
out of funds legally available for that purpose, cash distributions equal to
8.125% of the $25.00 liquidation preference per annum, which is equivalent to
$2.03125 per share. These distributions are cumulative and are payable
quarterly in arrears on the 25th day of March, June, September and December of
each year.
The Archstone-Smith Series F preferred shares are not convertible and are
not entitled to the benefit of any sinking fund.
On and after September 27, 2004, Archstone-Smith may redeem the Archstone-
Smith Series F preferred shares, in whole at any time or in part from time to
time, at a price of $25.00 per Archstone-Smith Series F preferred share, plus
any accumulated and unpaid distributions to the redemption date. The redemption
price, other than the portion consisting of accrued and unpaid distributions,
is payable only out of the sale proceeds of other shares of beneficial interest
of Archstone-Smith.
The Archstone-Smith Series F preferred shares will have the same limitations
on the payment of distributions on junior and parity shares as the Archstone-
Smith Series A, C, D and E preferred shares.
Series G Preferred Shares
The Archstone-Smith Series G preferred shares to be established before or at
the time of the merger will have preferences, conversion and other rights,
voting powers, restrictions, limitations as to dividends, qualifications and
terms or conditions of redemption identical to those of the existing Archstone
Series G preferred shares, except for such changes that do not materially and
adversely affect the holders of such shares. As of the date of this consent
solicitation statement/prospectus, there are no Archstone Series G preferred
shares issued or outstanding.
The Archstone-Smith Series G preferred shares, when issued, will rank senior
to the common shares and on a parity with all other series of the Archstone-
Smith preferred shares that will be issued in the merger with respect to
payment of distributions and distribution of assets upon liquidation,
dissolution or winding up of Archstone-Smith.
Holders of the Archstone-Smith Series G preferred shares will be entitled to
receive, when, as and if authorized by the Archstone-Smith board of trustees
out of funds legally available for that purpose, cash distributions equal to
8.625% of the $25.00 liquidation preference per annum, which is equivalent to
$2.15625 per share. These distributions are cumulative and are payable
quarterly in arrears on the 25th day of March, June, September and December of
each year.
The Archstone-Smith Series G preferred shares are not convertible and are
not entitled to the benefit of any sinking fund.
On and after March 3, 2005, Archstone-Smith may redeem the Archstone-Smith
Series G preferred shares, in whole at any time or in part from time to time,
at a price of $25.00 per Archstone-Smith Series G preferred share, plus any
accumulated and unpaid distributions to the redemption date. The redemption
price, other than the portion consisting of accrued and unpaid distributions,
is payable only out of the sale proceeds of other shares of beneficial interest
of Archstone-Smith.
The Archstone-Smith Series G preferred shares will have the same limitations
on the payment of distributions on junior and parity shares as the Archstone-
Smith Series A, C, D and E preferred shares.
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Liquidation Rights of Series A, C, D, E, F and G Preferred Shares
Upon any voluntary or involuntary liquidation, dissolution or winding up of
Archstone-Smith, the outstanding Archstone-Smith Series A, C, D, E, F and G
preferred shares are entitled to a liquidation preference of $25.00 per share
plus all accumulated and unpaid distributions to the date of payment, before
any distribution of assets is made to holders of common shares and any other
class or series of shares of Archstone-Smith ranking junior to the Archstone-
Smith Series A, C, D, E, F and G preferred shares. If upon any voluntary or
involuntary liquidation, dissolution or winding up of Archstone-Smith, the
assets of Archstone-Smith are insufficient to make such payments in full to
holders of Archstone-Smith Series A, C, D, E, F and G preferred shares and
other preferred shares ranking on a parity with the Archstone-Smith Series A,
C, D, E, F and G preferred shares, then holders of Archstone-Smith Series A, C,
D, E, F and G preferred shares and parity preferred shares will share ratably
in any distribution of assets in proportion to the full liquidating
distributions to which they would otherwise be respectively entitled. After
payment of the full amount of the liquidating distributions to which they are
entitled, the holders of Archstone-Smith Series A, C, D, E, F and G preferred
shares will not be entitled to any further participation in any distribution of
assets by Archstone-Smith.
Voting Rights of Series A, C and D Preferred Shares
Holders of Archstone-Smith Series A, C and D preferred shares do not have
any voting rights, except as set forth below or as otherwise required by law.
Under the provisions of the Archstone-Smith declaration of trust governing
these series of preferred shares, if six quarterly distributions, whether or
not consecutive, payable on any of these series of preferred shares, or any
other series or class of shares of beneficial interest of Archstone-Smith
ranking, as to distributions and distribution of assets upon liquidation, on a
parity with the Series A, C or D preferred shares, which we will refer to in
this section as "parity preferred shares," are in arrears, the number of
trustees on the Archstone-Smith board of trustees will be increased by two, and
the holders of the Series A, C and D preferred shares, voting together as a
class, with the holders of other series of parity preferred shares entitled to
such voting rights, which are referred to as "voting preferred shares," will
have the right to elect two additional trustees to serve on the Archstone-Smith
board of trustees until the distributions have been paid in full or set aside
for payment. The term of office of all trustees so elected will terminate with
the termination of such voting rights.
For each of the Series A, C and D preferred shares, the affirmative vote of
at least two-thirds of the votes entitled to be cast by the holders of such
series and all other series of voting preferred shares similarly affected and
having such voting rights, voting as a single class is required to:
. amend, alter or repeal any of the provisions of the declaration of trust
or the bylaws that materially and adversely affect the powers, rights or
preferences of the holders of such series,
. enter into a share exchange that affects such series, or consolidate
with or merge Archstone-Smith with or into any other entity, unless in
each case each preferred share of such series remains outstanding
without a material adverse change to its terms and rights or is
converted into or exchanged for preferred shares of the surviving entity
having preferences, conversion and other rights, voting powers,
restrictions, limitations as to distributions, qualifications and terms
or conditions of redemption thereof identical to those of such series,
except for changes that do not materially and adversely affect the
holders of such series, and
. authorize, create or increase the authorized amount of any class of
shares of beneficial interest having rights senior to such series with
respect to the payment of distributions or distribution of assets upon
liquidation, dissolution or winding up of the affairs of Archstone-
Smith.
However, Archstone-Smith may authorize or create, or increase the authorized
amount of, any classes of shares of beneficial interest ranking on a parity
with or junior to Series A, C or D preferred shares as to distributions or
distribution of assets upon liquidation, dissolution or winding up of the
affairs of Archstone-Smith without the consent of any holder of Series A, C and
D preferred shares.
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The Series A, C and D preferred shares will have one vote for each $25.00
of stated liquidation preference.
Voting Rights of Series E, F and G Preferred Shares
Holders of Archstone-Smith Series E, F and G preferred shares will not have
any voting rights, except as set forth below or as otherwise required bylaw.
Under the provisions of the Archstone-Smith declaration of trust governing
these series of preferred shares, if six quarterly distributions, whether or
not consecutive, payable on any of these series of preferred shares are in
arrears, then the holders of such series, together with any other series of
shares ranking as to distributions and distribution of assets upon
liquidation, on a parity with the Series E, F or G preferred shares upon which
like voting rights have been conferred and are exercisable, will have the
right to elect, by a plurality vote, two additional trustees to serve on the
Archstone-Smith board of trustees until the distributions have been paid in
full or set aside for payment. The term of office of all trustees so elected
will terminate with the termination of such voting rights.
For each of the Series E, F and G preferred shares, the affirmative vote of
at least two-thirds of the votes entitled to be cast by the holders of such
series is required to:
. designate or create, or increase the authorized or issued amount of, any
class or series of shares ranking senior to such series of preferred
shares with respect to the payment of distributions or rights upon
liquidation, dissolution or winding up of Archstone-Smith, or reclassify
any authorized shares of Archstone-Smith into any such shares, or
create, authorize or issue any obligations or security convertible into
or evidencing the right to purchase any such shares;
. designate or create, or increase the authorized or issued amount of, any
shares ranking, as to distributions or distribution of assets upon
liquidation, dissolution or winding up of Archstone-Smith on a parity
with such preferred series, or reclassify any authorized shares of
Archstone-Smith into any such shares, or create, authorize or issue any
obligations or security convertible into or evidencing the right to
purchase any such shares, but only to the extent such parity shares are
issued to an affiliate of Archstone-Smith;
. consolidate, merge into or with, or convey, transfer or lease its assets
substantially as an entirety, to any corporation, real estate investment
trust or other entity, unless, in each case, each preferred share of
such series remains outstanding without change, or the resulting,
surviving or transferee entity substitutes such series of preferred
shares for other preferred shares having substantially the same terms
and same rights as the Series E, F or G preferred shares; and
. amend, alter or repeal the provisions of the Archstone-Smith declaration
of trust or bylaws that materially and aversely affect the powers,
special rights, preferences, privileges or voting power of such series
of preferred shares.
However, Archstone-Smith may increase the amount of authorized preferred
shares or create or issue any other class or series of preferred shares, or
increase the authorized amount of any class or series ranking either junior to
or on a parity with the Series E, F or G preferred shares with respect to
payment of distributions and distribution of assets upon liquidation,
dissolution or winding up of Archstone-Smith, to the extent that such
preferred shares are not issued to an affiliate of Archstone-Smith.
The Series E, F and G preferred shares will have one vote for each $25.00
of stated liquidation preference.
New Series H, I, J, K and L Preferred Shares
The Archstone-Smith Series H, I, J, K and L preferred shares to be
established before or simultaneously with the merger will have preferences,
conversion and other rights, voting powers, restrictions, limitations as to
186
dividends, qualifications and terms or conditions of redemption identical to
those of the shares of the corresponding series of Smith Residential preferred
stock, except for changes that do not materially and adversely affect the
holders of such shares.
Series H Preferred Shares to be Issued in the Merger
The Archstone-Smith Series H preferred shares will be issued in the merger
to holders of shares of Smith Residential Series A preferred stock. The
Archstone-Smith Series H preferred shares to be issued in the merger will rank
senior to the Archstone-Smith common shares and on a parity with all other
series of Archstone-Smith preferred shares that will be issued in the merger
with respect to the payment of distributions and distribution of assets upon
liquidation, dissolution or winding up of Archstone-Smith.
Holders of the Archstone-Smith Series H preferred shares will be entitled to
receive when, as and if authorized by the Archstone-Smith board of trustees out
of funds legally available for that purpose, cash distributions equal to the
greater of 7.459% of the $27.08 liquidation preference per annum, which is
equivalent to $2.02 per annum per share, or the dividend on the common shares
into which a Series H preferred share is convertible. These distributions are
cumulative and are payable quarterly in arrears on the same date on which
Archstone-Smith pays a distribution on the common shares or, if no such
distribution is paid on the common shares, then on such date to be set by the
board, which date will not be later than 45 days after the end of each
distribution period ending March 31, June 30, September 30 and December 31.
Unless previously redeemed, the Archstone-Smith Series H preferred shares
will be convertible at any time, at the option of the holder, into the number
of Archstone-Smith common shares obtained by dividing the aggregate liquidation
preference of such shares by the conversion price of $13.71, which is
equivalent to a conversion rate of 1.975 common shares for each Archstone-Smith
Series H preferred share, and which may be adjusted in specified circumstances.
The Archstone-Smith Series H preferred shares will not be entitled to the
benefit of any sinking fund.
On or after May 15, 2003, Archstone-Smith may redeem the Archstone-Smith
Series H preferred shares, in whole or in part, at a cash redemption price of
$27.08 per Archstone-Smith Series H preferred share, or in exchange for that
number of Archstone-Smith common shares as equals the liquidation preference
per Series H preferred share divided by the conversion price, plus, in either
case, accumulated and unpaid distributions to the redemption date. Archstone-
Smith may issue common shares upon any such redemption only if:
. for 20 trading days, within the last 30 trading days immediately before
the date of the notice of the redemption, the weighted average trading
price of the Archstone-Smith common shares on the New York Stock
Exchange equals or exceeds $14.81 per share, which may be adjusted in
specified circumstances; and
. at least 1,000,000 common shares were traded during such 30 trading
days.
So long as any Series H preferred shares are outstanding, no distributions
may be declared or paid or set apart for payment on any class or series of
shares of beneficial interest of Archstone-Smith ranking, as to distributions
or distribution of assets upon liquidation, on a parity with or junior to
Series H preferred shares for any period unless full cumulative distributions
have been or contemporaneously are declared and paid or declared and a sum
sufficient for the payment thereof set apart for such payment on Series H
preferred shares for all distribution periods ending on or prior to the
distribution payment date for such parity shares.
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In addition, unless full cumulative distributions on Series H preferred
shares and on any class or series of shares of beneficial interest of
Archstone-Smith ranking as to distributions and distribution of assets upon
liquidation on parity with the Series H preferred shares 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:
. no distributions, other than distributions paid solely in Archstone-
Smith common shares, other shares of beneficial interest ranking junior
to Series H preferred shares as to distributions and distribution of
assets upon liquidation or options, warrants or rights to acquire such
junior shares, may be declared or paid or set aside for payment or other
distribution declared or made upon the Archstone-Smith common shares or
any other shares of beneficial interest of Archstone-Smith ranking
junior to the Series H preferred shares as to distributions or
distribution of assets upon liquidation; and
. no Archstone-Smith common shares or any other shares of beneficial
interest of Archstone-Smith ranking junior to the Series H preferred
shares as to distributions or distribution of assets upon liquidation
may 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 of beneficial interest, by Archstone-
Smith, except by conversion into or exchange for other shares of
beneficial interest of Archstone-Smith ranking junior to Series H
preferred shares as to distributions and distribution of assets upon
liquidation, and except for redemptions, purchases or other acquisitions
of common shares made for purposes of an employee incentive or benefit
plan of Archstone-Smith or its subsidiaries.
Upon any voluntary or involuntary liquidation, dissolution or winding up of
Archstone-Smith, holders of the Archstone-Smith Series H preferred shares, when
issued, will be entitled to a liquidation preference of $27.08 per share, plus
accrued and unpaid distributions to the date of payment, before any
distribution or payment to the Archstone-Smith common shares or any other class
or series of shares of beneficial interest of Archstone-Smith ranking junior to
the Archstone-Smith Series H preferred shares.
If upon any voluntary or involuntary liquidation, dissolution or winding up
of Archstone-Smith, the assets of Archstone-Smith are insufficient to make such
payments in full to holders of Archstone-Smith Series H preferred shares and
other preferred shares ranking on a parity with the Archstone-Smith Series H
preferred shares, then holders of Archstone-Smith Series H preferred shares and
such other preferred shares will share ratably in any distribution of assets in
proportion to the full liquidating distributions to which they would otherwise
be respectively entitled. After payment of the full amount of the liquidating
distributions to which they are entitled, the holders of Archstone-Smith Series
H preferred shares will not be entitled to any further participation in any
distribution of assets by Archstone-Smith.
Series I Preferred Shares to be Issued in the Merger
The Archstone-Smith Series I preferred shares will be issued in the merger
to holders of Smith Residential Series C preferred stock. The Archstone-Smith
Series I preferred shares to be issued in the merger will rank senior to the
Archstone-Smith common shares and on a parity with each other series of
Archstone-Smith preferred shares to be issued in the merger with respect to the
payment of distributions and distribution of assets upon liquidation,
dissolution or winding up of Archstone-Smith.
Holders of the Archstone-Smith Series I preferred shares will be entitled to
receive, when, as and if authorized by the Archstone-Smith board of trustees
out of funds legally available for that purpose, cash distributions equal to
$7,660.00 per annum per share. These distributions are cumulative and are
payable on the 15th day of February, May, August and November of each year.
The Archstone-Smith Series I preferred shares will not be convertible into
Archstone-Smith common shares and will not be entitled to the benefit of any
sinking fund.
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The Archstone-Smith Series I preferred shares, when issued, will be
redeemable by Archstone-Smith after February 1, 2028 at a price of $100,000 per
Archstone-Smith Series I preferred share, plus accumulated and unpaid
distributions to the redemption date.
The Archstone-Smith Series I preferred shares will have the same limitations
on the payment of distributions on junior and parity shares and the same
liquidation rights as the Archstone-Smith Series H preferred shares, with the
exception of a liquidation preference of $100,000 per share.
Series J Preferred Shares to be Issued in the Merger
The Archstone-Smith Series J preferred shares will be issued in the merger
to holders of Smith Residential Series E preferred stock. The Archstone-Smith
Series J preferred shares to be issued in the merger will rank senior to the
Archstone-Smith common shares and on a parity with each other series of
Archstone-Smith preferred shares to be issued in the merger with respect to the
payment of distributions and distribution of assets upon liquidation,
dissolution or winding up of Archstone-Smith.
Holders of Archstone-Smith Series J preferred shares will be entitled to
receive, when, as and if authorized by the Archstone-Smith board of trustees
out of funds legally available for that purpose, cash distributions equal to
the greater of 8.50% of the $36.50 liquidation preference per annum, which is
the equivalent of $3.1025 per year per share, or the dividend on the common
shares into which a Series J preferred share is convertible. Distributions on
the Archstone-Smith Series J preferred shares will cumulate and will be payable
quarterly in arrears on the same date on which Archstone-Smith pays a
distribution on the common shares or, if no such distribution is paid on the
common shares, then on such date to be set by the board, which date will not be
later than 45 days after the end of each distribution period ending March 31,
June 30, September 30 and December 31.
Unless previously redeemed, the Archstone-Smith Series J preferred shares
are convertible at any time, at the option of the holder, into the number of
Archstone-Smith common shares obtained by dividing the aggregate liquidation
preference of such shares by the conversion price of $18.48, which is
equivalent to a conversion rate of 1.975 common shares for each Archstone-Smith
Series J preferred share, and which may be adjusted in specified circumstances.
The Archstone-Smith Series J preferred shares will not be entitled to the
benefit of any sinking fund.
On or after July 13, 2002, Archstone-Smith may redeem the Archstone-Smith
Series J preferred shares, in whole or in part at a cash redemption price of
$36.50 per Archstone-Smith Series J preferred share, or in exchange for that
number of Archstone-Smith common shares as equals the liquidation preference
per Series J preferred share divided by the conversion price, plus, in either
case, accumulated and unpaid distributions to the redemption date. Archstone-
Smith may issue common shares upon any such redemption only:
. if for 20 consecutive trading days, within the last 30 trading days
immediately before the date of the notice of redemption, the weighted
average trading price of the Archstone-Smith common shares on the New
York Stock Exchange equals or exceeds $19.9584 per share, which may be
adjusted in specified circumstances; and
. at least 1,000,000 common shares were traded during such 30 trading
days.
The Archstone-Smith Series J preferred shares will have the same limitations
on the payment of distributions on junior and parity preferred shares and the
same liquidation rights as the Archstone-Smith Series H and I preferred shares,
with the exception of a liquidation preference of $36.50 per share.
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Series K Preferred Shares to be Issued in the Merger
The Archstone-Smith Series K preferred shares will be issued in the merger
to holders of Smith Residential Series F preferred stock. The Archstone-Smith
Series K preferred shares to be issued in the merger will rank senior to the
Archstone-Smith common shares and on a parity with each other series of
Archstone-Smith preferred shares to be issued in the merger with respect to the
payment of distributions and distribution of assets upon liquidation,
dissolution or winding up of Archstone-Smith.
Holders of Archstone-Smith Series K preferred shares will be entitled to
receive, when, as and if authorized by the Archstone-Smith board of trustees,
cash distributions equal to the greater of 8.25% of the $37.50 liquidation
preference per annum, which is the equivalent of $3.09375 per annum per share,
through October 1, 2001, and 8.50% of the liquidation preference per annum,
which is the equivalent of $3.1875 per annum per share, after October 1, 2001
or the dividend on the common shares into which a Series K preferred share is
convertible. Distributions on the Archstone-Smith Series K preferred shares
will cumulate and will be payable quarterly in arrears on the same date on
which Archstone-Smith pays a distribution on the common shares or, if no such
distribution is paid on the common shares, then on such date to be set by the
board, which date will not be later than 45 days after the end of each
distribution period ending March 31, June 30, September 30 and December 31.
Unless previously redeemed, the Archstone-Smith Series K preferred shares
are convertible at any time, at the option of the holder, into the number of
Archstone-Smith common shares obtained by dividing the aggregate liquidation
preference of such shares by the conversion price of $18.99, which is
equivalent to a conversion rate of 1.975 common shares for each Archstone-Smith
Series K preferred share, and which may be adjusted in specified circumstances.
The Archstone-Smith Series K preferred shares will not be entitled to the
benefit of any sinking fund.
On or after October 1, 2004, Archstone-Smith may redeem the Archstone-Smith
Series K preferred shares, in whole or in part at a cash redemption price of
$37.50 per Archstone-Smith Series K preferred share, or in exchange for that
number of Archstone-Smith common shares as equals the liquidation preference
per Series K preferred share divided by the conversion price, plus, in either
case, accumulated and unpaid distributions to the redemption date. Archstone-
Smith may issue common shares upon any such redemption only if:
. for 20 consecutive trading days, within the last 30 trading days
immediately before the date of the notice of redemption, the weighted
average trading price of the Archstone-Smith common shares on the New
York Stock Exchange equals or exceeds $20.5092 per share, which may be
adjusted in specified circumstances; and
. at least 1,000,000 common shares were traded during such 30 trading
days.
The Archstone-Smith Series K preferred shares will have the same limitations
on the payment of distributions on junior and parity preferred shares and the
same liquidation rights as the Archstone-Smith Series H, I and J preferred
shares, with the exception of a liquidation preference of $37.50 per share.
Series L Preferred Shares to be Issued in the Merger
The Archstone-Smith Series L preferred shares will be issued in the merger
to holders of Smith Residential Series G preferred stock. The Archstone-Smith
Series L preferred shares to be issued in the merger will rank senior to the
Archstone-Smith common shares and on a parity with each other series of
Archstone-Smith preferred shares to be issued in the merger with respect to the
payment of distributions and distribution of assets upon liquidation,
dissolution or winding up of Archstone-Smith.
Holders of Archstone-Smith Series L preferred shares will be entitled to
receive, when, as and if authorized by the board of trustees, cash
distributions equal to the greater of 8.25% of the $39.00 liquidation
preference per annum, which is the equivalent of $3.2175 per annum per share,
through November 5, 2001, and
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8.50% of the liquidation preference per annum, which is the equivalent of
$3.315 per annum per share after November 5, 2001, or the dividend on the
common shares into which a Series L preferred share is convertible.
Distributions on the Archstone-Smith Series L preferred shares, when issued,
will cumulate and will be payable quarterly, in arrears on the same date on
which Archstone-Smith pays a distribution on the common shares or, if no such
distribution is paid on the common shares, then on such date to be set by the
board, which date will not be later than 45 days after the end of each
distribution period ending March 31, June 30, September 30 and December 31.
Unless previously redeemed, the Archstone-Smith Series L preferred shares
are convertible at any time, at the option of the holder, into the number of
Archstone-Smith common shares obtained by dividing the aggregate liquidation
preference of such shares by the conversion price of $19.75, which is
equivalent to a conversion rate of 1.975 common shares for each Archstone-Smith
Series L preferred share, and which may be adjusted in specified circumstances.
The Archstone-Smith Series L preferred shares will not be entitled to the
benefit of any sinking fund.
On or after November 5, 2005, Archstone-Smith may redeem the Archstone-Smith
Series L preferred shares, in whole or in part at a cash redemption price of
$39.00 per Archstone-Smith Series L preferred share, or in exchange for that
number of Archstone-Smith common shares as equals the liquidation preference
per Series L preferred share divided by the conversion price, plus, in either
case, accumulated and unpaid distributions to the redemption date. Archstone-
Smith may issue common shares upon any such redemption only if:
. for 20 consecutive trading days, within the last 30 trading days
immediately before the date of the notice of redemption, the average
trading price of the Archstone-Smith common shares on the New York Stock
Exchange exceeds $21.33 per share, which may be adjusted in specified
circumstances; and
. at least 1,000,000 common shares were traded during such 30 trading
days.
The Archstone-Smith Series L preferred shares will have the same limitations
on the payment of distributions on junior and parity preferred shares and the
same liquidation rights as the Archstone-Smith Series H, I, J and K preferred
shares, with the exception of a liquidation preference of $39.00 per share.
Voting Rights of Archstone-Smith Series H, I, J, K and L Preferred Shares
Holders of Archstone-Smith Series H, I, J, K and L preferred shares will not
have any voting rights, except as set forth below or as otherwise required by
law.
Under the provisions of the Archstone-Smith declaration of trust governing
these series of preferred shares, if four quarterly distributions, or in the
case of the Series I preferred shares, six quarterly distributions, whether or
not consecutive, payable on any of these series of preferred shares, or any
other series or class of shares of beneficial interest of Archstone-Smith
ranking, as to distributions and distribution of assets upon liquidation, on a
parity with the Series H, I, J, K and L preferred shares, which we refer to in
this section as "parity preferred shares," are in arrears, the number of
trustees on the Archstone-Smith board of trustees will be increased by two, and
the holders of the Series H, I, J, K and L preferred shares, voting together as
a class, with the holders of other series of parity preferred shares entitled
to such voting rights, which are referred to as "voting preferred shares," will
have the right to elect two additional trustees to serve on the Archstone-Smith
board of trustees until the distributions have been paid in full or set aside
for payment. The term of office of all trustees so elected will terminate with
the termination of such voting rights.
191
For each of the Series H, I, J, K and L preferred shares, the affirmative
vote of at least 66 2/3% of the votes entitled to be cast by the holders of
such series is required to:
. amend, alter or repeal any of the provisions of the declaration of trust
or the bylaws that materially and adversely affect the powers, rights or
preferences of the holders of such series,
. enter into a share exchange that affects such series, or consolidate
with or merge Archstone-Smith with or into any other entity, unless in
each case each preferred share of such series remains outstanding
without a material adverse change to its terms and rights or is
converted into or exchanged for preferred shares of the surviving entity
having preferences, conversion and other rights, voting powers,
restrictions, limitations as to distributions, qualifications and terms
or conditions of redemption thereof identical to those of such series,
except for changes that do not materially and adversely affect the
holders of such series, or
. authorize, reclassify, create, or increase the authorized amount of any
class of shares of beneficial interest having rights senior to such
series with respect to the payment of distributions or distribution of
assets upon liquidation, dissolution or winding up of the affairs of
Archstone-Smith.
However, Archstone-Smith may authorize or create, or increase the authorized
amount of, any classes of shares of beneficial interest ranking on a parity
with or junior to Series H, I, J, K or L preferred shares as to distributions
or distribution of assets upon liquidation, dissolution or winding up of the
affairs of Archstone-Smith without the consent of any holder of Series H, I, J,
K or L preferred shares.
The Series H, I, J, K and L preferred shares will each have one vote for
each $25.00 of stated liquidation preference.
REIT Ownership Limitations and Transfer Restrictions Applicable to Archstone-
Smith Common Shares and Series A, C, D, E, F and G Preferred Shares
For Archstone-Smith to qualify as a real estate investment trust under the
Internal Revenue Code, no more than 50% in value of Archstone-Smith's shares,
after taking into account options to acquire shares, may be owned, directly or
indirectly, by five or fewer individuals, as defined in the Internal Revenue
Code to include various entities and constructive ownership among specified
family members, during the last half of a taxable year or during a
proportionate part of a short taxable year. Archstone-Smith shares must also 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.
Subject to various exceptions, no holder is permitted to beneficially own,
or be deemed to own by virtue of the attribution provisions of the Internal
Revenue Code, more than 9.8% in number of shares or value of the outstanding
shares. The Archstone-Smith board of trustees, upon receipt of a ruling from
the Internal Revenue Service or an opinion of counsel or other evidence
satisfactory to the board of trustees and upon such other conditions as the
board of trustees may direct, may also exempt a proposed transferee from the
ownership limit. The proposed transferee must give written notice to Archstone-
Smith of the proposed transfer at least 30 days prior to any transfer which, if
consummated, would result in the intended transferee owning shares in excess of
the ownership limit. The Archstone-Smith board of trustees may require such
opinions of counsel, affidavits, undertakings or agreements as it may deem
necessary or advisable in order to determine or ensure its status as a real
estate investment trust. Any transfer of shares that would:
. create a direct or indirect ownership of shares in excess of the
ownership limit;
. result in shares being beneficially owned by fewer than 100 persons,
determined without reference to any rules of attribution, as provided in
section 856(a) of the Internal Revenue Code;
. result in Archstone-Smith being "closely held" within the meaning of
section 856(h) of the Internal Revenue Code; or
. result in Archstone-Smith failing to qualify as a REIT,
192
shall be null and void, and the intended transferee will acquire no rights to
shares. The foregoing restrictions on transferability and ownership will not
apply if the board of trustees determines that it is no longer in Archstone-
Smith's best interests to attempt to qualify, or to continue to qualify, as a
real estate investment trust.
Any shares the purported transfer of which would result in a person owning
shares in excess of the ownership limit or cause Archstone-Smith to become
"closely held" under section 856(h) of the Internal Revenue Code that is not
otherwise permitted as provided above will constitute excess shares. These
excess shares will be transferred pursuant to the declaration of trust to a
party not affiliated with Archstone-Smith who is designated by Archstone-Smith
as the trustee of a trust for the exclusive benefit of an organization
described in Sections 170(b)(1)(A) and 170(c) of the Internal Revenue Code and
identified by the board of trustees as the beneficiary or beneficiaries of the
trust, until such time as the excess shares are transferred to a person whose
ownership will not violate the restrictions of ownership. While these excess
shares are held in trust, distributions on such excess shares will be paid to
the trust for the benefit of the beneficiary and may only be voted by the
trustee for the benefit of the beneficiary. Subject to the ownership limit, the
excess shares will be transferred by the trustee at Archstone-Smith's direction
to any person, if the excess shares would not be excess shares in the hands of
such person. The purported transferee will receive the lesser of:
. the price paid by the purported transferee for the excess shares, or, if
no consideration was paid, fair market value on the day of the event
causing the excess shares to be held in trust; and
. the price received from the sale or other disposition of the excess
shares held in trust.
Any proceeds in excess of the amount payable to the purported transferee
will be paid to the beneficiary. In addition, such excess shares held in trust
are subject to purchase by Archstone-Smith for a 90-day period at a purchase
price equal to the lesser of:
. the price paid for the excess shares by the purported transferee, or, if
no consideration was paid, fair market value at the time of event
causing the shares to be held in trust; and
. the fair market value of the excess shares on the date Archstone-Smith
elects to purchase such shares.
Fair market value, for these purposes, means:
. the last reported sales price on the New York Stock Exchange on the
trading day immediately preceding the relevant date,
. if not then traded on the New York Stock Exchange, the last reported
sales price on the trading day immediately preceding the relevant date
as reported on, over or through any exchange or quotation systems, or
. if not then traded on, over or through any exchange or quotation system,
then the market price on the relevant date as determined in good faith
by the board of trustees.
From and after the purported transfer to the purported transferee of the
excess shares, the purported transferee will cease to be entitled to
distributions, other than liquidating distributions, voting rights and other
benefits with respect to the excess shares except the right to payment on the
transfer of the excess shares as described above. Any distribution paid to a
purported transferee on excess shares prior to the discovery by Archstone-Smith
that such excess shares have been transferred in violation of the provisions of
the declaration of trust will be repaid, upon demand, to Archstone-Smith, and
Archstone-Smith will pay any such amounts to the trust for the benefit of the
beneficiary. If the foregoing transfer restrictions are determined to be void,
invalid or unenforceable by any court of competent jurisdiction, then the
purported transferee of any excess shares may be deemed, at Archstone-Smith's
option, to have acted as an agent on our behalf in acquiring such excess shares
and to hold such excess shares on its behalf.
All certificates evidencing shares will bear a legend referring to the
restrictions described above.
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All persons who own, directly or by virtue of the attribution provisions of
the Internal Revenue Code, more than 5%, or such other percentage between 0.5%
and 5%, as provided in the rules and regulations promulgated under the Internal
Revenue Code, of the number or value of Archstone-Smith's outstanding shares
must give Archstone-Smith a written notice containing certain information by
January 31 of each year. In addition, each shareholder is upon demand required
to disclose to Archstone-Smith in writing such information with respect to the
direct, indirect and constructive ownership of shares as the board of trustees
deems reasonably necessary to comply with the provisions of the Internal
Revenue Code applicable to a real estate investment trust, to determine its
status as a real estate investment trust, to comply with the requirements of
any taxing authority or governmental agency or to determine any such
compliance.
The ownership limitations under the declaration of trust are designed to
protect our real estate investment trust status. The limitations could have the
effect of discouraging a takeover or other transaction in which holders of
some, or a majority, of the common shares might receive a premium for their
shares over the then prevailing market price or which such holders might
believe to be otherwise in their best interest.
In addition to the foregoing restrictions, the Archstone-Smith Series A, C
and D preferred shares provide that no person, or persons acting as a group,
may beneficially own more than 25% of such series outstanding at any time,
except as a result of Archstone-Smith's redemption of preferred shares. Shares
acquired in excess of this ownership limit must be redeemed by Archstone-Smith
at a price equal to the average daily per share closing sale price during the
30-day period ending on the business day prior to the redemption date. Such
redemption is not applicable if a person's ownership exceeds the limitations
solely due to Archstone-Smith's redemption of preferred shares; provided that
thereafter any additional preferred shares acquired by such person will be
deemed excess shares. From and after the date of notice of such redemption, the
holder of the preferred shares thus redeemed shall cease to be entitled to any
distributions, other than distributions declared prior to the date of notice of
redemption, voting rights and other benefits with respect to such shares except
the right to receive payment of the redemption price determined as described
above.
The foregoing ownership limitations also may have the effect of preventing
or hindering any attempt to acquire control of Archstone-Smith without the
consent of the Archstone-Smith board of trustees.
REIT Ownership Limitations and Transfer Restrictions Applicable to Archstone-
Smith Series H, I, J, K and L Preferred Shares
Instead of being governed by the foregoing restrictions, the Archstone-Smith
Series H, I, J, K and L preferred shares will have ownership limitations and
transfer restrictions identical to those contained in the Smith Residential
charter and articles supplementary for the corresponding Smith Residential
Series A, C, E, F and G preferred stock, except for changes that do not
materially and adversely affect the holders of Smith Residential preferred
stock.
Under the provisions of the declaration of trust governing the Archstone-
Smith Series H, I, J, K and L preferred shares, no more than 50% in value of
Archstone-Smith's outstanding shares of beneficial interest may be owned,
directly or constructively under the applicable attribution rules of the
Internal Revenue Code, by five or fewer individuals, which is defined in the
Internal Revenue Code to include various entities, during the last half of a
taxable year. In addition, the shares of beneficial interest must be
beneficially owned by 100 or more persons. The Archstone-Smith declaration of
trust restricts various acquisitions of shares, including common shares, in
order to comply with these requirements. These restrictions are also intended
to inhibit changes of control of Archstone-Smith.
Subject to certain exceptions specified in the Archstone-Smith declaration
of trust, no holder may own, or be deemed to own by virtue of the attribution
provisions of the Internal Revenue Code, more than 9.8% in number or value of
the issued and outstanding shares of beneficial interest. The board of trustees
in its discretion may waive this ownership limit or the ownership limit
described in the preceding paragraph with respect to a holder that is an
entity, but not an individual, if such holder's ownership will not then or in
the future jeopardize Archstone-Smith's status as a REIT and other requirements
are met.
194
In addition, holders that have specified relationships with the Smith and
Kogod families are prohibited from acquiring shares of beneficial interest or
rights to acquire shares, if, as a result of, and after giving effect to, such
acquisition, any tenant would be regarded as a related party tenant for
purposes of section 856(d)(2)(B) of the Internal Revenue Code and Archstone-
Smith would be considered to receive more than 0.5% of its gross annual revenue
from related party tenants.
If any shareholder purports to transfer shares to a person and either the
transfer would result in Archstone-Smith failing to qualify as a REIT, or such
transfer would cause the transferee to hold shares in excess of the ownership
limits described above, the purported transfer will be null and void.
All certificates representing Archstone-Smith Series H, I, J, K and L
preferred shares 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 Internal Revenue Code or regulations thereunder, in number or
value of the issued and outstanding shares of beneficial interest, must file a
written notice with Archstone-Smith containing the information specified in the
Archstone-Smith declaration of trust no later than January 30th of each year.
In addition, each shareholder shall be required upon demand to disclose to
Archstone-Smith in writing such information as it may request in order to
determine the effect of such shareholder's direct, indirect and constructive
ownership of such shares on Archstone-Smith's REIT status.
The foregoing ownership limitations also may have the effect of preventing
or hindering any attempt to acquire control of Archstone-Smith without the
consent of the Archstone-Smith board of trustees.
Transfer Agent and Registrar
The transfer agent and registrar for the Archstone-Smith common and
preferred shares is Mellon Investor Services, LLC.
Anti-Takeover Considerations
Maryland law and the Archstone-Smith declaration of trust and bylaws contain
a number of provisions that may have the effect of discouraging transactions
that involve an actual or threatened change of control of Archstone-Smith. See
"Comparison of Shareholder Rights" beginning on page 197. These provisions
include:
. Classified board of trustees and size of board fixed with range; two-
thirds shareholder vote required for removal--The board of trustees of
Archstone-Smith is divided into three classes with staggered terms of
office. The total number of trustees is fixed by a majority vote of the
board of trustees within a range of a minimum of three and a maximum of
15. Trustees may be removed with or without cause, but only by the vote
of two-thirds of all of the votes entitled to be cast in the election of
trustees. These provisions may make it more difficult for a third party
to gain control of the board of trustees of Archstone-Smith. Unless two-
thirds of the shareholders have voted to remove incumbent trustees, at
least two annual meetings of shareholders of Archstone-Smith, instead of
one, generally would be required to effect a change in a majority of the
board of trustees, and the number of trustees cannot be increased above
the maximum number of trustees specified in the declaration of trust
without board and shareholder approvals.
. Unsolicited Takeover Provisions of Maryland Law--Maryland law provides
that the board of trustees is not subject to higher duties with regard
to actions taken in a takeover context. These provisions may make it
more difficult to effect an unsolicited takeover of a Maryland real
estate investment trust. Maryland law also allows publicly held Maryland
real estate investment trusts with at least three independent trustees
to elect to be governed by all or any part of Maryland law provisions
relating to extraordinary actions and unsolicited takeovers.
195
. Call of Special Meetings of Shareholders--The Archstone-Smith
declaration of trust provides that special meetings of shareholders may
be called only by the chairman of the board, the president, the chief
executive officer or a majority of the board of trustees, or by the
holders of shares entitled to cast not less than 25% of all the votes
entitled to be cast at the meeting. The effect of this provision is to
make it more difficult for a shareholder to call a special meeting than
if a lower percentage were required in the declaration of trust.
. Advance Notice Provisions for Shareholder Nominations and Shareholder
New Business Proposals--The Archstone-Smith bylaws require advance
written notice for shareholders to nominate a trustee or bring other
business before a meeting of shareholders. This provision limits the
ability of shareholders to make nominations for trustees or introduce
other proposals that are not timely received for consideration at a
meeting.
. Two-thirds Shareholder Vote Required to Approve Some Amendments to the
Declaration of Trust--Some amendments to the declaration of trust must
first be declared advisable by the board of trustees and thereafter must
be approved by shareholders by the affirmative vote of not less than
two-thirds of all votes entitled to be cast. These voting requirements
may make amendments to the Archstone-Smith declaration of trust that
shareholders believe desirable more difficult to effect.
. Business Combination with Interested Shareholders--The Maryland Business
Combination Act provides that, unless exempted, a Maryland real estate
investment trust may not engage in business combinations, including
mergers, dispositions of 10% or more of its assets, issuances of shares
and other specified transactions, with an "interested shareholder" or
its affiliates, for five years after the most recent date on which the
interested shareholder became an interested shareholder and thereafter
unless specified criteria are met.
. Control Share Acquisitions--The Maryland Control Shares Acquisition Act
provides that shares acquired by any person over one-tenth, one-third
and a majority of the voting power of a real estate investment trust do
not have voting rights, except to the extent approved by the vote of
two-thirds of the votes entitled to be cast on the matter. The
Archstone-Smith bylaws exempt from the provisions of the Maryland
Control Share Acquisition Act any business combination with any person.
However, this provision of the bylaws, by its terms, may be amended,
altered or repealed at any time, in whole or in part, by the board of
trustees.
. Other Constituencies--Maryland law expressly codifies the authority of a
Maryland real estate investment trust to include in its charter a
provision that allows the board of trustees to consider the effect of a
potential acquisition of control on shareholders, employees, suppliers,
customers, creditors and communities in which offices or other
establishments of the trust are located. The Archstone-Smith declaration
of trust does not include a provision of this type. Maryland law also
provides, however, that the inclusion or omission of this type of
provision in the declaration of trust of a Maryland real estate
investment trust does not create an inference concerning factors that
may be considered by the board of trustees regarding a potential
acquisition of control. This law may allow the board of trustees to
reject an acquisition proposal even though the proposal was in the best
interests of Archstone-Smith shareholders.
196
COMPARISON OF SHAREHOLDER RIGHTS
The following comparison of the rights of Smith Residential stockholders,
Archstone shareholders and Archstone-Smith shareholders summarizes the material
differences but is not intended to list all of the differences. As a Maryland
corporation, Smith Residential is subject to the Maryland General Corporation
Law, which is a general corporation statute dealing with a wide variety of
matters, including election, tenure, duties, limitation of liabilities and
indemnification of directors and officers, classification of the board,
classification of shares, dividends and other distributions, meetings and
voting rights of stockholders, and extraordinary actions, such as amendments to
the charter, mergers, sales of all or substantially all of the assets and
dissolution. As a Maryland REIT, Archstone and Archstone-Smith are subject to
the Maryland REIT Law. The Maryland REIT Law covers many of the same matters
covered by the Maryland General Corporation Law, including limitation of
liabilities of trustees and officers, indemnification of trustees and officers,
classification of the board, classification of shares, amendment to the
declaration of trust, mergers of a Maryland REIT with other entities, and
dissenters' rights and makes applicable to Maryland REITs, certain provisions
of the Maryland General Corporation Law. However, not all of the corporate
governance provisions in the Maryland General Corporation Law are specifically
addressed in the Maryland REIT Law. It is the general practice of Maryland
REITs to address some of these matters through provisions in their declarations
of trust or bylaws. In some instances where neither the Maryland-REIT law nor
the declaration of trust or bylaws of a Maryland REIT has addressed an issue,
Maryland courts have looked to the Maryland General Corporation Law for
guidance.
The following discussion should be read together with the charter and bylaws
of Smith Residential, the declaration of trust and bylaws of Archstone, the
form of the declaration of trust and bylaws of Archstone-Smith that is expected
to be adopted before the merger and applicable Maryland law. The current
charter and bylaws of Smith Residential, the current declaration of trust and
bylaws of Archstone and the form of the declaration of trust and bylaws of
Archstone-Smith are incorporated by reference into this joint proxy
statement/prospectus, and will be sent to holders of Smith Residential common
and preferred stock and Archstone common and preferred shares upon request. See
"Where You Can Find More Information" beginning on page 216.
Authorized Shares
Smith Residential. The authorized shares of stock of Smith Residential
consist of 145,000,000 shares, par value $0.01 per share, of which 80,000,000
shares are classified as common stock, 2,640,325 shares are classified as
Series A cumulative convertible redeemable preferred stock, 500 shares are
classified as Series C cumulative redeemable preferred stock, 72,980 shares are
classified as Series D junior participating preferred stock, 684,931 shares are
classified as Series E cumulative convertible redeemable preferred stock,
666,667 shares are classified as Series F cumulative convertible redeemable
preferred stock, 641,026 shares are classified as Series G cumulative
convertible redeemable preferred stock, 45,000,000 shares are classified as
excess stock and 1,142,509 shares are not classified.
Under the Smith Residential charter, subject to the rights of holders of any
class or series of preferred shares, the board of directors may classify and
reclassify any unissued shares of capital stock by setting or changing in any
one or more respects the preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends, qualifications or terms or
conditions of redemption of such shares of stock. In addition, the board of
directors may also authorize the issuance from time to time of shares of Smith
Residential stock of any class, whether now or hereafter authorized, or
securities convertible into shares of its stock of any class or classes,
whether now or hereafter authorized, for such consideration as may be deemed
advisable by the board of directors and without any action by the stockholders,
except for any voting rights of the holders of shares of preferred stock,
including the rights of the holders of any series of the preferred stock to
approve any increase in the authorized number of shares of preferred stock of
the applicable series by a vote of at least 66 2/3% of the votes entitled to be
cast by the holders of such series of preferred stock.
197
At August 31, 2001, there were issued and outstanding 25,878,455 shares of
Smith Residential common stock, 2,640,325 shares of Series A preferred stock,
500 shares of Series C preferred stock, 684,931 shares of Series E preferred
stock, 666,667 shares of Series F preferred stock, 641,026 shares of Series G
preferred stock and 400,000 shares of Series H preferred stock. On September
19, 2001, all 400,000 issued and outstanding shares of Smith Residential Series
H preferred stock were converted into 259,740 shares of Smith Residential
common stock. In addition, 72,980 shares of Smith Residential Series D junior
participating preferred stock have been reserved for issuance pursuant to the
Smith Residential stockholder rights plan and none are outstanding.
Archstone. The authorized shares of beneficial interest of Archstone consist
of 250,000,000 shares, par value $1.00 per share, of which 232,100,000 shares
are classified as common shares, 9,200,000 shares are classified as Series A
cumulative convertible preferred shares, 4,200,000 shares are classified as
Series B cumulative redeemable preferred shares, 2,000,000 shares are
classified as Series C cumulative redeemable preferred shares, 2,300,000 shares
are classified as Series D cumulative redeemable preferred shares, 1,600,000
shares are classified as Series E cumulative redeemable preferred shares,
800,000 shares are classified as Series F cumulative redeemable preferred
shares, 600,000 shares are classified as Series G cumulative redeemable
preferred shares and 2,500,000 shares are classified as Series B junior
participating preferred shares.
Under the Archstone declaration of trust, the Archstone board of trustees
may amend the declaration of trust, without the consent of the shareholders of
Archstone, to increase or decrease the aggregate number of shares or the number
of shares of any class which Archstone has authority to issue. The Archstone
board of trustees also may classify or reclassify any unissued shares from time
to time by setting or changing the preferences, conversion or other rights,
voting powers, restrictions, limitations as to dividends or distributions,
qualifications or terms or conditions of redemption of the shares by filing
articles supplementary pursuant to Maryland law. In addition, subject to the
rights of holders of any class or series of preferred shares, the Archstone
board may also issue from the authorized but unissued shares of the trust
preferred shares in series and to establish from time to time the number of
preferred shares to be included in each such series and to fix the designation
and any preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and conditions of
redemption of the shares of each series.
At August 31, 2001, there were issued and outstanding 121,528,479 shares of
Archstone common shares, 3,174,235 shares of Archstone Series A preferred
shares, no shares of Archstone Series B preferred shares, 1,969,100 shares of
Archstone Series C preferred shares, 1,989,956 shares of Archstone Series D
preferred shares, no shares of Archstone Series E preferred shares, no shares
of Archstone Series F preferred shares, no shares of Archstone Series G
preferred shares and no shares of Archstone junior participating preferred
shares.
Archstone-Smith. At the time of the merger, the authorized shares of
Archstone-Smith are expected to consist of 450,000,000 shares of beneficial
interest, par value $0.01 per share, of which 430,333,260 are classified as
common shares, 3,174,235 are classified as Series A cumulative convertible
preferred shares, 4,500,000 are classified as Series B junior participating
preferred shares, 1,969,100 are classified as Series C cumulative redeemable
preferred shares, 1,989,956 are classified as Series D cumulative redeemable
preferred shares, 1,600,000 are classified as Series E cumulative redeemable
preferred shares, 800,000 are classified as Series F cumulative redeemable
preferred shares, 600,000 are classified as Series G cumulative redeemable
preferred shares, 2,640,325 are classified as Series H cumulative convertible
redeemable preferred shares, 500 are classified as Series I cumulative
redeemable preferred shares, 684,931 are classified as Series J cumulative
convertible redeemable preferred shares, 666,667 are classified as Series K
cumulative convertible redeemable preferred shares and 641,026 are classified
as Series L cumulative convertible redeemable preferred shares.
Under the Archstone-Smith declaration of trust, the Archstone-Smith board of
trustees may amend the declaration of trust, without the consent of the
shareholders of Archstone-Smith, to increase or decrease the aggregate number
of shares or the number of shares of any class which Archstone-Smith has
authority to issue, subject to the rights of holders of any class or series of
preferred shares. Subject to the rights of holders of any class or series of
preferred shares, the Archstone-Smith board of trustees also may classify or
reclassify any
198
unissued shares from time to time by setting or changing the preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends or distributions, qualifications or terms or conditions of redemption
of the shares by filing articles supplementary pursuant to Maryland law. In
addition, subject to the rights of holders of any class or series of preferred
shares, the Archstone-Smith board may issue from the authorized but unissued
shares of the trust preferred shares in series and establish from time to time
the number of preferred shares to be included in each such series and fix the
designation and any preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption of the shares of each series.
Immediately after completion of the merger, based on the number of Archstone
and Smith Residential shares outstanding as of August 31, 2001, the issued and
outstanding shares of Archstone-Smith are expected to consist of 172,638,428
common shares, 3,174,235 Series A preferred shares, no Series B preferred
shares, 1,969,100 Series C preferred shares, 1,989,956 Series D preferred
shares, no Series E preferred shares, no Series F preferred shares, no Series G
preferred shares, 2,640,325 Series H preferred shares, 500 Series I preferred
shares, 684,931 Series J preferred shares, 666,667 Series K preferred shares
and 641,026 Series L. On September 19, 2001, all of the 400,000 issued and
outstanding shares of Smith Residential Series H preferred stock were converted
into 259,740 shares of Smith Residential common stock.
Voting Rights
Smith Residential. Subject to the provisions of the Smith Residential
charter regarding ownership limitations and restrictions on transfer of shares
of capital stock, and except for any special voting rights of any other class
or series of capital stock, each outstanding share of Smith Residential common
stock is entitled to one vote on all actions to be taken by the stockholders.
Except as provided with respect to any other class or series of shares of
capital stock, the exclusive voting power on all matters is vested in the
holders of Smith Residential common stock.
Archstone and Archstone-Smith. Subject to the provisions of the Archstone-
Smith declaration of trust regarding ownership limitations and restrictions on
transfer of shares of beneficial interest, and except for any special voting
rights of any other class or series of shares of beneficial interest, each
outstanding Archstone-Smith common share is entitled to one vote on all matters
to be acted upon by the shareholders. Except as provided with respect to any
other class or series of shares of beneficial interest, the exclusive voting
power on all matters is vested in the holders of Archstone-Smith common shares.
Classification of the Board; Removal of Directors/Trustees
Smith Residential. The Maryland General Corporation Law permits a Maryland
corporation to divide its board of directors into classes with staggered terms
of office so long as the term of office of at least one class expires each
year. Smith Residential's board of directors is divided into three classes,
with each class having a three-year term of office. The term of one of the
three classes of Smith Residential directors expires at the annual meeting of
stockholders in each year.
Under the Smith Residential charter and bylaws, a director may be removed
only for cause and only by the affirmative vote of stockholders holding at
least 80% of all the votes entitled to be cast for the election of directors.
However, in the case of any directors elected by holders of a class or series
of capital stock other than common stock, such directors may be removed without
cause, but solely by the affirmative vote of all of the votes of that class or
series.
Archstone and Archstone-Smith. The Maryland REIT Law permits a Maryland real
estate investment trust's board of trustees to be divided into up to three
classes with staggered terms of office. The board of trustees of each of
Archstone and Archstone-Smith is divided into three classes, with each class
having a three-year term of office. The term of one of the three classes of
Archstone trustees and of Archstone-Smith trustees expires at their respective
annual meetings of shareholders in each year.
199
The declaration of trust of each of Archstone and Archstone-Smith provides
that trustees may be removed from office with or without cause by the
shareholders by the affirmative vote of two-thirds of all the votes entitled to
be cast in the election of trustees or by the trustees then in office by a two-
thirds vote at a meeting of the board of trustees. However, in the case of any
trustees elected by holders of a class or series of preferred shares, such
trustees may be removed without cause solely by the affirmative vote of the
holders of that class or series of preferred shares.
Number of Directors/Trustees; Vacancies
Smith Residential. The Smith Residential charter provides that the number of
directors may be increased or decreased by the bylaws. The Smith Residential
bylaws establishes the current number of Smith Residential directors at 7
directors. The bylaws further provide that a majority of the entire board of
directors may alter the number of directors to not more than 25 nor less than
3, but the action may not affect the tenure of office of any director.
Smith Residential's charter and bylaws provide that, except in the case of a
vacancy on the board of directors among the directors elected by a class or
series of capital stock other than common stock, any vacancy on the board of
directors may be filled by the affirmative vote of the remaining directors,
except that a vacancy which results from an increase in the number of directors
may be filled by a majority of the entire board of directors, and, in the case
of a vacancy resulting from the removal of a director, by the stockholders. Any
vacancy on the board of directors among the directors elected by a class or
series of capital stock other than common stock may be filled by a majority of
the remaining directors or the sole remaining director elected by that class or
series, or by the stockholders of that class or series.
The provisions of Smith Residential's charter governing the outstanding
series of preferred stock provide for the right of the holders of such shares
to elect additional directors in certain circumstances.
Archstone. Archstone's declaration of trust provides that the board of
trustees shall be comprised of not less than 3 nor more than 15 trustees. The
current size of Archstone's board of trustees is 6, which number may be changed
from time to time by resolution of the board of trustees within the limits
described in the preceding sentence.
Vacancies on the board of trustees resulting from any cause, including an
increase in the number of trustees, may be filled either by a special meeting
or written consent of shareholders, by the remaining trustees in office or at
the next annual meeting of shareholders. Any vacancy among the trustees elected
by a class or series of preferred shares, however, may be filled by a majority
of the remaining trustees elected by that class or series of preferred shares
or by the holders of that class or series of preferred shares. Trustees elected
at special meetings of shareholders to fill vacancies or appointed by the
remaining trustees to fill vacancies shall hold office until the next annual
meeting of shareholders.
The provisions of Archstone's declaration of trust governing the outstanding
series of preferred shares provide for the right of the holders of such shares
to elect additional trustees in certain circumstances.
Archstone-Smith. Archstone-Smith's declaration of trust provides that the
board of trustees shall be comprised of not less than 3 nor more than 15
trustees. Immediately following completion of the merger, the Archstone-Smith
board is expected to be comprised of 9 members. The size of Archstone-Smith's
board of trustees may be changed from time to time by resolution of the board
of trustees within the limits provided in the preceding sentence.
Vacancies on the board of trustees resulting from any cause, including an
increase in the number of trustees, may be filled either by a special meeting
or written consent of shareholders, by the remaining trustees in office or at
the next annual meeting of shareholders. Any vacancy among the trustees elected
by a class or series of preferred shares, however, may be filled by a majority
of the remaining trustees elected by that class
200
or series of preferred shares or by the holders of that class or series of
preferred shares. Trustees elected at special meetings of shareholders to fill
vacancies hold office for the balance of the unexpired term of the trustees
whom they are replacing or whose vacancy they are filling, or in the case of a
vacancy created by an increase in the number of trustees, for the balance of
the unexpired term of trustees of the same class. Any trustee appointed by the
remaining trustees to fill vacancies shall hold office until the next annual
meeting of shareholders and until his or her successor is elected and
qualifies.
The provisions of Archstone's declaration of trust governing the outstanding
series of preferred shares provide rights to the holders of such preferred
shares to elect additional trustees under certain circumstances. See
"Description of Archstone-Smith Shares of Beneficial Interest--Preferred
Shares--Voting Rights of Series A, C and D Preferred Shares," "--Voting Rights
of Series E, F and G Preferred Shares" and "Description of Archstone-Smith
Shares of Beneficial Interest--Preferred Shares--New Series H, I, J, K and L
Preferred Shares--Voting Rights of Archstone-Smith Series H, I, J, K and L
Preferred Shares."
Limitation of Trustee/Director and Officer Liability
Smith Residential. Under Maryland law, the charter of a Maryland corporation
may include a provision expanding or limiting the liability of its directors
and officers to the corporation or its stockholders for money damages but may
not include a provision which restricts or limits the liability of its
directors or officers to the corporation or its stockholders to the extent
that:
. it is proved that the person actually received an improper benefit or
profit in money, property or services, for the amount of the benefit or
profit in money, property or services actually received; or
. a judgment or other final adjudication adverse to the person is entered
in a proceeding based on a finding that the person's action, or failure
to act, was the result of active and deliberate dishonesty and was
material to the cause of action adjudicated in the proceeding.
The Smith Residential charter provides that, to the fullest extent permitted
by Maryland law, no director or officer of Smith Residential will be personally
liable to Smith Residential or to its stockholders for money damages.
Archstone and Archstone-Smith. Maryland REIT law permits a real estate
investment trust to include in its declaration of trust any provision expanding
or limiting the liability of its trustees and officers to the trust or its
shareholders for money damages, subject to the same limitations described above
for a Maryland corporation. Both Archstone's and Archstone-Smith's declarations
of trust provides that, to the maximum extent permitted under Maryland law, no
officer or trustee shall be liable to the trust or to any shareholder for money
damages.
Indemnification
Smith Residential. The Maryland General Corporation Law allows corporations
to indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action or suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that he or she is or was a director, officer, employee or agent of the
corporation or is or was serving at the request of the corporation as a
director, officer, employee, partner, trustee, or agent of another foreign or
domestic corporation, partnership, joint venture, trust, other enterprise or
employee benefit plan, unless it is established that:
. the act or omission was material to the matter giving rise to the
proceeding and either was committed in bad faith or was the result of
active and deliberate dishonesty;
. the person actually received an improper personal benefit in money,
property or services; or
. in the case of any criminal proceeding, the person had reasonable cause
to believe that the act or omission was unlawful.
201
Under Maryland law, indemnification may be provided against judgments,
penalties, fines, settlements and reasonable expenses actually incurred by the
person in connection with the proceeding. The indemnification may be provided,
however, only if authorized for a specific proceeding after a determination has
been made that indemnification is permissible under the circumstances because
the person met the applicable standard of conduct. This determination is
required to be made:
. by the board of directors by a majority vote of a quorum consisting of
directors not, at the time, parties to the proceeding or, if a quorum
cannot be obtained, then by a majority vote of a committee of the board
consisting solely of two or more directors not, at the time, parties to
the proceeding and who a majority of the board of directors designated
to act in the matter;
. by special legal counsel selected by the board or board committee by the
vote set forth above or, if such vote cannot be obtained, by a majority
of the entire board; or
. by the shareholders.
If the proceeding is one by or in the right of the corporation,
indemnification may not be provided as to any proceeding in which the person is
found liable to the corporation.
A Maryland corporation may pay, before final disposition, the expenses,
including attorneys' fees, incurred by a director, officer, employee or agent
in defending a proceeding. Under Maryland law, expenses may be advanced to a
director or officer when the director or officer gives a written affirmation of
his or her good faith belief that he or she has met the standard of conduct
necessary for indemnification and a written undertaking to the corporation to
repay the amounts advanced if it is ultimately determined that he or she is not
entitled to indemnification. Maryland law does not require that the undertaking
be secured, and the undertaking may be accepted without reference to the
financial ability of the director or officer to repay the advance. A Maryland
corporation is required to indemnify any director who has been successful, on
the merits or otherwise, in defense of a proceeding for reasonable expenses.
The determination as to reasonableness of expenses is required to be made in
the same manner as required for indemnification.
Under Maryland law, the indemnification and advancement of expenses provided
by statute are not exclusive of any other rights to which a person who is not a
director seeking indemnification or advancement of expenses may be entitled
under any charter, bylaw, agreement, vote of stockholders, vote of directors or
otherwise.
Under the Smith Residential charter, Smith Residential is required to
indemnify
. its directors and officers, whether serving the corporation or at its
request any other entity, to the full extent required or permitted by
Maryland law now or hereafter in force, including the advance of
expenses under the procedures and to the full extent permitted by law;
and
. other employees and agents to such extent as shall be authorized by the
board of directors or Smith Residential's bylaws and be permitted by
law.
Archstone and Archstone-Smith. Maryland law generally permits a Maryland
real estate investment trust to indemnify any person made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative, or investigative, by reason of the fact that the
person is or was a trustee, officer, employee or agent of the trust or any
predecessor entity, or is or was serving at the request of the trust or
predecessor entity as a director, officer, partner, trustee, employee or agent
of another corporation, partnership, joint venture, trust, other enterprise or
employee benefit plan, on the same terms and subject to the same limitations as
described above for a Maryland corporation.
The declarations of trust of both Archstone and Archstone-Smith provides
that the trust shall indemnify each trustee, officer and employee to the
fullest extent permitted by Maryland law, as amended from time to time, in
connection with any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that he or she was a trustee, officer, employee or
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agent of the trust or is or was serving at the request of the trust as a
director, trustee, officer, partner, manager, member, employee or agent of
another foreign or domestic corporation, partnership, joint venture, trust,
limited liability company, other enterprise or employee benefit plan, from all
claims and liabilities to which such person may become subject by reason of
service in such capacity and shall pay or reimburse reasonable expenses, as
such expenses are incurred, of each trustee, officer, employee or agent in
connection with any such proceedings.
Duties of Trustees and Directors
Smith Residential, Archstone and Archstone-Smith. Maryland law provides
protection for Maryland corporations and Maryland real estate investment trusts
against unsolicited takeovers by protecting the board of directors or board of
trustees with regard to actions taken in a takeover context. Maryland law
provides that the duties of directors and trustees will not require them to:
.accept, recommend, or respond to any proposal by a person seeking to
acquire control;
. authorize the corporation or real estate investment trust, as
applicable, to redeem any rights under, modify, or render inapplicable a
shareholder or a stockholder rights plan;
. make a determination under the Maryland Business Combination Act or the
Maryland Control Share Acquisition Act, as described below;
. elect to be subject to any or all of the "elective provisions" related
to unsolicited takeovers described below; or
. act or fail to act solely because of:
-- the effect the act or failure to act may have on an acquisition or
potential acquisition of control; or
-- the amount or type of consideration that may be offered or paid to
shareholders in an acquisition.
Maryland law also establishes a presumption that the act of a director or
trustee satisfies the required standard of conduct. In the case of a Maryland
corporation, a director must perform his or her duties in good faith, in a
manner that is in the best interests of the corporation and with the care of an
ordinarily prudent person under similar circumstances. In the case of a
Maryland real estate investment trust, the standard of conduct is not
explicitly addressed in the statute. Archstone-Smith's bylaws, however, provide
that except to the extent that the trustees are subject to a different standard
under Maryland law or its declaration of trust, the trustees shall perform
their duties as trustees or members of committees of trustees in accordance
with the standard set forth in the Maryland General Corporation Law.
An act of a director or trustee relating to or affecting an acquisition or a
potential acquisition of control of a Maryland corporation or a Maryland REIT
is not subject under Maryland law to a higher duty or greater scrutiny than is
applied to any other act of a director or trustee. This provision creates a
Maryland rule which is less exacting than case law in many other jurisdictions
which:
. imposes an enhanced level of scrutiny when a board implements anti-
takeover measures in a change of control context, and
. in these circumstances shifts the burden of proof to directors to show
that the defensive mechanism adopted by a board is reasonable in
relation to the threat posed.
Maryland law also provides that the duty of a trustee is only enforceable by
the trust or in the right of the trust. A shareholder suit to enforce the duty
of a trustee, therefore, can only be brought derivatively.
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Call of Special Meetings of Shareholders
Smith Residential. Smith Residential's bylaws provide that special meetings
of shareholders may be called by the chairman of the board or the president or
by a majority of the board of directors, and upon the written request of
stockholders entitled to cast at least 25% of all the votes entitled to be cast
at the meeting.
Archstone. Archstone's declaration of trust provides that special meetings
of shareholders may be called by a majority of the trustees or by any officer,
and upon the written request of shareholders holding not less than 25% of the
outstanding shares entitled to vote.
Archstone-Smith. Archstone-Smith's declaration of trust provides that
special meetings of shareholders may be called by a majority of the trustees or
by the chairman of the board, the president or the chief executive officer, and
upon the written request of shareholders holding not less than 25% of the
outstanding shares entitled to vote.
Advance Notice Provisions for Shareholder Nominations and Shareholder New
Business Proposals
Smith Residential. The Smith Residential bylaws require advance written
notice for stockholders to nominate a director or bring other business before a
meeting of stockholders.
For an annual meeting, a stockholder must deliver notice to the secretary of
Smith Residential not less than 60 days nor more than 90 days prior to the
first anniversary of the preceding year's annual meeting. However, if the date
of the annual meeting is advanced by more than 30 days or delayed by more than
60 days from the anniversary date, notice by the stockholder must be delivered
not earlier than the 90th day before the annual meeting and not later than the
close of business on the later of the 60th day before the annual meeting or the
tenth day following the day on which public announcement of the date of the
meeting is first made.
In the case of a special meeting of stockholders called for the purpose of
electing directors, notice by the stockholder must be given not earlier than
the 90th day prior to such special meeting and not later than the close of
business on the later of the 60th day prior to such special meeting or the
tenth day following the day on which public announcement is first made of the
date of the special meeting and of the nominees proposed by the directors to be
elected at such meeting.
The Smith Residential bylaws contain detailed requirements for the contents
of stockholder notices of director nominations and business proposals.
Archstone and Archstone-Smith. Both Archstone's and Archstone-Smith's bylaws
require advance written notice for shareholders to nominate a trustee or bring
other business before a meeting of shareholders.
For an annual meeting, a shareholder must deliver written notice to the
secretary of Archstone or Archstone-Smith, as the case may be, not less than 90
days nor more than 120 days before the first anniversary of the date the proxy
statement was released to shareholders in connection with the preceding year's
annual meeting. However, if the date of the annual meeting is advanced by more
than 30 days or delayed by more than 60 days from the anniversary of the
preceding year's annual meeting, notice by the shareholder must be delivered
not more than 120 days nor less than 90 days before the first anniversary of
the date the proxy statement was released to shareholders in connection with
the preceding year's annual meeting or not later than the close of business on
the 10th day following the day on which public announcement of the date of the
annual meeting is first made.
In the case of a special meeting of stockholders called for the purpose of
electing trustees, a shareholder must give notice not more than 120 days nor
less than 90 days before the special meeting or not later than the close of
business on the 10th day following the day on which public announcement of the
date of the special meeting and of the nominees proposed by the board of
trustees to be elected at the meeting is first made.
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The declaration of trust of Archstone and the bylaws of Archstone-Smith
contain detailed requirements for the contents of shareholder notices of
trustee nominations and new business.
Amendment of the Smith Residential Charter and the Archstone and Archstone-
Smith Declarations of Trust
Smith Residential. Subject to the rights of any class or series of preferred
shares outstanding, amendments to Smith Residential's charter must be approved
by the board of directors and by the vote of at least two-thirds of the votes
entitled to be cast at a meeting of shareholders. However, notwithstanding any
other provisions of the charter or bylaws of Smith Residential and in addition
to any other vote that may be required, the affirmative vote of stockholders
holding at least 80% of all of the votes entitled to be cast on the matter
shall be required to amend, alter, change, repeal or adopt any provisions
inconsistent with the charter provisions relating to the number, selection and
removal of members of the board of directors. In addition, the Smith
Residential charter prohibits the board of directors from taking any action to
terminate Smith Residential's status as a REIT or to amend the ownership
limitations in the charter until the board of directors adopts a resolution
recommending such action and such resolution is subsequently approved at an
annual or special meeting of stockholders by at least a majority of all the
votes entitled to be cast on the matter.
Archstone and Archstone-Smith. Subject to the rights of any class or series
of preferred shares outstanding, amendments to the declaration of trust of
Archstone and the declaration of trust of Archstone-Smith are governed by the
provisions of the Maryland REIT Law. Under the Maryland REIT Law, Archstone-
Smith's declaration of trust and Archstone's declaration of trust, with
specified exceptions, amendments to Archstone's declaration of trust and
Archstone-Smith's declaration of trust require their respective boards of
trustees to adopt a resolution which sets forth the proposed amendment, declare
that it is advisable and direct that the proposed amendment be submitted for
consideration at an annual or special meeting of the shareholders entitled to
vote to approve the amendment and require approval by at least a majority of
the outstanding shares entitled to vote.
As permitted under Maryland REIT Law, however, both the Archstone and
Archstone-Smith declarations of trust provide that the trustees, by a two-
thirds vote, may at any time amend the declaration of trust solely to enable
the trust to qualify as a REIT under the Internal Revenue Code or as a real
estate investment trust under Maryland law, without action by its shareholders.
In addition, as permitted by Maryland REIT Law, the Archstone and Archstone-
Smith declarations of trust permit the board of trustees, without any action by
the shareholders, to amend the declaration of trust to increase or decrease the
aggregate number of shares of beneficial interest or, subject to the rights of
holders of certain series of preferred shares, the number of shares of
beneficial interest of any class that the trust has authority to issue.
Amendment of the Bylaws
Smith Residential. The Smith Residential bylaws provide that, unless
otherwise provided by statute, the power to make and adopt new bylaws, or to
amend, alter or repeal the bylaws is vested exclusively with the board of
directors.
Archstone and Archstone-Smith. The Archstone declaration of trust and
Archstone-Smith declarations of trust and bylaws provide that the bylaws may be
altered, amended or repealed, and that new bylaws may be adopted, at any
meeting of the board of trustees by vote of a majority of the trustees, subject
to repeal or change by action of the shareholders of the trust entitled to vote
thereon.
Mergers, Consolidations and Sales of Assets
Smith Residential. Under the Maryland General Corporation Law, Smith
Residential board of directors may approve a consolidation, merger, share
exchange or transfer of assets by adopting a resolution that declares the
proposed transaction is advisable on substantially the terms and conditions set
forth or referred to in the
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resolution and directing that the proposed transaction be submitted for
consideration at either an annual or special meeting of the stockholders.
Notice which states that a purpose of the meeting will be to act on the
proposed consolidation, merger, share exchange or transfer of assets must be
provided to each stockholder entitled to vote on the proposed transaction and
to each stockholder not entitled to vote on the proposed transaction, except
the stockholders of a successor in a merger if the merger does not alter the
contract rights of their stock as expressly provided in the charter.
Under the Maryland General Corporation Law and the Smith Residential
charter, a proposed merger, consolidation or sale of all or substantially all
of the assets of Smith Residential requires the approval of stockholders by the
affirmative vote of two-thirds of all the votes entitled to vote on the matter.
Archstone and Archstone-Smith. Under the Maryland REIT Law, a merger
involving a Maryland real estate investment trust generally requires approval
by the affirmative vote of not less than two-thirds of all votes entitled to be
cast on the matter, unless the declaration of trust specifies a greater or
lesser percentage, but not less than a majority of all votes entitled to be
cast. The Maryland REIT Law does not address the requirements for the approval
by shareholders of a consolidation or sale of all or substantially all of the
assets of a real estate investment trust.
Subject to the rights of any class or series of preferred shares
outstanding, both the Archstone declaration of trust and the Archstone-Smith
declaration of trust provide that the trust may merge with or into another
entity, consolidate the trust with one or more other entities into a new
entity, or sell or otherwise dispose of all or substantially all of the assets
of the trust so long as such action is approved by the board of trustees and by
the shareholders at a special meeting by the affirmative vote of the holders of
not less than a majority of the shares outstanding and entitled to vote on the
matter.
Dissolution of Smith Residential, Archstone or Archstone-Smith; Termination of
REIT Status
Smith Residential. Under the Maryland General Corporation Law, Smith
Residential may be dissolved if its board of directors adopts a resolution
which declares that dissolution is advisable and directs that the proposed
dissolution be submitted for consideration at either an annual or special
meeting of the stockholders. Notice which states that a purpose of the meeting
will be to act on the proposed dissolution must be given to each stockholder
entitled to vote on the proposed dissolution. To be effective, the proposed
dissolution must be approved by the stockholders by the affirmative vote of
two-thirds of all the votes entitled to be cast.
Archstone and Archstone-Smith. The Archstone declaration of trust and the
Archstone-Smith declaration of trust permit the termination of the existence of
the trust, subject to the provisions of any class or series of shares then
outstanding, if approved by a majority of the entire board of trustees and by
the shareholders at a special meeting by the affirmative vote of not less than
a majority of the outstanding shares. In addition, the board of trustees of
Archstone and Archstone-Smith may terminate the status of the trust as a REIT,
or reorganize as a corporation under the Internal Revenue Code without a vote
of its shareholders.
Business Combinations with Interested Shareholders
The Maryland Business Combination Act provides that, unless exempted, a
Maryland real estate investment trust or corporation may not engage in business
combinations, including, among other things, mergers, dispositions of assets
valued at 10% or more of the value of the corporation's outstanding stock or of
its net worth, issuances of shares and other specified transactions, with an
"interested shareholder" or its affiliates, for five years after the most
recent date on which the interested shareholder became an interested
shareholder. Thereafter, unless specified "price criteria" and other standards
are met or an exemption is available, a business combination with an interested
shareholder or its affiliates must be recommended by the board of directors or
board of trustees and approved by:
. at least 80% of the outstanding voting shares and
. at least two-thirds of the outstanding voting shares, other than voting
shares held by the interested shareholder or any of its affiliates.
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Under the statute, an "interested shareholder" generally is defined to mean
a person or group which owns beneficially, directly or indirectly, 10% or more
of the outstanding voting shares of the corporation or real estate investment
trust. These requirements do not apply to a business combination with an
interested shareholder or its affiliates if approved by the board of directors
or board of trustees before the time the interested shareholder first became an
interested shareholder. However, in approving a transaction, the board of
directors may provide that its approval is subject to compliance, at or after
the time of approval, with any terms and conditions determined by the board.
Smith Residential. Smith Residential has elected in its charter to exempt
from the provisions of the Maryland Business Combination Act any business
combinations of any type:
. with or involving Robert H. Smith, Robert P. Kogod and all persons,
firms or corporations affiliated with either of them or acting in
concert or as a group with either of them; or
. which may be involved in the issuance of shares of capital stock in
connection with the redemption of units of Smith Partnership.
Archstone and Archstone-Smith. The Archstone board of trustees and the
Archstone-Smith board of trustees have adopted a resolution that operates to
exempt from the provisions of the Maryland Business Combination Act the merger
and the transactions related to the merger. However, each of these resolutions,
by their terms, may be altered or repealed, in whole or in part, at any time by
the respective board of trustees.
Control Share Acquisitions
The Maryland Control Share Acquisition Act provides that shares of a
Maryland real estate investment trust or corporation that are acquired in a
"control share acquisition," which is defined as the acquisition of shares
comprising one-tenth, one-third or a majority of all voting shares, have no
voting rights except:
. if approved by shareholders by the affirmative vote of two-thirds of all
the votes entitled to be cast on the matter, excluding all "interested
shares"; or
. if the acquisition of the shares has been approved or exempted at any
time before the acquisition of the shares.
The Maryland Control Share Acquisition Act is applicable to a publicly
traded Maryland real estate investment trust or corporation unless its charter
or declaration of trust, as applicable, or bylaws specifically provides that it
shall be inapplicable.
Smith Residential. The Smith Residential charter provides that the Maryland
Control Share Acquisition Act shall not apply to any acquisition of shares of
Smith Residential that is not prohibited by the terms of the charter.
Archstone and Archstone-Smith. Both the Archstone and Archstone-Smith bylaws
contain a provision that provides that the Maryland Control Share Acquisition
Act shall not apply to any acquisition by any person of shares of Archstone or
Archstone-Smith, respectively, but also provides that this bylaw provision may
be repealed, in whole or in part, at any time, whether before or after an
acquisition of control shares. Upon such repeal, the Maryland Control Share
Acquisition Act may apply to any prior or subsequent control share acquisition
to the extent provided by any successor bylaw and consistent with applicable
law.
Distributions
Smith Residential. The Maryland General Corporation Law provides that the
board of directors may not make a distribution of money or property to its
stockholders if, after the distribution, the corporation would be unable to pay
its indebtedness as it becomes due in the usual course of business or, unless
and to the extent specifically allowed by the corporation's charter, if after
the distribution, the corporation's total assets would be less than the sum of
its total liabilities plus the amount that would be needed, if the corporation
were to be
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dissolved at the time of the distribution, to satisfy the preferential rights
to distributions upon dissolution of the corporation's shareholders whose
rights upon dissolution are superior to those receiving the distribution.
Archstone and Archstone-Smith. Maryland REIT law does not specify rules for
the payment of dividends or other distributions by Maryland REITs, such as
Archstone and Archstone-Smith. Both the Archstone declaration of trust and the
Archstone-Smith declaration of trust provide that the trustees will endeavor to
declare and pay distributions as necessary for it to qualify as a REIT under
the Internal Revenue Code, so long as qualification as a REIT, in the opinion
of the board of trustees, is in the best interest of the shareholders. However,
shareholders do not have any right to a distribution unless and until
authorized by the board of trustees and declared by the trust and then subject
to the rights of holders of any class or series of preferred shares.
Board Committees
Smith Residential. Under the Maryland General Corporation Law, a board of
directors of a Maryland corporation may not delegate to a committee of the
board of directors the power to authorize dividends on stock, issue stock,
other than specified permitted issuances, recommend to stockholders any action
which requires stockholder approval, amend the bylaws, or approve any merger or
share exchange which does not require stockholder approval.
Archstone and Archstone-Smith. Under the Maryland REIT Law, a board of
trustees of a Maryland REIT may delegate any of its powers to a committee of
the board of trustees.
Shareholder Rights Plans
Smith Residential. On December 2, 1998, Smith Residential adopted a
stockholder rights plan. On that date, the Smith Residential board of directors
declared a dividend payable on December 14, 1998 of one preferred stock
purchase right for each outstanding share of Smith Residential common stock
held of record at the close of business on December 14, 1998. Shares of Smith
Residential common stock issued thereafter and prior to the redemption or
expiration of the rights or the rights distribution date, as described below,
will have an attached right. Each right entitles the registered holder under
certain circumstances to purchase from Smith Residential one one-thousandth of
a share of Series D junior participating preferred stock of Smith Residential,
at a price of $108.00 per one one-thousandth of a Series D junior participating
preferred share, subject to adjustment.
The rights distribution date will occur upon the earliest of:
. 10 days following a public announcement that a person or group has
become an acquiring person, as described below, or
. 10 business days, or a later date to be determined by the board of
directors prior to the time any person becomes an acquiring person,
following the date any person or group commences or announces an
intention to make a tender or exchange offer which, if completed, would
result in that person or group beneficially owning 15% or more of the
outstanding shares of common stock of Smith Residential, with some
exceptions.
An acquiring person is any person or group of affiliated or associated
persons which beneficially owns 15% or more of the outstanding shares of common
stock of Smith Residential, with some exceptions.
The rights will become exercisable only after the rights distribution date.
In that event, each holder of a right, other than rights beneficially owned by
the acquiring persons, will have the right to receive upon exercise of the
right a number of shares of common stock having a market value of twice the
purchase price, subject to the ownership limit and other ownership restrictions
contained in Smith Residential's charter. In the event that, after any person
or group becomes an acquiring person, either Smith Residential is acquired in a
merger or other business combination or 50% or more of its consolidated assets
or earning power are sold or transferred, then each holder of a right would be
entitled to receive, upon exercise, common stock of the acquiring company
having a market value equal to twice the exercise price of the right.
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The Smith Residential board of directors may also elect, at any time after
any person or group becomes an acquiring person and prior to the acquisition by
that person or group of 50% or more of the outstanding common stock of Smith
Residential, to exchange the rights, in whole or in part, at an exchange ratio
of one share of common stock per right, subject to adjustment. At any time
before a person or group becomes an acquiring person, the board of directors
may redeem all of the outstanding rights at a price of $.005 per right, payable
in cash, Smith Residential common stock or any other form of consideration
deemed appropriate by the board of directors. Immediately upon the redemption
of the rights, the right to exercise the rights will terminate and each right
will thereafter represent only the right to receive the redemption price.
The rights will expire on December 13, 2008, unless the expiration date is
extended or unless the rights are earlier redeemed or exchanged by Smith
Residential as provided in the stockholder rights agreement.
The exercise price, the number of rights outstanding, and the number of
Series D junior participating preferred shares or other securities or property
issuable upon exercise of the rights, are subject to adjustment under certain
circumstances from time to time to prevent dilution.
As permitted in the stockholder rights agreement, the Smith Residential
board of directors has resolved to, prior to the merger, take all actions
necessary to render the rights issued under the stockholder rights agreement
inapplicable to the merger, the partnership merger and the transactions
contemplated thereby.
Archstone. On July 11, 1994, Archstone adopted a shareholder rights plan. On
that date, the Archstone board of trustees authorized and Archstone declared a
dividend payable on July 21, 1994 of one preferred share purchase right for
each outstanding Archstone common share held of record at the close of business
on July 21, 1994. Shares of Archstone common stock issued thereafter and prior
to the redemption or expiration of the rights or the rights distribution date,
as described below, will have an attached right. Each right entitles the
registered holder under certain circumstances to purchase from Archstone one
one-hundredth of a share of Series B junior participating preferred shares of
Archstone, at a price of $60.00 per one one-hundredth of a Series B junior
participating preferred share, subject to adjustment.
The rights distribution date will occur upon the earliest of:
. 10 days following a public announcement that a person or group has
become an acquiring person, as described below, or
. 15 business days, or a later date to be determined by the board of
trustees prior to the time any person becomes an acquiring person,
following the date any person or group commences or announces an
intention to make a tender or exchange offer which, if completed, would
result in that person beneficially owning 25% or more of the outstanding
common shares of Archstone, with some exceptions.
An acquiring person is any person or group of affiliated or associated
persons which beneficially owns 20% or more of the outstanding common shares of
Archstone, with some exceptions.
The rights will become exercisable only after the rights distribution date.
In that event, each holder of a right, other than rights beneficially owned by
the acquiring persons, will have the right to receive upon exercise of the
right a number of common shares having a market value of twice the purchase
price. In the event that, after any person or group becomes an acquiring
person, either Archstone is acquired in a merger or other business combination
or 50% or more of its consolidated assets or earning power are sold, then each
holder of a right would be entitled to receive, upon exercise, common stock of
the acquiring company having a market value equal to twice the exercise price
of the right.
The Archstone board of trustees may also elect, at any time after any person
or group becomes an acquiring person and prior to the acquisition by that
person or group of 50% or more of the outstanding common shares of Archstone,
to exchange the rights, in whole or in part, at an exchange ratio of one common
share or one one-hundredth of a Series B junior participating preferred share
per right, subject to adjustment. At any time before a person or group becomes
an acquiring person, the board of trustees may redeem all of the
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outstanding rights at a price of $.01 per right, payable in cash, Archstone
common shares or any other form of consideration deemed appropriate by the
board of trustees. Immediately upon the redemption of the rights, the right to
exercise the rights will terminate and each right will thereafter represent
only the right to receive the redemption price.
The rights will expire on July 21, 2004, unless the expiration date is
extended or unless the rights are earlier redeemed or exchanged by Archstone as
provided in the shareholder rights agreement.
The exercise price, the number of rights outstanding, and the number of
Series B junior participating preferred shares or other securities or property
issuable upon exercise of the rights, are subject to adjustment under certain
circumstances from time to time to prevent dilution.
As permitted in the shareholder rights agreement, the Archstone board of
trustees have resolved to amend the shareholder rights agreement to delay the
rights distribution date with respect to the acquisition of any shares of
beneficial interest of Archstone by Archstone-Smith and to provide for the
termination of the rights agreement following the completion of the merger to
accomplish the restructuring of Archstone into an UPREIT.
Archstone-Smith. On August 31, 2001, Archstone-Smith adopted a shareholder
rights plan. On that date, Archstone, as the sole trustee of Archstone-Smith,
authorized and Archstone declared a dividend, to be paid to holders of record
of common shares on the effective date of the reorganization of Archstone into
an UPREIT, of one preferred share purchase right for each outstanding
Archstone-Smith common share. Archstone-Smith common shares issued after that
date, including shares issued in the reorganization of Archstone into an UPREIT
and in the merger, and prior to the redemption or expiration of the rights or
the rights distribution date, as described below, will have an attached right.
Each right entitles the registered holder under certain circumstances to
purchase from Archstone-Smith one one-hundredth of a share of Series B junior
participating preferred shares of Archstone-Smith, at a price of $75 per one
one-hundredth of a Series B junior participating preferred share, subject to
adjustment.
The rights distribution date will occur upon the earliest of:
. 10 days following a public announcement that a person or group has
become an acquiring person, as described below, or
. 15 business days, or a later date to be determined by the board of
trustees prior to the time any person becomes an acquiring person,
following the date any person or group commences or announces an
intention to make a tender or exchange offer which, if completed, would
result in that person beneficially owning 15% or more of the outstanding
common shares of Archstone-Smith, with some exceptions.
An acquiring person is any person or group of affiliated or associated
persons which beneficially owns 15% or more of the outstanding common shares of
Archstone-Smith, with some exceptions.
The rights will become exercisable only after the rights distribution date.
In that event, each holder of a right, other than rights beneficially owned by
the acquiring persons, will have the right to receive upon exercise of the
right a number of common shares having a market value of twice the purchase
price. In the event that, after any person or group becomes an acquiring
person, either Archstone-Smith is acquired in a merger or other business
combination or 50% or more of its consolidated assets or earning power are
sold, then each holder of a right would be entitled to receive, upon exercise,
common stock of the acquiring company having a market value equal to twice the
exercise price of the right.
The board of trustees of Archstone-Smith may also elect, at any time after
any person or group becomes an acquiring person and prior to the acquisition by
that person or group of 50% or more of the outstanding common shares of
Archstone-Smith, to exchange the rights, in whole or in part, at an exchange
ratio of one common share or one one-hundredth of a Series B junior
participating preferred share per right, subject to
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adjustment. At any time before a person or group becomes an acquiring person,
the board of trustees may redeem all of the outstanding rights at a price of
$0.001 per right, payable in cash, Archstone-Smith common shares or any other
form of consideration deemed appropriate by the board of trustees. Immediately
upon the redemption of the rights, the right to exercise the rights will
terminate and each right will thereafter represent only the right to receive
the redemption price.
Any redemption of rights or any modification or termination of the
shareholders rights plan must be approved by a majority of the board of
trustees of Archstone-Smith who are not acquiring persons or associated with an
acquiring person and who were members of the board of trustees immediately
prior to the time any person becomes an acquiring person.
The rights will expire on August 31, 2011, unless the expiration date is
extended or unless the rights are earlier redeemed or exchanged by Archstone-
Smith as provided in the shareholder rights agreement.
The exercise price, the number of rights outstanding, and the number of
Series B junior participating preferred shares or other securities or property
issuable upon exercise of the rights, are subject to adjustment under certain
circumstances from time to time to prevent dilution.
REIT Ownership Limitations
Smith Residential. Smith Residential's charter provides that, subject to
certain exceptions, no holder may own, or be deemed to own by virtue of the
attribution provisions of the Internal Revenue Code, more than 9.8% in number
or value of the issued and outstanding shares of common stock or all of the
classes of stock of Smith Residential. The board of directors in its discretion
may waive this ownership limit or the ownership limit described in the next
paragraph with respect to a holder that is an entity, but not an individual, if
such holder's ownership will not then or in the future jeopardize Smith
Residential's status as a REIT and certain other requirements are met.
In addition, holders that have certain relationships with the Smith and
Kogod families are prohibited from acquiring stock or rights to acquire stock,
if, as a result of, and after giving effect to, such acquisition, any tenant
would be regarded as a related party tenant for purposes of section
856(d)(2)(B) of the Internal Revenue Code and Smith Residential 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 Internal Revenue Code, any shares of any class of Smith
Residential stock if such ownership or acquisition:
. would cause more than 50% in value of Smith Residential's shares to be
owned, either directly or constructively under the applicable
attribution rules of the Internal Revenue Code, by five or fewer
individuals, as defined in the Internal Revenue Code to include various
tax-exempt entities, other than, in general, qualified domestic pension
funds, or
. would result in Smith Residential's shares being beneficially owned by
less than 100 persons, determined without reference to any rules of
attribution.
If any stockholder purports to transfer shares to a person and either the
transfer would result in Smith Residential failing to qualify as a REIT, or
such transfer would cause the transferee to hold shares in excess of the
ownership limits described above, the purported transfer will be null and void.
In that event, in the case of common stock, 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 capital stock to Smith Residential
in exchange for excess common stock, which will be deemed to be held by Smith
Residential 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
211
attribution rules of the Internal Revenue 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 common stock, which will be
deemed to be held by Smith Residential as trustee of a trust for the exclusive
benefit of the person or persons to whom the shares of excess common stock 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 common stock will not be
entitled to vote the shares of excess common stock and will not be entitled to
receive any dividends or distributions. Any dividend or distribution paid on
shares of capital stock prior to Smith Residential's discovery that such shares
have been exchanged for excess stock shall be repaid to Smith Residential 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 common stock so long as consideration received for designating such
transferee does not exceed a price that is equal to the lesser of:
. in the case of a deemed exchange for excess common stock resulting from
a transfer, the price paid for the shares in such transfer or, in the
case of a deemed exchange for excess common stock resulting from some
other event, the fair market value, on the date of the deemed exchange,
of the shares deemed exchanged, and
. the fair market value of the shares for which such excess common stock
will be deemed to be exchanged on the date of the 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 on which
Smith Residential shares were traded on the New York Stock Exchange. The excess
common stock so transferred will automatically be deemed to be exchanged for
shares of capital stock. Smith Residential may purchase excess common stock for
the lesser of the price paid or the average closing price for the five days
immediately preceding such purchase on which the Smith Residential shares were
traded on the New York Stock Exchange. Under certain conditions, Smith
Residential may elect to redeem the excess common stock for units of Smith
Partnership.
If the foregoing transfer restrictions are determined to be void or invalid
by virtue of any legal decision, statute, rule or regulation, then the intended
transferee of any excess common stock may be deemed, at Smith Residential's
option, to have acted as an agent on Smith Residential's behalf in acquiring
such excess common stock and to hold such excess common stock on Smith
Residential's behalf.
All certificates representing Smith Residential shares 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 Internal Revenue Code or regulations thereunder, in number or
value of the issued and outstanding shares of capital stock, must file a
written notice with Smith Residential containing the information specified in
the Smith Residential charter no later than January 30th of each year. In
addition, each stockholder shall be required upon demand to disclose to Smith
Residential in writing such information as it may request in order to determine
the effect of such stockholder's direct, indirect and constructive ownership of
such shares on Smith Residential's REIT status.
Archstone. For Archstone to qualify as a real estate investment trust under
the Internal Revenue Code, no more than 50% in value of Archstone's shares,
after taking into account options to acquire shares, may be owned, directly or
indirectly, by five or fewer individuals, as defined in the Internal Revenue
Code to include various entities and constructive ownership among specified
family members, during the last half of a taxable year or during a
proportionate part of a short taxable year. Archstone shares must also 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.
212
Subject to various exceptions, no holder is permitted to own, or be deemed
to own by virtue of the attribution provisions of the Internal Revenue Code,
more than 9.8% in number of shares or value of the outstanding shares. The
Archstone board of trustees, upon receipt of a ruling from the Internal Revenue
Service or an opinion of counsel or other evidence satisfactory to the board of
trustees and upon such other conditions as the board of trustees may direct,
may also exempt a proposed transferee from the ownership limit. The proposed
transferee must give written notice to Archstone of the proposed transfer at
least 30 days prior to any transfer which, if consummated, would result in the
intended transferee owning shares in excess of the ownership limit. The
Archstone board of trustees may require such opinions of counsel, affidavits,
undertakings or agreements as it may deem necessary or advisable in order to
determine or ensure its status as a real estate investment trust. Any transfer
of shares that would:
. create a direct or indirect ownership of shares in excess of the
ownership limit;
. result in shares being beneficially owned by fewer than 100 persons,
determined without reference to any rules of attribution, as provided in
section 856(a) of the Internal Revenue Code;
. result in Archstone-Smith being "closely held" within the meaning of
section 856(h) of the Internal Revenue Code; or
. result in Archstone-Smith failing to qualify as a REIT,
shall be null and void, and the intended transferee will acquire no rights to
shares. The foregoing restrictions on transferability and ownership will not
apply if the board of trustees determines that it is no longer in Archstone's
best interests to attempt to qualify, or to continue to qualify, as a real
estate investment trust.
Any shares the purported transfer of which would result in a person owning
shares in excess of the ownership limit or cause Archstone to become "closely
held" under section 856(h) of the Internal Revenue Code that is not otherwise
permitted as provided above will constitute excess shares. These excess shares
will be transferred pursuant to the declaration of trust to a party not
affiliated with Archstone who is designated by Archstone as the trustee of a
trust for the exclusive benefit of an organization described in sections
170(b)(1)(A) and 170(c) of the Internal Revenue Code and identified by the
board of trustees as the beneficiary or beneficiaries of the trust, until such
time as the excess shares are transferred to a person whose ownership will not
violate the restrictions of ownership. While these excess shares are held in
trust, distributions on such excess shares will be paid to the trust for the
benefit of the beneficiary and may only be voted by the trustee for the benefit
of the beneficiary. Subject to the ownership limit, the excess shares will be
transferred by the trustee at Archstone's direction to any person, if the
excess shares would not be excess shares in the hands of such person. The
purported transferee will receive the lesser of:
. the price paid by the purported transferee for the excess shares, or, if
no consideration was paid, fair market value on the day of the event
causing the excess shares to be held in trust; and
. the price received from the sale or other disposition of the excess
shares held in trust.
Any proceeds in excess of the amount payable to the purported transferee
will be paid to the beneficiary. In addition, such excess shares held in trust
are subject to purchase by Archstone for a 90-day period at a purchase price
equal to the lesser of:
. the price paid for the excess shares by the purported transferee, or, if
no consideration was paid, fair market value at the time of event
causing the shares to be held in trust; and
. the fair market value of the excess shares on the date Archstone-Smith
elects to purchase such shares.
Fair market value, for these purposes, means
. the last reported sales price on the New York Stock Exchange on the
trading day immediately preceding the relevant date,
213
. if not then traded on the New York Stock Exchange, the last reported
sales price on the trading day immediately preceding the relevant date
as reported on any exchange or quotation systems, or
. if not then traded through any exchange or quotation system, then the
market price on the relevant date as determined in good faith by the
board of trustees.
From and after the purported transfer to the purported transferee of the
excess shares, the purported transferee will cease to be entitled to
distributions, other than liquidating distributions, voting rights and other
benefits with respect to the excess shares except the right to payment on the
transfer of the excess shares as described above. Any distribution paid to a
purported transferee on excess shares prior to the discovery by Archstone that
such excess shares have been transferred in violation of the provisions of the
declaration of trust will be repaid, upon demand, to Archstone, and Archstone
will pay any such amounts to the trust for the benefit of the beneficiary. If
the foregoing transfer restrictions are determined to be void, invalid or
unenforceable by any court of competent jurisdiction, then the purported
transferee of any excess shares may be deemed, at Archstone's option, to have
acted as an agent on Archstone's behalf in acquiring such excess shares and to
hold such excess shares on Archstone's behalf.
All certificates evidencing shares bear a legend referring to the
restrictions described above.
All persons who own, directly or by virtue of the attribution provisions of
the Internal Revenue Code, more than 5%, or such other percentage between 0.5%
and 5%, as provided in the rules and regulations promulgated under the Internal
Revenue Code, of the number or value of Archstone's outstanding shares must
give Archstone a written notice containing certain information by January 31 of
each year. In addition, each shareholder is upon demand required to disclose to
Archstone in writing such information with respect to the direct, indirect and
constructive ownership of shares as the board of trustees deems reasonably
necessary to comply with the provisions of the Internal Revenue Code applicable
to a real estate investment trust, to determine Archstone's status as a real
estate investment trust, to comply with the requirements of any taxing
authority or governmental agency or to determine any such compliance.
In addition to the foregoing restrictions, certain additional ownership
limitations and related provisions apply to the Archstone preferred shares.
Archstone-Smith. Substantially the same restrictions on transferability and
ownership that are contained in the current Archstone declaration of trust and
that apply to the Archstone common shares and Archstone Series A, C, D, E, F
and G preferred shares will also be contained in the Archstone-Smith
declaration of trust and will apply to the Archstone-Smith common shares and
the Archstone-Smith Series A, C, D, E, F and G preferred shares. Substantially
the same restrictions on transferability and ownership that are contained in
the current Smith Residential charter and that apply to the shares of Smith
Residential Series A, C, E, F and G preferred stock will also be contained in
the Archstone-Smith declaration of trust and will apply to the Archstone-Smith
Series H, I, J, K and L preferred shares. Therefore, the current holders of the
Archstone common shares, Archstone preferred shares and shares of Smith
Residential preferred stock will be subject to substantially the same ownership
restrictions both before and after the merger. The current holders of the Smith
Residential common stock, however, will become subject to the new ownership
restrictions applicable to the Archstone-Smith common shares as a result of the
merger. Refer to "Description of Archstone-Smith Shares of Beneficial
Interest--REIT Ownership Limitations and Transfer Restrictions Applicable to
Archstone-Smith Common Shares and Series A, C, D, E, F and G Preferred Shares"
and "--REIT Ownership Limitations and Transfer Restrictions Applicable to
Archstone-Smith Series H, I, J, K and L Preferred Shares" on pages 192 and 194,
respectively.
214
LEGAL MATTERS
The validity of the issuance of Archstone common and preferred units and the
Archstone-Smith common shares offered by this consent solicitation
statement/prospectus will be passed upon for Archstone and Archstone-Smith by
Mayer, Brown & Platt, Chicago, Illinois. As to certain matters of Maryland law,
Mayer, Brown & Platt will rely on the opinion of Ballard, Spahr Andrews &
Ingersoll, LLP, Baltimore, Maryland. Roger J. Kiley, Jr., a director of Smith
Residential, is a partner in Mayer, Brown & Platt.
The qualification of Archstone-Smith as a REIT and the classification of
Archstone as a partnership for federal income tax purposes will be passed upon
for Archstone-Smith and Archstone by Mayer, Brown & Platt, Chicago, Illinois.
The qualification of Smith Residential as a REIT and the classification of
Smith Partnership as a partnership for federal income tax purposes will be
passed upon for Smith Residential and Smith Partnership by Hogan & Hartson
L.L.P., Washington, D.C.
The federal income tax consequences of the partnership merger to Smith
Partnership unitholders that receive Archstone units in the partnership merger
will be passed upon for Archstone-Smith and Archstone by Mayer, Brown & Platt,
Chicago, Illinois and for Smith Residential and Smith Partnership by Hogan &
Hartson, L.L.P., Washington, D.C.
EXPERTS
The consolidated financial statements and schedule of Archstone as of
December 31, 2000 and 1999, and for each of the years in the three-year period
ended December 31, 2000, have been incorporated by reference herein and in the
registration statement in reliance upon the reports of KPMG LLP, independent
certified public accountants, incorporated by reference herein, and upon the
authority of said firm as experts in accounting and auditing.
With respect to the unaudited interim financial information of Archstone for
the periods ended March 31, and June 30, 2001 and 2000, incorporated by
reference herein, the independent certified public accountants have reported
that they applied limited procedures in accordance with professional standards
for review of such information. However, their separate reports included in
Archstone's quarterly reports on Form 10-Q for the three month period ended
March 31, 2001 and the three and six month periods ended June 30, 2001,
incorporated by reference herein, state that they did not audit and they do not
express an opinion on that interim financial information. Accordingly, the
degree of reliance on their reports on such information should be restricted in
light of the limited nature of the review procedures applied. The accountants
are not subject to the liability provisions of section 11 of the Securities Act
of 1933 for their reports on the unaudited interim financial information
because those reports are not a "report" or a "part" of the registration
statement prepared or certified by the accountants within the meaning of
sections 7 and 11 of the Act.
The audited financial statements and schedule of Smith Partnership included
in its Annual Report on Form 10-K and the audited financial statements included
in the Form 8-Ks which are incorporated by reference in this consent
solicitation statement/prospectus and elsewhere in the registration statement
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
With respect to the unaudited interim financial information for the quarters
ended March 31, 2001 and June 30, 2000 and 2001, Arthur Andersen LLP has
applied limited procedures in accordance with professional standards for a
review of that information. However, their separate report thereon states that
they did not audit and they do not express an opinion of that interim financial
information. Accordingly, the degree of reliance on their report on that
information should be restricted in light of the limited nature of the review
procedures applied. In addition, the accountants are not subject to the
liability provisions of section 11 of the Securities Act of 1933 for their
report on the unaudited interim financial information because that report is
not a "report" or a "part" of the registration statement prepared or certified
by the accountants within the meaning of sections 7 and 11 of the Act.
215
WHERE YOU CAN FIND MORE INFORMATION
Archstone and Archstone-Smith have filed with the SEC a registration
statement on Form S-4 of which this consent solicitation statement/prospectus
forms a part. The registration statement registers the distribution to Smith
Partnership unitholders of the Archstone units to be issued in connection with
the partnership merger and the Archstone-Smith shares into which they are
convertible. The registration statement, including the attached exhibits and
schedules, contains additional relevant information about the Archstone units
and Archstone-Smith shares. The rules and regulations of the SEC allow us to
omit specified information included in the registration statement from this
consent solicitation statement/prospectus. In addition, Archstone, Smith
Residential and Smith Partnership file reports, proxy statements and other
information with the SEC under the Securities Exchange Act of 1934. You may
read and copy any of this information at the following locations of the SEC:
Public Reference Room
450 Fifth Street, N.W.
Room 1024
Washington, D.C. 20549
You may obtain information on the operation of the SEC's Public Reference
Room by calling the SEC at 1-800-SEC-0330.
The SEC also maintains an Internet web site that contains reports, proxy
statements and other information regarding issuers, including Archstone-Smith,
Archstone, Smith Residential and Smith Partnership who file electronically with
the SEC. The address of that site is http://www.sec.gov. Reports, proxy
statements and other information concerning Archstone-Smith, following the
merger, Archstone and Smith Residential may also be inspected at the offices of
the New York Stock Exchange, which are located at 20 Broad Street, New York,
New York 10005.
The SEC allows Archstone-Smith, Archstone, Smith Residential and Smith
Partnership to "incorporate by reference" information in this document, which
means that the companies can disclose important information to you by referring
you to another document filed separately with the SEC. The information
incorporated by reference is considered to be a part of this consent
solicitation statement/prospectus, except for any information that is
superseded by information included directly in this document.
The documents listed below that Archstone, Smith Residential and Smith
Partnership have previously filed with the SEC are considered to be a part of
this consent solicitation statement/prospectus. They contain important business
and financial information about the companies that is not included in or
delivered with this document.
Archstone SEC Filings (File No. 1-10272):
2000 Annual Report on Form 10-K.............. Filed on March 9, 2001
Quarterly Reports on Form 10-Q............... Filed on May 15, 2001 and August 14, 2001
Current Reports on Form 8-K.................. Filed on February 16, 2001, June 19, 2001
and September 4, 2001
Registration Statements on Form 8-A.......... Filed with respect to, and setting forth
the descriptions of, Archstone common and
preferred shares and the related preferred
share purchase rights, including any
amendments or reports filed for the purpose
of updating such description
216
Smith Residential SEC Filings (File No. 1-
13174):
2000 Annual Report on Form 10-K.............. Filed on March 20, 2001
Quarterly Reports on Form 10-Q............... Filed on May 2, 2001, as amended on June
22, 2001, and August 14, 2001
Current Reports on Form 8-K.................. Filed on January 5, 2000 (as amended on
January 24, 2000 and March 2, 2000),
November 9, 2000, May 9, 2001, June 19,
2001, June 25, 2001, as amended on June 26,
2001, and August 28, 2001
Registration Statements on Form 8-A.......... Filed with respect to, and setting forth
the description of, the Smith Residential
common stock and related preferred stock
purchase rights, including any amendments
or reports filed for the purpose of
updating such description
Smith Partnership SEC Filings (File No. 0-
25968):
2000 Annual Report on Form 10-K.............. Filed on March 30, 2001
Quarterly Report on Form 10-Q................ Filed on May 4, 2001
Current Reports on Form 8-K.................. Filed on January 5, 2000 (as amended on
January 24, 2000 and March 2, 2000), May 9,
2001, June 19, 2001 and August 7, 2001
Registration Statements on Form 8-A.......... Filed with respect to, and setting forth
the description of, the Smith Partnership
units, including any amendments or reports
filed for the purpose of updating such
description
Archstone, Smith Residential and Smith Partnership incorporate by reference
additional documents that either company may file with the SEC between the date
of this consent solicitation statement/prospectus and the date of each
company's special meeting. These include periodic reports, such as Annual
Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on
Form 8-K, as well as proxy materials.
Documents incorporated by reference are available from the companies,
without charge, excluding all exhibits unless specifically incorporated by
reference as an exhibit to this document. Shareholders of Archstone,
stockholders of Smith Residential or unitholders of Smith Partnership may
obtain documents incorporated by reference in this document by requesting them
in writing or by telephone from the appropriate company at the following
addresses:
Archstone Communities Trust Charles E. Smith Residential Realty, Inc.
7670 South Chester Street, Suite 100 2345 Crystal Drive
Englewood, Colorado 80112 Arlington, Virginia 22202
Attention: Julie Brubaker Attention: Greg Samay
Telephone: (800) 982-9293 Telephone: (703) 769-1029
If you would like to request documents, in order to ensure timely delivery
you must do so at least five business days before the date of the special
meetings. This means you must request this information no later than October
22, 2001. If you request any incorporated documents, we will mail them to you
by first class mail, or another equally prompt means, within one business day
after we receive your request.
Archstone has supplied all information contained or incorporated by
reference in this consent solicitation statement/prospectus relating to
Archstone, as well as all pro forma financial information, and Smith
Residential has supplied all information contained or incorporated by reference
in this consent solicitation statement/prospectus relating to Smith Residential
and Smith Partnership. This document constitutes the prospectus of Archstone
and Archstone-Smith and a consent solicitation statement of Smith Partnership.
217
WHAT INFORMATION YOU SHOULD RELY ON
No person has been authorized to give any information or to make any
representation that differs from, or adds to, the information discussed in this
consent solicitation statement/ prospectus or in the annex attached hereto
which are specifically incorporated by reference. Therefore, if anyone gives
you different or additional information, you should not rely on it.
This document is dated September 20, 2001. The information contained in this
consent solicitation statement/prospectus speaks only as of its date unless the
information specifically indicates that another date applies. This consent
solicitation statement/prospectus does not constitute an offer to exchange or
sell, or a solicitation of an offer to exchange or purchase, Archstone common
or preferred units or Archstone-Smith common shares or to ask for consents, to
or from any person to whom it is unlawful to direct these activities.
218
INDEX TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Archstone-Smith Operating Trust Pro Forma Condensed Combined Financial
Statements.............................................................. F-2
Pro Forma Condensed Combined Balance Sheet as of June 30, 2001
(Unaudited)............................................................. F-3
Pro Forma Condensed Combined Statement of Earnings From Operations for
the six months ended June 30, 2001 (Unaudited).......................... F-4
Pro Forma Condensed Combined Statement of Earnings From Operations for
the year ended December 31, 2000 (Unaudited)............................ F-5
Notes to Pro Forma Condensed Combined Financial Statements (Unaudited)... F-6
Archstone-Smith Trust Pro Forma Condensed Combined Financial Statements.. F-15
Pro Forma Condensed Combined Balance Sheet as of June 30, 2001
(Unaudited)............................................................. F-16
Pro Forma Condensed Combined Statement of Earnings From Operations for
the six months ended June 30, 2001 (Unaudited).......................... F-17
Pro Forma Condensed Combined Statement of Earnings From Operations for
the year ended December 31, 2000 (Unaudited)............................ F-18
Notes to Pro Forma Condensed Combined Financial Statements (Unaudited)... F-19
F-1
ARCHSTONE-SMITH OPERATING TRUST
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(Unaudited)
The accompanying unaudited pro forma condensed combined financial statements
set forth Archstone and Smith Partnership as a combined entity, giving effect
to the proposed partnership merger as if it had occurred on the dates indicated
below and after giving effect to certain pro forma adjustments. The partnership
merger will be accounted for using the purchase method of accounting in
accordance with Statement of Financial Accounting Standards No. 141, "Business
Combinations." To facilitate the transaction, Archstone will be reorganized
into an umbrella partnership real estate investment trust, or "UPREIT," format
through a series of merger transactions. The transactions involved in the
conversion of Archstone from a REIT to an UPREIT structure will be accounted
for at historical cost since there is no change in ownership associated with
the reorganization. Archstone-Smith Trust and Archstone-Smith Operating Trust
will be the surviving entities resulting from these transactions. In accordance
with the terms of the agreement, each outstanding Smith Partnership common unit
will be converted into the right to receive 1.975 Archstone common units and
each outstanding preferred unit of Smith Partnership will be converted into the
right to receive a corresponding series of preferred units of Archstone.
Additionally, partners of Charles E. Smith Residential Realty L.P., a Delaware
limited partnership in which Smith Residential holds an interest, will receive
1.975 common units of Archstone for each common limited partnership interest.
In addition to the proposed partnership merger, the accompanying unaudited
pro forma condensed combined financial statements also present the pro forma
impact of certain acquisitions and dispositions of operating communities by
Smith Partnership during 2000. This investment activity was previously reported
in Smith Partnership's Form 8-K dated October 25, 2000 which is incorporated
herein by reference.
The accompanying unaudited pro forma condensed combined statement of
earnings from operations for the six months ended June 30, 2001 is presented as
if the partnership merger had been consummated on January 1, 2000. The
accompanying unaudited pro forma condensed combined statement of earnings from
operations for the year ended December 31, 2000 is presented as if the
partnership merger and the 2000 Smith Partnership acquisition and disposition
transactions had been consummated on January 1, 2000. The accompanying
unaudited pro forma condensed combined balance sheet is presented as if the
partnership merger had occurred on June 30, 2001. In the opinion of management,
all material adjustments necessary to reflect the effects of these transactions
and related assumptions have been made.
The pro forma condensed combined financial statements should be read in
conjunction with the historical financial statements of Archstone and Smith
Partnership, as set forth in their respective quarterly reports on Form 10-Q
for the six months ended June 30, 2001 and 2000 annual reports on Form 10-K all
of which are incorporated by reference into this document. See "Where You Can
Find More Information" beginning on page 216. The pro forma unaudited condensed
combined financial statements are presented for informational purposes only and
are not necessarily indicative of what the actual combined financial position
or results of operations of Archstone and Smith Partnership would have been for
the periods presented, nor do they purport to represent the forecasted results
of future periods.
F-2
ARCHSTONE-SMITH OPERATING TRUST
PRO FORMA COMBINED CONDENSED BALANCE SHEET
June 30, 2001
(In thousands, except per unit amounts)
(Unaudited)
Smith Partnership
-----------------------------------------
Pro Forma
--------------------------- Archstone-Smith
Archstone Purchase Price Purchase Merger Operating Trust
Historical(a) Historical(a) Adjustments(b) Value(b) Adjustments Pro Forma
------------- ------------- -------------- ---------- ----------- ---------------
Assets
------
Real estate............. $4,349,595 $2,270,153 $1,169,196 $3,439,349 $ -- $7,788,944
Less accumulated
depreciation........... 361,358 286,180 (286,180) -- -- 361,358
---------- ---------- ---------- ---------- ------- ----------
3,988,237 1,983,973 1,455,376 (c) 3,439,349 -- 7,427,586
Investment in and
advances to
unconsolidated property
service businesses..... -- 114,015 -- 114,015 -- 114,015
Investment in and
advances to
unconsolidated real
estate entities........ 212,649 55,499 -- 55,499 -- 268,148
---------- ---------- ---------- ---------- ------- ----------
Net investments..... 4,200,886 2,153,487 1,455,376 3,608,863 -- 7,809,749
Cash and cash
equivalents............ 89,162 -- (64,083)(d) (64,083) (5,934)(j) 19,145
Restricted cash in tax-
deferred exchange
escrow................. 260,935 1,492 -- 1,492 -- 262,427
Other assets............ 99,608 66,227 (14,481)(e) 51,746 -- 151,354
---------- ---------- ---------- ---------- ------- ----------
Total assets........ $4,650,591 $2,221,206 $1,376,812 $3,598,018 $(5,934) $8,242,675
========== ========== ========== ========== ======= ==========
Liabilities and
Unitholders' Equity
--------------------
Liabilities:
Unsecured credit
facilities........... $ -- $ 64,000 $ -- $ 64,000 $ -- $ 64,000
Long-term unsecured
debt................. 1,390,219 -- -- -- -- 1,390,219
Mortgages payable..... 831,653 1,276,584 30,713 (f) 1,307,297 -- 2,138,950
Accounts payable,
accrued expenses and
other liabilities.... 140,664 60,403 -- 60,403 -- 201,067
---------- ---------- ---------- ---------- ------- ----------
Total liabilities... 2,362,536 1,400,987 30,713 1,431,700 -- 3,794,236
---------- ---------- ---------- ---------- ------- ----------
Minority interest:
Perpetual preferred
units and other...... 73,180 -- -- -- -- 73,180
Convertible operating
partnership units.... 20,150 -- -- -- -- 20,150
---------- ---------- ---------- ---------- ------- ----------
Total minority
interest........... 93,330 -- -- -- -- 93,330
---------- ---------- ---------- ---------- ------- ----------
Other common
unitholders' interests
at redemption value.... -- 658,284 (26,001) 632,283 -- 632,283
---------- ---------- ---------- ---------- ------- ----------
Unitholders' equity:
Convertible preferred
units, at liquidation
value................ 80,166 156,500 79,185 (k) 235,685 (79,185)(k) 236,666
Cumulative convertible
redeemable preferred
units, at liquidation
value................ 99,535 50,000 (3,471)(k) 46,529 3,471 (k) 149,535
Common units (121,246
historical and
171,298 pro forma at
June 30, 2001)....... 2,015,024 (44,565) 1,296,386 (i) 1,251,821 (1,500)(j) 3,336,625
79,185 (k)
(3,471)(k)
(4,434)(j)
---------- ---------- ---------- ---------- ------- ----------
Total unitholders'
equity............. 2,194,725 161,935 1,372,100 (h) 1,534,035 (5,934) 3,722,826
---------- ---------- ---------- ---------- ------- ----------
Total liabilities
and unitholders'
equity............. $4,650,591 $2,221,206 $1,376,812 $3,598,018 $(5,934) $8,242,675
========== ========== ========== ========== ======= ==========
See accompanying notes to pro forma combined condensed balance sheet.
F-3
ARCHSTONE-SMITH OPERATING TRUST
PRO FORMA CONDENSED COMBINED STATEMENT OF EARNINGS FROM OPERATIONS
Six Months Ended June 30, 2001
(In thousands, except per unit amounts)
(Unaudited)
Smith Pro Forma Archstone-Smith
Archstone Partnership Merger Operating Trust
Historical(l) Historical(l) Adjustments Pro Forma
------------- ------------- ----------- ---------------
Revenues:
Rental revenue........ $327,342 $215,721 $ -- $543,063
Income from
unconsolidated real
estate entities...... 1,211 9,091 -- 10,302
Other income.......... 7,282 190 -- 7,472
-------- -------- ------ --------
335,835 225,002 -- 560,837
-------- -------- ------ --------
Expenses:
Rental expenses....... 75,297 71,136 -- 146,433
Real estate taxes..... 28,798 18,160 -- 46,958
Depreciation on real
estate investments... 61,495 25,400 3,554 (n) 90,449
Interest expense...... 67,076 44,489 (2,945)(o) 108,620
General and
administrative
expenses............. 11,806 5,917 -- (p) 17,723
Provision for possible
loss on investments.. 9,909 772 -- 10,681
Other expenses........ 1,032 3,347 -- 4,379
-------- -------- ------ --------
255,413 169,221 609 425,243
-------- -------- ------ --------
Earnings from
operations............. 80,422 55,781 (609) 135,594
Less:
Minority interest-
perpetual preferred
units................ 3,134 -- -- 3,134
Minority interest-
convertible operating
partnership units.... 778 -- -- 778
Plus: gains on
dispositions of
depreciated real
estate, net....... 70,521 -- -- 70,521
-------- -------- ------ --------
Net earnings from
continuing operations.. 147,031 55,781 (609) 202,203
Less: preferred unit
distributions........ 11,211 10,529 -- 21,740
-------- -------- ------ --------
Net earnings from
continuing operations
attributable to common
units--basic........... $135,820 $ 45,252 $ (609) $180,463
======== ======== ====== ========
Weighted average common
units outstanding
--basic(q)............. 121,569 192,406
-------- --------
Weighted average common
units outstanding
--diluted(q)........... 127,306 213,137
-------- --------
Net earnings from
continuing operations
per common unit:
Basic(q).............. $ 1.12 $ 0.94
======== ========
Diluted(q)............ $ 1.10 $ 0.91
======== ========
See accompanying notes to pro forma condensed combined statements of earnings
from operations.
F-4
ARCHSTONE-SMITH OPERATING TRUST
PRO FORMA CONDENSED COMBINED STATEMENT OF EARNINGS FROM OPERATIONS
Year Ended December 31, 2000
(In thousands, except per unit amounts)
(Unaudited)
Smith Partnership
----------------------------------------
Pro Forma Archstone-Smith
Archstone Acquisitions/ Pre-Merger Merger Operating Trust
Historical(l) Historical(l) Dispositions(m) Pro Forma Adjustments Pro Forma
------------- ------------- --------------- ---------- ----------- ---------------
Revenues:
Rental revenue......... $688,544 $383,233 $10,737 $393,970 $ -- $1,082,514
Income from
unconsolidated real
estate entities....... 2,575 10,838 -- 10,838 -- 13,413
Other income........... 32,115 345 -- 345 -- 32,460
-------- -------- ------- -------- ------- ----------
723,234 394,416 10,737 405,153 -- 1,128,387
-------- -------- ------- -------- ------- ----------
Expenses:
Rental expenses........ 166,800 113,786 4,697 118,483 -- 285,283
Real estate taxes...... 58,808 33,010 902 33,912 -- 92,720
Depreciation on real
estate investments.... 143,694 44,778 1,462 46,240 11,669 (n) 201,603
Interest expense....... 145,173 78,371 5,608 83,979 (6,042)(o) 223,110
General and
administrative
expenses.............. 23,157 10,155 -- 10,155 -- (p) 33,312
Provision for possible
loss on investments... 5,200 -- -- -- -- 5,200
Other expenses......... 3,936 1,135 -- 1,135 -- 5,071
-------- -------- ------- -------- ------- ----------
546,768 281,235 12,669 293,904 5,627 846,299
-------- -------- ------- -------- ------- ----------
Earnings from
operations............. 176,466 113,181 (1,932) 111,249 (5,627) 282,088
Less:
Minority interest-
perpetual preferred
units................. 5,915 -- -- -- -- 5,915
Minority interest-
convertible operating
partnership units..... 1,326 -- -- -- -- 1,326
Plus: gains on
dispositions of
appreciated real
estate, net............ 93,071 66,067 -- 66,067 -- 159,138
-------- -------- ------- -------- ------- ----------
Net earnings (loss) from
continuing operations
before extraordinary
items.................. 262,296 179,248 (1,932) 177,316 (5,627) 433,985
Less: preferred unit
distributions......... 25,340 23,903 -- 23,903 -- 49,243
-------- -------- ------- -------- ------- ----------
Net earnings (loss) from
continuing operations
before extraordinary
items attributable to
common units--basic.... $236,956 $155,345 $(1,932) $153,413 $(5,627) $ 384,742
======== ======== ======= ======== ======= ==========
Weighted average common
units outstanding--
basic(q)............... 131,874 200,993
-------- ----------
Weighted average common
units outstanding--
diluted(q)............. 137,730 221,734
-------- ----------
Net earnings from
continuing operations
before extraordinary
items per common unit:
Basic(q)............... $ 1.80 $ 1.91
======== ==========
Diluted(q)............. $ 1.78 $ 1.86
======== ==========
See accompanying notes to pro forma condensed combined statements of earnings
from operations.
F-5
ARCHSTONE-SMITH OPERATING TRUST
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per unit amounts and percentages)
(a) Reflects condensed historical balance sheet as of June 30, 2001. Certain
reclassifications have been made to Smith Partnership's balance sheet to
conform to Archstone's presentation. The equity section of the Archstone
historical balance sheet has been recast to reflect its conversion from a
real estate investment trust to an operating trust structure.
(b) Represents adjustments to record the partnership merger between Archstone
and Smith Partnership based upon the assumed purchase price of $3.6 billion
and application of the purchase method of accounting. The assumed purchase
price was based in part upon a market value of $24.39 for each Archstone
common share or share equivalent assumed to be issued, as shown in notes
(g) and (h). The $24.39 share price was based on the average closing price
of Archstone's common shares for the five day period ranging from two days
prior to and two days after the merger agreement was announced. For
accounting purposes, Archstone is treated as the acquiring entity since
Archstone's equity is being issued to Smith Partnership's unitholders and
Archstone is assuming Smith Partnership's liabilities. Furthermore, we
estimate that immediately upon completion of the partnership merger, former
holders of Archstone common units will have a 60% majority interest in
Archstone-Smith, on a fully diluted and as-converted basis. The partnership
merger acquisition cost was computed as follows:
Assumption of Smith Partnership's total liabilities.............. $1,400,987
Mark-to-market adjustment on Smith Partnership's debt (see note
(f))............................................................ 30,713
----------
Estimated fair value of liabilities incurred or assumed.......... 1,431,700
----------
Estimated fair value of other common unitholders' interests
assumed (see note (g)).......................................... 632,283
----------
Issuance of Archstone-Smith Operating Trust common units (see
note (h))....................................................... 1,220,779
Issuance of Archstone-Smith Operating Trust cumulative
convertible redeemable preferred units (see note (h))........... 235,685
Issuance of Archstone-Smith Operating Trust cumulative redeemable
preferred units (see note (h)).................................. 46,529
Valuation of Smith Residential stock options assuming 50% of all
option holders choose not to accept the cash offer (see note
(h))............................................................ 31,042
----------
Estimated fair value of equity issued............................ 1,534,035
----------
Total partnership merger acquisition cost...................... $3,598,018
==========
F-6
ARCHSTONE-SMITH OPERATING TRUST
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS--(Continued)
(c) Represents the estimated increase over Smith Partnership's investment in
real estate based upon the partnership merger acquisition cost to reflect
the allocation to other tangible assets of Smith Partnership being
acquired:
Partnership merger acquisition cost (see note (b))............ $ 3,598,018
Adjusted for:
Historical cost of Smith Partnership's total assets......... (2,221,206)
Elimination of deferred loan and lease costs (see note
(e))....................................................... 14,481
Assumed amount of cash on hand used to fund partnership
merger-related costs (see note (d))........................ 64,083
-----------
Adjustment to record step-up in basis of real estate based
on assumed purchase price.................................. $ 1,455,376
===========
The stepped-up basis falls within management's range of fair value
estimates for Smith Partnership's real estate assets. Management's fair
value estimates were based on the application of a range of estimated
current market capitalization rates to each community's expected net
operating income.
(d) Represents $36,466 in partnership merger-related costs and the assumed
$27,617 payment related to an offer to redeem 50% of the outstanding Smith
Residential stock options for cash (see calculation below) assumed to be
paid with cash on hand, leaving $19,145 of cash on hand. See note (j) for
registration and transfer tax cost assumptions.
The following is a calculation of estimated partnership merger-related
costs, including costs related to the concurrent reorganization of
Archstone into an operating trust (UPREIT) structure:
Investment advisory fees........................................... $16,250
Mortgage assumption fees........................................... 7,931
Employee termination costs......................................... 10,000
Legal, accounting and other fees................................... 2,285
-------
36,466
-------
Payment to Smith Residential stock option holders to redeem 1,851
Smith Residential Stock options at the fixed offer price of $49.48
each, less the weighted average exercise price of $34.56 per
option assuming 50% of all option holders choose to accept the
cash offer........................................................ 27,617
-------
Partnership merger-related costs assumed to be funded with cash on
hand.............................................................. $64,083
=======
(e) Represents the elimination of Smith Partnership's unamortized deferred loan
and lease costs.
(f) Represents the adjustments necessary to reflect Smith Partnership's
mortgages payable at their estimated market values, using effective
interest rates currently available for debt obligations with similar terms
and features.
(g) Represents adjustment to reflect Smith Partnership's other common
unitholders' interests at estimated fair value assuming a market value of
$24.39 for each share redeemable for an Archstone common unit. The $24.39
share price is based on the average closing price of Archstone's common
shares for the five day period ranging from two days prior to and two days
after the partnership merger agreement was announced.
Issuance of 25,924 Archstone Class A-1 common units (redeemable
for Archstone-Smith common shares) in exchange for 13,126 Smith
Partnership Class A common units (redeemable for Smith
Partnership common units) based on the 1.975:1 exchange ratio.. $ 632,283
Less: Smith Partnership's other common unitholders' interests at
redemption value............................................... (658,284)
---------
Adjustment to reflect Smith Partnership's other common
unitholders' interests at estimated fair value................. $ (26,001)
=========
F-7
ARCHSTONE-SMITH OPERATING TRUST
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS--(Continued)
(h) Represents adjustments to record the exchange of Archstone-Smith Operating
Trust units for Smith Partnership units at fair value, assuming a market
value of $24.39 for each Archstone-Smith Operating Trust common unit. The
$24.39 share price is based on the average closing price of Archstone's
common shares for the five day period ranging from two days prior to and
two days after the merger agreement was announced.
Issuance of 50,052 Archstone-Smith Operating Trust common units
in exchange for 25,343 Smith Partnership common units based on
the 1.975:1 fixed exchange rate............................... $1,220,779
----------
Issuance of 2,640 Archstone-Smith Operating Trust Series H
cumulative convertible redeemable preferred units (1.975:1
conversion rate) in exchange for 2,640 Smith Partnership
Series A cumulative convertible redeemable preferred units
(1:1 conversion rate)......................................... 127,169
Issuance of 685 Archstone-Smith Operating Trust Series J
cumulative convertible redeemable preferred units (1.975:1
conversion rate) in exchange for 685 Smith Partnership Series
E cumulative convertible redeemable preferred units (1:1
conversion rate).............................................. 32,997
Issuance of 667 Archstone-Smith Operating Trust Series K
cumulative convertible redeemable preferred units (1.975:1
conversion rate) in exchange for 667 Smith Partnership Series
F cumulative convertible redeemable preferred units (1:1
conversion rate).............................................. 32,130
Issuance of 641 Archstone-Smith Operating Trust Series L
cumulative convertible redeemable preferred units (1.975:1
conversion rate) in exchange for 641 Smith Partnership Series
G cumulative convertible redeemable preferred units (1:1
conversion rate).............................................. 30,877
Issuance of 400 Archstone-Smith Operating Trust Series M
cumulative convertible redeemable preferred units (1.2824:1
conversion rate) in exchange for 400 Smith Partnership Series
H cumulative convertible redeemable preferred units (0.65:1
conversion rate).............................................. 12,512
----------
Total cumulative convertible redeemable preferred units at
estimated fair value.......................................... 235,685
----------
Issuance of 0.5 of one Archstone-Smith Operating Trust Series I
cumulative redeemable preferred unit in exchange for 0.5 of
one unit of Smith Partnership Series C cumulative redeemable
preferred units (annual dividend 7.91%, par value per unit
$100,000, face value $50,000) at estimated fair value based on
the current public market preferred rate of 8.5%.............. 46,529
----------
Valuation of Smith Residential stock options assuming 50% of
all option holders choose not to accept the cash offer. All
Smith Residential options become fully vested as a result of
the merger. 3,702 options x 50% x $16.77 (estimated value per
option was calculated using the Black-Scholes valuation model
and the following assumptions: (1) risk-free interest rate
4.51%; (2) dividend yield 5.269%; (3) volatility 15.0%; and
(4) expected option life 3 years)............................. 31,042
----------
Total estimated fair value of common and preferred units issued
to Smith Partnership unitholders.............................. 1,534,035
Less: Smith Partnership's unitholders' equity at historical
cost.......................................................... (161,935)
----------
Adjustment to reflect Smith Partnership's unitholders' equity
at estimated fair value....................................... $1,372,100
==========
(i) Represents the adjustments necessary to record common units at estimated
fair value:
Issuance of 50,052 Archstone-Smith Operating Trust common units
in exchange for 25,343 Smith Partnership common units (see note
(h))........................................................... $1,220,779
Valuation of Smith Residential stock options assuming 50% of all
option holders choose not to accept the cash offer (see note
(h))........................................................... 31,042
Plus: Smith Partnership's historical common units............... 44,565
----------
Adjustment to reflect Smith Partnership's common units at
estimated fair value........................................... $1,296,386
==========
F-8
ARCHSTONE-SMITH OPERATING TRUST
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS--(Continued)
(j) Represents a $1,500 charge for the estimated partnership merger
registration costs and a $4,434 charge to unitholders' equity for the
estimated transfer taxes expected to be paid by Archstone as a result of
the expected reorganization into an UPREIT. Since the intent of the
accompanying pro forma condensed statements of earnings is to reflect the
expected continuing impact of the partnership merger, the one-time
adjustment related to the estimated transfer taxes has been excluded. It
will be recorded as an operating expense on Archstone-Smith's statement of
earnings upon consummation of the partnership merger.
An incremental use of cash on hand of $5,934 to fund these amounts have also
been reflected in the accompanying pro forma balance sheet.
(k) Represents the adjustment necessary to allocate the estimated market value
in excess of the liquidation preference on Smith Partnership's preferred
units to unitholders' equity as follows:
Estimated Amount to be
Market Value Allocated to
New Preferred Units Series (after (see note Liquidation Unitholders'
exchange) (h)) Value Equity
--------------------------------- ------------ ----------- ------------
Archstone-Smith Operating Trust Series
H cumulative convertible redeemable
preferred units....................... $127,169 $ 71,500 $55,669
Archstone-Smith Operating Trust Series
J cumulative convertible redeemable
preferred units....................... 32,997 25,000 7,997
Archstone-Smith Operating Trust Series
K cumulative convertible redeemable
preferred units....................... 32,130 25,000 7,130
Archstone-Smith Operating Trust Series
L cumulative convertible redeemable
preferred units....................... 30,877 25,000 5,877
Archstone-Smith Operating Trust Series
M cumulative convertible redeemable
preferred units....................... 12,512 10,000 2,512
-------- -------- -------
Subtotal............................. 235,685 156,500 79,185
Archstone-Smith Operating Trust Series
I cumulative redeemable preferred
units................................. 46,529 50,000 (3,471)
-------- -------- -------
Total................................ $282,214 $206,500 $75,714
======== ======== =======
F-9
ARCHSTONE-SMITH OPERATING TRUST
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS--(Continued)
Listed below is a combined summary of Archstone-Smith Operating Trust's
preferred units as of June 30, 2001. The preferred unitholders are entitled to
receive, when and as authorized by Archstone-Smith Operating Trust, cumulative
preferential cash distributions. Archstone-Smith Operating Trust may redeem the
preferred units at certain dates in whole or in part at a cash redemption price
equal to the redemption preference plus all accrued unpaid dividends to the
date fixed for redemption:
Quarterly Archstone-Smith
Liquidation Distribution Operating Trust's
Preference Balance Amount Per Distribution Voluntary Redemption
Series Per Unit Outstanding Unit Frequency Date
------ ----------- ----------- ------------ ------------ ----------------------
Series A (/1/).......... $ 25.00 $80,166 $ 0.55 Quarterly On or after 11/30/2003
Series C................ $ 25.00 $49,730 $ 0.54 Quarterly On or after 08/20/2002
Series D................ $ 25.00 $49,805 $ 0.55 Quarterly On or after 08/06/2004
Series H................ $ 27.08 $71,500 (2) Quarterly On or after 05/15/2003
Series I................ $100,000 $50,000 $1,915 Quarterly On or after 02/01/2028
Series J................ $ 36.50 $25,000 (2) Quarterly On or after 07/13/2002
Series K................ $ 37.50 $25,000 (3) Quarterly On or after 10/01/2004
Series L................ $ 39.00 $25,000 (4) Quarterly On or after 11/05/2005
Series M(/5/)........... $ 25.00 $10,000 (2) Quarterly On or after 09/13/2004
--------
(/1/The)Series A preferred units are convertible at any time, at the
option of the holder, into a number of Archstone-Smith Operating
Trust common units obtained by dividing the aggregate liquidation
preference by the conversion price of $18.561, which is equivalent
to a conversion rate of 1.3469 common units for each Archstone-
Smith Operating Trust Series A preferred unit.
(/2/Cash)distributions equal the greater of $2.02, $3.1025 and $2.03125
per year per unit for Series H, J and M, respectively, or the
dividend on the common units into which these preferred units are
convertible.
(/3/Cash)distributions equal to the greater of 8.25% of the $37.50
liquidation preference per year, equivalent to $3.09375 per year
per unit, through October 1, 2001, and 8.50% of the liquidation
preference, equivalent to $3.1875 per year per unit after October
1, 2001 or the dividend on the common units into which a Series K
preferred unit is convertible.
(/4/Cash)distributions equal to the greater of 8.25% of the $39.00
liquidation preference per year, equivalent to $3.2175 per year per
unit, through November 5, 2001, and 8.50% of the liquidation
preference, equivalent to $3.315 per year per unit after November
5, 2001 or the dividend on the common units into which a Series L
preferred unit is convertible.
(/5/On)June 29, 2001, 3,600,000 Series M preferred units were converted
into 2,337,662 Smith Residential common shares.
(l) Reflects condensed historical statement of earnings from continuing
operations. Certain reclassifications have been made to Smith Partnership's
statement of earnings from operations to conform to Archstone's
presentation.
F-10
ARCHSTONE-SMITH OPERATING TRUST
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS--(Continued)
(m) Reflects the pro forma impact of certain acquisitions and dispositions of
operating communities by Smith Partnership during 2000. Smith Partnership's
Form 8-K dated October 25, 2000, which is incorporated herein by reference,
provides further detail regarding these transactions and the related pro
forma adjustments for the six months ended June 30, 2000. One acquisition,
Harbour House, was closed on October 25, 2000, subsequent to the period
covered by the Form 8-K. The impact of this acquisition for the period from
July 1, 2000 to October 25, 2000 is also reflected, as shown below. Note
that no adjustments to the accompanying pro forma combined condensed
balance sheet as of June 30, 2001 or the pro forma combined condensed
statement of earnings from operations for the six months ended June 30,
2001 were necessary, since each transaction was consummated during 2000.
Form 8-K Harbour House
Dated July 1, 2000 to
October 25, 2000 October 25, 2000 Total
---------------- ---------------- -------
Rental revenues................. $ 6,909 $3,828 $10,737
Rental expenses................. (3,192) (1,505) (4,697)
Real estate taxes............... (495) (407) (902)
Depreciation on real estate
investments.................... (933) (529) (1,462)
Interest expense................ (3,392) (2,216) (5,608)
------- ------ -------
Total......................... $(1,103) $ (829) $(1,932)
======= ====== =======
(n) Represents estimated net increase in depreciation of real estate as a
result of the step-up in basis to record Smith Partnership's real estate
based on the partnership merger acquisition cost:
Buildings Properties
and Under
Land Improvements Construction Total
---------- ------------ ------------ ----------
Estimated value based on the
partnership merger
acquisition cost............ $1,002,202 $2,316,349 $120,798 $3,439,349
========== ---------- ======== ----------
Depreciable basis............ N/A $2,316,349 N/A $2,316,349
Pro forma annual depreciation
expense based on an
estimated useful life of 40
years....................... $ 57,909 $ 57,909
Less: Historical depreciation
expense for year ended
December 31, 2000..... (44,778) (44,778)
Pro forma adjustment for
depreciation expense
related to Smith
Partnership's 2000
acquisitions/dispositions.. (1,462) (1,462)
---------- ----------
Pro forma adjustment to
depreciation expense....... $ 11,669 $ 11,669
========== ==========
Pro forma depreciation
expense based on an
estimated useful life of 40
years for the six months
ended June 30, 2001......... $ 28,954 $ 28,954
Less: Historical depreciation
expense for the six months
ended June 30, 2001......... (25,400) (25,400)
---------- ----------
Pro forma adjustment to
depreciation expense...... $ 3,554 $ 3,554
========== ==========
F-11
ARCHSTONE-SMITH OPERATING TRUST
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS--(Continued)
(o) Represents the following pro forma interest expense adjustments:
Six Months Year Ended
Ended December 31,
June 30, 2001 2000
------------- ------------
Decreases to interest expense:
Reversal of Smith Partnership's historical loan
cost amortization due to the elimination of
deferred loan costs........................... $ (924) $(2,000)
Amortization of $30.7 million mark-to-market
adjustment made to Smith Partnership's debt
(see note (f))................................ (2,021) (4,042)
------- -------
Net decrease in interest expense........... $(2,945) $(6,042)
======= =======
(p) Management has estimated that there will be a reduction of over 50% of
Smith Partnership's general and administrative expenses as a result of the
partnership merger on a pro forma basis for the six months ended June 30,
2001 and the year ended December 31, 2000. The general and administrative
expense savings have not been included in the pro forma condensed combined
statements of earnings from operations as there can be no assurance that
such costs savings will be realized.
(q) A reconciliation of the numerator and denominator used to compute basic
earnings per common unit to the numerator and denominator used to compute
diluted earnings per common unit is as follows for the periods indicated:
Archstone-Smith
Archstone Operating Trust
Six Months Ended June 30, 2001 Historical Pro Forma
------------------------------ ---------- ---------------
Net earnings from continuing operations
attributable to common units--basic............. $135,820 $180,463
Distributions on convertible preferred units... 3,563 12,146
Minority interest--convertible operating
partnership units............................. 778 778
-------- --------
Net earnings from continuing operations
attributable to common units--diluted........... $140,161 $193,387
======== ========
Weighted average common units outstanding--basic
(see pro forma calculations on next page)....... 121,569 192,406
Assumed conversion of convertible preferred
units......................................... 4,360 18,594
Assumed conversion of convertible operating
partnership units............................. 949 949
Assumed exercise of options.................... 428 1,188
-------- --------
Weighted average common units outstanding--
diluted......................................... 127,306 213,137
======== ========
Net earnings from continuing operations per
common unit:
Basic.......................................... $ 1.12 $ 0.94
======== ========
Diluted........................................ $ 1.10 $ 0.91
======== ========
F-12
ARCHSTONE-SMITH OPERATING TRUST
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS--(Continued)
Archstone-
Smith
Operating
Archstone Trust Pro
Year Ended December 31, 2000 Historical Forma
---------------------------- ---------- ----------
Net earnings from continuing operations before
extraordinary items attributable to common units--
basic................................................ $236,956 $384,742
Distributions on convertible preferred units........ 7,254 27,202
Minority interest--convertible operating partnership
units.............................................. 1,326 1,326
-------- --------
Net earnings from continuing operations before
extraordinary items attributable to common units--
diluted.............................................. $245,536 $413,270
======== ========
Weighted average common units outstanding--basic (see
pro forma calculations on next page)................. 131,874 200,993
Assumed conversion of convertible preferred units... 4,721 19,006
Assumed conversion of convertible operating
partnership units.................................. 876 876
Assumed exercise of options......................... 259 859
-------- --------
Weighted average common units outstanding--diluted.... 137,730 221,734
======== ========
Net earnings from continuing operations before
extraordinary items per common unit:
Basic............................................... $ 1.80 $ 1.91
======== ========
Diluted............................................. $ 1.78 $ 1.86
======== ========
The weighted average common units outstanding--basic include units held by
Archstone-Smith and other unitholders in the operating trust as follows:
Six Months Year Ended
Ended June December 31,
30, 2001 2000
---------- ------------
Weighted average number of Smith Partnership units.. 35,867 34,997
======= =======
Weighted average number of Archstone-Smith Operating
Trust common units to be issued after assumed
conversion at the exchange ratio of 1.975.......... 70,837 69,119
Weighted average number of Archstone common units... 122,569 131,874
------- -------
Pro forma weighted average Archstone-Smith Operating
Trust common units outstanding--basic.............. 192,406 200,993
======= =======
(r) The following table summarizes the ratio of earnings to fixed charges for
each period presented:
Six Months ended Year Ended
June 30, 2001 December 31, 2000
-------------------------- --------------------------
Archstone-Smith Archstone-Smith
Archstone Operating Trust Archstone Operating Trust
Historical Pro Forma Historical Pro Forma
---------- --------------- ---------- ---------------